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Arcee AI 191

Page PART I Item 1. Business 1 Item 1A. Risk Factors 17 Item 1B. Unresolved Staff Comments 59 Item 2. Properties 59 Item 3. Legal Proceedings 59 Item 4. Mine Safety Disclosures 59 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 60 Item 6. Selected Financial Data 62 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 63 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 84 Item 8. Financial Statements and Supplementary Data 84 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 84 Item 9A. Controls and Procedures 84 Item 9B. Other Information 85 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 85 PART III Item 10. Directors, Executive Officers and Corporate Governance 86 Item 11. Executive Compensation 86 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 86 Item 13. Certain Relationships and Related Transactions, and Director Independence 86 Item 14. Principal Accounting Fees and Services 86 PART IV Item 15. Exhibits, Financial Statement Schedules 87 Item 16 Form 10-K Summary 89 i Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the "safe harbor" created by those sections. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "goal," "would," "expect," "plan," "anticipate," "believe," "estimate," "project," "predict," "potential" and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Annual Report on Form 10-K in greater detail under the heading "Risk Factors," including, among other thi • actual or anticipated fluctuations in our financial condition and operating results; • variance in our financial performance from expectations of securities analysts or investors; • changes in our projected operating and financial results; • changes in the pricing we offer our members; • our relationships with our health network partners and enterprise clients and any changes to or terminations of our contracts with the health network partners or enterprise clients; • changes in laws or regulations applicable to our solutions and services; • the impact of COVID-19 on our financial performance, financial condition and results of operations, and the financial performance and financial condition of our health network partners, our enterprise clients and others; • announcements by us or our competitors of significant business or strategic developments, acquisitions or new offerings; • actual or anticipated developments in our business, our competitors' businesses or the competitive landscape generally; • publicity associated with issues with our services and technology platforms; • our involvement in litigation, including medical malpractice claims and consumer class actions; • any governmental investigations or inquiries into our business and operations or challenges to our relationships with our affiliated professional entities under the Administrative Services Agreements ("ASAs"); • future sales of our common stock or other securities, by us or our stockholders; • changes in senior management or key personnel; • developments or disputes concerning our intellectual property or other proprietary rights; • changes in accounting standards, policies, guidelines, interpretations or principles; • the trading volume of our common stock; • general economic, regulatory and market conditions, including labor shortages, inflationary pressures and any future actions taken in an effort to mitigate the effects of inflation, which could increase our costs of doing business and cause our stock price to be volatile; • our estimates of our market opportunity and changes in the anticipated future size and growth rate of our market; • our ability to retain and recruit key personnel and expand our sales force; • the ability of our affiliated professional entities to attract and retain high quality providers; • our ability to fund our working capital requirements; ii • our compliance with, and the cost of, federal, state and foreign regulatory requirements; and • our ability to successfully integrate and realize the anticipated benefits and synergies of our past or future strategic acquisitions, including our acquisition of Iora Health, Inc. ("Iora"). These risks are not exhaustive. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements as predictions of future events. Also, these forward-looking statements represent our current beliefs, estimates and assumptions only as of the date of this filing, and information contained in this filing should not be relied upon as representing our estimates as of any subsequent date. You should read this Annual Report on Form 10-K completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. In addition, statements including "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the filing date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. In this report, unless otherwise indicated or the context otherwise requires, (i) all references to "One Medical," "we," "us," "our" or the "Company" mean 1Life Healthcare, Inc., its subsidiaries, and its consolidated affiliated professional entities, (ii) all references to "1Life" refer to 1Life Healthcare, Inc. and not to its consolidated affiliated professional entities and (iii) all references to "affiliated professional entities" refer to the professional entities affiliated with 1Life or its subsidiaries through administrative services agreements. 1Life and its affiliated professional entities conduct business under the "One Medical" brand. Risk Factor Summary Our business is subject to a number of risks and uncertainties which may prevent us from achieving our business and strategic objectives or may adversely impact our business, financial condition, results of operations, cash flows and prospects. These risks include but are not limited to the followin Risks Related to Our Business and Our Industry • the impact of the ongoing COVID-19 pandemic; • our dependence on a limited number of key existing payers; • our reliance on reimbursements from certain third-party payers for the services we provide; • the impact of reviews and audits by CMS in accordance with Medicare's risk adjustment payment system; • the impact of assuming some or all of the risk that the cost of providing services will exceed our compensation for such services under certain third-party payer agreements; • the impact of reduced reimbursement rates paid by third-party payers, or federal or state healthcare programs due to rule changes or other restrictions; • the impact of regulatory or policy changes in Medicare or other federal or state healthcare programs; • our dependence on the success of our strategic relationships with third parties; • the impact of a decline in the prevalence of private health insurance coverage; • our ability to cost-effectively develop widespread brand awareness and to maintain our reputation and market acceptance for our healthcare services; • our history of losses and uncertainty about our future profitability; • our ability to maintain and expand member utilization of our services; • our ability to compete effectively in the geographies in which we participate; iii • our ability to grow at the rates we historically have achieved; • the impact of current or future litigation against us, including medical liability claims and class actions; • our ability to attract and retain quality primary care providers to support our services; • fluctuations in our quarterly results and our ability to meet the expectations of securities analysts and investors; and • the loss of key members of our senior management team and our ability to attract and retain executive officers, employees, providers and medical support personnel. Risks Related to Government Regulation • the impact of healthcare reform legislation and changes in the healthcare industry and healthcare spending; • the impact of governmental or regulatory scrutiny of or challenge to our arrangements with health networks; • our dependence on our relationships with affiliated professional entities that we may not own, to provide healthcare services; • our ability to comply with rules related to billing and related documentation for healthcare services; and • our ability to comply with regulations governing the use and disclosure of personal information, including protected health information, or PHI. Risks Related to Information Technology • our reliance on internet infrastructure, bandwidth providers, other third parties and our own systems to provide a proprietary services platform to our members and providers; • our reliance on third-party vendors to host and maintain our technology platform; • any breaches of our systems or those of our vendors or unauthorized access to employee, contractor, member, client or partner data; • our ability to maintain and enhance our proprietary technology platform; and • our ability to optimize our technology solutions for members, integrate our systems with health network partners or resolve technical issues in a timely manner. Risks Related to Our Intellectual Property • our ability to obtain, maintain, protect and enforce our intellectual property rights. Risks Related to Our Acquisition of Iora • our ability to successfully integrate Iora's business and realize the benefits of the merger; and • the incurrence of substantial expenses related to the integration of Iora's business. iv PART I Item 1. Business. Overview Our mission is to transform health care for all through our human-centered, technology-powered model. Our vision is to delight millions of members with better health and better care while reducing the total cost of care. We are a membership-based primary care platform with seamless digital health and inviting in-office care, convenient to where people work, shop, live and click. We are disrupting health care from within the existing ecosystem by simultaneously addressing the frustrations and unmet needs of key stakeholders, which include consumers, employers, providers, and health networks. As of December 31, 2021, we have grown to approximately 736,000 total members including 703,000 Consumer and Enterprise members and 33,000 At-Risk members, and we operated 182 medical offices in 25 markets across the United States. The current state of the healthcare ecosystem leaves key stakeholders frustrated and with unmet needs. • Consumers. According to a 2020 report, 71% of consumers are dissatisfied with their healthcare experience, in part due to limited after-hours and digital access, long wait times for appointments, extended in-office delays, short and impersonal visits, uninviting medical offices in inconvenient locations, constrained access to specialists and a lack of care coordination across clinical settings. • Employers. Employers find their health benefit offerings often underperforming on such fundamental objectives as attracting and engaging employees, improving employee productivity, reducing absenteeism, producing better health outcomes, increasing the safety of the workplace through screening and treating communicable diseases such as COVID-19, or managing health care costs. • Providers. Within primary care, according to a 2019 Mayo Clinic report, over 50% of family physicians show symptoms of burnout, driven in part by misaligned fee-for-service compensation approaches incentivizing short transactional interactions, and excessive administrative tasks associated with burdensome electronic health record ("EHR") systems and convoluted insurance procedures. • Health Networks. Health systems as well as private and government payers, have been looking to develop coordinated networks of care to better attract patients, increase attributable lives and better integrate primary care with specialty services for improved patient outcomes and lower costs. Yet even with major investments in provider groups, care management programs and technology systems, health networks have struggled to deliver on these objectives. The U.S. commercial primary care and Medicare market together is estimated to be approximately $870 billion in 2021, including approximately $170 billion for the commercially insured population and $700 billion for the Medicare population. We estimate that the 25 markets in which we are physically present plus the four markets we are planning to launch in 2022 represent approximately $55 billion in primary care spend within the commercially insured population, and $220 billion for the Medicare population. We expect our total addressable market to grow as we further expand into additional geographies, additional services, serve additional populations and explore alternative risk-sharing reimbursement models. For example, we believe we can further expand our physical presence across the United States. The 50 largest metropolitan statistical areas in the U.S. represent an estimated market opportunity of approximately $80 billion within the commercially insured population, and $330 billion for the Medicare population. In addition, some employees of our enterprise customers can access our digital services nationally, providing us with additional growth potential and improving our ability to expand our physical footprint. We have developed a modernized healthcare membership model based on direct consumer enrollment and third-party sponsorship across commercially insured and Medicare populations. Our membership model includes seamless access to 24/7 digital health services paired with inviting in-office care routinely covered by most health care payers. Our technology drives high monthly active usage within our membership, promoting ongoing and longitudinal patient relationships for better health outcomes and high member retention. Our technology also helps our service-minded team in building trust and rapport with our members by facilitating proactive digital health outreach as well as responsive on-demand virtual and in-office care. Our digital health services and our well-appointed offices, which tend to be located in highly convenient locations, are staffed by a team of clinicians who are not paid on a fee-for-service basis, and therefore free of misaligned compensation incentives prevalent in health care. Additionally, we have developed clinically and digitally integrated partnerships with health networks, better coordinating more timely access to specialty care when needed by members. Together, this approach allows us to engage in value-based care across all age groups, including through At-Risk arrangements with Medicare Advantage payers and the 1 Center for Medicare & Medicaid Services ("CMS"), in which One Medical is responsible for managing a range of healthcare services and associated costs of our members. • Consumers. We delight consumers with a superior experience as evidenced by our average Net Promoter Score, or NPS, of 90 across our membership base over the twelve months ended December 31, 2021 and our key primary care-related Healthcare Effectiveness Data and Information Set ("HEDIS") quality measures. NPS measures the willingness of consumers to recommend a company's products or services to others. We use NPS as a proxy for gauging our members' overall satisfaction with us or our providers and loyalty to us. We calculate our NPS based on survey data using the standard method of subtracting the percentage of members who respond that they are not likely to recommend us or our providers from the percentage of members that respond that they are likely to recommend our providers, with responses based on a scale of 0 to 10. The resulting NPS is an index that ranges from a low of -100 to a high of 100. Our technology platforms advance consumer engagement and health through proactive digital health screenings, post-visit digital follow-ups, real-time access to medical records, and around-the-clock availability of our friendly and knowledgeable providers. Our technology platforms also provide insights for our care teams across our populations that aid in our care delivery. Our members receive access to 24/7 on-demand digital and virtual health services with quick response times. Members also have access to scheduled virtual visits as well as inviting in-office care in convenient locations with same day or next day appointments from a warm and caring staff. In addition to supporting members with routine and preventative primary, chronic and acute care, we provide lab- and immunization services, COVID-19 testing and care, behavioral health, women's health, men's health, LGBTQ+ care, pediatrics, geriatrics, sports medicine, lifestyle and well-being programs. • Employers . We support more than 8,500 enterprise clients across a diverse set of industries in achieving key goals of their health benefits offerings such as attracting and engaging employees, improving employee productivity and well-being, and delivering higher levels of value-based care. We are also helping them increase the safety of their workplace through screening for, treating, and immunizing against communicable diseases such as COVID-19. With real-time video and phone consults available typically within minutes, and same and next day in-office appointments, we have demonstrated a 41% reduction in emergency room visits and total employer cost savings of 8% or more based on a 2018 report. Additionally, a peer-reviewed study published in the Journal of American Medical Association (JAMA) Network Open in 2020 linked our membership-based, primary care model combining virtual, near-site and work-site services with 45% lower total medical and prescription claims costs for one employer, including 54% lower spending on specialty care, 43% lower spending on surgery, 33% lower spending on emergency department care, and 26% lower spending on prescriptions. Since then, we have further evolved our service offering, including scheduled virtual visits or behavioral health visits, which we believe provides additional value to employers and their employees. We have also launched a 24/7 virtual only service offering which is available exclusively to employees of our employer customers in geographies where we do not yet have a physical presence. This service offering allows employers to provide One Medical to all of their employees regardless of their location, while providing us with better insights about employer demographics and potential future demand for our other offerings. Employers typically cover our membership fee for their employees, with over 75% of employers also covering their employees’ dependents’ memberships as of December 31, 2021. Employers can add our services at any point during the year, as our services typically fit within their existing health benefits offerings and are typically covered under an employer’s routine health insurance benefit program, allowing for seamless and quick implementation. Within enterprise clients, we estimate that our median activation rate as of December 31, 2021, was over 40%, which we believe we can increase over time. We define estimated activation rate for any enterprise client at a given time as the percentage of eligible lives enrolled as members. Some of our enterprise clients offer membership benefits to the dependents of their employees, for which we assume eligible lives include one dependent per employee. • Providers. Our culture, technology, team-based approach, and salaried provider model help address the fundamental issues driving physician burnout. Our culture allows us to attract and retain top board-certified physicians and premier team members. We are focused on continuing to increase our diversity amongst providers so that our provider base reflects the diversity of the communities and members we serve. Our proprietary technology platforms allow for meaningful reductions in desktop medicine burdens, which are the excessive administrative hassles associated with the use of EHRs. Our support team takes on many of the administrative burdens for scheduling and insurance coordination. Our in-office and virtual medical teams jointly deliver longitudinal health care. Our salary-based provider compensation model incentivizes delivery of the right care at 2 the right time, without the adverse financial incentives that fee-for-service or compensation systems can have on clinical decision-making. • Health Networks. Health networks partner with us for consumer-driven care, direct-to-employer relationships, coordinated networks of attributable lives, and At-Risk arrangements where we are responsible for managing a range of healthcare services and associated costs for our members. Through our partnerships, we connect our primarily working-age, commercially insured membership base with health networks without the costs and risks these health networks typically face in the development of their own primary care networks. In our Medicare business, we partner with health care payers to enable members to access our service and enter into At-Risk arrangements where we are responsible for managing a range of healthcare services and associated costs of our members. We clinically and digitally integrate with our health network partners to advance more seamless member access to partner specialists and facilities when needed, while supporting reductions in duplicative testing and excessive delays often seen across uncoordinated healthcare settings. Such coordinated care can deliver better service levels and outcomes for consumers, while advancing employee productivity and value-based care to employers and our payer partners. We believe our model is highly scalable. Our business is driven by growth in Consumer and Enterprise members, and At-Risk members (see also Part II, Item 7 to this Annual Report, "Management's Discussion and Analysis — Key Metrics and Non-GAAP Financial Measures"). We have developed a modernized membership model based on direct consumer enrollment and third-party sponsorship. Our membership model includes seamless access to 24/7 digital health paired with inviting in-office care routinely covered by most health care payers. Consumer and Enterprise members join either individually as consumers by paying an annual membership fee or are sponsored by a third party. At-Risk members are members for whom we are responsible for managing a range of healthcare services and associated costs. Digital health services are delivered via our mobile app and website, through such modalities as video and voice encounters, chat and messaging. We are physically present in 25 markets as of December 31, 2021, comprised of Atlanta, Austin, Boston, Birmingham, Cape Cod, Charlotte, Chicago, Columbus, Denver, Greensboro, Hanover, Houston, Huntsville, Kansas City, Los Angeles, New York, Orange County, Phoenix, Portland, Raleigh-Durham, San Diego, the San Francisco Bay Area, Seattle, Tucson, and Washington, D.C., and serve patients across all stages of life, from the working-age, commercially-insured population and associated dependents to the Medicare populations. For the twelve months ended December 31, 2021, we retained 9 out of every 10 of our consumer members, 90% of our enterprise contract value and more than 8 out of every 10 of our At-Risk members. We grew our total membership by 307% from December 31, 2016 through December 31, 2021. We derive net revenue, consisting of Medicare revenue and commercial revenue, from multiple stakeholders, including (i) consumers, (ii) enterprise clients such as employers, schools, and universities, and (iii) health networks such as health systems and private and government payers. We generate Medicare revenue from (i) Capitated Revenue from At-Risk arrangements with Medicare Advantage payers and CMS, and (ii) fee-for-service and other revenue from fee-for-service visits for Other Patients not covered under At-Risk arrangements and from certain payers for clinical start-up, administration, or on-going coordination of care activities associated with providing care to At-Risk members and other Medicare patients. We generate commercial revenue from (i) partnership revenue from our health system partners with whom we have clinically and digitally integrated, on a per member per month (“PMPM”) basis, largely fixed price or fixed price per employee contracts with enterprise clients for medical services and COVID-19 on-site testing services for enterprise clients, schools and universities where we typically bill such customers a fixed price per service performed, (ii) net fee-for-service revenue from reimbursements received from our members' or other patients' health insurance plans or those with billing rates based on our agreements with our health network partners for healthcare services delivered to Consumer and Enterprise members on a fee-for-service basis, and (iii) membership revenue through the annual membership fees charged to either consumer members or enterprise clients, as well as fees paid for our One Medical Now service offering. Industry Challenges and Our Opportunity The current state of the healthcare ecosystem leaves key stakeholders frustrated and with unmet needs, delivering suboptimal results for consumers, employers, providers and health networks. We believe that these unmet needs represent a significant opportunity for us. Consumers 3 According to a 2020 report, approximately 71% of consumers are dissatisfied with their healthcare experience. Their frustrations include long lead times to schedule physician appointments and long waits once checked-in at provider offices. Appointments often occur in crowded medical offices and are typically short in duration, affording limited time to develop deeper provider-patient relationships. Opportunities to engage with providers before and after visits, as well as during nights and weekends, are often limited or non-existent, even though healthcare needs are not constrained to the operating hours of provider offices. Care delivered is also often uncoordinated with providers, leaving consumers to navigate their own way through a complex system. Employers To attract and retain staff, employers are making significant investments in health benefits; yet, as commercial insurance costs have reached record highs, employers and employees remain frustrated. Barriers to accessing timely care during the day and after business hours cause employees to miss work and lose productivity. As a result, many employees self-direct to higher cost settings such as emergency rooms. Additionally, uncoordinated care across primary care, specialty care and behavioral health settings creates frustration and causes excessive spending. According to a 2018 study from the National Academy of Medicine, approximately 30% of all U.S. healthcare spending is estimated to be avoidable wasted spending. Providers By predominantly compensating primary care providers on volume, the prevalent fee-for-service approach seen within the industry incentivizes short and transactional medical encounters, often with insufficient time to address underlying issues related to acute care, chronic disease, and behavioral health issues. Such fee-for-service compensation may also incentivize greater referrals to specialists for more time-intensive cases, even when such patients could otherwise be treated effectively within primary care. Management of preventive care and chronic conditions through longitudinal relationships is typically less-reimbursed, if paid for at all. In addition, providers often find themselves performing excessive administrative tasks that could be better performed by other staff or eliminated altogether. They suffer from rising administrative time spent populating data into cumbersome EHR systems, and documentation hassles associated with insurance procedures. These dynamics contribute to lower job satisfaction and provider burnout. Health Networks While many health networks have sought to better integrate primary care with specialty and hospital care, they may underperform on service, access, and coordination of care. This is partly due to their internal incentive systems, processes, and technologies, which are typically focused on addressing high revenue specialty care, rather than best supporting primary care. Moreover, primary care networks can be very costly to develop, and can require significant ongoing investments to operate, while often underperforming on strategic and financial objectives. According to the American Hospital Association's Futurescan survey of hospital CEOs and leaders published in 2019, 75% of hospital and health systems operate their primary care networks at a loss or are willing to do so, with 76% of health system leaders indicating they are pursuing or are likely to pursue external relationships to advance their physician networks and better serve consumers. We have developed a human-centered, technology-powered primary care model that simultaneously addresses the aforementioned frustrations and unmet needs of key stakeholders. As we continue to deploy our model at scale, we disrupt the healthcare ecosystem from within its current structure through ou • modernized healthcare membership model based on direct consumer enrollment and third-party sponsorship; • seamless care delivery that integrates across multiple digital and in-person modalities; • inviting offices with high quality service in convenient locations; • partnerships with health networks, including alignment with payers; • premier salaried medical group; • advanced technology-powered systems; and • service-oriented team implementing Lean processes. Our Value Proposition 4 Our modernized human-centered and technology-powered primary care model simultaneously addresses the frustrations and unmet needs faced by key stakeholders. Value Proposition for Consumers • Greater engagement for better health and better care. We regularly and proactively engage our members digitally and in-person. Members can digitally access medical information, prescriptions, lab results and other health data, and can reach out to our team regarding medical issues or health questions around-the-clock. Members may receive digital health status check-ins before and after office encounters, and our technology facilitates further follow-up with our providers. • Unique digital health experience. Our dedicated and compassionate providers and other team members deliver 24/7 digital care. Members engage through our website or mobile app in timely synchronous and asynchronous interactions, selecting their communication modality of choice, including messaging, text, voice and video. Our in-house virtual team delivers 24/7 service to address health concerns and administrative questions, coordinating with our in-office providers through a common EHR that is shared across digital and in-office settings. • Superior in-office care experience. We are focused on providing kind and attentive in-person care in aesthetically pleasing offices with contemporary interior designs. We offer same- or next-day appointments with minimal wait upon arrival in locations convenient to where consumers work, shop and live. Members enter into first-name relationships with providers who greet them upon arrival and walk them out upon appointment completion. Our approach allows for more time to thoroughly address a broader array of issues and to develop deeper relationships than traditional primary care settings. • Longitudinal approach to care. Our approach treats the whole person by including the physical, mental, social, emotional and administrative needs of our members. In addition to supporting members with routine and preventative primary, chronic and acute care, we provide lab- and immunization services, COVID-19 testing and care, behavioral health, women's health, men's health, LGBTQ+ care, pediatrics, geriatrics, sports medicine, lifestyle and well-being programs. We proactively reach out to members to assess their health status and mental wellness and follow up with reminders on key health initiatives. These initiatives support the health of our members with the goal of avoiding more costly care in the future. • Greater care coordination. We can serve as a trusted advisor to our members and, through our administrative teams and technology, help them better navigate the healthcare ecosystem. Our health network partnerships further advance clinically and digitally integrated care across primary, specialty and acute care settings by streamlining access to leading specialists and reducing delays and duplicative tests. • Improved health outcomes. We help drive better health outcomes for our members, as reflected in our key primary care-related HEDIS quality metrics. To prevent avoidable conditions and advance health, we can conduct population health initiatives such as proactively screening for cancers, chronic diseases, anxiety and depression. • COVID-19 . We offer COVID-19 testing and counseling across all of our markets, including in our offices and in several mobile COVID-19 testing sites. We also administer COVID-19 vaccines in select geographies. Value Proposition for Employers • Differentiated and highly valued employee benefit. We believe our model enhances the benefits offering of employers, improving their recruitment and retention of talent. • Increased workforce productivity. We reduce time away from work as well as employee distraction related to illness, injury or other medical conditions by providing quick and convenient access to care for employees and dependents, including virtual care. With longer appointments, we address more needs in our primary care setting, reducing avoidable referrals and additional time away from work. Additionally, our ability to facilitate timely specialist appointments with our health network partners further reduces an employee's distraction while waiting for specialty care. • Reduced costs. We reduce health care costs by increasing employee productivity and providing value-based care, substituting higher cost emergency room and specialty services with lower-cost primary care. We help avoid 5 unnecessary testing and higher cost branded prescriptions through best practice clinical protocols embedded in our technology. For example, we have demonstrated a 41% reduction in emergency room visits and total employer cost savings of 8% or more. A peer-reviewed study published in JAMA Network Open in 2020 linked our membership-based, primary care model combining virtual, near-site and work-site services with 45% lower total medical and prescription claims costs for one employer. • Insights on improving employee health and value-based care. We support population health improvement and medical cost assessment by analyzing anonymized aggregated health record information and employee health engagement patterns. We work with employers to better understand the health needs of their employees as well as to review overall utilization patterns. Our aggregated anonymized EHR information allows for timelier and deeper insights to help employers improve their health benefits programs and achieve higher levels of value. Value Proposition for Providers • More fulfilling way to practice. Our providers develop meaningful relationships with our members over time, allowing them to help improve healthy behaviors and better coordinate member health needs. Their relationships with members are more longitudinal and less transactional. Our providers are also supported by our technology platforms which enable them to practice at the top of their license while serving patients throughout all stages of life, making their work more professionally rewarding while reducing factors driving burnout. • Team-based approach across care modalities. Our in-office providers and our virtual team collaborate for longitudinal health care across time and settings. Our virtual care team and administrative specialists reduce our in-office providers' workloads while promoting 24/7 care. Providers can better focus on caring for patients during clinical interactions, while excessive administrative tasks can be handled by other team members. • Purpose-built technology platforms . Our proprietary technology platforms are developed with significant provider input and are purpose-built for primary care. For example, our technology is focused on capturing and surfacing the most meaningful clinical insights in a workflow that is intuitive to providers. Our platform meaningfully reduces administrative workloads by intelligently automating, streamlining and routing tasks across our network to the most appropriate team member, resulting in faster response times while freeing up providers to focus on caring for members. • Salaried model with flexible work schedules. Our salaried model avoids adverse fee-for-service and capitation incentives, and does not financially reward or penalize our providers based on utilization. It supports the delivery of the right amount of care in the best setting without impacting provider take-home pay. Additionally, we have flexible work arrangements and opportunities to practice in office or virtually. We believe this results in a better quality of life and work-life balance. With a presence in markets across the country, we also increasingly offer providers mobility opportunities. Value Proposition for Health Networks • Expansion of health networks. Our partnership model allows health networks to augment their existing primary care and network strategies, without significant additional investment in capital, technology or management resources. Partnering with us can be a more effective, expeditious, economical, and less risky way of developing a coordinated network of attributable lives. Additionally, our model can better position health networks with consumers and employers by focusing on consumer-driven care and facilitating direct-to-employer relationships. • Attractive customer base. Health networks look to partner with us to proactively establish relationships with our members. These partnerships allow health networks to better connect with our largely commercially insured membership base. • Coordinated care. We clinically and digitally integrate our modernized primary care model with our health network partners' provider networks, better coordinating care for members across a continuum of settings. We digitally integrate EHR information, avoiding duplicative testing often seen when patients are referred across care settings. Through better coordination, we provide members with more seamless access to specialty care when needed. We simultaneously reduce excessive health network administrative costs by linking our referral processes and digital technologies with health network partners. This coordination of care can lead to better experiences and outcomes for members, as well as reduced costs. 6 • Value Based Care. Our primary care model focuses on providing the right care at the right time, thereby reducing the need for costly and potentially unnecessary medical care which is often prevalent in the current fee-for-service healthcare system. As a result, we enter into At-Risk arrangements with payers such as Medicare Advantage plans and CMS, where we are responsible for managing a range of healthcare services and associated costs of our members. Our Competitive Strengths We believe the following are our key competitive strengths. Modernized Membership-Based Model Our membership-based model supports ongoing and longitudinal relationships where we can serve as trusted advisors to our members and as partners to our enterprise clients and health networks. Our model also generates stable revenue which is recurring in nature. By having an enrolled population of members, we can proactively reach out to members to encourage adherence to treatment protocols or to check in on their care needs. The relationship inherent in a membership model is very different than the traditional model of transactional patient care visits, where a provider typically only engages with a patient if the patient comes in for a visit. We proactively engage with our members on a regular basis through our digital platform and in our welcoming offices, and believe we are better able to develop long-term connections and relationships with them. Extraordinary Customer Experience Our human-centered approach is focused on providing a superior experience to our members, as evidenced by the bundling of services within our membership model, the way we hire and train our team, the culture of caring we foster, our easy-to-use technology, our 24/7 digital health, our inviting in-office care, our compassionate and salaried providers and our streamlined Lean processes. Whether members call, click or visit, they experience outstanding service, as evidenced by our average NPS of 90 across our membership base over the twelve months ended December 31, 2021. See "Overview" section above for a description of how we calculate NPS. Our virtual care is available around-the-clock. Our inviting medical offices are well-appointed and modern, and our providers and staff are very friendly and trained in customer service. We are committed to not keeping members waiting long, if at all, and our longer appointments provide our team with more time to address member needs. Our technology is designed to promote frictionless access, ease of use and high engagement. We look to address the whole-person needs of our members, providing physical and mental health services, lab services, and coordinating specialty services with health network partners. Our administrative staff is available to answer benefits questions and help navigate the healthcare ecosystem on behalf of our members. Simultaneously Addressing the Needs of Consumers, Employers, Providers and Health Networks Our modernized model simultaneously addresses the frustrations and unmet needs of key stakeholders, transforming health care from within the current ecosystem. For consumers, we deliver an extraordinary experience and superior results, including on key primary care-related HEDIS quality measures. For employers, we help improve employee productivity through frictionless access to virtual and in-office care and reduce medical costs by avoiding unnecessary emergency room and specialty visits. For providers, we create a more engaging and manageable primary care work environment by leveraging a salaried model and our proprietary technology. With health networks, we clinically integrate to expand their connections to commercially insured enrollees, and we are in-network with most health insurance plans in all of our markets. Our ability to lower medical costs for our members also allows us to enter into value based arrangements with select health networks such as Medicare Advantage health plans and CMS. Accordingly, we believe our model delivers differentiated value to all key stakeholders simultaneously within the current healthcare ecosystem. Engaged, Salaried Providers Delivering Best-in-Class Care We offer an outstanding environment to practice primary care, as reflected in our high provider retention rates and strong engagement scores. Our salaried compensation approach allows our providers to deliver patient-centered care without impacting their pay as might be the case under fee-for-service compensation approaches. Our providers also have significantly fewer EHR tasks to complete due to our proprietary technology that is purpose-built for primary care, freeing up their time to focus on delivering outstanding clinical care. Proprietary Technology Platforms 7 Our ability to simultaneously deliver significant value to key stakeholders is deeply rooted in our purpose-built, modernized technology platforms. Our proprietary technology platforms power all aspects of our company: engaging members, supporting providers and advancing business objectives. Our technology allows us to proactively engage members with personalized clinical outreach and improve health through online scheduling, virtual provider visits and ready access to health information. Our technology also supports providers by leveraging machine learning to reduce and re-route tasks that needlessly create administrative burdens while supporting team-based care. This allows providers to spend more time delivering clinical care, while facilitating higher levels of member responsiveness. Our technology also advances operational efficiencies, as our product designers and engineers collaborate closely with clinical and operational team members to observe and optimize workflows in ways that support better tracking of our members' health and outcomes. Our platform is built on a modern cloud-based technology stack, employing Agile development cycles and a DevOps approach to infrastructure. Our modular, service-oriented architecture utilizes Application Programming Interface ("API") standards for ease of implementing new functionalities and integrating with external systems. Operating Platform for High Performance at Scale Our approach for operating and scaling our platform is based on leading process improvement and management practices. We leverage Lean methodologies for process improvement, human-centered design thinking, behavioral design, and Agile methodologies for software development to deliver high performance levels at scale. Our operational processes, software development and staffing models, including our virtual medical team, are designed to work together to create efficiencies and uniquely achieve our objectives. Moreover, we standardize our processes and practices so we can efficiently deliver consistent outcomes at scale across existing and new markets, which we believe will further drive our financial performance. Highly Experienced Management Team Our management team has extensive experience working with leading health systems, health plans, technology companies, service organizations, consumer brands, and enterprise-sales-driven companies. Our leadership embodies our cultural alignment around our behavioral tenants of being human-centered, team-based, unbounded in thinking, driven to excel, and intellectually curious. Our leaders help organize teams of clinicians, technologists and staff to regularly engage together in designing processes and software to further advance our objectives. Accordingly, our team is well positioned to execute on our objectives and advance an outstanding workplace environment. Our Growth Strategies To transform health care at scale, we can pursue growth through the following avenues. Grow membership in existing markets We have significant opportunities to increase membership in our existing markets through (i) new sales to consumers and enterprise clients, (ii) expansion of the number of enrolled members, including dependents, within our enterprise clients, (iii) expansion of the number of At-Risk members including Medicare Advantage participants or Medicare members for which we are at risk as a result of CMS' Direct Contracting Program, (iv) expansion of Medicare Advantage payers, with whom we contract and (v) adding other potential services. As of December 31, 2021, we had more than 8,500 enterprise clients. Of our 703,000 Consumer and Enterprise members as of December 31, 2021, 61% were from our enterprise clients. Within enterprise clients, our median activation rate as of December 31, 2021 was over 40%. We believe the number of clients, the number of eligible lives and enrolled members will increase over time as our brand awareness grows and our customer relationships mature. We define estimated activation rate for any enterprise client at a given time as the percentage of eligible lives enrolled as members. Some of our enterprise clients offer membership benefits to the dependents of their employees, for which we assume eligible lives include one dependent per employee. Additionally, while the percentage of enterprise clients offering our services to dependents of their employees has grown from 67% in 2016 to over 75% as of December 31, 2021, we believe we have continued room to further grow the number of enterprise clients offering membership benefits to dependent of their employees. Furthermore, as we continue to scale our presence, we anticipate an increasing number of larger national and regional employers will look to partner with us for our services. As of December 31, 2021, we also had approximately 33,000 At-Risk members and partnered with 8 Medicare Advantage payers across our 10 geographies where we have At-Risk members. 8 Expand into new markets We are physically present in 25 markets with plans to enter four new markets in 2022. We assess potential markets using a variety of metrics, including population demographics and density, employer presence, potential health network partners, and other factors. In addition, we launched One Medical Now, a service offering that provides 24/7 access to unlimited virtual care nationwide, which is sold to new and existing enterprise clients to cover employees in geographies where we are not yet physically present. We do not count employees who have access to or use One Medical Now as members, but we believe this new virtual offering may help us enroll new members in a new geography if and when we decide to offer our in-person offering. We believe some or all of our service offerings are viable in most geographies across the United States. As of December 31, 2021, our At-Risk offering was available in 10 markets, and our commercial offering was available in 19 markets. We expect to continue to expand our At-Risk offering into markets where we currently only have a commercial offering, as well as our commercial offering into markets where we currently only have an At-Risk offering. In addition, we plan to enter new markets to continue to grow our business. Given our service offering, we can expand our Medicare Advantage offering throughout the year and are not beholden to the annual Medicare enrollment cycle. We are one of a select group of companies that participate in the Direct Contracting Program, which is an initiative with a new payment model in which CMS contracts directly with provider-entities designated by CMS as Direct Contracting Entities. As a result, we have an opportunity to expand our Direct Contracting service offering to new geographies over time. Grow health network partnerships To accelerate our growth and presence, we can extend existing health network partnerships into new markets where our partners may also have a presence, or we can enter into new health network partnerships in new or existing markets. In 2021, we entered into three markets with new health network partners, and added 8 Medicare Advantage payers and the Direct Contracting Program with CMS to our health network partnerships. Expand services and populations We currently provide services to members across all stages of life. In addition to supporting members with routine and preventative primary, chronic and acute care, we typically provide lab and immunization services, women's health, men's health, LGBTQ+ care, pediatrics, geriatrics, sports medicine, lifestyle and wellbeing programs. In addition, we expanded our service offering in part as a response to COVID-19 and launched several new billable services, includin • COVID-19 testing, and counseling across all of our markets, including in our offices and in several mobile COVID-19 testing sites; • COVID-19 vaccinations in select geographies; • Healthy Together, our COVID-19 screening and testing program for employers, schools and universities; • Mindset by One Medical, our behavioral health service integrated within primary care; • One Medical Now, an expansion of our 24/7 on-demand digital health solutions to employees of enterprise clients located in geographies where we are not yet physically present; and, • Remote Visits, where our providers perform typical primary care visits with our members remotely Competition We compete in a highly fragmented primary care market with direct and indirect competitors that offer varying services to key stakeholders such as consumers, employers, providers, and health networks. Our competitive success is contingent on our ability to simultaneously address the needs of key stakeholders efficiently and with superior outcomes at scale. We expect to face increasing competition, both from current competitors, who may be well-established and enjoy greater resources or other strategic advantages to compete for some or all key stakeholders in our markets, as well as new entrants into our market. We believe our most direct competition today is from primary care providers who are employed by or affiliated with health networks. We also face competition from direct-to-consumer solutions or employer-focused on-site primary care offerings. These competitors may be narrower in their competitive footprint and may not address all the key stakeholders we serve simultaneously. Our indirect competitors also include episodic point solutions such as telemedicine offerings as well as urgent care providers. These offerings may typically pay providers on a fee-for-service basis rather than the salaried model we employ. Given the size of the healthcare industry and the extent of unmet needs, we expect additional competition, potentially from new companies, including smaller emerging companies which could introduce new solutions and services, as well as other 9 incumbent players in the healthcare industry or from other industries who could develop their own offerings and may have substantial resources and relationships to leverage. In particular, in light of the COVID-19 pandemic, existing or new competitors have developed or further invested in telemedicine and remote medicine programs and ventures, which would compete with our virtual care offerings. With the emergence of new technologies and market entrants, we expect to face increasing competition over time, which we believe will generally increase awareness of the need for modernized primary care models and other innovative solutions in the United States and globally. The principal competitive factors in our industry inclu • patient engagement, satisfaction and utilization; • convenience, accessibility and availability; • brand awareness and reputation; • technology capabilities including interoperability with legacy enterprise and health network infrastructures; • ability to address the needs of employers and payers; • ability to attract and retain quality providers; • ability to reduce costs; • level of participation in insurance plans; • alignment with health networks; • domain expertise in health care, technology, sales and service; • scalability of models; and • operational execution abilities. We believe that we compete favorably with our competitors on the basis of these factors and we believe the offerings of competitors inadequately address the needs of key stakeholders simultaneously or fail to do so at scale. Sales and Marketing Our marketing and sales initiatives focus on member growth through three primary avenu directly acquiring consumer and Medicare members, working with Medicare agents and brokers, and signing agreements with employers that sponsor employee memberships as part of their benefits packages. We use marketing and sales strategies to reach consumers, Medicare eligibles, as well as enterprise benefits leaders. Enterprise marketing and sales strategies also include account-based marketing, business development initiatives, and client service teams focused on customer acquisition, employee enrollment, and member engagement. With a growing national model that is now even larger with the recent addition of Iora, we aspire to be the most loved brand in health care. We anchor our brand messaging on how we delight our members with human-centered, technology-powered care. Consumer Sales & Marketing When we market and sell directly to individuals who are not Medicare eligible, we initially focus on increasing brand awareness, followed by performance marketing targeted toward member enrollment. Our marketing strategy in new markets is primarily centered on increasing overall brand awareness, familiarity, consideration and ultimately enrollment. To achieve these objectives, we showcase our model via direct mail, print, digital, out-of-home, broadcast, and social media advertising. We also develop thought leadership content such as whitepapers, eBooks, and blog posts and use public relations to secure earned media placements. Additionally, we participate in industry conferences, and may partner with media outlets, event venues, and local businesses to increase brand awareness. As brand awareness increases in more established markets, we shift our efforts to performance marketing focused on both customer acquisition and engagement. Our performance marketing initiatives include customized task-based in-app 10 messages and email communications to drive engagement among members, in addition to more targeted advertisements through direct mail, Google Search, YouTube and social media for member acquisition. Enterprise Sales & Marketing Our in-house enterprise sales force is organized by geography and customer size. To support our sales force, we segment market data to help with prospect qualification and leverage publicly available and trade organization material to focus on enterprise clients who we believe value health outcomes and medical cost reduction targets. The sales analytics team further supports our value to employers with population health data and medical cost assessment. Additionally, our client services team actively manages our customer accounts through in-depth reporting on metrics such as NPS, member activation, utilization, engagement, and value. We also work with channel partners such as health plans, payroll and professional employer organizations to reach enterprise clients, including small and midsize businesses and early stage new businesses. Additionally, we partner with select regional and national benefits brokers and consultants to educate potential customers on our offerings. After onboarding new enterprise accounts, we shift our focus to enrolling and engaging employees. These efforts include on-site visits to employers, enterprise email communications, and social media and other forms of performance marketing. In 2021, these efforts also increasingly included COVID-19 screening and testing, and flu vaccination campaigns. Medicare Sales & Marketing Our growth strategy to the Medicare population is focused on balancing brand awareness and lead generation through paid media, organic activities and community outreach. We create brand awareness through TV, radio, print and out of home advertising, which is focused on telling our story and highlighting relationship-based care. We also add a variety of digital media and direct mail to drive lead generation and patient acquisition. We build fully integrated campaigns that vary by market based on market penetration, objectives and market response rates to different initiatives. In addition to paid media, we focus on organic media through Search Engine Optimization ("SEO") work, online reviews and driving word of mouth through our patient base. We also deploy a field sales team who manages community outreach and local presence. This team works with agents and brokers to educate them on our care model. They also look for opportunities to connect with prospects directly in the communities we serve. Lastly, we have utilized third party telesales vendors to help drive new sales. Intellectual Property We believe that our intellectual property rights are important to our business. We rely on a combination of trademarks, service marks, copyrights, trade secrets, and patent applications to protect our proprietary technology and other intellectual property. As of December 31, 2021, we exclusively own eleven registered trademarks in the United States, including One Medical and Iora marks, with additional registrations currently pending. In addition, we have registered domain names for websites that we use or may use in our business. As of December 31, 2021, we had no issued patents and one pending patent application in the United States. Currently, we do not have patent protection for any of our proprietary technology, including our technology platforms, mobile app or web portal. As of December 31, 2021, we have registered copyright ownership of the Healthy Together Playbook, an important part of our Healthy Together return-to-work program helping employers to safely bring their workforce back together amidst the pandemic. We seek to control access to and distribution of our proprietary information, including our algorithms, source and object code, designs, and business processes, through security measures and contractual restrictions. We seek to limit access to our confidential and proprietary information on a "need to know" basis and enter into confidentiality and nondisclosure agreements with our employees, consultants, customers, vendors, and others that may receive or otherwise have access to any confidential or proprietary information. We have company policies relating to intellectual property protection and we train our workforce on the same from time to time. We also obtain written invention assignment agreements from our employees, consultants, and vendors that assign to us all right, interest, and title to inventions and work product developed during their employment or service engagement with us. In the normal course of business, we provide our intellectual property to external parties through licensing or restricted use agreements. We have established a system of security measures to help protect our computer systems from security breaches and computer viruses. We have employed various technology and process-based methods, such as clustered and multi-layer firewalls, intrusion detection systems, vulnerability assessments, threat intelligence, content filtering, 11 endpoint security (including anti-malware and detection response capabilities), email security mechanisms, and access control mechanisms. We also use encryption techniques for data at rest and in transit. Government Regulation The healthcare industry and the practice of medicine are governed by an extensive and complex framework of federal and state laws, which continue to evolve and change over time. The costs and resources necessary to comply with these laws are high. Our profitability depends in part upon our ability, and that of our affiliated professional entities and their providers, to operate in compliance with applicable laws and to maintain all applicable licenses. A review of our operations by courts or regulatory authorities could result in determinations that could adversely affect our operations, or the healthcare regulatory environment could change in a way that restricts our operations. Practice of Medicine Corporate Practice of Medicine and Fee-Splitting We contract with our affiliated professional entities, who in turn employ or retain physicians and other medical providers to deliver professional clinical services to patients. We typically enter into ASAs with our affiliated professional entities pursuant to which we provide them with a wide range of administrative services and receive payment from the affiliated professional entity. These administrative services arrangements are subject to state laws, including those in certain of the states where we operate, which prohibit the practice of medicine by, and/or the splitting of professional fees with, non-professional persons or entities such as general business corporations. Corporate practice of medicine and fee-splitting prohibitions vary widely from state to state. In addition, such prohibitions are subject to broad powers of interpretation and enforcement by state regulators. Our failure to comply could lead to adverse action against us and/or our providers by courts or state agencies, civil or criminal penalties, loss of provider licenses, or the need to restructure our business model and/or physician relationships, any of which could harm our business. Practice of Medicine and Provider Licensing The practice of medicine by our affiliated professional entities is subject to various federal, state, and local laws and requirements, including, among other things, laws relating to the practice of medicine (including remote care), quality and adequacy of care, non-physician personnel (including advanced practitioners and non-clinicians), supervisory requirements, behavioral health, medical equipment, and the prescribing and dispensing of pharmaceuticals and controlled substances. Telehealth Provider Licensing, Medical Practice, Certification and Related Laws and Guidelines Providers who provide professional medical services to a patient via telehealth must, in most instances, hold a valid license to practice medicine in the state in which the patient is located, unless there are applicable exceptions. Federal and state laws also limit the ability of providers to prescribe pharmaceuticals and controlled substances via telehealth. We have established systems for ensuring that our affiliated providers are appropriately licensed under applicable state law and that their provision of telehealth to our members occurs in each instance in compliance with applicable rules governing telehealth. Failure to comply with these laws and regulations could lead to adverse action against our providers, which could harm our business model and/or physician relationships and have a negative impact on our business. Other Healthcare Laws The False Claims Act and its implementing regulations include several separate criminal penalties for making false or fraudulent claims to non-governmental payers. The healthcare fraud statute prohibits knowingly and recklessly executing a scheme or artifice to defraud any healthcare benefit program, which includes private payers. Violation of this statute is a felony and may result in fines, imprisonment, or exclusion from government healthcare programs. The false statements statute prohibits knowingly and willfully falsifying, concealing, or covering up a material fact by any trick, scheme, or device, or making any materially false, fictitious, or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items, or services. Violation of this statute is a felony and may result in fines or imprisonment. This statute could be used by the government to assert criminal liability if a healthcare provider knowingly fails to refund an overpayment. The federal government engages in significant civil and criminal enforcement efforts against healthcare companies under the False Claims Act and other civil and criminal statutes. False Claims Act investigations can be initiated not only by the government, but by private parties through qui tam (or whistleblower) lawsuits. Penalties for False Claims Act violations include fines ranging from $12,537 to $25,076 per false claim or statement (as of January 2022, and subject to annual adjustments for 12 inflation), plus up to three times the amount of damages sustained by the federal government. Violations of the False Claims Act violations can also result in exclusion from participation in government healthcare programs. In addition, many states have adopted analogous or similar fraud and false claims laws. In addition, the Civil Monetary Penalties Law imposes civil administrative sanctions for, among other violations, (1) inappropriate billing of services to government healthcare programs, (2) employing or contracting with individuals or entities who are excluded from participation in government healthcare programs, and (3) offering or providing Medicare or Medicaid beneficiaries with any remuneration, including full or partial waivers of co-payments and deductibles, that are likely to influence the beneficiary's selection of a particular provider, practitioner, or supplier (subject to an exception for non-routine, unadvertised co-payment and deductible waivers based on individualized determinations of financial need or exhaustion of reasonable collection efforts). State and Federal Health Information Privacy and Security Laws We must comply with various federal and state laws related to the privacy and security of personal information, including health information. In particular, HIPAA, as amended by the HITECH Act, and its implementing regulations, establishes privacy and security standards that limit the use and disclosure of protected health information, or PHI, and requires the implementation of administrative, physical, and technical safeguards to ensure the confidentiality, integrity, and availability of PHI. The affiliated professional entities are regulated as covered entities under HIPAA. HIPAA's requirements are also directly applicable to the contractors, agents, and other business associates of covered entities that create, receive, maintain, or transmit PHI in connection with their provision of services to covered entities. 1Life and its subsidiaries are business associates of the affiliated professional entities, health network partners and other covered entities when performing certain administrative services on their behalf. We are also subject to the HIPAA breach notification rule, which requires covered entities to notify affected individuals of breaches of unsecured PHI. In addition, covered entities must notify the Secretary of Health and Human Services, or HHS, Office of Civil Rights, or OCR, and the local media if a breach affects more than 500 individuals. Breaches affecting fewer than 500 individuals must be reported to OCR on an annual basis. The HIPAA regulations also require business associates to notify the covered entity of breaches by the business associate. Violations of HIPAA can result in significant civil and criminal penalties and a single breach incident can result in violations of multiple standards. Many states in which we operate have their own laws protecting the privacy and security of personal information, including health information. We must comply with such laws in the states where we do business in addition to our obligations under HIPAA. In some states, such as California, state privacy laws are even more protective than HIPAA. It may sometimes be necessary to modify our operations and procedures to comply with these more stringent state laws. State data privacy and security laws are subject to change, and we could be subject to financial penalties and sanctions if we fail to comply with these laws. In addition to federal and state laws protecting the privacy and security of personal information, we may be subject to other types of federal and state privacy laws, including laws that prohibit unfair privacy and security practices and deceptive statements about privacy and security, along with laws that impose specific requirements on certain types of activities, such as data security and texting. Federal and State Fraud and Abuse Laws Federal Stark Law We are subject to the federal physician self-referral law, commonly known as the Stark Law, which prohibits physicians from referring Medicare or Medicaid patients to an entity for the provision of certain "designated health services" if the referring physician or a member of the physician's immediate family has a direct or indirect financial relationship (including an ownership interest or a compensation arrangement) with the entity, unless an exception applies. The Stark Law is a strict liability statute, which means intent to violate the law is not required. In addition, the government and some courts have taken the position that claims presented in violation of various fraud, waste, and abuse laws, including the Stark Law, can be considered a predicate legal violation to submission of a false claim under the federal False Claims Act (described below) on the grounds that a provider impliedly certifies compliance with all applicable laws and rules when submitting claims for reimbursement. Penalties for violating the Stark Law may inclu denial of payment for services ordered in violation of the law, recoupments of monies paid for such services, civil penalties for each violation and three times the dollar value of each such service, and exclusion from participation in government healthcare programs. Violations of the Stark Law could have a material adverse effect on our business, financial condition, and results of operations. 13 Federal Anti-Kickback Statute We are also subject to the federal Anti-Kickback Statute, which, subject to certain exceptions known as "safe harbors," prohibits the knowing and willful offer, payment, solicitation or receipt of any bribe, kickback, rebate or other remuneration, in cash or in kind, in return for, or to induce, the (1) the referral of a person covered by government healthcare programs, (2) the furnishing or arranging for the furnishing of items or services reimbursable under government healthcare programs, or (3) the purchasing, leasing, ordering, or arranging or recommending the purchasing, leasing, or ordering, of any item or service reimbursable under government healthcare programs. Federal courts have held that the Anti-Kickback Statute can be violated if just one purpose of a payment is to induce referrals. Actual knowledge of this statute or specific intent to violate it is not required, which makes it easier for the government to prove that a defendant had the state of mind required for a violation. In addition to a few statutory exceptions, the Human Services Office of Inspector General, or OIG, has promulgated safe harbor regulations that outline categories of activities that are deemed protected from prosecution under the Anti-Kickback Statute, provided all applicable criteria are met. The failure of a financial relationship to meet all of the applicable safe harbor criteria does not necessarily mean that the particular arrangement violates the Anti-Kickback Statute, but business arrangements that do not fully satisfy all elements of a safe harbor may result in increased scrutiny by OIG and other enforcement authorities. Violations of the Anti-Kickback Statute can result in exclusion from government healthcare programs as well as civil and criminal penalties, including fines of $50,000 per violation and three times the amount of the unlawful remuneration. Violations of the Anti-Kickback Statute could have a material adverse effect on our business, financial condition, and results of operations. State Fraud, Waste and Abuse Laws Several states in which we operate have also adopted similar fraud, waste, and abuse laws to those described above. The scope and content of these laws vary from state to state and are enforced by state courts and regulatory authorities. Some states' fraud and abuse laws, known as "all-payer laws," are not limited to government healthcare programs, but apply more broadly to items or services reimbursed by any payer, including commercial insurers. Liability under state fraud, waste, and abuse laws could result in fines, penalties, and restrictions on our ability to operate in those jurisdictions. Our Health Network Partnerships Our health network partnerships include health system partners and arrangements with private and government payers. Health System Partners We have entered into strategic partnership arrangements with each of our health system partners under which we and the health system partner create a clinically integrated care delivery model that coordinates our network of affiliated primary care practices with the health system partner's healthcare system to better deliver coordinated care for members, improve operational efficiencies, and deliver value to employers and other players. Fee Structure Under most of the strategic partnership arrangements, the health system partners contract with one or more of our affiliated professional entities for professional clinical services and contract with 1Life for management, operational and administrative services, including billing and collection services and designing and managing the day-to-day administration of the business aspects of the primary care practices. Under these arrangements, when our medical offices provide professional clinical services to covered members, we, as administrator, perform billing and collection services on behalf of the health system, and the health system receives the fees for the services provided, including those paid by members' insurance plans. In return for these professional clinical, management, operational and administrative services, we receive (i) fees from these health system partners on a PMPM basis, which may be based on various factors such as visit rates, other primary care relationships our health system partners may have, and the rates these health system partners receive from payers, or (ii) fee-for-service payments based on our health system partners' health insurance contracts. Term and Termination The term of each strategic partnership arrangement is typically five or more years and automatically renews for additional two- to five-year terms unless either we or the health system partners decide not to renew. We or the health system partners generally may terminate a strategic partnership arrangement with 90 days' notice upon certain events such as uncured breach, mutual consent, or a change in law that conflicts with the applicable arrangement. The strategic partnership 14 arrangements generally may be terminated immediately upon certain events such as bankruptcy, exclusion and in some cases, business combinations involving us and a specified competing health system. Certain health system partners may also terminate upon their determination that we no longer meet their criteria for clinical partnership or the values or mission of the health system partner. Exclusivity and Non-Solicitation Under the terms of strategic partnership arrangements, we typically cannot enter into a similar arrangement with direct competitors to the health system partner within the territory covered by the strategic partnership arrangement. Additionally, the terms of some of the strategic partnership arrangements include a mutual non-solicitation clause, prohibiting us and our health system partners from soliciting each other's employees during the term of the arrangement and for one year following its expiration, subject to certain customary recruiting practices. Clinic Commitments and Development Fees Pursuant to each strategic partnership arrangement, we typically commit to open an initial number of clinics, ranging from low single digits to mid-teen double digits depending on the area covered, within the initial term. Our health system partners pay us certain development fees for the opening of each clinic. Arrangements with Private and Government Payers We have entered into At-Risk arrangements with a variety of Medicare payers such as private Medicare health plans including large national and regional payers, as well as with CMS, in which we receive a PMPM fee and are responsible for managing a range of healthcare services and associated costs of our members. Our At-Risk arrangements with private payers are generally managed on a region by region basis and we typically enter into a separate contract in each region with a payer's local affiliate. The PMPM fee that we receive is determined in part by these payers and is based on a variety of patient factors such as age and demographic benchmarks, and further adjusted to reflect the underlying complexity of a patient’s health conditions (acuity). Under certain contracts, we may also adjust the PMPM fees for a percentage share of any additional gross capitated revenues and associated medical claims expense generated by the provision of healthcare services not directly provided by us. Private Payer Arrangements Our At-Risk arrangements with private payers generally range from two to 11 years and will typically renew automatically for additional one- to two-year terms unless either we or the private payer decide not to renew. In general, at the end of an initial term, we or the private payer may terminate an arrangement with not less than 120 days’ notice. Also, we or the private payer generally may terminate an arrangement immediately upon certain events such as bankruptcy and exclusion or with 60 days' notice upon certain events such as uncured breach, mutual consent, or a change in law that conflicts with the applicable arrangement. Direct Contracting Arrangement with CMS We have entered into an agreement with the CMS’ Direct Contracting Program. The Direct Contracting Program is an initiative with a new payment model in which CMS contracts directly with provider-entities as Direct Contracting Entities, or DCEs, and is part of CMS’ strategy to drive broader healthcare reform and accelerate the shift from Medicare’s original fee-for-service model toward value-based care models. We are one of a limited group of companies chosen by CMS to be a DCE and to participate in the Global Risk component of the Direct Contracting Program, which started on April 1, 2021 and will be tested over six years. The Direct Contracting Program allows us to shift to an At-Risk model and receive a capitated, per member per month payment for managing the health of the enrolled patients that is based on what CMS would be paying for the enrolled patients if they were members of a Medicare Advantage health plan. The Direct Contracting Program allows us to take risk on these patients and share the economic benefits with CMS. Our Enterprise Client Agreements We enter into contractual arrangements with our enterprise clients pursuant to which our clients purchase memberships from us for their employees and, in certain circumstances, we provide on-site and near-site clinics and health services. The transaction price for memberships under most of these contracts is determined on a per employee per month basis, based on the 15 number of employees eligible for membership established at the beginning of each contract period. Our contracts with enterprise clients typically have one- to three-year terms. Google Services Agreement In August 2017, we entered into an inbound services agreement, or the ISA, with Google Inc. and certain of our affiliated professional entities. Under the ISA, we and Google enter into statements of work, or SOWs. As part of one or more of the SOW's, Google sponsors memberships for their employees and dependents in certain markets in exchange for payment of annual fees. We also provide on-site clinics and health services for certain Google office locations under one or more SOWs. Under the ISA, Google is not obligated to enter into any SOWs with us, and we are not obligated to provide any services to Google except as agreed in the SOWs. Any party may terminate the ISA or any SOW in certain circumstances, including following an uncured material breach, or suspend or terminate any SOW if applicable law prohibits performance under the SOW. For 2020, Google accounted for 10% of our net revenue. For 2021, Google accounted for less than 10% of our net revenue. Human Capital Resources Employee Well-Being and Culture We recognize that to be successful in our mission to transform healthcare, we need to take care of our teams as much as we take care of the members we serve. We reinforce this through our culture and team-based approach to longitudinal care as well as our salaried provider model, which eliminates the volume-based, fee-for-service compensation model commonly seen in our industry that could drive provider burnout. We also offer flexible work arrangements and opportunities to practice in-office or virtually. We believe this results in a better quality of life and work-life balance. To assist us with tracking the levels of engagement and satisfaction of our team members, we conduct annual team member engagement surveys to assess their views on the Company’s employee well-being, work-life blend, career advancement opportunities, inclusion and learning and development opportunities. We also provide our team members with confidential channels to voice their concerns. The feedback that we collect from these surveys and from alternative channels are used to assess employee engagement, our Company culture and our workplace environment as well as to refine and implement programs and processes for our team members. Our commitment to a team-based, collaborative environment and the values and benefits we provide to employees contributed to us being named by Forbes and Statista as one of America's Best Midsize Employers of 2022. We believe our culture embodies five distinct qualities which we refer to as our DNA: Human-Centered. We stay humble and empathetic, putting people at the heart of everything we build and every decision we make. Team-Based. We communicate effectively, respect our teammates, and make the difficult tradeoffs that foster the success of the organization. Intellectually Curious. We know we don't know everything; we're always eager to learn, and we're never afraid to question the status quo. Unbounded-Thinking. By staying open minded, creative, and positive, we aim to push beyond constraints that have stymied those before us. Driven to Excel. In our quest to be the best Primary Care group in the country, we focus on getting things done and pay attention to the little details that matter. Training and Development We believe in ensuring that all team members have access to tools to help them grow their careers and have focused our training and development on two primary areas: professional/career and leader development. We have invested in an array of internally generated and externally sourced learning resources, including a range of in-person, virtual and self-directed learning opportunities for our team members to help them develop the skills and competencies to further their career at One Medical. 16 Compensation and Benefits We are committed to fair compensation practices and, as a primary care company, we take a comprehensive approach to curating benefits for our employees to enable them to thrive personally and professionally and offer benefits that support an employee's mental, physical, financial and family well-being. We offer qualifying employees access to a variety of benefits, including, medical, dental and vision coverage, childcare benefits, flexible spending accounts, financial wellness and planning, paid time-off and parental leave, life and disability insurance, 401(k) plan matching contributions and resources for health and wellness, including complimentary One Medical membership and access to One Medical Virtual Coaching and various employee assistance programs. We also offer a four-week Company-paid sabbatical to qualifying team members who reach five and 10 years of service with us to allow team members to pursue personal and professional development. In response to the COVID-19 pandemic, we have also implemented special paid-time-off policies for employees who need to quarantine due to exposure to COVID-19. Diversity and Inclusion We also recognize the importance of having a diverse and inclusive environment as part of our mission of transforming healthcare. We maintain a Diversity, Equity, Inclusion and Justice Committee to encourage best practices to foster diversity, equity, inclusion and social justice in the workplace. To help support career development for our Black and Latinx team members, we have implemented mentorship programs and have also implemented training programs to help advance our culture of diversity, inclusion, equity and justice. Recently, we have also established a Health Equity Domain Working Group that evaluates policies and best practices on providing care in a manner that respects the diversity of our patients and the cultural factors that can affect their health. As of December 31, 2021, we had 3,090 full-time employees and none of our employees were represented by labor unions or covered by collective bargaining agreements. We consider our relationship with our employees to be good and we have not experienced any work stoppages due to labor disagreements. Corporate and Available Information We were incorporated under the laws of the state of Delaware in July 2002 under the name 1Life Healthcare, Inc. Our principal executive offices are located at One Embarcadero Center, Suite 1900, San Francisco, California 94111. Our telephone number is (415) 814-0927. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, are available free of charge on or through our website, http://www.one medical.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission, or the SEC. The SEC's website, http://www.sec.gov, contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Investors and others should note that we announce material financial and other information using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We also post supplemental materials on the "Events" section of our investor relations website at investor.onemedical.com. Except as specifically noted herein, information contained on or accessible through our website is not incorporated into, and does not form a part of, this Annual Report on Form 10-K or any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. We also use our Facebook, Twitter and LinkedIn accounts as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts, in addition to following our press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this Annual Report on Form 10-K. These channels may be updated from time to time on our investor relations website. Item 1A. Risk Factors. Investing in our common stock involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below, as well as other information included in this Annual Report, including our consolidated financial statements and related notes included elsewhere in this Annual Report, before making an investment decision. If any of the following risks actually occur, it could harm our business, prospects, operating results and financial condition. Unless 17 otherwise indicated, references to our business being harmed in these risk factors will include harm to our business, reputation, financial condition, results of operations, net revenue and future prospects. In such event, the trading price of our common stock could decline and you might lose all or part of your investment. Our results of operations for the year ended December 31, 2021 include the results of operations of Iora for the period from the close of our acquisition on September 1, 2021 through December 31, 2021. Risks Related to Our Business and Our Industry The ongoing coronavirus (COVID-19) pandemic has significantly impacted, and may continue to significantly impact our business, financial condition, results of operations and growth. The global COVID-19 pandemic and measures introduced by local, state and federal governments to contain the virus and mitigate its public health effects have significantly impacted and may continue to significantly impact our business, our industry and the global economy. While the full extent of the impacts of the COVID-19 pandemic may be difficult to predict or determine due to numerous evolving factors, including emerging variant strains of the virus and their degree of vaccine resistance as well as reinstatements or potential reinstatements of measures to curb the spread of COVID-19, we have seen and may continue to see adverse impacts on our operations, net revenues, expenses, collectability of accounts receivables and other money owed, capital expenditures, liquidity, and overall financial condition, including from: • reduced total billable visit volumes, temporary closures of certain offices, delays in openings of new medical offices, and delayed entry into new or expansion into existing geographies (in response to self-isolation practices, sustained remote work policies, quarantines, shelter-in-place requirements and similar government orders); • higher proportions of lower-revenue generating services and products, including billable remote visits, COVID-19 testing and COVID-19 vaccinations, which may not be reimbursable or have lower average reimbursements relative to traditional in-office visits; • deferral of healthcare by members and patients, which may result in difficulties completing comprehensive annual documentation of Medicare patient health conditions, future cost increases, deferred costs and inability to accurately estimate costs for incurred but not yet reported medical services claims for our At-Risk members, and may negatively impact the health of our patients; • increase in internal and third-party medical costs for care provided to At-Risk members suffering from COVID-19, which may be particularly significant given many of our members are under At-Risk arrangements in which we receive capitated payments; • negative impacts to the business, results of operations and financial condition of our health network partners and their ability or willingness to continue to pay us a fixed price PMPM if they receive reduced visit revenue due to decreases in billable utilization; • inquiries, regulatory or governmental investigations or other disputes that result from our provision of COVID-19 vaccinations, arrangements entered into in reliance on related orders, laws and regulations, or the failure of various waivers for limitations of liability or other provisions under such orders, laws and regulations that apply to us; • supply, resource and capital constraints related to the treatment of COVID-19 patients and disruptions or delays in the delivery of materials and products in the supply chain for our offices and increased capital expenditures due to the need to buy incremental materials or services; • staffing shortages and increased risk for workers’ compensation claims; or • increased costs, diversion of resources from managing our business and growth and reputational harm due to (i) implementation of new services and products in reliance on continuously evolving regulatory standards, (ii) alterations to our operations to address the changing needs of our members during the pandemic, or (iii) member or enterprise client dissatisfaction due to inaccurate results from testing or other services, overburdening of our medical offices and virtual care teams with inquiries and requests, which may result in longer phone wait times or service delays. Any continuation of the above factors and outcomes could harm our business, financial condition, results of operations and growth. 18 We cannot assure you that our current billable volumes and membership levels will be sustained or that average reimbursement for billable services will return to pre-COVID-19 levels. As more of the U.S. population receives the COVID-19 vaccination, our COVID-19 testing volumes may also decline, which may negatively impact our membership and revenue. Further, while vaccines have become available in certain countries and many economies have reopened, new shelter-in-place, quarantine, executive order or related measures or practices may be reinstated by governments and authorities, including due to future waves of outbreak or emerging variant strains of COVID-19, such as the Delta and Omicron variant. Such measures and practices, if reinstated, could reduce our total billable volumes, negatively impact our health network partners and harm our results of operations, business and financial condition. We have continued to adjust many of our new programs to rapidly respond to the COVID-19 pandemic, including telehealth visits, testing and vaccine administration arrangements, in reliance on continuously evolving regulatory standards such as emergency orders, laws and regulations from federal, state and local authorities and the relaxation of certain licensure requirements and privacy restrictions for telehealth intended to permit health care providers to provide care and distribute COVID-19 vaccines to patients during the COVID-19 pandemic. To continue providing some of these new services and products, we will be required to comply with federal, state and local rules, mandates and guidelines, which are subject to rapid change and may vary across jurisdictions. We cannot assure you that such orders, laws, regulations, mandates or guidelines will continue to apply or that regulators or other governmental entities will agree with our interpretations of these orders, laws, regulations, mandates and guidelines. Failure to remain in compliance, or even the perception of non-compliance, may curtail or result in restrictions on our ability to provide any such services, result in time-consuming and potentially costly inquiries, disputes, or investigations (such as the vaccine inquiries discussed in Note 17, “Commitments and Contingencies” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, or the Vaccine Inquiries, or inquiries from state and local public health departments), as well as damage to our reputation, any of which could harm our business, financial condition and results of operations. We are cooperating with the requests from the Vaccine Inquiries as well as requests received from other governmental agencies, including with respect to our compensation practices and membership generation during the relevant periods. We are unable to predict the outcome or timeline of any residual inquiries or if any additional requests, inquiries, investigations or other government actions may arise relating to such circumstances. The Vaccine Inquiries, together with any additional inquiries, regulatory or governmental investigations or other disputes that result from our provision of COVID-19 vaccinations or any other arrangements entered into in reliance on these orders, laws and regulations, or the failure or reversal of various waivers for limitations of liability or other provisions under such orders, laws and regulations to apply to us could require us to divert resources or adjust certain new programs to ensure compliance and harm our reputation, business, financial condition and results of operations. The pandemic has also resulted in, and may continue to result in, significant disruption of global financial markets, potentially reducing our ability to access capital and reducing the liquidity and value of our short-term marketable securities, which could in the future negatively affect our liquidity. In addition, due to our At-Risk arrangements for the care of Medicare Advantage participants, the full impact of the COVID-19 pandemic may not be fully reflected in our results of operations and overall financial condition until future periods. The COVID-19 pandemic may continue to impact our operations, and net revenues, expenses, collectability of accounts receivables and other money owed, capital expenditures, liquidity, and overall financial condition. We are dependent upon a limited number of key existing payers and loss of contracts with those payers, disruptions in those relationships or the inability of such payers to maintain their contracts with CMS, could adversely affect our business, financial condition, results of operations and prospects. We are dependent on a concentrated number of third-party payers with whom we contract to provide services to At-Risk Members. Contracts with one such payer accounted for 13% of net revenue for the four months ended December 31, 2021. We believe that a majority of our net revenue will continue to be derived from a limited number of key payers, who may terminate their contracts with us for convenience on short-term notice, or upon the occurrence of certain events, some of which may not be within our control. The loss of any of our payer partners or the renegotiation of any of our payer contracts could adversely affect our operating results. In the ordinary course of business, we engage in active discussions and renegotiations with payers in respect of the services we provide and the terms of our payers' agreements. As the payers’ businesses respond to market dynamics and financial pressures, and as payers make strategic business decisions in respect of the lines of business they pursue and programs in which they participate, certain of our payers may seek to renegotiate or terminate their agreements with us. These discussions could result in reductions to the fees and changes to the scope of services contemplated by our original payer contracts and consequently could negatively impact our net revenue, business, financial condition, results of operations and prospects. Because we rely on a limited number of these payers for a substantial portion of our revenue, we depend on the creditworthiness of these payers. Our payers are subject to a number of risks, including reductions in payment rates from governmental programs, higher than expected health care costs and lack of predictability of financial results when entering new lines of business, particularly with high-risk populations. If the financial condition of our payer partners declines, our credit risk 19 could increase. Should one or more of our significant payer partners declare bankruptcy, be declared insolvent or otherwise be restricted by state or federal laws or regulation from continuing in some or all of their operations, this could adversely affect our ongoing revenues, the collectability of our accounts receivable, our bad debt reserves and our net income. If a payer with which we contract loses its Medicare contracts with CMS, receives reduced or insufficient government reimbursement under the Medicare program, decides to discontinue its Medicare Advantage and/or commercial plans, decides to contract with another company to provide capitated care services to its patients, or decides to directly provide care, our contract with that payer could be at risk and we could lose revenue. We are reliant upon reimbursements from certain third-party payers for the services we provide in our business and reliance on these third-party payers could lead to delays and uncertainties in the reimbursement process. We are reliant upon contracts with certain third-party payers in order to receive reimbursement for some of the services we provide to patients, including value-based contracts from health insurance plans. The reimbursement process is complex and can involve lengthy delays. Although we recognize certain revenue when we provide services to our patients, we may from time to time experience delays in receiving the associated capitation payments or, for our patients on fee-for-service arrangements, the reimbursement for the service provided. In addition, third-party payers may disallow, in whole or in part, requests for reimbursement based on determinations that the member is not eligible for coverage, certain amounts are not reimbursable under plan coverage or were for services provided that were not medically necessary or additional supporting documentation is necessary. Retroactive adjustments may change amounts realized from third-party payers. We are also subject to claims reviews and/or audits by such third-party payers, including governmental audits of our Medicare claims, and may be required to repay these payers if a finding is made that we were incorrectly reimbursed. See “—Noncompliance with billing and documentation requirements could result in non-payment or subject us to audits, billing or other compliance investigations by government authorities, private payers or health network partners.” Third-party payers are also increasingly focused on controlling health care costs, and such efforts, including any revisions to reimbursement policies, may further complicate and delay our reimbursement claims. Furthermore, our business may be adversely affected by legislative initiatives aimed at or having the effect of reducing health care costs associated with Medicare and other changes in reimbursement policies. Delays and uncertainties in the reimbursement process may adversely affect our collection of accounts receivable, increase the overall costs of collection and cause us to incur additional borrowing costs to support our liquidity needs, which could harm our business, financial condition and results of operations. A significant portion of our net revenue is based on Medicare’s risk adjustment payment system and is subject to review and audit, which could result in material adjustments to our results of operations. CMS has implemented a risk adjustment payment system for Medicare health plans to improve the accuracy of payments and establish appropriate compensation for Medicare plans that enroll and treat less healthy Medicare beneficiaries. CMS’ risk adjustment model bases a portion of the total CMS reimbursement payments on various clinical and demographic factors, including hospital inpatient diagnoses, diagnosis data from hospital outpatient facilities and physician visits, gender, age and Medicaid eligibility. CMS requires that all managed care companies capture, collect and report the necessary diagnosis code information to CMS, which information is subject to review and audit for accuracy by CMS. This risk adjustment payment system has an indirect impact on the payments we receive from our contracted Medicare Advantage payers. Although we, and the payers with which we contract, have auditing and monitoring processes in place to collect and provide accurate risk adjustment data to CMS for these purposes, that program may not be sufficient to ensure accuracy. If the risk adjustment data submitted by us or our payers incorrectly overstates the health risk of our patients, we might be required to return to the payer or CMS, overpayments and/or be subject to penalties or sanctions, or if the data incorrectly understates the health risk of our members, we might be underpaid for the care that it must provide to its patients, any of which could harm our reputation and have a negative impact on our results of operations and financial condition. CMS may also change the way that they measure risk, and the impact of any such changes could harm our business. As a result of the COVID-19 pandemic, risk adjustment scores may also fall as a result of reduced data collection, decreased patient visits or delayed medical care and limitations on payments for certain telehealth services. As a result of the variability of factors affecting our patients’ risk scores, the actual payments we receive from our payers, after all adjustments, could be materially more or less than our estimates. Consequently, our estimate of our patients’ aggregate member risk scores for any period may result in favorable or unfavorable adjustments to our Medicare premium revenues, which may harm our results of operations. Under our At-Risk arrangements with certain third-party payers, we assume the risk that the cost of providing services will exceed our compensation for such services. 20 A substantial portion of our net revenue consists of Capitated Revenue, which, in the case of third party payers or health insurance plans, is based on a pre-negotiated percentage of the premium that the payer receives from CMS. While there are variations specific to each agreement, we sometimes contract with payers to receive recurring PMPM revenue and assume the financial responsibility for the healthcare expenses of our patients. This type of contract is referred to as a “capitation” contract. CMS pays capitation using risk adjustment scores. See “–A significant portion of our net revenue is based on Medicare’s risk adjustment payment system and is subject to review and audit, which would result in material adjustments to our results of operations.” To the extent we encounter delays in documenting patients’ acuity or patients requiring more care than initially anticipated and/or the cost of care increases, aggregate fixed compensation amounts, or capitation payments, may be insufficient to cover the costs associated with treatment. If medical costs and expenses exceed estimates, except in very limited circumstances, we will not be able to increase the fee received under these capitation agreements during their then-current terms and we could suffer losses with respect to such agreements. In addition, while we maintain stop-loss insurance that helps protect us for medical claims per patient in excess of certain levels, future claims could exceed our applicable insurance coverage limits or potential increases in insurance premiums may require us to decrease its level of coverage. Changes in our anticipated ratio of medical expense to revenue can significantly impact our financial results. Accordingly, the failure to adequately predict and control medical costs and expenses and to make reasonable estimates and maintain adequate accruals for incurred but not reported claims could have a material adverse effect on our business, results of operations, financial condition and cash flows. Additionally, the Medicare expenses of our At-Risk members may be outside of our control in the event that such members take certain actions that increase such expenses, such as unnecessary hospital visits. These actions or events also make it more difficult for us to estimate medical expenses and may cause delays in reporting them to payers. Any delays or failures to adequately predict and control medical costs may also result in delayed negative impacts to our Capitated Revenue, including as compared to our estimates of cost of care and capitation payments. Historically, our medical costs and expenses as a percentage of revenue have fluctuated. Factors that may cause medical expenses to exceed estimates inclu • the health status of our At-Risk members; • higher levels of hospitalization among our At-Risk members; • higher than expected utilization of new or existing healthcare services or technologies; • an increase in the cost of healthcare services and supplies, whether as a result of inflation or otherwise; • changes to mandated benefits or other changes in healthcare laws, regulations and practices; • increased costs attributable to specialist physicians, hospitals and ancillary providers; • changes in the demographics of our At-Risk members and medical trends; • contractual or claims disputes with providers, hospitals or other service providers within and outside a health plan’s network; • the occurrence of catastrophes, major epidemics or pandemics, including COVID-19, or acts of terrorism; and • the reduction of health plan premiums. If reimbursement rates paid by private third-party payers are reduced or if these third-party payers otherwise restrain our ability to obtain or provide services to patients, our business could be harmed. Private third-party payers, including health maintenance organizations, or HMOs, preferred provider organizations and other managed care plans, as well as medical groups and independent practice associations that contract with HMOs, pay for the services that we provide to many of our members. As a substantial proportion of our members are commercially insured or covered under Medicare Advantage plans with our contracted payers, if any third-party payers reduce their reimbursement rates or elect not to cover some or all of our services, our business may be harmed. Typically, our affiliated professional entities that provide medical services enter into contracts with certain of these payers either directly, or indirectly through certain of our health network partners, which allow them to participate in the payers’ respective networks and set forth reimbursement rates for services rendered thereunder. As a result, our ability to maintain or increase patient volumes covered by private third-party payers and to maintain and obtain favorable contracts with private third-party payers significantly affects our revenue and operating results. See also “—We are dependent upon a limited number of key existing payers and loss of contracts with those 21 payers, disruptions in those relationships or the inability of such payers to maintain their contracts with CMS, could adversely affect our business, financial condition, results of operations and prospects.” Private third-party payers often use plan structures, such as narrow networks or tiered networks, to encourage or require members to use in-network providers. In-network providers typically provide services through private third-party payers for a negotiated lower rate or other less favorable terms. Private third-party payers generally attempt to limit use of out-of-network providers by requiring members to pay higher copayment and/or deductible amounts for out-of-network care. Additionally, private third-party payers have become increasingly aggressive in attempting to minimize the use of out-of-network providers by disregarding the assignment of payment from members to out-of-network providers (i.e., sending payments directly to members instead of to out-of-network providers), capping out-of-network benefits payable to members, waiving out-of-pocket payment amounts and initiating litigation against out-of-network providers for interference with contractual relationships, insurance fraud and violation of state licensing and consumer protection laws. If we become out of network for payers, our business could be harmed and our revenue could be reduced because patients could stop using our services. If reimbursement rates paid by Medicare or other federal or state healthcare programs are reduced, if changes in the rules governing such programs occur, or if government payers otherwise restrain our ability to obtain or provide services to patients, our business, financial condition and results of operations could be harmed. A significant portion of our revenue comes from government healthcare programs, principally Medicare, either through Medicare Advantage plans or directly, including through the Center for Medicare and Medicaid Innovation's, or CMMI's, Global and Professional Direct Contracting Model, or the GPDC Model. In addition, many commercial payers base their reimbursement rates on the published Medicare rates or are themselves reimbursed by Medicare for the services we provide. As a result, our results of operations are, in part, dependent on the continuation of Medicare programs, including the GPDC Model and Medicare Advantage, as well as the levels of government funding provided therewith. Any changes that limit or reduce the GPDC Model, Medicare Advantage, or general Medicare reimbursement levels, such as reductions in or limitations of reimbursement amounts or rates under programs, reductions in funding of programs, expansion of benefits without adequate funding, elimination of coverage for certain benefits, or elimination of coverage for certain individuals or treatments under programs, could have a material adverse effect on our business, results of operations, financial condition and cash flows. The Medicare program and its reimbursement rates and rules, are subject to frequent change. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative rulings or executive orders, interpretations and determinations, requirements for utilization review and government funding restrictions, each of which may materially and adversely affect the rates at which CMS reimburses us for our services, as well as affect the cost of providing service to patients and the timing of payments to our affiliated professional entities. Budget pressures often lead the federal government to reduce or place limits on reimbursement rates under Medicare. Implementation of these and other types of measures has in the past and could in the future result in substantial reductions in our revenue and operating margins. The final impact of the Medicare Advantage rates can vary from any estimate we may have and may be further impacted by the relative growth of our Medicare Advantage patient volumes across certain geographies as well as by the benefit plan designs submitted. It is possible that we may underestimate the impact of the Medicare Advantage rates on our business, which could have a material adverse effect on our business, results of operations, financial condition and cash flows. In addition, our Medicare Advantage revenues may continue to be volatile in the future which could have a material adverse impact on our business, results of operations, financial condition and cash flows. In addition, CMS often changes the rules governing the Medicare program, including those governing reimbursement. Changes that could adversely affect our business inclu • administrative or legislative changes to base rates or the bases of payment; • limits on the services or types of providers for which Medicare will provide reimbursement; • changes in methodology for patient assessment and/or determination of payment levels; • the reduction or elimination of annual rate increases; or • an increase in co-payments or deductibles payable by beneficiaries. We are unable to predict the effect of recent and future policy changes on our operations. Recent legislative, judicial and executive efforts to enact further healthcare reform legislation have also caused many core aspects of the current U.S. healthcare system to be unclear. While specific changes and their timing are not yet apparent, enacted reforms and future 22 legislative, regulatory, judicial, or executive changes, particularly any changes to the Medicare Advantage program, could have a material adverse effect on our business, results of operations, financial condition and cash flows. Further, there is additional uncertainty around the long-term future of CMS’ GPDC Model in which we presently participate. The GPDC Model has been developed by CMS as a means to test various financial risk-sharing arrangements in the Medicare program over a nearly six-year period, from April 1, 2021 through December 31, 2026. At the end of that nearly six-year period, CMS may discontinue the GPDC Model, which may have a material adverse effect on our business. The GPDC Model is a new pilot program by CMS and we may not be able to realize the expected benefits of the GPDC Model. In 2021, CMMI announced the GPDC Model to create value-based payment arrangements directly with Direct Contracting Entities, or DCEs, which is part of CMMI's’ strategy to test the next evolution of risk-sharing arrangement to produce value and high quality health care by permitting DCEs to participate in value-based care arrangements with beneficiaries in Medicare fee-for-service. The GPDC Model began its first performance period on April 1, 2021. Our wholly owned subsidiary, Iora Health NE DCE, LLC, was one of a limited number of companies chosen by CMMI as a DCE. Given the recent launch of the GPDC Model, we have no experience serving as a DCE and may not be able to realize its expected benefits. For example, we may encounter difficulties calibrating our historical medical expense estimates to this new beneficiary population, which has not chosen to participate in risk-based care arrangements (unlike Medicare Advantage beneficiaries) and thus may utilize medical services differently than our current members. Moreover, beneficiaries assigned to us under the GPDC Model may not generate revenue as expected, initially or at all, and we cannot assure you that direct contracting will allow us to achieve the same financial outcomes on Medicare fee-for-service beneficiaries as we do on our existing patients. Additionally, adding new members through the GPDC Model will also require absorbing new members into our affiliated professional entities, which may strain resources or negatively affect our quality of care. We cannot assure you that the GPDC Model will continue beyond its initial nearly six-year period or that it will expand our total addressable market. We also cannot assure you that the GPDC Model will continue as currently contemplated without material changes and/or that it will not be replaced with a different government program. Changes to the GPDC Model could negatively impact our revenue as currently anticipated from that program. Our business model and future growth are substantially dependent on the success of our strategic relationships with health network partners, enterprise clients and distribution partners. We will continue to substantially depend on our relationships with third parties, including health network partners, enterprise clients and distribution partners to grow our business. In particular, our growth depends on maintaining existing, and developing new, strategic affiliations with health network partners, including health systems and private and government payers. We also rely on a number of partners such as benefits enrollment platforms, professional employment organizations, consultants and other distribution partners in order to sell our solutions and services and enroll members onto our platform. Our agreements with our enterprise clients often provide for fees based on the number of members that are covered by such clients’ programs each month, known as capitation arrangements. Certain of our enterprise clients and partners also pay us a fixed fee per year regardless of the number of registered members. The number of individuals who register as members through our enterprise clients is often affected by factors outside of our control, such as plan endorsement by the employer, member outreach and retention initiatives. Enterprise clients may also prohibit us from engaging in direct outreach with employees as potential members, or we may be unsuccessful in spreading brand awareness among employees who perceive competitors as offering better solutions and services, which would decrease growth in membership and reduce our net revenue. Increasing rates of unemployment may also result in loss of members at our enterprise clients, and economic recessions or slowdowns can result in our enterprise clients terminating their employee sponsorship arrangements with us. In addition, during periods of economic slowdown, enterprise clients may face less competition for new hires or may not need to hire as many employees and as a result, they may not need to sponsor memberships with us as a means to attract new hires. Even if the geographies in which our enterprise clients operate experience growth, it is possible that such client’s program membership could fail to grow at similar rates, if at all. If the number of members covered by one or more of such clients’ programs were to be reduced, including due to benefits reductions or layoffs during and after the COVID-19 pandemic, it would lead to a reduction of membership fees, a decrease in our net fee-for-service revenue and partnership revenue, and may also result in the enterprise client electing not to renew our contract for another year. In addition, the growth forecasts of our clients are subject to significant uncertainty, including after the COVID-19 pandemic and any prolonged ensuing economic recession, and are based 23 on assumptions and estimates that may prove to be inaccurate. Further, historical activation rates within a given enterprise client may not be indicative of future membership levels at that enterprise client or activation rates of similarly situated enterprise clients. High activation rates (i.e., the percentage of individuals eligible for membership who are enrolled as members) do not necessarily result in increased net fee-for-service revenue and do not typically result in increased membership revenue. Health network partnerships also comprise a significant portion of our revenue. For example, under certain health network partnership contracts, we closely collaborate with a health network on certain strategic initiatives such as the expansion of practice sites in a particular jurisdiction or service area, and clinical and digital integration between our primary care and their specialty care services. Our contracts with health network partners can sometimes be bespoke, with varying terms across health network partners. However, many contracts provide for fees on a PMPM basis or a fee-for-service basis. Under contracts providing for PMPM fees, when our medical offices provide professional clinical services to covered members, we, as administrator, perform billing and collection services on behalf of the health network, and the health network receives the fees for services provided, including those paid by members’ insurance plans. If we do not adequately satisfy the objectives of our partners or perform against contractual obligations, we may lose revenue under the applicable health network partner contract and the health network partner may become dissatisfied with the terms or our performance under the contract, which could result in its early termination or amendment, if permitted, and as a result, harm to our business and results of operations, including a reduction in net revenue. Even regardless of our performance under the contracts, we cannot guarantee that our health network partners will continue to be satisfied with the terms or circumstances under existing contracts, particularly given constraints and challenges posed by the COVID-19 pandemic. We have experienced contractual disputes and renegotiations with health network partners in the past and may experience additional disputes and renegotiations in the future. In certain situations, we may need to take legal or other action to enforce our contractual rights, which may strain relationships with our partners, delay payments owed to us, make us less attractive for potential or future partners and harm our business and reputation. Certain contracts with health network partners can be exclusive in the applicable jurisdiction; as a result, in new potential geographies, should we pursue a health network partnership, we would need to successfully contract with a sufficiently competitively viable health network partner, as we may not be able to terminate any such contract for several years without penalty or be able to partner with other health network partners in the same geographies due to competitive pressures or lack of counterparties. If we are unable to successfully continue our strategic relationships with our health network partners on terms favorable to us or at all, or if we do not successfully contract with health network partners in new jurisdictions, our business and results of operations could be harmed. Most of our enterprise clients and health network partners have no obligation to renew their agreements with us after the initial term expires. In addition, our health network partners and enterprise clients may negotiate terms less advantageous to us upon renewal, which may reduce our revenue from these entities. If our health network partners or enterprise clients fail to renew their contracts, or renew their contracts upon less favorable terms or at lower fee levels, our revenue may decline or our future revenue growth may be constrained. In addition, certain of our health network partners and enterprise clients may terminate their contracts with us early for various reasons. If a partner or customer terminates its contract early and revenue and cash flows expected from a partner or enterprise client are not realized in the time period expected or not realized at all, our business could be harmed. Identifying partners, and negotiating and documenting relationships with them, requires significant time and resources. Our competitors may be more effective in executing such relationships and performing against them. If we are unsuccessful in establishing or maintaining our relationships with third parties, our ability to compete in the marketplace or to grow our net revenue could be impaired and our results of operations may suffer. Even if we are successful, we cannot assure you that these relationships will result in increased member use of our solutions and services or increased net revenue. We conduct business in a heavily regulated industry, and any failure to comply with applicable healthcare laws and government regulations, could result in financial penalties, exclusion from participation in government healthcare programs and adverse publicity, or could require us to make significant operational changes, any of which could harm our business. The U.S. healthcare industry is heavily regulated and closely scrutinized by federal, state and local authorities. Comprehensive statutes and regulations govern the manner in which we provide and bill for services and collect reimbursement from governmental programs and private payers, our contractual relationships with our providers, vendors, health network partners, enterprise clients, members and patients, our marketing activities and other aspects of our operations. Of particular importance • state laws that prohibit general business corporations, such as us, from practicing medicine, controlling physicians’ medical decisions or engaging in practices such as splitting fees with physicians; 24 • federal and state laws pertaining to non-physician practitioners, such as nurse practitioners and physician assistants, including requirements for physician supervision of such practitioners and licensure and reimbursement-related requirements; • Medicare and Medicaid billing and reimbursement rules and regulations; • the federal physician self-referral law, commonly referred to as the Stark Law, which, subject to certain exceptions, prohibits physicians from referring Medicare or Medicaid patients to an entity for the provision of certain “designated health services” if the physician or a member of the physician’s immediate family has a direct or indirect financial relationship (including an ownership interest or a compensation arrangement) with the entity; • the federal Anti-Kickback Statute, which, subject to certain exceptions known as “safe harbors,” prohibits the knowing and willful offer, payment, solicitation or receipt of any bribe, kickback, rebate or other remuneration, in cash or in kind, in return for the referral of an individual for, or the lease, purchase, order or recommendation of, items or services covered, in whole or in part, by government healthcare programs such as Medicare and Medicaid; • the federal False Claims Act, which imposes civil and criminal liability on individuals or entities that knowingly or recklessly submit false or fraudulent claims to Medicare, Medicaid, and other government-funded programs or make or cause to be made false statements in order to have a claim paid; • a provision of the Social Security Act that imposes criminal penalties on healthcare providers who fail to disclose or refund known overpayments; • the criminal healthcare fraud provisions of the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, or collectively, HIPAA, and related rules that prohibit knowingly and willfully executing a scheme or artifice to defraud any healthcare benefit program or falsifying, concealing or covering up a material fact or making any material false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services; • the Civil Monetary Penalties Law, which prohibits the offering or giving of remuneration to Medicare and Medicaid beneficiaries that is likely to influence the beneficiary’s selection of a particular provider or supplier; • federal and state laws that prohibit providers from billing and receiving payment from Medicare and Medicaid for services unless the services are medically necessary, adequately and accurately documented, and billed using codes that accurately reflect the type and level of services rendered; • federal and state laws and policies related to healthcare providers’ licensure, certification, accreditation, Medicare and Medicaid program enrollment and reassignment of benefits; • federal and state laws and policies related to the prescribing and dispensing of pharmaceuticals and controlled substances; • state laws related to the advertising and marketing of services by healthcare providers; • federal and state laws related to confidentiality, privacy and security of personal information, including medical information and records, that limit the manner in which we may use and disclose that information, impose obligations to safeguard such information and require that we notify third parties in the event of a breach; • federal laws that impose civil administrative sanctions for, among other violations, inappropriate billing of services to government healthcare programs or employing or contracting with individuals who are excluded from participation in government healthcare programs; • laws and regulations limiting the use of funds in health savings accounts for individuals with high deductible health plans; • state laws pertaining to anti-kickback, fee splitting, self-referral and false claims, some of which are not limited to relationships involving government-funded programs; and 25 • state laws governing healthcare entities that bear financial risk. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Achieving and sustaining compliance with these laws requires us to implement controls across our entire organization and it may prove costly and challenging to monitor and enforce compliance. In particular, given the prevalence of laws, rules and regulations restricting the corporate practice of medicine in certain of the states that we operate, we are prohibited from interfering with or inappropriately influencing providers’ professional judgment and are typically reliant on the providers and other healthcare professionals at our affiliated professional entities to operate in compliance with applicable laws related to the practice of medicine and the provision of healthcare services. The risk of our being found in violation of healthcare laws and regulations is increased by the fact that many of them have not been fully interpreted by regulatory authorities or the courts, and their provisions are sometimes complex and open to a variety of interpretations. Failure to comply with these laws and other laws can result in civil and criminal penalties such as fines, damages, recoupments of overpayments, imprisonment, loss of enrollment status and exclusion from the Medicare and Medicaid programs. To enforce compliance with the federal laws, the U.S. Department of Justice and the Office of Inspector General for the HHS regularly scrutinize healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. The operation of medical practices is also subject to various state laws enforced by state regulators, including state attorneys general, boards of professional licensure and departments of health. A review of our business by judicial, law enforcement, regulatory or accreditation authorities could result in challenges or actions against us that could harm our business and operations. Responding to and managing government investigations or any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses, divert resources and management’s attention from the operation of our business and result in adverse publicity. Moreover, if one of our health system partners or another third party fails to comply with applicable laws and becomes the target of a government investigation, government authorities could require our cooperation in the investigation, which could cause us to incur additional legal expenses and result in adverse publicity. In addition, because of the potential for large monetary exposure under the federal False Claims Act, which provides for treble damages and penalties of $12,537 to $25,076 per false claim or statement (as of January 2022, and subject to annual adjustments for inflation), healthcare providers often resolve allegations without admissions of liability for significant amounts to avoid the uncertainty of treble damages that may be awarded in litigation proceedings. Such settlements often contain additional compliance and reporting requirements as part of a consent decree, settlement agreement or corporate integrity agreement. Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources to investigating healthcare providers’ compliance with the healthcare reimbursement rules and fraud and abuse laws. Further, our ability to provide our full range of services in each state is dependent upon a state’s treatment of telehealth and emerging technologies (such as digital health services), which are subject to changing political, regulatory and other influences. Many states have laws that limit or restrict the practice of telehealth, such as laws that require a provider to be licensed and/or physically located in the same state where the patient is located. Failure to comply with these laws could result in denials of reimbursement for our services (to the extent such services are billed), recoupments of prior payments, professional discipline for our providers or civil or criminal penalties. The laws, regulations and standards governing the provision of healthcare services may change significantly in the future and may harm our business and operations. For example, we have had to adapt our business as a result of the CARES Act and other emergency orders, laws and regulations enacted in response to the COVID-19 pandemic. While some of these changes have allowed us to rapidly respond to the COVID-19 pandemic including via expanded telehealth visits and testing arrangements, they have also required us to adapt to new offerings, processes and procedures. We cannot assure you that such emergency orders, laws and regulations will continue to apply or that regulators or other governmental entities will agree with our interpretation of these arrangements under applicable law. The Vaccine Inquiries or any other regulatory or governmental investigations or other disputes as a result of these arrangements, or the failure of various waivers for limitations of liability or other provisions under such emergency orders, laws and regulations to apply to us could divert resources and harm our reputation, business, financial condition and results of operations. If the prevalence of private health insurance coverage declines, including due to a decline in the prevalence of employer-sponsored health care, our revenue may be reduced. We currently derive a significant portion of our revenue from members acquired under contracts with enterprise clients that purchase health care for their employees (either via insurance or self-funded benefit plans). A large part of the demand for 26 our solutions and services among enterprise clients depends on the need of these employers to manage the costs of healthcare services that they pay on behalf of their employees. While the percentage of employers who are self-insured has been increasing over the past decade, this trend may not continue. Over time, employees may also increasingly decide to obtain their own insurance through state-sponsored insurance marketplaces rather than through their employers. While such employees may remain members, our reimbursement from providing services to these members would likely decrease. Employees who obtain their own insurance may also cancel their memberships, which may decrease the fees we receive under our contracts with health network partners as fewer members engage in their healthcare networks. If any of these trends accelerate, there is no guarantee that we would be able to compensate for the loss in revenue derived from enterprise clients and health network partners by increasing retail member acquisition. A decline in overall prevalence of private health insurance coverage, including due to the passage of healthcare reform proposals such as “Medicare for All,” could further harm our revenue, particularly if accompanied by a reduction in employer-sponsored health insurance. In addition, health network partners who rely on patient use of their networks, particularly specialty care, through our contracts with them, may become dissatisfied with the terms under the applicable contract and seek to amend or terminate, or elect not to renew, these contracts. In these cases, our business, financial condition and results of operations would be harmed. If we fail to cost-effectively develop widespread brand awareness and maintain our reputation, or if we fail to achieve and maintain market acceptance for our healthcare services, our business could suffer. We believe that developing and maintaining widespread awareness of our brand and maintaining our reputation for providing access to high quality and efficient health care in a cost-effective manner is critical to attracting new members, enterprise clients, and health network partners, maintaining existing members, clients and partners and thus growing our business and revenue. Market acceptance of our solutions and services and member acquisition depends on educating people, as well as enterprise clients and health networks, as to the distinct features, ease-of-use, positive lifestyle impact, cost savings, quality, and other perceived benefits of our solutions and services as compared to traditional or competing healthcare access options and our ability to directly market our solutions or services to the employees of our enterprise clients. In particular, market acceptance is highly dependent on sufficient geographic market saturation of medical offices, whether we are in-network with payers, customization of healthcare services, and word of mouth and informal member referrals. While we are in-network with CMS and our health network partners, shortfalls in any of the above areas, the loss or dissatisfaction of a significant contingent of our members or patients, adverse media reports or negative feedback about our solutions and services may substantially harm our brand and reputation, inhibit widespread adoption of our solutions and services, reduce our revenue from enterprise clients and health networks, and impair our ability to attract new or maintain existing members and patients. Our brand promotion activities may not generate awareness or increase revenue and, even if they do, any increase in revenue may not offset the expenses we incur in building our brand. We also cannot guarantee the quality and efficiency of healthcare service, particularly specialty healthcare, from our health network partners, over which we have no control. Many of our health network partners are large institutions with significant operations across a wide network of patients and may be unable to provide consistent levels of service to our members. Patients who experience poor quality healthcare provision from such partners may impute such dissatisfaction to our solutions and services, which could negatively impact member retention and acquisition, reduce our revenue and harm our business. We have a history of losses, which we expect to continue, and we may never achieve or sustain profitability. We have incurred significant losses in each period since our inception. We incurred net losses of $89.4 million and $254.6 million for the years ended December 31, 2020 and 2021, respectively. As of December 31, 2021, we had an accumulated deficit of $618.2 million. Our net losses and accumulated deficit reflect the substantial investments we made to acquire new health network partners and members, build our proprietary network of healthcare providers and develop our technology platform. We intend to continue scaling our business to increase our enterprise client, member and provider bases, broaden the scope of our health network and other partnerships and expand our applications of technology through which members can access our services. Accordingly, we anticipate that our cost of care and other operating expenses will continue to increase in the foreseeable future. Moreover, as we sign up new At-Risk members for whom we are responsible for managing a range of healthcare services and associated costs, our medical claims expense for such members may be higher relative to the Capitated Revenue earned or any excess revenue over medical claims expense may not be enough to cover our cost of care or other operating expenses. Our efforts to scale our business and manage the health of At-Risk members may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will be able to sustain or increase profitability. Our prior net losses, combined with our expected future net losses, have had and will continue to have a negative impact on our total (deficit) equity and working capital. As a result of these factors, we may need to raise additional capital through debt or equity financings in order to fund our operations, and such capital may not be available on reasonable terms, if at all. 27 Our net revenue depends in part on the number of members enrolled or patient visits, and a decrease in member utilization of our services could harm our business, financial condition and results of operations. Historically, we have relied on patient visits for a substantial portion of our net revenue. For the years ended December 31, 2020 and 2021, net fee-for-service revenue accounted for 39% and 29% of our net revenue, respectively. As we develop additional digital health solutions through our mobile platform and continue providing and expanding availability of remote visits, we cannot guarantee that our members will consistently make in-office visits in addition to using our digital health solutions, particularly after the COVID-19 pandemic and as related shelter-in-place and quarantine measures and orders are relaxed or lifted. Further, it may be difficult for us to accurately forecast future patient in-office visits over time, which may vary across geographies and depend on patient demographics within a given market. In part due to the reduction of in-office visits observed due to COVID-19, we have introduced billable remote visits. We cannot predict with any certainty the number of remote billable services and their impact on our in-office visits. As remote billable services on average generate lower reimbursement than in-office visits, this may impact our operations and financial results. In addition, we will continue to rely on our reputation and recommendations from members and key enterprise clients to promote our solutions and services to potential new members. A substantial portion of our members hold subscriptions through their respective employers with which we have membership arrangements. The loss of any of our key enterprise clients, or a failure of some of them to renew or expand their arrangements with us, could have a significant impact on the growth rate of our revenue. If we are unable to attract and retain sufficient members in any given market, we may have reduced visits, which could harm our results of operations, reduce our revenue and harm our business. In addition, under certain of our contracts with enterprise clients, we base our fees on the number of individuals to whom our clients provide benefits. Under certain of our health network partner agreements, we also collect fees from members who receive healthcare services within the health network partner’s network. Many factors, most of which we do not control, may lead to a decrease in the number of individuals covered by our enterprise clients, including, but not limited to, the followin • changes in the nature or operations of our enterprise clients or the failure of our enterprise clients to adopt or maintain effective business practices; • changes of control of our enterprise clients; • reduced demand in particular geographies; • shifts away from employer-sponsored health plans toward employee self-insurance; • shifting regulatory climate and new or changing government regulations; and • increased competition or other changes in the benefits marketplace. If the number of members covered by our enterprise clients and health network partners decreases, our revenue will likely decrease. We operate in a competitive industry, and if we are not able to compete effectively our business would be harmed. The market for healthcare solutions and services is highly fragmented and intensely competitive, with direct and indirect competitors offering varying levels of impact to key stakeholders such as consumers, employers, providers, and health networks. We compete across various segments within the healthcare market and currently face competition from a range of companies and providers for market share and for quality providers and personnel, includin • traditional healthcare providers and medical practices nationally, regionally and locally, that offer similar services, often at lower prices, and that are continuing to develop additional products and becoming more sophisticated and effective; • health networks, including our health network partners, who employ or affiliate with primary care providers, unaffiliated freestanding outpatient centers and specialty hospitals (some of which are physician-owned); • episodic, consumer-driven point solutions such as telemedicine as well as urgent care providers, which may typically pay providers on a fee-for-service basis rather than the salary-based model we employ; 28 • health care or expert medical service tools developed by well-financed health plans which may be provided to health plan customers at discounted prices; and • other companies providing healthcare-focused products and services, including companies offering specialized software and applications, technology platforms, care management and coordination, digital health, telehealth and telemedicine and health information exchange. Our competitive success and growth, which can be measured in part by retention of existing members and gaining of new members in both existing and target geographies, are contingent on our ability to simultaneously address the needs of key stakeholders efficiently while delivering superior outcomes at scale compared with competitors. In recent years, the number of freestanding specialty hospitals, surgery centers, emergency departments, urgent care centers and diagnostic imaging centers has increased significantly in the geographic areas in which we serve and may provide services similar to those we offer. Some of our existing and potential competitors may be larger, have greater name recognition, have longer operating histories, offer a broader array of services or a larger or more specialized medical staff, provide newer or more desirable facilities or have significantly greater resources than we do. Some of the clinics and medical offices that compete with us are also owned by government agencies or not-for-profit organizations that can finance capital expenditures and operations on a tax-exempt basis. In addition, our current or potential competitors may be acquired by third parties with greater available resources. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements and may have the ability to initiate or withstand substantial price competition. In light of the COVID-19 pandemic, existing or new competitors have developed or further invested in telemedicine and remote medicine programs and ventures, which would compete with our virtual care offerings. Also, current and potential competitors have established, and may in the future establish, cooperative relationships with vendors of complementary technologies or services to increase the availability of their solutions in the marketplace. Accordingly, new competitors or alliances may emerge that have greater market share, a larger member or patient base, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources and larger sales forces than we have, which could put us at a competitive disadvantage. Our competitors could also be better positioned to serve certain segments of the healthcare market, which would limit our member and patient growth. In light of these factors, even if our solution is more effective than those of our competitors, current or potential members, health network partners and enterprise clients may accept competitive solutions in lieu of purchasing our solution. Our enterprise clients or health network partners may also elect to terminate their arrangements with us and enter into arrangements with our competitors, particularly in primary care, to the extent they are more favorable from a fee or price perspective or provide greater exposure to, or volume of, patients. In addition, in any geographic area, we may enter into an exclusive contractual arrangement with a single health network partner, which could allow competitors to contract with other health network partners in the same area and gain market share for potential patients. Competitors may also be better positioned to contract with leading health network partners in our target geographies, including existing geographies, after our current contracts expire. If our competitors are better able to attract patients, contract with health network partners, recruit providers, expand services or obtain favorable managed care contracts at their facilities than we are, we may experience an overall decline in member volumes and net revenue. Competition from specialized providers, health plans, medical practices, digital health companies and other parties will result in continued member acquisition and patient visit and utilization volume pressure, which could negatively impact our revenue and market share. Competition in our industry also involves consumer perceptions of quality and pricing, rapidly changing technologies, evolving regulatory requirements and industry expectations, frequent new product and service introductions and changes in customer requirements. As access to hospital performance data on quality measures, patient satisfaction surveys, and standard charges for services increases, healthcare consumers also have more tools to compare competing providers. If any of our affiliated professional entities achieve poor results (or results that are lower than our competitors’) on quality measures or patient satisfaction surveys, or if our standard charges are or are perceived to be higher than our competitors, we may attract fewer members. Moreover, if we are unable to keep pace with the evolving needs of our clients, members and partners and continue to develop, enhance and market new applications and services in a timely and efficient manner, demand for our solutions and services may be reduced and our business and results of operations would be harmed. We cannot guarantee that we will possess the resources, either financial or personnel, for the research, design and development of new applications or services, or that we will be able to utilize these resources successfully and avoid technological or market obsolescence. Further, we cannot assure you that technological advances by one or more of our competitors or future competitors will not result in our present or future applications and services becoming uncompetitive or obsolete. If we are unable to successfully compete in the healthcare market, our business would be harmed. 29 We may not grow at the rates we historically have achieved or at all, even if our key metrics may imply future growth, which could have a negative impact on our business, financial condition and results of operations. We have experienced significant growth in our recent history. Future revenue may not grow at these same rates or may decline. Our future growth will depend, in part, on our ability to grow members in existing geographies, expand into new geographies, expand our service offerings and grow our health network partnerships while maintaining high quality and efficient services. We are continually executing a number of growth initiatives, strategies and operating plans designed to enhance our business. For example, we are expanding our strategic relationships with health network partners to build integrated delivery networks for broad access to their networks of specialists and hospitals. The anticipated benefits from these efforts are based on several assumptions that may prove to be inaccurate. We may not be able to successfully complete these growth initiatives, strategies and operating plans and realize all of the benefits, including growth targets and cost savings, that we expect to achieve, or it may be more costly to do so than we anticipate. We can provide no assurances that even if our key metrics indicate future growth, we will continue to grow our revenue or to generate net income. Moreover, our continued implementation of these programs may disrupt our operations and performance. If, for any reason, the benefits we realize are less than our estimates or the implementation of these growth initiatives, strategies and operating plans negatively impact our operations or cost more or take longer to effectuate than we expect, or if our assumptions prove inaccurate, our business, financial condition and results of operations may be harmed. If we fail to manage our growth effectively, our expenses could increase more than expected, our revenue may not increase proportionally or at all, and we may be unable to implement our business strategy. We have experienced significant growth in recent periods, which puts strain on our business, operations and employees. For example, we grew from 1,340 employees as of December 31, 2018 to 3,090 employees as of December 31, 2021 (including 791 employees from our acquisition of Iora). We have also increased our customer and membership bases significantly over the past two years. We anticipate that our operations will continue to rapidly expand. To manage our current and anticipated future growth effectively, we must continue to maintain and enhance our IT infrastructure, financial and accounting systems and controls. In particular, in order for our providers to provide quality healthcare services and longitudinal care to patients and avoid burn-out, we need to provide them with adequate IT and technology support, which requires sufficient staffing for these areas. In addition, as we expand in existing geographies and move into new geographies, we will need to attract and retain an increasing number of quality healthcare professionals and providers. Failure to retain a sufficient number of providers may result in overworking of existing personnel leading to burn-out or poor quality of healthcare services. In addition, our strategy is to provide longitudinal care to members and patients, which requires substantial time and attention from our providers. We must also attract, train and retain a significant number of qualified sales and marketing personnel, customer support personnel, professional services personnel, software engineers, technical personnel and management personnel, and the availability of such personnel, in particular software engineers, may be constrained. A key aspect to managing our growth is our ability to scale our capabilities to implement our solutions and services satisfactorily with respect to both large and demanding enterprise clients and health network partners as well as individual consumers. Large clients and partners often require specific features or functions unique to their membership base, which, at a time of significant growth or during periods of high demand, may strain our implementation capacity and hinder our ability to successfully provide our services to our clients and partners in a timely manner. We may also need to make further investments in our technology to decrease our costs. If we are unable to address the needs of our clients, partners or members, or our clients, partners or members are unsatisfied with the quality of our solutions or services, they may not renew their contracts or memberships, seek to cancel or terminate their relationship with us or may renew on less favorable terms, any of which could harm our business and results of operations. Failure to effectively manage our growth could also lead us to over-invest or under-invest in development and operations, result in weaknesses in our infrastructure, internal systems, processes or controls, give rise to operational mistakes, financial losses, loss of productivity or business opportunities and result in loss of employees and reduced productivity of remaining employees. In order to manage the increasing complexities of our business, we will need to continue to scale and adapt our operational, financial and management controls, as well as our reporting systems and procedures. We may not be able to successfully implement and scale improvements to our systems, processes and controls or in connection with third party software in a timely or efficient manner or in a manner that does not negatively affect our operating results. For example, we may not be able to effectively monitor certain extraordinary contract requirements or provisions that are individually negotiated as the number of transactions continues to grow. In addition, our systems and processes may not prevent or detect all errors, omissions, or fraud, including any fraudulent activities conducted or facilitated by our employees or the providers or staff at our affiliated professional entities. Any of these events could result in our expenses increasing more than expected, lack of growth or slower than expected growth in our revenue, and inability to implement our business strategies. The quality of our services 30 may also suffer, which could negatively affect our reputation and harm our ability to attract and retain members, clients and partners. Investment of significant capital expenditures to support our growth may also divert financial resources from other projects such as the development of new applications and services. In particular, as we enter new geographies or seek to expand our presence in existing geographies, we will need to make upfront capital expenditures, including to lease and furnish medical office space, acquire medical equipment, staff providers at such medical offices and incur related expenses. As we do not recognize patient revenue until those offices open and begin receiving patients, our margins may be reduced during the periods in which such capital expenditures were incurred. Expansion in new or existing geographies can be lengthy and cost-intensive, and we may encounter difficulties or unanticipated issues during the process of opening such new medical offices. We cannot assure you that we will be able to open our planned new medical offices, in existing or new geographies, within our operating budgets and planned timelines, or at all. Cost overruns in the process of opening new offices can result in higher than expected cost of care, exclusive of depreciation and amortization, and operating expenses as compared to revenue in the applicable quarter. In addition, we cannot assure you that new medical offices will operate efficiently or be strategically placed to attract the optimal number of patients. If an office is underperforming for any reason, we could incur additional costs to relocate or shut down that office. It is essential to our ongoing business that our affiliated professional entities attract and retain an appropriate number of quality primary care providers to support our services and that we maintain good relations with those providers. The success of our business depends in significant part on the number, availability and quality of licensed primary care providers employed or contracted by our affiliated professional entities. Providers employed or contracted with our affiliated professional entities are free to terminate their association at any time. In addition, although providers who own interests in affiliated professional entities are generally subject to agreements restricting them from owning an interest in competitive facilities or transferring their ownership interests in the affiliated professional entity without our consent, we may not learn of, or may be unsuccessful in preventing, our provider partners from acquiring interests in competitive facilities or making transfers without our consent. Moreover, in certain states in which we operate, such as California, non-competition and other restrictive covenants may be limited in their enforceability, particularly against physicians and providers. If we are unable to recruit and retain providers and other healthcare professionals, our business and results of operations could be harmed and our ability to grow could be impaired. In any particular geographical location, providers could demand higher payments or take other actions that could result in higher medical costs, less attractive service for our members or difficulty meeting regulatory or accreditation requirements. Our ability to develop and maintain satisfactory relationships with providers also may be negatively impacted by other factors not associated with us, such as changes in Medicare reimbursement levels and other pressures on healthcare providers and consolidation activity among hospitals, provider groups and healthcare providers. We expect to encounter increased competition from health insurers and private equity companies seeking to acquire providers in the geographies where we operate practices and, where permitted by law, employ providers. In some geographies, provider recruitment and retention are affected by a shortage of providers and the difficulties that providers can experience in obtaining affordable malpractice insurance or finding insurers willing to provide such insurance. Providers may also leave our affiliated professional entities or perceive them as providing a poor quality of life if our affiliated professional entities do not adequately manage causes of provider burnout and workload, some of which we have little to no control over under the administrative services agreements, or ASAs. Our business is dependent on providing longitudinal and long-term care for members and requires providers to consistently follow members over time, track overall long-term health and, in certain geographies, be available 24/7 for virtual care questions and services. If we are unable to efficiently manage provider workload and capacity to provide longitudinal and long-term care, our providers may depart and our patients may experience lower quality of care, which would harm our business. Furthermore, our ability to recruit and employ providers is closely regulated. For example, the types, amount and duration of compensation and assistance we can provide to recruited providers are limited by the Stark law, the Anti-kickback Statute, state anti-kickback statutes and related regulations. If we are unable to attract and retain sufficient numbers of quality providers by providing adequate support personnel, technologically advanced equipment and facilities that meet the needs of those providers and their patients, memberships and patient visits may decrease, our enterprise clients may alter or terminate their membership contracts with us and our operating performance may decline. We incur significant upfront costs in our enterprise client and health network partner relationships, and if we are unable to maintain and grow these relationships over time, we are likely to fail to recover these costs, which could have a negative impact on our business, financial condition and results of operations. 31 Our business model and growth depend heavily on achieving economies of scale because our initial upfront investment for any enterprise client or certain health network partners is costly and the associated revenue is recognized on a ratable basis. We devote significant resources to establishing relationships with our clients and partners and implementing our solutions and services. This is particularly so in the case of large enterprises that, to date, have contributed a large portion of our membership base and revenue as well as health network partners, who may require specific features or functions unique to their particular processes or under the terms of their contracts with us, including significant systems integration and interoperability undertakings. Accordingly, our results of operations will depend in substantial part on our ability to deliver a successful experience for these clients and related members and partners to persuade our clients and partners to maintain and grow their relationship with us over time. Additionally, as our business is growing significantly, our new customer and partner acquisition costs could outpace our revenue growth and we may be unable to reduce our total operating costs through economies of scale such that we are unable to achieve profitability. Our costs of doing business could also increase significantly due to labor shortages and inflationary pressures, which could increase the cost of labor, healthcare services and supplies and rental payments for our office locations. If we fail to achieve appropriate economies of scale or if we fail to manage or anticipate the evolution and in future periods, demand of our clients and partners, our business may be harmed. Our marketing cycle can be long and unpredictable and requires considerable time and expense, which may cause our results of operations to fluctuate. The marketing cycle for our solutions and services from initial contact with a potential enterprise client or health network partner to contract execution and implementation varies widely by enterprise client or partner. Some of our partners undertake a significant and prolonged evaluation process, including to determine whether our solutions and services meet their unique healthcare needs, which evaluation can be complex given the size and scale of our clients and partners. Our contractual arrangements with our health network partners are often highly specific to each partner depending on their needs, the characteristics and patient demographics of the geographical region they serve, their growth plans and their operations, among other things. As a result, our marketing efforts to any new health network partner must be tailored to meet its specific strategic demands, which can be time consuming and require significant upfront cost. These efforts also must address interoperability between our IT infrastructure and systems and such partner’s systems, which can result in substantial cost without any assurance that we will ultimately enter into a contractual arrangement with any such partner. Our large enterprise clients often initially restrict direct access by us to their employees to curb information overflow. As a result, we may not be able to directly market our solutions and services to, and educate, employees at our enterprise clients until much later after execution of an agreement with such clients. This can result in limited membership acquisition at any such enterprise client for a significant period of time following contract execution, and we cannot assure you that we will be able to gain sufficient membership acquisition to justify our upfront investments. Further, even after contract execution with a particular enterprise client, we generally compete with other health service providers who market to the same employees at such enterprise client, and our marketing and employee education efforts may not be successful in winning members from other competing services, many of which are traditional healthcare models that employees are more familiar with. We also incur significant marketing costs to grow awareness of our solution and services in both existing and new geographical locations for potential new members. Our marketing efforts for member acquisition are dependent in part on word of mouth, which may take substantial time to spread. In addition, for both new and existing geographic locations, we will need to continuously open medical offices in targeted locations to build awareness, which is both time-intensive and requires substantial upfront fixed costs. If our substantial upfront marketing and implementation investments do not result in sufficient sales to justify our investments, it could harm our business and results of operations. We could experience losses or liability, including medical liability claims, causing us to incur significant expenses and requiring us to pay significant damages if not covered by insurance. Our business entails the risk of medical liability claims against our affiliated professional entities, their providers, and 1Life and its subsidiaries and we have in the past been subject to such claims in the ordinary course of business. Although 1Life, its subsidiaries, our affiliated professional entities and individual providers may carry insurance at the entity level and at the provider level covering medical malpractice claims in amounts that we believe are appropriate in light of the risks attendant to our business, successful medical liability claims could result in substantial damage awards that exceed the limits of our affiliated professional entities' insurance coverage. Professional liability insurance is expensive and insurance premiums may increase significantly in the future, particularly as we expand our services and as the professional liability insurance market becomes more challenging due to COVID-19. As a result, adequate professional liability insurance may not be available to our providers or to us in the future at acceptable costs or at all. Any claims made against us that are not fully covered by insurance could be costly to defend against, result in substantial damage awards against us and divert the attention of our management and our providers from our operations, which could harm our business. In addition, any claims may significantly harm our business or reputation. 32 Moreover, we do not control the providers and other healthcare professionals at our affiliated professional entities with respect to the practice of medicine and the provision of healthcare services. While we seek to attract high quality professionals, the risk of liability, including through unexpected medical outcomes, is inherent in the healthcare industry, and negative outcomes may result for any of our members. We attempt to limit our liability to members, clients and partners by contract; however, the limitations of liability set forth in the contracts may not be enforceable or may not otherwise protect us from liability for damages. Additionally, we may be subject to claims that are not explicitly covered by such contractual limits. We also maintain general liability coverage for certain risks, claims and litigation proceedings. However, this coverage may not continue to be available on acceptable terms or in sufficient amounts to cover one or more large claims against us, and may include larger self-insured retentions or exclusions. In addition, the insurer might deny coverage for the claims we submit or disclaim coverage as to any future claim. Any liability claim brought against us, or any ensuing litigation, regardless of merit, could result in a substantial cost to us, divert management’s attention from operations and could also result in an increase of our insurance premiums and damage to our reputation. A successful claim not fully covered by our insurance could have a negative impact on our liquidity, financial condition, and results of operations. Current or future litigation against us could be costly and time-consuming to defend. We are subject, and in the future may become subject from time to time, to legal proceedings and claims that arise in the ordinary course of business such as claims brought by our members, clients or partners in connection with commercial disputes, consumer class action claims, employment claims made by our current or former employees, technology errors or omissions, medical malpractice, professional negligence or other related actions or claims inherent in the provision of healthcare services as well as other litigation matters. In particular, as we grow our base of consumer members, we may be subject to an increasing number of consumer claims, disputes and class action complaints, including an ongoing claim alleging misrepresentations with respect to our membership fees. While our membership terms generally require individual arbitration, we cannot assure you that such terms will be enforced, which may result, and has resulted in the past, in costly class action litigation. Litigation may result in substantial costs, settlement and judgments and may divert management’s attention and resources, which may substantially harm our business, financial condition and results of operations. Insurance may not cover such claims, may not provide sufficient payments to cover all of the costs to resolve one or more such claims and may not continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, thereby leading analysts or potential investors to reduce their expectations of our performance, which could reduce the market price of our common stock. Our labor costs could be negatively impacted by competition for staffing, the shortage of experienced nurses and providers and labor union activity. The operations of our affiliated professional entities are dependent on the efforts, abilities and experience of our management and medical support personnel, including nurses, therapists and lab technicians, as well as our providers. We compete with other healthcare providers in recruiting and retaining employees, and, like others in the healthcare industry, we continue to experience a shortage of nurses and providers in certain disciplines and geographic areas. As a result, from time to time, we may be required to enhance wages and benefits to recruit and retain experienced employees, make greater investments in education and training for newly licensed medical support personnel, or hire more expensive temporary or contract employees. Furthermore, state-mandated nurse-staffing ratios in California affect not only our labor costs, but, if we are unable to hire the necessary number of experienced nurses to meet the required ratios, they may also cause us to limit patient volumes, which would have a corresponding negative impact on our net revenue. In addition, while none of our employees are represented by a labor union as of December 31, 2021, our employees may seek to be represented by one or more labor unions in the future. If some or all of our employees were to become unionized, it could increase labor costs, among other expenses, and may require us to adjust our employee policies and protocols. Further, labor is subject to external factors that are beyond our control, including the competitive market for skilled workers and leaders in the healthcare industry, cost inflation, the COVID-19 pandemic and workforce participation rates. In general, our failure to recruit and retain qualified management, experienced nurses and other medical support personnel, or to control labor costs, could harm our business. In order to support the growth of our business, we may need to incur additional indebtedness or seek capital through new equity or debt financings, which sources of additional capital may not be available to us on acceptable terms or at all. Our operations have consumed substantial amounts of cash since inception and we intend to continue to make significant investments to support our business growth, respond to business challenges or opportunities, expand our services in new geographic locations, enhance our operating infrastructure and existing solutions and services and potentially acquire complementary businesses and technologies. For the years ended December 31, 2020 and 2021, our net cash used in operating 33 activities was $4.4 million and $88.6 million, respectively. As of December 31, 2021, we had $342.0 million of cash and cash equivalents and $160.0 million of marketable securities, which are held for working capital purposes. As of December 31, 2021, we had $316.3 million aggregate principal amount of debt outstanding under our convertible senior notes issued in May 2020, or the 2025 Notes. As of December 31, 2021, we have also deferred payroll taxes in the amount of $5.0 million and received $1.8 million in grants as part of the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, through the Provider Relief Fund, or PRF, of the U.S. Department of Health and Human Services, or HHS, to help offset the impact of increased healthcare related expenses and lost revenues attributable to the COVID-19 pandemic. We are not required to repay this grant, provided we attest to and comply with certain terms and conditions, including the use of PRF funds for only permitted purposes and only after funds from other sources obligated to reimburse recipients have been applied. If we are unable to attest to or comply with current or future terms and conditions, our ability to retain some or all of the PRF funds received may be impacted. Our future capital requirements may be significantly different from our current estimates and will depend on many factors, including our growth rate, membership renewal activity and growth, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new or enhanced services, expansion of services to new geographic locations, addition of new health network partners and the continuing market acceptance of our healthcare services. Accordingly, we may need to engage in equity or debt financings or collaborative arrangements to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Moreover, while we are not restricted from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions under the terms of the indenture governing the 2025 Notes, such actions could have the effect of diminishing our ability to make payments on the notes when due. Any debt financing secured by us in the future could involve additional restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, during times of economic instability, including the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic, it has been difficult for many companies to obtain financing in the public markets or to obtain debt financing, and we may not be able to obtain additional financing on commercially reasonable terms, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, it could harm our business and growth prospects. Our revenues have historically been concentrated among our top customers, and the loss of any of these customers could reduce our revenues and adversely impact our operating results. Historically, our revenue has been concentrated among a small number of customers. In 2020 and 2021, our top three customers accounted for 35% and 32% of our net revenue, respectively. These customers included commercial payers and a health network partner. This customer mix may also shift in the near and medium term as a result of our recent acquisition of Iora. The loss of one or more of these customers could reduce our revenue, harm our results of operations and limit our growth. Our quarterly results may fluctuate significantly, which could adversely impact the value of our common stock. Our quarterly results of operations, including our net revenue, loss from operations, net loss and cash flows, have varied and may vary significantly in the future, and period-to-period comparisons of our results of operations may not be meaningful. Accordingly, our quarterly results should not be relied upon as an indication of future performance. Our quarterly financial results have fluctuated, and may fluctuate in the future, as a result of a variety of factors, many of which are outside of our control, including, without limitation, the followin • the addition or loss of health network partners or enterprise clients, including through acquisitions or consolidations of such entities; • the addition or loss of contracts with, or modification of contract terms with, payers, including the reduction of reimbursements for our services or the termination of our network contracts with payers; • seasonal and other variations in the timing and volume of patient visits, such as the historically higher volume of use of our service during peak cold and flu season months; 34 • fluctuations in unemployment rates resulting in reductions in total members; • slowdown in the overall economy resulting in losses of enterprise clients as they scale back on expenses; • new enterprise sponsorships and renewal of existing enterprise sponsorships and the timing thereof as well as enterprise and consumer member activation and renewal and timing thereof; • the timing of recognition of revenue; • the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure, including upfront capital expenditures and other costs related to expanding in existing or entering new geographical locations, as well as providing administrative and operational services to our affiliated professional entities under the ASAs; • our ability to effectively estimate the potential costs of medical services incurred, including under our at-risk arrangements, and the adequacy of our reserves for such incurred but not reported claims for medical services, which could result in fluctuations in our quarterly results and may not accurately reflect the underlying performance of our business within a given period; • our ability to effectively manage the size and composition of our proprietary network of healthcare professionals relative to the level of demand for services from our members; • the timing and success of introductions of new applications and services by us or our competitors, including well-known competitors with significant market clout and perceived ability to compete favorably due to access to resources and overall market reputation; • changes in the competitive dynamics of our industry, including consolidation among competitors, health network partners or enterprise clients; and • the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill from acquired companies. Most of our net revenue in any given quarter is derived from contracts entered into with our partners and clients during previous quarters as well as membership fees that are recognized ratably over the term of each membership. Consequently, a decline in new or renewed contracts or memberships in any one quarter may not be fully reflected in our net revenue for that quarter. Such declines, however, would negatively affect our net revenue in future periods and the effect of loss of members, and potential changes in our rate of renewals or renewal terms, may not be fully reflected in our results of operations until future periods. While we encourage enterprise clients to purchase memberships off of their periodic enrollment cycle, we cannot guarantee that they will do so. Accordingly, the effect of changes in the industry impacting our business or loss of members may not be reflected in our short-term results of operations. In addition, revenues associated with our At-Risk arrangements are subject to significant estimation risk related to reserves for incurred but not reported claims. If the actual claims expense differs significantly from the estimated liability due to differences in utilization of healthcare services, the amount of charges and other factors, it could negatively impact our revenue and have a material adverse impact on our business, results of operations, financial condition and cash flows. Any fluctuation in our quarterly results may not accurately reflect the underlying performance of our business and could cause a decline in the trading price of our common stock. If we lose key members of our senior management team or are unable to attract and retain executive officers and employees we need to support our operations and growth, our business and growth may be harmed. Our success depends largely upon the continued services of our key executive officers, particularly our Chair, Chief Executive Officer and President and 1Life's Chief Medical Officer. These executive officers are at-will employees and therefore they may terminate employment with us at any time with no advance notice. We also do not maintain any key person life insurance policies. Further, we rely on our leadership team in the areas of research and development, marketing, services and general and administrative functions. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. The replacement of one or more of our executive officers or other key employees would likely involve significant time and costs and may significantly delay or prevent the achievement of our business objectives. We are particularly dependent on 1Life's Chief Medical Officer, who is the sole 35 director and officer of many of the affiliated professional entities and is responsible for overseeing the operation of several of such entities, among other roles. While we have succession plans in place and have employment or service arrangements with a limited number of key executives, these measures do not guarantee that the services of these or suitable successor executives will continue to be available to us. To continue to execute our growth strategy, we also must attract and retain highly skilled personnel. Competition is intense for qualified professionals and we may not be successful in continuing to attract and retain qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled personnel with appropriate qualifications. The pool of qualified personnel with experience working in the healthcare market is limited overall. In addition, many of the companies with which we compete for experienced personnel have greater resources than we have. Further, labor is subject to external factors that are beyond our control, including the competitive market for skilled workers and leaders in the healthcare industry, cost inflation, the COVID-19 pandemic and workforce participation rates. As a result, our success is dependent on our ability to evolve our culture, align our talent with our business needs, engage our employees and inspire our employees to be open to change, to innovate and to maintain member- and customer-focus when delivering our services. In addition, job candidates often consider the value of the stock options or other equity-based awards they are to receive in connection with their employment. Volatility in the price of our stock may, therefore, negatively impact our ability to attract or retain highly skilled personnel. Further, the requirement to expense stock options and other equity-based compensation may discourage us from granting the size or type of stock option or equity awards that job candidates require to join our company. Our business would be harmed if we fail to adequately plan for succession of our executives and senior management; or if we fail to effectively recruit, integrate, retain and develop key talent and/or align our talent with our business needs and the current rapidly changing environment. We may acquire other companies or technologies, which could divert our management’s attention, result in dilution to our stockholders and otherwise disrupt our operations and we may have difficulty integrating any such acquisitions successfully or realizing the anticipated benefits therefrom, any of which could harm our business. We may seek to acquire or invest in businesses, applications and services or technologies that we believe could complement or expand our business, enhance our technical capabilities or otherwise offer growth opportunities. For example, we recently completed our acquisition of Iora in an all-stock transaction and our stockholders incurred substantial dilution. For additional risks related to the acquisition of Iora, please refer to "—Risks Related to the Acquisition of Iora." The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated. We do not have a history of acquiring or investing in businesses, applications and services or technologies and may not have the experience or capabilities to successfully execute such transactions or integrate them following consummation. In addition, if we acquire additional businesses, we may not be able to integrate the acquired personnel, operations and technologies successfully, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including, but not limited t • inability to integrate or benefit from acquired technologies or services in a profitable manner; • lack of experience in making acquisitions and integrating acquired businesses or assets; • unanticipated costs or liabilities associated with the acquisition; • difficulty integrating the accounting systems, operations and personnel of the acquired business; • difficulties and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business; • diversion of management’s attention from other business concerns; • negative impacts to our existing relationships with enterprise clients or health network partners as a result of the acquisition; • the potential loss of key employees; 36 • use of resources that are needed in other parts of our business; • deficiencies associated with the assets or companies we acquire or ineffective or inadequate controls, procedures or policies at any acquired business that were not identified in advance and may result in significant unanticipated costs; and • use of substantial portions of our available cash to consummate the acquisition. The effectiveness of our due diligence review of potential acquisitions and assessments of potential benefits or synergies are dependent upon the accuracy and completeness of statements and disclosures made or actions taken by the companies we acquire or their representatives. We may fail to accurately forecast the financial impact of an acquisition transaction, including tax and accounting charges. In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our results of operations based on this impairment assessment process, which could harm our results of operations. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could harm our results of operations. In addition, if an acquired business fails to meet our expectations, our business may be harmed. The estimates of market opportunity and forecasts of market and revenue growth included in this Annual Report may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all. Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. In particular, the size and growth of the overall U.S. healthcare market is subject to significant variables, including a changing regulatory environment and population demographic, which can be difficult to measure, estimate or quantify. Our business depends on member acquisition and retention, which further drives revenue from our contracts with health network partners. Estimates and forecasts of these factors in any given market is difficult and affected by multiple variables such as population growth, concentration of enterprise clients and population density, among other things. Further, we cannot assure you that we will be able to sufficiently penetrate certain market segments included in our estimates and forecasts, including due to limited deployable capital, ineffective marketing efforts or the inability to develop sufficient presence in a given market to gain members or contract with employers and health network partners in that market. Once we acquire a member, apart from fixed annual membership fees and payments from health care partners, we primarily derive revenue from patient in-office visits, which may be difficult to forecast over time, particularly as our billable service mix continues to expand, including due to the COVID-19 pandemic. Finally, our contractual arrangements with health network partners typically have highly tailored capitation and other fee structures which vary across health network partners and are dependent on either the number of members that receive healthcare services in a health network partner’s network or the volume and expense of the care received by At-Risk members. As a result, we may not be able to accurately forecast revenue from our health network partners. For these reasons, the estimates and forecasts in this Annual Report relating to the size and expected growth of our target markets may prove to be inaccurate. Even if the markets in which we compete meet our size estimates and forecasted growth, our business could fail to grow at similar rates, if at all. Natural or man-made disasters and other similar events may significantly disrupt our business and negatively impact our business, financial condition and results of operations. Our offices and facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, extreme weather conditions (including adverse weather conditions caused by global climate change or otherwise), power outages, fires, floods, protests and civil unrest, nuclear disasters and acts of terrorism or other criminal activities, which may result in physical damage to our offices, temporary office closures and could render it difficult or impossible for us to operate our business for some period of time. In particular, certain of the facilities we lease to house our computer and telecommunications equipment are located in the San Francisco Bay Area, a region known for seismic activity, and our insurance coverage may not compensate us for losses that may occur in the event of an earthquake or other significant natural disaster. Any disruptions in our operations related to the repair or replacement of our offices, could negatively impact our business and results of operations and harm our reputation. Although we maintain an insurance policy covering damages to our property and, in certain situations, interruptions to our business, such insurance may not be available or sufficient to compensate for the different types of associated losses that may occur, including business interruption losses. Any such losses or damages could harm our business, financial condition and results of operations. In addition, our health network partners’ facilities may be harmed or rendered inoperable by such natural or man-made disasters, which may cause disruptions, difficulties or other negative effects on our business and operations. 37 Risks Related to Government Regulation The impact of healthcare reform legislation and other changes in the healthcare industry and in healthcare spending is currently unknown, but may harm our business. Our revenue is dependent on the healthcare industry and could be affected by changes in healthcare spending and policy. The healthcare industry is subject to changing political, regulatory and other influences. The Patient Protection and Affordable Care Act, or ACA, made major changes in how health care is delivered and reimbursed, and increased access to health insurance benefits to the uninsured and underinsured populations in the United States. ACA, among other things, increased the number of individuals with Medicaid and private insurance coverage. ACA has been subject to legislative and regulatory changes and court challenges and there is uncertainty regarding whether, when, and how ACA may be changed, the ultimate outcome of court challenges and how the law will be interpreted and implemented. Changes by Congress or government agencies could eliminate or alter provisions beneficial to us, while leaving in place provisions reducing our reimbursement or otherwise negatively impacting our business. In addition, current and prior healthcare reform proposals have included the concept of creating a single payer such as “Medicare for All” or a public option for health insurance. If enacted, these proposals could have an extensive impact on the healthcare industry, including us and may impact our business, financial condition, results of operations, cash flows and the trading price of our security. We are unable to predict whether such reforms may be enacted or their impact on our operations. We are also impacted by the Medicare Access and CHIP Reauthorization Act, under which physicians must choose to participate in one of two payment formulas, Merit-Based Incentive Payment System, or MIPS, or Alternative Payment Models, or APMs. Beginning in 2019, MIPS allows eligible physicians to receive upward or downward adjustments to their Medicare Part B payments based on certain quality and cost metrics, among other measures. As an alternative, physicians can choose to participate in an Advanced APM. Advanced APMs are exempt from the MIPS requirements, and physicians who are meaningful participants in APMs will receive bonus payments from Medicare pursuant to the law. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the number of individuals who qualify for health care coverage and amounts that federal and state governments and other third-party payers will pay for healthcare services, which could harm our business, financial condition and results of operations. Our arrangements with health networks may be subject to governmental or regulatory scrutiny or challenge. Some of our relationships with health networks involve risk arrangements, such as capitated payments designed to achieve alignment of financial incentives and to encourage close collaboration on clinical care for patients. Although we believe that our health network contracts involving capitated payments comply with the federal Anti-Kickback Statute and the Stark Law, we cannot assure you that regulators or other governmental entities will agree with our interpretation of these arrangements under applicable law. Our health network partnerships may be subject to scrutiny or investigation from time to time by regulators or other governmental entities, which may be lengthy, costly, and divert resources and our management’s attention from managing our business and growth. If our health network partnerships are challenged and found to violate the Anti-Kickback Statute or the Stark Law, we could incur substantial financial penalties, reimbursement denials, repayments or recoupments, or exclusion from participation in government healthcare programs, any of which could harm our business. Evolving government regulations may increase costs or negatively impact our results of operations. Our operations may be subject to direct and indirect adoption, expansion, revision or reinterpretation of various laws and regulations. In the event any such changes in law or interpretation impacts our services or contractual arrangements, we may be required to modify such services, or revise our arrangements, in a manner that undermines the attractiveness of services or may not preserve the same economics, or may be required to discontinue such arrangements. In each case, our revenue may decline and our business may be harmed. Compliance with changes in interpretation of laws and regulations may require us to change our practices at an undeterminable and possibly significant initial and recurring monetary expense. These additional monetary expenditures may increase future overhead, which could harm our results of operations. We have identified what we believe are areas of government regulation that, if changed, could be costly to us. These inclu fraud, waste and abuse laws; rules governing the practice of medicine by providers; licensure standards for primary care providers and behavioral health professionals; laws limiting the corporate practice of medicine and professional fee 38 splitting; tax laws and regulations applicable to our annual membership fees; cybersecurity and privacy laws; laws and rules relating to the distinction between independent contractors and employees (including recent developments in California that have expanded the scope of workers that are treated as employees instead of independent contractors); and tax and other laws encouraging employer-sponsored health insurance and group benefits. There could be laws and regulations applicable to our business that we have not identified or that, if changed, may be costly to us, and we cannot predict all the ways in which implementation of such laws and regulations may affect us. We are dependent on our relationships with affiliated professional entities that we may not own to provide healthcare services and our business would be harmed if those relationships were disrupted or if our arrangements with these affiliated professional entities become subject to legal challenges. The corporate practice of medicine prohibition exists in some form, by statute, regulation, board of medicine or attorney general guidance, or case law, in certain of the states in which we operate. These laws generally prohibit the practice of medicine by lay persons or entities and are intended to prevent unlicensed persons or entities from interfering with or inappropriately influencing providers’ professional judgment. As a result, many of our affiliated professional entities that deliver healthcare services to our members are wholly owned by providers licensed in their respective states, including Andrew Diamond, M.D., Ph.D., 1Life's Chief Medical Officer who oversees the operation of several of the affiliated professional entities as the sole director and officer of many of the affiliated professional entities. Under the ASAs between 1Life and/or its subsidiaries with each affiliated professional entity, we provide various administrative and operations support services in exchange for scheduled fees at the fair market value of our services provided to each affiliated professional entity. As a result, our ability to receive cash fees from the affiliated professional entities is limited to the fair market value of the services provided under the ASAs. To the extent our ability to receive cash fees from the affiliated professional entities is limited, our ability to use that cash for growth, debt service or other uses at the affiliated professional entity may be impaired and, as a result, our results of operations and financial condition may be adversely affected. Our ability to perform medical and digital health services in a particular U.S. state is directly dependent upon the applicable laws governing the practice of medicine, healthcare delivery and fee splitting in such locations, which are subject to changing political, regulatory and other influences. The extent to which a U.S. state considers particular actions or contractual relationships to constitute the practice of medicine is subject to change and to evolving interpretations by medical boards and state attorneys general, among others, each of which has broad discretion. There is a risk that U.S. state authorities in some jurisdictions may find that our contractual relationships with the affiliated professional entities, which govern the provision of medical and digital health services and the payment of administrative and operations support fees, violate laws prohibiting the corporate practice of medicine and fee splitting. Accordingly, we must monitor our compliance with laws in every jurisdiction in which we operate on an ongoing basis, and we cannot provide assurance that our activities and arrangements, if challenged, will be found to be in compliance with the law. Additionally, it is possible that the laws and rules governing the practice of medicine, including the provision of digital health services, and fee splitting in one or more jurisdictions may change in a manner adverse to our business. While the ASAs prohibit us from controlling, influencing or otherwise interfering with the practice of medicine at each affiliated professional entity, and provide that physicians retain exclusive control and responsibility for all aspects of the practice of medicine and the delivery of medical services, we cannot assure you that our contractual arrangements and activities with the affiliated professional entities will be free from scrutiny from U.S. state authorities, and we cannot guarantee that subsequent interpretation of the corporate practice of medicine and fee splitting laws will not circumscribe our business operations. State corporate practice of medicine doctrines also often impose penalties on physicians themselves for aiding the corporate practice of medicine, which could discourage providers from participating in our network of physicians. If a successful legal challenge or an adverse change in relevant laws were to occur, and we were unable to adapt our business model accordingly, our operations in affected jurisdictions would be disrupted, which could harm our business. Any material changes in our relationship with or among the affiliated professional entities, whether resulting from a dispute among the entities, a challenge from a governmental regulator, a change in government regulation, or the loss of these relationships or contracts with the affiliated professional entities, could impair our ability to provide services to our members and could harm our business. For example, our arrangements in place to help ensure an orderly succession of the owner or owners of certain of the affiliated professional entities upon the occurrence of certain events may be challenged, which may impact our relationship with the affiliated professional entities and harm our business and results of operations. The ASAs and these succession arrangements could also subject us to additional scrutiny by federal and state regulatory bodies regarding federal and state fraud and abuse laws. Any scrutiny, investigation or litigation with regard to our arrangement with the affiliated professional entities, and any resulting penalties, including monetary fines and restrictions on or mandated changes to our current business and operating arrangements, could harm our business. 39 Noncompliance with billing and documentation requirements could result in non-payment or subject us to audits, billing or other compliance investigations by government authorities, private payers or health network partners. Payers typically have differing and complex billing and documentation requirements. If we fail to comply with these payer-specific requirements, we may not be paid for our services or payment may be substantially delayed or reduced. Moreover, federal and state laws, rules and regulations impose substantial penalties, including criminal and civil fines, monetary penalties, exclusion from participation in government healthcare programs and imprisonment, on entities or individuals (including any individual corporate officers or physicians deemed responsible) that fraudulently or wrongfully bill government-funded programs or other third-party payers for healthcare services. Both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies, as well as their executives and managers, with enforcement actions covering a variety of topics, including referral and billing practices. Further, the federal False Claims Act and a growing number of state laws allow private parties to bring qui tam or “whistleblower” lawsuits against companies for false billing violations. Some of our activities could become the subject of governmental investigations or inquiries. From time to time in the ordinary course of business, governmental agencies and private payers also conduct audits of healthcare providers like us. For example, as a result of our participation in the Medicare program, including through CMS’ Direct Contracting Program, we are also subject to various governmental inspections, reviews, audits and investigations to verify our compliance with the Medicare program and applicable laws and regulations. We also periodically conduct internal audits and reviews of our regulatory compliance and our health network partners can also conduct audits under their agreements with us. Such audits could result in the incurrence of additional costs and diversion of management’s time and attention. In addition, such audits could trigger repayment demands based on findings that our services were not medically necessary, were billed at an improper level or otherwise violated applicable billing requirements or contractual terms. Our failure to comply with rules related to billing or adverse findings from such audits could result in, among other penalti • non-payment for services rendered or recoupments or refunds of amounts previously paid for such services by our health network partners; • refunding amounts we have been paid pursuant to the Medicare program or from payers; • state or federal agencies imposing fines, penalties and other sanctions on us; • temporary suspension of payment from payers for new patients to the facility or agency; • decertification or exclusion from participation in the Medicare program or one or more payer networks; • self-disclosure of violations to applicable regulatory authorities; • damage to our reputation; • the revocation of a facility’s or agency’s license; and • loss of certain rights under, or termination of, our contracts with and health network partners. We will likely be required in the future to refund amounts that have been paid and/or pay fines and penalties as a result of these inspections, reviews, audits and investigations. If adverse inspections, reviews, audits or investigations occur and any of the results noted above occur, it could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our securities. Furthermore, the legal, document production and other costs associated with complying with these inspections, reviews, audits or investigations could be significant. Our use and disclosure of personal information, including PHI, is subject to federal and state privacy and security regulations, and our failure to comply with those regulations or to adequately secure such information we hold could result in significant liability or reputational harm and, in turn, substantial harm to our health network partner and enterprise client base, membership base and revenue. In the ordinary course of our business, we and third parties upon whom we rely receive, collect, store, process and use personal information as part of our business. Numerous state and federal laws and regulations inside the United States govern the collection, dissemination, use, privacy, confidentiality, security, availability and integrity of personal information including PHI. These laws and regulations include HIPAA, as amended by the HITECH Act, and its implementing regulations, as well as 40 state privacy and data protection laws. HIPAA establishes a set of baseline national privacy and security standards for the protection of PHI, by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, which includes our affiliated professional entities, and the business associates with whom such covered entities contract for services that involve the use or disclosure of PHI, which includes 1Life and our affiliated professional entities. States may enforce more stringent privacy and data protection laws exceeding the requirements of HIPAA. Compliance with privacy, data protection and information security laws and regulations in the United States could cause us to incur substantial costs or require us to change our business practices and compliance procedures in a manner adverse to our business. We strive to comply with applicable laws, regulations, policies and other legal obligations relating to privacy, data protection and information security. However, as the various regulatory frameworks for privacy, data protection and information security continue to develop, uncertainties exist as to their application, and it is possible that these or other actual or alleged obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules and subject our business practices to uncertainty. Penalties for violations of these laws vary. For example, penalties for violations of HIPAA and its implementing regulations are assessed at varying rates per violation, subject to a statutory cap for violations of the same standard in a single calendar year. Such penalties may be subject to periodic adjustments. However, a single breach incident can result in violations of multiple standards, which could result in significant fines. HIPAA also authorizes state attorneys general to file suit on behalf of their residents. Courts may award damages, costs and attorneys’ fees related to violations of HIPAA in such cases, which may be significant. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI. Any such penalties or lawsuits could harm our business, financial condition, results of operations and prospects. In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA covered entities or business associates for compliance with the HIPAA Privacy and Security Standards and Breach Notification Rule. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the civil monetary penalty fine or settlement paid by the violator. HIPAA further requires that patients be notified of any unauthorized acquisition, access, use or disclosure of their unsecured PHI that compromises the privacy or security of such information, with certain exceptions related to unintentional or inadvertent use or disclosure by employees or authorized individuals or where there is a good faith belief that the person who received the impermissible disclosure would not have been able to retain the information. HIPAA specifies that such notifications must be made “without unreasonable delay and in no case later than 60 calendar days after discovery of the breach.” If a breach affects 500 patients or more, it must be reported to HHS without unreasonable delay, and HHS will post the name of the breaching entity on its public web site. Breaches affecting 500 patients or more in the same state or jurisdiction must also be reported to the local media. If a breach involves fewer than 500 people, the covered entity must record it in a log and notify HHS at least annually. Any such notifications, including notifications to the public, could harm our business, financial condition, results of operations and prospects. Numerous other federal and state laws protect the confidentiality, privacy, availability, integrity and security of personal information, including health information. For example, various states, such as California and Massachusetts, have implemented privacy laws and regulations that in many cases are more restrictive than, and may not be preempted by, the HIPAA rules and may be subject to varying interpretations by courts and government agencies, creating complex compliance issues for us and our health network partners and enterprise clients and potentially exposing us to additional expense, adverse publicity and liability. The cost of compliance could be significant and require investments to enhance our technology and security infrastructure. In addition, in certain situations, regulators, partners, clients and consumers may disagree with our analysis of, and response to, data-related incidents and our execution of obligations under the laws, which may cause disputes, liability and negative publicity and harm our business, operations and prospects. In particular, some laws, such as the California Consumer Privacy Act of 2018, or CCPA, allow for a private right of action and statutory damages, which may motivate plaintiffs’ attorneys to file class action claims, which can be resource-intensive and costly to defend. If our security measures, some of which are managed by third parties, are breached or fail, and unauthorized access to personal information or PHI occurs, our reputation could be severely damaged, harming member, client and partner confidence and may result in members curtailing their use of our services. In addition, we could face litigation, significant damages for contract breach, significant penalties and regulatory actions for violation of HIPAA and other applicable laws or regulations and significant costs for remediation, notification to individuals and the public and measures to prevent future occurrences. Any potential security breach could also result in increased costs associated with liability for stolen assets or information, inaccessibility of systems or information, repairing system damage that may have been caused by such breaches, remediation 41 offered to employees, contractors, health network partners, enterprise clients or members in an effort to maintain our business relationships after a breach and implementing measures to prevent future occurrences, including organizational changes, deploying additional personnel and protection technologies, training employees and engaging third-party experts and consultants. We outsource important aspects of the storage and transmission of personal information and PHI, and thus rely on third parties to manage functions that have material cybersecurity risks. We require our vendors who handle personal information and PHI to contractually commit to safeguarding personal information and PHI such as by signing information protection addenda and/or business associate agreements, as applicable, to the same extent that applies to us and require such vendors to undergo security examinations. In addition, we periodically hire third-party security experts to assess and test our security posture. However, we cannot assure that these contractual measures and other safeguards will adequately protect us from the risks associated with the storage and transmission of employees’, contractors’, patients’ and members’ personal information and PHI. Any violation of applicable laws, regulations or policies by these parties, including violations that cause us to incur significant liability and put sensitive data at risk, could in turn harm our business. We also publish statements to our members that describe how we handle and protect personal information and PHI. If federal or state regulatory authorities or private litigants consider any portion of these statements to be untrue, we may be subject to claims of misrepresentation and/or deceptive practices, which could lead to significant liabilities and consequences, including, without limitation, significant costs of responding to investigations, defending against litigation, settling claims and complying with regulatory or court orders. As public and regulatory focus on privacy issues continues to increase, we expect that there will continue to be new laws, regulations and industry standards concerning privacy, data protection and information security. For example, the CCPA imposes obligations on businesses to which it applies. These obligations include, without limitation, providing specific disclosures in privacy notices, affording California residents certain rights related to their personal information, and requiring businesses subject to the CCPA to implement certain measures to effectuate California residents' rights to their personal information. The CCPA allows for statutory fines for noncompliance. The California Privacy Rights Act, or the CPRA, approved by California voters in November 2020 and expected to go into effect on January 1, 2023, builds upon the CCPA and affords consumers expanded privacy rights and protections. Colorado and Virginia passed similar consumer privacy laws expected to go into effect in 2023. The potential effects of state privacy, data protection and information security laws are far-reaching and will require us to modify our data processing practices and policies and to incur substantial costs and expenses to comply. Further, obligations under new laws and regulations may not be clear, creating uncertainty and risk despite our efforts to comply. If we fail, or are perceived to have failed, to address or comply with our privacy, data protection and information security obligations, we could be subject to governmental enforcement actions such as investigations, fines, penalties, audits, or inspections, class action or other litigation, contract breach claims, additional reporting requirements and/or oversight, bans on processing personal information, orders to destroy or not use personal information, reputational harm and imprisonment of company officials. Any significant change to applicable privacy, data protection and information security laws, regulations or industry practices regarding the collection, use, retention, security or disclosure of our members’ personal information, or regarding the manner in which the express or implied consent for the collection, use, retention or disclosure of such personal information is obtained, could increase our costs to comply and require us to modify our services and features, possibly in a material manner, which we may be unable to complete and may limit our ability to store and process the personal information of our members, optimize our operations or develop new services and features. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. Individuals may claim our call and text messaging services are not compliant with applicable law, including the Telephone Consumer Protection Act. We call and send short message service, or SMS, text messages to members and potential members who are eligible to use our service. While we obtain consent from these individuals to call and send text messages, federal or state regulatory authorities or private litigants may claim that the notices and disclosures we provide, form of consents we obtain or our call and SMS texting practices are not adequate to comply with, or violate applicable law, including the Telephone Consumer Protection Act, or TCPA. The TCPA imposes specific requirements relating to the marketing to individuals leveraging technology such as telephones, mobile devices and texts. TCPA violations can result in significant financial penalties as businesses can incur civil forfeiture penalties or criminal fines imposed by the Federal Communications Commission or be fined for each violation through private litigation or state attorneys general or other state actor enforcement. Class action suits are the most common method for private enforcement. Our call and SMS texting campaigns are potential sources of risk for class action lawsuits and liability for our company. Numerous class-action suits under federal and state laws have been filed in recent years against 42 companies who conduct call and SMS texting programs, with many resulting in multi-million-dollar settlements to the plaintiffs. While we strive to adhere to strict policies and procedures, the Federal Communications Commission, as the agency that implements and enforces the TCPA, may disagree with our interpretation of the TCPA and subject us to penalties and other consequences for noncompliance. Determination by a court or regulatory agency that our call or SMS text messaging violate the TCPA could subject us to civil penalties, could require us to change some portions of our business and could otherwise harm our business. Even an unsuccessful challenge by members, consumers or regulatory authorities of our activities could result in adverse publicity and could require a costly response from and defense by us. Negative publicity regarding the managed healthcare industry generally could adversely affect our results of operations or business. Negative publicity regarding the managed healthcare industry generally, or the Medicare Advantage program in particular, may result in increased regulation and legislative review of industry practices that further increase the costs of doing business and adversely affect our results of operations or business • requiring us to change our products and services provided to patients; • increasing the regulatory burdens under which we operate, which may increase the costs of providing services; • adversely affecting our ability to market our products or services through the imposition of further regulatory restrictions regarding the manner in which plans and providers market to Medicare Advantage enrollees; or • adversely affecting our ability to attract and retain patients. Risks Related to Information Technology We rely on internet infrastructure, bandwidth providers, other third parties and our own systems to provide proprietary service platforms to our members and providers, and any failure or interruption in the services provided by these third parties or our own systems could expose us to liability and hurt our reputation and relationships with members and clients. Our ability to maintain our proprietary service platform, including our digital health services and our electronic health records systems, is dependent on the development and maintenance of the infrastructure of the internet and other telecommunications services by third parties, including bandwidth and telecommunications equipment providers. This includes maintenance of a reliable network connection with the necessary speed, data capacity and security for providing reliable internet access and services and reliable telephone and facsimile services. We exercise limited control over these third-party providers. Our platforms are designed to operate without perceptible interruption in accordance with our service level commitments. We have, however, experienced limited interruptions in these systems in the past, including server failures that temporarily slowed down or diminished the performance of our platforms, and we may experience similar or more significant interruptions in the future. We do not currently maintain redundant systems or facilities for some of these services. Interruptions to third party systems or services, whether due to system failures, cyber incidents (the risk of which has been higher due to the significant increase in remote work across the technology industry as a result of the COVID-19 pandemic), ransomware, physical or electronic break-ins, phishing campaigns or other events, could affect the security or availability of our platforms or services and prevent or inhibit the ability of our members or providers to access our platforms or services. In the event of a catastrophic event with respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which could result in liability, substantial costs to remedy those problems or harm our relationship with our members and our business. Additionally, any disruption in the network access, telecommunications or co-location services provided by third-party providers or any failure of or by third-party providers’ systems or our own systems to handle current or higher volumes of use could significantly harm our business. The reliability and performance of our third-party providers’ systems and services may be harmed by increased usage or by ransomware, denial-of-service attacks or related cyber incidents, which has increased due to more opportunities created by remote work necessitated by the COVID-19 pandemic. Any errors, failures, interruptions or delays experienced in connection with these third-party services or our own systems could hurt our ability to deliver our services platform and damage our relationships with health network partners, enterprise clients and members and expose us to third-party liabilities, which could in turn harm our competitive position, business, financial condition, results of operations and prospects. 43 We rely on third-party vendors to host and maintain our technology platform. We rely on third-party vendors to host and maintain our technology platform. Our ability to operate our business is dependent on maintaining our relationships with third-party vendors and entering into new relationships to meet the changing needs of our business. Any deterioration in our relationships with such vendors or our failure to enter into agreements with vendors in the future could significantly disrupt our operations or hinder our ability to execute our growth strategies. Because we rely on certain vendors to store and process our data, it is possible that, despite precautions taken at our vendors’ facilities, the occurrence of a natural disaster, cyber incident, decision to close the facilities without adequate notice or other unanticipated problems could result in our non-compliance with data protection laws and regulations, loss of proprietary information, personal information, and other confidential information, and disruption to our technology platform. These service interruptions could also cause our platform to be unavailable to our health network partners, enterprise clients and members, and impair our ability to deliver services and negatively impact our relationships with new and existing health network partners, enterprise clients and members. Some of our vendor agreements may be unilaterally terminated by the vendor for convenience, including with respect to Amazon Web Services, and if such agreements are terminated, we may not be able to enter into similar relationships in the future on reasonable terms or at all. We may also incur substantial costs, delays and disruptions to our business in transitioning such services to ourselves or other third-party vendors. In addition, third-party vendors may not be able to provide the services required in order to meet the changing needs of our business. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. If our or our vendors’ security measures fail or are breached and unauthorized access to our employees’, contractors’, members’, clients’ or partners’ data is obtained, our services may be perceived as insecure, we may incur significant liabilities, including through private litigation or regulatory action, our reputation may be harmed, and we could lose members, clients and partners. Our services and operations involve the storage and transmission of personal information and other sensitive data, including proprietary and confidential business data, trade secrets and intellectual property and the personal information (including health information) of employees, contractors, clients, partners, members and others. Because of the sensitivity of the information we store and transmit, the security features of our and our third-party vendors’ computer, network, and communications systems infrastructure are critical to the success of our business. A breach or failure of our or our third-party vendors’ security measures could result from a variety of circumstances and events, including, but not limited to, social engineering attacks (including through phishing attacks), malicious code (such as viruses and worms), malware (including as a result of advanced persistent threat intrusions), denial-of-service attacks (such as credential stuffing), ransomware attacks, supply-chain attacks, employee negligence or human errors, software bugs, server malfunction, software or hardware failures, loss of data or other information technology assets, adware, telecommunications failures, earthquakes, fire, flood, and other similar threats. Ransomware attacks, including those perpetrated by organized criminal threat actors, nation-states, and nation-state supported actors, are becoming increasingly prevalent and severe and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, strategic security objectives or applicable laws or regulations prohibiting payments. Similarly, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our information technology systems (including our services) or the third-party information technology systems that support us and our services. The COVID-19 pandemic and our remote workforce poses increased risks to our information technology systems and data, as more of our employees work from home, utilizing network connections outside our premises. Any of the previously identified or similar threats could cause a security incident. If we our or our third-party vendors experience a security incident, it could result in unauthorized, unlawful or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of or access to data. A security incident could disrupt our (and third parties upon whom we rely) ability to provide our services. We may expend significant resources or modify our business activities in an effort to protect against security incidents. While we have implemented security measures designed to protect against a security incident, there can be no assurance that these measures will always be effective. We have not always been able in the past and may be unable in the future to detect vulnerabilities in our information technology systems because such threats and techniques change frequently, are often sophisticated in nature, and may not be detected until after a security incident has occurred. Some security incidents may remain undetected for an extended period of time. Despite our efforts to identify and remediate vulnerabilities, if any, in our information technology systems (including our products), our efforts may not be successful. Further, as cyber threats 44 continue to evolve, we may be required to expend additional resources to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities and we may experience delays in developing and deploying remedial measures designed to address any such identified vulnerabilities. Certain privacy, data protection and information security obligations may require us to implement and maintain specific security measures, industry-standard or reasonable security measures to protect our information technology systems and data. Our clients, partners and members may demand that we adopt additional security measures or make further security investments, which may be costly and time-consuming. Such failures or breaches of our or our third-party vendors’ security measures, or our or our third-party vendors’ inability to effectively resolve such failures or breaches in a timely manner, could severely damage our reputation, adversely impact customer, partner, member or investor confidence in us, and reduce the demand for our services. Applicable privacy, data protection and security information obligations may require us to notify relevant stakeholders of security incidents. Such disclosures are costly, and the disclosures or the failure to comply with such requirements, could lead to adverse impacts. In addition, we could face litigation, significant damages for contract breach or other breaches of law, significant monetary penalties, or regulatory actions for violation of applicable laws or regulations, and incur significant costs for remedial or preventive measures. Although we maintain insurance covering certain security and privacy damages and claim expenses, we may not carry insurance or maintain coverage sufficient to compensate for all liability. Adequate insurance may not be available in the future at acceptable costs or at all and coverage disputes could also occur with our insurers. If security and privacy claims are not fully covered by insurance, they could result in substantial costs to us, which could harm our business. Insurance coverage would also not address the reputational damage that could result from a security incident. If an actual or perceived breach or inadequacy of our or our third-party vendors’ security occurs, or if we or our third-party vendors are unable to effectively resolve a breach in a timely manner, we could lose current and potential members, partners and clients, which could harm our business, results of operations, financial condition and prospects. Our proprietary technology platforms may not operate properly, which could damage our reputation, subject us to claims or require us to divert application of our resources from other purposes, any of which could harm our business and growth. Our proprietary technology platforms provide members with the ability to, among other things, register for our services, request a visit (either scheduled or on demand) and communicate and interact with providers, and allows our providers to, among other things, chart patient notes, maintain medical records, and conduct visits (via video, phone or the internet). Proprietary software development is time-consuming, expensive and complex, and may involve unforeseen difficulties. We may encounter technical obstacles, and it is possible that we may discover additional problems that prevent our proprietary software from operating properly. Due to the COVID-19 pandemic, use of virtual care, including remote visits, has increased, which places a heavier demand on our technology platform and may cause performance levels to deteriorate. When we launch new features and functions within our technology platform, we could inadvertently introduce bugs or errors, including latent ones, into our platforms which could impact usability as well as technology and clinical operations. We continue to implement software with respect to a number of new applications and services. The operation of our technology also depends in part on the performance of third-party service providers. If our technology platform does not function reliably or fails to achieve member, provider, partner or client expectations in terms of performance, we may be required to divert resources allocated for other business purposes to address these issues, may suffer reputational harm, lose or fail to grow member usage, fail to retain or grow provider talent, members, partners and clients, and may be subject to liability claims. The information that we provide to our health network partners, enterprise clients and members could be inaccurate or incomplete, which could harm our business, financial condition and results of operations. We provide healthcare-related information for use by our health network partners, enterprise clients and members. Because data in the healthcare industry is fragmented in origin, inconsistent in format and often incomplete, the overall quality of data in the healthcare industry is poor, and we frequently discover data issues and errors. If the data that we provide to our health network partners, enterprise clients and members is incorrect or incomplete or if we make mistakes in the capture or input of this data, our reputation may suffer and our ability to attract and retain health network partners, enterprise clients and members may be harmed. In addition, a court or government agency may take the position that our storage and display of health information exposes us to personal injury liability or other liability for wrongful delivery or handling of healthcare services or erroneous health information, which could harm our business, financial condition and results of operations. If we cannot implement or optimize our technology solutions for members, integrate our systems with health network partners or resolve technical issues in a timely manner, we may lose clients and partners and our reputation may be harmed. Our health network partners utilize a variety of data formats, applications, systems and infrastructure. Moreover, each health network partner may have a unique technology ecosystem and infrastructure or have specific technology or certification requirements. To maintain our relationships with such partners and to continue to grow our business and membership, we may 45 be required to meet such requirements and, in certain circumstances, our services must be seamlessly integrated and interoperable with our partners’ complex systems, which may cause us to incur significant upfront and maintenance costs. Additionally, we do not control our partners’ integration schedules. As a result, if our partners do not allocate the internal resources necessary to meet their integration responsibilities, which resources can be significant as many of them are large healthcare institutions with substantial operations to manage, or if we face unanticipated integration difficulties, the integration may be delayed. In addition, competitors with more efficient operating models with lower integration costs could jeopardize our partner relationships. If the integration process with our partners is not executed successfully or if execution is delayed, we could incur significant costs, partners could become dissatisfied and decide not to continue a strategic contractual relationship with us beyond an initial period during their term commitment or, in some cases, revenue recognition could be delayed, any of which could harm our business and results of operations. Our members depend on our digital health platform, including our mobile app, web portal, and support services to access on-demand digital health services or schedule in-office visits. We may be unable to quickly accommodate increases in member technology usage, particularly as we increase the size of our membership base, grow our services and as the COVID-19 pandemic drives more member demand for our digital health services and virtual care. We also may be unable to modify the format of our technology solutions and support services to compete with developments from our competitors. If we are unable to further develop and enhance our technology solutions or maintain effective technical support services to address members’ needs or preferences in a timely fashion, our members, clients and partners may become dissatisfied, which could damage our ability to maintain or expand our membership and business. While any refunds or credits we have issued historically have not had a significant impact on net revenue, we cannot assure you as to whether we may need to issue additional refunds or credits for membership fees in the future as a result of member or client dissatisfaction. For example, our members expect on-demand healthcare services through our mobile app and rapid in-office visit scheduling. Failure to maintain these standards or negative publicity related to our technology solutions, regardless of its accuracy, may reduce our overall NPS, harm our reputation and cause us to lose current or potential members, enterprise clients or partners. In addition, our enterprise clients expect our technology solutions to facilitate long-term cost of care reductions through high employee digital engagement, which we market as potential benefits for employers in providing employees with One Medical memberships. If employers do not perceive our solutions and services as providing such efficiencies and cost savings, they may terminate their contracts with us or elect not to renew. Any such outcomes could also negatively affect our ability to contract with new enterprise clients through damage to our reputation. If any of these were to occur, our revenue may decline and our business, results of operations, financial condition and prospects could be harmed. Risks Related to Taxation and Accounting Standards Certain U.S. state tax authorities may assert that we have a state nexus and seek to impose state and local income taxes which could harm our results of operations. As of December 31, 2021, we are qualified to operate in, and file income tax returns in, 19 states as well as Washington, D.C. There is a risk that certain state tax authorities where we do not currently file a state income tax return could assert that we are liable for state and local income taxes based upon income or gross receipts allocable to such states. States are becoming increasingly aggressive in asserting a nexus for state income tax purposes. We could be subject to state and local taxation, including penalties and interest attributable to prior periods, if a state tax authority successfully asserts that our activities give rise to a nexus. Such tax assessments, penalties and interest to the extent the Company has taxable income in prior periods may adversely impact our results of operations. Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations. In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. As of December 31, 2021, we have $894.3 million of federal net operating loss carryforwards and $598.5 million of state and local net operating loss carryforwards. The federal net operating loss carryforwards of $687.1 million arising after 2017 carry forward indefinitely, but the deduction for these carryforwards is limited to 80% of post-2020 current-year taxable income. The federal net operating loss carryforwards of $136.7 million from prior years will begin to expire in 2025. The state and local net operating loss carryforwards begin to expire in 2024. The Company has identified $25.2 million and $31.0 million of the above federal and state net operating losses, respectively, in certain affiliated professional entities that will expire unused due to prior ownership changes. In addition, future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code, further limiting our ability to utilize NOLs arising prior to such ownership 46 change in the future. There is also a risk that due to statutory or regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. We have recorded a full valuation allowance against the deferred tax assets attributable to our NOLs. Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use or similar taxes for our membership, enterprise and other service offerings, which could negatively impact our results of operations. We do not collect sales and use and similar taxes in any states for our membership, enterprise and other service offerings based on our belief that our services are not subject to such taxes in any state. Sales and use and similar tax laws and rates vary greatly from state to state. Certain states in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest with respect to past services, and we may be required to collect such taxes for services in the future. For example, the State of New York audited our sales and use tax records from March 2011 through February 2017 and issued a determination that we owe back taxes, penalties and interest. If we are not successful in disputing such proposed assessments, we may be required to make payments in tax assessments, penalties or interest, and may be required to collect sales and use taxes in the future. Such tax assessments, penalties and interest or future requirements may negatively impact our results of operations. Our financial results may be adversely impacted by changes in accounting principles applicable to us. Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC and other various bodies formed to promulgate and interpret appropriate accounting principles. For example, in May 2014, the FASB issued accounting standards update No. 2014-09 (Topic 606), Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under GAAP and specifies that an entity should recognize revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services; this new accounting standard also impacted the recognition of sales commissions. Changes in accounting standards and interpretations or in our accounting assumptions and judgments could significantly impact our consolidated financial statements and our reported financial position and financial results may be harmed if our estimates or judgments prove to be wrong, assumptions change, or actual circumstances differ from those in our assumptions. Any difficulties in implementing these pronouncements could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm our business. If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be harmed. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, liability for medical claims incurred in the period but not yet reported (“IBNR”), valuation and related impairment recognition of intangible assets and goodwill, and stock-based compensation. Our results of operations may be harmed if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock. There are significant risks associated with estimating revenue under our At-Risk arrangements with certain payers, and if our estimates of revenues are materially inaccurate, it could negatively impact the timing and the amount of our revenue recognition or have a material adverse effect on our business, results of operations, financial condition and cash flows. We recognize revenue net of risk shares and adjustments in the month in which eligible members are entitled to receive healthcare benefits during the contract term. Due to reporting lag times and other factors, significant judgment is required to estimate risk adjustments to PMPM fees received from payers for At-Risk members. The billing and collection process with payers is complex due to ongoing insurance coverage changes, geographic coverage differences, differing interpretations of contract coverage and other payer issues, such as ensuring appropriate documentation. Determining applicable primary and secondary coverage for our patients, together with the changes in patient coverage that occur each month, requires complex, resource-intensive processes. Errors in determining the correct coordination of benefits may result in refunds to payers. 47 Revenues associated with Medicare programs are also subject to estimation risk related to the amounts not paid by the primary government payer that will ultimately be collectible from other government programs paying secondary coverage, the patient’s commercial health insurance plan secondary coverage or the patient. Collections, refunds and payer retractions typically continue to occur for up to three years and longer after services are provided. Inaccurate estimates of revenues could negatively impact the timing and the amount of our revenue recognition and have a material adverse impact on our business, results of operations, financial condition and cash flows. If our goodwill, intangible assets or other long-lived assets become impaired, we may be required to record a significant charge to earnings. Consummation of the acquisition of Iora resulted in us recognizing additional goodwill, intangible assets and other long-lived assets such as leases and fixed assets on our consolidated balance sheet. Intangible assets with finite lives will be amortized using the method that best reflects how their economic benefits are utilized or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over their estimated useful lives. Goodwill will not be amortized, but instead tested for potential impairment at least annually. Goodwill, intangible assets and other long-lived assets will also be tested for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If our goodwill, intangible assets or other long-lived assets are determined to be impaired in the future, we may be required to record additional significant, non-cash charges to earnings during the period in which the impairment is determined to have occurred. Risks Related to Our Intellectual Property If we are unable to obtain, maintain and enforce intellectual property protection for our business assets or if the scope of our intellectual property protection is not sufficiently broad, others may be able to develop and commercialize technology and solutions substantially similar to ours, and our ability to conduct business may be compromised. Our business depends on proprietary technology and other business assets, including software, processes, databases, confidential information and know-how, the protection of which is crucial to the success of our business. We rely on a combination of trademark, trade-secret and copyright laws, confidentiality policies and procedures, cybersecurity practices and contractual provisions to protect our intellectual property. We do not currently own any issued patents. Third parties, including our competitors, may have or obtain patents relating to technologies that overlap or compete with our technology, which they may assert against us to seek licensing fees or preclude the use of our technology. We may, over time, increase our investment in protecting our intellectual property through additional trademark, patent, copyright and other intellectual property filings, which could be expensive and time-consuming. While our operations are currently based in the United States, we may also be required to protect our intellectual property in foreign jurisdictions, a process that can be prolonged and costly, and one that we may choose not to pursue in every instance. We may not be able to obtain protection for our technology and even if we are successful, it is expensive to maintain intellectual property rights and the costs of defending our rights could be substantial. Moreover, these measures may not be sufficient to offer us meaningful protection or provide us with any competitive advantage. Furthermore, changes to U.S. intellectual property laws may jeopardize the enforceability and validity of our intellectual property portfolio and harm our ability to obtain patent protection of certain inventions. If we are unable to adequately protect our intellectual property and other proprietary rights, our competitive position and our business could be harmed, as competitors may be able to commercialize similar offerings without having incurred the development and licensing costs that we have incurred. Any of our owned or licensed intellectual property rights could be challenged, invalidated, circumvented, infringed, misappropriated or violated, our trade secrets and other confidential information could be disclosed in an unauthorized manner to third parties, which could result in costly redesign efforts, business disruptions, discontinuance of some of our offerings or other competitive harm. We may become involved in lawsuits to protect or enforce or defend our intellectual property rights, which could be expensive, time consuming and unsuccessful. Third parties, including our competitors, could infringe, misappropriate or otherwise violate our intellectual property rights. Monitoring unauthorized use of our intellectual property is difficult and costly. From time to time, we seek to analyze our competitors’ solutions and services, and may in the future seek to enforce our rights against potential infringement, misappropriation or violation of our intellectual property. However, the steps we have taken to protect our proprietary rights may not be adequate to enforce our rights as against such infringement, misappropriation or violation of our intellectual property. We may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. 48 Any inability to meaningfully enforce our intellectual property rights could harm our ability to compete and reduce demand for our services. In recent years, companies are increasingly bringing and becoming subject to lawsuits and proceedings alleging infringement, misappropriation or violation of intellectual property rights, particularly patent rights. Our competitors and other third parties may hold patents or other intellectual property rights, which could be related to our business. We expect that we may receive in the future notices that claim we or our partners, clients or members using our solutions and services have misappropriated or misused other parties’ intellectual property rights, particularly as the number of competitors in our market grows and the functionality of applications amongst competitors overlaps. If we are found to infringe, misappropriate or violate another party’s intellectual property rights, we could be prohibited, including by court order, from further use of the intellectual property asset or be required to obtain a license from such third party to continue commercializing or using such technologies, solutions or services, which may not be available on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors and other third parties access to the same technologies licensed to us, and it could require us to make substantial licensing and royalty payments. Accordingly, we may be forced to design around such violated intellectual property, which may be expensive, time-consuming or infeasible. In addition, we could be found liable for significant monetary damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a patent or other intellectual property right. Claims that we have misappropriated the confidential information or trade secrets of third parties could similarly harm our business. Any adverse outcome in such cases could affect our competitive position, business, financial condition, results of operations and prospects. Litigation or other legal proceedings relating to intellectual property claims, regardless of merits and even if resolved in our favor, can be expensive, time consuming, and resource intensive. In addition, there could be public announcements of the results of hearings, motions, or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing, or other business activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of intellectual property proceedings could harm our ability to compete in the marketplace. In addition, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. If we fail to comply with our license obligations, if our license rights are challenged, or if we cannot license rights to use technologies on reasonable terms, we may experience business disruption, increased costs, or inability to commercialize certain services. We license certain intellectual property, including content, technologies and software from third parties, that are important to our business. In the future we may need to enter into additional agreements that provide us with licenses and rights to valuable intellectual property or technology. If we fail to comply with any of the obligations under our license agreements, or if our use or license rights are challenged, we may be required to pay damages, the licensor may have the right to terminate the license and the owner of the intellectual property asset may assert claims against us. Termination by the licensor or dispute with an owner of an intellectual property asset would cause us to lose valuable rights, and could disrupt or prevent us from providing our services, or adversely impact our ability to commercialize future solutions and services. In addition, our rights to certain technologies are licensed to us on a non-exclusive basis. The owners of these non-exclusively licensed technologies are therefore free to license them to third parties, including our competitors, on terms that may be superior to those offered to us, which could place us at a competitive disadvantage. Our licensors may also own or control intellectual property that has not been licensed to us and, as a result, we may be subject to claims, regardless of their merit, that we are infringing or otherwise violating the licensor’s rights. In addition, the agreements under which we license intellectual property or technology from third parties are generally complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property or technology, or increase what we believe to be our financial or other obligations under the relevant agreement. Moreover, the licensing or acquisition of third-party intellectual property rights is a competitive area, and established companies may have a competitive advantage over us due to their size, capital resources and greater development or commercialization capabilities. Companies that perceive us to be a competitor may also be unwilling to license or grant rights to us. Even if such licenses are available, we may be required to pay the licensor substantial fees or royalties. Such fees or 49 royalties will become a cost of our operations and may affect our margins. If we are unable to obtain licenses on acceptable terms or at all, if any licenses are subsequently terminated, if our licensors fail to abide by the terms of the licenses, if our licensors fail to prevent infringement by third parties, or if the licensed intellectual property rights are found to be invalid or unenforceable, we could be restricted from commercializing our solutions and services and may be required to incur substantial costs to seek or develop alternatives. Any of the foregoing could harm our business, financial condition, results of operations, and prospects. If our trademarks and trade names are not adequately protected, we may not be able to build and maintain name recognition in our markets of interest and our competitive position may be harmed. The registered or unregistered trademarks or trade names that we own may be challenged, infringed, circumvented, declared generic, lapsed or determined to be infringing on or dilutive of other marks. We may not be able to protect our rights in these trademarks and trade names, which we need in order to build and maintain name recognition with the public. In addition, third parties have filed, and may in the future file, for registration of trademarks similar or identical to our trademarks, thereby impeding our ability to build and maintain brand identity and possibly leading to market confusion. If they succeed in registering or developing common law rights in such trademarks, and if we are not successful in challenging such third-party rights, we may not be able to use these trademarks to develop or maintain brand recognition of our services or be required to expend substantial resources and expenses to rebrand. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. If we are unable to establish or protect our trademarks and trade names, or if we are unable to build or maintain name recognition based on our trademarks and trade names, we may not be able to compete effectively, which could harm our competitive position, business, financial condition, results of operations and prospects. If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed. We rely heavily on trade secrets and confidentiality agreements to protect our unpatented know-how, technology, and other proprietary information, including our technology platform, and to maintain our competitive position. With respect to our technology platform, we consider trade secrets and know-how to be one of our primary sources of intellectual property. However, trade secrets and know-how can be difficult to protect. We seek to protect these trade secrets and other proprietary technology, in part, by implementing topical policies and processes and by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, contractors, consultants, advisors, clients, prospects, partners, and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. We cannot guarantee that we have entered into such agreements with each party that may have or have had access to our trade secrets or proprietary information. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive, and time-consuming, and the outcome is unpredictable. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets are misappropriated, improperly disclosed, or independently developed by a competitor or other third party, it could harm our competitive position, business, financial condition, results of operations, and prospects. We may be subject to claims that our employees, consultants, or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting ownership of what we regard as our own intellectual property. Many of our employees, consultants, and advisors are currently or were previously employed at other companies in our field, including our competitors or potential competitors. Although we try to ensure that our employees, consultants, and advisors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these individuals have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management. In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our 50 own. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. Our use of open source software could compromise our ability to offer our services and subject us to possible litigation. We use open source software in connection with our solutions and services. Companies that incorporate open source software into their solutions have, from time to time, faced claims challenging the use of open source software and compliance with open source license terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software or claiming noncompliance with open source licensing terms. Some open source software licenses require users who distribute software containing open source software to publicly disclose all or part of the source code to the licensee’s software that incorporates, links or uses such open source software, and make available to third parties for no cost, any derivative works of the open source code created by the licensee, which could include the licensee’s own valuable proprietary code. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose our proprietary source code or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur, or could be claimed to have occurred, in part because open source license terms are often ambiguous. There is little legal precedent in this area and any actual or claimed requirement to disclose our proprietary source code or pay damages for breach of contract could harm our business and could help third parties, including our competitors, develop solutions and services that are similar to or better than ours. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. Risks Related to Ownership of Our Common Stock Our stock price may be volatile, and the value of our common stock may decline. The market price of our common stock may be highly volatile and may fluctuate or decline substantially as a result of a variety of factors, some of which are beyond our control or are related in complex ways, includin • actual or anticipated fluctuations in our financial condition and operating results; • variance in our financial performance from expectations of securities analysts or investors; • changes in the pricing we offer our members; • changes in our projected operating and financial results; • the impact of COVID-19 on our financial performance, financial condition and results of operations, and the financial performance and financial condition of our health network partners, our enterprise clients and others; • the impact of protests and civil unrest; • our relationships with our health network partners and any changes to or terminations of our contracts with the health network partners; • changes in laws or regulations applicable to our industry and our solutions and services; • announcements by us or our competitors of significant business developments, acquisitions, or new offerings; • publicity associated with issues with our services and technology platform; • our involvement in litigation, including medical malpractice claims and consumer class action claims; • any governmental investigations or inquiries into our business and operations or challenges to our relationships with our affiliated professional entities under the ASAs or to our relationships with health network partners; • future sales of our common stock or other securities, by us or our stockholders; • changes in senior management or key personnel; 51 • developments or disputes concerning our intellectual property or other proprietary rights, including allegations that we have infringed, misappropriated or otherwise violated any intellectual property of any third party; • changes in accounting standards, policies, guidelines, interpretations or principles; • actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally, including competition or perceived competition from well-known and established companies or entities; • the trading volume of our common stock, including effects of inflation; • changes in the anticipated future size and growth rate of our market; • rates of unemployment; and • general economic, regulatory and market conditions, including economic recessions or slowdowns and inflationary pressures. Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may negatively impact the market price of our common stock, which has recently been volatile. In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us, because companies reliant on technology solutions have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business. As a result of being a public company, we are obligated to maintain proper and effective internal control over financial reporting and any failure to maintain the adequacy of these internal controls may negatively impact investor confidence in our company and, as a result, the value of our common stock. We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of Nasdaq. In particular, we are required pursuant to Section 404 of the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, our independent registered public accounting firm is required to attest to the effectiveness of our internal control over financial reporting commencing from this Annual Report on Form 10-K. The process of compiling the system and process documentation necessary to perform the evaluation required under Section 404 is costly and challenging. Also, we currently do not have an internal audit group, and we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and compile the system and process documentation necessary to support ongoing work to comply with Section 404. Any failure to maintain effective internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities and our access to the capital markets could be restricted in the future. We reported in our Annual Report on Form 10-K as of December 31, 2019, material weaknesses in our internal control over financial reporting related to controls over the accounting for significant and unusual transactions, segregation of duties and adequate information technology general controls. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. During 2020, we completed the remediation measures related to our previously reported material weaknesses and have concluded that our internal control over financial reporting was effective as of December 31, 2020 and 2021. However, remediation of these material weaknesses does not provide assurance that our remediated controls will continue to operate properly or that our financial statements will be free from error. We cannot assure you that the measures we have taken will be sufficient to avoid potential future material weaknesses. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business and we may discover weaknesses in our disclosure controls and internal control over financial reporting in the future. 52 Any failure to develop or maintain effective internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. Accordingly, there could continue to be a possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities and our access to the capital markets could be restricted in the future. A significant portion of our total outstanding common stock may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well. Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the public market, the market price of our common stock could decline significantly. All of our outstanding shares of common stock are eligible for sale in the public market, other than shares held by directors, executive officers and other affiliates that are subject to volume and other limitations under Rule 144 under the Securities Act. In addition, we have reserved shares for future issuance under our equity incentive plan. Certain holders of our common stock, or their transferees, also have rights, subject to some conditions, to require us to file one or more registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. If we were to register the resale of these shares, they could be freely sold in the public market without limitation. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline. Future sales and issuances of our capital stock or rights to purchase capital stock could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to decline. We may issue additional securities in the future and from time to time. Future sales and issuances of our capital stock or rights to purchase our capital stock could result in substantial dilution to our existing stockholders. We may sell or issue common stock, convertible securities and other equity securities in one or more transactions at prices and in a manner as we may determine from time to time, including in connection with future acquisitions or strategic transactions. If we sell any such securities in subsequent transactions, investors may be materially diluted. If securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business, our common stock price and trading volume could decline. Our stock price and trading volume will be heavily influenced by the way analysts and investors interpret our financial information and other disclosures. If securities or industry analysts do not publish research or reports about our business, delay publishing reports about our business or publish negative reports about our business, regardless of accuracy, or cease covering us, our common stock price and trading volume could decline. Even if our common stock is actively covered by analysts, we do not have any control over the analysts or the measures that analysts or investors may rely upon to forecast our future results. Over-reliance by analysts or investors on any particular metric to forecast our future results may result in forecasts that differ significantly from our own. Regardless of accuracy, unfavorable interpretations of our financial information and other public disclosures could have a negative impact on our stock price. If our financial performance fails to meet analyst estimates, for any of the reasons discussed above or otherwise, or one or more of the analysts who cover us downgrade our common stock or change their opinion of our common stock, our stock price would likely decline. We do not intend to pay dividends for the foreseeable future and, as a result, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock. We have never declared or paid any cash dividends on our capital stock, and we do not intend to pay any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and may be restricted by the terms of any outstanding debt obligations. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments. 53 We incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices. As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. We expect such expenses to further increase now that we are no longer an emerging growth company. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of Nasdaq, and other applicable securities rules and regulations impose various requirements on public companies. Furthermore, the senior members of our management team do not have significant experience with operating a public company. As a result, our management and other personnel will have to devote a substantial amount of time to compliance with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we will incur as a public company or the timing of such costs. If, notwithstanding our efforts, we fail to comply with new laws, regulations and standards, regulatory authorities may initiate legal proceedings against us and our business may be harmed. Failure to comply with these rules might also make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior management. Anti-takeover provisions in our charter documents, under Delaware law and under the indenture governing our 2025 Notes could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock. Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions tha • provide for a classified board of directors whose members serve staggered terms; • authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights, and preferences determined by our board of directors that may be senior to our common stock; • require that any action to be taken by our stockholders be affected at a duly called annual or special meeting and not by written consent; • specify that special meetings of our stockholders can be called only by our board of directors, the chairperson of our board of directors, or our chief executive officer; • establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors; • prohibit cumulative voting in the election of directors; • provide that our directors may be removed for cause only upon the vote of the holders of at least 66 2⁄3% of our outstanding shares of common stock; • provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and • require the approval of our board of directors or the holders of at least 66 2/3% of our outstanding shares of common stock to amend our bylaws and certain provisions of our certificate of incorporation. These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally, subject to certain exceptions, prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a 54 period of three years following the date on which the stockholder became an “interested” stockholder. Furthermore, the indenture governing our 2025 Notes requires us to repurchase such notes for cash if we undergo certain fundamental changes and, in certain circumstances, to increase the conversion rate for a holder of our 2025 Notes. A takeover of us may trigger the requirement that we purchase our 2025 Notes and/or increase the conversion rate, which could make it more costly for a potential acquiror to engage in a business combination transaction with us. Any delay or prevention of a change of control transaction or changes in our management could cause the market price of our common stock to decline. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware or, under certain circumstances, the federal district courts of the United States of America will be the exclusive forums for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware (or, if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, any state court located within the State of Delaware or, if all such state courts lack subject matter jurisdiction, the federal district court for the District of Delaware) is the sole and exclusive forum for the following types of actions or proceedings under Delaware statutory or common law • any derivative action or proceeding brought on our behalf; • any action asserting a breach of fiduciary duty; • any action arising pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; and • any action asserting a claim against us that is governed by the internal-affairs doctrine. These provisions would not apply to suits brought to enforce a duty or liability created by the Exchange Act or any claim for which the federal district courts of the United States of America have exclusive jurisdiction. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. Our stockholders cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our amended and restated certificate of incorporation described in the preceding sentences. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation further provides that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions. These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could harm our business. Risks Related to Our Outstanding Notes Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the 2025 Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our 55 debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. Regulatory actions and other events may adversely impact the trading price and liquidity of the 2025 Notes. We expect that many investors in, and potential purchasers of, the 2025 Notes will employ, or seek to employ, a convertible arbitrage strategy with respect to the notes. Investors would typically implement such a strategy by selling short the common stock underlying the 2025 Notes and dynamically adjusting their short position while continuing to hold the notes. Investors may also implement this type of strategy by entering into swaps on our common stock in lieu of or in addition to short selling the common stock. The SEC and other regulatory and self-regulatory authorities have implemented various rules and taken certain actions, and may in the future adopt additional rules and take other actions, that may impact those engaging in short selling activity involving equity securities (including our common stock). Such rules and actions include Rule 201 of SEC Regulation SHO, the adoption by the Financial Industry Regulatory Authority, Inc. and the national securities exchanges of a “Limit Up-Limit Down” program, the imposition of market-wide circuit breakers that halt trading of securities for certain periods following specific market declines, and the implementation of certain regulatory reforms required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Any governmental or regulatory action that restricts the ability of investors in, or potential purchasers of, the notes to effect short sales of our common stock, borrow our common stock or enter into swaps on our common stock could adversely impact the trading price and the liquidity of our 2025 Notes. We may not have the ability to raise the funds necessary to settle conversions of the 2025 Notes in cash or to repurchase the notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the 2025 Notes. Subject to limited exceptions, holders of the 2025 Notes will have the right to require us to repurchase all or a portion of their 2025 Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest, if any, as described under Note 12 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. In addition, upon conversion of the 2025 Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the 2025 Notes being converted as described under Note 12 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of 2025 Notes surrendered therefor or 2025 Notes being converted. In addition, our ability to repurchase the 2025 Notes or to pay cash upon conversions of the 2025 Notes may be limited by law, by regulatory authority or by agreements governing our existing or future indebtedness. Our failure to repurchase 2025 Notes at a time when the repurchase is required by the indenture or to pay any cash payable on future conversions of the 2025 Notes as required by the indenture would constitute a default under the indenture governing the 2025 Notes. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our existing or future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the 2025 Notes or make cash payments upon conversions thereof. The conditional conversion feature of the 2025 Notes, if triggered, may adversely impact our financial condition and operating results. In the event the conditional conversion feature of the 2025 Notes is triggered, holders of 2025 Notes will be entitled to convert the 2025 Notes at any time during specified periods at their option. If one or more holders elect to convert their 2025 Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely impact our liquidity. In addition, even if holders do not elect to convert their 2025 Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2025 Notes as a current rather than long-term liability, which would result in a significant reduction of our net working capital. Risks Related to Our Acquisition of Iora 56 We may be unable to successfully integrate Iora's business and realize the anticipated benefits of the merger. We will be required to devote significant management attention and resources to integrating our and Iora's business practices and operations to effectively realize synergies as a combined company, including opportunities to maintain members as they become Medicare eligible, sign up incremental members, reduce combined costs, and reduce combined capital expenditures compared to both companies’ standalone plans. Potential difficulties the combined company may encounter in the integration process include the followin • the inability to successfully combine our and Iora's businesses in a manner that permits the combined company to realize the growth, operations and cost synergies anticipated to result from the merger, which would result in the anticipated benefits of the merger, including projected financial targets, not being realized in the time frames currently anticipated, previously disclosed or at all; • lost patients or members, or a reduction in the increase in patients or members as a result of certain enterprise clients, patients, members or partners of either of the two companies deciding to terminate or reduce their business with the combined company or not to engage in business in the first place; • a reduction in the combined company’s ability to recruit or maintain providers; • an inability of the combined company to maintain its health network partnerships or payer contracts on substantially the same terms; • the complexities associated with managing the larger combined businesses and integrating personnel from the two companies, while at the same time attempting to (i) provide consistent, high quality services under a unified culture and (ii) focus on other ongoing transactions; • the additional complexities of combining two companies with different histories, regulatory restrictions, operating structures and markets; • the failure to retain key employees of either of the two companies; • compliance by us with additional regulatory regimes and with the rules and regulations of additional regulatory entities, including the Centers for Medicare and Medicaid Services, which we refer to as CMS; • potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the merger; and • performance shortfalls at one or both of the two companies as a result of the diversion of management’s attention caused by completing the merger and integrating the companies’ operations. For all these reasons, you should be aware that it is possible that the integration process could result in the distraction of the combined company’s management, the disruption of the combined company’s ongoing business or inconsistencies in the combined company’s services, standards, controls, procedures and policies, any of which could adversely affect the ability of the combined company to maintain relationships with enterprise clients, patients, members, vendors, partners, employees or providers or to achieve the anticipated benefits of the merger, or could otherwise adversely affect the business and financial results of the combined company. We expect to continue to incur substantial expenses related to the integration of Iora. We have incurred and expect to continue to incur substantial expenses in connection with integrating Iora's business, operations, networks, systems, technologies, policies and procedures of Iora with our business, operation, networks, systems, technologies, policies and procedures. While we have assumed that a certain level of integration expenses would be incurred, there are a number of factors beyond our control that could affect the total amount or the timing of our integration expenses. Many of the expenses that were and will be incurred, by their nature, are difficult to estimate accurately at the present time. In addition, the combined company may need significant additional capital in the form of equity or debt financing to implement or expand its business plan and there can be no assurance that such capital will be available to the combined company on terms acceptable to it, or at all. If the combined company issues additional capital stock in the future in connection with financing activities, stockholders will 57 experience dilution of their ownership interests and the per share value of the combined company’s common stock may decline. Due to these factors, the transaction and integration expenses could be greater or could be incurred over a longer period of time than we currently expect. We and Iora have been and may continue to be targets of securities class action and derivative lawsuits which could result in substantial costs and have an adverse effect on our financial condition. Securities class action lawsuits and derivative lawsuits are often brought against public companies and particularly those that have entered into merger agreements, and several shareholders have filed lawsuits related to the One Medical and Iora merger. We believe these lawsuits are without merit; however, defending against these lawsuits, or any that may be brought in the future, could result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on our liquidity and financial condition. Additionally, if a plaintiff is successful in obtaining injunctive relief, it may adversely affect our business, financial position and results of operations. 58 Item 1B. Unresolved Staff Comments. None. Item 2. Properties. Our headquarters are located in San Francisco, California and consist of approximately 60,874 square feet of leased space. Our lease on this space expires on July 31, 2029. As of December 31, 2021, we also leased approximately 862,008 square feet of clinical space for our subsidiaries and affiliated professional entities pursuant to our ASAs. We believe that our headquarters and other offices are adequate for our immediate needs and that additional or substitute space is available if needed to accommodate growth and expansion. Item 3. Legal Proceedings. We are currently involved in, and may in the future become involved in, legal proceedings, claims and investigations in the ordinary course of our business, including medical malpractice and consumer claims. Although the results of these legal proceedings, claims and investigations cannot be predicted with certainty, we do not believe that the final outcome of any matters that we are currently involved in are reasonably likely to have a material adverse effect on our business, financial condition or results of operations. Regardless of final outcomes, however, any such proceedings, claims, and investigations may nonetheless impose a significant burden on management and employees and be costly to defend, with unfavorable preliminary or interim rulings. Please see Note 17, "Commitments and Contingencies" to our consolidated financial statements in Part IV, Item 15 of this Annual Report on Form 10-K for a discussion of our legal proceedings. Item 4. Mine Safety Disclosures. Not applicable. 59 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our common stock has been listed on the Nasdaq Global Select Market under the symbol "ONEM" since January 31, 2020. Prior to that, there was no public trading market for our common stock. Holders of Record As of the close of business on February 14, 2022, there were approximately 147 stockholders of record of our common stock. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities. Dividend Policy We have never declared or paid cash dividends on our capital stock and do not intend to declare or pay any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to support operations and to finance the growth and development of our business. Any future determination to pay dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend upon, among other factors, our results of operations, financial condition, contractual restrictions and capital requirements. Our future ability to pay cash dividends on our capital stock may be limited by the terms of any future debt or preferred securities. Securities Authorized for Issuance under Equity Compensation Plans The information required by this item will be set forth in the Proxy Statement and is incorporated into this Annual Report on Form 10-K by reference. Stock Performance Graph The following graph compares the 23-month total stockholder return on our common stock with the comparable cumulative returns of the Standard & Poor's 500 Stock Index ("S&P 500") and the S&P Health Care Index ("S&P Health Care"). This graph assumes that on January 31, 2020, the initial trading day of our common stock on Nasdaq, $100 was invested in our common stock and in each of the other two indices and assumes the reinvestment of any dividends. However, no dividends have been declared on our common stock to date. The stock price performance on the following graph represents past performance and is not necessarily indicative of possible future stock price performance. 60 1/31/2020 (1) 2/29/2020 3/31/2020 4/30/2020 5/31/2020 6/30/2020 7/31/2020 8/31/2020 9/30/2020 10/31/2020 11/30/2020 12/31/2020 1Life Healthcare Inc $ 100.00 $ 97.96 $ 82.24 $ 111.78 $ 146.35 $ 164.57 $ 134.16 $ 132.17 $ 128.50 $ 127.82 $ 148.94 $ 197.78 S&P 500 $ 100.00 $ 91.77 $ 80.43 $ 90.74 $ 95.07 $ 96.96 $ 102.42 $ 109.79 $ 105.61 $ 102.81 $ 114.06 $ 118.45 S&P Health Care $ 100.00 $ 93.34 $ 89.77 $ 101.12 $ 104.45 $ 101.97 $ 107.46 $ 110.32 $ 107.95 $ 103.97 $ 112.23 $ 116.62 1/31/2021 2/29/2021 3/31/2021 4/30/2021 5/31/2021 6/30/2021 7/31/2021 8/31/2021 9/30/2021 10/31/2021 11/30/2021 12/31/2021 1Life Healthcare Inc $ 229.27 $ 215.27 $ 177.07 $ 197.15 $ 167.65 $ 149.80 $ 122.52 $ 111.06 $ 91.75 $ 98.14 $ 72.18 $ 79.61 S&P 500 $ 117.25 $ 120.48 $ 125.76 $ 132.47 $ 133.40 $ 136.51 $ 139.75 $ 144.00 $ 137.31 $ 146.93 $ 145.91 $ 152.45 S&P Health Care $ 118.27 $ 115.78 $ 120.32 $ 125.09 $ 127.45 $ 130.44 $ 136.83 $ 140.08 $ 132.31 $ 139.14 $ 134.97 $ 147.09 (1) $100 invested on January 31, 2020 in shares and in indices The information above shall not be deemed "soliciting material" or to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities under that section, and shall not be incorporated by reference into any of our other filings under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, regardless of any general incorporation language in those filings. Recent Sales of Unregistered Securities None. Issuer Purchases of Equity Securities None. Use of Proceeds from Registered Securities On January 30, 2020, our registration statement on Form S-1 (File No. 333-235792) relating to the initial public offering of our common stock was declared effective by the SEC. Pursuant to such registration statement, we issued and sold an aggregate of 20,125,000 shares of our common stock at a price of $14.00 per share for aggregate cash proceeds of 61 approximately $258.2 million, net of underwriting discounts and commissions and offering costs, which includes the full exercise by the underwriters of their option to purchase additional shares of common stock. No payments for offering expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities or (iii) any of our affiliates. J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC acted as joint-bookrunning managers for the offering. There has been no material change in the expected use of the net proceeds from our initial public offering, as described in our final prospectus filed with the SEC on February 3, 2020 pursuant to Rule 424(b) under the Securities Act of 1933, as amended. Item 6. Reserved 62 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with our consolidated financial statements and accompanying notes included elsewhere in this Annual Report. This discussion includes both historical information and forward-looking statements based upon current expectations that involve risks, uncertainties and assumptions. We have omitted discussion of 2019 results where it would be redundant to the discussion previously included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020. Our results of operations include the results of operations of Iora for the period from the close of our acquisition on September 1, 2021 through December 31, 2021. Our actual results may differ materially from management’s expectations and those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, our ability to timely and successfully achieve the anticipated benefits and potential synergies of our acquisition of Iora Health, Inc. and the continuing impact of the COVID-19 pandemic and societal and governmental responses as well as those discussed in “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Overview Our mission is to transform health care for all through our human-centered, technology-powered model. Our vision is to delight millions of members with better health and better care while reducing the total cost of care. We are a membership-based primary care platform with seamless digital health and inviting in-office care, convenient to where people work, shop, live and click. We are disrupting health care from within the existing ecosystem by simultaneously addressing the frustrations and unmet needs of key stakeholders, which include consumers, employers, providers, and health networks. We have developed a modernized healthcare membership model based on direct consumer enrollment and third-party sponsorship across commercially insured and Medicare populations. Our membership model includes seamless access to 24/7 digital health services paired with inviting in-office care routinely covered by most health care payers. Our technology drives high monthly active usage within our membership, promoting ongoing and longitudinal patient relationships for better health outcomes and high member retention. Our technology also helps our service-minded team in building trust and rapport with our members by facilitating proactive digital health outreach as well as responsive on-demand virtual and in-office care. Our digital health services and our well-appointed offices, which tend to be located in highly convenient locations, are staffed by a team of clinicians who are not paid on a fee-for-service basis, and therefore free of misaligned compensation incentives prevalent in health care. Additionally, we have developed clinically and digitally integrated partnerships with health networks, better coordinating more timely access to specialty care when needed by members. Together, this approach allows us to engage in value-based care across all age groups, including through At-Risk arrangements with Medicare Advantage payers and CMS, in which One Medical is responsible for managing a range of healthcare services and associated costs of our members. Our focus on simultaneously addressing the unfulfilled needs and frustrations of key stakeholders has allowed us to consistently grow the number of members we serve. From December 31, 2016 through December 31, 2021, inclusive of our acquisition of Iora, we grew our membership by 307%. During the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2016, inclusive of our acquisition of Iora, our net revenue grew 342%, our digital interactions grew 422%, and the number of in-office visits grew 183%. As of December 31, 2021, we have grown to approximately 736,000 total members including 703,000 Consumer and Enterprise members and 33,000 At-Risk members, 182 medical offices in 25 markets, and have greater than 8,500 enterprise clients across the United States. Impact of COVID-19 on Our Business The COVID-19 pandemic has impacted and may continue to impact our operations, and net revenues, expenses, collectability of accounts receivables and other money owed, capital expenditures, liquidity, and overall financial condition. During the first half of 2020, we believe the COVID-19 pandemic negatively impacted our business, as many of the communities we serve promoted self-isolation practices, and as shelter-in-place requirements were enacted. These measures and practices reduced in-office visits, and also resulted in temporary closures of certain offices and delays in openings of some of our new medical offices which negatively affected our net revenue. Correspondingly, our cost of care as a percentage of net revenue and loss from operations also increased. Beginning in the second half of 2020, we believe the COVID-19 pandemic helped drive an increase in membership, an increase in total revenue due to new and expanded service offerings, and an increase in our aggregate billable services. COVID-19 has also resulted in an increase in our medical claims expenses for our At-Risk business. 63 For example, we believe COVID-19 caused our value proposition to resonate with a broader audience of consumers seeking access to primary care, as well as with a broader audience of employers focusing on safely reopening their workplaces and managing the ongoing health and well-being of employees and their families. As a result, we experienced increased demand for our memberships beginning in the second half of 2020. In addition, we expanded our service offering in part as a response to COVID-19 and launched several new billable services, includin • COVID-19 testing, and counseling across all of our markets, including in our offices and in several mobile COVID-19 testing sites; • COVID-19 vaccinations in select geographies; • Healthy Together, our COVID-19 screening and testing program for employers, schools and universities; • Mindset by One Medical, our behavioral health service integrated within primary care; • One Medical Now, an expansion of our 24/7 on-demand digital health solutions to employees of enterprise clients located in geographies where we are not yet physically present; and, • Remote Visits, where our providers perform typical primary care visits with our members remotely We believe some of the precautionary measures and challenges resulting from the COVID-19 pandemic may continue or be reinstated. Such actions or events may present additional challenges to our business, financial condition and results of operations. As a result, we cannot assure you that our recent increase in membership, aggregate reimbursement and revenue are indicative of future results or will be sustained, including following the COVID-19 pandemic, or that we will not experience additional impacts associated with COVID-19, which could be significant. Additionally, it is unclear what the impact of the COVID-19 pandemic will be on future utilization, medical expense patterns, and the associated impact on our business. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020. Intended to provide economic relief to those impacted by the COVID-19 pandemic, the CARES Act includes various tax and lending provisions, among others. Under the CARES Act, we received an income grant of $1.8 million and $2.6 million from the Provider Relief Fund administered by the Department of Health and Human Services (“HHS”), which we recognized as Grant income during the year ended December 31, 2021 and 2020, respectively. Please see Note 5, "Revenue Recognition" to our consolidated financial statements in Part IV, Item 15 of this Annual Report on Form 10-K. Acquisition of Iora On September 1, 2021, we acquired all outstanding equity and capital stock of Iora Health, Inc. ("Iora"), a human-centered, value-based primary care group with built-for-purpose technology focused on serving the Medicare population, for an aggregate purchase consideration of approximately $1.4 billion. Iora developed an innovative, technology-enabled, and relationship-based health care delivery model designed to provide value-based primary care and aims to deliver superior health outcomes and lower overall health care costs primarily for the Medicare population. During 2021, we incurred approximately $39.5 million expenses related to this transaction. Our results of operations include the activity of Iora beginning from the close of our acquisition on September 1, 2021. See Note 8, "Business Combinations" to our consolidated financial statements in Part IV, Item 15 of this Annual Report on Form 10-K. Our Business Model Our business is driven by growth in Consumer and Enterprise members, and At-Risk members (see also "Key Metrics and Non-GAAP Financial Measures"). We have developed a modernized membership model based on direct consumer enrollment and third-party sponsorship. Our membership model includes seamless access to 24/7 digital health paired with inviting in-office care routinely covered by most health care payers. Consumer and Enterprise members join either individually as consumers by paying an annual membership fee or are sponsored by a third party. At-Risk members are members for whom we are responsible for managing a range of healthcare services and associated costs. Digital health services are delivered via our mobile app and website, through such modalities as video and voice encounters, chat and messaging. Our in-office care is delivered in our medical offices, and as of December 31, 2021, we had 182 medical offices, compared to 107 medical offices as of December 31, 2020. We derive net revenue, consisting of Medicare revenue and commercial revenue, from multiple stakeholders, including consumers, employers and health networks such as health systems and government and private payers. 64 Medicare Revenue Medicare revenue consists of (i) Capitated Revenue and (ii) fee-for-service and other revenue that is not generated from Consumer and Enterprise members. We generate Capitated Revenue from At-Risk arrangements with Medicare Advantage payers and CMS. Under these At-Risk arrangements, we generally receive capitated payments, consisting of each eligible member’s risk adjusted health care premium PMPM, for managing a range of healthcare services and associated costs for such members. The risk adjusted health care premium PMPM is determined by payers and based on a variety of patients' factors such as age and demographic benchmarks, and further adjusted to reflect the underlying complexity of a member’s health conditions. These fees give us revenue economics that are contractually recurring in nature for a majority of our Medicare revenue. Capitated Revenue represents 97% of Medicare revenue and 20% of total net revenue, respectively, for the year ended December 31, 2021. We generate fee-for-service and other revenue from fee-for-service visits for Other Patients not covered under At-Risk arrangements and from certain payers for clinical start-up, administration, or on-going coordination of care activities associated with providing care to At-Risk members and other Medicare patients. Commercial Revenue Commercial revenue consists of (i) partnership revenue (ii) net fee-for-service revenue and (iii) membership revenue. We generate our partnership revenue from (i) our health network partners with whom we have clinically and digitally integrated, on a PMPM basis, (ii) largely fixed price or fixed price per employee contracts with enterprise clients for medical services and (iii) COVID-19 on-site testing services for enterprise clients, schools and universities where we typically bill such customers a fixed price per service performed. For our health network arrangements that provide for PMPM payments, when our medical offices provide professional clinical services to covered members, we, as administrator, perform billing and collection services on behalf of the health network, and the health network receives the fees for services provided, including those paid by members’ insurance plans. In those circumstances, we earn and receive PMPM payments from the health network partners in lieu of per visit fees for services from member office visits. See “Business—Our Health Network Partnerships.” Our net fee-for-service revenue primarily consists of reimbursements received from our members' or other patients' health insurance plans or those with billing rates based on our agreements with our health network partners for healthcare services delivered to Consumer and Enterprise members on a fee-for-service basis. We generate our membership revenue through the annual membership fees charged to either consumer members or enterprise clients, as well as fees paid for our One Medical Now service offering. As of December 31, 2021, our list price for new members for an annual consumer membership was $199. Our enterprise clients typically pay a discounted fee collected in advance, based on a rate per employee per month. Our membership fee revenue and partnership revenue are contractual and, with the exception of our COVID-19 on-site testing services, generally recurring in nature. Membership revenue and part nership revenue as a percentage of commercial revenue was 63% and 60% for the year ended 2021 and 2020, respectively. Membership revenue and part nership revenue as a percentage of total net revenue was 50% and 60% for the year ended 2021 and 2020, respectively. Key Factors Affecting Our Performance • Acquisition of Net New Members. Our ability to increase our membership will enable us to drive financial growth as members drive our commercial revenue and Medicare revenue. We believe that we have significant opportunities to increase members in our existing geographies through (i) new sales to consumers and enterprise clients, (ii) expansion of the number of enrolled members, including dependents, within our enterprise clients, (iii) expansion of the number of At-Risk members including Medicare Advantage participants or Medicare members for which we are at risk as a result of CMS' Direct Contracting Program, (iv) expansion of Medicare Advantage payers, with whom we contract and (v) adding other potential services. • Components of Revenue. Our ability to maintain or improve pricing levels for our memberships and the pricing under our contracts with health networks will also impact our total revenue. As of December 31, 2021, our list price for new members for an annual consumer membership was $199. Our enterprise clients typically pay a discounted fee collected in advance, based on a rate per employee per month. In geographies where our health network partners pay us on a PMPM basis for Consumer and Enterprise members, to the extent that the PMPM 65 rate changes, our partnership revenue will change. Similarly, if the largely fixed price or number of employees covered by fixed price per employee arrangements change or the number of COVID-19 on-site tests or vaccinations changes, our partnership revenue will also change. Our net fee-for-service revenue is dependent on (i) our billing rates and third-party payer contracted rates through agreements with health networks, (ii) the mix of members who are commercially insured and (iii) the nature of visits. Our net fee-for-service revenue may also change based on the services we provide to commercially insured Other Patients as defined in "Key Metrics and Non-GAAP Financial Measures" below. Our Medicare revenue is dependent on (i) the percentage of members in at-risk contracts, (ii) our contracted percentage of premium, (iii) our ability to accurately document the acuity of our At-Risk members, and (iv) the services we provide to Other Patients who are Medicare participants. In the future, we may add additional services for which we may charge in a variety of ways. To the extent the net amounts we charge our members, patients, partners, payers and clients change, our net revenue will also change. • Medical Claims Expense. The nature of our contracting with Medicare Advantage payers and CMS requires us to be financially responsible for a range of healthcare services of our At-Risk members. Our care model focuses on leveraging the primary care setting as a means of reducing unnecessary or avoidable health care costs and balancing the cost of care with the impact of our service on medical claims expense. We are liable for potentially large medical claims should we not effectively manage our At-Risk members’ health. We call the ratio between medical claims expense divided by Capitated Revenue the "Medical Claims Expense Ratio". As we sign up new At-Risk members, our Medical Claims Expense Ratio is likely to increase initially due to a potential increase in medical claims expense from a lag in improvement in health outcomes with member tenure. Similarly, there may be a lag in adequately documenting the health status of our members, resulting in different Capitated Revenue compared to what is indicated by the health status of an At-Risk member. We believe that the Medical Claims Expense Ratio for a given set of At-Risk members can improve over time as we help improve their health outcomes relative to their underlying health conditions. • Cost of Care, Exclusive of Depreciation and Amortization. Cost of care primarily includes our provider and support employee-related costs for both virtual and in-office care, occupancy costs, medical supplies, insurance and other operating costs. Providers include doctors of medicine, doctors of osteopathy, nurse practitioners, physician assistants, and behavioral health specialists. Support employees include registered nurses, phlebotomists, health coaches, and administrative assistants assisting our members with all non-medical related services. Virtual care includes video visits and other synchronous and asynchronous communication via our app and website. A large portion of these costs are relatively fixed regardless of member utilization of our services. Our care model focuses on leveraging the primary care setting as a means of reducing unnecessary or avoidable health care costs and balancing the cost of care with the impact of increased service levels on medical claims expense. An increase in cost of care may help us in reducing total health care costs for our members. For Consumer and Enterprise members, this reduction in total health care costs typically accrues to the benefit of our enterprise clients or our members' health insurance plans through lower claims costs, or our members through lower deductibles, making our membership more competitive. For our At-Risk members, reductions in total health care costs typically accrue directly to us, to our health network partners such as Medicare Advantage payers and CMS, or to our At-Risk members, making our membership more competitive. As a result, we seek to balance the cost of care based on a variety of considerations. For example, cost of care as a percentage of net revenue may decrease if our net revenue increases. Similarly, our cost of care as a percentage of net revenue may increase if we decide to increase our investments in our providers or support employees to try to reduce our medical claims expense. As we open new offices, and expand into new geographies, we expect cost of care to increase. Our cost of care, exclusive of depreciation and amortization, also excludes stock-based compensation. • Care Margin. Care Margin is driven by net revenue, medical claims expense, and cost of care. We believe we can (i) improve revenue over time by signing up more members and increasing the revenue per member, (ii) reduce Medical Claims Expense Ratio over time from primary care engagement and population health management, improving member health and satisfaction, while reducing the need for avoidable and costly care, and (iii) reduce cost of care as a percentage of revenue by better leveraging our fixed cost base and technology. • Investments in Growth. We expect to continue to focus on long-term growth through investments in sales and marketing, technology research and development, and existing and new medical offices. We are working to enhance our digital health and technology offering and increase the potential breadth of our modernized platform solution. In particular, we plan to launch new offices and enter new geographies. As we expand to new geographies, we expect to make significant upfront investments in sales and marketing to establish brand awareness and acquire new members. Additionally, we intend to continue to invest in new offices in new and existing geographies. As we invest in new geographies, in the short term, we expect these activities to increase our operating expenses and cost of care; however, in the long term we anticipate that these investments will positively impact our results of operations. 66 • Seasonality. Seasonality affects our business in a variety of ways. In the near term, we expect these typical seasonal trends to fluctuate due to the COVID-19 pandemic. Medicare Reve We recognize Capitated Revenue from At-Risk members ratably over their period of enrollment. We typically experience the largest portion of our At-Risk member growth in the first quarter, as the Medicare Advantage enrollment from the prior Medicare Annual Enrollment Period (“AEP”) becomes effective January 1. Throughout the remainder of year, we can continue to enroll new At-Risk members predominantly through (i) new Medicare Advantage enrollees joining us outside AEP, (ii) through expanding the Medicare Advantage plans we are participating in, and (iii) adding additional geographies where we participate in At-Risk arrangements. Commercial Revenue : Our partnership and membership revenue are predominantly driven by the number of Consumer and Enterprise members, and recognized ratably over the period of each contract. While Consumer and Enterprise members have the opportunity to buy memberships throughout the year, we typically experience the largest portion of our Consumer and Enterprise member growth in the first and fourth quarter of each year, when enterprise customers tend to make and implement decisions on their employee benefits. Our net fee-for-service revenue is typically highest during the first and fourth quarter of each year, when we generally experience the highest levels of reimbursable visits. Medical Claims Expense: Medical claims expense is driven by our At-Risk members and varies seasonally depending on a number of factors, including the weather and the number of business days in a quarter. Typically, we experience higher utilization levels during the first and fourth quarter of the year. Key Metrics and Non-GAAP Financial Measures We review a number of operating and financial metrics, including members, Medical Claims Expense Ratio, Care Margin and Adjusted EBITDA, to evaluate our business, measure our performance, identify trends affecting our business, formulate our business plan and make strategic decisions. These key metrics are presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP. Care Margin and Adjusted EBITDA are not financial measures of, nor do they imply, profitability. We have not yet achieved profitability and, even in periods when our net revenue exceeds our cost of care, exclusive of depreciation and amortization, we may not be able to achieve or maintain profitability. The relationship of operating loss to cost of care, exclusive of depreciation and amortization is also not necessarily indicative of future performance. Other companies may not publish similar metrics, or may present similarly titled key metrics that are calculated differently. As a result, similarly titled measures presented by other companies may not be directly comparable to ours and these key metrics should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP, such as net loss. We provide investors and other users of our financial information with a reconciliation of Care Margin and Adjusted EBITDA to their most closely comparable GAAP financial measure. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view Care Margin and Adjusted EBITDA in conjunction with loss from operations and net loss, respectively. Year Ended December 31, 2021 2020 2019 (in thousands except for members) Members (as of the end of the period) Consumer and Enterprise 703,000 549,000 422,000 At-Risk 33,000 — — Total 736,000 549,000 422,000 Net revenue $ 623,315 $ 380,223 $ 276,258 Care margin $ 188,133 $ 145,264 $ 108,640 Adjusted EBITDA $ (34,858) $ (13,890) $ (24,968) Members 67 Members include both Consumer and Enterprise members as well as At-Risk members as defined below. Our number of members depends, in part, on our ability to successfully market our services directly to consumers including Medicare-eligible as well as non-Medicare eligible individuals, to Medicare Advantage health plans and Medicare Advantage enrollees, to employers that are not yet enterprise clients, as well as our activation rate within existing enterprise clients. We define estimated activation rate for any enterprise client at a given time as the percentage of eligible lives enrolled as members. While growth in the number of members is an important indicator of expected revenue growth, it also informs our management of the areas of our business that will require further investment to support expected future member growth. Member numbers as of the end of each period are rounded to the thousands. Consumer and Enterprise Members A Consumer and Enterprise member is a person who has registered with us and has paid for membership for a period of at least one year or whose membership has been sponsored by an enterprise or other third party under an agreement having a term of at least one year. Consumer and Enterprise members do not include trial memberships, our virtual only One Medical Now users, or any temporary users. Our number of Consumer and Enterprise members depends, in part, on our ability to successfully market our services directly to consumers and to employers that are not yet enterprise clients and our activation rate within existing clients. Consumer and Enterprise members may include individuals who (i) Medicare-eligible and (ii) have paid for a membership or whose membership has been sponsored by an enterprise or other third party. Consumer and Enterprise members do not include any At-Risk members as defined below. Consumer and Enterprise members help drive commercial revenue. As of December 31, 2021, we had 703,000 Consumer and Enterprise members. At-Risk Members An At-Risk member is a person for whom we are responsible for managing a range of healthcare services and associated costs. At-Risk members help drive Medicare revenue. As of December 31, 2021, we had 33,000 At-Risk members. Members (in thousands)* * Number of members is shown as of the end of each period. Other Patients An “Other Patient” is a person who is neither a Consumer and Enterprise member nor an At-Risk member, and who has received digital or in-person care from us over the last twelve months. As of December 31, 2021, we had 21,000 Other Patients. 68 Medical Claims Expense Ratio We define Medical Claims Expense Ratio as medical claims expense divided by Capitated Revenue. The nature of our contracting with Medicare Advantage payers and CMS requires us to be financially responsible for a range of healthcare services of our At-Risk members. Our care model focuses on leveraging the primary care setting as a means of reducing unnecessary or avoidable health care costs and balancing our cost of care with the impact of our service levels on medical claims expense. We are liable for potentially large medical claims should we not effectively manage our At-Risk members’ health. We therefore consider the Medical Claims Expense Ratio to be an important measure to monitor our performance. As we sign up new At-Risk members or open new offices to serve these members, our Medical Claims Expense Ratio is likely to increase initially due to a potential increase in medical claims expense from a lag in improvement in health outcomes with member tenure. Similarly, there may be a lag in adequately documenting the health status of our members, resulting in different Capitated Revenue compared to what is indicated by the health status of an At-Risk member. We believe that the Medical Claims Expense Ratio for a given set of At-Risk members can improve over time as we help improve their health outcomes relative to their underlying health conditions. The following table provides a calculation of the Medical Claims Expense Ratio for the year ended December 31, 2021: Year Ended December 31, 2021 (in thousands) Medical claims expense $ 116,543 Capitated Revenue $ 126,609 Medical Claims Expense Ratio 92 % Medical Claims Expense Ratio Cohort Trends: 2017 to 2021 The following graph presents the historical Medical Claims Expense Ratio trended by Medicare Advantage At-Risk members by sign-up year. We believe the 2017 to 2021 cohorts are a fair representation of our overall patient population because they include patients across geographies and demographics. (1) At-Risk members are included in our members count beginning from the acquisition date of September 1, 2021. 69 The following graph presents our Medicare Advantage At-Risk members by sign-up year. We believe the 2017 to 2021 cohorts are a fair representation of our overall patient population because they include patients across geographies and demographics. (1) At-Risk members are included in our members count beginning from the acquisition date of September 1, 2021. Care Margin We define Care Margin as income or loss from operations excluding depreciation and amortization, general and administrative expense and sales and marketing expense. We consider Care Margin to be an important measure to monitor our performance, specific to the direct costs of delivering care. We believe this margin is useful to both us and investors to measure whether we are effectively pricing our services and managing the health care and associated costs, including medical claims expense and cost of care, of our At-Risk members successfully. The following table provides a reconciliation of loss from operations, the most closely comparable GAAP financial measure, to Care Margin: Year Ended December 31, 2021 2020 2019 (in thousands) Loss from operations $ (243,484) $ (71,359) $ (54,113) Sales and marketing* 61,994 36,967 39,520 General and administrative* 323,127 157,282 108,965 Depreciation and amortization 46,496 22,374 14,268 Care margin $ 188,133 $ 145,264 $ 108,640 Care margin as a percentage of net revenue 30 % 38 % 39 % * Includes stock-based compensation Adjusted EBITDA We define Adjusted EBITDA as net income or loss excluding interest income, interest and other expense, depreciation and amortization, stock-based compensation, change in the fair value of our redeemable convertible preferred stock warrant 70 liability, provision for (benefit from) income taxes, certain legal or advisory costs, and acquisition and integration costs that we do not consider to be expenses incurred in the normal operation of the business. Such legal or advisory costs may include but are not limited to expenses with respect to evaluating potential business combinations, legal investigations, or settlements. Acquisition and integration costs include expenses incurred in connection with the closing and integration of acquisitions, which may vary significantly and are unique to each acquisition. We started to exclude prospectively from our presentation certain legal or advisory costs from the first quarter of 2021 and acquisition and integration costs from the second quarter of 2021, because amounts incurred in the prior periods were insignificant relative to our consolidated operations. We include Adjusted EBITDA in this Annual Report because it is an important measure upon which our management assesses and believes investors should assess our operating performance. We consider Adjusted EBITDA to be an important measure to both management and investors because it helps illustrate underlying trends in our business and our historical operating performance on a more consistent basis. Adjusted EBITDA has limitations as an analytical tool, includin • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash used for capital expenditures for such replacements or for new capital expenditures; • Adjusted EBITDA does not include the dilution that results from stock-based compensation or any cash outflows included in stock-based compensation, including from our purchases of shares of outstanding common stock; and • Adjusted EBITDA does not reflect interest expense on our debt or the cash requirements necessary to service interest or principal payments. The following table provides a reconciliation of net loss, the most closely comparable GAAP financial measure, to Adjusted EBITDA, calculated as set forth above: Year Ended December 31, 2021 2020 2019 (in thousands) Net loss $ (254,641) $ (89,421) $ (53,695) Interest income (798) (1,809) (4,498) Interest and other expense 13,757 13,434 474 Depreciation and amortization 46,496 22,374 14,268 Stock-based compensation 112,298 35,095 14,877 Change in fair value of redeemable convertible preferred stock warrant liability — 6,560 3,519 Provision for (benefit from) income taxes (1,802) (123) 87 Legal or advisory costs (1) (2) 16,514 — — Acquisition and integration costs 33,318 — — Adjusted EBITDA $ (34,858) $ (13,890) $ (24,968) (1) Approximately $5.6 million of the legal or advisory costs relate to a legal settlement during the year ended December 31, 2021. See Note 17 "Commitments and Contingencies". (2) Amount excludes approximately $1.2 million of legal or advisory costs incurred during the year ended December 31, 2020. We began excluding certain legal or advisory costs from Adjusted EBITDA starting from the first quarter of 2021. Components of Our Results of Operations Net Revenue We generate net revenue through Medicare revenue and commercial revenue. We generate Medicare revenue from Capitated Revenue, and fee-for-service and other revenue. We generate commercial revenue from partnership revenue, net fee-for-service revenue, and membership revenue. 71 Capitated Revenue. We generate Capitated Revenue from At-Risk arrangements with payers including Medicare Advantage plans and CMS. Under these At-Risk arrangements, we receive capitated payments, consisting of each eligible member’s risk adjusted health care premium per month ("PMPM"), for managing a range of healthcare services and associated costs for such members. The risk adjusted health care premium per month is determined by payers and based on a variety of a patient's factors such as age and demographic benchmarks, and further adjusted to reflect the underlying complexity of a member’s health conditions. Capitated Revenue is recognized in the month in which eligible members are entitled to receive healthcare benefits during the contract term. We expect our Capitated Revenue to increase as a percentage of total net revenue in future periods. Fee-For-Service and Other Revenue. We generate fee-for-service and other revenue from fee-for-service visits for Other Patients not covered under At-Risk arrangements and from certain payers for clinical start-up, administration, on-going coordination of care activities associated with providing care to At-Risk members and other Medicare patients. Partnership Revenue. We generate partnership revenue from (i) our health network partners on a PMPM basis, (ii) largely fixed price or fixed price per employee contracts with enterprise clients for medical services and (iii) COVID-19 on-site testing services for enterprise clients, schools and universities for which we typically bill such customers a fixed price per service performed. Under our partnership arrangements, we generally receive fees that are linked to PMPM, fixed price, fixed price per employee, fixed price per service, or capitation arrangements. All partnership revenue is recognized during the period in which we are obligated to provide professional clinical services to the member, employee, or participant, as applicable, and associated management, operational and administrative services to the health network partner, enterprise client, schools and universities. Net fee-for-service revenue. We generate net fee-for-service revenue from providing primary care services to patients in our offices when we bill the member or their insurance plan on a fee-for-service basis as medical services are rendered. While significantly all of our patients are members, we occasionally also provide care to non-members. Membership Revenue. We generate membership revenue from the annual membership fees charged to either consumer members or enterprise clients, who purchase access to memberships for their employees and dependents. Membership revenue also includes fees we receive from enterprise clients for trial memberships or for access to our One Medical Now service offering. Membership revenue is recognized ratably over the contract period with the individual member or enterprise client. Grant Income. Under the CARES Act, we were eligible for and received grant income from the Provider Relief Fund administered by HHS during the years ended December 31, 2021 and 2020. The purpose of the payment is to reimburse us for healthcare-related expenses or lost revenues attributable to COVID-19. The following table summarizes the Company's net revenue by primary source as a percentage of net revenue. Amounts may not sum due to rounding. Year Ended December 31, 2021 2020 2019 Net reve Capitated revenue 20 % — % — % Fee-for-service and other revenue 1 % — % — % Total Medicare revenue 21 % — % — % Partnership revenue 36 % 42 % 29 % Net fee-for-service revenue 29 % 39 % 53 % Membership revenue 14 % 18 % 19 % Grant income — % 1 % — % Total commercial revenue 79 % 100 % 100 % Total net revenue 100 % 100 % 100 % Operating Expenses 72 Medical Claims Expense Medical claims expenses primarily consist of certain third-party medical expenses paid by payers contractually on behalf of us, including costs for inpatient and outpatient services, certain pharmacy benefits and physician services but excludes cost of care, exclusive of depreciation and amortization. We expect our medical claims expense to increase in absolute dollars as our Capitated Revenue increases in future periods. Cost of Care, Exclusive of Depreciation and Amortization Cost of care primarily includes provider and support employee-related costs for both virtual and in-office care, occupancy costs, medical supplies, insurance and other operating costs. Providers include doctors of medicine, doctors of osteopathy, nurse practitioners, physician assistants, and behavioral health specialists. Support employees include registered nurses, phlebotomists, health coaches, and administrative assistants assisting our members with all non-medical related services. Virtual care includes video visits and other synchronous and asynchronous communication via our app and website. A large portion of these costs are relatively fixed regardless of member utilization of our services. As we open new offices, and expand into new geographies, we expect cost of care to increase. Our cost of care, exclusive of depreciation and amortization, also excludes stock-based compensation. Sales and Marketing Sales and marketing expenses consist of employee-related expenses, including salaries and related costs, commissions and stock-based compensation costs for our employees engaged in marketing, sales, account management and sales support. Sales and marketing expenses also include advertising production and delivery costs of communications materials that are produced to generate greater awareness and engagement among our clients and members, third-party independent research, trade shows and brand messages and public relations costs. We expect our sales and marketing expenses to increase as we strategically invest to expand our business. We expect to hire additional sales personnel and related account management and sales support personnel to capture an increasing amount of our market opportunity. We also expect to continue our brand awareness and targeted marketing campaigns. As we scale our sales and marketing, we expect these expenses to increase in absolute dollars. General and Administrative General and administrative expenses include employee-related expenses, including salaries and related costs and stock-based compensation for all employees except sales and marketing teams, which are included in the sales and marketing expenses. In addition, general and administrative expenses include corporate technology, occupancy costs, legal and professional services expenses. We expect our general and administrative expenses to increase over time due to the additional costs associated with continuing to grow our business. Depreciation and Amortization Depreciation and amortization consist primarily of depreciation of property and equipment and amortization of capitalized software development costs. Other Income (Expense) Interest Income Interest income consists of income earned on our cash and cash equivalents, restricted cash and marketable securities. 73 Interest and Other Expense Interest and other expense consists of interest costs associated with our notes payable issued pursuant to the loan and security agreement with an institutional lender (the “LSA”) and our convertible senior notes (the “2025 Notes”). On September 1, 2020, the term loans pursuant to the LSA matured and the remaining outstanding principal was repaid, plus accrued and unpaid interests. Interest and other expense also consists of remeasurement adjustment related to our indemnification asset. Upon the close of the Iora acquisition, as part of the Merger Agreement, certain shares of our common stock were placed into a third-party escrow account to satisfy any then pending and unsatisfied or unresolved claim for indemnification for any indemnifiable loss incurred by us pursuant to the indemnity provisions of the Merger Agreement. The indemnification asset is subject to remeasurement at each reporting date until the shares are released from escrow, with the remeasurement adjustment reported as interest and other expense in our consolidated statement of operations. Change in Fair Value of Redeemable Convertible Preferred Stock Warrant Liability Prior to our initial public offering in January 2020, we classified our redeemable convertible preferred stock warrants as a liability in our consolidated balance sheets. We remeasured the redeemable convertible preferred stock warrant liability to fair value at each reporting date and recognized changes in the fair value of the redeemable convertible preferred stock warrant liability as a component of other income (expense), net in our consolidated statements of operations. Upon the closing of our initial public offering, the warrants to purchase shares of redeemable convertible preferred stock became exercisable for shares of common stock, at which time we adjusted the redeemable convertible preferred stock warrant liability to fair value prior to reclassifying the redeemable convertible preferred stock warrant liability to additional paid-in capital. As a result, following the closing of our initial public offering, the warrants are no longer subject to fair value accounting. Provision for (Benefit from) Income Taxes We account for income taxes using an asset and liability approach. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances are provided when necessary to reduce net deferred tax assets to an amount that is more likely than not to be realized. In determining whether a valuation allowance for deferred tax assets is necessary, we analyze both positive and negative evidence related to the realization of deferred tax assets and inherent in that, assess the likelihood of sufficient future taxable income. We also consider the expected reversal of deferred tax liabilities and analyze the period in which these would be expected to reverse to determine whether the taxable temporary difference amounts serve as an adequate source of future taxable income to support the realizability of the deferred tax assets. Net Loss Attributable to Noncontrolling Interest In September 2014, we entered into a joint venture agreement with a healthcare system to jointly operate physician-owned primary care offices in a market. We had the responsibility for the provision of medical services and for the day-to-day operation and management of the offices, including the establishment of guidelines for the employment and compensation of the physicians. Based upon this and other provisions of the operating agreement that indicated that we directed the economic activities that most significantly affect the economic performance of the joint venture, we determined that the joint venture was a variable interest entity and we were the primary beneficiary. Accordingly, we consolidated the joint venture and the healthcare system’s interest was shown within equity (deficit) as noncontrolling interest. The healthcare system’s share of earnings was recorded in the consolidated statements of operations as net loss attributable to noncontrolling interest. Effective April 1, 2020, we terminated the joint venture agreement with the healthcare system and transferred our ownership interest in the joint venture to the healthcare system. As a result, we determined that the joint venture no longer met the definition of a variable interest entity and accordingly, we determined that the joint venture was no longer required to be consolidated under the variable interest entity model. The joint venture was deconsolidated in the consolidated financial statements as of April 1, 2020 and we derecognized all assets and liabilities of the joint venture. We did not record a gain or loss in association with the deconsolidation as we did not retain any noncontrolling interest in the joint venture and no consideration was transferred as a result of the ownership interest transfer to the healthcare system. The consolidated statement of operations for the year ended December 31, 2020 includes the operations of the joint venture through the date of deconsolidation. The consolidated balance sheets as of December 31, 2021 and December 31, 2020 74 and the consolidated statement of operations for the year ended December 31, 2021 do not include the operations of the joint venture. Results of Operations The following tables set forth our results of operations for the periods presented and as a percentage of our net revenue for those periods. Percentages presented in the following tables may not sum due to rounding. Year Ended December 31, 2021 2020 Amount % of Revenue Amount % of Revenue (dollar amounts in thousands) Net reve Medicare revenue $ 129,979 21 % $ — — % Commercial revenue 493,336 79 % 380,223 100 % Total net revenue 623,315 100 % 380,223 100 % Operating expens Medical claims expense 116,543 19 % — — % Cost of care, exclusive of depreciation and amortization shown separately below 318,639 51 % 234,959 62 % Sales and marketing (1) 61,994 10 % 36,967 10 % General and administrative (1) 323,127 52 % 157,282 41 % Depreciation and amortization 46,496 7 % 22,374 6 % Total operating expenses 866,799 139 % 451,582 119 % Loss from operations (243,484) (39) % (71,359) (19) % Other income (expense), n Interest income 798 — % 1,809 — % Interest and other expense (13,757) (2) % (13,434) (4) % Change in fair value of redeemable convertible preferred stock warrant liability — — % (6,560) (2) % Total other income (expense), net (12,959) (2) % (18,185) (5) % Loss before income taxes (256,443) (41) % (89,544) (24) % Provision for (benefit from) income taxes (1,802) — % (123) — % Net loss (254,641) (41) % (89,421) (24) % L Net loss attributable to noncontrolling interest — — % (704) — % Net loss attributable to 1Life Healthcare, Inc. stockholders $ (254,641) (41) % $ (88,717) (23) % (1) Includes stock-based compensation, as follows: Year Ended December 31, 2021 2020 Amount % of Revenue Amount % of Revenue (dollar amounts in thousands) Sales and marketing $ 4,136 1 % $ 2,385 1 % General and administrative 108,162 17 % 32,710 9 % Total $ 112,298 18 % $ 35,095 9 % 75 Comparison of the Years Ended December 31, 2021 and 2020 Net Revenue Year Ended December 31, 2021 2020 Change % Change (dollar amounts in thousands) Net reve Capitated revenue $ 126,609 $ — $ 126,609 nm Fee-for-service and other revenue 3,370 — 3,370 nm Total Medicare revenue 129,979 — 129,979 nm Partnership revenue 224,051 159,482 64,569 40 % Net fee-for-service revenue 181,811 149,695 32,116 21 % Membership revenue 85,711 68,466 17,245 25 % Grant income 1,763 2,580 (817) (32) % Total commercial revenue 493,336 380,223 113,113 30 % Total net revenue $ 623,315 $ 380,223 $ 243,092 64 % nm - not meaningful Medicare revenue increased $130.0 million for the year ended December 31, 2021 compared to the same period in 2020. The increase was due to revenue contribution from our acquisition of Iora on September 1, 2021. Commercial revenue increased $113.1 million, or 30%, for the year ended December 31, 2021 compared to the same period in 2020. The increase was primarily due to an increase in Consumer and Enterprise members by 154,000, or 28%, from 549,000 as of December 31, 2020 to 703,000 as of December 31, 2021. Partnership revenue increased $64.6 million, or 40%, for the year ended December 31, 2021 compared to the same period in 2020. The increase was primarily a result of the new and expanded partnerships with health networks and increased members, in addition to an increase in the COVID-19 on-site testing services for employers, schools and universities during the year ended December 31, 2021. Net fee-for-service revenue increased $32.1 million, or 21%, for the year ended December 31, 2021 compared to the same period in 2020. The increase was primarily due to an increase in aggregate billable services driven by an increase in billable in-office and remote visits, partially offset by a decrease in COVID-19 testing visits for the year ended December 31, 2021. Membership revenue increased $17.2 million, or 25%, for the year ended December 31, 2021 compared to the same period in 2020. The increase was primarily due to an increase in Consumer and Enterprise members by 154,000, or 28%, from 549,000 as of December 31, 2020 to 703,000 as of December 31, 2021. 76 Operating Expenses Medical claims expense Year Ended December 31, 2021 2020 $ Change % Change (dollar amounts in thousands) Medical claims expense $ 116,543 $ — $ 116,543 nm Medical claims expense increased $116.5 million for the year ended December 31, 2021 compared to the same period in 2020. The increases were due to medical claims expenses from our acquisition of Iora on September 1, 2021. Cost of Care, Exclusive of Depreciation and Amortization Year Ended December 31, 2021 2020 Change % Change (dollar amounts in thousands) Cost of care, exclusive of depreciation and amortization $ 318,639 $ 234,959 $ 83,680 36 % The $83.7 million, or 36%, increase in cost of care, exclusive of depreciation and amortization, for the year ended December 31, 2021 compared to the same period in 2020 was primarily due to increases in provider employee and support employee-related expenses of $48.3 million, occupancy costs of $16.8 million, COVID-19 testing site and related security expenses of $7.5 million and medical supply costs of $7.3 million. In addition to growth in our existing offices, we added 75 offices during the year, bringing our total number of offices to 182 as of December 31, 2021. The cost of care in 2021 included cost of care from Iora from September 1, 2021 through the year end. Cost of care, exclusive of depreciation and amortization, as a percentage of net revenue decreased from 62% for the year ended December 31, 2020 to 51% for the year ended December 31, 2021. This decrease was due to the impact of the Iora acquisition on September 1, 2021. Sales and Marketing Year Ended December 31, 2021 2020 Change % Change (dollar amounts in thousands) Sales and marketing $ 61,994 $ 36,967 $ 25,027 68 % Sales and marketing expenses increased $25.0 million, or 68%, for the year ended December 31, 2021 compared to the same period in 2020. This increase was primarily due to a $16.9 million increase in advertising expenses and a $7.6 million increase in employee-related expenses. The sales and marketing expenses in 2021 included sales and marketing expenses from our acquired Iora business from September 1, 2021 through December 31, 2021. General and Administrative 77 Year Ended December 31, 2021 2020 Change % Change (dollar amounts in thousands) General and administrative $ 323,127 $ 157,282 $ 165,845 105 % The $165.8 million, or 105%, increase in general and administrative expenses for the year ended December 31, 2021 compared to the same period in 2020 was primarily due to higher employee-related expenses by $97.3 million, $75.5 million of which was related to stock-based compensation expense and the remainder of which was related to salaries and benefits as we expanded our team to support our growth. In addition, legal and professional services expenses increased by $54.9 million, $5.6 million of which relates to expenses incurred in connection with the legal settlement during the year ended December 31, 2021. See Note 17 "Commitments and Contingencies" in Part IV, Item 15 of this Annual Report on Form 10-K. The remainder of the increase in legal and professional services expenses primarily relates to expenses incurred in connection with the Iora acquisition. The general and administrative expenses in 2021 included general and administrative expenses from Iora from September 1, 2021 through December 31, 2021. Depreciation and Amortization Year Ended December 31, 2021 2020 Change % Change (dollar amounts in thousands) Depreciation and amortization $ 46,496 $ 22,374 $ 24,122 108 % Depreciation and amortization expenses increased $24.1 million, or 108%, for the year ended December 31, 2021 compared to the same period in 2020. This was primarily due to depreciation and amortization expenses recognized related to new medical offices, capitalization of software development, upgraded office software, and the Iora acquisition during the year ended December 31, 2021. Other Income (Expense) Interest Income Year Ended December 31, 2021 2020 Change % Change (dollar amounts in thousands) Interest income $ 798 $ 1,809 $ (1,011) (56) % Interest income decreased $1.0 million, or 56%, for the year ended December 31, 2021 compared to the same period in 2020. The decrease was due to higher amortization of premiums from marketable securities, partially offset by higher interest rates and investment yields, as well as interest income from the note receivable issued in connection with the Iora acquisition prior to September 1, 2021. Interest and Other Expense Year Ended December 31, 2021 2020 Change % Change (dollar amounts in thousands) Interest and other expense $ (13,757) $ (13,434) $ (323) 2 % Interest and other expense increased $0.3 million, or 2% for the year ended December 31, 2021 compared to the same period in 2020. The increase was primarily due to the payment of cash interest, amortization of the issuance costs on our 2025 Notes, and an unrealized loss recorded for the indemnification asset recognized as a result of the Iora acquisition, mostly offset 78 by elimination of debt discount amortization on our 2025 Notes issued in the second quarter of 2020 as a result of the adoption of ASU 2020-06 on January 1, 2021. Change in Fair Value of Redeemable Convertible Preferred Stock Warrant Liability Year Ended December 31, 2021 2020 Change % Change (dollar amounts in thousands) Change in fair value of redeemable convertible preferred stock warrant liability $ — $ (6,560) $ 6,560 nm nm - not meaningful The change in fair value of the redeemable convertible preferred stock warrant liability decreased $6.6 million for the year ended December 31, 2021 compared to the same period in 2020. Upon the closing of our initial public offering in the first quarter of 2020, the warrants to purchase shares of redeemable convertible preferred stock were automatically converted to warrants to purchase shares of common stock, at which time we adjusted the redeemable convertible preferred stock warrant liability to fair value prior to reclassifying the redeemable convertible preferred stock warrant liability to additional paid-in capital. As a result, following the closing of the initial public offering in the first quarter of 2020, the warrants are no longer subject to fair value accounting. Provision for (Benefit from) Income Taxes Year Ended December 31, 2021 2020 Change % Change (dollar amounts in thousands) Provision for (benefit from) income taxes $ (1,802) $ (123) $ (1,679) nm nm - not meaningful The provision for (benefit from) income taxes increased $1.7 million from a benefit of $0.1 million for the year ended December 31, 2020 to a benefit of $1.8 million for the year ended December 31, 2021. This was primarily due to impact of amortization on book basis identified intangibles, establishing a valuation allowance and state tax law changes. Net Loss Attributable to Noncontrolling Interest Year Ended December 31, 2021 2020 Change % Change (dollar amounts in thousands) Net loss attributable to noncontrolling interest $ — $ (704) $ 704 nm nm - not meaningful The $0.7 million decrease in net loss attributable to noncontrolling interest for the year ended December 31, 2021 compared to the same period in 2020 was due to the deconsolidation of the joint venture as of April 1, 2020. Liquidity and Capital Resources Since our inception, we have financed our operations primarily with the issuance of the 2025 Notes, our initial public offering, the sale of redeemable convertible preferred stock, and to a lesser extent, the issuance of term notes under credit 79 facilities. As of December 31, 2021, we had cash, cash equivalents and marketable securities of $501.9 million, compared to $683.0 million as of December 31, 2020. We believe that our existing cash, cash equivalents and marketable securities will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months. We believe we will meet longer-term expected future cash requirements and obligations through a combination of available cash, cash equivalents and marketable securities, cash flows from operating activities, and access to private and public financing sources. We expect capital expenditures to increase in future periods to support growth initiatives in existing and new markets. On September 1, 2021, we completed the acquisition of Iora, a human-centered, value-based primary care group with built-for-purpose technology focused on serving the Medicare population, for an aggregate purchase consideration of $1.4 billion, which was paid in part through the issuance of shares of our common stock with a fair value of $1.3 billion, in part by cash of $62.9 million, and in part by stock options of Iora assumed by 1Life towards pre-combination services of $48.6 million. During the year ended December 31, 2021, we incurred costs related to this acquisition of $39.5 million. We may be required to seek additional equity or debt financing. Our future capital requirements will depend on many factors, including our pace of new member growth and expanded enterprise client and health network relationships, our pace and timing of expansion of new medical offices in existing and new markets, the timing and extent of spend to support the expansion of sales, marketing and development activities, acquisitions and related costs, and the impact of the COVID-19 pandemic. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition and results of operations would be harmed. See Part I - Item 1A. to this Annual Report "Risk Factors-Risks Related to Our Business and Our Industry — In order to support the growth of our business, we may need to incur additional indebtedness or seek capital through new equity or debt financings, which sources of additional capital may not be available to us on acceptable terms or at all.” In addition, given the uncertainty around the duration and extent of the COVID-19 pandemic, we cannot accurately predict at this time the future potential impact of the pandemic on our business, results of operations, financial condition or liquidity. The Company's material cash requirements include the following contractual and other obligatio Debt In May 2020, we issued $275.0 million aggregate principal amount of 3.0% convertible senior notes due June 2025 in a private offering and in June 2020, an additional $41.2 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment option by the initial purchasers. The 2025 Notes are unsecured obligations and bear interest at a fixed rate of 3.0% per annum, payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2020. As of December 31, 2021, the principal amount of debt outstanding from the 2025 Notes was $316.3 million. Total interest expense associated with the convertible senior notes is $33.2 million, of which $9.5 million is due within 12 months. Leases We have operating lease arrangements for medical offices and our headquarter office facilities. As of December 31, 2021, we had fixed lease payment obligations of $408.1 million, with $51.3 million payable within 12 months. Other Purchase Obligations Our other purchase obligations primarily consist of non-cancelable purchase obligations related to professional and technology services and non-cancelable purchase obligations to acquire capital assets. We did not have material non-cancellable purchase obligations as of December 31, 2021. Summary Statement of Cash Flows The following table summarizes our cash flows: 80 Year Ended December 31, 2021 2020 Net cash used in operating activities $ (88,566) $ (4,378) Net cash provided by (used in) investing activities 291,804 (514,474) Net cash provided by financing activities 27,811 604,528 Net increase in cash, cash equivalents and restricted cash $ 231,049 $ 85,676 Cash Flows from Operating Activities For the year ended December 31, 2021, our net cash used in operating activities was $88.6 million, resulting from our net loss of $254.6 million and net cash used by our working capital of $15.7 million, partially offset by adjustments for non-cash charges of $181.7 million. Cash used by our working capital consisted primarily of a $19.0 million increase in prepaid expenses and other current assets, a $20.9 million decrease in operating lease liabilities, and a $16.5 million increase in accounts receivables, net, partially offset by an increase of $20.3 million in other liabilities, an increase of $14.3 million in accrued expenses and accounts payable, an increase of $3.4 million in deferred revenue, and a decrease of $2.8 million in inventory and other assets. The increase in prepaid expenses and other current assets is primarily due to $8.9 million prepaid income taxes and a $6.0 million receivable from insurers related to a legal settlement recovery as described in Note 17 "Commitments and Contingencies" to our consolidated financial statements. The increase in other liabilities is primarily due to an indemnification liability of $13.0 million recognized as part of the Iora acquisition as described in Note 8 "Business Combinations", and a legal settlement liability of $11.5 million as described in Note 17 "Commitments and Contingencies". The changes in accounts receivable and deferred revenue are primarily due to timing of billing and cash collections from our health network partners and enterprise clients. The net increase in accounts payable and accrued expenses is primarily related to timing of payments for accrued compensation and accrued interest on our 2025 Notes. For the year ended December 31, 2020, our net cash used in operating activities was $4.4 million, resulting from our net loss of $89.4 million and net cash used by our working capital needs of $3.1 million, largely offset by adjustments for non-cash charges of $82.0 million. The cash decrease resulting from changes in our working capital in 2020 consisted primarily of a $35.2 million increase in accounts receivables, net, a $12.2 million decrease in operating lease liabilities and a $4.9 million increase in inventories and other assets, partially offset by an increase of $27.1 million in accrued expenses and accounts payable, an increase of $16.6 million in deferred revenue, a decrease of $6.5 million in prepaid expenses and other current assets and an increase of $5.1 million in other liabilities. The increase in accounts receivable, net and deferred revenue is primarily due to growth of our partnership with health networks and growth of our enterprise and on-site clients. The net increase in accounts payable and accrued expenses is primarily related to timing of payments for accrued compensation and accrued interest on our 2025 Notes. Cash Flows from Investing Activities For the year ended December 31, 2021, our net cash provided by investing activities was $291.8 million, resulting primarily from sales and maturities of marketable securities of $624.0 million, partially offset by purchases of marketable securities of $215.3 million, acquisition of business and issuance of note receivable of $53.3 million and purchases of property and equipment of $63.6 million related to leasehold improvements, computer equipment, and furniture and fixtures for new offices, remodels and improvements to existing offices, capitalization of internal-use software development costs, and office hardware and software. For the year ended December 31, 2020, our net cash used by investing activities was $514.5 million, resulting primarily from purchases of marketable securities of $963.3 million and purchases of property and equipment, net of $63.7 million related to leasehold improvements, computer equipment, and furniture and fixtures for new offices, remodels and improvements to existing offices, capitalization of internal-use software development costs, and office hardware and software. This was partially offset by sales and maturities of marketable securities of $513.3 million. Cash Flows from Financing Activities For the year ended December 31, 2021, our net cash provided by financing activities was $27.8 million, resulting primarily from exercise of stock options of $22.8 million and proceeds from employee stock purchase plan of $5.1 million. For the year ended December 31, 2020, our net cash provided by financing activities was $604.5 million, resulting primarily from proceeds from the issuance of our 2025 Notes of $316.3 million, our initial public offering of $281.8 million, 81 exercises of stock options and warrants of $35.8 million, proceeds from the issuance of stock under our employee stock purchase plan of $4.8 million, offset by payment of the 2025 Notes issuance costs of $9.4 million, payment of offering costs associated with our initial public offering net against reimbursements for our secondary offering of $20.5 million and payment of a debt obligation of $3.3 million. Critical Accounting Policies and Significant Judgments and Estimates Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. While our significant accounting policies are described in greater detail in Note 2, "Summary of Significant Accounting Policies," to our consolidated financial statements included in this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements. Business Combinations Accounting for business combinations requires us to allocate the fair value of purchase considerations to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values, which were determined primarily using the income method. The excess of the fair value of purchase consideration over the fair values of these identified assets and liabilities is recorded as goodwill. Such valuations require us to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, revenue growth rates, medical claims expense, cost of care expenses, operating expenses, trademark royalty rate, contributory asset charges, discount rate, contract terms and useful life from acquired payer contracts with Medicare Advantage plans and CMS. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Allocation of purchase consideration to identifiable assets and liabilities affects our amortization expense, as acquired finite-lived intangible assets are amortized over the useful life, whereas any indefinite lived intangible assets, including goodwill, are not amortized. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. Revenue Recognition We recognize revenue from contracts with customers using the five-step method described in Note 2 of the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We generate net revenue through Medicare revenue and commercial revenue. We generate Medicare revenue primarily from Capitated At-Risk arrangements with Medicare Advantage payers and CMS. We generate commercial revenue from partnership revenue, net fee-for-service revenue and membership revenue. We recognize partnership revenue from contracts with health systems to provide professional clinical services and the associated management and administrative services. Our contracts with health systems contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on their relative standalone selling price. We determine standalone selling price, or SSP, for all our performance obligations using observable inputs, such as standalone sales and historical contract pricing. SSP is consistent with our overall pricing objectives, taking into consideration the type of services. SSP also reflects the amount we would charge for that performance obligation if it were sold separately in a standalone sale, and the price we would sell to similar customers in similar circumstances. We review the contract terms and conditions to evaluate the timing and amount of revenue recognition; the related contract balances; and our remaining performance obligations. For our contracts with health systems, we estimate the variable consideration related to customer rebates or discounts based on our assessment of historical, current, and forecasted performance. These evaluations require significant judgment that could affect the timing and amount of revenue recognized. 82 The transaction price for our capitated At-Risk arrangements with payers including Medicare Advantage payers and CMS is variable as it primarily includes PMPM fees for our At-Risk members. PMPM fees can fluctuate throughout the contract based on the health status (acuity) of each individual member. In certain contracts, PMPM fees also include “risk adjustments” for items such as risk shares. The adjustment to the PMPM fees must be estimated due to reporting lag times, and requires significant judgment. These are estimated using the expected value methodology based on historical data and actuarial inputs. Final adjustments related to the contracts may take up to 18 months due to reserves for claims incurred but not reported. The Capitated Revenue, net of risk shares and adjustments, is recognized in the month in which eligible members are entitled to receive healthcare benefits during the contract term. Subsequent changes in PMPM fees and the amount of revenue to be recognized are reflected through subsequent period adjustments to properly recognize the ultimate capitation amount. For our capitated revenue arrangements, we concluded that we are the principal, and report revenues on a gross basis. In this assessment, we consider if we obtain control of the specified services before they are transferred to our customers, as well as other indicators such as the party primarily responsible for fulfillment. Medical Claims Expense Medical claims expenses are costs for third-party health care service providers that provide medical care to our At-Risk members for which we are contractually obligated to pay through our At-Risk arrangements. The IBNR claims liability is recorded at the contract level and consist of the Company’s Capitated Revenue attributed from enrolled At-Risk members less actual paid medical claims expense. If the Capitated Revenue exceeds the actual medical claims expense at the end of the reporting period, such surplus is recorded as capitated accounts receivable within accounts receivable, net in the consolidated balance sheets. If the actual medical claims expense exceeds the Capitated Revenue, such deficit is recorded as capitated accounts payable within other current liabilities in the consolidated balance sheets. Actual claims expense will differ from the estimated liability due to factors in estimated and actual member utilization of healthcare services, the amount of charges and other factors. We assess our estimates with an independent actuarial expert to ensure our estimates represent the best, most reasonable estimate given the data available to us at the time the estimates are made. The actuarial models consider significant assumptions such as completion factors and per member per month claim trends, as well as other factors such as health care professional contract rate changes, membership volume and demographics, the introduction of new technologies and benefit plan changes. Stock-Based Compensation We measure stock-based awards granted to employees and directors based on their fair value on the date of the grant and recognize compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. For stock option awards issued with market-based vesting conditions, the grant date fair value is determined based on multiple stock price paths developed through the use of a Monte Carlo simulation that incorporates into the valuation the possibility that the market condition may not be satisfied. A Monte Carlo simulation requires the use of various assumptions, including the underlying stock price, volatility and the risk-free interest rate as of the valuation date, corresponding to the length of the time remaining in the performance period, and expected dividend yield. The expected term represents the derived service period for the respective tranches, which is the longer of the explicit service period or the period in which the market conditions are expected to be met. Stock-based compensation expense associated with market-based awards is recognized over the derived requisite service using the accelerated attribution method, regardless of whether the market conditions are achieved. If the related market conditions are achieved earlier than the derived service period, the stock-based compensation expense will be recognized as a cumulative catch-up expense from the grant date to that point in time in achieving the share price goal. We continue to use judgment in evaluating the expected volatility and expected term utilized in our stock-based compensation expense calculation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may refine our estimates of expected volatility and expected term, which could materially impact our future stock-based compensation expense. Recent Accounting Pronouncements Please see Note 2, "Summary of Significant Accounting Policies" to our consolidated financial statements in Part IV, Item 15 of this Annual Report on Form 10-K. 83 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Interest Rate Sensitivity We had cash and cash equivalents of $342.0 million as of December 31, 2021, compared to $113.0 million as of December 31, 2020, held primarily in cash deposits and money market funds for working capital purposes. We had marketable securities of $160.0 million as of December 31, 2021, compared to $570.0 million as of December 31, 2020, consisting of U.S. Treasury obligations, U.S. government agency securities, foreign government bonds and commercial paper. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes. All our investments are denominated in U.S. dollars. In May 2020, we issued the 2025 Notes which bear interest at a fixed rate of 3.0% per annum. As of December 31, 2020, the principal amount of debt outstanding from the 2025 Notes was $316.3 million. Our cash and cash equivalents, marketable securities and debt are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value negatively impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. We do not believe that an increase or decrease in interest rates of 100 basis points would have a material effect on our business, financial condition or results of operations. Item 8. Financial Statements and Supplementary Data. All information required by this item is included in Item 15 of this Annual Report on Form 10-K and is incorporated into this item by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, as of December 31, 2021, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Management's Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our management, with the participation of our Chief Executive Officer and Chief Financial Officer and the oversight of our audit committee, has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2021. In assessing the effectiveness of our internal control over financial reporting, our management used the framework established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2021. 84 In accordance with guidance issued by the SEC, companies are permitted to exclude acquisitions from their final assessment of internal control over financial reporting for the first fiscal year in which the acquisition occurred. Our management’s evaluation of internal control over financial reporting excluded the internal control activities of Iora Health, Inc. ("Iora"), which we acquired on September 1, 2021. Iora's total assets of $144.0 million and total net revenue of $130.6 million excluded from our assessment of internal control over financial reporting as of December 31, 2021 represent 5% of the Company's consolidated total assets as of December 31, 2021, and 21% of the Company’s consolidated net revenue for the year ended December 31, 2021, respectively. The effectiveness of our internal control over financial reporting as of December 31, 2021, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which can be found Part IV Item 15 of this Annual Report on Form 10-K. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitation on the Effectiveness of Internal Control The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting. Item 9B. Other Information. None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. 85 PART III Item 10. Directors, Executive Officers and Corporate Governance. The information required by this item will be set forth in the definitive proxy statement to be filed with the SEC in connection with the Annual Meeting of Stockholders within 120 days after December 31, 2021 (the "Proxy Statement") and is incorporated into this Annual Report on Form 10-K by reference. Item 11. Executive Compensation. The information required by this item will be set forth in the Proxy Statement and is incorporated into this Annual Report on Form 10-K by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this item will be set forth in the Proxy Statement and is incorporated into this Annual Report on Form 10-K by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this item will be set forth in the Proxy Statement and is incorporated into this Annual Report on Form 10-K by reference. Item 14. Principal Accounting Fees and Services. The information required by this item will be set forth in the Proxy Statement and is incorporated into this Annual Report on Form 10-K by reference. 86 PART IV Item 15. Exhibits, Financial Statement Schedules. (a) The following documents are filed as part of this Annual Report on Form 10-K: 1. Financial Statements: The following financial statements and schedules of the Registrant are contained in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K: Page Report of Independent Registered Public Accounting Firm F- 2 Financial Statements: Consolidated Balance Sheets F- 5 Consolidated Statements of Operations F- 6 Consolidated Statements of Comprehensive Loss F- 7 Consolidated Statements of Redeemable Convertible Preferred Stock and Equity (Deficit) F- 8 Consolidated Statements of Cash Flows F- 9 Notes to the Consolidated Financial Statements F- 10 2. Financial Statement Schedules No financial statement schedules are provided because the information called for is not required or is shown either in the financial statements or notes thereto. (b) Exhibits The exhibits listed in the following "Exhibit Index" are filed, furnished or incorporated by reference as part of this Annual Report on Form 10-K. 87 EXHIBIT INDEX Number Exhibit Description Form File No. Exhibit Filing Date Filed Herewith 2.1* Agreement and Plan of Merger, dated June 6, 2021, by and among 1Life Healthcare, Inc., SB Merger Sub, Inc., Iora Health, Inc. and Fortis Advisors LLC, solely in its capacity as the representative of the stockholders of Iora Health, Inc. 8-K 001-39203 2.1 6/7/20211 3.1 Amended and Restated Certificate of Incorporation of the Registrant 8-K 001-39203 3.1 2/4/2020 3.2 Amended and Restated Bylaws of the Registrant 8-K 001-39203 3.2 2/4/2020 4.1 Reference is made to Exhibits 3.1 and 3.2 4.2 Form of Common Stock Certificate. S-1 333-235792 4.1 1/21/2020 4.3 Description of Securities X 4.4 Indenture, dated as of May 26, 2020, by and between 1Life Healthcare, Inc. and U.S. Bank National Association, as Trustee. 8-K 001-39203 4.1 5/29/2020 4.5 Form of Global Note, representing 1Life Healthcare, Inc.'s 3.00% Convertible Senior Notes due 2025 (included as Exhibit A to the Indenture filed as Exhibit 4.1) 8-K 001-39203 4.2 5/29/2020 10.1+ Amended and Restated Investor Rights Agreement, dated January 15, 2020, by and among the Registrant and the investors listed on Exhibit A thereto. S-1 333- 235792 10.1 1/21/2020 10.2+ 2007 Equity Incentive Plan, as amended. S-1 333- 235792 10.2 1/3/2020 10.3+ Forms of Option Agreement, Stock Option Grant Notice and Notice of Exercise under the 2007 Equity Incentive Plan. S-1 333- 235792 10.3 1/3/2020 10.4+ 2017 Equity Incentive Plan, as amended. S-1 333- 235792 10.4 1/21/2020 10.5+ Forms of Option Agreement, Stock Option Grant Notice and Notice of Exercise under the 2017 Equity Incentive Plan. S-1 333- 235792 10.5 1/3/2020 10.6+ 2020 Equity Incentive Plan. S-1 333- 235792 10.6 1/21/2020 10.7+ Forms of Option Agreement, Stock Option Grant Notice and Notice of Exercise under the 2020 Equity Incentive Plan. S-1 333- 235792 10.7 1/21/2020 10.8+ Forms of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under the 2020 Equity Incentive Plan. S-1 333- 235792 10.8 1/21/2020 10.9+ 2020 Employee Stock Purchase Plan. S-1 333- 235792 10.9 1/21/2020 10.10+ Executive Annual Incentive Plan. S-1 333- 235792 10.10 1/3/2020 10.11+ Form of Indemnification Agreement, by and between the Registrant and each of its directors and executive officers. S-1 333- 235792 10.11 1/21/2020 10.12+ Employment Agreement, dated June 27, 2017, by and between the Registrant and Amir Dan Rubin, as amended on January 17, 2020. S-1 333- 235792 10.17 1/21/2020 10.13+ Physician Employment Agreement, dated August 1, 2007, by and between One Medical Group, Inc. (previously Apollo Medical Group) and Andrew S. Diamond, M.D., Ph.D. S-1 333- 235792 10.19 1/3/2020 10.14+ Provider Stock Option Program and Advisory Services Agreement, dated October 28, 2014, by and between the Registrant and Andrew S. Diamond, M.D., Ph.D. S-1 333- 235792 10.20 1/3/2020 10.15 Office Lease, dated September 25, 2018, by and between the Registrant and One Embarcadero Center Venture. S-1 333- 235792 10.21 1/3/2020 10.16 First Amendment to Office Lease, dated June 17, 2019, by and between the Registrant and One Embarcadero Center Venture. S-1 333- 235792 10.22 1/3/2020 10.17 Form of Administrative Services Agreement by and between the Registrant and its affiliated professional entities. S-1 333- 235792 10.23 1/3/2020 10.18¥ Inbound Services Agreement, dated August 18, 2017, by and between the Registrant and Google Inc. S-1 333- 235792 10.25 1/3/2020 10.19+ 1Life Healthcare, Inc. Executive Severance and Change in Control Plan. S-1 333- 235792 10.26 1/21/2020 10.20+ Offer Letter, dated February 14, 2019, by and between the Registrant and Bjorn B. Thaler. S-1 333- 235792 10.27 1/3/2020 10.21+ Offer Letter, dated October 16, 2015, by and between the Registrant and Lisa A. Mango. S-1 333- 235792 10.28 1/3/2020 21.1 List of Subsidiaries of the Registrant X 23.1 Consent of Independent Registered Public Accounting Firm X 31.1 Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 88 Number Exhibit Description Form File No. Exhibit Filing Date Filed Herewith 31.2 Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 32.1† Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X 101.INS Inline XBRL Instance Document X 101.SCH Inline XBRL Taxonomy Schema Linkbase Document X 101.CAL Inline XBRL Taxonomy Definition Linkbase Document X 101.DEF Inline XBRL Taxonomy Calculation Linkbase Document X 101.LAB Inline XBRL Taxonomy Labels Linkbase Document X 101.PRE Inline XBRL Taxonomy Presentation Linkbase Document X 104 Cover Page Interactive Data File (formatted as inline XBRL and contained within Exhibit 101). X * The Schedules and exhibits have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished to the Securities and Exchange Commission upon request. † The certification attached as Exhibit 32.1 that accompanies this Annual Report on Form 10-K, are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of 1Life Healthcare, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing. + Indicates management contract or compensatory plan. ¥ Portions of this exhibit have been omitted as the Registrant has determined that the omitted information (i) is not material and (ii) the type of information the Registrant treats as private or confidential. Item 16. Form 10-K Summary None. 89 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 1LIFE HEALTHCARE, INC. Date:  February 23, 2022 By: /s/ Amir Dan Rubin Amir Dan Rubin Chief Executive Officer and President (Principal Executive Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Amir Dan Rubin and Bjorn Thaler, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution for him or her, and in his or her name in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and either of them, his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. 90 Signature Title Date /s/ Amir Dan Rubin Chair, Chief Executive Officer and President February 23, 2022 Amir Dan Rubin (Principal Executive Officer) /s/ Bjorn Thaler Chief Financial Officer February 23, 2022 Bjorn Thaler (Principal Financial and Accounting Officer) /s/ Paul R. Auvil Director February 23, 2022 Paul R. Auvil /s/ Mark S. Blumenkranz Director February 23, 2022 Mark S. Blumenkranz, M.D . /s/ Bruce W. Dunlevie Director February 23, 2022 Bruce W. Dunlevie /s/ Kalen F. Holmes Director February 23, 2022 Kalen F. Holmes, Ph.D. /s/ David P. Kennedy Director February 23, 2022 David P. Kennedy /s/ Freda Lewis-Hall Director February 23, 2022 Freda Lewis-Hall, M.D. /s/ Robert R. Schmidt Director February 23, 2022 Robert R. Schmidt /s/ Scott C. Taylor Director February 23, 2022 Scott C. Taylor /s/ Mary Ann Tocio Director February 23, 2022 Mary Ann Tocio 91 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) F- 2 Consolidated Balance Sheets as of December 31, 2021 and 2020 F- 5 Consolidated Statements of Operations for the Years Ended December 31, 2021, 2020, and 2019 F- 6 Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2021, 2020, and 2019 F- 7 Consolidated Statements of Redeemable Convertible Preferred Stock and Equity (Deficit) for the Years Ended December 31, 2021, 2020, and 2019 F- 8 Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020, and 2019 F- 9 Notes to Consolidated Financial Statements F- 10 F-1 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of 1Life Healthcare, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of 1Life Healthcare, Inc. and its subsidiaries (the "Company") as of December 31, 2021 and 2020, and the related consolidated statements of operations, of comprehensive loss, of redeemable convertible preferred stock and stockholders' equity (deficit) and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for convertible instruments and contracts in an entity's own equity in 2021. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. As described in Management’s Annual Report on Internal Control Over Financial Reporting, management has excluded Iora Health, Inc. from its assessment of internal control over financial reporting as of December 31, 2021, because it was acquired by the Company in a purchase business combination during 2021. We have also excluded Iora Health, Inc. from our audit of internal control over financial reporting. Iora Health, Inc. is a wholly-owned subsidiary whose total assets and total net revenue excluded from management’s assessment and our audit of internal control over financial reporting represent 5% and 21%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2021. Definition and Limitations of Internal Control over Financial Reporting F-2 A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Acquisition of Iora Health, Inc. – Valuation of Intangible Assets related to Medicare Advantage and CMS Direct Contracting Contracts As described in Note 8 to the consolidated financial statements, on September 1, 2021, the Company acquired all outstanding equity and capital stock of Iora Health, Inc. for an aggregate purchase consideration of $1.4 billion, which resulted in intangible assets of $298 million for Medicare Advantage contracts and $52 million for CMS Direct Contracting contracts (“Contract Intangibles”) being recorded. As disclosed by management, management valued the acquired Contract Intangibles using the income method. Significant estimates and assumptions used in valuing these Contract Intangibles included, revenue growth rates, medical claims expense, cost of care expenses, operating expenses, trademark royalty rate, contributory asset charges, discount rate, contract terms, and useful life. The principal considerations for our determination that performing procedures relating to the valuation of Contract Intangibles as a result of the acquisition of Iora Health, Inc. is a critical audit matter are (i) a high degree of auditor judgment and subjectivity in performing procedures relating to the fair value of the Contract Intangibles acquired due to the significant judgment by management when developing the estimates; (ii) the significant audit effort in evaluating the significant assumptions related to revenue growth rates, medical claims expense, cost of care expenses, operating expenses, trademark royalty rate, contributory asset charges, discount rate, contract terms, and useful life; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the Contract Intangibles and controls over the development of significant assumptions related to revenue growth rates, medical claims expense, cost of care expenses, operating expenses, trademark royalty rate, contributory asset charges, discount rate, contract terms, and useful life. These procedures also included, among others (i) reading the purchase agreement and (ii) testing management’s process for estimating the fair value of the Contract Intangibles. Testing management’s process included evaluating the appropriateness of the income method, testing the completeness and accuracy of data provided by management, and evaluating the reasonableness of significant assumptions related to revenue growth rate, medical claims expense, cost of care expenses, operating expenses, trademark royalty rate, contributory asset charges, discount rate, contract terms, and useful life. Evaluating the reasonableness of the revenue growth rate, medical claims expense, cost of care expenses, operating expenses, contract terms, and useful life assumptions involved considering (i) the past performance of the acquired business; (ii) consistency with economic and industry forecasts, considering comparable businesses; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s income method and the trademark royalty rate, contributory asset charges, discount rate and useful life assumptions. F-3 Valuation of Incurred but not yet Reported (“IBNR”) Claims Liability related to Iora Health, Inc. As described in Note 2 to the consolidated financial statements, the Company’s incurred but not yet reported (“IBNR”) claims liability was $32.2 million as of December 31, 2021. As disclosed by management, the estimated IBNR liability is developed by management using actuarial models which consider significant assumptions such as completion factors and per member per month claim trends. Actual claims expense will differ from the estimated liability due to factors in estimated and actual member utilization of healthcare services, the amount of charges and other factors. Changes in this estimate can materially affect, either favorably or unfavorably, results from operations and overall financial position. The estimated reserve for IBNR claims liability is included in accounts receivable, net. The principal considerations for our determination that performing procedures relating to the valuation of the IBNR claims liability related to Iora Health, Inc. is a critical audit matter are (i) the significant judgment by management when developing the estimate of IBNR claims liability related to Iora Healthcare, Inc., (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate the actuarial models and significant assumptions related to completion factors and per member per month claims trends; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge . Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent estimate of the IBNR claims liability. This independent estimate considers a range of reasonable outcomes which are compared to management’s estimate of the IBNR claims liability. Developing the independent estimate involved developing independent completion factors and per member per month claims estimates using management’s data, testing the completeness and accuracy of data provided by management, and evaluating the reasonableness of management’s assumptions related to completion factors and per member per month claims trends assumptions. /s/ PricewaterhouseCoopers LLP San Francisco, California February 23, 2022 We have served as the Company's auditor since 2013. F-4 1LIFE HEALTHCARE, INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except par value amounts) December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 341,971 $ 112,975 Short-term marketable securities 111,671 570,023 Accounts receivable, net 103,498 67,895 Inventories 6,065 7,113 Prepaid expenses 28,055 9,169 Other current assets 21,767 7,524 Total current assets 613,027 774,699 Long-term marketable securities 48,296 — Restricted cash 3,801 1,911 Property and equipment, net 193,716 126,037 Right-of-use assets 256,293 138,840 Intangible assets, net 352,158 — Goodwill 1,147,464 21,301 Deferred income taxes — 2,656 Other assets 12,277 5,546 Total assets $ 2,627,032 $ 1,070,990 Liabilities and Stockholders' Equity Current liabiliti Accounts payable $ 18,725 $ 12,654 Accrued expenses 72,672 46,527 Deferred revenue, current 47,928 35,966 Operating lease liabilities, current 31,152 17,418 Other current liabilities 31,632 4,861 Total current liabilities 202,109 117,426 Operating lease liabilities, non-current 269,641 153,614 Convertible senior notes 309,844 241,233 Deferred income taxes 73,875 — Deferred revenue, non-current 29,317 7,624 Other non-current liabilities 13,663 2,618 Total liabilities 898,449 522,515 Commitments and contingencies (Note 17) Stockholders' Equity: Common stock, $ 0.001 par value, 1,000,000 and 1,000,000 shares authorized as of December 31, 2021 and December 31, 2020, respectively; 191,722 and 134,472 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively 193 134 Additional paid-in capital 2,346,781 918,118 Accumulated deficit ( 618,198 ) ( 369,785 ) Accumulated other comprehensive income ( 193 ) 8 Total stockholders' equity 1,728,583 548,475 Total liabilities and stockholders' equity $ 2,627,032 $ 1,070,990 The accompanying notes are an integral part of these consolidated financial statements. F-5 1LIFE HEALTHCARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share amounts) Year Ended December 31, 2021 2020 2019 Net Reve Medicare revenue $ 129,979 $ — $ — Commercial revenue 493,336 380,223 276,258 Total net revenue 623,315 380,223 276,258 Operating expens Medical claims expense 116,543 — — Cost of care, exclusive of depreciation and amortization shown separately below 318,639 234,959 167,618 Sales and marketing 61,994 36,967 39,520 General and administrative 323,127 157,282 108,965 Depreciation and amortization 46,496 22,374 14,268 Total operating expenses 866,799 451,582 330,371 Loss from operations ( 243,484 ) ( 71,359 ) ( 54,113 ) Other income (expense), n Interest income 798 1,809 4,498 Interest and other expense ( 13,757 ) ( 13,434 ) ( 474 ) Change in fair value of redeemable convertible preferred stock warrant liability — ( 6,560 ) ( 3,519 ) Total other income (expense), net ( 12,959 ) ( 18,185 ) 505 Loss before income taxes ( 256,443 ) ( 89,544 ) ( 53,608 ) Provision for (benefit from) income taxes ( 1,802 ) ( 123 ) 87 Net loss ( 254,641 ) ( 89,421 ) ( 53,695 ) L Net loss attributable to noncontrolling interest — ( 704 ) ( 1,141 ) Net loss attributable to 1Life Healthcare, Inc. stockholders $ ( 254,641 ) $ ( 88,717 ) $ ( 52,554 ) Net loss per share attributable to 1Life Healthcare, Inc. stockholders - basic and diluted $ ( 1.64 ) $ ( 0.75 ) $ ( 2.84 ) Weighted average common shares outstanding - basic and diluted 155,343 118,379 18,476 The accompanying notes are an integral part of these consolidated financial statements. F-6 1LIFE HEALTHCARE, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Amounts in thousands) Year Ended December 31, 2021 2020 2019 Net loss $ ( 254,641 ) $ ( 89,421 ) $ ( 53,695 ) Other comprehensive l Net unrealized gain (loss) on marketable securities ( 201 ) ( 30 ) 52 Comprehensive loss ( 254,842 ) ( 89,451 ) ( 53,643 ) L Comprehensive loss attributable to noncontrolling interest — ( 704 ) ( 1,141 ) Comprehensive loss attributable to 1Life Healthcare, Inc. stockholders $ ( 254,842 ) $ ( 88,747 ) $ ( 52,502 ) The accompanying notes are an integral part of these consolidated financial statements. F-7 1LIFE HEALTHCARE, INC. CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (Amounts in thousands) Redeemable Convertible Preferred Stock Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity (Deficit) Attributable to 1Life Healthcare, Inc. Stockholders Non controlling Interest Total Equity (Deficit) Shares Amount Shares Amount Balance at December 31, 2018 86,252 $ 402,488 18,136 $ 18 $ 76,029 $ ( 228,449 ) $ ( 14 ) $ ( 152,416 ) $ 4,176 $ ( 148,240 ) Impact of adoption of ASC 606 ( 65 ) ( 65 ) ( 65 ) Exercise of stock options 816 1 3,039 3,040 3,040 Stock-based compensation expense 14,877 14,877 14,877 Net unrealized gain (loss) on marketable securities 52 52 52 Net loss ( 52,554 ) ( 52,554 ) ( 1,141 ) ( 53,695 ) Balance at December 31, 2019 86,252 402,488 18,952 19 93,945 ( 281,068 ) 38 ( 187,066 ) 3,035 ( 184,031 ) Exercise of redeemable convertible preferred stock warrant 5 76 — — Conversion of redeemable convertible preferred stock into common stock upon closing of initial public offering ( 86,257 ) ( 402,564 ) 86,257 86 402,478 402,564 402,564 Issuance of common stock upon closing of initial public offering, net of issuance costs and underwriting fees of $ 23,631 20,125 20 258,099 258,119 258,119 Fair value adjustment to redeemable convertible preferred stock warrants upon conversion into common stock warrants 13,740 13,740 13,740 Reimbursed secondary offering issuance costs 784 784 784 Exercise of stock options 8,123 9 35,677 35,686 35,686 Exercise of common stock warrants 11 73 73 73 Cashless exercise of common stock warrants 590 — — Issuance of common stock under the employee stock purchase plan 349 4,834 4,834 4,834 Issuance of common stock for settlement of RSUs 40 ( 833 ) ( 833 ) ( 833 ) Shares issued related to net share settlement 25 833 833 833 Stock-based compensation expense 35,095 35,095 35,095 Net unrealized gain (loss) on marketable securities ( 30 ) ( 30 ) ( 30 ) Equity component of convertible senior notes, net of issuance costs of $ 2,242 73,393 73,393 73,393 VIE deconsolidation — ( 2,331 ) ( 2,331 ) Net loss ( 88,717 ) ( 88,717 ) ( 704 ) ( 89,421 ) Balances at December 31, 2020 — — 134,472 134 918,118 ( 369,785 ) 8 548,475 — 548,475 Impact of adoption of ASU 2020-06 ( 73,393 ) 6,656 ( 66,737 ) ( 66,737 ) Impact of adoption of ASC 326 ( 428 ) ( 428 ) ( 428 ) Exercise of stock options 4,284 6 22,778 22,784 22,784 Issuance of common stock under the Employee Stock Purchase Plan 222 5,078 5,078 5,078 Issuance of common stock for settlement of RSUs 338 — Issuance of common stock in acquisition 52,406 53 1,313,259 1,313,312 1,313,312 Equity awards assumed in acquisition 48,643 48,643 48,643 Stock-based compensation expense 112,298 112,298 112,298 Net unrealized gain (loss) on marketable securities ( 201 ) ( 201 ) ( 201 ) Net loss ( 254,641 ) ( 254,641 ) ( 254,641 ) Balances at December 31, 2021 — $ — 191,722 $ 193 $ 2,346,781 $ ( 618,198 ) $ ( 193 ) $ 1,728,583 $ — $ 1,728,583 The accompanying notes are an integral part of these consolidated financial statements. F-8 1LIFE HEALTHCARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended December 31, 2021 2020 2019 Cash flows from operating activiti Net loss $ ( 254,641 ) $ ( 89,421 ) $ ( 53,695 ) Adjustments to reconcile net loss to net cash used in operating activiti Provision for bad debts 966 105 — Depreciation and amortization 46,496 22,374 14,268 Amortization of debt discount and issuance costs 1,874 7,767 84 Accretion of discounts and amortization of premiums on marketable securities, net 1,178 ( 933 ) ( 3,359 ) Change in fair value of redeemable convertible preferred stock warrant liability — 6,560 3,519 Reduction of operating lease right-of-use assets 22,062 13,653 10,235 Stock-based compensation 112,298 35,095 14,877 Deferred income taxes ( 4,006 ) ( 2,656 ) — Other non-cash items 864 ( 8 ) 69 Changes in operating assets and liabiliti Accounts receivable, net ( 16,546 ) ( 35,167 ) ( 14,484 ) Inventories 1,118 ( 3,921 ) 659 Prepaid expenses and other current assets ( 18,979 ) 6,488 ( 1,027 ) Other assets 1,687 ( 943 ) ( 4,567 ) Accounts payable 3,111 298 3,929 Accrued expenses 11,175 26,849 3,476 Deferred revenue 3,350 16,566 2,119 Operating lease liabilities ( 20,919 ) ( 12,169 ) ( 8,087 ) Other liabilities 20,346 5,085 310 Net cash used in operating activities ( 88,566 ) ( 4,378 ) ( 31,674 ) Cash flows from investing activiti Purchases of property and equipment, net ( 63,616 ) ( 63,707 ) ( 54,411 ) Purchases of marketable securities ( 215,289 ) ( 963,272 ) ( 246,116 ) Proceeds from sales and maturities of marketable securities 623,966 513,315 324,250 Acquisitions of businesses, net of cash and restricted cash acquired ( 23,257 ) — — Issuance of note receivable ( 30,000 ) — — VIE deconsolidation — ( 810 ) — Net cash provided by (used in) investing activities 291,804 ( 514,474 ) 23,723 Cash flows from financing activiti Proceeds from issuance of convertible senior notes — 316,250 — Payment of convertible senior notes issuance costs — ( 9,374 ) — Proceeds from initial public offering — 281,750 — Payment of underwriting discount and commissions, and offering costs — ( 20,538 ) — Proceeds from the exercise of stock options 22,784 35,686 3,040 Proceeds from employee stock purchase plan 5,078 4,835 — Taxes paid related to net share settlement of equity awards — ( 833 ) — Proceeds from the exercise of redeemable convertible preferred and common stock warrants — 110 — Repayment of notes payable — ( 3,300 ) ( 4,400 ) Payment of principal portion of finance lease liability ( 51 ) ( 58 ) ( 16 ) Net cash provided by (used in) financing activities 27,811 604,528 ( 1,376 ) Net increase (decrease) in cash, cash equivalents and restricted cash 231,049 85,676 ( 9,327 ) Cash, cash equivalents and restricted cash at beginning of period 115,005 29,329 38,656 Cash, cash equivalent and restricted cash at end of period $ 346,054 $ 115,005 $ 29,329 Supplemental disclosure of cash flow informati Cash paid for income taxes $ 13,177 $ — $ — Cash paid for interest $ 9,495 $ 5,251 $ 414 Supplemental disclosure of non-cash investing and financing activiti Purchases of property and equipment included in accounts payable and accrued expenses $ 10,707 $ 4,571 $ 9,093 Equity consideration provided for business acquisition $ 1,361,955 $ — $ — Unpaid deferred offering costs $ — $ — $ 1,318 The accompanying notes are an integral part of these consolidated financial statements. F-9 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) 1. Nature of the Business and Basis of Presentation 1Life Healthcare, Inc. (“1Life”) was incorporated in Delaware on July 25, 2002. 1Life’s headquarters are located in San Francisco, California. 1Life has developed a modernized healthcare membership model based on direct consumer enrollment and third-party sponsorship across commercially insured and Medicare populations. Our membership model includes access to 24/7 digital health services paired with in-office care routinely covered by most health care payers, and allows the Company to engage in value-based care across all age groups, including through At-Risk arrangements as defined in Note 2 “Summary of Significant Accounting Policies” with Medicare Advantage payers and the Center for Medicare & Medicaid Services ("CMS") , in which the Company is responsible for managing a range of healthcare services and associated costs of its members. 1Life is also an administrative and managerial services company that provides services pursuant to contracts with physician-owned professional corporations (“One Medical PCs”) that provide medical services virtually and in-office. On September 1, 2021, 1Life completed the acquisition of Iora Health, Inc. ("Iora Health"), a human-centered, value-based primary care group with built-for-purpose technology focused on serving the Medicare population. Iora Health and Iora Senior Health, Inc. (“Iora Senior Health”) are administrative and managerial service companies that provide services pursuant to contracts with physician-owned professional corporations (“Iora PCs”, together with the One Medical PCs, the “PCs”) that provide medical services virtually and in-office. Iora Health is an administrative and managerial services company that provides services pursuant to contracts with Iora Health NE DCE, LLC, a limited liability company that participates in the Center for Medicare and Medicaid Services’ direct contracting model (the “DCE entity”). Iora Health, Iora Senior Health, the Iora PCs and the DCE entity are collectively referred to herein as “Iora”. See Note 8, "Business Combinations" to the consolidated financial statements. 1Life, Iora Health, Iora Senior Health, the PCs and the DCE entity are collectively referred to herein as the “Company”. 1Life and the One Medical PCs operate under the brand name One Medical. Certain Risks and Uncertainties The Company has incurred losses from operations since inception. Management expects that operating losses and negative cash flows from operations will continue in the foreseeable future; however, it currently believes that the Company's current cash, cash equivalents and marketable securities are sufficient to fund its operating expenses and capital expenditure requirements for the next twelve months. In March 2020, the World Health Organization declared a pandemic due to the global COVID-19 outbreak. Due to the ongoing COVID-19 pandemic, the global economy and financial markets have been and continue to be affected, and there is a significant amount of uncertainty about the length and severity of the consequences caused by the pandemic. The Company has considered information available to it as of the date of issuance of these financial statements and is not aware of any specific events or circumstances that would require an update to its estimates or judgments, or an adjustment to the carrying value of its assets or liabilities. The accounting estimates and other matters assessed include, but were not limited to, allowance for credit losses, goodwill and other long-lived assets, and revenue recognition. These estimates may change as new events occur and additional information becomes available. Actual results could differ materially from these estimates. Basis of Presentation The Company has prepared the accompanying consolidated financial statements in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") and applicable rules and regulations of the Securities and Exchange Commission (“SEC”). The accompanying consolidated financial statements include the accounts of 1Life, Iora Health and Iora Senior Health, their wholly owned subsidiaries, and variable interest entities (“VIE”) in which 1Life, Iora Health and Iora Senior Health have an interest and are the primary beneficiaries. See Note 3, “Variable Interest Entities”. All significant intercompany balances and transactions have been eliminated in consolidation. 2. Summary of Significant Accounting Policies Use of Estimates The preparation of consolidated financial statements and related disclosures in conformity with U.S. GAAP and regulations of the SEC requires management to make estimates and assumptions that affect the amounts reported in the F-10 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) consolidated financial statements and accompanying notes. Estimates include, but are not limited to, revenue recognition, liability for medical claims incurred in the period but not yet reported (“IBNR”), valuation of certain assets and liabilities acquired from business combinations, and stock-based compensation. Actual results could differ from these estimates and may result in material effects on the Company’s operating results and financial position. Cash, Cash Equivalents and Restricted Cash The Company considers all short-term, highly liquid investments purchased with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash deposits are all in financial institutions in the United States. Cash and cash equivalents consist of cash on deposit, investments in money market funds and commercial paper. Restricted cash represents cash held under letters of credit for various leases and certain At-Risk arrangements. The expected duration of restrictions on the Company's restricted cash generally ranges from 1 to 8 years. The reconciliation of cash, cash equivalents and restricted cash reported within the applicable balance sheet line items that sum to the total of the same such amount shown in the consolidated statements of cash flows is as follows: December 31, 2021 2020 2019 Cash and cash equivalents $ 341,971 $ 112,975 $ 27,390 Restricted cash, current (included in prepaid expenses and other current assets) 282 119 17 Restricted cash, non-current 3,801 1,911 1,922 $ 346,054 $ 115,005 $ 29,329 Marketable Securities The Company's investments in marketable securities are classified as available-for-sale and are carried at fair value, with the unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) in total equity (deficit). The Company determines the appropriate classification of these investments at the time of purchase and reevaluates such designation at each balance sheet date. The Company classifies the available-for-sale investments as either short-term or long-term based on each instrument's underlying contractual maturity date. Realized gains and losses and declines in value determined to be other than temporary are based on the specific identification method and are included as a component of other income (expense), net in the consolidated statements of operations. The Company periodically evaluates its available-for-sale debt securities for unrealized losses when carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. No material unrealized losses were recorded during the periods presented. Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three levels of inputs that may be used to measure fair value are defined be • Level 1 - Quoted prices in active markets for identical assets or liabilities. • Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3 - Unobservable inputs that are supported by little or no market activity that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. The Company determines the fair value of its marketable securities based on quoted prices in active markets (Level 1 inputs) for identical assets and on quoted prices for similar assets (Level 2 inputs), which are classified as available-for-sale. The carrying amounts of the Company's term notes approximate the fair value based on consideration of current borrowing F-11 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) rates available to the Company (Level 2 inputs). The carrying values of accounts receivable, accounts payable, accrued expenses and other current liabilities approximate their fair values due to the short-term nature of these assets and liabilities. Variable Interest Entities The Company evaluates its ownership, contractual and other interests in entities to determine if it has any variable interest in a variable interest entity ("VIE"). These evaluations are complex, involve judgment, and the use of estimates and assumptions based on available historical information, among other factors. If the Company determines that an entity in which it holds a contractual or ownership interest is a VIE and that the Company is the primary beneficiary, the Company consolidates such entity in its consolidated financial statements. The primary beneficiary of a VIE is the party that meets both of the following criteri (i) has the power to make decisions that most significantly affect the economic performance of the VIE; and (ii) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. Management performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company's involvement with a VIE will cause the consolidation conclusion to change. Changes in consolidation status are applied prospectively. Segment Information The Company operates and manages its business as one reportable and operating segment. The Company's chief executive officer, who is the chief operating decision maker ("CODM"), reviews financial information on an aggregate basis for purposes of evaluating financial performance and allocating resources. All of the Company's long-lived assets and customers are located in the United States. Concentration of Credit Risk and Significant Customers Financial instruments that potentially subject the company to concentration of credit risk consist of cash, cash equivalents, marketable securities and accounts receivable. The Company's cash balances with individual banking institutions might be in excess of federally insured limits. Cash equivalents are invested in highly rated money market funds and commercial paper. The Company's marketable securities are invested in U.S. Treasury obligations, U.S. government agency securities, foreign government bonds and commercial paper. The Company is not exposed to any significant concentrations of credit risk from these financial instruments. The Company has not experienced any losses on its deposits of cash, cash equivalents or marketable securities. The Company grants unsecured credit to patients, most of whom reside in the service area of the One Medical or Iora facilities and are largely insured under third-party payer agreements. The Company’s concentration of credit risk is limited by the diversity, geography and number of patients and payers. The table below presents the customers or payers that individually represented 10% or more of the Company's accounts receivable, net balance as of December 31, 2021 and December 31, 2020. December 31, 2021 2020 Customer E — % 12 % Customer F 38 % 24 % Customer H — % 16 % Customer I 23 % * *Represents percentages below 10% of the Company's accounts receivable in the period. The table below presents the customers or payers that individually exceeded 10% or more of the Company's net revenue for the years ended December 31, 2021, 2020 and 2019. Year Ended December 31, 2021 2020 2019 Customer A — % 13 % 14 % Customer E — % 10 % 10 % Customer F — % 12 % 12 % Customer I 13 % * * * Represents percentages below 10% of the Company's net revenue in the period. F-12 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Accounts Receivable, net Accounts receivable is comprised of amounts due from patients, health systems and government and private payers for healthcare services, and amounts due from employers, schools and universities who purchase access to memberships for their employees, students and faculty and other medical services. The Company reports accounts receivable net of estimated explicit price concessions and any allowance for credit losses. Collection of accounts receivable is the Company’s primary source of cash and is critical to its operating performance. The Company’s primary collection risks relate to co-payments and other amounts owed by patients and amounts owed by health systems. The Company regularly reviews the adequacy of the allowance for credit losses based on a combination of factors, including historical losses adjusted for current market conditions, the Company’s customers’ financial condition, delinquency trends, aging behaviors of receivables and credit and liquidity indicators for industry groups, and future market and economic conditions. Accounts receivable deemed uncollectable are charged against the allowance for credit losses when identified. Increases and decreases in the allowance for credit losses from patients, health systems, payers and customers are included in general and administrative expense in the consolidated statements of operations Changes in the allowance for credit losses were as follows: Balance at Beginning of Period Additions (1) Write-offs and Deductions Balance at End of Period Allowance for credit losses Year ended December 31, 2020 $ — $ 271 $ — $ 271 Year ended December 31, 2021 $ 271 $ 1,695 $ ( 332 ) $ 1,634 (1) Amount for the year ended December 31, 2021 included an impact of the adjustment recorded for adoption of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). See "Recent Accounting Pronouncements" for details. Capitated accounts receivable and payable related to At-Risk arrangements are recorded net in the consolidated balance sheets when a legal right of offset exists. A right of offset exists when all of the following conditions are 1) each of two parties (the Company and the third-party payer) owes the other determinable amounts; 2) the reporting party (the Company) has the right to offset the amount owed with the amount owed by the other party (the third-party payer); 3) the reporting party (the Company) intends to offset; and 4) the right of offset is enforceable by law. All of the aforementioned conditions were met as of December 31, 2021. The capitated accounts receivable and payable are recorded at the contract level and consist of the Company’s Capitated Revenue attributed from enrolled At-Risk members less actual paid medical claims expense. If the Capitated Revenue exceeds the actual medical claims expense at the end of the reporting period, such surplus is recorded as capitated accounts receivable within accounts receivable, net in the consolidated balance sheets. If the actual medical claims expense exceeds the Capitated Revenue, such deficit is recorded as capitated accounts payable within other current liabilities in the consolidated balance sheets. As of December 31, 2021, the Company has capitated accounts receivable, net, of $ 23,903 and capitated accounts payable, net, of $ 7,220 , representing amounts due from and to Medicare Advantage payers and CMS in At-Risk arrangements, respectively. The capitated accounts receivable and payable are presented net of IBNR claims liability and other adjustments. There were no significant prior period adjustments or changes to the assumptions used in estimating the IBNR claims liability as of December 31, 2021. The Company believes the amounts accrued to cover IBNR claims as of December 31, 2021 are adequate. The capitated accounts receivable and payable, net and IBNR claims liability were assumed as part of the Company's acquisition of Iora, which was completed on September 1, 2021. As a result, comparative periods were not presented in the tables below. Components of capitated accounts receivable, net is summarized be December 31, 2021 Capitated accounts receivable $ 56,384 IBNR claims liability ( 32,320 ) Other adjustments ( 161 ) Capitated accounts receivable, net $ 23,903 F-13 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Components of capitated accounts payable, net is summarized be December 31, 2021 Capitated accounts payable $ 5,483 IBNR claims liability 1,438 Other adjustments 299 Capitated accounts payable, net $ 7,220 Activity in IBNR claims liability from September 1, 2021 through December 31, 2021 is summarized be Amount Balance as at September 1, 2021 $ 31,384 Incurred related t Current period 116,017 Prior periods 526 116,543 Paid related t Current period ( 84,770 ) Prior periods ( 29,399 ) ( 114,169 ) Balance as at December 31, 2021 $ 33,758 Inventories Inventories consist of medical supplies such as vaccines and are stated at the lower of cost or net realizable value with cost being determined on a weighted average basis. Net realizable value is determined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of disposal and transportation. The cost of inventory includes product cost, shipping costs and taxes. Management assesses the valuation of inventory and periodically adjusts the value for estimated excess and obsolete inventory based on forecasted future sales volume and pricing and through specific identification of obsolete or damaged products. Property and Equipment, net Property and equipment are stated at cost, net of accumulated depreciation. Depreciation and amortization are computed using the straight-line method over the estimated useful lives. The general range of useful lives of other property and equipment is as follows: Estimated Useful Life Furniture and fixtures 5 to 7 years Computer equipment 3 to 5 years Computer software 1.5 to 5 years Laboratory equipment 5 to 10 years Leasehold improvements Lesser of lease term or 10 years When assets are sold or retired, the cost and related accumulated depreciation are removed from the accounts, with any resulting gain or loss recorded in general and administrative expenses in the consolidated statements of operations. Costs of repairs and maintenance are expensed as incurred. Software Developed for Internal Use The Company capitalizes costs related to internal-use software during the application development stage including consulting costs and compensation expenses related to employees who devote time to the development projects. The Company records software development costs in property and equipment, net. Costs incurred in the preliminary stages of development activities and post implementation activities are expensed in the period incurred and included in general and administrative F-14 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) expense in the consolidated statements of operations. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Capitalized costs associated with internal-use software are amortized on a straight-line basis over their estimated useful life, which is 1.5 to 5 years, and are included in depreciation and amortization in the consolidated statements of operations. Business Combinations The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill is measured as the excess of the consideration transferred over the fair value of assets acquired and liabilities assumed on the acquisition date. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed, these estimates are inherently uncertain and subject to refinement. The authoritative guidance allows a measurement period of up to one year from the date of acquisition to make adjustments to the preliminary allocation of the purchase price. As a result, during the measurement period the Company may record adjustments to the fair values of assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation. Upon conclusion of the measurement period or final determination of the values of the assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments will be recorded in the consolidated statement of operations. Goodwill, Intangible Assets and Other Long-Lived Assets Goodwill The Company recognizes the excess of the purchase price over the fair value of identifiable net assets acquired as goodwill. The Company performs a qualitative assessment on goodwill at least annually on October 1st or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. If it is determined in the qualitative assessment that the fair value of a reporting unit is more likely than not below its carrying amount, then the Company will perform a quantitative impairment test. The quantitative goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. Any excess in the carrying value of a reporting unit's goodwill over its fair value is recognized as an impairment loss, limited to the total amount of goodwill allocated to that reporting unit. For purposes of goodwill impairment testing, the Company has one reporting unit. There were no goodwill impairments recorded during the years ended December 31, 2021, 2020 and 2019 Intangible Assets and Other Long-Lived Assets The Company amortizes the acquired finite-lived intangible assets on a straight-line basis over its estimated useful lives, which ranges from 3 to 9 years. Intangible assets are reviewed for impairment in conjunction with other long-lived assets. The Company's long-lived assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset or asset group may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset or asset group to the future undiscounted cash flows expected to be generated by the asset or asset group. If such asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. There were no long-lived asset impairments recorded during the years ended December 31, 2021, 2020 and 2019. Leases The Company determines if a contract meets with definition of a lease at inception of a contract. Lease liabilities represent the obligation to make lease payments and right-of-use ("ROU") assets represent the right to use the underlying asset during the lease term. Leases with a term greater than one year are recognized in the consolidated balance sheet as lease liabilities and ROU assets at the commencement date of the lease based on the present value of lease payments over the lease term. The Company has elected not to recognize on the balance sheet leases with terms of one year or less. When the implicit rate is unknown, an incremental borrowing rate based on the information available at the commencement date is used in determining the present value of the lease payments. Options to extend or terminate the lease are included in the determination of the lease term when it is reasonably certain that the Company will exercise such options. Operating lease ROU assets are adjusted for (i) payments made at or before the commencement date, (ii) initial direct costs incurred, and (iii) tenant incentives under the lease. When a lease contains an escalation clause or a concession, such as a rent holiday or tenant improvement allowance, the Company includes these items in the determination of the ROU asset and the lease liabilities. The effects of these escalation clauses or concessions have been reflected in lease expenses on a straight-line F-15 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) basis over the expected lease term and any variable lease payments subsequent to establishing the lease liability are expensed as incurred. Certain lease agreements include rental payments that are adjusted periodically for inflation or other variables. In addition to rent, the leases may require the Company to pay additional amounts for taxes, insurance, maintenance and other expenses, which are generally referred to as non-lease components. Such adjustments to rental payments and variable non-lease components are treated as variable lease payments and recognized in the period as incurred. Variable lease components and variable non-lease components are not measured as part of the right-of-use assets and lease liability. Only when lease components and their associated non-lease components are fixed are they recognized as part of the right-of-use assets and lease liability. The Company has made an accounting policy election to not separate lease and non-lease components to all asset classes. Rather, each lease component and the related non-lease components will be accounted for together as a single component. A portfolio approach is applied where appropriate to certain lease contracts with similar characteristics. The Company's lease agreements do not contain any significant residual value guarantees or material restrictive covenants imposed by the leases. Operating leases are included in right of use assets, operating lease liabilities, current and operating lease liabilities, non-current on the Company's consolidated balance sheets. Finance leases are included in property and equipment, net, other current liabilities, and other long-term liabilities in the Company's consolidated balance sheets. Finance leases are not material. Income Taxes Income taxes are computed using the asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements. In estimating future tax consequences, the Company considers all expected future events other than enactment of changes in tax laws or rates. A valuation allowance is recorded, if necessary, to reduce net deferred tax assets to their realizable values if management does not believe it is more likely than not that the net deferred tax assets will be realized. The Company accounts for uncertainty in income taxes pursuant to authoritative guidance to recognize and measure uncertain tax positions taken or expected to be taken in a tax return. The company can recognize the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit can be recognized. Assessing an uncertain tax position begins with the initial determination of the sustainability of the position and is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed. Additionally, the Company must accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. The Company's policy is to recognize interest and penalties related to uncertain tax positions in the provision for income taxes. As of December 31, 2021 and 2020, the Company had no accrued interest or penalties related to uncertain tax positions. Net Loss per Share Attributable to 1Life Healthcare, Inc. Stockholders The Company applies the two-class method to compute basic and diluted net loss per share attributable to 1Life Healthcare, Inc. stockholders when shares meet the definition of participating securities. The two-class method determines net loss per share for each class of common and redeemable convertible preferred stock according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income (loss) available to common stockholders for the period to be allocated between common and redeemable convertible preferred stock based upon their respective rights to share in the earnings as if all income (loss) for the period had been distributed. During periods of loss, there is no allocation required under the two-class method since the redeemable convertible preferred stock does not have a contractual obligation to share in the Company’s losses. Basic net loss per share attributable to 1Life Healthcare, Inc. stockholders is computed by dividing net loss attributable to 1Life Healthcare, Inc. stockholders by the weighted-average number of common shares outstanding during the period without consideration of potentially dilutive common stock. Diluted net loss per share attributable to 1Life Healthcare, Inc. stockholders reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company unless inclusion of such shares would be anti-dilutive. For periods in which the Company reports net losses, diluted net loss per common share attributable to 1Life Healthcare, Inc. stockholders is the same as basic net loss per common share attributable to 1Life Healthcare, Inc. stockholders, because potentially dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. F-16 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Revenue Recognition The Company adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, effective January 1, 2019, using the modified retrospective transition method. Net revenue for the years ended December 31, 2021, 2020 and 2019 is presented under Topic 606. The Company's net revenue consists of Medicare revenue and commercial revenue. Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. The Company determines revenue recognition through the following steps: (i) Identify the contract(s) with a customer; (ii) Identify the performance obligations in the contract; (iii) Determine the transaction price; (iv) Allocate the transaction price to the performance obligations in the contract; and (v) Recognize revenue as the entity satisfies a performance obligation. Medicare Revenue Medicare revenue consists of (i) Capitated Revenue and (ii) fee-for-service and other revenue. Capitated Revenue The Company receives a per member per month (“PMPM”) fee under At-Risk arrangements, which refers to a model in which the Company receives a PMPM fee from the third-party payer, and is responsible for managing a range of healthcare services and associated costs of its members. Under certain contracts, the Company adjusts the PMPM fees for a percentage share of any additional gross capitated revenues and associated medical claims expense generated by the provision of healthcare services not directly provided by the Company. The capitated revenues, medical claims expense, and related adjustments are recorded gross because the Company is acting as a principal in arranging, providing, and controlling the managed healthcare services provided to the eligible enrolled members. The Company’s contracts, which are negotiated by the payer on behalf of its enrolled members, generally have a term of two years or longer. The Company considers its obligation to provide healthcare services to all enrolled members under a given contract as a single performance obligation. This performance obligation is to stand ready to provide managed healthcare services and it is satisfied over time as measured by months of service provided. The Company’s revenues are based on the PMPM amounts it is entitled to receive from the payers, subject to estimates for variable considerations due to changes in the member population and the member's health status (acuity). The adjustment to the PMPM fees must also be estimated due to reporting lag times, and requires significant judgment. These are estimated using the expected value methodology based on historical data and actuarial inputs. Final adjustments related to the contracts may take up to 18 months due to reserves for claims incurred but not reported. The Company recognizes revenue in the month in which eligible members are entitled to receive healthcare benefits during the contract term. The variable consideration is estimated and recorded as earned, which is directly related to the period in which the services are performed. The Company does not have a historical pattern of granting material concessions or waiving fees and, as such, does not include any such estimate in the transaction price of its contracts. Fee-for-service and Other Revenue The Company recognizes fee-for-service Medicare revenue as services are rendered, which are delivered over a period of time but typically within one day, when the Company provides services to Other Patients not covered under At-Risk arrangements. The Company receives payments for services from third-party payers as well as from Other Patients where they may bear some cost of the service in the form of co-pays, coinsurance or deductibles. Providing medical services to patients represents the Company’s performance obligation under these contracts, and accordingly, the transaction price is allocated entirely to the one performance obligation. Fee-for-service Medicare revenue is reported net of provisions for contractual allowances from third-party payers and Other patients. The Company does not have a historical pattern of granting material concessions or waiving fees and, as such, does not include any such estimate in the transaction price of its fee-for-service contracts. The Company may be entitled to one-time payments under certain contracts to compensate the Company for clinical start-up, administration, and on-going coordination of care activities. Such payments are recognized ratably over the length of the term stated in the contracts as they are refundable on a pro-rata basis if the Company ceases to provide services at the specified clinics prior to the contractual end date. These payments are part of the transaction price that is fully allocated to the single performance obligation to provide healthcare services on a stand-ready basis. F-17 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Commercial Revenue Commercial revenue consists of (i) partnership revenue, (ii) net fee-for-service revenue and (iii) membership revenue. Partnership Revenue Partnership revenue is generated from (i) contracts with health systems as health network partners, (ii) contracts with employers to provide professional clinical services to employee members, and (iii) contracts with employers, schools, and universities to provide COVID-19 on-site testing service. The Company's main performance obligation under the various partnership arrangements is to stand ready to provide professional clinical services and the associated management and administrative services. As the services are provided concurrently over the contract term and have the same pattern of transfer, the Company has concluded that this represents one performance obligation comprising of a series of distinct services over the contract term. The Company also receives an incentive from certain health network partners to open new clinics, which is considered a distinct performance obligation from the stand-ready obligation to provide clinical and administrative services. Revenue is recognized when the performance obligation is satisfied upon the opening of the new location. While the Company can receive either fixed or variable fees from its enterprise clients (i.e., stated fee per employee per month) for medical services, it generally receives variable fees from health networks on a stated fee PMPM basis, based on the number of members (or participants) serviced. The Company also receives variable fees from enterprise clients, schools and, universities on a stated fee per each COVID-19 on-site testing per month basis, based on the number of tests delivered. The Company recognizes revenue as it satisfies its performance obligation. For fixed-fee agreements with its enterprise clients, the Company uses a time-based measure to recognize revenue ratably over the contract term. For variable-fee agreements with health networks, the Company allocates the PMPM variable consideration to the month that the fee is earned, correlated with the amount of services it is providing, which is consistent with the allocation objective of the series guidance. For variable-fee arrangements with employers, schools, and universities to provide COVID-19 on-site testing services, revenue is recognized as services are rendered. The Company generally invoices for the on-site testing services as the work is incurred and monthly in arrears. From time to time, the Company may provide discounts and rebates to the customer. The Company estimates the variable consideration subject to the constraint and recognizes such variable consideration over the contract term. The estimate of variable consideration is based on the Company’s assessment of historical, current, and forecasted performance. The reserves for variable consideration are recorded as customer refund liabilities within other current liabilities in the consolidated balance sheets. Net Fee-For-Service Revenue Net fee-for-service revenue is generated from providing primary care services pursuant to contracts with the Company's Consumer and Enterprise members. The Company recognizes revenue as services are rendered, which are delivered over a period of time but typically within one day, when the Company provides services to Consumer and Enterprise members. The Company receives payments for services from third-party payers as well as from Consumer and Enterprise members who have health insurance where they may bear some cost of the service in the form of co-pays, coinsurance or deductibles. In addition, patients who do not have health insurance are required to pay for their services in full. Providing medical services to patients represents the Company's performance obligation under the contracts, and accordingly, the transaction price is allocated entirely to the one performance obligation. Net fee-for-service revenue is reported net of provisions for contractual allowances from third-party payers and Consumer and Enterprise members. The Company has certain agreements with third-party payers that provide for reimbursement at amounts different from the Company's standard billing rates. The differences between the estimated reimbursement rates and the standard billing rates are accounted for as contractual adjustments, which are deducted from gross revenue to arrive at net fee-for-service revenue. The Company estimates implicit price concessions related to payer and patient receivable balances as part of estimating the original transaction price which is based on historical experience, current market conditions, the amount of any receivables in dispute, current receivables aging and other collection indicators. Membership Revenue Membership revenue is generated from annual membership fees paid by consumer members and from enterprise clients who purchase access to memberships for their employees and dependents. The terms of service on the Company's website serve as the contract between the Company and consumer members. The Company enters into written contracts with enterprise clients. The transaction price for contracts with enterprise clients is determined on a per employee per month basis, based on the number of employees eligible for membership established at the beginning of the contract term, which is generally one year. The transaction price for the contract is stated in the contract or determinable and is generally collected in advance of the F-18 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) contract term. The Company may provide numerous services under the agreements; however, these services are generally not considered individually distinct as they are not separately identifiable in the context of the agreement. As a result, the Company's single performance obligation in the transaction constitutes a series for the provision of membership and services as and when requested over the membership term. The transaction price relates specifically to the Company's efforts to transfer the services for a distinct increment of the series. Accordingly, the transaction price is allocated entirely to the one performance obligation. Membership revenue is recognized ratably over the contract period with the individual member or enterprise client. Unrecognized but collected amounts are recorded to deferred revenue and amortized over the remainder of the applicable membership period. Contracts with Multiple Performance Obligations Certain contracts with customers contain multiple performance obligations that are distinct and accounted for separately. The transaction price is allocated to the separate performance obligations on a relative standalone selling price ("SSP") basis. The Company determines SSP for all performance obligations using observable inputs, such as standalone sales and historical contract pricing. SSP is consistent with the Company's overall pricing objectives, taking into consideration the type of services. SSP also reflects the amount the Company would charge for that performance obligation if it were sold separately in a standalone sale, and the price the Company would sell to similar customers in similar circumstances. Deferred Revenue The Company records deferred revenue, which is a contract liability, when it has an obligation to provide services to a customer and payment is received in advance of performance. Medical Claims Expense Medical claims expenses consist of certain third-party medical expenses paid by payers contractually on behalf of the Company. Medical claims expense is recognized in the period in which services are provided and includes an estimate of the Company’s obligations for medical services that have been provided to its members and patients but for which claims have not been received or processed, and for liabilities for third-party physician, hospital and other medical expense disputes. Medical claims expenses include such costs as inpatient and outpatient services, certain pharmacy benefits and physician services by providers other than the physicians employed by the Company. The cost of healthcare services provided or contracted for is accrued in the period in which the services are rendered. These costs include an estimate, supported by actuarial inputs, of the related IBNR claims liability, which is based on completion factors and per member per month claim trends. Changes in this estimate can materially affect, either favorably or unfavorably, results from operations and overall financial position. The estimated reserve for IBNR claims liability is included in accounts receivable, net and other current liabilities in the consolidated balance sheets. Cost of Care, Exclusive of Depreciation and Amortization Cost of care, exclusive of depreciation and amortization includes provider and support employee-related costs for both virtual and in-office care, occupancy costs, medical supplies, insurance and other operating costs. Providers include doctors of medicine, doctors of osteopathy, nurse practitioners and physician assistants. Support employees include phlebotomists and administrative assistants assisting our members with all non-medical related services. Virtual care includes video visits and other synchronous and asynchronous communication via our app and website. Cost of care, exclusive of depreciation and amortization also excludes stock-based compensation. Advertising The Company expenses advertising costs the first time the advertising takes place. Advertising costs are included in sales and marketing in the consolidated statements of operations. For the years ended December 31, 2021, 2020 and 2019, advertising costs were $ 32,166 , $ 15,871 , and $ 23,368 , respectively. Stock-Based Compensation The Company measures all stock-based awards granted to employees and directors based on the fair value on the date of the grant and recognizes compensation expense for those awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. For stock option grants with only service-based vesting conditions, the fair value is estimated on the date of grant using a Black-Scholes option-pricing model, which requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term of the option, the risk-free interest rate for a period that approximates the expected term F-19 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) of the option, and the Company's expected dividend yield. The expense for the stock option grants with only service-based vesting conditions is recorded using the accelerated attribution method. The Company also uses the Black‑Scholes option‑pricing model to estimate the fair value of its stock purchase rights under the 2020 Employee Stock Purchase Plan on the grant date. For stock option awards issued with market-based vesting conditions, the grant date fair value is determined based on multiple stock price paths developed through the use of a Monte Carlo simulation that incorporates into the valuation the possibility that the market condition may not be satisfied. A Monte Carlo simulation requires the use of various assumptions, including the underlying stock price, volatility and the risk-free interest rate as of the valuation date, corresponding to the length of the time remaining in the performance period, and expected dividend yield. The expected term represents the derived service period for the respective tranches, which is the longer of the explicit service period or the period in which the market conditions are expected to be met. Stock-based compensation expense associated with market-based awards is recognized over the derived requisite service using the accelerated attribution method, regardless of whether the market conditions are achieved. If the related market conditions are achieved earlier than the derived service period, the stock-based compensation expense will be recognized as a cumulative catch-up expense from the grant date to that point in time in achieving the share price goal. (see Note 14, "Stock-Based Compensation and Employee Benefit Plans"). Self-Insurance Program The Company self-insures for certain levels of employee medical benefits. The Company maintains a stop-loss insurance policy to protect it from individual losses over $ 250 per claim in 2021, $ 250 per claim in 2020 and $ 225 per claim in 2019. A liability for expected claims incurred but not reported is established on a monthly basis. As claims are paid, the liability is relieved. The Company reviews its self-insurance accruals on a quarterly basis based on actuarial methods to determine the liability for actual claims and claims incurred but not yet reported. As of December 31, 2021 and 2020, the Company's liability for outstanding claims (included in accrued expenses) was $ 3,000 and $ 1,936 , respectively. Recent Accounting Pronouncements Emerging Growth Company Status Effective December 31, 2021, the Company is no longer an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Recently Adopted Pronouncements as of December 31, 2021 In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires the measurement of contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. Under previous GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination at fair value on the acquisition date. The standard is effective for public companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application. The Company early adopted this standard in the fourth quarter of 2021 retrospectively to all business combinations for which the acquisition date occurs on or after January 1, 2021. The adoption resulted in an increase of $ 4,905 in current and non-current deferred revenue assumed from the acquisition of Iora as of September 1, 2021. In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which simplifies the accounting for convertible instruments by removing certain separation models in Subtopic 470-20, Debt—Debt with Conversion and Other Options , for convertible instruments and also increases information transparency by making disclosure amendments. The standard is effective for private companies for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company early adopted this standard on January 1, 2021 on a modified retrospective basis. Under previous GAAP, instruments that may be partially settled in cash were in the scope of the “cash conversion” model, which required conversion features to be separately reported in equity. Upon the adoption of ASU 2020-06, the cash conversion model was eliminated and the Company no longer separates its convertible senior notes (“the 2025 Notes”) into liability and equity components and F-20 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) instead accounts for the 2025 Notes as a single liability instrument. As a result, there is no longer a debt discount or subsequent amortization to be recognized as interest expense. Further, ASU 2020-06 requires the use of the if-converted method for diluted earnings per share calculation, and no longer allows the use of the treasury stock method for instruments with flexible settlement arrangements. Under the previous treasury stock method, only the excess of the average stock price of the Company’s common stock for the reporting period over the conversion price was used in determining the impact to the diluted earnings per share denominator. Under the current if-converted method, all underlying shares shall be included in the denominator regardless of the average stock price for the reporting period, in addition to adding back to the numerator, the related interest expense from the stated coupon and the amortization of issuance costs, if dilutive. The prior period consolidated financial statements have not been retrospectively adjusted and continue to be reported under the accounting standards in effect for those periods. Accordingly, the cumulative-effect adjustment to the opening balance of accumulated deficit as of January 1, 2021 was as follows: December 31, 2020 As Reported Effect of the Adoption of ASU 2020-06 January 1, 2021 As Adjusted Liabilities Convertible senior notes $ 241,233 $ 66,737 $ 307,970 Stockholders' Equity Additional paid-in capital 918,118 ( 73,393 ) 844,725 Accumulated deficit $ ( 369,785 ) $ 6,656 $ ( 363,129 ) The impact of adoption to the consolidated statements of operations for the year ended December 31, 2021 was primarily a reduction of non-cash interest expense of $ 13,104 . The reduction in interest expense decreased the net loss attributable to common stockholders and decreased the basic net loss per share. The required use of the if-converted method for earnings per share does not impact the diluted net loss per share as long as the Company is in a net loss position. The adoption had no impact on the consolidated statement of cash flows. In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and also issued subsequent amendments to the initial guidance (collectively, Topic 326) . Topic 326 replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. For available-for-sale debt securities with unrealized losses, the standard limits the amount of credit losses to be recognized to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. The Company early adopted the standard on January 1, 2021 using a modified retrospective approach with no material impact to the consolidated financial statements. In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , which aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use-software. The Company adopted the standard on January 1, 2021 on a prospective basis. The adoption did not have a material impact on the Company’s consolidated financial statements. Recently Issued Accounting Pronouncements Not Yet Adopted as of December 31, 2021 In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance which requires annual disclosures that increase the transparency of transactions involving government grants, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on an entity’s financial statements. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2021. The Company does not expect this accounting standard update to have a material impact on its consolidated financial statements. 3. Variable Interest Entities 1Life, Iora Health and Iora Senior Health's agreements with the PCs generally consist of both Administrative Services Agreements (“ASAs”), which provide for various administrative and management services to be provided by 1Life, Iora Health or Iora Senior Health, respectively, to the PCs, and succession agreements, which provide for transition of ownership of the PCs under certain conditions ("Succession Agreements"). F-21 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) The ASAs typically provide that the term of the arrangements is ten to twenty years with automatic renewal for successive one-year terms, subject to termination by the contracting parties in certain specified circumstances. The outstanding voting equity instruments of the PCs are owned by nominee shareholders appointed by 1Life, Iora Health or Iora Senior Health (or the PC in one instance) under the terms of the Succession Agreements or other shareholders who are also subject to the terms of the Succession Agreements. 1Life, Iora Health and Iora Senior Health have the right to receive income as an ongoing administrative fee in an amount that represents the fair value of services rendered and has provided all financial support through loans to the PCs. 1Life, Iora Health and Iora Senior Health have exclusive responsibility for the provision of all nonmedical services including facilities, technology and intellectual property required for the day-to-day operation and management of each of the PCs, and makes recommendations to the PCs in establishing the guidelines for the employment and compensation of the physicians and other employees of the PCs. In addition, the agreements provide that 1Life, Iora Health and Iora Senior Health have the right to designate a person(s) to purchase the stock of the PCs for a nominal amount in the event of a succession event. Based upon the provisions of these agreements, 1Life determined that the PCs are variable interest entities due to its equity holder having insufficient capital at risk, and 1Life has a variable interest in the PCs. The contractual arrangement to provide management services allows 1Life, Iora Health or Iora Senior Health to direct the economic activities that most significantly affect the PCs. Accordingly, 1Life, Iora Health or Iora Senior Health is the primary beneficiary of the PCs and consolidates the PCs under the VIE model. Furthermore, as a direct result of nominal initial equity contributions by the physicians, the financial support 1Life, Iora Health or Iora Senior Health provides to the PCs (e.g. loans) and the provisions of the nominee shareholder succession arrangements described above, the interests held by noncontrolling interest holders lack economic substance and do not provide them with the ability to participate in the residual profits or losses generated by the PCs. Therefore, all income and expenses recognized by the PCs are allocated to 1Life stockholders. The aggregate carrying value of the assets and liabilities included in the consolidated balance sheets for the PCs after elimination of intercompany transactions and balances were $ 129,474 and $ 115,744 , respectively, as of December 31, 2021 and $ 48,182 and $ 31,462 , respectively, as of December 31, 2020. In September 2014, 1Life entered into a joint venture agreement with a healthcare system to jointly operate physician owned primary care offices in a new market. Pursuant to the formation of this joint venture, the healthcare system contributed $ 10,000 for a 56.9 % interest and 1Life contributed management expertise for a 43.1 % interest. One of the PCs had the responsibility for the provision of medical services and 1Life had responsibility for the day-to-day operation and management of the offices, including the establishment of guidelines for the employment and compensation of the physicians. Based upon this and other provisions of the operating agreement that indicated that 1Life directed the economic activities that most significantly affected the economic performance of the joint venture, 1Life determined that the joint venture was a variable interest entity and that 1Life was the primary beneficiary. The Company recorded the $ 10,000 cash received in noncontrolling interest in the consolidated balance sheet. The income and expenses of the joint venture were recorded in the consolidated statements of operations and statements of comprehensive loss as net loss attributable to noncontrolling interest. Effective April 1, 2020, 1Life terminated the joint venture agreement with the healthcare system and transferred its ownership interest in the joint venture to the healthcare system. As a result, the joint venture became a wholly owned subsidiary of the healthcare system. The joint venture was deconsolidated in the consolidated financial statements as of April 1, 2020 and the Company derecognized all assets and liabilities of the joint venture. The Company did not record a gain or loss in association with the deconsolidation as the Company did not retain any noncontrolling interest in the joint venture and no consideration was transferred as a result of the ownership interest transfer to the healthcare system. At the point of deconsolidation, 100 % of the net assets were attributable to the noncontrolling interest. The following table shows the balances immediately preceding the deconsolidation of the joint venture that occurred on April 1, 2020: F-22 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Partially Owned April 1, 2020 Assets Current assets: Cash and cash equivalents $ 810 Accounts receivable, net 768 Prepaid expenses and other current assets 18 Total current assets 1,596 Other assets 19 Property and equipment, net 1,504 Right-of-use assets 1,509 Total assets $ 4,628 Liabilities Current liabiliti Accounts payable and accrued expenses $ 9 Operating lease liabilities, current 273 Other current liabilities 143 Total current liabilities 425 Operating lease liabilities, non-current 1,872 Total liabilities $ 2,297 The consolidated statement of operations for the year ended December 31, 2020 include the operations of the joint venture through the date of deconsolidation. The consolidated balance sheet as of December 31, 2020 does not include the operations of the joint venture. 4. Fair Value Measurements and Investments Fair Value Measurements The following tables present information about the Company's financial assets and liabilities measured at fair value on a recurring basis: Fair Value Measurements as of December 31, 2021 Usin Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market fund $ 315,817 $ — $ — $ 315,817 Short-term marketable securiti U.S. Treasury obligations 58,232 — — 58,232 Foreign government bonds — 5,012 — 5,012 Commercial paper — 48,427 — 48,427 Long-term marketable securiti U.S. Treasury obligations 48,296 48,296 Total financial assets $ 422,345 $ 53,439 $ — $ 475,784 F-23 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Fair Value Measurements as of December 31, 2020 Usin Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market fund $ 50,761 $ — $ — $ 50,761 Commercial paper — 19,999 — 19,999 Short-term marketable securiti U.S. Treasury obligations 416,158 — — 416,158 U.S. government agency securities 20,000 — — 20,000 Commercial paper — 133,865 — 133,865 Total financial assets $ 486,919 $ 153,864 $ — $ 640,783 Our financial assets are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily available pricing sources for comparable instruments, identical instruments in less active markets, or models using market observable inputs. During the years ended December 31, 2021 and 2020, there were no transfers between Level 1, Level 2 and Level 3. Valuation of Convertible Senior Notes The Company has $ 316,250 aggregate principal amount outstanding of 3.0 % convertible senior notes due in 2025 (the "2025 Notes"). See Note 12 "Debt" for details. The fair value of the 2025 Notes was $ 288,461 and $ 397,472 as of December 31, 2021 and 2020, respectively. The fair value was determined based on the closing trading price of the 2025 Notes as of the last day of trading for the period. The fair value of the 2025 Notes is primarily affected by the trading price of the Company's common stock and market interest rates. The fair value of the 2025 Notes is considered a Level 2 measurement as they are not actively traded. Investments At December 31, 2021 and 2020, the Company's cash equivalents and marketable securities were as follows: December 31, 2021 Amortized cost Gross unrealized gains (losses) Fair value Cash equivalents: Money market fund $ 315,817 $ — $ 315,817 Total cash equivalents 315,817 — 315,817 Short-term marketable securiti U.S. Treasury obligations 58,293 ( 61 ) 58,232 Foreign government bonds 5,013 ( 1 ) 5,012 Commercial paper 48,427 — 48,427 Total short-term marketable securities 111,733 ( 62 ) 111,671 Long-term marketable securiti U.S. Treasury obligations 48,427 ( 131 ) 48,296 Total cash equivalents and marketable securities $ 475,977 $ ( 193 ) $ 475,784 F-24 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) December 31, 2020 Amortized cost Gross unrealized gains (losses) Fair value Cash equivalents: Money market fund $ 50,761 $ — $ 50,761 Commercial paper 19,999 — 19,999 Total cash equivalents 70,760 — 70,760 Short-term marketable securiti U.S. Treasury obligations 416,150 8 416,158 U.S government agency securities 20,000 — 20,000 Commercial paper 133,865 — 133,865 Total short-term marketable securities 570,015 8 570,023 Total cash equivalents and marketable securities $ 640,775 $ 8 $ 640,783 5. Revenue Recognition The following table summarizes the Company's net revenue by primary Year Ended December 31, 2021 2020 2019 Net reve Capitated revenue $ 126,609 $ — $ — Fee-for-service and other revenue 3,370 — — Total Medicare revenue 129,979 — — Partnership revenue 224,051 159,482 78,734 Net fee-for-service revenue 181,811 149,695 145,389 Membership revenue 85,711 68,466 52,135 Grant income 1,763 2,580 — Total commercial revenue 493,336 380,223 276,258 Total net revenue $ 623,315 $ 380,223 $ 276,258 Net fee-for-service revenue (previously reported as net patient service revenue) is primarily generated from commercial third-party payers with which the One Medical entities have established contractual billing arrangements. The following table summarizes net fee-for-service revenue by Year Ended December 31, 2021 2020 2019 Net fee-for-service reve Commercial and government third-party payers $ 168,426 $ 136,388 $ 121,502 Patients, including self-pay, insurance co-pays and deductibles 13,385 13,307 23,887 Net fee-for-service revenue $ 181,811 $ 149,695 $ 145,389 The CARES Act was enacted on March 27, 2020 to provide economic relief to those impacted by the COVID-19 pandemic. The CARES Act includes various tax and lending provisions, among others. Under the CARES Act, the Company received an income grant of $ 1,763 and $ 2,580 from the Provider Relief Fund administered by the Health and Human Services ("HHS") during the year ended December 31, 2021 and 2020, respectively. Management has concluded that the Company met conditions of the grant funds and has recognized it as Grant income for the year ended December 31, 2021 and 2020, respectively. During the year ended December 31, 2021, the Company recognized revenue of $ 35,664 , which was included in the beginning deferred revenue balance as of January 1, 2021. During the year ended December 31, 2020, the Company recognized revenue of $ 26,026 , which was included in the beginning deferred revenue balance as of January 1, 2020. F-25 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) As of December 31, 2021, a total of $ 5,844 is included within deferred revenue related to variable consideration, of which $ 4,735 is classified as non-current as it will not be recognized within the next twelve months. The estimate of variable consideration is based on the Company's assessment of historical, current, and forecasted performance. As summarized in the table below, the Company recorded contract assets and deferred revenue as a result of timing differences between the Company's performance and the customer's payment. December 31, 2021 2020 Balances from contracts with custome Capitated accounts receivable, net $ 23,903 $ — All other accounts receivable, net 79,595 67,895 Contract asset (included in prepaid expenses and other current assets) 458 513 Deferred revenue $ 77,245 $ 43,590 The Company does not disclose the value of remaining performance obligations for (i) contracts with an original contract term of one year or less, (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice when that amount corresponds directly with the value of services performed, and (iii) variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied distinct service that forms part of a single performance obligation. For those contracts that do not meet the above criteria, the Company's remaining performance obligation as of December 31, 2021, is expected to be recognized as follows: Less than or equal to 12 months Greater than 12 months Total As of December 31, 2021 $ 15,212 $ 33,997 $ 49,209 6. Property and Equipment, net Property and equipment consisted of the followin December 31, 2021 2020 Leasehold improvements $ 156,518 $ 118,434 Computer software, including internal-use software 56,620 25,708 Computer equipment 27,237 21,502 Furniture and fixtures 17,075 11,805 Laboratory equipment 9,217 6,541 Construction in progress 19,876 8,550 286,543 192,540 L Accumulated depreciation and amortization ( 92,827 ) ( 66,503 ) $ 193,716 $ 126,037 The Company capitalized $ 11,617 , $ 10,069 and $ 6,914 in internal-use software development costs, and recognized depreciation expense related to these assets of $ 7,181 , $ 4,907 and $ 3,152 during the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021 and 2020, the net book value of internal-use software was $ 39,441 and $ 14,106 , respectively. Total depreciation and amortization expense related to property and equipment for the years ended December 31, 2021, 2020 and 2019 was $ 31,702 , $ 22,301 and $ 13,970 , respectively. All long-lived assets are maintained in the United States. 7. Leases At inception of a contract, the Company determines if a contact meets the definition of a lease. A lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. The Company assesses throughout the period of use whether the Company has both of the followin (i) the right to obtain substantially all of the economic benefits from use of the identified asset, and (ii) the right to direct the use of the identified asset. This determination is reassessed if the terms of the contract are changed. Leases are classified as operating or finance leases based on the terms of the lease agreement and certain characteristics of the F-26 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) identified asset. Right-of-use assets and operating lease liabilities are recognized at lease commencement date based on the present value of the minimum future lease payments. The carrying value of the Company's right-of-use assets are substantially concentrated in real estate as the Company primarily leases office space. The Company's policy is not to record leases with an original lease term of one year or less in the consolidated balance sheets. The Company recognizes lease expense for these short-term leases on a straight-line basis over the lease term. Certain lease agreements include rental payments that are adjusted periodically for inflation or other variables. In addition to rent, the leases may require the Company to pay additional amounts for taxes, insurance, maintenance and other expenses, which are generally referred to as non-lease components. Such adjustments to rental payments and variable non-lease components are treated as variable lease payments and recognized in the period as incurred. Variable lease components and variable non-lease components are not measured as part of the right-of-use assets and lease liability. Only when lease components and their associated non-lease components are fixed are they recognized as part of the right-of-use assets and lease liability. Most leases contain clauses for renewal at the Company's option with renewal terms that generally extend the lease term from 1 to 7 years. Certain lease agreements contain options to terminate the lease before maturity. The Company does not have any lease contracts with the option to purchase as of December 31, 2021 and 2020. Payments to be made in option periods are recognized as part of the right-of-use lease assets and lease liabilities when the Company is reasonably certain that the option to extend the lease will be exercised or the option to terminate the lease will not be exercised, or is not at the Company's option. The Company determines whether the reasonably certain threshold is met by considering contract-, asset-, market-, and entity-based factors. A portfolio approach is applied where appropriate to certain lease contracts with similar characteristics. The Company's lease agreements do not contain any significant residual value guarantees or material restrictive covenants imposed by the leases. Certain of the Company's furniture and fixtures and lab equipment are held under finance leases. Finance-lease-related assets are included in property and equipment, net in the consolidated balance sheets and are immaterial as of December 31, 2021 and 2020. The components of operating lease costs were as follows: Year Ended December 31, 2021 2020 2019 Operating lease costs $ 37,214 $ 25,250 $ 19,165 Variable lease costs 6,297 4,166 2,612 Total lease costs $ 43,511 $ 29,416 $ 21,777 Other information related to leases was as follows: Supplemental Cash Flow Information Year Ended December 31, 2021 2020 2019 Cash paid for amounts included in the measurement of lease liabiliti Operating cash flows from operating leases $ 36,935 $ 24,735 $ 17,260 Non-cash leases activity: Right-of-use lease assets obtained in exchange for new operating lease liabilities $ 139,515 $ 45,957 $ 57,621 Lease Term and Discount Rate As of December 31, 2021 2020 Weighted-average remaining lease term (in years) 8.02 8.36 Weighted-average discount rate 6.55 % 7.60 % F-27 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) At the lease commencement date, the discount rate implicit in the lease is used to discount the lease liability if readily determinable. If not readily determinable or leases do not contain an implicit rate, the Company's incremental borrowing rate is used as the discount rate. Management determines the appropriate incremental borrowing rates for each of its leases based on the remaining lease term at lease commencement. Future minimum lease payments under non-cancellable operating leases as of December 31, 2021 were as follows (excluding the effect of lease incentives to be received that are recorded in prepaid expenses and other current assets of $ 12,002 which serve to reduce total lease payments): As of December 31, 2021 2022 $ 49,963 2023 52,714 2024 50,840 2025 47,095 2026 43,564 Thereafter 149,026 Total lease payments 393,202 L interest ( 92,409 ) Total lease liabilities $ 300,793 The amounts in the table above do not reflect total payments for leases that have not yet commenced in the amount of $ 26,659 . 8. Business Combinations Acquisition of Iora On September 1, 2021 ("Acquisition Date"), 1Life acquired all outstanding equity and capital stock of Iora Health, a human-centered, value-based primary care group with built-for-purpose technology focused on serving the Medicare population, for an aggregate purchase consideration of $ 1,424,836 , which was paid through the issuance of 1Life common shares with a fair value of $ 1,313,312 , in part by cash of $ 62,881 , and in part by stock options of Iora assumed by 1Life towards pre-combination services of $ 48,643 . The acquisition was accounted for as a business combination. Subsequent to the Acquisition Date and as of December 31, 2021, the Company recorded $ 8,866 decrease to goodwill during the measurement period, and $ 4,905 increase to goodwill as a result of the early adoption of ASU 2021-08. The preliminary purchase price allocations resulted in $ 1,120,283 of goodwill and $ 363,031 of acquired identifiable intangible assets related to Iora trade name and contracts in existing geographies valued using the income method. Goodwill recorded in the acquisition is not expected to be deductible for tax purposes. Goodwill was primarily attributable to the planned growth in new geographies, synergies expected to be achieved in the combined operations of 1Life and Iora, and assembled workforce of Iora. The acquisition expanded the Company's reach to become a premier national human-centered, technology-powered, value-based primary care platform across all age groups. The acquisition allows the Company to participate in At-Risk arrangements with Medicare Advantage payers and CMS, in which the Company is responsible for managing a range of healthcare services and associated costs of its members. Preliminary Purchase Price Allocation The purchase price components are summarized in the following tab Consideration in 1Life common stock (1) $ 1,313,312 Cash consideration (2) 62,881 Stock options of Iora assumed by 1Life towards pre-combination services (3) 48,643 Total Purchase Price $ 1,424,836 (1) Represents the fair value of 53,583 shares of 1Life common stock transferred as consideration consisting of 52,406 shares issued and 1,177 shares to be issued to former Iora shareholders for outstanding Iora capital stock based on 77,687 Iora shares with the Exchange Ratio of 0.69 for a share of Iora and 1Life's stock price of $ 24.51 as of the closing date. The fair value of the F-28 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) 53,583 shares transferred as consideration was determined on the basis of the closing market price of the Company's common stock one business day prior to the Acquisition Date. (2) Included in the cash consideration • $ 5,993 for the settlement of vested phantom stock awards and cash bonuses contingent on the completion of the merger. Iora's unvested phantom stock awards, to the extent they relate to post-combination services, will be paid out and expensed as they vest subsequent to the acquisition and will be treated as stock-based compensation expense. • $ 30,253 of loans made by the Company to Iora prior to the Acquisition Date • $ 5,391 of repayment of the existing Silicon Valley Bank (“SVB”) loan, which was not legally assumed as part of the merger • The remainder of the cash consideration primarily relates to transaction expenses incurred by Iora and paid by the Company as of the closing date. (3) Represents the fair value of Iora’s equity awards assumed by 1Life for pre-combination services. Pursuant to the terms of the merger agreement, Iora’s outstanding equity awards that are vested and unvested as of the effective time of the merger were replaced by 1Life equity awards with the same terms and conditions. The vested portion of the fair value of 1Life’s replacement equity awards issued represents consideration transferred, while the unvested portion represents post-combination compensation expense based on the vesting terms of the equity awards. The awards that include a provision for accelerated vesting upon a change of control are included in the vested consideration. The fair value of the stock options of Iora assumed by 1Life was determined by using a Black-Scholes option pricing model with the applicable assumptions as of the Acquisition Date. The fair value of the unvested stock awards, for which post-combination service is required, will be recorded as share-based compensation expense over the respective vesting period of each award. See Note 14, "Stock-Based Compensation and Employee Benefit Plans". The following table presents the preliminary purchase price allocation recorded in the Company's consolidated balance sheet as of the Acquisition Date: Cash and cash equivalents acquired $ 17,808 Accounts receivable, net (3) 20,451 Prepaid expenses and other current assets 3,043 Restricted cash 2,069 Property and equipment, net 29,565 Right-of-use assets 70,249 Intangible assets, net 363,031 Other assets (1) 8,418 Total assets 514,634 Accounts payable 1,974 Accrued expenses 9,819 Deferred revenue, current (2) 5,989 Operating lease liabilities, current 6,617 Operating lease liabilities, non-current 63,558 Deferred revenue, non-current (2) 24,316 Deferred income taxes (5) 80,537 Other non-current liabilities (1) (3) (4) 17,271 Total liabilities 210,081 Net assets acquired 304,553 Estimated Merger Consideration 1,424,836 Estimated goodwill attributable to Merger $ 1,120,283 (1) Included in the other assets was an escrow asset of $ 8,401 related to 1Life common stock held by a third-party escrow agent to be released to the former stockholders of Iora, less any amounts that would be necessary to satisfy any then pending F-29 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) and unsatisfied or unresolved claim for indemnification for any 1Life indemnifiable loss pursuant to the indemnity provisions of the Merger Agreement. A corresponding indemnification liability of $ 12,983 was recorded in other non-current liabilities in the Company's consolidated balance sheet as of the Acquisition Date. The escrow asset and indemnification liability reflected measurement period adjustments of $ 505 and $ 1,064 , respectively, from the Acquisition Date as of December 31, 2021. The indemnification asset is subject to remeasurement at each reporting date due to changes to the underlying value of the escrow shares until the shares are released from escrow, with the remeasurement adjustment reported in the Company's consolidated statement of operations. During the year ended December 31, 2021, the fair value of the escrow asset had reduced and the unrealized loss recorded for was immaterial for the period. (2) Reflected an increase in deferred revenue, current and deferred revenue, non-current of $ 4,905 as a result of the early adoption of ASU 2021-08. See Note 2 "Summary of Significant Accounting Policies — Recent Accounting Pronouncements" for details. (3) Reflected a decrease in accounts receivable, net of $ 4,227 and an increase of other non-current liabilities of $ 2,116 as a result of an adjustment identified during the measurement period from the Acquisition Date as of December 31, 2021. (4) Reflected a decrease in other non-current liabilities of $ 6,096 as a result of an adjustment related to uncertain tax positions liability identified during the measurement period from the Acquisition Date as of December 31, 2021. (5) Reflected a decrease in deferred income taxes of $ 9,672 as a result of an adjustment as a result of an adjustment identified during the measurement period from the Acquisition Date as of December 31, 2021. The Company allocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on the preliminary estimates of fair values, which were determined primarily using the income method based on estimates and assumptions made by management at the time of the Iora acquisition and are subject to change during the measurement period which is not expected to exceed one year. The primary tasks that are required to be completed include valuation of certain assets and liabilities, including any related tax impacts. Any adjustments to the preliminary purchase price allocation identified during the measurement period will be recognized in the period in which the adjustments are determined. The Company recognized a net deferred tax liability of $ 80,537 in this business combination that is included in long-term liabilities in the accompanying consolidated balance sheet. This primarily related to identified intangible assets recorded in acquisition for which there is no tax basis. The acquired entity's results of operations were included in the Company's consolidated financial statements from the date of acquisition, September 1, 2021. For the period from September 1, 2021 through December 31, 2021, Iora contributed net revenue of $ 130,623 which is reflected in the accompanying consolidated statement of operations for the year ended December 31, 2021. Due to the integrated nature of the Company's operations, it is not practicable to separately identify earnings of Iora on a stand-alone basis. During the year ended December 31, 2021, the Company incurred costs related to this acquisition of $ 39,530 that were expensed as incurred and recorded in general and administrative expenses in the accompanying consolidated statement of operations. Identifiable intangible assets are comprised of the followin Preliminary Fair Value Estimated Useful Life (in years) Intangible Ass Medicare Advantage contracts - existing geographies $ 298,000 9 CMS Direct Contracting contract - existing geographies 52,000 9 Trade n Iora 13,031 3 Total $ 363,031 Net tangible assets were valued at their respective carrying amounts as of the Acquisition Date, which approximated their fair values. Medicare Advantage contracts and CMS Direct Contracting contract represent the At-Risk arrangements that Iora has with Medicare Advantage plans or directly with CMS. Trade names represent the Company’s right to the Iora trade names and associated design. Loan Agreement Under the Merger Agreement, 1Life and Iora have also entered into a Loan and Security Agreement on June 21, 2021. See Note 19 "Note Receivable" for more details. F-30 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Iora had an existing credit facility with SVB, which is referred to as the SVB Facility. The SVB facility of $ 5,391 was repaid on September 1, 2021, of which $ 50 is related to the prepayment penalty. Repayment of the existing SVB loan is accounted for as part of the acquisition purchase considerations. Supplemental Unaudited Pro Forma Information The following unaudited pro forma financial information summarizes the combined results of operations for 1Life and Iora as if the companies were combined as of the beginning of fiscal year 2020. The unaudited pro forma information includes transaction and integration costs, adjustments to amortization and depreciation for intangible assets and property and equipment acquired, stock-based compensation costs and tax effects. The table below reflects the impact of material adjustments to the unaudited pro forma results for the year ended December 31, 2021 and 2020 that are directly attributable to the acquisiti Year Ended December 31, Material Adjustments 2021 2020 (Decrease) / increase to expense as result of transaction and integration costs $ ( 51,433 ) $ 38,918 (Decrease) / increase to expense as result of amortization and depreciation expenses 30,757 46,405 (Decrease) / increase to expense as a result of stock-based compensation costs 1,686 12,136 (Decrease) / increase to expense as result of changes in tax effects $ ( 7,325 ) $ ( 17,880 ) The unaudited pro forma information presented below is for informational purposes only and is not necessarily indicative of our consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of fiscal year 2020 or the results of our future operations of the combined businesses. Year Ended December 31, 2021 2020 Revenue $ 834,622 $ 592,936 Net Loss $ ( 290,052 ) $ ( 247,556 ) Other Acquisitions During the year ended December 31, 2021, the Company completed three other acquisitions for $ 9,908 of total cash consideration. The acquisitions were each accounted for as business combinations. The Company does not consider these acquisitions to be material, individually or in aggregate, to the Company’s consolidated financial statements. The purchase price allocations resulted in $ 5,880 of goodwill and $ 3,921 of acquired identifiable intangible assets related to customer relationships valued using the income method. Intangible assets are being amortized over their respective useful lives of three or seven years . Acquisition-related costs were immaterial and were expensed as incurred in the consolidated statements of operations. 9. Goodwill and Intangible Assets Goodwill On September 1, 2021, the Company completed the acquisition of Iora, which was accounted for as a business combination resulting in $ 1,120,283 in goodwill. See Note 8 "Business Combinations". No goodwill impairments were recorded during the year ended December 31, 2021. There were no changes to the goodwill balance for the year ended December 31, 2020. Goodwill balances as of December 31, 2021 and December 31, 2020 were as follows: Amount Balance as of December 31, 2020 $ 21,301 Goodwill recorded in connection with acquisitions 1,130,124 Measurement period adjustments ( 3,961 ) Balance as of December 31, 2021 $ 1,147,464 F-31 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Intangible Assets The Company recorded amortization expense of $ 14,794 , $ 23 , and $ 281 for the years ended December 31, 2021, 2020 and 2019. The Company had no intangible assets as of December 31, 2020. The following summarizes the Company’s intangible assets and accumulated amortization as of December 31, 2021: December 31, 2021 Original Cost Accumulated Amortization Net Book Value Medicare Advantage contracts - existing geographies $ 298,000 $ ( 11,037 ) $ 286,963 CMS Direct Contracting contract - existing geographies 52,000 ( 1,926 ) 50,074 Trade n Iora 13,031 ( 1,448 ) 11,583 Customer relationships 3,921 ( 383 ) 3,538 Total intangible assets $ 366,952 $ ( 14,794 ) $ 352,158 Purchased intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The change in purchased intangible assets gross carrying amount resulted primarily from the Iora acquisition. See Note 8 "Business Combinations". As of December 31, 2021, estimated future amortization expense related to intangible assets were as follows: December 31, 2021 2022 $ 43,835 2023 43,835 2024 42,356 2025 39,417 2026 39,417 2027 and thereafter 143,298 Total $ 352,158 10. Accrued Expenses and Other Current Liabilities Accrued expenses consisted of the followin December 31, 2021 2020 Accrued employee compensation and benefits $ 37,970 $ 28,414 Inventories received not yet invoiced 4,066 3,749 Construction in progress 5,962 811 Self-insurance programs 3,000 1,936 Legal and professional fees 8,744 1,486 Medical office and lab supplies 2,026 3,581 Other accrued expenses 10,904 6,550 Total $ 72,672 $ 46,527 Other current liabilities consisted of the followin December 31, 2021 2020 Legal settlement liability $ 11,273 $ — Customer refund liabilities 10,223 2,937 Capitated accounts payable 7,220 — Other current liabilities 2,916 1,924 Total $ 31,632 $ 4,861 F-32 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) 11. Self-Insurance Reserves The following table provides a roll-forward of the insurance reserves related to the Company's self-insurance program: Year Ended December 31, 2021 2020 2019 Beginning balance $ 1,936 $ 1,753 $ 819 Expenses incurred 22,909 16,577 11,801 Expenses paid ( 21,845 ) ( 16,394 ) ( 10,867 ) Ending balance $ 3,000 $ 1,936 $ 1,753 12. Debt Term Notes In January 2013, the Company entered into a loan and security agreement with an institutional lender and with subsequent amendments for borrowings of $ 11,000 at an interest rate at the greater of prime plus 1.81 % or 5.56 %, ("the "LSA"). In connection with the LSA agreement, the Company issued to the lenders 494,833 warrants. Borrowings under the LSA were secured by substantially all of the Company's properties, rights and assets, excluding intellectual property. On September 1, 2020, the term notes under the LSA matured and the remaining outstanding principal was repaid, plus accrued and unpaid interest. For the years ended December 31, 2020 and 2019, the Company recorded aggregate interest expense of $ 86 and $ 469 , respectively. The non-cash interest expense related to the accretion of debt discounts for common and redeemable convertible preferred stock warrants included in the aggregate interest expense for the years ended December 31, 2020 and 2019 was immaterial. The Company's annual effective interest rate was approximately 6.0 % and 7.2 % for the years ended December 31, 2020 and 2019, respectively. During the years ended December 31, 2020 and 2019, the Company made aggregate principal payments of $ 3,300 and $ 4,400 , respectively. Convertible Senior Notes In May 2020, the Company issued and sold $ 275,000 aggregate principal amount of 3.0 % convertible senior notes due 2025 in a private offering exempt from the registration requirements of the Securities Act of 1933, and in June 2020, the Company issued an additional $ 41,250 aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment option by the initial purchasers of the 2025 Notes. The 2025 Notes are unsecured obligations and bear interest at a fixed rate of 3.0 % per annum, payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2020. The 2025 Notes will mature on June 15, 2025, unless earlier converted, redeemed or repurchased. The total net proceeds from the debt offering, after deducting the initial purchasers' commissions and other issuance costs, were $ 306,868 . Each $ 1 principal amount of the 2025 Notes will initially be convertible into 0.0225052 shares of the Company's common stock, which is equivalent to an initial conversion price of $ 44.43 per share, subject to adjustment upon the occurrence of specified events but not for any accrued and unpaid interest. Holders may convert the 2025 Notes at their option at any time prior to the close of business on the business day immediately preceding March 15, 2025 only under the following circumstanc (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the "measurement period") in which the trading price (as defined below) per $ 1 principal amount of the 2025 Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day; (3) if the Company calls such 2025 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. It is the Company's current intent to settle conversions through combination settlement comprising of cash and equity. F-33 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) On or after March 15, 2025 until the close of business on the business day immediately preceding the maturity date, holders may convert all or any portion of their 2025 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election and in accordance with the terms of the indenture governing the 2025 Notes. If the Company satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of the Company's common stock, the amount of cash and shares of common stock, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 40 trading day observation period. In addition, following certain corporate events that occur prior to the maturity date or if the Company delivers a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 2025 Notes in connection with such a corporate event or notice of redemption, as the case may be. If the Company undergoes a fundamental change prior to the maturity date, holders of the 2025 Notes may require the Company to repurchase for cash all or any portion of their notes at a repurchase price equal to 100 % of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if specific corporate events occur prior to the applicable maturity date, the Company will increase the conversion rate for a holder who elects to convert their 2025 Notes in connection with such a corporate event in certain circumstances. The Company may not redeem the 2025 Notes prior to June 20, 2023. The Company may redeem for cash all or any portion of the 2025 Notes, at the Company's option, on or after June 20, 2023 and prior to March 15, 2025, if the last reported sale price of the Company's common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100 % of the principal amount of the 2025 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the notes. During the year ended December 31, 2021, the conditions allowing holders of the 2025 Notes to convert have not been met. The 2025 Notes are therefore not convertible as of December 31, 2021 and are classified in long term liabilities in the consolidated balance sheet. The Company adopted ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), ("ASU 2020-06"), as of January 1, 2021. Under ASU 2020-06, the Company is no longer required to bifurcate the equity component from the liability component for the 2025 Notes and instead accounts for it as a single liability instrument. Comparative prior period consolidated financial statements have not been restated for ASU 2020-06 and are not directly comparable to the current period consolidated financial statements. See Note 2, "Summary of Significant Accounting Policies" for details on adoption impact. The Company incurred issuance costs of $ 9,374 and amortizes the issuance costs to interest expense over the contractual term of the 2025 Notes at an effective interest rate of 0.65 %. The net carrying amount of the 2025 Notes was as follows: Year Ended December 31 Liabiliti 2021 2020 Principal $ 316,250 $ 316,250 Unamortized debt discount — ( 68,441 ) Unamortized issuance costs ( 6,406 ) ( 6,576 ) Net carrying amount $ 309,844 $ 241,233 The following table sets forth the interest expense recognized related to the 2025 Not Year Ended December 31 2021 2020 Contractual interest expense $ 9,488 $ 5,587 Amortization of debt discount — 7,194 Amortization of issuance costs 1,875 556 Total interest expense related to the 2025 Notes $ 11,363 $ 13,337 F-34 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) 13. Common Stock As of December 31, 2021and 2020, the Company's Certificate of Incorporation, as amended and restated, authorized the Company to issue 1,000,000 and 1,000,000 shares of common stock, respectively, par value of $ 0.001 per share. Each share of common stock is entitled to one vote. Initial Public Offering On February 4, 2020, the Company closed its initial public offering ("IPO") and sold 20,125 shares of common stock, including the underwriters' option to purchase additional shares at the IPO price. The public offering price of the shares sold in the IPO was $ 14.00 per share. In aggregate, the shares issued in the offering generated $ 258,119 in net proceeds, which amount is net of $ 18,314 in underwriters' discount and commissions, and $ 5,317 in offering costs. Upon the closing of the IPO, all shares of redeemable convertible preferred stock then outstanding were automatically converted into 86,257 shares of common stock and all redeemable preferred stock warrants were converted into warrants to purchase 668 shares of common stock. In addition, 1,590 options held by a named executive officer that were subject to immediate vesting upon the execution of the IPO underwriting agreement vested and accordingly, $ 3,506 of stock-based compensation expense was recognized. In June 2020, the Company completed a secondary offering in which certain stockholders sold 8,300 shares of common stock at an offering price of $ 31.00 per share. The selling stockholders received all of the net proceeds from the sale of shares in this offering. The Company did not sell any shares or receive any proceeds in this secondary offering. The Company had reserved shares of common stock for issuance in connection with the followin December 31, 2021 2020 Options outstanding under the Equity Incentive Plans 28,312 28,273 Unvested restricted stock 3,249 1,291 Common stock reserved for issuance in connection with acquisitions 1,177 — Options available for future issuance 12,972 9,855 45,710 39,419 14. Stock-Based Compensation and Employee Benefit Plans Stock Incentive Plan The Company has the following stock-based compensation pla the 2007 Equity Incentive Plan (the "2007 Plan"), the 2017 Equity Incentive Plan (the "2017 Plan"), and the 2020 Equity Incentive Plan (the "2020 Plan", and, together with the 2007 Plan and the 2017 Plan, the "Plans"). In January 2020, the Company's stockholders approved the 2020 Equity Incentive Plan, which took effect upon the execution of the underwriting agreement for the Company's IPO in January 2020. The 2020 Plan is intended as the successor to and continuation of the 2007 Plan and the 2017 Plan. The number of shares of common stock reserved for issuance under the Company's 2020 Plan will automatically increase on January 1 of each year, beginning on January 1, 2021, and continuing through and including January 1, 2030, by 4 % of the total number of shares of common stock outstanding on December 31 of the immediately preceding calendar year, or a lesser number of shares determined by the Company's board prior to the applicable January 1st. The number of shares issuable under the Plans is adjusted for capitalization changes, forfeitures, expirations and certain share reacquisitions. The Plan provides for the grants of incentive stock options ("ISOs"), nonstatutory stock options ("NSOs"), restricted stock awards, and restricted stock unit awards ("RSUs"). ISOs may be granted only to employees, including officers. All other awards may be granted to employees, including officers, non-employee directors and consultants. The 2020 Plan provides that grants of ISOs will be made at no less than the estimated fair value of common stock, as determined by the Board of Directors, at the date of grant. Stock options granted to employees and nonemployees under the Plans generally vest over four years . Options granted under the Plans generally expire ten years after the date of grant. At December 31, 2021, 8,726 shares were available for future grants. 2020 Employee Stock Purchase Plan In January 2020, the Company's stockholders approved the 2020 Employee Stock Purchase Plan ("ESPP") Plan. The 2020 ESPP became effective upon the execution of the underwriting agreement for the Company's IPO in January 2020. The F-35 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Company has initially reserved 2,800 shares of common stock for issuance under the 2020 ESPP. The reserve will automatically increase on January 1st of each calendar year for a period of up to ten years , commencing on January 1, 2021 and ending on (and including) January 1, 2030, in an amount equal to the lesser of (1) 1.5 % of the total number of shares of Common Stock outstanding on December 31st of the preceding fiscal year, (2) 2,800 shares, and (3) a number of shares determined by the Company's board. At December 31, 2021, 4,246 shares were available for future issuance. The ESPP allows eligible employees to contribute, through payroll deductions, up to 15 % of their earnings for the purchase of the Company's common stock at a discounted price per share, subject to limitations imposed by federal income tax regulations. The price at which common stock is purchased under the ESPP is equal to 85 % of the fair market value of the Company's common stock on the first or last day of the offering period, whichever is lower. The initial offering period ran from January 31, 2020 to August 15, 2020 and the second offering period ran from August 16, 2020 to November 15, 2020. On a going forward basis, the ESPP will provide for separate six-month offering periods beginning on May 16 and November 16 of each year. During the year ended December 31, 2021 and 2020, the Company's employees purchased approximately 222 and 350 shares, respectively under the ESPP at a weighted-average price of $ 22.89 and $ 13.83 , respectively per share. The stock-based compensation expense recognized for the ESPP was $ 2,139 and $ 2,058 , respectively during the year ended December 31, 2021 and 2020. The fair value of the stock purchase right granted under the ESPP was estimated on the first day of each offering period using the Black-Scholes option pricing model. The following assumptions were used to calculate the stock-based compensation for each stock purchase right granted under the ESPP: Year Ended December 31, 2021 2020 Expected term in years 0.5 - 0.5 0.3 - 0.5 Expected stock price volatility 44.5 % - 59.4 % 53.7 % - 63.5 % Risk-free interest rate — % - 0.1 % 0.1 % - 1.5 % Expected dividend yield — % — % At December 31, 2021, there was $ 599 in unrecognized stock-based compensation expense related to the ESPP that is expected to be recognized over a period of 0.4 years. F-36 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Stock Options The following table summarizes stock option activity under the Pla Number of Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Outstanding as of December 31, 2018 21,504 $ 4.30 8.00 $ 74,546 Granted 7,702 10.39 Exercised ( 816 ) 3.73 Canceled ( 584 ) 5.99 Outstanding as of December 31, 2019 27,806 $ 5.97 7.76 $ 207,956 Granted 381 22.32 Exercised ( 8,123 ) 4.39 Canceled ( 436 ) 8.06 Market-based stock options granted 8,645 43.31 Outstanding as of December 31, 2020 28,273 $ 18.03 8.20 $ 724,339 Granted 5,013 13.91 Exercised ( 4,284 ) 5.32 Canceled ( 690 ) 14.01 Outstanding as of December, 2021 28,312 $ 19.32 7.57 $ 192,955 Options exercisable as of December 31, 2021 11,546 $ 5.67 6.20 $ 142,078 Options vested and expected to vest as of December 31, 2021 18,174 $ 8.26 6.84 $ 185,771 The aggregate intrinsic value of service-based options exercised for the years ended December 31, 2021, 2020 and 2019 was $ 133,807 , $ 206,143 and $ 4,998 , respectively. At December 31, 2021, there was $ 26,271 in unrecognized compensation expense related to service-based options, net of forfeitures, that is expected to be recognized over a weighted-average period of 1.6 years. Fair Value of Stock Options Granted The fair value of stock option grants with service-based vesting conditions is estimated using the Black-Scholes option-pricing model. The Company lacks company-specific historical and implied volatility information. Therefore, it estimated its expected stock volatility based on the historical volatility of a publicly traded set of peer companies. For options with service-based vesting conditions, the expected term of the Company's stock options has been determined utilizing the "simplified" method for awards that qualify as "plain-vanilla" options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future. We estimated the fair value of stock option grants with service-based vesting conditions using a Black-Scholes option pricing model with the following assumptions presented on a weighted-average basis: Year Ended December 31, 2021 2020 2019 Expected term in years 5.1 6.0 6.3 Expected stock price volatility 53.7 % 57.4 % 44.8 % Risk-free interest rate 0.9 % 0.9 % 1.9 % Expected dividend yield — % — % — % Estimated fair value per option granted $ 18.56 $ 11.88 $ 4.78 F-37 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) The fair value of stock option grants with service-based vesting conditions for the years ended December 31, 2021, 2020 and 2019 was $ 93,062 , $ 4,519 and $ 36,785 , respectively. Assumed Equity Awards As of the Acquisition Date, the Company assumed Iora’s outstanding equity awards related to stock options and phantom stock. The awards under the assumed equity plan were generally settled as follows: • Optio All Iora options outstanding on the close date were assumed by 1Life and converted into options to acquire shares of 1Life common stock. The vested and unvested options, to the extent related to pre-combination services were included in the consideration transferred. Iora’s unvested options, to the extent they relate to post-combination services, will be expensed as they vest post the acquisition and will be treated as stock-based compensation expense. See Note 8 "Business Combinations". • Phantom stoc Each Iora vested phantom stock award has been settled in cash. Each Iora unvested phantom stock award has been assumed by the Company and converted into the right to receive the unvested phantom cash award. Each unvested phantom cash award will remain subject to the same terms and conditions as were applicable to the underlying unvested phantom stock award immediately prior to the close date. The unvested phantom stock award is considered a liability-classified award as the settlement involves a cash payment upon the dates when these awards vest. The entire vested award and unvested phantom stock, to the extent they relate to pre-combination services, were included in the consideration transferred. Iora’s unvested phantom stock awards, to the extent they relate to post-combination services, will be expensed as they vest post acquisition and will be treated as stock-based compensation expense. See Note 8 "Business Combinations". As of the Acquisition Date, the estimated fair value of the assumed equity awards was $ 60,856 , of which $ 52,662 was allocated to the purchase price and the balance of $ 8,194 will be recognized as stock-based compensation expense over the remainder term of the assumed equity awards. The fair value of the assumed equity awards for service rendered through the Acquisition Date was recognized as a component of the acquisition consideration, with the remaining fair value related to post combination services to be recorded as stock-based compensation over the remaining vesting period. Market-based Stock Options During the year ended December 31, 2020, the Board of Directors ("Board") approved the grant of a long-term market-based stock option (the "Performance Stock Option") to the Company's Chief Executive Officer and President. The Performance Stock Option was granted to acquire up to 8,645 shares of the Company's common stock upon exercise. The Performance Stock Option consists of four separate tranches and each tranche will vest over a seven-year time period and only if the Company’s stock price sustains achievement of pre-determined increases for a period of 90 consecutive calendar days and the Chief Executive Officer remains employed with the Company. The exercise price per share of the Stock Option is the closing price of a share of the Company's common stock on the date of grant. The vesting of the Performance Stock Option can also be triggered upon a change in control. The following table presents additional information relating to each tranche of the Performance Stock Opti Tranche Stock Price Milestone Number of Options Tranche 1 $ 55 per share 1,330 Tranche 2 $ 70 per share 1,995 Tranche 3 $ 90 per share 2,660 Tranche 4 $ 110 per share 2,660 The grant date fair value of the Performance Stock Option is determined using a Monte Carlo simulation that incorporates estimates of the potential outcomes of the market condition on the grant with the following assumptio Year Ended December 31, 2020 Derived service period in years 1.16 - 3.09 Expected stock price volatility 55.0 % Risk-free interest rate 0.7 % Expected dividend yield 0.0 % Weighted-average fair value per option granted $ 22.84 F-38 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) The Company will recognize aggregate stock-based compensation expense of $ 197,469 over the derived service period of each tranche using the accelerated attribution method as long as the service-based vesting conditions are satisfied. If the market conditions are achieved sooner than the derived service period, the Company will adjust its stock-based compensation to reflect the cumulative expense associated with the vested awards. The Company recorded stock-based compensation expense of $ 60,027 and $ 490 related to the award for the year ended December 31, 2021 and 2020, respectively, which is included in general and administrative in the consolidated statements of operations. Unamortized stock-based compensation expense related to the award was $ 136,952 as of December 31, 2021. Restricted Stock Units In March 2016, the Company issued 150 shares of restricted stock pursuant to a purchase agreement that was subject to a twenty-four-month pro-rata vesting period with any unvested shares forfeited upon termination of the employees. The fair value of these shares was recorded as stock-based compensation expense in the Company's consolidated financial statements. The following table summarizes restricted stock unit activity under the Pla Number of Shares Grant Date Fair Value Unvested and outstanding as of December 31, 2019 — $ — Granted 1,490 21.52 Vested ( 65 ) 15.00 Canceled and forfeited ( 134 ) 18.74 Unvested and outstanding as of December 31, 2020 1,291 $ 22.14 Granted 2,697 30.44 Vested ( 338 ) 22.98 Canceled and forfeited ( 401 ) 30.62 Unvested and outstanding as of December 31, 2021 3,249 $ 27.90 The fair value of restricted stock units granted for the year ended December 31, 2021 and 2020 was $ 82,131 and 32,071 , respectively. As of December 31, 2021, there was $ 41,069 in unrecognized compensation expense related to restricted stock units, net of forfeitures, that is expected to be recognized over a weighted-average period of 1.9 years. Stock-Based Compensation Expense Total stock-based compensation expense for employees and nonemployees recognized by the Company for the years ended December 31, 2021, 2020 and 2019, was $ 112,298 , $ 35,095 and $ 14,877 , respectively. A tax benefit of $ 33,547 , $ 53,749 and $ 707 for the years ended December 31, 2021, 2020 and 2019, respectively, was included in the Company's net operating loss carry-forward that could potentially reduce future tax liabilities. Stock-based compensation expense was classified in the consolidated statements of operations as follows: Year Ended December 31, 2021 2020 2019 Sales and marketing $ 4,136 $ 2,385 $ 1,256 General and administrative 108,162 32,710 13,621 Total $ 112,298 $ 35,095 $ 14,877 Employee Benefit Plan Effective January 1, 2007, the Company adopted a 401(k) plan that is available to all full-time employees over the age of 18, who have been employed at least three months with the Company. Eligible employees may contribute up to 90 % of their annual compensation to the 401(k) plan, subject to limitations imposed by federal income tax regulations. The Company matches 50 % of the first 5 % of amounts contributed by employees, subject to limitations by federal income tax regulations. The Company's contribution was $ 6,103 , $ 5,051 , and $ 3,618 for the years ended December 31, 2021, 2020 and 2019, respectively. F-39 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) 15. Income Taxes The provision for (benefit from) income taxes consists of the followin Year Ended December 31, 2021 2020 2019 Curren Federal $ 1,166 $ 869 $ 1 State 607 1,664 86 Total current 1,773 2,533 87 Deferr Federal ( 3,022 ) ( 1,895 ) — State ( 553 ) ( 761 ) — Total deferred ( 3,575 ) ( 2,656 ) — Total provision for (benefit from) income taxes $ ( 1,802 ) $ ( 123 ) $ 87 The following table reconciles the Federal statutory income tax provision to the Company's effective income tax provision. Amounts may not sum due to rounding. Year Ended December 31, 2021 2020 2019 Federal statutory income tax rate 21.0 % 21.0 % 21.0 % Valuation allowance ( 24.7 ) % ( 49.8 ) % ( 12.6 ) % Section 382 limitations — % — % ( 10.0 ) % State income tax expense ( 2.0 ) % ( 6.3 ) % ( 1.4 ) % Stock-based compensation 3.1 % 38.6 % 4.5 % Adoption of ASU 2020-06 5.5 % — % — % Section 162(m) ( 1.1 ) % ( 0.6 ) % — % Transaction Costs ( 1.1 ) % — % — % Warrant fair value adjustment — % ( 1.5 ) % ( 1.4 ) % Other, net — % ( 1.3 ) % ( 0.3 ) % Effective income tax rate 0.7 % 0.1 % ( 0.2 ) % F-40 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Deferred income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company's deferred income tax assets and liabilities at December 31, 2021 and 2020 were comprised of the followin December 31, 2021 2020 Deferred tax assets: Net operating loss and credit carryforwards $ 249,685 $ 114,662 Reserves and allowances 11,675 1,713 Basis difference in fixed and intangible assets 290 72 Stock-based compensation 19,550 11,970 Lease liability 86,328 52,045 Section 163(j) interest 4,460 2,750 Total gross deferred tax assets 371,988 183,212 Valuation allowance ( 265,898 ) ( 113,770 ) Total deferred tax assets 106,090 69,442 Deferred tax liabiliti Basis difference in fixed and intangible assets ( 106,276 ) ( 3,460 ) Right-of-use assets ( 73,372 ) ( 42,249 ) Capitalized commissions ( 317 ) ( 250 ) Reserves and allowances — — Convertible note debt discount — ( 20,827 ) Total deferred tax liabilities ( 179,965 ) ( 66,786 ) Net deferred tax assets (liabilities) $ ( 73,875 ) $ 2,656 Of the total deferred tax assets, none are related to the noncontrolling interest as of December 31, 2021 and 2020, respectively. A valuation allowance is required to be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. A full review of all positive and negative evidence needs to be considered, including the Company’s current and past performance, the market environments in which the Company operates, the utilization of past tax credits, length of carry back and carry forward periods, as well as tax planning strategies that might be implemented. Management believes that, based on a number of factors, it is more likely than not, that most of the deferred tax assets may not be realized; and accordingly, as of December 31, 2021, the Company has provided a full valuation allowance against its net deferred tax assets. A partial valuation allowance was established against deferred tax assets in entities with recent cumulative losses as of December 31, 2020. The change in total valuation allowance was an increase of $ 152,128 and $ 47,235 for the years ended December 31, 2021 and 2020, respectively. At December 31, 2021, the Company had net operating loss carryforwards for federal and state and local income tax purposes of $ 894,276 and $ 598,454 , respectively, which are available to reduce future income subject to income taxes. Federal net operating losses generated after 2017, of $ 687,126 , do not expire. The remaining federal and state net operating loss carry forwards will begin to expire, if not used, at various dates beginning in tax year 2025 and 2024, respectively. As of December 31, 2021, the Company had federal credits of $ 618 and state credit carryforwards of $ 783 which are available to reduce future income tax. The federal credits will begin to expire, if not used, in tax year 2030. Some of the state credit carryforwards will begin to expire, if not used, in tax year 2023. Utilization of some of the federal, state and local net operating loss and credit carryforwards may be subject to annual limitations due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state and local provisions. The annual limitations may result in the expiration of net operating losses and credits before utilization. The Company performed a Section 382 analysis through December 31, 2021, on 1Life ownership history, including the pre-acquisition Iora group history. The Company has identified $ 25,215 and $ 31,003 of federal and state net operating losses, respectively, in the historical One Medical PCs that will expire unused due to ownership changes in the non-controlling interests. State credits of $ 71 will not be able to be utilized due to ownership change limitations in the historical One Medical F-41 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) PCs. The Company has identified $ 2,838 of historical Iora federal net operating losses and $ 165 of historical Iora federal credits that will expire unused. Intended to provide economic relief to those impacted by the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted on March 27, 2020 and includes provisions, among others, addressing the carryback of net operating losses for specific periods, refunds of alternative minimum tax credits, temporary modifications to the limitations placed on the tax deductibility of net interest expenses, and technical amendments for qualified improvement property ("QIP"). Additionally, the CARES Act, in efforts to enhance business' liquidity, provides for refundable employee retention tax credits and the deferral of the employer paid portion of social security taxes. The CARES Act did not have a material impact on the Company's income taxes. On June 29, 2020, California Governor Newsom signed into law the state's budget package which included Assembly Bill 85 ("AB 85"). AB 85 contained two major tax chan (1) the suspension of net operating loss ("NOLs") utilization for certain taxpayers; and (2) the limitation of certain business tax credits for tax years 2020, 2021 and 2022. AB 85 resulted in an additional $ 105 of current expense to the Company's 2020 state income tax provision. The Company has analyzed its filing positions in all significant Federal and State jurisdictions where it is required to file income tax returns, as well as open tax years in these jurisdictions. The Company had immaterial unrecognized tax benefits as of December 31, 2021 and no unrecognized tax benefits as of December 31, 2020. During the years ended December 31, 2021 and 2020, no interest or penalties were required to be recognized relating to unrecognized tax benefits. Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next twelve months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities, we do not anticipate any significant changes to unrecognized tax benefits over the next 12 months. The Company’s tax returns continue to remain subject to examination by U.S. federal and state taxing authorities for effectively all years since inception due to net operating loss carryforwards. The Company is not currently under examination in any jurisdictions. 16. Net Loss Per Share Net Loss Per Share Attributable to 1Life Healthcare, Inc. Stockholders Basic and diluted net loss per share attributable to 1Life Healthcare, Inc. stockholders were calculated as follows: Year Ended December 31, 2021 2020 2019 Numerato Net loss $ ( 254,641 ) $ ( 89,421 ) $ ( 53,695 ) L Net loss attributable to noncontrolling interest — ( 704 ) ( 1,141 ) Net loss attributable to 1Life Healthcare, Inc. stockholders $ ( 254,641 ) $ ( 88,717 ) $ ( 52,554 ) Denominato Weighted average common shares outstanding- basic and diluted 155,343 118,379 18,476 Net loss per share attributable to1Life Healthcare, Inc. stockholders- basic and diluted $ ( 1.64 ) $ ( 0.75 ) $ ( 2.84 ) The Company's potentially dilutive securities have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to 1Life Healthcare, Inc. stockholders is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from F-42 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) the computation of diluted net loss per share attributable to 1Life Healthcare, Inc. stockholders for the periods indicated because including them would have had an anti-dilutive effec Year Ended December 31, 2021 2020 2019 Options to purchase common stock 28,312 28,273 27,806 Unvested restricted stock 3,249 1,291 — Redeemable convertible preferred stock (as converted to common stock) — — 86,252 Warrants to purchase common stock — — 673 2025 Notes (1) 7,117 — — Shares held in special indemnity escrow account in connection with Iora acquisition 405 — — 39,083 29,564 114,731 (1) Under the modified retrospective method of adoption of ASU 2020-06, the dilutive impact of convertible senior notes was calculated using the if-converted method for the year ended December 31, 2021. During the year ended December 31, 2021, the conditions allowing holders of the 2025 Notes to convert have not been met. The 2025 Notes are therefore not convertible as of December 31, 2021. See Note 2 "Summary of Significant Accounting Policies". 17. Commitments and Contingencies Indemnification Agreements In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its Board of Directors and executive officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. As of December 31, 2021 and 2020, the Company has not incurred any material costs as a result of such indemnifications. Legal Matters In May 2018, a class action complaint was filed by two former members against the Company in the Superior Court of California for the County of San Francisco, or the Court, alleging that the Company made certain misrepresentations resulting in them paying the Annual Membership Fee, or AMF, in violation of California’s Consumers Legal Remedies Act, California’s False Advertising Law and California’s Unfair Competition Law, and seeking damages and injunctive relief. Following certain trial court proceedings and certain appeals, arbitration proceedings, and court-ordered mediation proceedings, in June 2021, the parties filed a joint notice of settlement and request for a six month stay before the appellate court in light of reaching a settlement in principle. The parties later executed a class action settlement agreement and release effective June 30, 2021, which requires trial court approval. A preliminary class settlement approval hearing was scheduled to take place in August 2021, but the trial court requested supplemental briefing and vacated the previously scheduled hearing. Plaintiffs filed their supplemental brief and supporting documents on October 12, 2021. The trial court granted the motion for preliminary approval on November 12, 2021. Under the terms of the settlement and the trial court’s order, the settlement will proceed to the class notice phase, which is expected to happen in early 2022. The final approval hearing on the settlement is currently set for May 26, 2022. The settlement amount of $ 11,500 was recorded as other current liabilities in the condensed consolidated balance sheets as of June 30, 2021. The Company's insurers committed to pay $ 5,950 towards the settlement amount. The settlement amount, net of expected insurance recovery, of $ 5,550 was recorded as general and administrative expenses in the condensed consolidated statements of operations for the three months ended June 30, 2021. Class payout is expected to occur in 2022. There was no material change to the liability amount or any incremental expenses incurred during the year ended December 31, 2021. Stockholder Litigation Related to Iora Health Acquisition In July and August of 2021, a total of eight complaints were filed by purported stockholders against the Company and its board of directors alleging, among other things, that the disclosures in the Company’s registration statement on Form S-4 F-43 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) regarding the then proposed merger with Iora were materially misleading and that the defendants therefore violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. Each plaintiff sought, among other things, injunctive relief, including enjoining the proposed merger, and attorney’s fees and costs. Each plaintiff also sought rescission of the merger or rescissory damages once the merger was completed and an order directing the individual defendants to disseminate a registration statement that does not contain untrue statements of material fact and states all material facts required to make the statements contained therein not misleading. The Company filed amendments to the registration statement and subsequently all of the lawsuits were voluntarily dismissed. Additional lawsuits may be filed against the Company or its directors and officers in connection with the merger. Defending such lawsuits could require the Company to incur significant costs and divert the attention of the management team. Further, the defense or settlement of any lawsuit or claim that remains unresolved at the closing of the proposed merger may adversely affect the Company's business, financial condition, results of operations and cash flows. The Company cannot predict the outcome of the lawsuits or any others that might be filed subsequent to the date of filing of this Annual Report on Form 10-K and cannot reasonably estimate the possible loss or range of loss with respect to these matters. The Company believes that such lawsuits are without merit and intends to defend against the claims vigorously. Government Inquiries and Investigations In March 2021, the Company received (i) requests for information and documents from the United States House Select Subcommittee on the Coronavirus Crisis, (ii) a request for information from the California Attorney General and the Alameda County District Attorney’s Office and (iii) a request for information and documents from the Federal Trade Commission relating to the Company’s provision of COVID-19 vaccinations. The Company has also received inquiries from state and local public health departments regarding its vaccine administration practices and has and may continue to receive additional requests for information from other governmental agencies relating to its provision of COVID-19 vaccinations. The Company is cooperating with these requests as well as requests received from other governmental agencies, including with respect to the Company's compensation practices and membership generation during the relevant periods. The majority staff of the Subcommittee released a memorandum of findings on December 21, 2021 highlighting some of the issues identified in documents and data provided by the Company and no further disclosures, testimony or other responses have been requested by the Subcommittee. In addition, in February 2022, the Federal Trade Commission advised us that they were closing their inquiry on our provision of COVID-19 vaccinations. The Company is unable to predict the outcomes or timeline of the residual government inquiries or if any additional requests, inquiries, investigations or other government actions may arise relating to such circumstances. Legal fees have been recorded as general and administrative expenses in the consolidated statements of operations. Sales and Use Tax During 2017 and 2018, a state jurisdiction engaged in an audit of 1Life's sales and use tax records applicable to that jurisdiction from March 2011 through February 2017. As of December 31, 2021, the Company estimated a probable loss from the audit and recorded the estimate in accrued expenses related to one aspect of the finding, including interest and penalties. The Company disputed the other finding representing the majority of the state's proposed audit change and successfully overturned the sales tax assessment resulting from the audit in December 2021. In addition, from time to time, the Company has been and may be involved in various legal proceedings arising in the ordinary course of business. The Company currently believes that the outcome of these legal proceedings, either individually or in the aggregate, will not have a material effect on its consolidated financial position, results of operations or cash flows. 18. Related Party Transactions Certain of the Company's investors are also customers of the Company. Revenue recognized under contractual obligations from such customers was immaterial for the year ended December 31, 2021. Revenue recognized under contractual obligations from such customers was $ 2,093 and $ 27,748 for the years ended December 31, 2020 and 2019, respectively. The outstanding receivable balance from such customers was immaterial as of December 31, 2021 and December 31, 2020. 19. Note Receivable In connection with the Iora acquisition, on June 21, 2021, 1Life and Iora entered into a loan agreement under which the Company might advance secured loans to Iora to fund working capital, at Iora's request from time to time, in outstanding amounts not to exceed $ 75,000 in the aggregate. Amounts drawn under the loan agreement are secured by all assets of Iora and were subordinated to Iora's obligations under its then-existing credit facility with SVB. The loan agreement is effective through the maturity date of borrowed amounts under the loan agreement. Such maturity date is the later of 90 days following the F-44 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) earliest of certain maturity dates set forth in the SVB Facility. Amounts drawn bear interest at a rate equal to 10 % per year, payable monthly. As of the Acquisition Date, there was $ 30,000 drawn and outstanding under the loan agreement. Pursuant to the consummation of Iora's acquisition by 1Life, this note receivable was eliminated as part of intercompany eliminations. $ 30,253 of note receivable including accrued interests prior to the Acquisition Date was treated as purchase consideration. See Note 8 "Business Combinations" for details. F-45

Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements 1 Condensed Consolidated Balance Sheets (Unaudited) 1 Condensed Consolidated Statements of Operations (Unaudited) 2 Condensed Consolidated Statements of Comprehensive Loss (Unaudited) 3 Condensed Consolidated Statements of St ockholders' Equity (Deficit) (Unaudited) 4 Condensed Consolidated Statements of Cash Flows (Unaudited) 5 Notes to Unaudited Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26 Item 3. Quantitative and Qualitative Disclosures About Market Risk 43 Item 4. Controls and Procedures 43 PART II. OTHER INFORMATION Item 1. Legal Proceedings 44 Item 1A. Risk Factors 44 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 86 Item 3. Defaults Upon Senior Securities 86 Item 4. Mine Safety Disclosures 86 Item 5. Other Information 86 Item 6. Exhibits 87 Signatures 88 Where You Can Find More Information Investors and others should note that we announce material financial and other information using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We also post supplemental materials on the “Events” section of our investor relations website at investor.onemedical.com. Except as specifically noted herein, information on or accessible through our website is not, and will not be deemed to be, a part of this Quarterly Report on Form 10-Q or incorporated by reference into any other filings we may make with the U.S. Securities and Exchange Commission (the “SEC”). We also use our Facebook, Twitter and LinkedIn accounts as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts, in addition to following our press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this Quarterly Report on Form 10-Q. These channels may be updated from time to time on our investor relations website. i PART I—FINANCIAL INFORMATION Item 1. Financial Statements. 1LIFE HEALTHCARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except par value amounts) (unaudited) March 31, 2022 December 31, 2021 Assets Current assets: Cash and cash equivalents $ 239,978 $ 341,971 Short-term marketable securities 141,064 111,671 Accounts receivable, net 142,288 103,498 Inventories 6,021 6,065 Prepaid expenses 31,466 28,055 Other current assets 23,311 21,767 Total current assets 584,128 613,027 Long-term marketable securities 47,438 48,296 Restricted cash 3,801 3,801 Property and equipment, net 199,137 193,716 Right-of-use assets 266,592 256,293 Intangible assets, net 341,200 352,158 Goodwill 1,145,094 1,147,464 Other assets 8,639 12,277 Total assets $ 2,596,029 $ 2,627,032 Liabilities and Stockholders' Equity Current liabiliti Accounts payable $ 15,842 $ 18,725 Accrued expenses 73,534 72,672 Deferred revenue, current 64,317 47,928 Operating lease liabilities, current 33,316 31,152 Other current liabilities 34,088 31,632 Total current liabilities 221,097 202,109 Operating lease liabilities, non-current 283,206 269,641 Convertible senior notes 310,313 309,844 Deferred income taxes 67,141 73,875 Deferred revenue, non-current 27,385 29,317 Other non-current liabilities 11,042 13,663 Total liabilities 920,184 898,449 Commitments and contingencies (Note 13) Stockholders' Equity: Common stock, $ 0.001 par value, 1,000,000 and 1,000,000 shares authorized as of March 31, 2022 and December 31, 2021, respectively; 193,483 and 191,722 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively 194 193 Additional paid-in capital 2,385,934 2,346,781 Accumulated deficit ( 709,057 ) ( 618,198 ) Accumulated other comprehensive income ( 1,226 ) ( 193 ) Total stockholders' equity 1,675,845 1,728,583 Total liabilities and stockholders' equity $ 2,596,029 $ 2,627,032 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 1LIFE HEALTHCARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share amounts) (unaudited) Three Months Ended March 31, 2022 2021 Net reve Medicare revenue $ 127,422 $ — Commercial revenue 126,680 121,352 Total net revenue 254,102 121,352 Operating expens Medical claims expense 104,966 — Cost of care, exclusive of depreciation and amortization shown separately below 101,377 70,092 Sales and marketing 22,459 12,689 General and administrative 97,036 64,345 Depreciation and amortization 20,893 6,607 Total operating expenses 346,731 153,733 Loss from operations ( 92,629 ) ( 32,381 ) Other income (expense), n Interest income 157 105 Interest and other expense ( 5,119 ) ( 2,843 ) Total other income (expense), net ( 4,962 ) ( 2,738 ) Loss before income taxes ( 97,591 ) ( 35,119 ) Provision for (benefit from) income taxes ( 6,732 ) 4,199 Net loss $ ( 90,859 ) $ ( 39,318 ) Net loss per share — basic and diluted $ ( 0.47 ) $ ( 0.29 ) Weighted average common shares outstanding — basic and diluted 193,019 136,516 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 1LIFE HEALTHCARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Amounts in thousands) (unaudited) Three Months Ended March 31, 2022 2021 Net loss $ ( 90,859 ) $ ( 39,318 ) Other comprehensive l Net unrealized gain (loss) on marketable securities ( 1,033 ) 12 Comprehensive loss $ ( 91,892 ) $ ( 39,306 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 3 1LIFE HEALTHCARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Amounts in thousands) (unaudited) Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity (Deficit) Shares Amount Balances at December 31, 2021 191,722 $ 193 $ 2,346,781 $ ( 618,198 ) $ ( 193 ) $ 1,728,583 Exercise of stock options 579 1 2,234 2,235 Issuance of common stock for settlement of RSUs 442 — Issuance of common stock in acquisition 740 — Stock-based compensation expense 36,919 36,919 Net unrealized gain (loss) on marketable securities ( 1,033 ) ( 1,033 ) Net loss ( 90,859 ) ( 90,859 ) Balances at March 31, 2022 193,483 $ 194 $ 2,385,934 $ ( 709,057 ) $ ( 1,226 ) $ 1,675,845 Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity (Deficit) Shares Amount Balances at December 31, 2020 134,472 $ 134 $ 918,118 $ ( 369,785 ) $ 8 $ 548,475 Impact of adoption of ASU 2020-06 ( 73,393 ) 6,656 ( 66,737 ) Impact of adoption of ASC 326 ( 428 ) ( 428 ) Exercise of stock options 2,584 3 13,476 13,479 Issuance of common stock for settlement of RSUs 241 — Stock-based compensation expense 26,328 26,328 Net unrealized gain (loss) on marketable securities 12 12 Net loss ( 39,318 ) ( 39,318 ) Balances at March 31, 2021 137,297 $ 137 $ 884,529 $ ( 402,875 ) $ 20 $ 481,811 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 1LIFE HEALTHCARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (unaudited) Three Months Ended March 31, 2022 2021 Cash flows from operating activiti Net loss $ ( 90,859 ) $ ( 39,318 ) Adjustments to reconcile net loss to net cash used in operating activiti Provision for bad debts 281 ( 60 ) Depreciation and amortization 20,893 6,607 Amortization of debt discount and issuance costs 469 468 Accretion of discounts and amortization of premiums on marketable securities, net 338 199 Reduction of operating lease right-of-use assets 7,950 4,156 Stock-based compensation 36,919 26,328 Deferred income taxes ( 6,734 ) — Other non-cash items 211 202 Changes in operating assets and liabilities, net of acquisitio Accounts receivable, net ( 39,071 ) 8,583 Inventories 44 2,478 Prepaid expenses and other current assets ( 999 ) ( 4,870 ) Other assets 2,625 ( 171 ) Accounts payable ( 680 ) ( 1,248 ) Accrued expenses 2,529 8,168 Deferred revenue 14,457 11,050 Operating lease liabilities ( 6,687 ) ( 4,434 ) Other liabilities 3,230 3,946 Net cash (used in) provided by operating activities ( 55,084 ) 22,084 Cash flows from investing activiti Purchases of property and equipment, net ( 19,225 ) ( 14,808 ) Purchases of marketable securities ( 54,906 ) ( 69,995 ) Proceeds from sales and maturities of marketable securities 25,000 339,000 Net cash (used in) provided by investing activities ( 49,131 ) 254,197 Cash flows from financing activiti Proceeds from the exercise of stock options 2,235 13,479 Payment of principal portion of finance lease liability ( 13 ) ( 14 ) Net cash provided by financing activities 2,222 13,465 Net (decrease) increase in cash, cash equivalents and restricted cash ( 101,993 ) 289,746 Cash, cash equivalents and restricted cash at beginning of period 346,054 115,005 Cash, cash equivalents and restricted cash at end of period $ 244,061 $ 404,751 Supplemental disclosure of non-cash investing and financing activiti Purchases of property and equipment included in accounts payable and accrued expenses $ 6,837 $ 6,115 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) (unaudited) 1. Nature of the Business and Basis of Presentation 1Life Healthcare, Inc. (“1Life”) was incorporated in Delaware on July 25, 2002. 1Life’s headquarters are located in San Francisco, California. 1Life has developed a modernized healthcare membership model based on direct consumer enrollment and third-party sponsorship across commercially insured and Medicare populations. Our membership model includes access to 24/7 digital health services paired with in-office care routinely covered by most health care payers, and allows the Company to engage in value-based care across all age groups, including through At-Risk arrangements as defined in Note 2 “Summary of Significant Accounting Policies” with Medicare Advantage payers and the Center for Medicare & Medicaid Services ("CMS"), in which the Company is responsible for managing a range of healthcare services and associated costs of its members. 1Life is also an administrative and managerial services company that provides services pursuant to contracts with physician-owned professional corporations (“One Medical PCs”) that provide medical services virtually and in-office. On September 1, 2021, 1Life completed the acquisition of Iora Health, Inc. ("Iora Health"), a human-centered, value-based primary care group with built-for-purpose technology focused on serving the Medicare population. Iora Health and Iora Senior Health, Inc. (“Iora Senior Health”) are administrative and managerial service companies that provide services pursuant to contracts with physician-owned professional corporations (“Iora PCs”, together with the One Medical PCs, the “PCs”) that provide medical services virtually and in-office. Iora Health is an administrative and managerial services company that provides services pursuant to contracts with Iora Health NE DCE, LLC, a limited liability company that participates in the Center for Medicare and Medicaid Services’ direct contracting model (the “DCE entity”). Iora Health, Iora Senior Health, the Iora PCs and the DCE entity are collectively referred to herein as “Iora”. See Note 7 "Business Combinations" to the unaudited condensed consolidated financial statements. 1Life, Iora Health, Iora Senior Health, the PCs and the DCE entity are collectively referred to herein as the “Company”. 1Life and the One Medical PCs operate under the brand name One Medical. Basis of Presentation The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Pursuant to these rules and regulations, the Company has condensed or omitted certain information and footnote disclosures it normally includes in its annual consolidated financial statements prepared in accordance with U.S. GAAP. The accompanying condensed consolidated financial statements include the accounts of 1Life, Iora Health and Iora Senior Health, their wholly owned subsidiaries, and variable interest entities (“VIE”) in which 1Life, Iora Health and Iora Senior Health have an interest and are the primary beneficiaries. See Note 3, “Variable Interest Entities”. All significant intercompany balances and transactions have been eliminated in consolidation. In management’s opinion, the Company has made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly state its condensed consolidated financial position, results of operations, comprehensive loss and cash flows. The Company’s interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the SEC on February 23, 2022 (the “Form 10-K”). Use of Estimates The preparation of condensed consolidated financial statements and related disclosures in conformity with U.S. GAAP and regulations of the SEC requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Estimates include, but are not limited to, revenue recognition, liability for medical claims incurred in the period but not yet reported (“IBNR”), valuation of certain assets and liabilities acquired from business combinations, and stock-based compensation. Actual results could differ from these estimates and may result in material effects on the Company’s operating results and financial position. 6 Due to the COVID-19 global pandemic, the global economy and financial markets have been disrupted and there continues to be a significant amount of uncertainty about the length and severity of the consequences caused by the pandemic. The Company has considered information available to it as of the date of issuance of these financial statements and is not aware of any specific events or circumstances that would require an update to its estimates or judgments, or an adjustment to the carrying value of its assets or liabilities. The accounting estimates and other matters assessed include, but were not limited to, allowance for credit losses, goodwill and other long-lived assets, and revenue recognition. These estimates may change as new events occur and additional information becomes available. Actual results could differ materially from these estimates. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020. Intended to provide economic relief to those impacted by the COVID-19 pandemic, the CARES Act includes various tax and lending provisions, among others. Under the CARES Act, the Company received an income grant from the Provider Relief Fund administered by the Department of Health and Human Services (“HHS”), which we recognized as Grant income during the three months ended March 31, 2021. The Company did not receive any income grant from the HHS for the three months ended March 31, 2022. See Note 5, "Revenue Recognition". Cash, Cash Equivalents and Restricted Cash The Company considers all short-term, highly liquid investments purchased with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash deposits are all in financial institutions in the United States. Cash and cash equivalents consist of cash on deposit, investments in money market funds and commercial paper. Restricted cash represents cash held under letters of credit for various leases and certain At-Risk arrangements. The expected duration of restrictions on the Company’s restricted cash generally ranges from 1 to 8 years. The reconciliation of cash, cash equivalents and restricted cash reported within the applicable balance sheet line items that sum to the total of the same such amount shown in the condensed consolidated statements of cash flows is as follows: March 31, December 31, March 31, December 31, 2022 2021 2021 2020 Cash and cash equivalents $ 239,978 $ 341,971 $ 402,721 $ 112,975 Restricted cash, current (included in other current assets) 282 282 119 119 Restricted cash, non-current 3,801 3,801 1,911 1,911 Total cash, cash equivalents, and restricted cash $ 244,061 $ 346,054 $ 404,751 $ 115,005 Concentration of Credit Risk and Significant Customers Financial instruments that potentially subject the Company to concentration of credit risk consist of cash, cash equivalents, marketable securities and accounts receivable. The Company’s cash balances with individual banking institutions might be in excess of federally insured limits. Cash equivalents are invested in highly rated money market funds and commercial paper. The Company’s marketable securities are invested in U.S. Treasury obligations and commercial paper. The Company is not exposed to any significant concentrations of credit risk from these financial instruments. The Company has not experienced any losses on its deposits of cash, cash equivalents or marketable securities. The Company grants unsecured credit to patients, most of whom reside in the service area of the One Medical or Iora facilities and are largely insured under third-party payer agreements. The Company’s concentration of credit risk is limited by the diversity, geography and number of patients and payers. The table below presents the customers or payers that individually represented 10% or more of the Company’s accounts receivable, net balance as of March 31, 2022 and December 31, 2021. March 31, December 31, 2022 2021 Customer F 39 % 38 % Customer I 19 % 23 % * Represents percentages below 10% of the Company’s accounts receivable in the period. 7 The table below presents the customers or payers that individually represented 10% or more of the Company’s net revenue for the three months ended March 31, 2022 and 2021. Three Months Ended March 31, 2022 2021 Customer A * 12 % Customer F * 12 % Customer I 27 % N/A Customer J 18 % N/A * Represents percentages below 10% of the Company’s net revenue in the period. 2. Summary of Significant Accounting Policies The Company’s significant accounting policies are discussed in Note 2 “Summary of Significant Accounting Policies” in Item 15 of its Form 10-K for the fiscal year ended December 31, 2021. Recently Adopted Pronouncements as of March 31, 2022 In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance which requires annual disclosures that increase the transparency of transactions involving government grants, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on an entity’s financial statements. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2021. The Company adopted the standard on January 1, 2022 on a prospective basis. The adoption did not have a material impact to the Company's condensed consolidated financial statements. Recently Issued Accounting Pronouncements Not Yet Adopted as of March 31, 2022 There have been no recent accounting pronouncements or changes in accounting pronouncements that are of significance or potential significance to the Company as of March 31, 2022. 3. Variable Interest Entities 1Life, Iora Health and Iora Senior Health's agreements with the PCs generally consist of both Administrative Services Agreements (“ASAs”), which provide for various administrative and management services to be provided by 1Life, Iora Health or Iora Senior Health, respectively, to the PCs, and succession agreements, which provide for transition of ownership of the PCs under certain conditions ("Succession Agreements"). The ASAs typically provide that the term of the arrangements is ten to twenty years with automatic renewal for successive one-year terms, subject to termination by the contracting parties in certain specified circumstances. The outstanding voting equity instruments of the PCs are owned by nominee shareholders appointed by 1Life, Iora Health or Iora Senior Health (or the PC in one instance) under the terms of the Succession Agreements or other shareholders who are also subject to the terms of the Succession Agreements. 1Life, Iora Health and Iora Senior Health have the right to receive income as an ongoing administrative fee in an amount that represents the fair value of services rendered and has provided all financial support through loans to the PCs. 1Life, Iora Health and Iora Senior Health have exclusive responsibility for the provision of all nonmedical services including facilities, technology and intellectual property required for the day-to-day operation and management of each of the PCs, and makes recommendations to the PCs in establishing the guidelines for the employment and compensation of the physicians and other employees of the PCs. In addition, the agreements provide that 1Life, Iora Health and Iora Senior Health have the right to designate a person(s) to purchase the stock of the PCs for a nominal amount in the event of a succession event. Based upon the provisions of these agreements, 1Life determined that the PCs are variable interest entities due to its equity holder having insufficient capital at risk, and 1Life has a variable interest in the PCs. The contractual arrangement to provide management services allows 1Life, Iora Health or Iora Senior Health to direct the economic activities that most significantly affect the PCs. Accordingly, 1Life, Iora Health or Iora Senior Health is the primary beneficiary of the PCs and consolidates the PCs under the VIE model. Furthermore, as a direct result of nominal initial equity contributions by the physicians, the financial support 1Life, Iora Health or Iora Senior Health provides to the PCs (e.g. loans) and the provisions of the nominee shareholder succession arrangements described above, the interests held by noncontrolling interest holders lack economic substance and do not provide them with the ability to participate in the residual 8 profits or losses generated by the PCs. Therefore, all income and expenses recognized by the PCs are allocated to 1Life stockholders. The aggregate carrying value of the assets and liabilities included in the condensed consolidated balance sheets for the PCs after elimination of intercompany transactions and balances were $ 136,405 and $ 122,520 , respectively, as of March 31, 2022 and $ 129,474 and $ 115,744 , respectively, as of December 31, 2021. 4. Fair Value Measurements and Investments Fair Value Measurements The following tables present information about the Company’s financial assets measured at fair value on a recurring basis: Fair Value Measurements as of March 31, 2022 Usin Level 1 Level 2 Level 3 Total Cash equivalents: Money market fund $ 195,964 $ — $ — $ 195,964 Short-term marketable securiti U.S. Treasury obligations 107,619 — — 107,619 Commercial paper — 33,445 — 33,445 Long-term marketable securiti U.S. Treasury obligations 47,438 — — 47,438 Total financial assets $ 351,021 $ 33,445 $ — $ 384,466 Fair Value Measurements as of December 31, 2021 Usin Level 1 Level 2 Level 3 Total Cash equivalents: Money market fund $ 315,817 $ — $ — $ 315,817 Short-term marketable securiti U.S. Treasury obligations 58,232 — — 58,232 Foreign government bonds — 5,012 — 5,012 Commercial paper — 48,427 — 48,427 Long-term marketable securiti U.S. Treasury obligations 48,296 — — 48,296 Total financial assets $ 422,345 $ 53,439 $ — $ 475,784 Our financial assets are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily available pricing sources for comparable instruments, identical instruments in less active markets, or models using market observable inputs. During the three months ended March 31, 2022 and 2021, there were no transfers between Level 1, Level 2 and Level 3. Valuation of Convertible Senior Notes The Company has $ 316,250 aggregate principal amount outstanding of 3.0 % convertible senior notes due in 2025 (the “2025 Notes”). See Note 9, “Convertible Senior Notes” for details. The fair value of the 2025 Notes was $ 275,210 and $ 288,461 as of March 31, 2022 and December 31, 2021, respectively. The fair value was determined based on the closing trading price of the 2025 Notes as of the last day of trading for the period. The fair value of the 2025 Notes is primarily affected by the trading price of the Company's common stock and market interest rates. The fair value of the 2025 Notes is considered a Level 2 measurement as they are not actively traded. 9 Investments At March 31, 2022 and December 31, 2021, the Company’s cash equivalents and marketable securities were as follows: March 31, 2022 Amortized cost Gross unrealized gains (losses) Fair value Cash equivalents: Money market fund $ 195,964 $ — $ 195,964 Total cash equivalents 195,964 — 195,964 Short-term marketable securiti U.S. Treasury obligations 108,020 ( 401 ) 107,619 Commercial paper 33,445 — 33,445 Total short-term marketable securities 141,465 ( 401 ) 141,064 Long-term marketable securiti U.S. Treasury obligations 48,263 ( 825 ) 47,438 Total cash equivalents and marketable securities $ 385,692 $ ( 1,226 ) $ 384,466 December 31, 2021 Amortized cost Gross unrealized gains (losses) Fair value Cash equivalents: Money market fund $ 315,817 $ — $ 315,817 Total cash equivalents 315,817 — 315,817 Short-term marketable securiti U.S. Treasury obligations 58,293 ( 61 ) 58,232 Foreign government bonds 5,013 ( 1 ) 5,012 Commercial paper 48,427 — 48,427 Total short-term marketable securities 111,733 ( 62 ) 111,671 Long-term marketable securiti U.S. Treasury obligations 48,427 ( 131 ) 48,296 Total cash equivalents and marketable securities $ 475,977 $ ( 193 ) $ 475,784 10 5. Revenue Recognition The following table summarizes the Company’s net revenue by primary Three Months Ended March 31, 2022 2021 Net reve Capitated revenue $ 124,630 $ — Fee-for-service and other revenue 2,792 — Total Medicare revenue 127,422 — Partnership revenue 60,935 54,931 Net fee-for-service revenue 41,514 44,462 Membership revenue 24,231 20,196 Grant income — 1,763 Total commercial revenue 126,680 121,352 Total net revenue $ 254,102 $ 121,352 Net fee-for-service revenue (previously reported as net patient service revenue) is primarily generated from commercial third-party payers with which the One Medical entities have established contractual billing arrangements. The following table summarizes net fee-for-service revenue by Three Months Ended March 31, 2022 2021 Net fee-for-service reve Commercial and government third-party payers $ 36,606 $ 42,235 Patients, including self-pay, insurance co-pays and deductibles 4,908 2,227 Net fee-for-service revenue $ 41,514 $ 44,462 The CARES Act was enacted on March 27, 2020 to provide economic relief to those impacted by the COVID-19 pandemic. The CARES Act includes various tax and lending provisions, among others. Under the CARES Act, the Company received an income grant of $ 1,763 from the Provider Relief Fund administered by the Health and Human Services ("HHS") during the three months ended March 31, 2021. The Company did no t receive any income grants from the HHS for the three months ended March 31, 2022. Management has concluded that the Company met conditions of the grant funds and has recognized it as Grant income for the three months ended March 31, 2021. During the three months ended March 31, 2022, the Company recognized revenue of $ 19,015 , which was included in the beginning deferred revenue balances as of January 1, 2022. During the three months ended March 31, 2021, the Company recognized revenue of $ 14,321 , which was included in the beginning deferred revenue balances as of January 1, 2021. As of March 31, 2022, a total of $ 5,571 is included within deferred revenue related to variable consideration, of which $ 4,425 is classified as non-current as it will not be recognized within the next twelve months. The estimate of variable consideration is based on the Company’s assessment of historical, current, and forecasted performance. 11 As summarized in the table below, the Company recorded contract assets and deferred revenue as a result of timing differences between the Company’s performance and the customer’s payment. March 31, December 31, 2022 2021 Balances from contracts with custome Capitated accounts receivable, net $ 34,083 $ 23,903 All other accounts receivable, net 108,205 79,595 Contract asset (included in other current assets) 382 458 Deferred revenue $ 91,702 $ 77,245 Capitated accounts receivable and payable related to At-Risk arrangements are recorded net in the condensed consolidated balance sheets when a legal right of offset exists. A right of offset exists when all of the following conditions are 1) each of two parties (the Company and the third-party payer) owes the other determinable amounts; 2) the reporting party (the Company) has the right to offset the amount owed with the amount owed by the other party (the third-party payer); 3) the reporting party (the Company) intends to offset; and 4) the right of offset is enforceable by law. All of the aforementioned conditions were met as of March 31, 2022. The capitated accounts receivable and payable are recorded at the contract level and consist of the Company’s Capitated Revenue attributed from enrolled At-Risk members less actual paid medical claims expense. If the Capitated Revenue exceeds the actual medical claims expense at the end of the reporting period, such surplus is recorded as capitated accounts receivable within accounts receivable, net in the condensed consolidated balance sheets. If the actual medical claims expense exceeds the Capitated Revenue, such deficit is recorded as capitated accounts payable within other current liabilities in the condensed consolidated balance sheets. As of March 31, 2022, the Company has capitated accounts receivable, net, of $ 34,083 and capitated accounts payable, net, of $ 6,132 , representing amounts due from and to Medicare Advantage payers and CMS in At-Risk arrangements, respectively. The capitated accounts receivable and payable are presented net of IBNR claims liability and other adjustments. There were no significant prior period adjustments or changes to the assumptions used in estimating the IBNR claims liability as of March 31, 2022. The Company believes the amounts accrued to cover IBNR claims as of March 31, 2022 are adequate. Components of capitated accounts receivable, net is summarized be March 31, December 31 2022 2021 Capitated accounts receivable $ 72,286 $ 56,384 IBNR claims liability ( 36,989 ) ( 32,320 ) Other adjustments ( 1,214 ) ( 161 ) Capitated accounts receivable, net $ 34,083 $ 23,903 12 Components of capitated accounts payable, net is summarized be March 31, December 31 2022 2021 Capitated accounts payable $ 4,874 $ 5,483 IBNR claims liability 1,315 1,438 Other adjustments ( 57 ) 299 Capitated accounts payable, net $ 6,132 $ 7,220 Activity in IBNR claims liability from December 31, 2021 through March 31, 2022 is summarized be Amount Balance as of December 31, 2021 $ 33,758 Incurred related t Current period 102,864 Prior periods 2,102 104,966 Paid related t Current period ( 67,755 ) Prior periods ( 32,665 ) ( 100,420 ) Balance as of March 31, 2022 $ 38,304 The Company does not disclose the value of remaining performance obligations for (i) contracts with an original contract term of one year or less, (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice when that amount corresponds directly with the value of services performed, and (iii) variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied distinct service that forms part of a single performance obligation. For those contracts that do not meet the above criteria, the Company’s remaining performance obligation as of March 31, 2022, is expected to be recognized as follows: Less than or equal to 12 months Greater than 12 months Total As of March 31, 2022 $ 15,671 $ 30,279 $ 45,950 6. Leases Most leases contain clauses for renewal at the Company’s option with renewal terms that generally extend the lease term from 1 to 7 years. Certain lease agreements contain options to terminate the lease before maturity. The Company does not have any lease contracts with the option to purchase as of March 31, 2022. The Company’s lease agreements do not contain any significant residual value guarantees or material restrictive covenants imposed by the leases. Certain of the Company’s furniture and fixtures and lab equipment are held under finance leases. Finance-lease-related assets are included in property and equipment, net in the condensed consolidated balance sheets and are immaterial as of March 31, 2022. The components of operating lease costs were as follows: Three Months Ended March 31, 2022 2021 Operating lease costs $ 13,004 $ 7,333 Variable lease costs 2,047 1,311 Total lease costs $ 15,051 $ 8,644 13 Other information related to leases was as follows: Supplemental Cash Flow Information Three Months Ended March 31, 2022 2021 Cash paid for amounts included in the measurement of lease liabiliti Operating cash flows from operating leases $ 12,066 $ 7,855 Non-cash leases activity: Right-of-use lease assets obtained in exchange for new operating lease liabilities $ 18,249 $ 16,086 Lease Term and Discount Rate March 31, December 31, 2022 2021 Weighted-average remaining lease term (in years) 8.08 8.02 Weighted-average discount rate 6.61 % 6.55 % At the lease commencement date, the discount rate implicit in the lease is used to discount the lease liability if readily determinable. If not readily determinable or leases do not contain an implicit rate, the Company’s incremental borrowing rate is used as the discount rate. Management determines the appropriate incremental borrowing rates for each of its leases based on the remaining lease term at lease commencement. Future minimum lease payments under non-cancellable operating leases as of March 31, 2022 were as follows (excluding the effect of lease incentives to be received that are recorded in other current assets of $ 13,990 which serve to reduce total lease payments): March 31, 2022 Remainder of 2022 $ 39,186 2023 55,546 2024 53,831 2025 50,127 2026 46,658 Thereafter 168,984 Total lease payments 414,332 L interest ( 97,810 ) Total lease liabilities $ 316,522 7. Business Combinations Acquisition of Iora 14 On September 1, 2021 ("Acquisition Date"), 1Life acquired all outstanding equity and capital stock of Iora Health, a human-centered, value-based primary care group with built-for-purpose technology focused on serving the Medicare population, for an aggregate purchase consideration of $ 1,424,836 , which was paid through the issuance of 1Life common shares with a fair value of $ 1,313,312 , in part by cash of $ 62,881 , and in part by stock options of Iora assumed by 1Life towards pre-combination services of $ 48,643 . The acquisition was accounted for as a business combination. Subsequent to the Acquisition Date, the Company recorded $ 2,370 decrease to goodwill during the measurement period in the first quarter of 2022. The preliminary purchase price allocations resulted in $ 1,117,913 of goodwill and $ 363,031 of acquired identifiable intangible assets related to Iora trade name and contracts in existing geographies valued using the income method. Goodwill recorded in the acquisition is not expected to be deductible for tax purposes. Goodwill was primarily attributable to the planned growth in new geographies, synergies expected to be achieved in the combined operations of 1Life and Iora, and assembled workforce of Iora. The acquisition expanded the Company's reach to become a premier national human-centered, technology-powered, value-based primary care platform across all age groups. The acquisition allows the Company to participate in At-Risk arrangements with Medicare Advantage payers and CMS, in which the Company is responsible for managing a range of healthcare services and associated costs of its members. Preliminary Purchase Price Allocation The purchase price components are summarized in the following tab Consideration in 1Life common stock (1) $ 1,313,312 Cash consideration (2) 62,881 Stock options of Iora assumed by 1Life towards pre-combination services (3) 48,643 Total Purchase Price $ 1,424,836 (1) Represents the fair value of 53,583 shares of 1Life common stock transferred as consideration consisting of 53,146 shares issued and 437 shares to be issued to former Iora shareholders for outstanding Iora capital stock based on 77,687 Iora shares with the Exchange Ratio of 0.69 for a share of Iora and 1Life's stock price of $ 24.51 as of the closing date. The fair value of the 53,583 shares transferred as consideration was determined on the basis of the closing market price of the Company's common stock one business day prior to the Acquisition Date. (2) Included in the cash consideration • $ 5,993 for the settlement of vested phantom stock awards and cash bonuses contingent on the completion of the merger. Iora's unvested phantom stock awards, to the extent they relate to post-combination services, will be paid out and expensed as they vest subsequent to the acquisition and will be treated as stock-based compensation expense. • $ 30,253 of loans made by the Company to Iora prior to the Acquisition Date. • $ 5,391 of repayment of the existing Silicon Valley Bank (“SVB”) loan, which was not legally assumed as part of the merger. • The remainder of the cash consideration primarily relates to transaction expenses incurred by Iora and paid by the Company as of the closing date. (3) Represents the fair value of Iora’s equity awards assumed by 1Life for pre-combination services. Pursuant to the terms of the merger agreement, Iora’s outstanding equity awards that are vested and unvested as of the effective time of the merger were replaced by 1Life equity awards with the same terms and conditions. The vested portion of the fair value of 1Life’s replacement equity awards issued represents consideration transferred, while the unvested portion represents post-combination compensation expense based on the vesting terms of the equity awards. The awards that include a provision for accelerated vesting upon a change of control are included in the vested consideration. The fair value of the stock options of Iora assumed by 1Life was determined by using a Black-Scholes option pricing model with the applicable assumptions as of the Acquisition Date. The fair value of the unvested stock awards, for which post-combination service is required, will be recorded as share-based compensation expense over the respective vesting period of each award. See Note 10, "Stock-Based Compensation". 15 The following table presents the preliminary purchase price allocation recorded in the Company's unaudited condensed consolidated balance sheet as of the Acquisition Date: Cash and cash equivalents acquired $ 17,808 Accounts receivable, net 20,451 Prepaid expenses and other current assets 3,043 Restricted cash 2,069 Property and equipment, net 29,565 Right-of-use assets 70,249 Intangible assets, net 363,031 Other assets (1) 7,405 Total assets 513,621 Accounts payable 1,974 Accrued expenses 9,819 Deferred revenue, current 5,989 Operating lease liabilities, current 6,617 Operating lease liabilities, non-current 63,558 Deferred revenue, non-current 24,316 Deferred income taxes 80,537 Other non-current liabilities (1) 13,888 Total liabilities 206,698 Net assets acquired 306,923 Estimated Merger Consideration 1,424,836 Estimated goodwill attributable to Merger $ 1,117,913 (1) Included in the other assets was an escrow asset of $ 2,875 related to 1Life common stock held by a third-party escrow agent to be released to the former stockholders of Iora, less any amounts that would be necessary to satisfy any then pending and unsatisfied or unresolved claim for indemnification for any 1Life indemnifiable loss pursuant to the indemnity provisions of the Merger Agreement. A corresponding indemnification liability of $ 9,600 was recorded in other non-current liabilities in the Company's unaudited condensed consolidated balance sheet. During the three months ended March 31, 2022, a reduction in escrow asset and indemnification liability of $ 1,013 and $ 3,383 , respectively was recorded as part of the measurement period adjustment. The indemnification asset is subject to remeasurement at each reporting date due to changes to the underlying value of the escrow shares until the shares are released from escrow, with the remeasurement adjustment reported in the Company's condensed consolidated statement of operations as interest and other expense. During the three months ended March 31, 2022, the fair value of the escrow asset had reduced and the unrealized loss recorded was $ 2,277 for the period. The Company allocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on the preliminary estimates of fair values, which were determined primarily using the income method based on estimates and assumptions made by management at the time of the Iora acquisition and are subject to change during the measurement period which is not expected to exceed one year. The primary tasks that are required to be completed include valuation of certain assets and liabilities, including any related tax impacts. Any adjustments to the preliminary purchase price allocation identified during the measurement period will be recognized in the period in which the adjustments are determined. The Company recognized a net deferred tax liability of $ 80,537 in this business combination that is included in long-term liabilities in the accompanying condensed consolidated balance sheet. This primarily related to identified intangible assets recorded in acquisition for which there is no tax basis. 16 Identifiable intangible assets are comprised of the followin Preliminary Fair Value Estimated Useful Life (in years) Intangible Ass Medicare Advantage contracts - existing geographies $ 298,000 9 CMS Direct Contracting contract - existing geographies 52,000 9 Trade n Iora 13,031 3 Total $ 363,031 Net tangible assets were valued at their respective carrying amounts as of the Acquisition Date, which approximated their fair values. Medicare Advantage contracts and CMS Direct Contracting contract represent the At-Risk arrangements that Iora has with Medicare Advantage plans or directly with CMS. Trade names represent the Company’s right to the Iora trade names and associated design. Loan Agreement Under the Merger Agreement, 1Life and Iora have also entered into a Loan and Security Agreement on June 21, 2021. See Note 15 "Note Receivable" for more details. Iora had an existing credit facility with SVB, which is referred to as the SVB Facility. The SVB facility of $ 5,391 was repaid on September 1, 2021, of which $ 50 is related to the prepayment penalty. Repayment of the existing SVB loan is accounted for as part of the acquisition purchase consideration. Supplemental Unaudited Pro Forma Information The following unaudited pro forma financial information summarizes the combined results of operations for 1Life and Iora as if the companies were combined as of the beginning of fiscal year 2020. The unaudited pro forma information includes transaction and integration costs, adjustments to amortization and depreciation for intangible assets and property and equipment acquired, stock-based compensation costs and tax effects. The table below reflects the impact of material adjustments to the unaudited pro forma results for the three months ended March 31, 2021 that are directly attributable to the acquisiti Three Months Ended March 31, Material Adjustments 2021 (Decrease) / increase to expense as result of transaction costs $ ( 3,237 ) (Decrease) / increase to expense as result of amortization and depreciation expenses 11,541 (Decrease) / increase to expense as a result of stock-based compensation costs 698 (Decrease) / increase to expense as result of changes in tax effects $ ( 4,909 ) The unaudited pro forma information presented below is for informational purposes only and is not necessarily indicative of our condensed consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of fiscal year 2020 or the results of our future operations of the combined businesses. Three Months Ended March 31, 2021 Revenue $ 183,620 Net Loss $ ( 62,374 ) 17 Other Acquisitions In 2021, the Company completed three other acquisitions for $ 9,908 of total cash consideration. The acquisitions were each accounted for as business combinations. The Company does not consider these acquisitions to be material, individually or in aggregate, to the Company’s condensed consolidated financial statements. The purchase price allocations resulted in $ 5,880 of goodwill and $ 3,921 of acquired identifiable intangible assets related to customer relationships valued using the income method. Intangible assets are being amortized over their respective useful lives of three or seven years . Acquisition-related costs were immaterial and were expensed as incurred in the condensed consolidated statements of operations. 8. Goodwill and Intangible Assets Goodwill As of March 31, 2022 and December 31, 2021, goodwill was $ 1,145,094 and $ 1,147,464 , respectively. Due to the recent decline in the Company's stock price and uncertainties in general economic conditions, the Company considered the recoverability of its goodwill and determined, during three months ended March 31, 2022, there were no events or circumstances that have changed since the last annual test that could more likely than not reduce the fair value of the Company's reporting unit below its carrying value. No goodwill impairments were recorded during the three months ended March 31, 2022. Changes in economic and operating conditions and any further decline in the Company's stock price could result in potential goodwill impairment in future periods. Goodwill balances as of March 31, 2022 and December 31, 2021 were as follows: Goodwill Balance as of December 31, 2021 $ 1,147,464 Measurement period adjustments ( 2,370 ) Balance as of March 31, 2022 $ 1,145,094 Intangible Assets The following summarizes the Company’s intangible assets and accumulated amortization as of March 31, 2022: March 31, 2022 Original Cost Accumulated Amortization Net Book Value Medicare Advantage contracts - existing geographies $ 298,000 $ ( 19,315 ) $ 278,685 CMS Direct Contracting contract - existing geographies 52,000 ( 3,370 ) 48,630 Trade n Iora 13,031 ( 2,534 ) 10,497 Customer relationships 3,921 ( 533 ) 3,388 Total intangible assets $ 366,952 $ ( 25,752 ) $ 341,200 The following summarizes the Company’s intangible assets and accumulated amortization as of December 31, 2021: 18 December 31, 2021 Original Cost Accumulated Amortization Net Book Value Medicare Advantage contracts - existing geographies $ 298,000 $ ( 11,037 ) $ 286,963 CMS Direct Contracting contract - existing geographies 52,000 ( 1,926 ) 50,074 Trade n Iora 13,031 ( 1,448 ) 11,583 Customer relationships 3,921 ( 383 ) 3,538 Total intangible assets $ 366,952 $ ( 14,794 ) $ 352,158 The Company did no t record any amortization expense of intangible assets for the three months ended March 31, 2021. Purchased intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. As of March 31, 2022, estimated future amortization expense related to intangible assets were as follows: March 31, 2022 Remainder of 2022 $ 32,876 2023 43,835 2024 42,356 2025 39,417 2026 39,417 Thereafter 143,299 Total $ 341,200 9. Convertible Senior Notes In May 2020, the Company issued and sold $ 275,000 aggregate principal amount of 3.0 % convertible senior notes due 2025 in a private offering exempt from the registration requirements of the Securities Act of 1933, and in June 2020, the Company issued an additional $ 41,250 aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment option by the initial purchasers of the notes (the “2025 Notes”). The 2025 Notes are unsecured obligations and bear interest at a fixed rate of 3.0 % per annum, payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2020. The 2025 Notes will mature on June 15, 2025, unless earlier converted, redeemed or repurchased. The total net proceeds from the debt offering, after deducting the initial purchasers’ commissions and other issuance costs, were $ 306,868 . Each $ 1 principal amount of the 2025 Notes will initially be convertible into 0.0225052 shares of the Company’s common stock, which is equivalent to an initial conversion price of $ 44.43 per share, subject to adjustment upon the occurrence of specified events but not for any accrued and unpaid interest. Holders may convert the 2025 Notes at their option at any time prior to the close of business on the business day immediately preceding March 15, 2025 only under the following circumstanc (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the trading price (as defined below) per $ 1 principal amount of the 2025 Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; (3) if the Company calls such 2025 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the 19 redemption date; or (4) upon the occurrence of specified corporate events. It is the Company’s current intent to settle conversions through combination settlement comprising of cash and equity. On or after March 15, 2025 until the close of business on the business day immediately preceding the maturity date, holders may convert all or any portion of their 2025 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election and in accordance with the terms of the indenture governing the 2025 Notes. If the Company satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of the Company’s common stock, the amount of cash and shares of common stock, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 40 trading day observation period. In addition, following certain corporate events that occur prior to the maturity date or if the Company delivers a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 2025 Notes in connection with such a corporate event or notice of redemption, as the case may be. If the Company undergoes a fundamental change prior to the maturity date, holders of the 2025 Notes may require the Company to repurchase for cash all or any portion of their notes at a repurchase price equal to 100 % of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if specific corporate events occur prior to the applicable maturity date, the Company will increase the conversion rate for a holder who elects to convert their 2025 Notes in connection with such a corporate event in certain circumstances. The Company may not redeem the 2025 Notes prior to June 20, 2023. The Company may redeem for cash all or any portion of the 2025 Notes, at the Company’s option, on or after June 20, 2023 and prior to March 15, 2025, if the last reported sale price of the Company’s common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100 % of the principal amount of the 2025 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the notes. During the three months ended March 31, 2022, the conditions allowing holders of the 2025 Notes to convert have not been met. The 2025 Notes are therefore not convertible as of March 31, 2022 and are classified in long term liabilities in the condensed consolidated balance sheet. The Company incurred issuance costs of $ 9,374 and amortizes the issuance costs to interest expense over the contractual term of the 2025 Notes at an effective interest rate of 0.65 %. The net carrying amount of the 2025 Notes was as follows: March 31, December 31, 2022 2021 Liabiliti Principal $ 316,250 $ 316,250 Unamortized issuance costs ( 5,937 ) ( 6,406 ) Net carrying amount $ 310,313 $ 309,844 The following table sets forth the interest expense recognized related to the 2025 Not Three Months Ended March 31, 2022 2021 Contractual interest expense $ 2,372 $ 2,372 Amortization of issuance costs 469 469 Total interest expense related to the 2025 Notes $ 2,841 $ 2,841 20 10. Stock-Based Compensation Stock Incentive Plan The Company has the following stock-based compensation pla the 2007 Equity Incentive Plan (the “2007 Plan”), the 2017 Equity Incentive Plan (the “2017 Plan”), and the 2020 Equity Incentive Plan (the “2020 Plan”, and, together with the 2007 Plan and the 2017 Plan, the “Plans”). In January 2020, the Company’s stockholders approved the 2020 Plan, which took effect upon the execution of the underwriting agreement for the Company’s IPO in January 2020. The 2020 Plan is intended as the successor to and continuation of the 2007 Plan and the 2017 Plan. The number of shares of common stock reserved for issuance under the Company’s 2020 Plan will automatically increase on January 1 of each year, beginning on January 1, 2021, and continuing through and including January 1, 2030, by 4 % of the total number of shares of common stock outstanding on December 31 of the immediately preceding calendar year, or a lesser number of shares determined by the Company’s board prior to the applicable January 1st. The number of shares issuable under the Plans is adjusted for capitalization changes, forfeitures, expirations and certain share reacquisitions. The Plan provides for the grants of incentive stock options (“ISOs”), non-statutory stock options (“NSOs”), restricted stock awards, and restricted stock unit awards (“RSUs”). ISOs may be granted only to employees, including officers. All other awards may be granted to employees, including officers, non-employee directors and consultants. The 2020 Plan provides that grants of ISOs will be made at no less than the estimated fair value of common stock, as determined by the Board of Directors, at the date of grant. Stock options granted to employees and nonemployees under the Plans generally vest over 4 years. Options granted under the Plans generally expire 10 years after the date of grant. At March 31, 2022, 2,950 shares were available for future grants. 2020 Employee Stock Purchase Plan In January 2020, the Company’s stockholders approved the 2020 Employee Stock Purchase Plan (“ESPP”), which became effective upon the execution of the underwriting agreement for the Company’s IPO in January 2020. The ESPP provides for separate six-month offering periods beginning on May 16 and November 16 of each year. At March 31, 2022, 4,246 shares were available for future issuance. The stock-based compensation expense recognized for the ESPP was $ 425 and $ 621 during the three months ended March 31, 2022 and 2021, respectively. Stock Options The following table summarizes stock option activity under the Pla Number of Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Outstanding as of December 31, 2021 28,312 $ 19.32 7.57 $ 192,955 Granted 1,819 12.11 Exercised ( 579 ) 3.86 Canceled ( 444 ) 15.51 Outstanding as of March 31, 2022 29,108 $ 19.24 7.49 $ 79,748 Options exercisable as of March 31, 2022 12,146 $ 5.95 6.08 $ 71,253 Options vested and expected to vest as of March 31, 2022 18,893 $ 8.60 6.83 $ 79,303 At March 31, 2022 and 2021, there was $ 24,640 and $ 17,897 , respectively, in unrecognized compensation expense related to service-based options, net of forfeitures, that is expected to be recognized over a weighted-average period of 1.6 and 1.9 years, respectively. The fair value of stock option grants with service-based vesting conditions was $ 11,598 and $ 12,168 for the three months ended March 31, 2022 and 2021, respectively. 21 Assumed Equity Awards As of the Acquisition Date, the Company assumed Iora’s outstanding equity awards related to stock options and phantom stock. The awards under the assumed equity plan were generally settled as follows: • Optio All Iora options outstanding on the close date were assumed by 1Life and converted into options to acquire shares of 1Life common stock. The vested and unvested options, to the extent related to pre-combination services were included in the consideration transferred. Iora’s unvested options, to the extent they relate to post-combination services, will be expensed as they vest post the acquisition and will be treated as stock-based compensation expense. See Note 7 "Business Combinations". • Phantom stoc Each Iora vested phantom stock award has been settled in cash. Each Iora unvested phantom stock award has been assumed by the Company and converted into the right to receive the unvested phantom cash award. Each unvested phantom cash award will remain subject to the same terms and conditions as were applicable to the underlying unvested phantom stock award immediately prior to the close date. The unvested phantom stock award is considered a liability-classified award as the settlement involves a cash payment upon the dates when these awards vest. The entire vested award and unvested phantom stock, to the extent they relate to pre-combination services, were included in the consideration transferred. Iora’s unvested phantom stock awards, to the extent they relate to post-combination services, will be expensed as they vest post acquisition and will be treated as stock-based compensation expense. See Note 7 "Business Combinations". As of the Acquisition Date, the estimated fair value of the assumed equity awards was $ 60,856 , of which $ 52,662 was allocated to the purchase price and the balance of $ 8,194 will be recognized as stock-based compensation expense over the remainder term of the assumed equity awards. The fair value of the assumed equity awards for service rendered through the Acquisition Date was recognized as a component of the acquisition consideration, with the remaining fair value related to post combination services to be recorded as stock-based compensation over the remaining vesting period. Market-based Stock Options During the year ended December 31, 2020, the Board of Directors (“Board”) approved the grant of a long-term market-based stock option (the “Performance Stock Option”) to the Company’s Chief Executive Officer and President. The Performance Stock Option was granted to acquire up to 8,645 shares of the Company’s common stock upon exercise. The Performance Stock Option consists of four separate tranches and each tranche will vest over a seven-year time period and only if the Company’s stock price sustains achievement of pre-determined increases for a period of 90 consecutive calendar days and the Chief Executive Officer remains employed with the Company. The exercise price per share of the Stock Option is the closing price of a share of the Company’s common stock on the date of grant. The vesting of the Performance Stock Option can also be triggered upon a change in control. The following table presents additional information relating to each tranche of the Performance Stock Opti Tranche Stock Price Milestone Number of Options Tranche 1 $ 55 per share 1,330 Tranche 2 $ 70 per share 1,995 Tranche 3 $ 90 per share 2,660 Tranche 4 $ 110 per share 2,660 As of March 31, 2022, no stock price milestones have been achieved. Consequently, no shares subject to the Performance Stock Option have vested as of the date of this filing. The entire 8,645 shares granted are excluded from options vested and expected to vest from the options activity table presented above. The Company will recognize aggregate stock-based compensation expense of $ 197,469 over the derived service period of each tranche using the accelerated attribution method as long as the service-based vesting conditions are satisfied. If the market conditions are achieved sooner than the derived service period, the Company will adjust its stock-based compensation to reflect the cumula tive expense associated with the vested awards. The Company recorded stock-based compensation expense of $ 14,089 and $ 14,926 related to the award for the three months ended March 31, 2022 and 2021, which is included in general and administrative on the condensed consolidated statements of operations. Unamortized stock-based compensation expense related to the award was $ 122,863 as of March 31, 2022. 22 Restricted Stock Units The following table summarizes restricted stock unit activity under the 2020 Pl Number of Shares Grant Date Fair Value Unvested and outstanding as of December 31, 2021 3,249 $ 27.90 Granted 4,693 11.78 Vested ( 434 ) 31.76 Canceled and forfeited ( 292 ) 17.78 Unvested and outstanding as of March 31, 2022 7,216 $ 17.60 Stock-Based Compensation Expense Stock-based compensation expense was classified in the condensed consolidated statements of operations as follows: Three Months Ended March 31, 2022 2021 Sales and marketing $ 943 $ 1,023 General and administrative 35,976 25,305 Total $ 36,919 $ 26,328 A tax benefit of $ 1,938 and $ 30,394 for the three months ended March 31, 2022 and 2021, respectively, was included in the Company’s net operating loss carry-forward that could potentially reduce future tax liabilities. 11. Income Taxes The Company recorded an income tax benefit of $ 6,732 and an income tax provision of $ 4,199 for the three months ended March 31, 2022 and 2021, respectively. This represents an effective tax rate for the respective periods of 6.9 % and ( 12.0 )%, respectively. The Company reassessed the ability to realize deferred tax assets by considering the available positive and negative evidence. As of March 31, 2022, the Company maintains a full valuation allowance against its net deferred tax assets. Amortization of book identified intangibles from that acquisition resulted in a decrease to deferred tax liabilities; the associated income tax benefit during the period was $ 6,745 . The effective tax rate differs in 2022 from the federal statutory rate due to the change in need for valuation allowance and amortization of identified intangibles. The effective tax rate differs in 2021 from the federal statutory rate due to increased taxable income in profitable entities and the change in need for valuation allowance. 12. Net Loss Per Share Basic and diluted net loss per share were calculated as follows: Three Months Ended March 31, 2022 2021 Numerato Net loss $ ( 90,859 ) $ ( 39,318 ) Denominato Weighted average common shares outstanding — basic and diluted 193,019 136,516 Net loss per share — basic and diluted $ ( 0.47 ) $ ( 0.29 ) The Company’s potentially dilutive securities, which include stock options, unvested RSUs, 2025 Notes and shares held in special indemnity escrow account in connection with Iora acquisition, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share is the same. The Company excluded the following 23 potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share for the periods indicated because including them would have had an anti-dilutive effec As of March 31, 2022 2021 Options to purchase common stock 29,108 26,160 Unvested restricted stock 7,207 1,847 2025 Notes (1) 7,117 7,117 Shares held in special indemnity escrow account in connection with Iora acquisition 405 — 43,837 35,124 (1) During the three months ended March 31, 2022, the conditions allowing holders of the 2025 Notes to convert have not been met. The 2025 Notes are therefore not convertible as of March 31, 2022. 13. Commitments and Contingencies Indemnification Agreements In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its Board of Directors and executive officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. As of March 31, 2022 and December 31, 2021, the Company has not incurred any material costs as a result of such indemnifications. Legal Matters In May 2018, a class action complaint was filed by two former members against the Company in the Superior Court of California for the County of San Francisco, or the Court, alleging that the Company made certain misrepresentations resulting in them paying the Annual Membership Fee, or AMF, in violation of California’s Consumers Legal Remedies Act, California’s False Advertising Law and California’s Unfair Competition Law, and seeking damages and injunctive relief. Following certain trial court proceedings and certain appeals, arbitration proceedings, and court-ordered mediation proceedings, in June 2021, the parties filed a joint notice of settlement and request for a six month stay before the appellate court in light of reaching a settlement in principle. The parties later executed a class action settlement agreement and release effective June 30, 2021, which requires trial court approval. A preliminary class settlement approval hearing was scheduled to take place in August 2021, but the trial court requested supplemental briefing and vacated the previously scheduled hearing. Plaintiffs filed their supplemental brief and supporting documents on October 12, 2021. The trial court granted the motion for preliminary approval on November 12, 2021. Under the terms of the settlement and the trial court’s order, the settlement will proceed to the class notice phase, which is expected to happen in early 2022. The final approval hearing on the settlement is currently set for July 25, 2022. The settlement amount of $ 11,500 was recorded as other current liabilities in the condensed consolidated balance sheets as of June 30, 2021. The Company's insurers committed to pay $ 5,950 towards the settlement amount. The settlement amount, net of expected insurance recovery, of which $ 5,550 was recorded as general and administrative expenses in the condensed consolidated statements of operations for the three months ended June 30, 2021. Class payout is expected to occur in 2022. There was no material change to the liability amount or any incremental expenses incurred during the three months ended March 31, 2022. Government Inquiries and Investigations In March 2021, the Company received (i) requests for information and documents from the United States House Select Subcommittee on the Coronavirus Crisis, (ii) a request for information from the California Attorney General and the Alameda County District Attorney’s Office and (iii) a request for information and documents from the Federal Trade Commission relating to the Company’s provision of COVID-19 vaccinations. The Company has also received inquiries from state and local 24 public health departments regarding its vaccine administration practices and has and may continue to receive additional requests for information from other governmental agencies relating to its provision of COVID-19 vaccinations. The Company is cooperating with these requests as well as requests received from other governmental agencies, including with respect to the Company's compensation practices and membership generation during the relevant periods. The majority staff of the Subcommittee released a memorandum of findings in December 2021. No further disclosures, testimony or other responses have been requested by the Subcommittee. In addition, in February 2022, the Federal Trade Commission advised us that they were closing their inquiry on our provision of COVID-19 vaccinations. The Company is unable to predict the outcomes or timeline of the residual government inquiries or if any additional requests, inquiries, investigations or other government actions may arise relating to such circumstances. Legal fees have been recorded as general and administrative expenses in the consolidated statements of operations. Sales and Use Tax During 2017 and 2018, a state jurisdiction engaged in an audit of 1Life’s sales and use tax records applicable to that jurisdiction from March 2011 through February 2017. The Company disputed the finding representing the majority of the state's proposed audit change and successfully overturned the sales tax assessment resulting from the audit in December 2021. As of March 31, 2022, the audit was closed and the payment remitted was not material. In addition, from time to time, the Company has been and may be involved in various legal proceedings arising in the ordinary course of business. The Company currently believes that the outcome of these legal proceedings, either individually or in the aggregate, will not have a material effect on its consolidated financial position, results of operations or cash flows. 14. Related Party Transactions Certain of the Company’s investors are also affiliated with customers of the Company. Revenue recognized under contractual obligations from such customers was immaterial for the three months ended March 31, 2022 and March 31, 2021, respectively. The outstanding receivable balance from such customers was immaterial as of March 31, 2022 and December 31, 2021, respectively. 15. Note Receivable In connection with the Iora acquisition, on June 21, 2021, 1Life and Iora entered into a loan agreement under which the Company may advance secured loans to Iora to fund working capital, at Iora's request from time to time, in outstanding amounts not to exceed $ 75,000 in the aggregate. Amounts drawn under the loan agreement are secured by all assets of Iora and were subordinated to Iora's obligations under its then-existing credit facility with SVB. The loan agreement is effective through the maturity date of borrowed amounts under the loan agreement. Such maturity date is the later of 90 days following the earliest of certain maturity dates set forth in the SVB Facility. Amounts drawn bear interest at a rate equal to 10 % per year, payable monthly. As of the Acquisition Date, there was $ 30,000 drawn and outstanding under the loan agreement. Pursuant to the consummation of Iora's acquisition by 1Life, this note receivable was eliminated as part of intercompany eliminations. $ 30,253 of note receivable including accrued interests prior to the Acquisition Date was treated as purchase consideration. See Note 7 "Business Combinations" for additional details. 25 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “goal,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. In addition, statements including “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with our condensed consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report. This discussion includes both historical information and forward-looking statements based upon current expectations that involve risk, uncertainties and assumptions. Our results of operations include the results of operations of Iora since the close of our acquisition on September 1, 2021. Our actual results may differ materially from management’s expectations and those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, our ability to timely and successfully achieve the anticipated benefits and potential synergies of our acquisition of Iora Health, Inc. and the continuing impact of the COVID-19 pandemic and societal and governmental responses as well as those discussed in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Overview Our mission is to transform health care for all through our human-centered, technology-powered model. Our vision is to delight millions of members with better health and better care while reducing the total cost of care. We are a membership-based primary care platform with seamless digital health and inviting in-office care, convenient to where people work, shop, live and click. We are disrupting health care from within the existing ecosystem by simultaneously addressing the frustrations and unmet needs of key stakeholders, which include consumers, employers, providers, and health networks. We have developed a modernized healthcare membership model based on direct consumer enrollment and third-party sponsorship across commercially insured and Medicare populations. Our membership model includes seamless access to 24/7 digital health services paired with inviting in-office care routinely covered by most health care payers. Our technology drives high monthly active usage within our membership, promoting ongoing and longitudinal patient relationships for better health outcomes and high member retention. Our technology also helps our service-minded team in building trust and rapport with our members by facilitating proactive digital health outreach as well as responsive on-demand virtual and in-office care. Our digital health services and our well-appointed offices, which tend to be located in highly convenient locations, are staffed by a team of clinicians who are not paid on a fee-for-service basis, and therefore free of misaligned compensation incentives prevalent in health care. Additionally, we have developed clinically and digitally integrated partnerships with health networks, better coordinating more timely access to specialty care when needed by members. Together, this approach allows us to engage in value-based care across all age groups, including through At-Risk arrangements with Medicare Advantage payers and CMS, in which One Medical is responsible for managing a range of healthcare services and associated costs of our members. Our focus on simultaneously addressing the unfulfilled needs and frustrations of key stakeholders has allowed us to consistently grow the number of members we serve. As of March 31, 2022, we have grown to approximately 767,000 total members including 728,000 Consumer and Enterprise members and 39,000 At-Risk members, 188 medical offices in 25 markets, and have greater than 8,500 enterprise clients across the United States. Impact of COVID-19 on Our Business The COVID-19 pandemic has impacted and may continue to impact our operations, and net revenues, expenses, collectability of accounts receivables and other money owed, capital expenditures, liquidity, and overall financial condition. 26 While we experienced negative impacts to our business from the COVID-19 pandemic during the first half of 2020, beginning in the second half of 2020 and through 2021, we believe the COVID-19 pandemic helped drive an increase in Consumer and Enterprise membership and increase in commercial revenue due to new and expanded service offerings, and an increase in our aggregate billable services primarily driven by COVID-19 related visits. For example, we believe COVID-19 caused our value proposition to resonate with a broader audience of consumers seeking access to primary care, as well as with a broader audience of employers focusing on safely reopening their workplaces and managing the ongoing health and well-being of employees and their families. As a result, we experienced increased demand for our memberships beginning in the second half of 2020 and through 2021. In addition, we expanded our service offering in part as a response to COVID-19 and launched several new billable services, includin • COVID-19 testing, and counseling across all of our markets, including in our offices and in several mobile COVID-19 testing sites; • COVID-19 vaccinations in select geographies; • Healthy Together, our COVID-19 screening and testing program for employers, schools and universities; • Mindset by One Medical, our behavioral health service integrated within primary care; • One Medical Now, an expansion of our 24/7 on-demand digital health solutions to employees of enterprise clients located in geographies where we are not yet physically present; and, • Remote Visits, where our providers perform typical primary care visits with our members remotely Towards the tail end of 2021, we started to experience a decline in COVID-related visits while we have not yet seen non-COVID-related primary care visits return to their pre-COVID levels, which negatively impacted our commercial revenue. Starting in the fourth quarter of 2021, the Omicron variant caused a spike in COVID-19 cases. This caused an increase in hospitalizations among At-Risk members, which negatively impacted our medical claims expense. We also saw an increase in the number of providers who were required to quarantine as a result of potential exposure to the virus, which caused some supply constraint in our ability to meet member demand for appointments. The effects of the Omicron variant appeared to peak in mid-January 2022, and the impact has since decreased. However, future COVID-19 outbreaks or variants may cause additional reductions in visits and increased hospitalizations of At-Risk members, which may negatively impact our results of operations and cause our revenue and margins to fluctuate across periods. We believe some of the precautionary measures and challenges resulting from the COVID-19 pandemic may continue or be reinstated upon the occurrence of future outbreaks of variants. Such actions or events may present additional challenges to our business, financial condition and results of operations. As a result, we cannot assure you that any increase in membership, aggregate reimbursement and revenue or reduction in medical claims expense, or any increased trends in visits, are indicative of future results or will be sustained, including following the COVID-19 pandemic, or that we will not experience additional impacts associated with COVID-19, which could be significant. Our results may also continue to fluctuate across periods due to the future COVID-19 outbreaks or variants. Additionally, it is unclear what the impact of the COVID-19 pandemic will be on future utilization, medical expense patterns, and the associated impact on our business and results of operations. Our Business Model Our business is driven by growth in Consumer and Enterprise members, and At-Risk members (see also "Key Metrics and Non-GAAP Financial Measures"). We have developed a modernized membership model based on direct consumer enrollment and third-party sponsorship. Our membership model includes seamless access to 24/7 digital health paired with inviting in-office care routinely covered by most health care payers. Consumer and Enterprise members join either individually as consumers by paying an annual membership fee or are sponsored by a third party. At-Risk members are members for whom we are responsible for managing a range of healthcare services and associated costs. Digital health services are delivered via our mobile app and website, through such modalities as video and voice encounters, chat and messaging. Our in-office care is delivered in our medical offices, and as of March 31, 2022, we had 188 medical offices, compared to 110 medical offices as of March 31, 2021. We derive net revenue, consisting of Medicare revenue and commercial revenue, from multiple stakeholders, including consumers, employers and health networks such as health systems and government and private payers. Medicare Revenue 27 Medicare revenue consists of (i) Capitated Revenue and (ii) fee-for-service and other revenue that is not generated from Consumer and Enterprise members. We generate Capitated Revenue from At-Risk arrangements with Medicare Advantage payers and CMS. Under these At-Risk arrangements, we generally receive capitated payments, consisting of each eligible member’s risk adjusted health care premium per member per month ("PMPM"), for managing a range of healthcare services and associated costs for such members. The risk adjusted health care premium PMPM is determined by payers and based on a variety of patients' factors such as age and demographic benchmarks, and further adjusted to reflect the underlying complexity of a member’s health conditions. These fees give us revenue economics that are contractually recurring in nature for a majority of our Medicare revenue. Capitated Revenue represents 98% of Medicare revenue and 49% of total net revenue, respectively, for the three months ended March 31, 2022. We generate fee-for-service and other revenue from fee-for-service visits for Other Patients not covered under At-Risk arrangements and from certain payers for clinical start-up, administration, or on-going coordination of care activities associated with providing care to At-Risk members and other Medicare patients. Commercial Revenue Commercial revenue consists of (i) partnership revenue (ii) net fee-for-service revenue and (iii) membership revenue. We generate our partnership revenue from (i) our health network partners with whom we have clinically and digitally integrated, on a PMPM basis, (ii) largely fixed price or fixed price per employee contracts with enterprise clients for medical services and (iii) COVID-19 on-site testing services for enterprise clients, schools and universities where we typically bill such customers a fixed price per service performed. For our health network arrangements that provide for PMPM payments, when our medical offices provide professional clinical services to covered members, we, as administrator, perform billing and collection services on behalf of the health network, and the health network receives the fees for services provided, including those paid by members’ insurance plans. In those circumstances, we earn and receive PMPM payments from the health network partners in lieu of per visit fees for services from member office visits. Our net fee-for-service revenue primarily consists of reimbursements received from our members' or other patients' health insurance plans or those with billing rates based on our agreements with our health network partners for healthcare services delivered to Consumer and Enterprise members on a fee-for-service basis. We generate our membership revenue through the annual membership fees charged to either consumer members or enterprise clients, as well as fees paid for our One Medical Now service offering. As of March 31, 2022, our list price for new members for an annual consumer membership was $199. Our enterprise clients typically pay a discounted fee collected in advance, based on a rate per employee per month. Our membership fee revenue and partnership revenue are contractual and, with the exception of our COVID-19 on-site testing services, generally recurring in nature. Membership revenue and part nership revenue as a percentage of commercial revenue was 67% and 62% f or each of the three months ended March 31, 2022 and 2021, respectively. Membership revenue and part nership revenue as a percentage of total net revenue was 34% and 62% for t he three months ended March 31, 2022 and 2021, respectively. Key Factors Affecting Our Performance • Acquisition of Net New Members. Our ability to increase our membership will enable us to drive financial growth as members drive our commercial revenue and Medicare revenue. We believe that we have significant opportunities to increase members in our existing geographies through (i) new sales to consumers and enterprise clients, (ii) expansion of the number of enrolled members, including dependents, within our enterprise clients, (iii) expansion of the number of At-Risk members including Medicare Advantage participants or Medicare members for which we are at risk as a result of CMS' Direct Contracting Program, (iv) expansion of Medicare Advantage payers, with whom we contract and (v) adding other potential services. • Components of Revenue . Our ability to maintain or improve pricing levels for our memberships and the pricing under our contracts with health networks will also impact our total revenue. As of March 31, 2022, our list price for new members for an annual consumer membership was $199. Our enterprise clients typically pay a discounted fee collected in advance, based on a rate per employee 28 per month. In geographies where our health network partners pay us on a PMPM basis for Consumer and Enterprise members, to the extent that the PMPM rate changes, our partnership revenue will change. Similarly, if the largely fixed price or number of employees covered by fixed price per employee arrangements change or the number of COVID-19 on-site tests or vaccinations changes, our partnership revenue will also change. Our net fee-for-service revenue is dependent on (i) our billing rates and third-party payer contracted rates through agreements with health networks, (ii) the mix of members who are commercially insured and (iii) the nature of visits. Our net fee-for-service revenue may also change based on the services we provide to commercially insured Other Patients as defined in "Key Metrics and Non-GAAP Financial Measures" below. Our Medicare revenue is dependent on (i) the percentage of members in at-risk contracts, (ii) our contracted percentage of premium, (iii) our ability to accurately document the acuity of our At-Risk members, and (iv) the services we provide to Other Patients who are Medicare participants. In the future, we may add additional services for which we may charge in a variety of ways. To the extent the net amounts we charge our members, patients, partners, payers and clients change, our net revenue will also change. • Medical Claims Expense. The nature of our contracting with Medicare Advantage payers and CMS requires us to be financially responsible for a range of healthcare services of our At-Risk members. Our care model focuses on leveraging the primary care setting as a means of reducing unnecessary or avoidable health care costs and balancing the cost of care with the impact of our service on medical claims expense. We are liable for potentially large medical claims should we not effectively manage our At-Risk members’ health. We call the ratio between medical claims expense divided by Capitated Revenue the "Medical Claims Expense Ratio". As we sign up new At-Risk members, our Medical Claims Expense Ratio is likely to increase initially due to a potential increase in medical claims expense from a lag in improvement in health outcomes with member tenure. Similarly, there may be a lag in adequately documenting the health status of our members, resulting in different Capitated Revenue compared to what is indicated by the health status of an At-Risk member. We believe that the Medical Claims Expense Ratio for a given set of At-Risk members can improve over time as we help improve their health outcomes relative to their underlying health conditions, though the ratio may fluctuate for any given customers or cohort of customers depending on future outbreaks or variants of COVID-19 and associated increases in medical claims expense. • Cost of Care, Exclusive of Depreciation and Amortization. Cost of care primarily includes our provider and support employee-related costs for both virtual and in-office care, occupancy costs, medical supplies, insurance and other operating costs. Providers include doctors of medicine, doctors of osteopathy, nurse practitioners, physician assistants and behavioral health specialists. Support employees include registered nurses, phlebotomists, health coaches, and administrative assistants assisting our members with all non-medical related services. Virtual care includes video visits and other synchronous and asynchronous communication via our app and website. A large portion of these costs are relatively fixed regardless of member utilization of our services. Our care model focuses on leveraging the primary care setting as a means of reducing unnecessary or avoidable health care costs and balancing the cost of care with the impact of increased service levels on medical claims expense. An increase in cost of care may help us in reducing total health care costs for our members. For Consumer and Enterprise members, this reduction in total health care costs typically accrues to the benefit of our enterprise clients or our members' health insurance plans through lower claims costs, or our members through lower deductibles, making our membership more competitive. For our At-Risk members, reductions in total health care costs typically accrue directly to us, to our health network partners such as Medicare Advantage payers and CMS, or to our At-Risk members, making our membership more competitive. As a result, we seek to balance the cost of care based on a variety of considerations. For example, cost of care as a percentage of net revenue may decrease if our net revenue increases. Similarly, our cost of care as a percentage of net revenue may increase if we decide to increase our investments in our providers or support employees to try to reduce our medical claims expense. As we open new offices, and expand into new geographies, we expect cost of care to increase. Our cost of care, exclusive of depreciation and amortization, also excludes stock-based compensation. • Care Margin. Care Margin is driven by net revenue, medical claims expense, and cost of care. We believe we can (i) improve revenue over time by signing up more members and increasing the revenue per member, (ii) reduce Medical Claims Expense Ratio over time from primary care engagement and population health management, improving member health and satisfaction, while 29 reducing the need for avoidable and costly care, and (iii) reduce cost of care as a percentage of revenue by better leveraging our fixed cost base and technology. • Investments in Growth. We expect to continue to focus on long-term growth through investments in sales and marketing, technology research and development, and existing and new medical offices. We are working to enhance our digital health and technology offering and increase the potential breadth of our modernized platform solution. In particular, we plan to launch new offices and enter new geographies. As we expand to new geographies, we expect to make significant upfront investments in sales and marketing to establish brand awareness and acquire new members. Additionally, we intend to continue to invest in new offices in new and existing geographies. As we invest in new geographies, in the short term, we expect these activities to increase our operating expenses and cost of care; however, in the long term we anticipate that these investments will positively impact our results of operations. • Seasonality. Seasonality affects our business in a variety of ways. In the near term, we expect these typical seasonal trends to fluctuate due to future outbreaks or variants of the COVID-19 pandemic. Medicare Reve We recognize Capitated Revenue from At-Risk members ratably over their period of enrollment. We typically experience the largest portion of our At-Risk member growth in the first quarter, as the Medicare Advantage enrollment from the prior Medicare Annual Enrollment Period (“AEP”) becomes effective January 1. Throughout the remainder of year, we can continue to enroll new At-Risk members predominantly through (i) new Medicare Advantage enrollees joining us outside AEP, (ii) through expanding the Medicare Advantage plans we are participating in, and (iii) adding additional geographies where we participate in At-Risk arrangements. Commercial Revenue : Our partnership and membership revenue are predominantly driven by the number of Consumer and Enterprise members, and recognized ratably over the period of each contract. While Consumer and Enterprise members have the opportunity to buy memberships throughout the year, we typically experience the largest portion of our Consumer and Enterprise member growth in the first and fourth quarter of each year, when enterprise customers tend to make and implement decisions on their employee benefits. Our net fee-for-service revenue is typically highest during the first and fourth quarter of each year, when we generally experience the highest levels of reimbursable visits. Medical Claims Expense: Medical claims expense is driven by our At-Risk members and varies seasonally depending on a number of factors, including the weather and the number of business days in a quarter. Typically, we experience higher utilization levels during the first and fourth quarter of the year. Key Metrics and Non-GAAP Financial Measures We review a number of operating and financial metrics, including members, Medical Claims Expense Ratio, Care Margin and Adjusted EBITDA, to evaluate our business, measure our performance, identify trends affecting our business, formulate our business plan and make strategic decisions. These key metrics are presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP. Care Margin and Adjusted EBITDA are not financial measures of, nor do they imply, profitability. We have not yet achieved profitability and, even in periods when our net revenue exceeds our cost of care, exclusive of depreciation and amortization, we may not be able to achieve or maintain profitability. The relationship of operating loss to cost of care, exclusive of depreciation and amortization is also not necessarily indicative of future performance. Other companies may not publish similar metrics, or may present similarly titled key metrics that are calculated differently. As a result, similarly titled measures presented by other companies may not be directly comparable to ours and these key metrics should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP, such as net loss. We provide investors and other users of our financial information with a reconciliation of Care Margin and Adjusted EBITDA to their most closely comparable GAAP financial measure. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view Care Margin and Adjusted EBITDA in conjunction with loss from operations and net loss, respectively. 30 Three Months Ended March 31, 2022 2021 (in thousands except for members) Members (as of the end of the period) Consumer and Enterprise 728,000 598,000 At-Risk 39,000 — Total 767,000 598,000 Net revenue $ 254,102 $ 121,352 Medical Claims Expense Ratio 84 % N/A Care Margin $ 47,759 $ 51,260 Adjusted EBITDA $ (28,944) $ 4,839 Members Members include both Consumer and Enterprise members as well as At-Risk members as defined below. Our number of members depends, in part, on our ability to successfully market our services directly to consumers including Medicare-eligible as well as non-Medicare eligible individuals, to Medicare Advantage health plans and Medicare Advantage enrollees, to employers that are not yet enterprise clients, as well as our activation rate within existing enterprise clients. We define estimated activation rate for any enterprise client at a given time as the percentage of eligible lives enrolled as members. While growth in the number of members is an important indicator of expected revenue growth, it also informs our management of the areas of our business that will require further investment to support expected future member growth. Member numbers as of the end of each period are rounded to the thousands. Consumer and Enterprise Members A Consumer and Enterprise member is a person who has registered with us and has paid for membership for a period of at least one year or whose membership has been sponsored by an enterprise or other third party under an agreement having a term of at least one year. Consumer and Enterprise members do not include trial memberships, our virtual only One Medical Now users, or any temporary users. Our number of Consumer and Enterprise members depends, in part, on our ability to successfully market our services directly to consumers and to employers that are not yet enterprise clients and our activation rate within existing clients. Consumer and Enterprise members may include individuals who (i) Medicare-eligible and (ii) have paid for a membership or whose membership has been sponsored by an enterprise or other third party. Consumer and Enterprise members do not include any At-Risk members as defined below. Consumer and Enterprise members help drive commercial revenue. As of March 31, 2022, we had 728,000 Consumer and Enterprise members. At-Risk Members An At-Risk member is a person for whom we are responsible for managing a range of healthcare services and associated costs. At-Risk members help drive Medicare revenue. As of March 31, 2022, we had 39,000 At-Risk members. 31 Members (in thousands)* * Number of members is shown as of the end of each period. Other Patients An “Other Patient” is a person who is neither a Consumer and Enterprise member nor an At-Risk member, and who has received digital or in-person care from us over the last twelve months. As of December 31, 2021, we had 21,000 Other Patients. Medical Claims Expense Ratio We define Medical Claims Expense Ratio as medical claims expense divided by Capitated Revenue. The nature of our contracting with Medicare Advantage payers and CMS requires us to be financially responsible for a range of healthcare services of our At-Risk members. Our care model focuses on leveraging the primary care setting as a means of reducing unnecessary or avoidable health care costs and balancing our cost of care with the impact of our service levels on medical claims expense. We are liable for potentially large medical claims should we not effectively manage our At-Risk members’ health. We therefore consider the Medical Claims Expense Ratio to be an important measure to monitor our performance. As we sign up new At-Risk members or open new offices to serve these members, our Medical Claims Expense Ratio is likely to increase initially due to a potential increase in medical claims expense from a lag in improvement in health outcomes with member tenure. Similarly, there may be a lag in adequately documenting the health status of our members, resulting in different Capitated Revenue compared to what is indicated by the health status of an At-Risk member. We believe that the Medical Claims Expense Ratio for a given set of At-Risk members can improve over time as we help improve their health outcomes relative to their underlying health conditions, though the ratio may fluctuate for any given customers or cohort of customers depending on future outbreaks or variants of COVID-19 and associated increases in medical claims expense. 32 The following table provides a calculation of the Medical Claims Expense Ratio for the three months ended March 31, 2022 and 2021. Three Months Ended March 31, 2022 2021 (in thousands) Medical claims expense $ 104,966 $ — Capitated Revenue $ 124,630 $ — Medical Claims Expense Ratio 84 % N/A Care Margin We define Care Margin as income or loss from operations excluding depreciation and amortization, general and administrative expense and sales and marketing expense. We consider Care Margin to be an important measure to monitor our performance, specific to the direct costs of delivering care. We believe this margin is useful to both us and investors to measure whether we are effectively pricing our services and managing the health care and associated costs, including medical claims expense and cost of care, of our At-Risk members successfully. The following table provides a reconciliation of loss from operations, the most closely comparable GAAP financial measure, to Care Margin: Three Months Ended March 31, 2022 2021 (in thousands) Loss from operations $ (92,629) $ (32,381) Sales and marketing* 22,459 12,689 General and administrative* 97,036 64,345 Depreciation and amortization 20,893 6,607 Care Margin $ 47,759 $ 51,260 Care Margin as a percentage of net revenue 19 % 42 % * Includes stock-based compensation Adjusted EBITDA We define Adjusted EBITDA as net income or loss excluding interest income, interest and other expense, depreciation and amortization, stock-based compensation, provision for (benefit from) income taxes, certain legal or advisory costs, and acquisition and integration costs that we do not consider to be expenses incurred in the normal operation of the business. Such legal or advisory costs may include but are not limited to expenses with respect to evaluating potential business combinations, legal investigations, or settlements. Acquisition and integration costs include expenses incurred in connection with the closing and integration of acquisitions, which may vary significantly and are unique to each acquisition. We started to exclude prospectively from our presentation certain legal or advisory costs from the first quarter of 2021 and acquisition and integration costs from the second quarter of 2021, because amounts incurred in the prior periods were insignificant relative to our consolidated operations. We include Adjusted EBITDA in this Quarterly Report because it is an important measure upon which our management assesses and believes investors should assess our operating performance. We consider Adjusted EBITDA to be an important measure to both management and investors because it helps illustrate underlying trends in our business and our historical operating performance on a more consistent basis. Adjusted EBITDA has limitations as an analytical tool, includin • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash used for capital expenditures for such replacements or for new capital expenditures; 33 • Adjusted EBITDA does not include the dilution that results from stock-based compensation or any cash outflows included in stock-based compensation, including from our purchases of shares of outstanding common stock; and • Adjusted EBITDA does not reflect interest expense on our debt or the cash requirements necessary to service interest or principal payments. The following table provides a reconciliation of net loss, the most closely comparable GAAP financial measure, to Adjusted EBITDA, calculated as set forth above: Three Months Ended March 31, 2022 2021 (in thousands) Net loss $ (90,859) $ (39,318) Interest income (157) (105) Interest and other expense 5,119 2,843 Depreciation and amortization 20,893 6,607 Stock-based compensation 36,919 26,328 Provision for (benefit from) income taxes (6,732) 4,199 Legal or advisory costs 547 4,285 Acquisition and integration costs 5,326 — Adjusted EBITDA $ (28,944) $ 4,839 Components of Our Results of Operations Net Revenue We generate net revenue through Medicare revenue and commercial revenue. We generate Medicare revenue from Capitated Revenue and fee-for-service and other revenue. We generate commercial revenue from partnership revenue, net fee-for-service revenue, and membership revenue. Capitated Revenue. We generate Capitated Revenue from At-Risk arrangements with payers including Medicare Advantage plans and CMS. Under these At-Risk arrangements, we receive capitated payments, consisting of each eligible member’s risk adjusted health care premium PMPM, for managing a range of healthcare services and associated costs for such members. The risk adjusted health care premium per month is determined by payers and based on a variety of a patient's factors such as age and demographic benchmarks, and further adjusted to reflect the underlying complexity of a member’s health conditions. Capitated Revenue is recognized in the month in which eligible members are entitled to receive healthcare benefits during the contract term. We expect our Capitated Revenue to increase as a percentage of total net revenue in future periods. Fee-For-Service and Other Revenue. We generate fee-for-service and other revenue from fee-for-service visits for Other Patients not covered under At-Risk arrangements and from certain payers for clinical start-up, administration, on-going coordination of care activities associated with providing care to At-Risk members and other Medicare patients. Partnership Revenue. We generate partnership revenue from (i) our health network partners on a PMPM basis, (ii) largely fixed price or fixed price per employee contracts with enterprise clients for medical services and (iii) COVID-19 on-site testing services for enterprise clients, schools and universities for which we typically bill such customers a fixed price per service performed. Under our partnership arrangements, we generally receive fees that are linked to PMPM, fixed price, fixed price per employee, fixed price per service, or capitation arrangements. All partnership revenue is recognized during the period in which we are obligated to provide professional clinical services to the member, employee, or participant, as applicable, and associated management, operational and administrative services to the health network partner, enterprise client, schools and universities. Net fee-for-service revenue. We generate net fee-for-service revenue from providing primary care services to patients in our offices when we bill the member or their insurance plan on a fee-for-service basis as medical services are rendered. While significantly all of our patients are members, we occasionally also provide care to non-members. 34 Membership Revenue. We generate membership revenue from the annual membership fees charged to either consumer members or enterprise clients, who purchase access to memberships for their employees and dependents. Membership revenue also includes fees we receive from enterprise clients for trial memberships or for access to our One Medical Now service offering. Membership revenue is recognized ratably over the contract period with the individual member or enterprise client. Grant Income. Under the CARES Act, we were eligible for and received grant income from the Provider Relief Fund administered by HHS during the three months ended March 31, 2021. The purpose of the payment is to reimburse us for healthcare-related expenses or lost revenues attributable to COVID-19. The following table summarizes our net revenue by primary source as a percentage of net revenue. Amounts may not sum due to rounding. Three Months Ended March 31, 2022 2021 Net reve Capitated revenue 49 % — % Fee-for-service and other revenue 1 % — % Total Medicare revenue 50 % — % Partnership revenue 24 % 45 % Net fee-for-service revenue 16 % 37 % Membership revenue 10 % 17 % Grant income — % 1 % Total commercial revenue 50 % 100 % Total net revenue 100 % 100 % Operating Expenses Medical Claims Expense Medical claims expenses primarily consist of certain third-party medical expenses paid by payers contractually on behalf of us, including costs for inpatient and outpatient services, certain pharmacy benefits and physician services but excludes cost of care, exclusive of depreciation and amortization. We expect our medical claims expense to increase in absolute dollars as our Capitated Revenue increases in future periods. Cost of Care, Exclusive of Depreciation and Amortization Cost of care primarily includes provider and support employee-related costs for both virtual and in-office care, occupancy costs, medical supplies, insurance and other operating costs. Providers include doctors of medicine, doctors of osteopathy, nurse practitioners, physician assistants, and behavioral health specialists. Support employees include registered nurses, phlebotomists, health coaches, and administrative assistants assisting our members with all non-medical related services. Virtual care includes video visits and other synchronous and asynchronous communication via our app and website. A large portion of these costs are relatively fixed regardless of member utilization of our services. As we open new offices, and expand into new geographies, we expect cost of care to increase. Our cost of care, exclusive of depreciation and amortization, also excludes stock-based compensation. Sales and Marketing Sales and marketing expenses consist of employee-related expenses, including salaries and related costs, commissions and stock-based compensation costs for our employees engaged in marketing, sales, account management and sales support. Sales and marketing expenses also include advertising production and delivery costs of communications materials that are produced to generate greater awareness and engagement among our clients and members, third-party independent research, trade shows and brand messages and public relations costs. 35 We expect our sales and marketing expenses to increase as we strategically invest to expand our business. We expect to hire additional sales personnel and related account management and sales support personnel to capture an increasing amount of our market opportunity. We also expect to continue our brand awareness and targeted marketing campaigns. As we scale our sales and marketing, we expect these expenses to increase in absolute dollars. General and Administrative General and administrative expenses include employee-related expenses, including salaries and related costs and stock-based compensation for all employees except sales and marketing teams, which are included in the sales and marketing expenses. In addition, general and administrative expenses include corporate technology, occupancy costs, legal and professional services expenses. We expect our general and administrative expenses to increase over time due to the additional costs associated with continuing to grow our business. Depreciation and Amortization Depreciation and amortization consist primarily of depreciation of property and equipment and amortization of capitalized software development costs. Other Income (Expense) Interest Income Interest income consists of income earned on our cash and cash equivalents, restricted cash and marketable securities. Interest and Other Expense Interest and other expense consists of interest costs associated with our notes payable issued pursuant to the loan and security agreement with an institutional lender (the “LSA”) and our convertible senior notes (the “2025 Notes”). On September 1, 2020, the term loans pursuant to the LSA matured and the remaining outstanding principal was repaid, plus accrued and unpaid interests. Interest and other expense also consists of remeasurement adjustment related to our indemnification asset. Upon the close of the Iora acquisition, as part of the Merger Agreement, certain shares of our common stock were placed into a third-party escrow account to satisfy any then pending and unsatisfied or unresolved claim for indemnification for any indemnifiable loss incurred by us pursuant to the indemnity provisions of the Merger Agreement. The indemnification asset is subject to remeasurement at each reporting date until the shares are released from escrow, with the remeasurement adjustment reported as interest and other expense in our condensed consolidated statement of operations. Provision for (Benefit from) Income Taxes We account for income taxes using an asset and liability approach. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances are provided when necessary to reduce net deferred tax assets to an amount that is more likely than not to be realized. In determining whether a valuation allowance for deferred tax assets is necessary, we analyze both positive and negative evidence related to the realization of deferred tax assets and inherent in that, assess the likelihood of sufficient future taxable income. We also consider the expected reversal of deferred tax liabilities and analyze the period in which these would be expected to reverse to determine whether the taxable temporary difference amounts serve as an adequate source of future taxable income to support the realizability of the deferred tax assets. 36 Results of Operations The following tables set forth our results of operations for the periods presented and as a percentage of our net revenue for those periods. Percentages presented in the following tables may not sum due to rounding. Comparison of the Three Months Ended March 31, 2022 and 2021 Three Months Ended March 31, 2022 2021 Amount % of Revenue Amount % of Revenue (dollar amounts in thousands) Net revenue Medicare revenue $ 127,422 50 % $ — — % Commercial revenue 126,680 50 % 121,352 100 % Total net revenue 254,102 100 % 121,352 100 % Operating expens Medical claims expense 104,966 41 % — — % Cost of care, exclusive of depreciation and amortization shown separately below 101,377 40 % 70,092 58 % Sales and marketing (1) 22,459 9 % 12,689 10 % General and administrative (1) 97,036 38 % 64,345 53 % Depreciation and amortization 20,893 8 % 6,607 5 % Total operating expenses 346,731 136 % 153,733 127 % Loss from operations (92,629) (36) % (32,381) (27) % Other income (expense), n Interest income 157 — % 105 — % Interest and other expense (5,119) (2) % (2,843) (2) % Total other income (expense), net (4,962) (2) % (2,738) (2) % Loss before income taxes (97,591) (38) % (35,119) (29) % Provision for (benefit from) income taxes (6,732) (3) % 4,199 3 % Net loss $ (90,859) (36) % $ (39,318) (32) % (1) Includes stock-based compensation, as follows: Three Months Ended March 31, 2022 2021 Amount % of Revenue Amount % of Revenue (dollar amounts in thousands) Sales and marketing $ 943 — % $ 1,023 1 % General and administrative 35,976 14 % 25,305 21 % Total $ 36,919 15 % $ 26,328 22 % 37 Net Revenue Three Months Ended March 31, 2022 2021 $ Change % Change (dollar amounts in thousands) Net reve Capitated revenue $ 124,630 $ — $ 124,630 nm Fee-for-service and other revenue 2,792 — 2,792 nm Total Medicare revenue 127,422 — 127,422 nm Partnership revenue 60,935 54,931 6,004 11 % Net fee-for-service revenue 41,514 44,462 (2,948) (7) % Membership revenue 24,231 20,196 4,035 20 % Grant income — 1,763 (1,763) (100) % Total commercial revenue 126,680 121,352 5,328 4 % Total net revenue $ 254,102 $ 121,352 $ 132,750 109 % nm – not meaningful Medicare revenue increased $127.4 million for the three months ended March 31, 2022 compared to the same period in 2021. The increase was due to revenue contribution from our acquired Iora business. Commercial revenue increased $5.3 million, or 4%, for the three months ended March 31, 2022 compared to the same period in 2021. The increase was primarily due to an increase in Consumer and Enterprise members by 130,000, or 22%, from 598,000 as of March 31, 2021 to 728,000 as of March 31, 2022, partially offset by a decrease in total billable visits. Partnership revenue increased $6.0 million, or 11%, for the three months ended March 31, 2022 compared to the same period in 2021. The increase was primarily a result of the new and expanded partnerships with health networks, new and expanded on-site medical services for enterprise clients and increased members, partially offset by a decrease in COVID-19 on-site testing services for employers, schools and universities during the three months ended March 31, 2022. Net fee-for-service revenue decreased $2.9 million, or 7%, for the three months ended March 31, 2022 compared to the same period in 2021. The decrease was primarily due to a decrease in total billable visits as a result of a decrease in COVID-19 testing visits, partially offset by a higher average reimbursement rate per visit and increased members for the three months ended March 31, 2022. Membership revenue increased $4.0 million, or 20%, for the three months ended March 31, 2022 compared to the same period in 2021. The increase was primarily due to an increase in Consumer and Enterprise members of 130,000, or 22%, from 598,000 as of March 31, 2021 to 728,000 as of March 31, 2022. Operating Expenses Medical claims expense Three Months Ended March 31, 2022 2021 $ Change % Change (dollar amounts in thousands) Medical claims expense $ 104,966 $ — $ 104,966 nm Medical claims expense increased $105.0 million for the three months ended March 31, 2022 compared to the same period in 2021. The increase was due to medical claims expenses from our acquired Iora business. 38 Cost of Care, Exclusive of Depreciation and Amortization Three Months Ended March 31, 2022 2021 $ Change % Change (dollar amounts in thousands) Cost of care, exclusive of depreciation and amortization $ 101,377 $ 70,092 $ 31,285 45 % The $31.3 million, or 45%, increase in cost of care, exclusive of depreciation and amortization, for the three months ended March 31, 2022 compared to the same period in 2021 was primarily due to increases in provider employee and support employee-related expenses of $22.2 million, occupancy costs of $8.3 million, and medical supply costs of $0.6 million. In addition to growth in our existing offices, we added 78 offices since March 31, 2021, bringing our total number of offices to 188 as of March 31, 2022. The cost of care and total offices in 2022 includes the result from our acquired Iora business. Cost of care, exclusive of depreciation and amortization, as a percentage of net revenue decreased from 58% for the three months ended March 31, 2021 to 40% for the three months ended March 31, 2022. The decrease was due to the impact of our acquired Iora business. Sales and Marketing Three Months Ended March 31, 2022 2021 $ Change % Change (dollar amounts in thousands) Sales and marketing $ 22,459 $ 12,689 $ 9,770 77 % Sales and marketing expenses increased $9.8 million, or 77%, for the three months ended March 31, 2022 compared to the same period in 2021. This increase was primarily due to a $5.8 million increase in advertising expenses and a $3.0 million increase in employee-related expenses. The sales and marketing expenses in 2022 included sales and marketing expenses from our acquired Iora business. General and Administrative Three Months Ended March 31, 2022 2021 $ Change % Change (dollar amounts in thousands) General and administrative $ 97,036 $ 64,345 $ 32,691 51 % The $32.7 million, or 51%, increase in general and administrative expenses for the three months ended March 31, 2022 compared to the same period in 2021 was primarily due to higher employee-related expenses of $25.6 million, as we expanded our team to support our growth, and a $3.0 million increase in enterprise software costs. The general and administrative expenses in 2022 included general and administrative expenses from our acquired Iora business. Depreciation and Amortization Three Months Ended March 31, 2022 2021 $ Change % Change (dollar amounts in thousands) Depreciation and amortization $ 20,893 $ 6,607 $ 14,286 216 % Depreciation and amortization expenses increased $14.3 million, or 216%, for the three months ended March 31, 2022 compared to the same period in 2021. This increase was primarily due to depreciation and amortization expenses recognized 39 related to new medical offices, capitalization of software development, upgraded office software, and the Iora acquisition during the three months ended March 31, 2022. Other Income (Expense) Interest Income Three Months Ended March 31, 2022 2021 $ Change % Change (dollar amounts in thousands) Interest income $ 157 $ 105 $ 52 50 % Interest income increased $0.05 million, or 50%, for the three months ended March 31, 2022 compared to the same period in 2021. The increase was primarily due to higher interest rates and investment yields, partially offset by amortization of premiums from marketable securities. Interest and Other Expense Three Months Ended March 31, 2022 2021 $ Change % Change (dollar amounts in thousands) Interest and other expense $ (5,119) $ (2,843) $ (2,276) 80% Interest and other expense increased $2.3 million, or 80%, for the three months ended March 31, 2022 compared to the same period in 2021. The increase was primarily due to an unrealized loss recorded for the indemnification asset recognized as a result of the Iora acquisition. Provision for (Benefit from) Income Taxes Three Months Ended March 31, 2022 2021 $ Change % Change (dollar amounts in thousands) Provision for (benefit from) income taxes $ (6,732) $ 4,199 $ (10,931) (260)% Provision for (benefit from) income taxes decreased $10.9 million from a provision of $4.2 million for the three months ended March 31, 2021 to a benefit of $6.7 million for the three months ended March 31, 2022 due primarily to amortization of identified intangibles. Liquidity and Capital Resources Since our inception, we have financed our operations primarily with the issuance of the 2025 Notes, our initial public offering, the sale of redeemable convertible preferred stock, and to a lesser extent, the issuance of term notes under credit facilities. As of March 31, 2022, we had cash, cash equivalents and marketable securities of $428.5 million, compared to $501.9 million as of December 31, 2021. We believe that our existing cash, cash equivalents and marketable securities will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months. We believe we will meet longer-term expected future cash requirements and obligations through a combination of available cash, cash equivalents and marketable securities, cash flows from operating activities, and access to private and public financing sources. Our principal commitments consist of the principal amount of debt outstanding from convertible senior notes due June 2025 and obligations under our operating leases for office space. We expect capital expenditures to increase in future periods to support growth initiatives in existing and new markets. 40 We may be required to seek additional equity or debt financing. Our future capital requirements will depend on many factors, including our pace of new member growth and expanded enterprise client and health network relationships, our pace and timing of expansion of new medical offices or services in existing and new markets, the timing and extent of spend to support the expansion of sales, marketing and development activities, acquisitions and related costs, and the impact of the COVID-19 pandemic. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition and results of operations would be harmed, and we may be forced to adjust our growth plans and capital expenditures as a result. See " Part II—Item 1A—Risk Factors — In order to support the growth of our business, we may need to incur additional indebtedness or seek capital through new equity or debt financings, which sources of additional capital may not be available to us on acceptable terms or at all.” In addition, given the uncertainty around the duration and extent of the COVID-19 pandemic, we cannot accurately predict at this time the future potential impact of the pandemic on our business, results of operations, financial condition or liquidity. There have been no material changes to our material cash requirements from contractual and other obligations as of March 31, 2022 as compared to those disclosed as of December 31, 2021 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on February 23, 2022. Summary Statement of Cash Flows The following table summarizes our cash flows: Three Months Ended March 31, 2022 2021 Net cash (used in) provided by operating activities $ (55,084) $ 22,084 Net cash (used in) provided by investing activities (49,131) 254,197 Net cash provided by financing activities 2,222 13,465 Net (decrease) increase in cash, cash equivalents and restricted cash $ (101,993) $ 289,746 Cash Flows from Operating Activities For the three months ended March 31, 2022, our net cash used in operating activities was $55.1 million, resulting from our net loss of $90.9 million and cash used in working capital of $24.6 million, mostly offset by non-cash charges of $60.3 million. Cash used in our working capital consisted primarily of a $39.1 million increase in accounts receivable, a $6.7 million decrease in operating lease liabilities, a $1.0 million increase in prepaid expenses and other current assets and a $0.7 million decrease in accounts payable, partially offset by an increase of $14.5 million in deferred revenue, an increase of $3.2 million in other liabilities, a decrease of $2.6 million in other assets, and an increase of $2.5 million in accrued liabilities. The changes in accounts receivable and deferred revenue are primarily due to timing of billing and cash collections from our health network partners and enterprise clients. The changes in accounts payable and accrued expenses are primarily related to timing of payments. For the three months ended March 31, 2021, our net cash provided by operating activities was $22.1 million, resulting from net cash provided by our working capital of $23.5 million and adjustments for non-cash charges of $37.9 million, partially offset by our net loss of $39.3 million. The cash increase resulting from changes in our working capital for the three months ended March 31, 2021 consisted primarily of a $12.1 million increase in accrued expenses and other liabilities, a $11.1 million increase in deferred revenue, a $8.6 million decrease in accounts receivables, net, a $2.5 million decrease in inventory, partially offset by a $4.9 million increase in prepaid expenses and other current assets, a $4.4 million decrease in operating lease liabilities and a $1.2 million decrease in accounts payable. The changes in accounts receivable and deferred revenue are primarily due to timing of billing and cash collections from our health network partners and enterprise clients. The changes in accounts payable and accrued expenses are primarily related to timing of payments. Cash Flows from Investing Activities For the three months ended March 31, 2022, our net cash used in investing activities was $49.1 million, resulting primarily from purchases of marketable securities of $54.9 million and purchases of property and equipment of $19.2 million related to leasehold improvements, computer equipment, and furniture and fixtures for new offices, remodels and improvements 41 to existing offices, capitalization of internal-use software development costs, and office hardware and software. This is partially offset by sales and maturities of marketable securities of $25.0 million. For the three months ended March 31, 2021, our net cash provided by investing activities was $254.2 million, resulting primarily from sales and maturities of short-term marketable securities of $339.0 million, partially offset by purchases of short-term marketable securities of $70.0 million and purchases of property and equipment, of $14.8 million related to leasehold improvements, computer equipment, and furniture and fixtures for new offices, remodels and improvements to existing offices, capitalization of internal-use software development costs, and office hardware and software. Cash Flows from Financing Activities For the three months ended March 31, 2022, our net cash provided by financing activities was $2.2 million, resulting primarily from exercise of stock options of $2.2 million. For the three months ended March 31, 2021, our net cash provided by financing activities was $13.5 million, resulting primarily from exercise of stock options of $13.5 million. Critical Accounting Policies and Significant Judgments and Estimates Our condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. During the three months ended March 31, 2022, there were no significant changes to our critical accounting policies and estimates as described in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 23, 2022. Recent Accounting Pronouncements Please see Note 2, “Summary of Significant Accounting Policies” to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. 42 Item 3. Quantitative and Qualitative Disclosures About Market Risk. Interest Rate Sensitivity We had cash and cash equivalents of $240.0 million as of March 31, 2022, compared to $342.0 million as of December 31, 2021, held primarily in cash deposits and money market funds for working capital purposes. We had marketable securities of $188.5 million as of March 31, 2022, compared to $160.0 million as of December 31, 2021, consisting of U.S. Treasury obligations, U.S. government agency securities, foreign government bonds and commercial paper. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes. All our investments are denominated in U.S. dollars. In May 2020, we issued the 2025 Notes which bear interest at a fixed rate of 3.0% per annum. As of March 31, 2022, the principal amount of debt outstanding from the 2025 Notes was $316.3 million. Our cash and cash equivalents, marketable securities and debt are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value negatively impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. We do not believe that an increase or decrease in interest rates of 100 basis points would have a material effect on our business, financial condition or results of operations. Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, as of March 31, 2022, that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitation on the Effectiveness of Internal Control The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting. 43 PART II—OTHER INFORMATION Item 1. Legal Proceedings. We are currently involved in, and may in the future become involved in, legal proceedings, claims and investigations in the ordinary course of our business, including medical malpractice and consumer claims. Although the results of these legal proceedings, claims and investigations cannot be predicted with certainty, we do not believe that the final outcome of any matters that we are currently involved in are reasonably likely to have a material adverse effect on our business, financial condition or results of operations. Regardless of final outcomes, however, any such proceedings, claims, and investigations may nonetheless impose a significant burden on management and employees and be costly to defend, with unfavorable preliminary or interim rulings. Please see Note 13, “Commitments and Contingencies” to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of our legal proceedings, claims and investigations. Item 1A. Risk Factors. Investing in our common stock involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below, as well as other information included in this Quarterly Report, including our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report, before making an investment decision. If any of the following risks actually occur, it could harm our business, prospects, operating results and financial condition. Unless otherwise indicated, references to our business being harmed in these risk factors will include harm to our business, reputation, financial condition, results of operations, net revenue and future prospects. In such event, the trading price of our common stock could decline and you might lose all or part of your investment. Risk Factor Summary Our business is subject to a number of risks and uncertainties which may prevent us from achieving our business and strategic objectives or may adversely impact our business, financial condition, results of operations, cash flows and prospects. These risks include but are not limited to the followin Risks Related to Our Business and Our Industry • the impact of the ongoing COVID-19 pandemic; • our dependence on a limited number of key existing payers; • our reliance on reimbursements from certain third-party payers for the services we provide; • the impact of reviews and audits by CMS in accordance with Medicare's risk adjustment payment system; • the impact of assuming some or all of the risk that the cost of providing services will exceed our compensation for such services under certain third-party payer agreements; • the impact of reduced reimbursement rates paid by third-party payers, or federal or state healthcare programs due to rule changes or other restrictions; • the impact of regulatory or policy changes in Medicare or other federal or state healthcare programs; • our dependence on the success of our strategic relationships with third parties; • the impact of a decline in the prevalence of private health insurance coverage; • our ability to cost-effectively develop widespread brand awareness and to maintain our reputation and market acceptance for our healthcare services; • our history of losses and uncertainty about our future profitability; • our ability to maintain and expand member utilization of our services; • our ability to compete effectively in the geographies in which we participate; • our ability to grow at the rates we historically have achieved; • the impact of current or future litigation against us, including medical liability claims and class actions; 44 • our ability to attract and retain quality primary care providers to support our services; • fluctuations in our quarterly results and our ability to meet the expectations of securities analysts and investors; and • the loss of key members of our senior management team and our ability to attract and retain executive officers, employees, providers and medical support personnel. Risks Related to Government Regulation • the impact of healthcare reform legislation and changes in the healthcare industry and healthcare spending; • the impact of governmental or regulatory scrutiny of or challenge to our arrangements with health networks; • our dependence on our relationships with affiliated professional entities that we may not own, to provide healthcare services; • our ability to comply with rules related to billing and related documentation for healthcare services; and • our ability to comply with regulations governing the use and disclosure of personal information, including protected health information, or PHI. Risks Related to Information Technology • our reliance on internet infrastructure, bandwidth providers, other third parties and our own systems to provide a proprietary services platform to our members and providers; • our reliance on third-party vendors to host and maintain our technology platform; • any breaches of our systems or those of our vendors or unauthorized access to employee, contractor, member, client or partner data; • our ability to maintain and enhance our proprietary technology platform; and • our ability to optimize our technology solutions for members, integrate our systems with health network partners or resolve technical issues in a timely manner. Risks Related to Our Intellectual Property • our ability to obtain, maintain, protect and enforce our intellectual property rights. Risks Related to Our Acquisition of Iora • our ability to successfully integrate Iora's business and realize the benefits of the merger; and • the incurrence of substantial expenses related to the integration of Iora's business. Risks Related to Our Business and Our Industry The ongoing coronavirus (COVID-19) pandemic has significantly impacted, and may continue to significantly impact our business, financial condition, results of operations and growth. The global COVID-19 pandemic and measures introduced by local, state and federal governments to contain the virus and mitigate its public health effects have significantly impacted and may continue to significantly impact our business, our industry and the global economy. While the full extent of the impacts of the COVID-19 pandemic may be difficult to predict or determine due to numerous evolving factors, including emerging variant strains of the virus and their degree of vaccine resistance as well as reinstatements or potential reinstatements of measures to curb the spread of COVID-19, we have seen and may continue to see adverse impacts on our operations, net revenues, expenses, collectability of accounts receivables and other money owed, capital expenditures, liquidity, and overall financial condition, including from: • reduced total billable visit volumes, temporary closures of certain offices, delays in openings of new medical offices, and delayed entry into new or expansion into existing geographies (in response to self-isolation practices, sustained remote work policies, quarantines, shelter-in-place requirements and similar government orders); • higher proportions of lower-revenue generating services and products, including billable remote visits, COVID-19 testing and COVID-19 vaccinations, which may not be reimbursable or have lower average reimbursements relative to traditional in-office visits; 45 • deferral of healthcare by members and patients, which may result in difficulties completing comprehensive annual documentation of Medicare patient health conditions, future cost increases, deferred costs and inability to accurately estimate costs for incurred but not yet reported medical services claims for our At-Risk members, and may negatively impact the health of our patients; • increase in internal and third-party medical costs for care provided to At-Risk members suffering from COVID-19, which may be particularly significant given many of our members are under At-Risk arrangements in which we receive capitated payments and may be more pronounced as a result of future outbreaks or variants of COVID-19; • negative impacts to the business, results of operations and financial condition of our health network partners and their ability or willingness to continue to pay us a fixed price PMPM if they receive reduced visit revenue due to decreases in billable utilization; • inquiries, regulatory or governmental investigations or other disputes that result from our provision of COVID-19 vaccinations, arrangements entered into in reliance on related orders, laws and regulations, or the failure of various waivers for limitations of liability or other provisions under such orders, laws and regulations that apply to us; • supply, resource and capital constraints related to the treatment of COVID-19 patients and disruptions or delays in the delivery of materials and products in the supply chain for our offices and increased capital expenditures due to the need to buy incremental materials or services; • staffing shortages and increased risk for workers’ compensation claims; or • increased costs, diversion of resources from managing our business and growth and reputational harm due to (i) implementation of new services and products in reliance on continuously evolving regulatory standards, (ii) alterations to our operations to address the changing needs of our members during the pandemic, or (iii) member or enterprise client dissatisfaction due to inaccurate results from testing or other services, overburdening of our medical offices and virtual care teams with inquiries and requests, which may result in longer phone wait times or service delays. Any continuation of the above factors and outcomes could harm our business, financial condition, results of operations and growth. We cannot assure you that our current billable volumes and membership levels will be sustained or that average reimbursement for billable services will return to pre-COVID-19 levels. As more of the U.S. population receives the COVID-19 vaccination, our COVID-19 testing volumes may also decline, which may negatively impact our membership and revenue. Further, while vaccines have become available in certain countries and many economies have reopened, new shelter-in-place, quarantine, executive order or related measures or practices may be reinstated by governments and authorities, including due to future waves of outbreak or emerging variant strains of COVID-19, such as the Delta and Omicron variant. Such measures and practices, if reinstated, could reduce our total billable volumes, negatively impact our health network partners and harm our results of operations, business and financial condition. We have continued to adjust many of our new programs to rapidly respond to the COVID-19 pandemic, including telehealth visits, testing and vaccine administration arrangements, in reliance on continuously evolving regulatory standards such as emergency orders, laws and regulations from federal, state and local authorities and the relaxation of certain licensure requirements and privacy restrictions for telehealth intended to permit health care providers to provide care and distribute COVID-19 vaccines to patients during the COVID-19 pandemic. To continue providing some of these new services and products, we will be required to comply with federal, state and local rules, mandates and guidelines, which are subject to rapid change and may vary across jurisdictions. We cannot assure you that such orders, laws, regulations, mandates or guidelines will continue to apply or that regulators or other governmental entities will agree with our interpretations of these orders, laws, regulations, mandates and guidelines. Failure to remain in compliance, or even the perception of non-compliance, may curtail or result in restrictions on our ability to provide any such services, result in time-consuming and potentially costly inquiries, disputes, or investigations (such as the vaccine inquiries discussed in Note 13, “Commitments and Contingencies” to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, or the Vaccine Inquiries, or inquiries from state and local public health departments), as well as damage to our reputation, any of which could harm our business, financial condition and results of operations. We are cooperating with the requests from the Vaccine Inquiries as well as requests received from other governmental agencies, including with respect to our compensation practices and membership generation during the relevant periods. We are unable to predict the outcome or timeline of any residual inquiries or if any additional requests, inquiries, investigations or other government actions may arise relating to such circumstances. The Vaccine Inquiries, together with any additional inquiries, regulatory or governmental investigations or other disputes that result from our provision of COVID-19 vaccinations or any other arrangements entered into in reliance on these 46 orders, laws and regulations, or the failure or reversal of various waivers for limitations of liability or other provisions under such orders, laws and regulations to apply to us could require us to divert resources or adjust certain new programs to ensure compliance and harm our reputation, business, financial condition and results of operations. The pandemic has also resulted in, and may continue to result in, significant disruption of global financial markets, potentially reducing our ability to access capital and reducing the liquidity and value of our marketable securities, which could in the future negatively affect our liquidity. In addition, due to our At-Risk arrangements for the care of Medicare Advantage participants, the full impact of the COVID-19 pandemic may not be fully reflected in our results of operations and overall financial condition until future periods. The COVID-19 pandemic may continue to impact our operations, and net revenues, expenses, collectability of accounts receivables and other money owed, capital expenditures, liquidity, and overall financial condition. We are dependent upon a limited number of key existing payers and loss of contracts with those payers, disruptions in those relationships or the inability of such payers to maintain their contracts with CMS, could adversely affect our business, financial condition, results of operations and prospects. We are dependent on a concentrated number of third-party payers with whom we contract to provide services to At-Risk Members. Contracts with one such payer across multiple markets accounted for 27% of net revenue for the three months ended March 31, 2022. We believe that a majority of our net revenue will continue to be derived from a limited number of key payers, who may terminate their contracts with us for convenience on short-term notice, or upon the occurrence of certain events, some of which may not be within our control. The loss of any of our payer partners or the renegotiation of any of our payer contracts could adversely affect our operating results. In the ordinary course of business, we engage in active discussions and renegotiations with payers in respect of the services we provide and the terms of our payers' agreements. As the payers’ businesses respond to market dynamics, regulatory developments and financial pressures, and as payers make strategic business decisions in respect of the lines of business they pursue and programs in which they participate, certain of our payers may seek to renegotiate or terminate their agreements with us. These discussions could result in reductions to the fees and changes to the scope of services contemplated by our original payer contracts and consequently could negatively impact our net revenue, business, financial condition, results of operations and prospects. Because we rely on a limited number of these payers for a substantial portion of our revenue, we depend on the creditworthiness of these payers. Our payers are subject to a number of risks, including reductions in payment rates from governmental programs, higher than expected health care costs and lack of predictability of financial results when entering new lines of business, particularly with high-risk populations. If the financial condition of our payer partners declines, our credit risk could increase. Should one or more of our significant payer partners declare bankruptcy, be declared insolvent or otherwise be restricted by state or federal laws or regulation from continuing in some or all of their operations, this could adversely affect our ongoing revenues, the collectability of our accounts receivable, our bad debt reserves and our net income. If a payer with which we contract loses its Medicare contracts with CMS, receives reduced or insufficient government reimbursement under the Medicare program, decides to discontinue its Medicare Advantage and/or commercial plans, decides to contract with another company to provide capitated care services to its patients, decides to directly provide care, or otherwise makes or announces an adjustment to its business or strategies, our contract with that payer could be at risk and we could lose revenue or members, and our stock price could decline. We are reliant upon reimbursements from certain third-party payers for the services we provide in our business and reliance on these third-party payers could lead to delays and uncertainties in the reimbursement process. We are reliant upon contracts with certain third-party payers in order to receive reimbursement for some of the services we provide to patients, including value-based contracts from health insurance plans. The reimbursement process is complex and can involve lengthy delays. Although we recognize certain revenue when we provide services to our patients, we may from time to time experience delays in receiving the associated capitation payments or, for our patients on fee-for-service arrangements, the reimbursement for the service provided. In addition, third-party payers may disallow, in whole or in part, requests for reimbursement based on determinations that the member is not eligible for coverage, certain amounts are not reimbursable under plan coverage or were for services provided that were not medically necessary or additional supporting documentation is necessary. Retroactive adjustments may change amounts realized from third-party payers. We are also subject to claims reviews and/or audits by such third-party payers, including governmental audits of our Medicare claims, and may be required to repay these payers if a finding is made that we were incorrectly reimbursed. See “—Noncompliance with billing and documentation requirements could result in non-payment or subject us to audits, billing or other compliance investigations by government authorities, private payers or health network partners.” Third-party payers are also increasingly focused on controlling health care costs, and such efforts, including any revisions to reimbursement policies, may further complicate and delay our reimbursement claims. Furthermore, our business may be adversely affected by legislative initiatives aimed at or 47 having the effect of reducing health care costs associated with Medicare and other changes in reimbursement policies. Delays and uncertainties in the reimbursement process may adversely affect our collection of accounts receivable, increase the overall costs of collection and cause us to incur additional borrowing costs to support our liquidity needs, which could harm our business, financial condition and results of operations. A significant portion of our net revenue is based on Medicare’s risk adjustment payment system and is subject to review and audit, which could result in material adjustments to our results of operations. CMS has implemented a risk adjustment payment system for Medicare health plans to improve the accuracy of payments and establish appropriate compensation for Medicare plans that enroll and treat less healthy Medicare beneficiaries. CMS’ risk adjustment model bases a portion of the total CMS reimbursement payments on various clinical and demographic factors, including hospital inpatient diagnoses, diagnosis data from hospital outpatient facilities and physician visits, gender, age and Medicaid eligibility. CMS requires that all managed care companies capture, collect and report the necessary diagnosis code information to CMS, which information is subject to review and audit for accuracy by CMS. This risk adjustment payment system has an indirect impact on the payments we receive from our contracted Medicare Advantage payers. Although we, and the payers with which we contract, have auditing and monitoring processes in place to collect and provide accurate risk adjustment data to CMS for these purposes, that program may not be sufficient to ensure accuracy. If the risk adjustment data submitted by us or our payers incorrectly overstates the health risk of our patients, we might be required to return to the payer or CMS, overpayments and/or be subject to penalties or sanctions, or if the data incorrectly understates the health risk of our members, we might be underpaid for the care that it must provide to its patients, any of which could harm our reputation and have a negative impact on our results of operations and financial condition. CMS may also change the way that they measure risk, and the impact of any such changes could harm our business. As a result of the COVID-19 pandemic, risk adjustment scores may also fall as a result of reduced data collection, decreased patient visits or delayed medical care and limitations on payments for certain telehealth services. As a result of the variability of factors affecting our patients’ risk scores, the actual payments we receive from our payers, after all adjustments, could be materially more or less than our estimates. Consequently, our estimate of our patients’ aggregate member risk scores for any period may result in favorable or unfavorable adjustments to our Medicare premium revenues, which may harm our results of operations. Under our At-Risk arrangements with certain third-party payers, we assume the risk that the cost of providing services will exceed our compensation for such services. A substantial portion of our net revenue consists of Capitated Revenue, which, in the case of third party payers or health insurance plans, is based on a pre-negotiated percentage of the premium that the payer receives from CMS. While there are variations specific to each agreement, we sometimes contract with payers to receive recurring PMPM revenue and assume the financial responsibility for the healthcare expenses of our patients. This type of contract is referred to as a “capitation” contract. CMS pays capitation using risk adjustment scores. See “–A significant portion of our net revenue is based on Medicare’s risk adjustment payment system and is subject to review and audit, which would result in material adjustments to our results of operations.” To the extent we encounter delays in documenting patients’ acuity or patients requiring more care than initially anticipated and/or the cost of care increases, aggregate fixed compensation amounts, or capitation payments, may be insufficient to cover the costs associated with treatment. If medical costs and expenses exceed estimates, except in very limited circumstances, we will not be able to increase the fee received under these capitation agreements during their then-current terms and we could suffer losses with respect to such agreements. In addition, while we maintain stop-loss insurance that helps protect us for medical claims per patient in excess of certain levels, future claims could exceed our applicable insurance coverage limits or potential increases in insurance premiums may require us to decrease its level of coverage. Changes in our anticipated ratio of medical expense to revenue can significantly impact our financial results. Accordingly, the failure to adequately predict and control medical costs and expenses and to make reasonable estimates and maintain adequate accruals for incurred but not reported claims could have a material adverse effect on our business, results of operations, financial condition and cash flows. Additionally, the Medicare expenses of our At-Risk members may be outside of our control in the event that such members take certain actions that increase such expenses, such as unnecessary hospital visits. These actions or events also make it more difficult for us to estimate medical expenses and may cause delays in reporting them to payers. Any delays or failures to adequately predict and control medical costs may also result in delayed negative impacts to our Capitated Revenue, including as compared to our estimates of cost of care and capitation payments. Historically, our medical costs and expenses as a percentage of revenue have fluctuated. Factors that may cause medical expenses to exceed estimates inclu 48 • the health status of our At-Risk members; • higher levels of hospitalization among our At-Risk members; • higher than expected utilization of new or existing healthcare services or technologies; • an increase in the cost of healthcare services and supplies, whether as a result of inflation or otherwise; • changes to mandated benefits or other changes in healthcare laws, regulations and practices; • increased costs attributable to specialist physicians, hospitals and ancillary providers; • changes in the demographics of our At-Risk members and medical trends; • contractual or claims disputes with providers, hospitals or other service providers within and outside a health plan’s network; • the occurrence of catastrophes, major epidemics or pandemics, including COVID-19, or acts of terrorism; and • the reduction of health plan premiums. If reimbursement rates paid by private third-party payers are reduced or if these third-party payers otherwise restrain our ability to obtain or provide services to patients, our business could be harmed. Private third-party payers, including health maintenance organizations, or HMOs, preferred provider organizations and other managed care plans, as well as medical groups and independent practice associations that contract with HMOs, pay for the services that we provide to many of our members. As a substantial proportion of our members are commercially insured or covered under Medicare Advantage plans with our contracted payers, if any third-party payers reduce their reimbursement rates or elect not to cover some or all of our services, our business may be harmed. Typically, our affiliated professional entities that provide medical services enter into contracts with certain of these payers either directly, or indirectly through certain of our health network partners, which allow them to participate in the payers’ respective networks and set forth reimbursement rates for services rendered thereunder. As a result, our ability to maintain or increase patient volumes covered by private third-party payers and to maintain and obtain favorable contracts with private third-party payers significantly affects our revenue and operating results. See also “—We are dependent upon a limited number of key existing payers and loss of contracts with those payers, disruptions in those relationships or the inability of such payers to maintain their contracts with CMS, could adversely affect our business, financial condition, results of operations and prospects.” Private third-party payers often use plan structures, such as narrow networks or tiered networks, to encourage or require members to use in-network providers. In-network providers typically provide services through private third-party payers for a negotiated lower rate or other less favorable terms. Private third-party payers generally attempt to limit use of out-of-network providers by requiring members to pay higher copayment and/or deductible amounts for out-of-network care. Additionally, private third-party payers have become increasingly aggressive in attempting to minimize the use of out-of-network providers by disregarding the assignment of payment from members to out-of-network providers (i.e., sending payments directly to members instead of to out-of-network providers), capping out-of-network benefits payable to members, waiving out-of-pocket payment amounts and initiating litigation against out-of-network providers for interference with contractual relationships, insurance fraud and violation of state licensing and consumer protection laws. If we become out of network for payers, our business could be harmed and our revenue could be reduced because patients could stop using our services. If reimbursement rates paid by Medicare or other federal or state healthcare programs are reduced, if changes in the rules governing such programs occur, or if government payers otherwise restrain our ability to obtain or provide services to patients, our business, financial condition and results of operations could be harmed. A significant portion of our revenue comes from government healthcare programs, principally Medicare, either through Medicare Advantage plans or directly, including through the Center for Medicare and Medicaid Innovation's, or CMMI's, Global and Professional Direct Contracting Model, or the GPDC Model, which CMMI announced has been redesigned and renamed the ACO Realizing Equity, Access, and Community Health Model, or the ACO REACH Model, to take effect January 1, 2023 for both new applicants who are approved to participate and current GPDC Model participants that have maintained a strong compliance record and meet the requirements of the ACO REACH Model. In addition, many commercial payers base 49 their reimbursement rates on the published Medicare rates or are themselves reimbursed by Medicare for the services we provide. As a result, our results of operations are, in part, dependent on the continuation of Medicare programs, including Medicare Advantage, the GPDC Model (through December 31, 2022) or the ACO REACH Model (starting January 1, 2023), as well as the levels of government funding provided therewith. Any changes that limit or reduce the GPDC Model or the ACO REACH Model, Medicare Advantage, or general Medicare reimbursement levels, such as reductions in or limitations of reimbursement amounts or rates under programs, reductions in funding of programs, expansion of benefits without adequate funding, elimination of coverage for certain benefits, or elimination of coverage for certain individuals or treatments under programs, could have a material adverse effect on our business, results of operations, financial condition and cash flows. The Medicare program and its reimbursement rates and rules, are also subject to frequent change. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative rulings or executive orders, interpretations and determinations, requirements for utilization review and government funding restrictions, each of which may materially and adversely affect the rates at which CMS reimburses us for our services, as well as affect the cost of providing service to patients and the timing of payments to our affiliated professional entities. Budget pressures often lead the federal government to reduce or place limits on reimbursement rates under Medicare. Implementation of these and other types of measures has in the past and could in the future result in substantial reductions in our revenue and operating margins. The final impact of the Medicare Advantage rates can vary from any estimate we may have and may be further impacted by the relative growth of our Medicare Advantage patient volumes across certain geographies as well as by the benefit plan designs submitted. It is possible that we may underestimate the impact of the Medicare Advantage rates on our business, which could have a material adverse effect on our business, results of operations, financial condition and cash flows. In addition, our Medicare Advantage revenues may continue to be volatile in the future which could have a material adverse impact on our business, results of operations, financial condition and cash flows. In addition, CMS often changes the rules governing the Medicare program, including those governing reimbursement. Changes that could adversely affect our business inclu • administrative or legislative changes to base rates or the bases of payment; • limits on the services or types of providers for which Medicare will provide reimbursement; • changes in methodology for patient assessment and/or determination of payment levels; • the reduction or elimination of annual rate increases; or • an increase in co-payments or deductibles payable by beneficiaries. We are unable to predict the effect of recent and future policy changes on our operations. Recent legislative, judicial and executive efforts to enact further healthcare reform legislation have also caused many core aspects of the current U.S. healthcare system to be unclear. While specific changes and their timing are not yet apparent, enacted reforms and future legislative, regulatory, judicial, or executive changes, particularly any changes to the Medicare Advantage program, could have a material adverse effect on our business, results of operations, financial condition and cash flows. There is additional uncertainty around the future of the ACO REACH Model. The ACO REACH Model has been developed by CMS as a means to test various financial risk sharing arrangements in the Medicare program over a four-year period, from January 1, 2023 through December 31, 2026. CMS may make additional, material changes to the ACO REACH Model in the intervening years or, at the end of that four-year period, CMS may not extend or replace the ACO REACH Model with a similar program that we can participate in, which may have a material adverse effect on our business. The GPDC Model and the ACO REACH Model are new CMS programs and we therefore may not be able to realize the expected benefits of either model. In 2021, CMMI announced the GPDC Model to create value-based payment arrangements directly with Direct Contracting Entities, or DCEs, which is part of CMMI's’ strategy to test the next evolution of risk-sharing arrangement to produce value and high quality health care by permitting DCEs to participate in value-based care arrangements with beneficiaries in Medicare fee-for-service. The GPDC Model began its first performance period on April 1, 2021. 50 Our wholly owned subsidiary, Iora Health NE DCE, LLC, was one of a limited number of companies chosen by CMMI as a DCE. In February 2022, CMS announced that the GPDC Model had been redesigned and renamed the ACO REACH Model, with such changes to take effect beginning January 1, 2023. Current Direct Contracting Entities, or DCEs, like us, will participate in the current GPDC Model until December 31, 2022. To participate in the ACO REACH Model, we must (i) agree to meet all of the ACO REACH requirements as of January 1, 2023, including new requirements related to corporate governance, health equity and data collection and reporting and (ii) maintain a strong compliance record during 2022, as determined by CMS. Given the recent enactment of the ACO REACH Model, we cannot assure you that we will be able to participate in and/or comply with the new requirements of the ACO REACH Model. We have no experience serving as an ACO under the new ACO REACH Model and may not be able to realize the expected benefits of the new model. For example, we may encounter difficulties calibrating our historical medical expense estimates to this new beneficiary population, which has not chosen to participate in risk-based care arrangements (unlike Medicare Advantage beneficiaries) and thus may utilize medical services differently than our current members. While we have invested and expect to continue to invest significant time and resources to meet the requirements of the GPDC Model and adapt to the ACO REACH Model, beneficiaries assigned to us under either model may not generate revenue as expected, initially or at all, and we cannot assure you that direct contracting will allow us to achieve the same financial outcomes on Medicare fee-for-service beneficiaries as we do on our existing patients. Additionally, adding new members through either model will also require absorbing new members into our affiliated professional entities, which may strain resources or negatively affect our quality of care. We cannot assure you that our current participation in the GPDC Model will be successful or that we will be able to participate in the ACO REACH Model in the future. We also cannot assure you that our participation in either model will expand our total addressable market in the manner that we expect. Our business model and future growth are substantially dependent on the success of our strategic relationships with health network partners, enterprise clients and distribution partners. We will continue to substantially depend on our relationships with third parties, including health network partners, enterprise clients and distribution partners to grow our business. In particular, our growth depends on maintaining existing, and developing new, strategic affiliations with health network partners, including health systems and private and government payers. We also rely on a number of partners such as benefits enrollment platforms, professional employment organizations, consultants and other distribution partners in order to sell our solutions and services and enroll members onto our platform. Our agreements with our enterprise clients often provide for fees based on the number of members that are covered by such clients’ programs each month, known as capitation arrangements. Certain of our enterprise clients and partners also pay us a fixed fee per year regardless of the number of registered members. The number of individuals who register as members through our enterprise clients is often affected by factors outside of our control, such as plan endorsement by the employer, member outreach and retention initiatives. Enterprise clients may also prohibit us from engaging in direct outreach with employees as potential members, or we may be unsuccessful in spreading brand awareness among employees who perceive competitors as offering better solutions and services, which would decrease growth in membership and reduce our net revenue. Increasing rates of unemployment may also result in loss of members at our enterprise clients, and economic recessions or slowdowns can result in our enterprise clients terminating their employee sponsorship arrangements with us. In addition, during periods of economic slowdown, enterprise clients may face less competition for new hires or may not need to hire as many employees and as a result, they may not need to sponsor memberships with us as a means to attract new hires. Even if the geographies in which our enterprise clients operate experience growth, it is possible that such client’s program membership could fail to grow at similar rates, if at all. If the number of members covered by one or more of such clients’ programs were to be reduced, including due to benefits reductions or layoffs during and after the COVID-19 pandemic, it would lead to a reduction of membership fees, a decrease in our net fee-for-service revenue and partnership revenue, and may also result in the enterprise client electing not to renew our contract for another year. In addition, the growth forecasts of our clients are subject to significant uncertainty, including after the COVID-19 pandemic and any prolonged ensuing economic recession, and are based on assumptions and estimates that may prove to be inaccurate. Further, historical activation rates within a given enterprise client may not be indicative of future membership levels at that enterprise client or activation rates of similarly situated enterprise clients. High activation rates (i.e., the percentage of individuals eligible for membership who are enrolled as members) do not necessarily result in increased net fee-for-service revenue and do not typically result in increased membership revenue. 51 Health network partnerships also comprise a significant portion of our revenue. For example, under certain health network partnership contracts, we closely collaborate with a health network on certain strategic initiatives such as the expansion of practice sites in a particular jurisdiction or service area, and clinical and digital integration between our primary care and their specialty care services. Our contracts with health network partners can sometimes be bespoke, with varying terms across health network partners. However, many contracts provide for fees on a PMPM basis or a fee-for-service basis. Under contracts providing for PMPM fees, when our medical offices provide professional clinical services to covered members, we, as administrator, perform billing and collection services on behalf of the health network, and the health network receives the fees for services provided, including those paid by members’ insurance plans. If we do not adequately satisfy the objectives of our partners or perform against contractual obligations, we may lose revenue under the applicable health network partner contract and the health network partner may become dissatisfied with the terms or our performance under the contract, which could result in its early termination or amendment, if permitted, and as a result, harm to our business and results of operations, including a reduction in net revenue. Even regardless of our performance under the contracts, we cannot guarantee that our health network partners will continue to be satisfied with the terms or circumstances under existing contracts, particularly given constraints and challenges posed by the COVID-19 pandemic. We have experienced contractual disputes and renegotiations, including with respect to delays in payments due to us, with health network partners in the past and may experience additional disputes and renegotiations in the future. In certain situations, we may need to take legal or other action to enforce our contractual rights, which may strain relationships with our partners, further delay payments owed to us, make us less attractive for potential or future partners and harm our business, results of operations and reputation. Certain contracts with health network partners can be exclusive in the applicable jurisdiction; as a result, in new potential geographies, should we pursue a health network partnership, we would need to successfully contract with a sufficiently competitively viable health network partner, as we may not be able to terminate any such contract for several years without penalty or be able to partner with other health network partners in the same geographies due to competitive pressures or lack of counterparties. If we are unable to successfully continue our strategic relationships with our health network partners on terms favorable to us or at all, or if we do not successfully contract with health network partners in new jurisdictions, our business and results of operations could be harmed. Most of our enterprise clients and health network partners have no obligation to renew their agreements with us after the initial term expires. In addition, our health network partners and enterprise clients may negotiate terms less advantageous to us upon renewal, which may reduce our revenue from these entities. If our health network partners or enterprise clients fail to renew their contracts, or renew their contracts upon less favorable terms or at lower fee levels, our revenue may decline or our future revenue growth may be constrained. In addition, certain of our health network partners and enterprise clients may terminate their contracts with us early for various reasons. If a partner or customer terminates its contract early and revenue and cash flows expected from a partner or enterprise client are not realized in the time period expected or not realized at all, our business could be harmed. Identifying partners, and negotiating and documenting relationships with them, requires significant time and resources. Our competitors may be more effective in executing such relationships and performing against them. If we are unsuccessful in establishing or maintaining our relationships with third parties, our ability to compete in the marketplace or to grow our net revenue could be impaired and our results of operations may suffer. Even if we are successful, we cannot assure you that these relationships will result in increased member use of our solutions and services or increased net revenue. We conduct business in a heavily regulated industry, and any failure to comply with applicable healthcare laws and government regulations, could result in financial penalties, exclusion from participation in government healthcare programs and adverse publicity, or could require us to make significant operational changes, any of which could harm our business. The U.S. healthcare industry is heavily regulated and closely scrutinized by federal, state and local authorities. Comprehensive statutes and regulations govern the manner in which we provide and bill for services and collect reimbursement from governmental programs and private payers, our contractual relationships with our providers, vendors, health network partners, enterprise clients, members and patients, our marketing activities and other aspects of our operations. Of particular importance • state laws that prohibit general business corporations, such as us, from practicing medicine, controlling physicians’ medical decisions or engaging in practices such as splitting fees with physicians; • federal and state laws pertaining to non-physician practitioners, such as nurse practitioners and physician assistants, including requirements for physician supervision of such practitioners and licensure and reimbursement-related requirements; • Medicare and Medicaid billing and reimbursement rules and regulations; 52 • the federal physician self-referral law, commonly referred to as the Stark Law, which, subject to certain exceptions, prohibits physicians from referring Medicare or Medicaid patients to an entity for the provision of certain “designated health services” if the physician or a member of the physician’s immediate family has a direct or indirect financial relationship (including an ownership interest or a compensation arrangement) with the entity; • the federal Anti-Kickback Statute, which, subject to certain exceptions known as “safe harbors,” prohibits the knowing and willful offer, payment, solicitation or receipt of any bribe, kickback, rebate or other remuneration, in cash or in kind, in return for the referral of an individual for, or the lease, purchase, order or recommendation of, items or services covered, in whole or in part, by government healthcare programs such as Medicare and Medicaid; • the federal False Claims Act, which imposes civil and criminal liability on individuals or entities that knowingly or recklessly submit false or fraudulent claims to Medicare, Medicaid, and other government-funded programs or make or cause to be made false statements in order to have a claim paid; • a provision of the Social Security Act that imposes criminal penalties on healthcare providers who fail to disclose or refund known overpayments; • the criminal healthcare fraud provisions of the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, or collectively, HIPAA, and related rules that prohibit knowingly and willfully executing a scheme or artifice to defraud any healthcare benefit program or falsifying, concealing or covering up a material fact or making any material false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services; • the Civil Monetary Penalties Law, which prohibits the offering or giving of remuneration to Medicare and Medicaid beneficiaries that is likely to influence the beneficiary’s selection of a particular provider or supplier; • federal and state laws that prohibit providers from billing and receiving payment from Medicare and Medicaid for services unless the services are medically necessary, adequately and accurately documented, and billed using codes that accurately reflect the type and level of services rendered; • federal and state laws and policies related to healthcare providers’ licensure, certification, accreditation, Medicare and Medicaid program enrollment and reassignment of benefits; • federal and state laws and policies related to the prescribing and dispensing of pharmaceuticals and controlled substances; • state laws related to the advertising and marketing of services by healthcare providers; • federal and state laws related to confidentiality, privacy and security of personal information, including medical information and records, that limit the manner in which we may use and disclose that information, impose obligations to safeguard such information and require that we notify third parties in the event of a breach; • federal laws that impose civil administrative sanctions for, among other violations, inappropriate billing of services to government healthcare programs or employing or contracting with individuals who are excluded from participation in government healthcare programs; • laws and regulations limiting the use of funds in health savings accounts for individuals with high deductible health plans; • state laws pertaining to anti-kickback, fee splitting, self-referral and false claims, some of which are not limited to relationships involving government-funded programs; and • state laws governing healthcare entities that bear financial risk. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Achieving and sustaining compliance with these laws requires us to implement controls across our entire organization and it may prove costly 53 and challenging to monitor and enforce compliance. In particular, given the prevalence of laws, rules and regulations restricting the corporate practice of medicine in certain of the states that we operate, we are prohibited from interfering with or inappropriately influencing providers’ professional judgment and are typically reliant on the providers and other healthcare professionals at our affiliated professional entities to operate in compliance with applicable laws related to the practice of medicine and the provision of healthcare services. The risk of our being found in violation of healthcare laws and regulations is increased by the fact that many of them have not been fully interpreted by regulatory authorities or the courts, and their provisions are sometimes complex and open to a variety of interpretations. Failure to comply with these laws and other laws can result in civil and criminal penalties such as fines, damages, recoupments of overpayments, imprisonment, loss of enrollment status and exclusion from the Medicare and Medicaid programs. To enforce compliance with the federal laws, the U.S. Department of Justice and the Office of Inspector General for the HHS regularly scrutinize healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. The operation of medical practices is also subject to various state laws enforced by state regulators, including state attorneys general, boards of professional licensure and departments of health. A review of our business by judicial, law enforcement, regulatory or accreditation authorities could result in challenges or actions against us that could harm our business and operations. Responding to and managing government investigations or any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses, divert resources and management’s attention from the operation of our business and result in adverse publicity. Moreover, if one of our health system partners or another third party fails to comply with applicable laws and becomes the target of a government investigation, government authorities could require our cooperation in the investigation, which could cause us to incur additional legal expenses and result in adverse publicity. In addition, because of the potential for large monetary exposure under the federal False Claims Act, which provides for treble damages and penalties of $12,537 to $25,076 per false claim or statement (as of January 2022, and subject to annual adjustments for inflation), healthcare providers often resolve allegations without admissions of liability for significant amounts to avoid the uncertainty of treble damages that may be awarded in litigation proceedings. Such settlements often contain additional compliance and reporting requirements as part of a consent decree, settlement agreement or corporate integrity agreement. Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources to investigating healthcare providers’ compliance with the healthcare reimbursement rules and fraud and abuse laws. Further, our ability to provide our full range of services in each state is dependent upon a state’s treatment of telehealth and emerging technologies (such as digital health services), which are subject to changing political, regulatory and other influences. Many states have laws that limit or restrict the practice of telehealth, such as laws that require a provider to be licensed and/or physically located in the same state where the patient is located. Failure to comply with these laws could result in denials of reimbursement for our services (to the extent such services are billed), recoupments of prior payments, professional discipline for our providers or civil or criminal penalties. The laws, regulations and standards governing the provision of healthcare services may change significantly in the future and may harm our business and operations. For example, we have had to adapt our business as a result of the CARES Act and other emergency orders, laws and regulations enacted in response to the COVID-19 pandemic. While some of these changes have allowed us to rapidly respond to the COVID-19 pandemic including via expanded telehealth visits and testing arrangements, they have also required us to adapt to new offerings, processes and procedures. We cannot assure you that such emergency orders, laws and regulations will continue to apply or that regulators or other governmental entities will agree with our interpretation of these arrangements under applicable law. The Vaccine Inquiries or any other regulatory or governmental investigations or other disputes as a result of these arrangements, or the failure of various waivers for limitations of liability or other provisions under such emergency orders, laws and regulations to apply to us could divert resources and harm our reputation, business, financial condition and results of operations. If the prevalence of private health insurance coverage declines, including due to a decline in the prevalence of employer-sponsored health care, our revenue may be reduced. We currently derive a significant portion of our revenue from members acquired under contracts with enterprise clients that purchase health care for their employees (either via insurance or self-funded benefit plans). A large part of the demand for our solutions and services among enterprise clients depends on the need of these employers to manage the costs of healthcare services that they pay on behalf of their employees. While the percentage of employers who are self-insured has been increasing over the past decade, this trend may not continue. Over time, employees may also increasingly decide to obtain their own insurance through state-sponsored insurance marketplaces rather than through their employers. While such employees may remain members, our reimbursement from providing services to these members would likely decrease. Employees who obtain 54 their own insurance may also cancel their memberships, which may decrease the fees we receive under our contracts with health network partners as fewer members engage in their healthcare networks. If any of these trends accelerate, there is no guarantee that we would be able to compensate for the loss in revenue derived from enterprise clients and health network partners by increasing retail member acquisition. A decline in overall prevalence of private health insurance coverage, including due to the passage of healthcare reform proposals such as “Medicare for All,” could further harm our revenue, particularly if accompanied by a reduction in employer-sponsored health insurance. In addition, health network partners who rely on patient use of their networks, particularly specialty care, through our contracts with them, may become dissatisfied with the terms under the applicable contract and seek to amend or terminate, or elect not to renew, these contracts. In these cases, our business, financial condition and results of operations would be harmed. If we fail to cost-effectively develop widespread brand awareness and maintain our reputation, or if we fail to achieve and maintain market acceptance for our healthcare services, our business could suffer. We believe that developing and maintaining widespread awareness of our brand and maintaining our reputation for providing access to high quality and efficient health care in a cost-effective manner is critical to attracting new members, enterprise clients, and health network partners, maintaining existing members, clients and partners and thus growing our business and revenue. Market acceptance of our solutions and services and member acquisition depends on educating people, as well as enterprise clients and health networks, as to the distinct features, ease-of-use, positive lifestyle impact, cost savings, quality, and other perceived benefits of our solutions and services as compared to traditional or competing healthcare access options and our ability to directly market our solutions or services to the employees of our enterprise clients. In particular, market acceptance is highly dependent on sufficient geographic market saturation of medical offices, whether we are in-network with payers, customization of healthcare services, and word of mouth and informal member referrals. While we are in-network with CMS and our health network partners, shortfalls in any of the above areas, the loss or dissatisfaction of a significant contingent of our members or patients, adverse media reports or negative feedback about our solutions and services may substantially harm our brand and reputation, inhibit widespread adoption of our solutions and services, reduce our revenue from enterprise clients and health networks, and impair our ability to attract new or maintain existing members and patients. Our brand promotion activities may not generate awareness or increase revenue and, even if they do, any increase in revenue may not offset the expenses we incur in building our brand. We also cannot guarantee the quality and efficiency of healthcare service, particularly specialty healthcare, from our health network partners, over which we have no control. Many of our health network partners are large institutions with significant operations across a wide network of patients and may be unable to provide consistent levels of service to our members. Patients who experience poor quality healthcare provision from such partners may impute such dissatisfaction to our solutions and services, which could negatively impact member retention and acquisition, reduce our revenue and harm our business. We have a history of losses, which we expect to continue, and we may never achieve or sustain profitability. We have incurred significant losses in each period since our inception. We incurred net losses of $90.9 million, $89.4 million and $254.6 million for the three months ended March 31, 2022 and the years ended December 31, 2020 and 2021 respectively. As of March 31, 2022, we had an accumulated deficit of $709.1 million. Our net losses and accumulated deficit reflect the substantial investments we made to acquire new health network partners and members, build our proprietary network of healthcare providers and develop our technology platform. We intend to continue scaling our business to increase our enterprise client, member and provider bases, broaden the scope of our health network and other partnerships and expand our applications of technology through which members can access our services. Accordingly, we anticipate that our cost of care and other operating expenses will continue to increase in the foreseeable future. Moreover, as we sign up new At-Risk members for whom we are responsible for managing a range of healthcare services and associated costs, our medical claims expense for such members may be higher relative to the Capitated Revenue earned or any excess revenue over medical claims expense may not be enough to cover our cost of care or other operating expenses. Our efforts to scale our business and manage the health of At-Risk members may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will be able to sustain or increase profitability. Our prior net losses, combined with our expected future net losses, have had and will continue to have a negative impact on our total (deficit) equity and working capital. As a result of these factors, we may need to raise additional capital through debt or equity financings in order to fund our operations, and such capital may not be available on reasonable terms, if at all. Our net revenue depends in part on the number of members enrolled or patient visits, and a decrease in member utilization of our services could harm our business, financial condition and results of operations. 55 Historically, we have relied on patient visits for a substantial portion of our net revenue. For the three months ended March 31, 2022 and the years ended December 31, 2020 and 2021, net fee-for-service revenue accounted for 16%, 39% and 29% of our net revenue, respectively. As we develop additional digital health solutions through our mobile platform and continue providing and expanding availability of remote visits, we cannot guarantee that our members will consistently make in-office visits in addition to using our digital health solutions, particularly after the COVID-19 pandemic and as related shelter-in-place and quarantine measures and orders are relaxed or lifted. Further, it may be difficult for us to accurately forecast future patient in-office visits over time, which may vary across geographies and depend on patient demographics within a given market. In part due to the reduction of in-office visits observed due to COVID-19, we have introduced billable remote visits. We cannot predict with any certainty the number of remote billable services and their impact on our in-office visits. As remote billable services on average generate lower reimbursement than in-office visits, this may impact our operations and financial results. In addition, we will continue to rely on our reputation and recommendations from members and key enterprise clients to promote our solutions and services to potential new members. A substantial portion of our members hold subscriptions through their respective employers with which we have membership arrangements. The loss of any of our key enterprise clients, or a failure of some of them to renew or expand their arrangements with us, could have a significant impact on the growth rate of our revenue. If we are unable to attract and retain sufficient members in any given market, we may have reduced visits, which could harm our results of operations, reduce our revenue and harm our business. In addition, under certain of our contracts with enterprise clients, we base our fees on the number of individuals to whom our clients provide benefits. Under certain of our health network partner agreements, we also collect fees from members who receive healthcare services within the health network partner’s network. Many factors, most of which we do not control, may lead to a decrease in the number of individuals covered by our enterprise clients, including, but not limited to, the followin • changes in the nature or operations of our enterprise clients or the failure of our enterprise clients to adopt or maintain effective business practices; • changes of control of our enterprise clients; • reduced demand in particular geographies; • shifts away from employer-sponsored health plans toward employee self-insurance; • shifting regulatory climate and new or changing government regulations; and • increased competition or other changes in the benefits marketplace. If the number of members covered by our enterprise clients and health network partners decreases, our revenue will likely decrease. We operate in a competitive industry, and if we are not able to compete effectively our business would be harmed. The market for healthcare solutions and services is highly fragmented and intensely competitive, with direct and indirect competitors offering varying levels of impact to key stakeholders such as consumers, employers, providers, and health networks. We compete across various segments within the healthcare market and currently face competition from a range of companies and providers for market share and for quality providers and personnel, includin • traditional healthcare providers and medical practices nationally, regionally and locally, that offer similar services, often at lower prices, and that are continuing to develop additional products and becoming more sophisticated and effective; • health networks, including our health network partners, who employ or affiliate with primary care providers, unaffiliated freestanding outpatient centers and specialty hospitals (some of which are physician-owned); • episodic, consumer-driven point solutions such as telemedicine as well as urgent care providers, which may typically pay providers on a fee-for-service basis rather than the salary-based model we employ; • health care or expert medical service tools developed by well-financed health plans which may be provided to health plan customers at discounted prices; and 56 • other companies providing healthcare-focused products and services, including companies offering specialized software and applications, technology platforms, care management and coordination, digital health, telehealth and telemedicine and health information exchange. Our competitive success and growth, which can be measured in part by retention of existing members and gaining of new members in both existing and target geographies, are contingent on our ability to simultaneously address the needs of key stakeholders efficiently while delivering superior outcomes at scale compared with competitors. Over the years, the number of freestanding specialty hospitals, surgery centers, emergency departments, urgent care centers and diagnostic imaging centers has increased significantly in the geographic areas in which we serve and may provide services similar to those we offer. Some of our existing and potential competitors may be larger, have greater name recognition, have longer operating histories, offer a broader array of services or a larger or more specialized medical staff, provide newer or more desirable facilities or have significantly greater resources than we do. Some of the clinics and medical offices that compete with us are also owned by government agencies or not-for-profit organizations that can finance capital expenditures and operations on a tax-exempt basis. In addition, our current or potential competitors may be acquired by third parties with greater available resources. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements and may have the ability to initiate or withstand substantial price competition. In light of the COVID-19 pandemic, existing or new competitors have developed or further invested in telemedicine and remote medicine programs and ventures, which would compete with our virtual care offerings. Also, current and potential competitors have established, and may in the future establish, cooperative relationships with vendors of complementary technologies or services to increase the availability of their solutions in the marketplace. Accordingly, new competitors or alliances may emerge that have greater market share, a larger member or patient base, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources and larger sales forces than we have, which could put us at a competitive disadvantage. Our competitors could also be better positioned to serve certain segments of the healthcare market, which would limit our member and patient growth. In light of these factors, even if our solution is more effective than those of our competitors, current or potential members, health network partners and enterprise clients may accept competitive solutions in lieu of purchasing our solution. Our enterprise clients or health network partners may also elect to terminate their arrangements with us and enter into arrangements with our competitors, particularly in primary care, to the extent they are more favorable from a fee or price perspective or provide greater exposure to, or volume of, patients. In addition, in any geographic area, we may enter into an exclusive contractual arrangement with a single health network partner, which could allow competitors to contract with other health network partners in the same area and gain market share for potential patients. Competitors may also be better positioned to contract with leading health network partners in our target geographies, including existing geographies, after our current contracts expire. If our competitors are better able to attract patients, contract with health network partners, recruit providers, expand services or obtain favorable managed care contracts at their facilities than we are, we may experience an overall decline in member volumes and net revenue. Competition from specialized providers, health plans, medical practices, digital health companies and other parties will result in continued member acquisition and patient visit and utilization volume pressure, which could negatively impact our revenue and market share. Competition in our industry also involves consumer perceptions of quality and pricing, rapidly changing technologies, evolving regulatory requirements and industry expectations, frequent new product and service introductions and changes in customer requirements. As access to hospital performance data on quality measures, patient satisfaction surveys, and standard charges for services increases, healthcare consumers also have more tools to compare competing providers. If any of our affiliated professional entities achieve poor results (or results that are lower than our competitors’) on quality measures or patient satisfaction surveys, or if our standard charges are or are perceived to be higher than our competitors, we may attract fewer members. Moreover, if we are unable to keep pace with the evolving needs of our clients, members and partners and continue to develop, enhance and market new applications and services in a timely and efficient manner, demand for our solutions and services may be reduced and our business and results of operations would be harmed. We cannot guarantee that we will possess the resources, either financial or personnel, for the research, design and development of new applications or services, or that we will be able to utilize these resources successfully and avoid technological or market obsolescence. Further, we cannot assure you that technological advances by one or more of our competitors or future competitors will not result in our present or future applications and services becoming uncompetitive or obsolete. If we are unable to successfully compete in the healthcare market, our business would be harmed. We may not grow at the rates we historically have achieved or at all, even if our key metrics may imply future growth, which could have a negative impact on our business, financial condition and results of operations. We have experienced significant growth in our recent history. Future revenue may not grow at these same rates or may decline. Our future growth will depend, in part, on our ability to grow members in existing geographies, expand into new 57 geographies, expand our service offerings and grow our health network partnerships while maintaining high quality and efficient services. We are continually executing a number of growth initiatives, strategies and operating plans designed to enhance our business. For example, we are expanding our strategic relationships with health network partners to build integrated delivery networks for broad access to their networks of specialists and hospitals. The anticipated benefits from these efforts are based on several assumptions that may prove to be inaccurate. We may not be able to successfully complete these growth initiatives, strategies and operating plans and realize all of the benefits, including growth targets and cost savings, that we expect to achieve, or it may be more costly to do so than we anticipate. We can provide no assurances that even if our key metrics indicate future growth, we will continue to grow our revenue or to generate net income. Moreover, our continued implementation of these programs may disrupt our operations and performance. If, for any reason, the benefits we realize are less than our estimates or the implementation of these growth initiatives, strategies and operating plans negatively impact our operations or cost more or take longer to effectuate than we expect, or if our assumptions prove inaccurate, our business, financial condition and results of operations may be harmed. If we fail to manage our growth effectively, our expenses could increase more than expected, our revenue may not increase proportionally or at all, and we may be unable to implement our business strategy. We have experienced significant growth in recent periods, which puts strain on our business, operations and employees. For example, we grew from 1,340 employees as of December 31, 2018 to 3,090 employees as of December 31, 2021 (including 791 employees from our acquisition of Iora). We have also increased our customer and membership bases significantly over the past two years. We anticipate that our operations will continue to rapidly expand. To manage our current and anticipated future growth effectively, we must continue to maintain and enhance our IT infrastructure, financial and accounting systems and controls. In particular, in order for our providers to provide quality healthcare services and longitudinal care to patients and avoid burn-out, we need to provide them with adequate IT and technology support, which requires sufficient staffing for these areas. In addition, as we expand in existing geographies and move into new geographies, we will need to attract and retain an increasing number of quality healthcare professionals and providers. Failure to retain a sufficient number of providers may result in overworking of existing personnel leading to burn-out or poor quality of healthcare services. In addition, our strategy is to provide longitudinal care to members and patients, which requires substantial time and attention from our providers. We must also attract, train and retain a significant number of qualified sales and marketing personnel, customer support personnel, professional services personnel, software engineers, technical personnel and management personnel, and the availability of such personnel, in particular software engineers, may be constrained. A key aspect to managing our growth is our ability to scale our capabilities to implement our solutions and services satisfactorily with respect to both large and demanding enterprise clients and health network partners as well as individual consumers. Large clients and partners often require specific features or functions unique to their membership base, which, at a time of significant growth or during periods of high demand, may strain our implementation capacity and hinder our ability to successfully provide our services to our clients and partners in a timely manner. We may also need to make further investments in our technology to decrease our costs. If we are unable to address the needs of our clients, partners or members, or our clients, partners or members are unsatisfied with the quality of our solutions or services, they may not renew their contracts or memberships, seek to cancel or terminate their relationship with us or may renew on less favorable terms, any of which could harm our business and results of operations. Failure to effectively manage our growth could also lead us to over-invest or under-invest in development and operations, result in weaknesses in our infrastructure, internal systems, processes or controls, give rise to operational mistakes, financial losses, loss of productivity or business opportunities and result in loss of employees and reduced productivity of remaining employees. In order to manage the increasing complexities of our business, we will need to continue to scale and adapt our operational, financial and management controls, as well as our reporting systems and procedures. We may not be able to successfully implement and scale improvements to our systems, processes and controls or in connection with third party software in a timely or efficient manner or in a manner that does not negatively affect our operating results. For example, we may not be able to effectively monitor certain extraordinary contract requirements or provisions that are individually negotiated as the number of transactions continues to grow. In addition, our systems and processes may not prevent or detect all errors, omissions, or fraud, including any fraudulent activities conducted or facilitated by our employees or the providers or staff at our affiliated professional entities. Any of these events could result in our expenses increasing more than expected, lack of growth or slower than expected growth in our revenue, and inability to implement our business strategies. The quality of our services may also suffer, which could negatively affect our reputation and harm our ability to attract and retain members, clients and partners. Investment of significant capital expenditures to support our growth may also divert financial resources from other projects such as the development of new applications and services. In particular, as we enter new geographies or seek to expand our presence in existing geographies, we will need to make upfront capital expenditures, including to lease and furnish medical 58 office space, acquire medical equipment, staff providers at such medical offices and incur related expenses. As we do not recognize patient revenue until those offices open and begin receiving patients, our margins may be reduced during the periods in which such capital expenditures were incurred. Expansion in new or existing geographies can be lengthy and cost-intensive, and we may encounter difficulties or unanticipated issues during the process of opening such new medical offices. We cannot assure you that we will be able to open our planned new medical offices, in existing or new geographies, within our operating budgets and planned timelines, or at all. Cost overruns in the process of opening new offices can result in higher than expected cost of care, exclusive of depreciation and amortization, and operating expenses as compared to revenue in the applicable quarter. In addition, we cannot assure you that new medical offices will operate efficiently or be strategically placed to attract the optimal number of patients. If an office is underperforming for any reason, we could incur additional costs to relocate or shut down that office. It is essential to our ongoing business that our affiliated professional entities attract and retain an appropriate number of quality primary care providers to support our services and that we maintain good relations with those providers. The success of our business depends in significant part on the number, availability and quality of licensed primary care providers employed or contracted by our affiliated professional entities. Providers employed or contracted with our affiliated professional entities are free to terminate their association at any time. In addition, although providers who own interests in affiliated professional entities are generally subject to agreements restricting them from owning an interest in competitive facilities or transferring their ownership interests in the affiliated professional entity without our consent, we may not learn of, or may be unsuccessful in preventing, our provider partners from acquiring interests in competitive facilities or making transfers without our consent. Moreover, in certain states in which we operate, such as California, non-competition and other restrictive covenants may be limited in their enforceability, particularly against physicians and providers. If we are unable to recruit and retain providers and other healthcare professionals, our business and results of operations could be harmed and our ability to grow could be impaired. In any particular geographical location, providers could demand higher payments or take other actions that could result in higher medical costs, less attractive service for our members or difficulty meeting regulatory or accreditation requirements. Our ability to develop and maintain satisfactory relationships with providers also may be negatively impacted by other factors not associated with us, such as changes in Medicare reimbursement levels and other pressures on healthcare providers and consolidation activity among hospitals, provider groups and healthcare providers. We expect to encounter increased competition from health insurers and private equity companies seeking to acquire providers in the geographies where we operate practices and, where permitted by law, employ providers. In some geographies, provider recruitment and retention are affected by a shortage of providers and the difficulties that providers can experience in obtaining affordable malpractice insurance or finding insurers willing to provide such insurance. Providers may also leave our affiliated professional entities or perceive them as providing a poor quality of life if our affiliated professional entities do not adequately manage causes of provider burnout and workload, some of which we have little to no control over under the administrative services agreements, or ASAs. Our business is dependent on providing longitudinal and long-term care for members and requires providers to consistently follow members over time, track overall long-term health and, in certain geographies, be available 24/7 for virtual care questions and services. If we are unable to efficiently manage provider workload and capacity to provide longitudinal and long-term care, our providers may depart and our patients may experience lower quality of care, which would harm our business. Furthermore, our ability to recruit and employ providers is closely regulated. For example, the types, amount and duration of compensation and assistance we can provide to recruited providers are limited by the Stark law, the Anti-kickback Statute, state anti-kickback statutes and related regulations. If we are unable to attract and retain sufficient numbers of quality providers by providing adequate support personnel, technologically advanced equipment and facilities that meet the needs of those providers and their patients, memberships and patient visits may decrease, our enterprise clients may alter or terminate their membership contracts with us and our operating performance may decline. We incur significant upfront costs in our enterprise client and health network partner relationships, and if we are unable to maintain and grow these relationships over time, we are likely to fail to recover these costs, which could have a negative impact on our business, financial condition and results of operations. Our business model and growth depend heavily on achieving economies of scale because our initial upfront investment for any enterprise client or certain health network partners is costly and the associated revenue is recognized on a ratable basis. We devote significant resources to establishing relationships with our clients and partners and implementing our solutions and services. This is particularly so in the case of large enterprises that, to date, have contributed a large portion of our membership base and revenue as well as health network partners, who may require specific features or functions unique to their particular processes or under the terms of their contracts with us, including significant systems integration and interoperability undertakings. Accordingly, our results of operations will depend in substantial part on our ability to deliver a successful 59 experience for these clients and related members and partners to persuade our clients and partners to maintain and grow their relationship with us over time. Additionally, as our business is growing significantly, our new customer and partner acquisition costs could outpace our revenue growth and we may be unable to reduce our total operating costs through economies of scale such that we are unable to achieve profitability. Our costs of doing business could also increase significantly due to labor shortages and inflationary pressures, which could increase the cost of labor, healthcare services and supplies and rental payments for our office locations. If we fail to achieve appropriate economies of scale or if we fail to manage or anticipate the evolution and in future periods, demand of our clients and partners, our business may be harmed. Our marketing cycle can be long and unpredictable and requires considerable time and expense, which may cause our results of operations to fluctuate. The marketing cycle for our solutions and services from initial contact with a potential enterprise client or health network partner to contract execution and implementation varies widely by enterprise client or partner. Some of our partners undertake a significant and prolonged evaluation process, including to determine whether our solutions and services meet their unique healthcare needs, which evaluation can be complex given the size and scale of our clients and partners. Our contractual arrangements with our health network partners are often highly specific to each partner depending on their needs, the characteristics and patient demographics of the geographical region they serve, their growth plans and their operations, among other things. As a result, our marketing efforts to any new health network partner must be tailored to meet its specific strategic demands, which can be time consuming and require significant upfront cost. These efforts also must address interoperability between our IT infrastructure and systems and such partner’s systems, which can result in substantial cost without any assurance that we will ultimately enter into a contractual arrangement with any such partner. Our large enterprise clients often initially restrict direct access by us to their employees to curb information overflow. As a result, we may not be able to directly market our solutions and services to, and educate, employees at our enterprise clients until much later after execution of an agreement with such clients. This can result in limited membership acquisition at any such enterprise client for a significant period of time following contract execution, and we cannot assure you that we will be able to gain sufficient membership acquisition to justify our upfront investments. Further, even after contract execution with a particular enterprise client, we generally compete with other health service providers who market to the same employees at such enterprise client, and our marketing and employee education efforts may not be successful in winning members from other competing services, many of which are traditional healthcare models that employees are more familiar with. We also incur significant marketing costs to grow awareness of our solution and services in both existing and new geographical locations for potential new members. Our marketing efforts for member acquisition are dependent in part on word of mouth, which may take substantial time to spread. In addition, for both new and existing geographic locations, we will need to continuously open medical offices in targeted locations to build awareness, which is both time-intensive and requires substantial upfront fixed costs. If our substantial upfront marketing and implementation investments do not result in sufficient sales to justify our investments, it could harm our business and results of operations. We could experience losses or liability, including medical liability claims, causing us to incur significant expenses and requiring us to pay significant damages if not covered by insurance. Our business entails the risk of medical liability claims against our affiliated professional entities, their providers, and 1Life and its subsidiaries and we have in the past been subject to such claims in the ordinary course of business. Although 1Life, its subsidiaries, our affiliated professional entities and individual providers may carry insurance at the entity level and at the provider level covering medical malpractice claims in amounts that we believe are appropriate in light of the risks attendant to our business, successful medical liability claims could result in substantial damage awards that exceed the limits of our affiliated professional entities' insurance coverage. Professional liability insurance is expensive and insurance premiums may increase significantly in the future, particularly as we expand our services and as the professional liability insurance market becomes more challenging due to COVID-19. As a result, adequate professional liability insurance may not be available to our providers or to us in the future at acceptable costs or at all. Any claims made against us that are not fully covered by insurance could be costly to defend against, result in substantial damage awards against us and divert the attention of our management and our providers from our operations, which could harm our business. In addition, any claims may significantly harm our business or reputation. Moreover, we do not control the providers and other healthcare professionals at our affiliated professional entities with respect to the practice of medicine and the provision of healthcare services. While we seek to attract high quality professionals, the risk of liability, including through unexpected medical outcomes, is inherent in the healthcare industry, and negative outcomes may result for any of our members. We attempt to limit our liability to members, clients and partners by contract; however, the limitations of liability set forth in the contracts may not be enforceable or may not otherwise protect us from liability for damages. Additionally, we may be subject to claims that are not explicitly covered by such contractual limits. 60 We also maintain general liability coverage for certain risks, claims and litigation proceedings. However, this coverage may not continue to be available on acceptable terms or in sufficient amounts to cover one or more large claims against us, and may include larger self-insured retentions or exclusions. In addition, the insurer might deny coverage for the claims we submit or disclaim coverage as to any future claim. Any liability claim brought against us, or any ensuing litigation, regardless of merit, could result in a substantial cost to us, divert management’s attention from operations and could also result in an increase of our insurance premiums and damage to our reputation. A successful claim not fully covered by our insurance could have a negative impact on our liquidity, financial condition, and results of operations. Current or future litigation against us could be costly and time-consuming to defend. We are subject, and in the future may become subject from time to time, to legal proceedings and claims that arise in the ordinary course of business such as claims brought by our members, clients or partners in connection with commercial disputes, consumer class action claims, employment claims made by our current or former employees, technology errors or omissions, medical malpractice, professional negligence or other related actions or claims inherent in the provision of healthcare services as well as other litigation matters. In particular, as we grow our base of consumer members, we may be subject to an increasing number of consumer claims, disputes and class action complaints, including an ongoing claim alleging misrepresentations with respect to our membership fees. While our membership terms generally require individual arbitration, we cannot assure you that such terms will be enforced, which may result, and has resulted in the past, in costly class action litigation. Litigation may result in substantial costs, settlement and judgments and may divert management’s attention and resources, which may substantially harm our business, financial condition and results of operations. Insurance may not cover such claims, may not provide sufficient payments to cover all of the costs to resolve one or more such claims and may not continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, thereby leading analysts or potential investors to reduce their expectations of our performance, which could reduce the market price of our common stock. Our labor costs could be negatively impacted by competition for staffing, the shortage of experienced nurses and providers and labor union activity. The operations of our affiliated professional entities are dependent on the efforts, abilities and experience of our management and medical support personnel, including nurses, therapists and lab technicians, as well as our providers. We compete with other healthcare providers in recruiting and retaining employees, and, like others in the healthcare industry, we continue to experience a shortage of nurses and providers in certain disciplines and geographic areas. As a result, from time to time, we may be required to enhance wages and benefits to recruit and retain experienced employees, make greater investments in education and training for newly licensed medical support personnel, or hire more expensive temporary or contract employees. Furthermore, state-mandated nurse-staffing ratios in California affect not only our labor costs, but, if we are unable to hire the necessary number of experienced nurses to meet the required ratios, they may also cause us to limit patient volumes, which would have a corresponding negative impact on our net revenue. In addition, while none of our employees are represented by a labor union as of March 31, 2022, our employees may seek to be represented by one or more labor unions in the future. If some or all of our employees were to become unionized, it could increase labor costs, among other expenses, and may require us to adjust our employee policies and protocols. Further, labor is subject to external factors that are beyond our control, including the competitive market for skilled workers and leaders in the healthcare industry, cost inflation, the COVID-19 pandemic and workforce participation rates. In general, our failure to recruit and retain qualified management, experienced nurses and other medical support personnel, or to control labor costs, could harm our business. In order to support the growth of our business, we may need to incur additional indebtedness or seek capital through new equity or debt financings, which sources of additional capital may not be available to us on acceptable terms or at all. Our operations have consumed substantial amounts of cash since inception and we intend to continue to make significant investments to support our business growth, respond to business challenges or opportunities, expand our services in new geographic locations, enhance our operating infrastructure and existing solutions and services and potentially acquire complementary businesses and technologies. For the three months ended March 31, 2022 and the years ended December 31, 2020 and 2021, our net cash used in operating activities was $55.1 million, $4.4 million and $88.6 million, respectively. As of March 31, 2022, we had $240.0 million of cash and cash equivalents and $188.5 million of marketable securities, which are held for working capital purposes. As of March 31, 2022, we had $316.3 million aggregate principal amount of debt outstanding under our convertible senior notes issued in May 2020, or the 2025 Notes. As of March 31, 2022, we have also deferred payroll taxes in the amount of $5.0 million and received $4.3 million in grants as part of the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, through the Provider Relief Fund, or 61 PRF, of the U.S. Department of Health and Human Services, or HHS, to help offset the impact of increased healthcare related expenses and lost revenues attributable to the COVID-19 pandemic. We are not required to repay this grant, provided we attest to and comply with certain terms and conditions, including the use of PRF funds for only permitted purposes and only after funds from other sources obligated to reimburse recipients have been applied. If we are unable to attest to or comply with current or future terms and conditions, our ability to retain some or all of the PRF funds received may be impacted. Our future capital requirements may be significantly different from our current estimates and will depend on many factors, including our growth rate, membership renewal activity and growth, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new or enhanced services, expansion of services to new geographic locations, addition of new health network partners and the continuing market acceptance of our healthcare services. Accordingly, we may need to engage in equity or debt financings or collaborative arrangements to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Moreover, while we are not restricted from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions under the terms of the indenture governing the 2025 Notes, such actions could have the effect of diminishing our ability to make payments on the notes when due. Any debt financing secured by us in the future could involve additional restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, during times of economic instability, including the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic, it has been difficult for many companies to obtain financing in the public markets or to obtain debt financing, and we may not be able to obtain additional financing on commercially reasonable terms, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, it could harm our business and growth prospects. Our revenues have historically been concentrated among our top customers, and the loss of any of these customers could reduce our revenues and adversely impact our operating results. Historically, our revenue has been concentrated among a small number of customers. In 2020 and 2021, our top three customers accounted for 35% and 32% of our net revenue, respectively. These customers included commercial payers and a health network partner. This customer mix may also shift in the near and medium term as a result of our recent acquisition of Iora. The loss of one or more of these customers could reduce our revenue, harm our results of operations and limit our growth. Our quarterly results may fluctuate significantly, which could adversely impact the value of our common stock. Our quarterly results of operations, including our net revenue, loss from operations, net loss and cash flows, have varied and may vary significantly in the future, and period-to-period comparisons of our results of operations may not be meaningful. Accordingly, our quarterly results should not be relied upon as an indication of future performance. Our quarterly financial results have fluctuated, and may fluctuate in the future, as a result of a variety of factors, many of which are outside of our control, including, without limitation, the followin • the addition or loss of health network partners or enterprise clients, including through acquisitions or consolidations of such entities; • the addition or loss of contracts with, or modification of contract terms with, payers, including the reduction of reimbursements for our services or the termination of our network contracts with payers; • seasonal and other variations in the timing and volume of patient visits, such as the historically higher volume of use of our service during peak cold and flu season months or due to COVID-19 outbreaks or variants; • fluctuations in unemployment rates resulting in reductions in total members; • slowdown in the overall economy resulting in losses of enterprise clients as they scale back on expenses; • new enterprise sponsorships and renewal of existing enterprise sponsorships and the timing thereof as well as enterprise and consumer member activation and renewal and timing thereof; 62 • the timing of recognition of revenue; • the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure, including upfront capital expenditures and other costs related to expanding in existing or entering new geographical locations, as well as providing administrative and operational services to our affiliated professional entities under the ASAs; • our ability to effectively estimate the potential costs of medical services incurred, including under our at-risk arrangements, and the adequacy of our reserves for such incurred but not reported claims for medical services, in either case including due to increased visits and costs following a future COVID-19 outbreak or variant, which could result in fluctuations in our quarterly results and may not accurately reflect the underlying performance of our business within a given period; • our ability to effectively manage the size and composition of our proprietary network of healthcare professionals relative to the level of demand for services from our members; • the timing and success of introductions of new applications and services by us or our competitors, including well-known competitors with significant market clout and perceived ability to compete favorably due to access to resources and overall market reputation; • changes in the competitive dynamics of our industry, including consolidation among competitors, health network partners or enterprise clients; and • the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill from acquired companies. Most of our net revenue in any given quarter is derived from contracts entered into with our partners and clients during previous quarters as well as membership fees that are recognized ratably over the term of each membership. Consequently, a decline in new or renewed contracts or memberships in any one quarter may not be fully reflected in our net revenue for that quarter. Such declines, however, would negatively affect our net revenue in future periods and the effect of loss of members, and potential changes in our rate of renewals or renewal terms, may not be fully reflected in our results of operations until future periods. While we encourage enterprise clients to purchase memberships off of their periodic enrollment cycle, we cannot guarantee that they will do so. Accordingly, the effect of changes in the industry impacting our business or loss of members may not be reflected in our short-term results of operations. In addition, revenues associated with our At-Risk arrangements are subject to significant estimation risk related to reserves for incurred but not reported claims. If the actual claims expense differs significantly from the estimated liability due to differences in utilization of healthcare services, the amount of charges and other factors, it could negatively impact our revenue and have a material adverse impact on our business, results of operations, financial condition and cash flows. For example, future outbreaks or variants of COVID-19 may significantly increase actual claims which are difficult to forecast or predict, and as a result, may cause estimated liability to differ significantly. Any fluctuation in our quarterly results may not accurately reflect the underlying performance of our business and could cause a decline in the trading price of our common stock. If we lose key members of our senior management team or are unable to attract and retain executive officers and employees we need to support our operations and growth, our business and growth may be harmed. Our success depends largely upon the continued services of our key executive officers, particularly our Chair, Chief Executive Officer and President and 1Life's Chief Medical Officer. These executive officers are at-will employees and therefore they may terminate employment with us at any time with no advance notice. We also do not maintain any key person life insurance policies. Further, we rely on our leadership team in the areas of research and development, marketing, services and general and administrative functions. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. The replacement of one or more of our executive officers or other key employees would likely involve significant time and costs and may significantly delay or prevent the achievement of our business objectives. We are particularly dependent on 1Life's Chief Medical Officer, who is the sole director and officer of many of the affiliated professional entities and is responsible for overseeing the operation of several of such entities, among other roles. While we have succession plans in place and have employment or service arrangements with a limited number of key executives, these measures do not guarantee that the services of these or suitable successor executives will continue to be available to us. 63 To continue to execute our growth strategy, we also must attract and retain highly skilled personnel. Competition is intense for qualified professionals and we may not be successful in continuing to attract and retain qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled personnel with appropriate qualifications. The pool of qualified personnel with experience working in the healthcare market is limited overall. In addition, many of the companies with which we compete for experienced personnel have greater resources than we have. Further, labor is subject to external factors that are beyond our control, including the competitive market for skilled workers and leaders in the healthcare industry, cost inflation, the COVID-19 pandemic and workforce participation rates. As a result, our success is dependent on our ability to evolve our culture, align our talent with our business needs, engage our employees and inspire our employees to be open to change, to innovate and to maintain member- and customer-focus when delivering our services. In addition, job candidates often consider the value of the stock options or other equity-based awards they are to receive in connection with their employment. Volatility in the price of our stock may, therefore, negatively impact our ability to attract or retain highly skilled personnel. Further, the requirement to expense stock options and other equity-based compensation may discourage us from granting the size or type of stock option or equity awards that job candidates require to join our company. Our business would be harmed if we fail to adequately plan for succession of our executives and senior management; or if we fail to effectively recruit, integrate, retain and develop key talent and/or align our talent with our business needs and the current rapidly changing environment. We may acquire other companies or technologies, which could divert our management’s attention, result in dilution to our stockholders and otherwise disrupt our operations and we may have difficulty integrating any such acquisitions successfully or realizing the anticipated benefits therefrom, any of which could harm our business. We may seek to acquire or invest in businesses, applications and services or technologies that we believe could complement or expand our business, enhance our technical capabilities or otherwise offer growth opportunities. For example, we recently completed our acquisition of Iora in an all-stock transaction and our stockholders incurred substantial dilution. For additional risks related to the acquisition of Iora, please refer to "—Risks Related to the Acquisition of Iora." The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated. We do not have a history of acquiring or investing in businesses, applications and services or technologies and may not have the experience or capabilities to successfully execute such transactions or integrate them following consummation. In addition, if we acquire additional businesses, we may not be able to integrate the acquired personnel, operations and technologies successfully, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including, but not limited t • inability to integrate or benefit from acquired technologies or services in a profitable manner; • lack of experience in making acquisitions and integrating acquired businesses or assets; • unanticipated costs or liabilities associated with the acquisition; • difficulty integrating the accounting systems, operations and personnel of the acquired business; • difficulties and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business; • diversion of management’s attention from other business concerns; • negative impacts to our existing relationships with enterprise clients or health network partners as a result of the acquisition; • the potential loss of key employees; • use of resources that are needed in other parts of our business; • deficiencies associated with the assets or companies we acquire or ineffective or inadequate controls, procedures or policies at any acquired business that were not identified in advance and may result in significant unanticipated costs; and 64 • use of substantial portions of our available cash to consummate the acquisition. The effectiveness of our due diligence review of potential acquisitions and assessments of potential benefits or synergies are dependent upon the accuracy and completeness of statements and disclosures made or actions taken by the companies we acquire or their representatives. We may fail to accurately forecast the financial impact of an acquisition transaction, including tax and accounting charges. In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our results of operations based on this impairment assessment process, which could harm our results of operations. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could harm our results of operations. In addition, if an acquired business fails to meet our expectations, our business may be harmed. The estimates of market opportunity and forecasts of market and revenue growth included in this Quarterly Report may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all. Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. In particular, the size and growth of the overall U.S. healthcare market is subject to significant variables, including a changing regulatory environment and population demographic, which can be difficult to measure, estimate or quantify. Our business depends on member acquisition and retention, which further drives revenue from our contracts with health network partners. Estimates and forecasts of these factors in any given market is difficult and affected by multiple variables such as population growth, concentration of enterprise clients and population density, among other things. Further, we cannot assure you that we will be able to sufficiently penetrate certain market segments included in our estimates and forecasts, including due to limited deployable capital, ineffective marketing efforts or the inability to develop sufficient presence in a given market to gain members or contract with employers and health network partners in that market. Once we acquire a consumer or enterprise member, apart from fixed annual membership fees and payments from health care partners, we primarily derive revenue from patient in-office visits, which may be difficult to forecast over time, particularly as our billable service mix continues to expand, including due to the COVID-19 pandemic. Finally, our contractual arrangements with health network partners typically have highly tailored capitation and other fee structures which vary across health network partners and are dependent on either the number of members that receive healthcare services in a health network partner’s network or the volume and expense of the care received by At-Risk members. As a result, we may not be able to accurately forecast revenue from our health network partners. For these reasons, the estimates and forecasts in this Quarterly Report relating to the size and expected growth of our target markets may prove to be inaccurate. Even if the markets in which we compete meet our size estimates and forecasted growth, our business could fail to grow at similar rates, if at all. Natural or man-made disasters and other similar events may significantly disrupt our business and negatively impact our business, financial condition and results of operations. Our offices and facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, extreme weather conditions (including adverse weather conditions caused by global climate change or otherwise), power outages, fires, floods, protests and civil unrest, nuclear disasters and acts of terrorism or other criminal activities, which may result in physical damage to our offices, temporary office closures and could render it difficult or impossible for us to operate our business for some period of time. In particular, certain of the facilities we lease to house our computer and telecommunications equipment are located in the San Francisco Bay Area, a region known for seismic activity, and our insurance coverage may not compensate us for losses that may occur in the event of an earthquake or other significant natural disaster. Any disruptions in our operations related to the repair or replacement of our offices, could negatively impact our business and results of operations and harm our reputation. Although we maintain an insurance policy covering damages to our property and, in certain situations, interruptions to our business, such insurance may not be available or sufficient to compensate for the different types of associated losses that may occur, including business interruption losses. Any such losses or damages could harm our business, financial condition and results of operations. In addition, our health network partners’ facilities may be harmed or rendered inoperable by such natural or man-made disasters, which may cause disruptions, difficulties or other negative effects on our business and operations. Risks Related to Government Regulation 65 The impact of healthcare reform legislation and other changes in the healthcare industry and in healthcare spending is currently unknown, but may harm our business. Our revenue is dependent on the healthcare industry and could be affected by changes in healthcare spending and policy. The healthcare industry is subject to changing political, regulatory and other influences. The Patient Protection and Affordable Care Act, or ACA, made major changes in how health care is delivered and reimbursed, and increased access to health insurance benefits to the uninsured and underinsured populations in the United States. ACA, among other things, increased the number of individuals with Medicaid and private insurance coverage. ACA has been subject to legislative and regulatory changes and court challenges and there is uncertainty regarding whether, when, and how ACA may be changed, the ultimate outcome of court challenges and how the law will be interpreted and implemented. Changes by Congress or government agencies could eliminate or alter provisions beneficial to us, while leaving in place provisions reducing our reimbursement or otherwise negatively impacting our business. In addition, current and prior healthcare reform proposals have included the concept of creating a single payer such as “Medicare for All” or a public option for health insurance. If enacted, these proposals could have an extensive impact on the healthcare industry, including us and may impact our business, financial condition, results of operations, cash flows and the trading price of our security. We are unable to predict whether such reforms may be enacted or their impact on our operations. We are also impacted by the Medicare Access and CHIP Reauthorization Act, under which physicians must choose to participate in one of two payment formulas, Merit-Based Incentive Payment System, or MIPS, or Alternative Payment Models, or APMs. Beginning in 2019, MIPS allows eligible physicians to receive upward or downward adjustments to their Medicare Part B payments based on certain quality and cost metrics, among other measures. As an alternative, physicians can choose to participate in an Advanced APM. Advanced APMs are exempt from the MIPS requirements, and physicians who are meaningful participants in APMs will receive bonus payments from Medicare pursuant to the law. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the number of individuals who qualify for health care coverage and amounts that federal and state governments and other third-party payers will pay for healthcare services, which could harm our business, financial condition and results of operations. Our arrangements with health networks may be subject to governmental or regulatory scrutiny or challenge. Some of our relationships with health networks involve risk arrangements, such as capitated payments designed to achieve alignment of financial incentives and to encourage close collaboration on clinical care for patients. Although we believe that our health network contracts involving capitated payments comply with the federal Anti-Kickback Statute and the Stark Law, we cannot assure you that regulators or other governmental entities will agree with our interpretation of these arrangements under applicable law. Our health network partnerships may be subject to scrutiny or investigation from time to time by regulators or other governmental entities, which may be lengthy, costly, and divert resources and our management’s attention from managing our business and growth. If our health network partnerships are challenged and found to violate the Anti-Kickback Statute or the Stark Law, we could incur substantial financial penalties, reimbursement denials, repayments or recoupments, or exclusion from participation in government healthcare programs, any of which could harm our business. Evolving government regulations may increase costs or negatively impact our results of operations. Our operations may be subject to direct and indirect adoption, expansion, revision or reinterpretation of various laws and regulations. In the event any such changes in law or interpretation impacts our services or contractual arrangements, we may be required to modify such services, or revise our arrangements, in a manner that undermines the attractiveness of services or may not preserve the same economics, or may be required to discontinue such arrangements. In each case, our revenue may decline and our business may be harmed. Compliance with changes in interpretation of laws and regulations may require us to change our practices at an undeterminable and possibly significant initial and recurring monetary expense. These additional monetary expenditures may increase future overhead, which could harm our results of operations. We have identified what we believe are areas of government regulation that, if changed, could be costly to us. These inclu fraud, waste and abuse laws; rules governing the practice of medicine by providers; licensure standards for primary care providers and behavioral health professionals; laws limiting the corporate practice of medicine and professional fee splitting; laws, regulations, and other requirements applicable to the Medicare program (including any CMMI programs in which we may participate); tax laws and regulations applicable to our annual membership fees; cybersecurity and privacy laws; laws and rules relating to the distinction between independent contractors and employees (including recent developments in 66 California that have expanded the scope of workers that are treated as employees instead of independent contractors); and tax and other laws encouraging employer-sponsored health insurance and group benefits. There could be laws and regulations applicable to our business that we have not identified or that, if changed, may be costly to us, and we cannot predict all the ways in which implementation of such laws and regulations may affect us. We are dependent on our relationships with affiliated professional entities that we may not own to provide healthcare services and our business would be harmed if those relationships were disrupted or if our arrangements with these affiliated professional entities become subject to legal challenges. The corporate practice of medicine prohibition exists in some form, by statute, regulation, board of medicine or attorney general guidance, or case law, in certain of the states in which we operate. These laws generally prohibit the practice of medicine by lay persons or entities and are intended to prevent unlicensed persons or entities from interfering with or inappropriately influencing providers’ professional judgment. As a result, many of our affiliated professional entities that deliver healthcare services to our members are wholly owned by providers licensed in their respective states, including Andrew Diamond, M.D., Ph.D., 1Life's Chief Medical Officer who oversees the operation of several of the affiliated professional entities as the sole director and officer of many of the affiliated professional entities. Under the ASAs between 1Life and/or its subsidiaries with each affiliated professional entity, we provide various administrative and operations support services in exchange for scheduled fees at the fair market value of our services provided to each affiliated professional entity. As a result, our ability to receive cash fees from the affiliated professional entities is limited to the fair market value of the services provided under the ASAs. To the extent our ability to receive cash fees from the affiliated professional entities is limited, our ability to use that cash for growth, debt service or other uses at the affiliated professional entity may be impaired and, as a result, our results of operations and financial condition may be adversely affected. Our ability to perform medical and digital health services in a particular U.S. state is directly dependent upon the applicable laws governing the practice of medicine, healthcare delivery and fee splitting in such locations, which are subject to changing political, regulatory and other influences. The extent to which a U.S. state considers particular actions or contractual relationships to constitute the practice of medicine is subject to change and to evolving interpretations by medical boards and state attorneys general, among others, each of which has broad discretion. There is a risk that U.S. state authorities in some jurisdictions may find that our contractual relationships with the affiliated professional entities, which govern the provision of medical and digital health services and the payment of administrative and operations support fees, violate laws prohibiting the corporate practice of medicine and fee splitting. Accordingly, we must monitor our compliance with laws in every jurisdiction in which we operate on an ongoing basis, and we cannot provide assurance that our activities and arrangements, if challenged, will be found to be in compliance with the law. Additionally, it is possible that the laws and rules governing the practice of medicine, including the provision of digital health services, and fee splitting in one or more jurisdictions may change in a manner adverse to our business. While the ASAs prohibit us from controlling, influencing or otherwise interfering with the practice of medicine at each affiliated professional entity, and provide that physicians retain exclusive control and responsibility for all aspects of the practice of medicine and the delivery of medical services, we cannot assure you that our contractual arrangements and activities with the affiliated professional entities will be free from scrutiny from U.S. state authorities, and we cannot guarantee that subsequent interpretation of the corporate practice of medicine and fee splitting laws will not circumscribe our business operations. State corporate practice of medicine doctrines also often impose penalties on physicians themselves for aiding the corporate practice of medicine, which could discourage providers from participating in our network of physicians. If a successful legal challenge or an adverse change in relevant laws were to occur, and we were unable to adapt our business model accordingly, our operations in affected jurisdictions would be disrupted, which could harm our business. Any material changes in our relationship with or among the affiliated professional entities, whether resulting from a dispute among the entities, a challenge from a governmental regulator, a change in government regulation, or the loss of these relationships or contracts with the affiliated professional entities, could impair our ability to provide services to our members and could harm our business. For example, our arrangements in place to help ensure an orderly succession of the owner or owners of certain of the affiliated professional entities upon the occurrence of certain events may be challenged, which may impact our relationship with the affiliated professional entities and harm our business and results of operations. The ASAs and these succession arrangements could also subject us to additional scrutiny by federal and state regulatory bodies regarding federal and state fraud and abuse laws. Any scrutiny, investigation or litigation with regard to our arrangement with the affiliated professional entities, and any resulting penalties, including monetary fines and restrictions on or mandated changes to our current business and operating arrangements, could harm our business. Noncompliance with billing and documentation requirements could result in non-payment or subject us to audits, billing or other compliance investigations by government authorities, private payers or health network partners. 67 Payers typically have differing and complex billing and documentation requirements. If we fail to comply with these payer-specific requirements, we may not be paid for our services or payment may be substantially delayed or reduced. Moreover, federal and state laws, rules and regulations impose substantial penalties, including criminal and civil fines, monetary penalties, exclusion from participation in government healthcare programs and imprisonment, on entities or individuals (including any individual corporate officers or physicians deemed responsible) that fraudulently or wrongfully bill government-funded programs or other third-party payers for healthcare services. Both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies, as well as their executives and managers, with enforcement actions covering a variety of topics, including referral and billing practices. Further, the federal False Claims Act and a growing number of state laws allow private parties to bring qui tam or “whistleblower” lawsuits against companies for false billing violations. Some of our activities could become the subject of governmental investigations or inquiries. From time to time in the ordinary course of business, governmental agencies and private payers also conduct audits of healthcare providers like us. For example, as a result of our participation in the Medicare program, including through CMS’ Direct Contracting Program, we are also subject to various governmental inspections, reviews, audits and investigations to verify our compliance with the Medicare program and applicable laws and regulations. We also periodically conduct internal audits and reviews of our regulatory compliance and our health network partners can also conduct audits under their agreements with us. Such audits could result in the incurrence of additional costs and diversion of management’s time and attention. In addition, such audits could trigger repayment demands based on findings that our services were not medically necessary, were billed at an improper level or otherwise violated applicable billing requirements or contractual terms. Our failure to comply with rules related to billing or adverse findings from such audits could result in, among other penalti • non-payment for services rendered or recoupments or refunds of amounts previously paid for such services by our health network partners; • refunding amounts we have been paid pursuant to the Medicare program or from payers; • state or federal agencies imposing fines, penalties and other sanctions on us; • temporary suspension of payment from payers for new patients to the facility or agency; • decertification or exclusion from participation in the Medicare program or one or more payer networks; • self-disclosure of violations to applicable regulatory authorities; • damage to our reputation; • the revocation of a facility’s or agency’s license; and • loss of certain rights under, or termination of, our contracts with and health network partners. We will likely be required in the future to refund amounts that have been paid and/or pay fines and penalties as a result of these inspections, reviews, audits and investigations. If adverse inspections, reviews, audits or investigations occur and any of the results noted above occur, it could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our securities. Furthermore, the legal, document production and other costs associated with complying with these inspections, reviews, audits or investigations could be significant. Our use and disclosure of personal information, including PHI, is subject to federal and state privacy and security regulations, and our failure to comply with those regulations or to adequately secure such information we hold could result in significant liability or reputational harm and, in turn, substantial harm to our health network partner and enterprise client base, membership base and revenue. In the ordinary course of our business, we and third parties upon whom we rely receive, collect, store, process and use personal information as part of our business. Numerous state and federal laws and regulations inside the United States govern the collection, dissemination, use, privacy, confidentiality, security, availability and integrity of personal information including PHI. These laws and regulations include HIPAA, as amended by the HITECH Act, and its implementing regulations, as well as state privacy and data protection laws. HIPAA establishes a set of baseline national privacy and security standards for the protection of PHI, by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, which includes our affiliated professional entities, and the business associates with whom such covered entities contract for 68 services that involve the use or disclosure of PHI, which includes 1Life and our affiliated professional entities. States may enforce more stringent privacy and data protection laws exceeding the requirements of HIPAA. Compliance with privacy, data protection and information security laws and regulations in the United States could cause us to incur substantial costs or require us to change our business practices and compliance procedures in a manner adverse to our business. We strive to comply with applicable laws, regulations, policies and other legal obligations relating to privacy, data protection and information security. However, as the various regulatory frameworks for privacy, data protection and information security continue to develop, uncertainties exist as to their application, and it is possible that these or other actual or alleged obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules and subject our business practices to uncertainty. Penalties for violations of these laws vary. For example, penalties for violations of HIPAA and its implementing regulations are assessed at varying rates per violation, subject to a statutory cap for violations of the same standard in a single calendar year. Such penalties may be subject to periodic adjustments. However, a single breach incident can result in violations of multiple standards, which could result in significant fines. HIPAA also authorizes state attorneys general to file suit on behalf of their residents. Courts may award damages, costs and attorneys’ fees related to violations of HIPAA in such cases, which may be significant. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI. Any such penalties or lawsuits could harm our business, financial condition, results of operations and prospects. In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA covered entities or business associates for compliance with the HIPAA Privacy and Security Standards and Breach Notification Rule. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the civil monetary penalty fine or settlement paid by the violator. HIPAA further requires that patients be notified of any unauthorized acquisition, access, use or disclosure of their unsecured PHI that compromises the privacy or security of such information, with certain exceptions related to unintentional or inadvertent use or disclosure by employees or authorized individuals or where there is a good faith belief that the person who received the impermissible disclosure would not have been able to retain the information. HIPAA specifies that such notifications must be made “without unreasonable delay and in no case later than 60 calendar days after discovery of the breach.” If a breach affects 500 patients or more, it must be reported to HHS without unreasonable delay, and HHS will post the name of the breaching entity on its public web site. Breaches affecting 500 patients or more in the same state or jurisdiction must also be reported to the local media. If a breach involves fewer than 500 people, the covered entity must record it in a log and notify HHS at least annually. Any such notifications, including notifications to the public, could harm our business, financial condition, results of operations and prospects. Numerous other federal and state laws protect the confidentiality, privacy, availability, integrity and security of personal information, including health information. For example, various states, such as California and Massachusetts, have implemented privacy laws and regulations that in many cases are more restrictive than, and may not be preempted by, the HIPAA rules and may be subject to varying interpretations by courts and government agencies, creating complex compliance issues for us and our health network partners and enterprise clients and potentially exposing us to additional expense, adverse publicity and liability. The cost of compliance could be significant and require investments to enhance our technology and security infrastructure. In addition, in certain situations, regulators, partners, clients and consumers may disagree with our analysis of, and response to, data-related incidents and our execution of obligations under the laws, which may cause disputes, liability and negative publicity and harm our business, operations and prospects. In particular, some laws, such as the California Consumer Privacy Act of 2018, or CCPA, allow for a private right of action and statutory damages, which may motivate plaintiffs’ attorneys to file class action claims, which can be resource-intensive and costly to defend. If our security measures, some of which are managed by third parties, are breached or fail, and unauthorized access to personal information or PHI occurs, our reputation could be severely damaged, harming member, client and partner confidence and may result in members curtailing their use of our services. In addition, we could face litigation, significant damages for contract breach, significant penalties and regulatory actions for violation of HIPAA and other applicable laws or regulations and significant costs for remediation, notification to individuals and the public and measures to prevent future occurrences. Any potential security breach could also result in increased costs associated with liability for stolen assets or information, inaccessibility of systems or information, repairing system damage that may have been caused by such breaches, remediation offered to employees, contractors, health network partners, enterprise clients or members in an effort to maintain our business relationships after a breach and implementing measures to prevent future occurrences, including organizational changes, 69 deploying additional personnel and protection technologies, training employees and engaging third-party experts and consultants. We outsource important aspects of the storage and transmission of personal information and PHI, and thus rely on third parties to manage functions that have material cybersecurity risks. We require our vendors who handle personal information and PHI to contractually commit to safeguarding personal information and PHI such as by signing information protection addenda and/or business associate agreements, as applicable, to the same extent that applies to us and require such vendors to undergo security examinations. In addition, we periodically hire third-party security experts to assess and test our security posture. However, we cannot assure that these contractual measures and other safeguards will adequately protect us from the risks associated with the storage and transmission of employees’, contractors’, patients’ and members’ personal information and PHI. Any violation of applicable laws, regulations or policies by these parties, including violations that cause us to incur significant liability and put sensitive data at risk, could in turn harm our business. We also publish statements to our members that describe how we handle and protect personal information and PHI. If federal or state regulatory authorities or private litigants consider any portion of these statements to be untrue, we may be subject to claims of misrepresentation and/or deceptive practices, which could lead to significant liabilities and consequences, including, without limitation, significant costs of responding to investigations, defending against litigation, settling claims and complying with regulatory or court orders. As public and regulatory focus on privacy issues continues to increase, we expect that there will continue to be new laws, regulations and industry standards concerning privacy, data protection and information security. For example, the CCPA imposes obligations on businesses to which it applies. These obligations include, without limitation, providing specific disclosures in privacy notices, affording California residents certain rights related to their personal information, and requiring businesses subject to the CCPA to implement certain measures to effectuate California residents' rights to their personal information. The CCPA allows for statutory fines for noncompliance. The California Privacy Rights Act, or the CPRA, approved by California voters in November 2020 and expected to go into effect on January 1, 2023, builds upon the CCPA and affords consumers expanded privacy rights and protections. Colorado and Virginia passed similar consumer privacy laws expected to go into effect in 2023. The potential effects of state privacy, data protection and information security laws are far-reaching and will require us to modify our data processing practices and policies and to incur substantial costs and expenses to comply. Further, obligations under new laws and regulations may not be clear, creating uncertainty and risk despite our efforts to comply. If we fail, or are perceived to have failed, to address or comply with our privacy, data protection and information security obligations, we could be subject to governmental enforcement actions such as investigations, fines, penalties, audits, or inspections, class action or other litigation, contract breach claims, additional reporting requirements and/or oversight, bans on processing personal information, orders to destroy or not use personal information, reputational harm and imprisonment of company officials. Any significant change to applicable privacy, data protection and information security laws, regulations or industry practices regarding the collection, use, retention, security or disclosure of our members’ personal information, or regarding the manner in which the express or implied consent for the collection, use, retention or disclosure of such personal information is obtained, could increase our costs to comply and require us to modify our services and features, possibly in a material manner, which we may be unable to complete and may limit our ability to store and process the personal information of our members, optimize our operations or develop new services and features. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. Individuals may claim our call and text messaging services are not compliant with applicable law, including the Telephone Consumer Protection Act. We call and send short message service, or SMS, text messages to members and potential members who are eligible to use our service. While we obtain consent from these individuals to call and send text messages, federal or state regulatory authorities or private litigants may claim that the notices and disclosures we provide, form of consents we obtain or our call and SMS texting practices are not adequate to comply with, or violate applicable law, including the Telephone Consumer Protection Act, or TCPA. The TCPA imposes specific requirements relating to the marketing to individuals leveraging technology such as telephones, mobile devices and texts. TCPA violations can result in significant financial penalties as businesses can incur civil forfeiture penalties or criminal fines imposed by the Federal Communications Commission or be fined for each violation through private litigation or state attorneys general or other state actor enforcement. Class action suits are the most common method for private enforcement. Our call and SMS texting campaigns are potential sources of risk for class action lawsuits and liability for our company. Numerous class-action suits under federal and state laws have been filed in recent years against companies who conduct call and SMS texting programs, with many resulting in multi-million-dollar settlements to the plaintiffs. While we strive to adhere to strict policies and procedures, the Federal Communications Commission, as the agency 70 that implements and enforces the TCPA, may disagree with our interpretation of the TCPA and subject us to penalties and other consequences for noncompliance. Determination by a court or regulatory agency that our call or SMS text messaging violate the TCPA could subject us to civil penalties, could require us to change some portions of our business and could otherwise harm our business. Even an unsuccessful challenge by members, consumers or regulatory authorities of our activities could result in adverse publicity and could require a costly response from and defense by us. Negative publicity regarding the managed healthcare industry generally could adversely affect our results of operations or business. Negative publicity regarding the managed healthcare industry generally, or the Medicare Advantage program in particular, may result in increased regulation and legislative review of industry practices that further increase the costs of doing business and adversely affect our results of operations or business • requiring us to change our products and services provided to patients; • increasing the regulatory burdens under which we operate, which may increase the costs of providing services; • adversely affecting our ability to market our products or services through the imposition of further regulatory restrictions regarding the manner in which plans and providers market to Medicare Advantage enrollees; or • adversely affecting our ability to attract and retain patients. Risks Related to Information Technology We rely on internet infrastructure, bandwidth providers, other third parties and our own systems to provide proprietary service platforms to our members and providers, and any failure or interruption in the services provided by these third parties or our own systems could expose us to liability and hurt our reputation and relationships with members and clients. Our ability to maintain our proprietary service platform, including our digital health services and our electronic health records systems, is dependent on the development and maintenance of the infrastructure of the internet and other telecommunications services by third parties, including bandwidth and telecommunications equipment providers. This includes maintenance of a reliable network connection with the necessary speed, data capacity and security for providing reliable internet access and services and reliable telephone and facsimile services. We exercise limited control over these third-party providers. Our platforms are designed to operate without perceptible interruption in accordance with our service level commitments. We have, however, experienced limited interruptions in these systems in the past, including server failures that temporarily slowed down or diminished the performance of our platforms, and we may experience similar or more significant interruptions in the future. We do not currently maintain redundant systems or facilities for some of these services. Interruptions to third party systems or services, whether due to system failures, cyber incidents (the risk of which has been higher due to the significant increase in remote work across the technology industry as a result of the COVID-19 pandemic), ransomware, physical or electronic break-ins, phishing campaigns or other events, could affect the security or availability of our platforms or services and prevent or inhibit the ability of our members or providers to access our platforms or services. In the event of a catastrophic event with respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which could result in liability, substantial costs to remedy those problems or harm our relationship with our members and our business. Additionally, any disruption in the network access, telecommunications or co-location services provided by third-party providers or any failure of or by third-party providers’ systems or our own systems to handle current or higher volumes of use could significantly harm our business. The reliability and performance of our third-party providers’ systems and services may be harmed by increased usage or by ransomware, denial-of-service attacks or related cyber incidents, which has increased due to more opportunities created by remote work necessitated by the COVID-19 pandemic. Any errors, failures, interruptions or delays experienced in connection with these third-party services or our own systems could hurt our ability to deliver our services platform and damage our relationships with health network partners, enterprise clients and members and expose us to third-party liabilities, which could in turn harm our competitive position, business, financial condition, results of operations and prospects. 71 We rely on third-party vendors to host and maintain our technology platform. We rely on third-party vendors to host and maintain our technology platform. Our ability to operate our business is dependent on maintaining our relationships with third-party vendors and entering into new relationships to meet the changing needs of our business. Any deterioration in our relationships with such vendors or our failure to enter into agreements with vendors in the future could significantly disrupt our operations or hinder our ability to execute our growth strategies. Because we rely on certain vendors to store and process our data, it is possible that, despite precautions taken at our vendors’ facilities, the occurrence of a natural disaster, cyber incident, decision to close the facilities without adequate notice or other unanticipated problems could result in our non-compliance with data protection laws and regulations, loss of proprietary information, personal information, and other confidential information, and disruption to our technology platform. These service interruptions could also cause our platform to be unavailable to our health network partners, enterprise clients and members, and impair our ability to deliver services and negatively impact our relationships with new and existing health network partners, enterprise clients and members. Some of our vendor agreements may be unilaterally terminated by the vendor for convenience, including with respect to Amazon Web Services, and if such agreements are terminated, we may not be able to enter into similar relationships in the future on reasonable terms or at all. We may also incur substantial costs, delays and disruptions to our business in transitioning such services to ourselves or other third-party vendors. In addition, third-party vendors may not be able to provide the services required in order to meet the changing needs of our business. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. Failure or breach of our or our vendors' security measures or inability to meet applicable privacy and security obligations, as well as any instances of unauthorized access to our employees’, contractors’, members’, clients’ or partners’ data may result in disruption to our business and operations, incurrence of significant liabilities, loss of members, clients and partners and damage to our reputation. Our services and operations involve the storage and transmission of personal information and other sensitive data, including proprietary and confidential business data, trade secrets and intellectual property and the personal information (including health information) of employees, contractors, clients, partners, members and others. Because of the sensitivity of the information we store and transmit, the security features of our and our third-party vendors’ computer, network, and communications systems infrastructure are critical to the success of our business. A breach or failure of our or our third-party vendors’ security measures could result from a variety of circumstances and events, including, but not limited to, social engineering attacks (including through phishing attacks), malicious code (such as viruses and worms), malware (including as a result of advanced persistent threat intrusions), denial-of-service attacks (such as credential stuffing), ransomware attacks, supply-chain attacks, employee negligence or human errors, software bugs, server malfunction, software or hardware failures, loss of data or other information technology assets, adware, telecommunications failures, earthquakes, fire, flood, and other similar threats. Ransomware attacks, including those perpetrated by organized criminal threat actors, nation-states, and nation-state supported actors, are becoming increasingly prevalent and severe and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, strategic security objectives or applicable laws or regulations prohibiting payments. Similarly, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our information technology systems (including our services) or the third-party information technology systems that support us and our services. The COVID-19 pandemic and our remote workforce pose increased risks to our information technology systems and data, as more of our employees work from home, utilizing network connections outside our premises. Any of the previously identified or similar threats could cause a security incident. If our or our third-party vendors experience a security incident, it could result in unauthorized, unlawful or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of or access to data. A security incident could disrupt our (and third parties upon whom we rely) ability to provide our services. We may expend significant resources or modify our business activities in an effort to protect against security incidents. While we have implemented security measures designed to protect against a security incident, there can be no assurance that these measures will always be effective. We have not always been able in the past and may be unable in the future to detect vulnerabilities in our information technology systems because such threats and techniques change frequently, are often sophisticated in nature, and may not be detected until after a security incident has occurred. Some security incidents may remain undetected for an extended period of time. Despite our efforts to identify and remediate vulnerabilities, if any, in our information technology systems (including our products), our efforts may not be successful. Further, as cyber threats continue to evolve, we may be required to expend additional resources to enhance our information security measures and/or to 72 investigate and remediate any information security vulnerabilities and we may experience delays in developing and deploying remedial measures designed to address any such identified vulnerabilities. Certain privacy, data protection and information security obligations, whether imposed by law or by clients, partners or vendors with whom we work, may require us to implement and maintain specific security and data privacy measures, industry-standard or reasonable security measures to protect our information technology systems and data, and to provide certain end-user rights in connection with their data. Our vendors, clients, partners and members may also demand that we adopt additional security or data privacy measures or make further security or data privacy investments, which may be costly and time-consuming. Such failures or breaches of our or our third-party vendors', clients' and partners' security or data privacy measures, or our or our third-party vendors’, clients' and partners' inability to effectively resolve such failures or breaches in a timely manner, could disrupt the operation of our technology and business, adversely affect customer, partner, member or investor confidence in us, result in breach of contract claims, severely damage our reputation and reduce the demand for our services. Under certain circumstances, it could also impact the availability of our mobile app or related updates on various software platforms. Applicable privacy, data protection and security information obligations may require us to notify relevant stakeholders of security incidents. Such disclosures are costly, and the disclosures or the failure to comply with such requirements, could lead to adverse impacts. In addition, we could face litigation, significant damages for contract breach or other breaches of law, significant monetary penalties, or regulatory actions for violation of applicable laws or regulations, and incur significant costs for remedial or preventive measures. Although we maintain insurance covering certain security and privacy damages and claim expenses, we may not carry insurance or maintain coverage sufficient to compensate for all liability. Adequate insurance may not be available in the future at acceptable costs or at all and coverage disputes could also occur with our insurers. If security and privacy claims are not fully covered by insurance, they could result in substantial costs to us, which could harm our business. Insurance coverage would also not address the reputational damage that could result from a security incident. If an actual or perceived breach or inadequacy of our or our third-party vendors’ security occurs, or if we or our third-party vendors are unable to effectively resolve a breach in a timely manner, we could lose current and potential members, partners and clients, which could harm our business, results of operations, financial condition and prospects. Our proprietary technology platforms may not operate properly, which could damage our reputation, subject us to claims or require us to divert application of our resources from other purposes, any of which could harm our business and growth. Our proprietary technology platforms provide members with the ability to, among other things, register for our services, request a visit (either scheduled or on demand) and communicate and interact with providers, and allows our providers to, among other things, chart patient notes, maintain medical records, and conduct visits (via video, phone or the internet). Proprietary software development is time-consuming, expensive and complex, and may involve unforeseen difficulties. We may encounter technical obstacles, and it is possible that we may discover additional problems that prevent our proprietary software from operating properly. Due to the COVID-19 pandemic, use of virtual care, including remote visits, has increased, which places a heavier demand on our technology platform and may cause performance levels to deteriorate. When we launch new features and functions within our technology platform, we could inadvertently introduce bugs or errors, including latent ones, into our platforms which could impact usability as well as technology and clinical operations. We continue to implement software with respect to a number of new applications and services. The operation of our technology also depends in part on the performance of third-party service providers. If our technology platform does not function reliably or fails to achieve member, provider, partner or client expectations in terms of performance, we may be required to divert resources allocated for other business purposes to address these issues, may suffer reputational harm, lose or fail to grow member usage, fail to retain or grow provider talent, members, partners and clients, and may be subject to liability claims. The information that we provide to our health network partners, enterprise clients and members could be inaccurate or incomplete, which could harm our business, financial condition and results of operations. We provide healthcare-related information for use by our health network partners, enterprise clients and members. Because data in the healthcare industry is fragmented in origin, inconsistent in format and often incomplete, the overall quality of data in the healthcare industry is poor, and we frequently discover data issues and errors. If the data that we provide to our health network partners, enterprise clients and members is incorrect or incomplete or if we make mistakes in the capture or input of this data, our reputation may suffer and our ability to attract and retain health network partners, enterprise clients and members may be harmed. In addition, a court or government agency may take the position that our storage and display of health information exposes us to personal injury liability or other liability for wrongful delivery or handling of healthcare services or erroneous health information, which could harm our business, financial condition and results of operations. If we cannot implement or optimize our technology solutions for members, integrate our systems with health network partners or resolve technical issues in a timely manner, we may lose clients and partners and our reputation may be harmed. 73 Our health network partners utilize a variety of data formats, applications, systems and infrastructure. Moreover, each health network partner may have a unique technology ecosystem and infrastructure or have specific technology or certification requirements. To maintain our relationships with such partners and to continue to grow our business and membership, we may be required to meet such requirements and, in certain circumstances, our services must be seamlessly integrated and interoperable with our partners’ complex systems, which may cause us to incur significant upfront and maintenance costs. Additionally, we do not control our partners’ integration schedules. As a result, if our partners do not allocate the internal resources necessary to meet their integration responsibilities, which resources can be significant as many of them are large healthcare institutions with substantial operations to manage, or if we face unanticipated integration difficulties, the integration may be delayed. In addition, competitors with more efficient operating models with lower integration costs could jeopardize our partner relationships. If the integration process with our partners is not executed successfully or if execution is delayed, we could incur significant costs, partners could become dissatisfied and decide not to continue a strategic contractual relationship with us beyond an initial period during their term commitment or, in some cases, revenue recognition could be delayed, any of which could harm our business and results of operations. Our members depend on our digital health platform, including our mobile app, web portal, and support services to access on-demand digital health services or schedule in-office visits. We may be unable to quickly accommodate increases in member technology usage, particularly as we increase the size of our membership base, grow our services and as the COVID-19 pandemic drives more member demand for our digital health services and virtual care. We also may be unable to modify the format of our technology solutions and support services to compete with developments from our competitors. If we are unable to further develop and enhance our technology solutions or maintain effective technical support services to address members’ needs or preferences in a timely fashion, our members, clients and partners may become dissatisfied, which could damage our ability to maintain or expand our membership and business. While any refunds or credits we have issued historically have not had a significant impact on net revenue, we cannot assure you as to whether we may need to issue additional refunds or credits for membership fees in the future as a result of member or client dissatisfaction. For example, our members expect on-demand healthcare services through our mobile app and rapid in-office visit scheduling. Failure to maintain these standards or negative publicity related to our technology solutions, regardless of its accuracy, may reduce our overall NPS, harm our reputation and cause us to lose current or potential members, enterprise clients or partners. In addition, our enterprise clients expect our technology solutions to facilitate long-term cost of care reductions through high employee digital engagement, which we market as potential benefits for employers in providing employees with One Medical memberships. If employers do not perceive our solutions and services as providing such efficiencies and cost savings, they may terminate their contracts with us or elect not to renew. Any such outcomes could also negatively affect our ability to contract with new enterprise clients through damage to our reputation. If any of these were to occur, our revenue may decline and our business, results of operations, financial condition and prospects could be harmed. Risks Related to Taxation and Accounting Standards Certain U.S. state tax authorities may assert that we have a state nexus and seek to impose state and local income taxes which could harm our results of operations. As of December 31, 2021, we are qualified to operate in, and file income tax returns in, 23 states as well as Washington, D.C. There is a risk that certain state tax authorities where we do not currently file a state income tax return could assert that we are liable for state and local income taxes based upon income or gross receipts allocable to such states. States are becoming increasingly aggressive in asserting a nexus for state income tax purposes. We could be subject to state and local taxation, including penalties and interest attributable to prior periods, if a state tax authority successfully asserts that our activities give rise to a nexus. Such tax assessments, penalties and interest to the extent the Company has taxable income in prior periods may adversely impact our results of operations. Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations. In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. As of December 31, 2021, we have $894.3 million of federal net operating loss carryforwards and $598.5 million of state and local net operating loss carryforwards. The federal net operating loss carryforwards of $687.1 million arising after 2017 carry forward indefinitely, but the deduction for these carryforwards is limited to 80% of post-2020 current-year taxable income. The federal net operating loss carryforwards of $136.7 million from prior years will begin to expire in 2025. The state and local net operating loss carryforwards begin to expire in 2024. The Company has identified $25.2 million and $31.0 million of the above federal and 74 state net operating losses, respectively, in certain affiliated professional entities that will expire unused due to prior ownership changes. In addition, future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code, further limiting our ability to utilize NOLs arising prior to such ownership change in the future. There is also a risk that due to statutory or regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. We have recorded a full valuation allowance against the deferred tax assets attributable to our NOLs. Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use or similar taxes for our membership, enterprise and other service offerings, which could negatively impact our results of operations. We do not collect sales and use and similar taxes in any states for our membership, enterprise and other service offerings based on our belief that our services are not subject to such taxes in any state. Sales and use and similar tax laws and rates vary greatly from state to state. Certain states in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest with respect to past services, and we may be required to collect such taxes for services in the future. We have received, and may in the future continue to receive proposed assessments or determinations that we owe back taxes, penalties and interest for sales and use and similar taxes. If we are not successful in disputing such proposed assessments, we may be required to make payments in tax assessments, penalties or interest, and may be required to collect sales and use taxes in the future. Such tax assessments, penalties and interest or future requirements may negatively impact our results of operations. Our financial results may be adversely impacted by changes in accounting principles applicable to us. Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC and other various bodies formed to promulgate and interpret appropriate accounting principles. For example, in May 2014, the FASB issued accounting standards update No. 2014-09 (Topic 606), Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under GAAP and specifies that an entity should recognize revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services; this new accounting standard also impacted the recognition of sales commissions. Changes in accounting standards and interpretations or in our accounting assumptions and judgments could significantly impact our consolidated financial statements and our reported financial position and financial results may be harmed if our estimates or judgments prove to be wrong, assumptions change, or actual circumstances differ from those in our assumptions. Any difficulties in implementing these pronouncements could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm our business. If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be harmed. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on February 23, 2022. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, liability for medical claims incurred in the period but not yet reported (“IBNR”), valuation and related impairment recognition of intangible assets and goodwill, and stock-based compensation. Our results of operations may be harmed if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock. There are significant risks associated with estimating revenue under our At-Risk arrangements with certain payers, and if our estimates of revenues are materially inaccurate, it could negatively impact the timing and the amount of our revenue recognition or have a material adverse effect on our business, results of operations, financial condition and cash flows. We recognize revenue net of risk shares and adjustments in the month in which eligible members are entitled to receive healthcare benefits during the contract term. Due to reporting lag times and other factors, significant judgment is required to estimate risk adjustments to PMPM fees received from payers for At-Risk members. The billing and collection process with 75 payers is complex due to ongoing insurance coverage changes, geographic coverage differences, differing interpretations of contract coverage and other payer issues, such as ensuring appropriate documentation. Determining applicable primary and secondary coverage for our patients, together with the changes in patient coverage that occur each month, requires complex, resource-intensive processes. Errors in determining the correct coordination of benefits may result in refunds to payers. Revenues associated with Medicare programs are also subject to estimation risk related to the amounts not paid by the primary government payer that will ultimately be collectible from other government programs paying secondary coverage, the patient’s commercial health insurance plan secondary coverage or the patient. Collections, refunds and payer retractions typically continue to occur for up to three years and longer after services are provided. Inaccurate estimates of revenues could negatively impact the timing and the amount of our revenue recognition and have a material adverse impact on our business, results of operations, financial condition and cash flows. If our goodwill, intangible assets or other long-lived assets become impaired, we may be required to record a significant charge to earnings. Consummation of the acquisition of Iora resulted in us recognizing additional goodwill, intangible assets and other long-lived assets such as leases and fixed assets on our consolidated balance sheet. Intangible assets with finite lives will be amortized using the method that best reflects how their economic benefits are utilized or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over their estimated useful lives. Goodwill will not be amortized, but instead tested for potential impairment at least annually. Goodwill, intangible assets and other long-lived assets will also be tested for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If our goodwill, intangible assets or other long-lived assets are determined to be impaired in the future, we may be required to record additional significant, non-cash charges to earnings during the period in which the impairment is determined to have occurred. Risks Related to Our Intellectual Property If we are unable to obtain, maintain and enforce intellectual property protection for our business assets or if the scope of our intellectual property protection is not sufficiently broad, others may be able to develop and commercialize technology and solutions substantially similar to ours, and our ability to conduct business may be compromised. Our business depends on proprietary technology and other business assets, including software, processes, databases, confidential information and know-how, the protection of which is crucial to the success of our business. We rely on a combination of trademark, trade-secret and copyright laws, confidentiality policies and procedures, cybersecurity practices and contractual provisions to protect our intellectual property. We do not currently own any issued patents. Third parties, including our competitors, may have or obtain patents relating to technologies that overlap or compete with our technology, which they may assert against us to seek licensing fees or preclude the use of our technology. We may, over time, increase our investment in protecting our intellectual property through additional trademark, patent, copyright and other intellectual property filings, which could be expensive and time-consuming. While our operations are currently based in the United States, we may also be required to protect our intellectual property in foreign jurisdictions, a process that can be prolonged and costly, and one that we may choose not to pursue in every instance. We may not be able to obtain protection for our technology and even if we are successful, it is expensive to maintain intellectual property rights and the costs of defending our rights could be substantial. Moreover, these measures may not be sufficient to offer us meaningful protection or provide us with any competitive advantage. Furthermore, changes to U.S. intellectual property laws may jeopardize the enforceability and validity of our intellectual property portfolio and harm our ability to obtain patent protection of certain inventions. If we are unable to adequately protect our intellectual property and other proprietary rights, our competitive position and our business could be harmed, as competitors may be able to commercialize similar offerings without having incurred the development and licensing costs that we have incurred. Any of our owned or licensed intellectual property rights could be challenged, invalidated, circumvented, infringed, misappropriated or violated, our trade secrets and other confidential information could be disclosed in an unauthorized manner to third parties, which could result in costly redesign efforts, business disruptions, discontinuance of some of our offerings or other competitive harm. We may become involved in lawsuits to protect or enforce or defend our intellectual property rights, which could be expensive, time consuming and unsuccessful. Third parties, including our competitors, could infringe, misappropriate or otherwise violate our intellectual property rights. Monitoring unauthorized use of our intellectual property is difficult and costly. From time to time, we seek to analyze 76 our competitors’ solutions and services, and may in the future seek to enforce our rights against potential infringement, misappropriation or violation of our intellectual property. However, the steps we have taken to protect our proprietary rights may not be adequate to enforce our rights as against such infringement, misappropriation or violation of our intellectual property. We may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Any inability to meaningfully enforce our intellectual property rights could harm our ability to compete and reduce demand for our services. In recent years, companies are increasingly bringing and becoming subject to lawsuits and proceedings alleging infringement, misappropriation or violation of intellectual property rights, particularly patent rights. Our competitors and other third parties may hold patents or other intellectual property rights, which could be related to our business. We expect that we may receive in the future notices that claim we or our partners, clients or members using our solutions and services have misappropriated or misused other parties’ intellectual property rights, particularly as the number of competitors in our market grows and the functionality of applications amongst competitors overlaps. If we are found to infringe, misappropriate or violate another party’s intellectual property rights, we could be prohibited, including by court order, from further use of the intellectual property asset or be required to obtain a license from such third party to continue commercializing or using such technologies, solutions or services, which may not be available on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors and other third parties access to the same technologies licensed to us, and it could require us to make substantial licensing and royalty payments. Accordingly, we may be forced to design around such violated intellectual property, which may be expensive, time-consuming or infeasible. In addition, we could be found liable for significant monetary damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a patent or other intellectual property right. Claims that we have misappropriated the confidential information or trade secrets of third parties could similarly harm our business. Any adverse outcome in such cases could affect our competitive position, business, financial condition, results of operations and prospects. Litigation or other legal proceedings relating to intellectual property claims, regardless of merits and even if resolved in our favor, can be expensive, time consuming, and resource intensive. In addition, there could be public announcements of the results of hearings, motions, or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing, or other business activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of intellectual property proceedings could harm our ability to compete in the marketplace. In addition, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. If we fail to comply with our license obligations, if our license rights are challenged, or if we cannot license rights to use technologies on reasonable terms, we may experience business disruption, increased costs, or inability to commercialize certain services. We license certain intellectual property, including content, technologies and software from third parties, that are important to our business. In the future we may need to enter into additional agreements that provide us with licenses and rights to valuable intellectual property or technology. If we fail to comply with any of the obligations under our license agreements, or if our use or license rights are challenged, we may be required to pay damages, the licensor may have the right to terminate the license and the owner of the intellectual property asset may assert claims against us. Termination by the licensor or dispute with an owner of an intellectual property asset would cause us to lose valuable rights, and could disrupt or prevent us from providing our services, or adversely impact our ability to commercialize future solutions and services. In addition, our rights to certain technologies are licensed to us on a non-exclusive basis. The owners of these non-exclusively licensed technologies are therefore free to license them to third parties, including our competitors, on terms that may be superior to those offered to us, which could place us at a competitive disadvantage. Our licensors may also own or control intellectual property that has not been licensed to us and, as a result, we may be subject to claims, regardless of their merit, that we are infringing or otherwise violating the licensor’s rights. In addition, the agreements under which we license intellectual property or technology from third parties are generally complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property or technology, or increase what we believe to be our financial or other obligations under the relevant agreement. 77 Moreover, the licensing or acquisition of third-party intellectual property rights is a competitive area, and established companies may have a competitive advantage over us due to their size, capital resources and greater development or commercialization capabilities. Companies that perceive us to be a competitor may also be unwilling to license or grant rights to us. Even if such licenses are available, we may be required to pay the licensor substantial fees or royalties. Such fees or royalties will become a cost of our operations and may affect our margins. If we are unable to obtain licenses on acceptable terms or at all, if any licenses are subsequently terminated, if our licensors fail to abide by the terms of the licenses, if our licensors fail to prevent infringement by third parties, or if the licensed intellectual property rights are found to be invalid or unenforceable, we could be restricted from commercializing our solutions and services and may be required to incur substantial costs to seek or develop alternatives. Any of the foregoing could harm our business, financial condition, results of operations, and prospects. If our trademarks and trade names are not adequately protected, we may not be able to build and maintain name recognition in our markets of interest and our competitive position may be harmed. The registered or unregistered trademarks or trade names that we own may be challenged, infringed, circumvented, declared generic, lapsed or determined to be infringing on or dilutive of other marks. We may not be able to protect our rights in these trademarks and trade names, which we need in order to build and maintain name recognition with the public. In addition, third parties have filed, and may in the future file, for registration of trademarks similar or identical to our trademarks, thereby impeding our ability to build and maintain brand identity and possibly leading to market confusion. If they succeed in registering or developing common law rights in such trademarks, and if we are not successful in challenging such third-party rights, we may not be able to use these trademarks to develop or maintain brand recognition of our services or be required to expend substantial resources and expenses to rebrand. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. If we are unable to establish or protect our trademarks and trade names, or if we are unable to build or maintain name recognition based on our trademarks and trade names, we may not be able to compete effectively, which could harm our competitive position, business, financial condition, results of operations and prospects. If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed. We rely heavily on trade secrets and confidentiality agreements to protect our unpatented know-how, technology, and other proprietary information, including our technology platform, and to maintain our competitive position. With respect to our technology platform, we consider trade secrets and know-how to be one of our primary sources of intellectual property. However, trade secrets and know-how can be difficult to protect. We seek to protect these trade secrets and other proprietary technology, in part, by implementing topical policies and processes and by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, contractors, consultants, advisors, clients, prospects, partners, and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. We cannot guarantee that we have entered into such agreements with each party that may have or have had access to our trade secrets or proprietary information. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive, and time-consuming, and the outcome is unpredictable. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets are misappropriated, improperly disclosed, or independently developed by a competitor or other third party, it could harm our competitive position, business, financial condition, results of operations, and prospects. We may be subject to claims that our employees, consultants, or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting ownership of what we regard as our own intellectual property. Many of our employees, consultants, and advisors are currently or were previously employed at other companies in our field, including our competitors or potential competitors. Although we try to ensure that our employees, consultants, and advisors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these individuals have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management. 78 In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. Our use of open source software could compromise our ability to offer our services and subject us to possible litigation. We use open source software in connection with our solutions and services. Companies that incorporate open source software into their solutions have, from time to time, faced claims challenging the use of open source software and compliance with open source license terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software or claiming noncompliance with open source licensing terms. Some open source software licenses require users who distribute software containing open source software to publicly disclose all or part of the source code to the licensee’s software that incorporates, links or uses such open source software, and make available to third parties for no cost, any derivative works of the open source code created by the licensee, which could include the licensee’s own valuable proprietary code. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose our proprietary source code or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur, or could be claimed to have occurred, in part because open source license terms are often ambiguous. There is little legal precedent in this area and any actual or claimed requirement to disclose our proprietary source code or pay damages for breach of contract could harm our business and could help third parties, including our competitors, develop solutions and services that are similar to or better than ours. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. Risks Related to Ownership of Our Common Stock Our stock price may be volatile, and the value of our common stock may decline. The market price of our common stock may be highly volatile and may fluctuate or decline substantially as a result of a variety of factors, some of which are beyond our control or are related in complex ways, includin • actual or anticipated fluctuations in our financial condition and operating results; • variance in our financial performance from expectations of securities analysts or investors; • changes in the pricing we offer our members; • changes in our projected operating and financial results; • the impact of COVID-19, including future outbreaks or variants, on our financial performance, financial condition and results of operations, and the financial performance and financial condition of our health network partners, our enterprise clients and others; • the impact of protests and civil unrest; • our relationships with our health network partners and any changes to or terminations of our contracts with the health network partners; • changes in laws or regulations applicable to our industry and our solutions and services; • announcements by us, our health network partners or our competitors of significant business developments, acquisitions, or new offerings; • publicity associated with issues with our services and technology platform; • our involvement in litigation, including medical malpractice claims and consumer class action claims; 79 • any governmental investigations or inquiries into our business and operations or challenges to our relationships with our affiliated professional entities under the ASAs or to our relationships with health network partners; • future sales of our common stock or other securities, by us or our stockholders; • changes in senior management or key personnel; • developments or disputes concerning our intellectual property or other proprietary rights, including allegations that we have infringed, misappropriated or otherwise violated any intellectual property of any third party; • changes in accounting standards, policies, guidelines, interpretations or principles; • actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally, including competition or perceived competition from well-known and established companies or entities; • our relationships with our health network partners and any changes to or terminations of our contracts with the health network partners; • the trading volume of our common stock, including effects of inflation; • changes in the anticipated future size and growth rate of our market; • rates of unemployment; and • general economic, regulatory and market conditions, including economic recessions or slowdowns and inflationary pressures. Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may negatively impact the market price of our common stock, which has recently been volatile. In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us, because companies reliant on technology solutions have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business. As a result of being a public company, we are obligated to maintain proper and effective internal control over financial reporting and any failure to maintain the adequacy of these internal controls may negatively impact investor confidence in our company and, as a result, the value of our common stock. We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of Nasdaq. In particular, we are required pursuant to Section 404 of the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, our independent registered public accounting firm is required to attest to the effectiveness of our internal control over financial reporting. The process of compiling the system and process documentation necessary to perform the evaluation required under Section 404 is costly and challenging. Also, we currently do not have an internal audit group, and we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and compile the system and process documentation necessary to support ongoing work to comply with Section 404. Any failure to maintain effective internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities and our access to the capital markets could be restricted in the future. We have in the past identified material weaknesses in our internal control over financial reporting, and we cannot assure you that the measures we have taken will be sufficient to avoid potential future material weaknesses, that our remediated controls will continue to operate properly, or that our financial statements will be free from error. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business and we may discover 80 weaknesses in our disclosure controls and internal control over financial reporting in the future. Any failure to develop or maintain effective internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. Accordingly, there could continue to be a possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities and our access to the capital markets could be restricted in the future. A significant portion of our total outstanding common stock may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well. Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the public market, the market price of our common stock could decline significantly. All of our outstanding shares of common stock are eligible for sale in the public market, other than shares held by directors, executive officers and other affiliates that are subject to volume and other limitations under Rule 144 under the Securities Act. In addition, we have reserved shares for future issuance under our equity incentive plan. Certain holders of our common stock, or their transferees, also have rights, subject to some conditions, to require us to file one or more registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. If we were to register the resale of these shares, they could be freely sold in the public market without limitation. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline. Future sales and issuances of our capital stock or rights to purchase capital stock could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to decline. We may issue additional securities in the future and from time to time. Future sales and issuances of our capital stock or rights to purchase our capital stock could result in substantial dilution to our existing stockholders. We may sell or issue common stock, convertible securities and other equity securities in one or more transactions at prices and in a manner as we may determine from time to time, including in connection with future acquisitions or strategic transactions. If we sell any such securities in subsequent transactions, investors may be materially diluted. If securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business, our common stock price and trading volume could decline. Our stock price and trading volume will be heavily influenced by the way analysts and investors interpret our financial information and other disclosures. If securities or industry analysts do not publish research or reports about our business, delay publishing reports about our business or publish negative reports about our business, regardless of accuracy, or cease covering us, our common stock price and trading volume could decline. Even if our common stock is actively covered by analysts, we do not have any control over the analysts or the measures that analysts or investors may rely upon to forecast our future results. Over-reliance by analysts or investors on any particular metric to forecast our future results may result in forecasts that differ significantly from our own. Regardless of accuracy, unfavorable interpretations of our financial information and other public disclosures could have a negative impact on our stock price. If our financial performance fails to meet analyst estimates, for any of the reasons discussed above or otherwise, or one or more of the analysts who cover us downgrade our common stock or change their opinion of our common stock, our stock price would likely decline. We do not intend to pay dividends for the foreseeable future and, as a result, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock. We have never declared or paid any cash dividends on our capital stock, and we do not intend to pay any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and may be restricted by the terms of any outstanding debt obligations. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments. 81 We incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices. As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. We expect such expenses to further increase now that we are no longer an emerging growth company. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of Nasdaq, and other applicable securities rules and regulations impose various requirements on public companies. Furthermore, the senior members of our management team do not have significant experience with operating a public company. As a result, our management and other personnel will have to devote a substantial amount of time to compliance with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we will incur as a public company or the timing of such costs. If, notwithstanding our efforts, we fail to comply with new laws, regulations and standards, regulatory authorities may initiate legal proceedings against us and our business may be harmed. Failure to comply with these rules might also make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior management. Anti-takeover provisions in our charter documents, under Delaware law and under the indenture governing our 2025 Notes could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock. Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions tha • provide for a classified board of directors whose members serve staggered terms; • authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights, and preferences determined by our board of directors that may be senior to our common stock; • require that any action to be taken by our stockholders be affected at a duly called annual or special meeting and not by written consent; • specify that special meetings of our stockholders can be called only by our board of directors, the chairperson of our board of directors, or our chief executive officer; • establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors; • prohibit cumulative voting in the election of directors; • provide that our directors may be removed for cause only upon the vote of the holders of at least 66 2⁄3% of our outstanding shares of common stock; • provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and • require the approval of our board of directors or the holders of at least 66 2/3% of our outstanding shares of common stock to amend our bylaws and certain provisions of our certificate of incorporation. These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally, subject to certain exceptions, prohibits a 82 Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Furthermore, the indenture governing our 2025 Notes requires us to repurchase such notes for cash if we undergo certain fundamental changes and, in certain circumstances, to increase the conversion rate for a holder of our 2025 Notes. A takeover of us may trigger the requirement that we purchase our 2025 Notes and/or increase the conversion rate, which could make it more costly for a potential acquiror to engage in a business combination transaction with us. Any delay or prevention of a change of control transaction or changes in our management could cause the market price of our common stock to decline. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common • any derivative action or proceeding brought on our behalf; • any action asserting a breach of fiduciary duty; • any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; and • any action asserting a claim against us that is governed by the internal-affairs doctrine. This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation further provides that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that such choice of forum provisions are facially valid and several state trial courts have enforced such provisions and required that suits asserting Securities Act claims be filed in federal court, there is no guarantee that courts of appeal will affirm the enforceability of such provisions and a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation. This may require significant additional costs associated with resolving such action in other jurisdictions and we cannot assure you that the provisions will be enforced by a court in those other jurisdictions. If a court were to find either exclusive forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with litigating Securities Act claims in state court, or both state and federal court, which could seriously harm our business, financial condition, results of operations, and prospects. These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could seriously harm our business. Risks Related to Our Outstanding Notes Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the 2025 Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or 83 more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. Regulatory actions and other events may adversely impact the trading price and liquidity of the 2025 Notes. We expect that many investors in, and potential purchasers of, the 2025 Notes will employ, or seek to employ, a convertible arbitrage strategy with respect to the notes. Investors would typically implement such a strategy by selling short the common stock underlying the 2025 Notes and dynamically adjusting their short position while continuing to hold the notes. Investors may also implement this type of strategy by entering into swaps on our common stock in lieu of or in addition to short selling the common stock. The SEC and other regulatory and self-regulatory authorities have implemented various rules and taken certain actions, and may in the future adopt additional rules and take other actions, that may impact those engaging in short selling activity involving equity securities (including our common stock). Such rules and actions include Rule 201 of SEC Regulation SHO, the adoption by the Financial Industry Regulatory Authority, Inc. and the national securities exchanges of a “Limit Up-Limit Down” program, the imposition of market-wide circuit breakers that halt trading of securities for certain periods following specific market declines, and the implementation of certain regulatory reforms required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Any governmental or regulatory action that restricts the ability of investors in, or potential purchasers of, the notes to effect short sales of our common stock, borrow our common stock or enter into swaps on our common stock could adversely impact the trading price and the liquidity of our 2025 Notes. We may not have the ability to raise the funds necessary to settle conversions of the 2025 Notes in cash or to repurchase the notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the 2025 Notes. Subject to limited exceptions, holders of the 2025 Notes will have the right to require us to repurchase all or a portion of their 2025 Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest, if any, as described under Note 9 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. In addition, upon conversion of the 2025 Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the 2025 Notes being converted as described under Note 9 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of 2025 Notes surrendered therefor or 2025 Notes being converted. In addition, our ability to repurchase the 2025 Notes or to pay cash upon conversions of the 2025 Notes may be limited by law, by regulatory authority or by agreements governing our existing or future indebtedness. Our failure to repurchase 2025 Notes at a time when the repurchase is required by the indenture or to pay any cash payable on future conversions of the 2025 Notes as required by the indenture would constitute a default under the indenture governing the 2025 Notes. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our existing or future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the 2025 Notes or make cash payments upon conversions thereof. The conditional conversion feature of the 2025 Notes, if triggered, may adversely impact our financial condition and operating results. In the event the conditional conversion feature of the 2025 Notes is triggered, holders of 2025 Notes will be entitled to convert the 2025 Notes at any time during specified periods at their option. If one or more holders elect to convert their 2025 Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely impact our liquidity. In addition, even if holders do not elect to convert their 2025 Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2025 Notes as a current rather than long-term liability, which would result in a significant reduction of our net working capital. Risks Related to Our Acquisition of Iora We may be unable to successfully integrate Iora's business and realize the anticipated benefits of the merger. 84 We will be required to devote significant management attention and resources to integrating our and Iora's business practices and operations to effectively realize synergies as a combined company, including opportunities to maintain members as they become Medicare eligible, sign up incremental members, reduce combined costs, and reduce combined capital expenditures compared to both companies’ standalone plans. Potential difficulties the combined company may encounter in the integration process include the followin • the inability to successfully combine our and Iora's businesses in a manner that permits the combined company to realize the growth, operations and cost synergies anticipated to result from the merger, which would result in the anticipated benefits of the merger, including projected financial targets, not being realized in the time frames currently anticipated, previously disclosed or at all; • lost patients or members, or a reduction in the increase in patients or members as a result of certain enterprise clients, patients, members or partners of either of the two companies deciding to terminate or reduce their business with the combined company or not to engage in business in the first place; • a reduction in the combined company’s ability to recruit or maintain providers; • an inability of the combined company to maintain its health network partnerships or payer contracts on substantially the same terms; • the complexities associated with managing the larger combined businesses and integrating personnel from the two companies, while at the same time attempting to (i) provide consistent, high quality services under a unified culture and (ii) focus on other ongoing transactions; • the additional complexities of combining two companies with different histories, regulatory restrictions, operating structures and markets; • the failure to retain key employees of either of the two companies; • compliance by us with additional regulatory regimes and with the rules and regulations of additional regulatory entities, including the Centers for Medicare and Medicaid Services, which we refer to as CMS; • potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the merger; and • performance shortfalls at one or both of the two companies as a result of the diversion of management’s attention caused by completing the merger and integrating the companies’ operations. For all these reasons, you should be aware that it is possible that the integration process could result in the distraction of the combined company’s management, the disruption of the combined company’s ongoing business or inconsistencies in the combined company’s services, standards, controls, procedures and policies, any of which could adversely affect the ability of the combined company to maintain relationships with enterprise clients, patients, members, vendors, partners, employees or providers or to achieve the anticipated benefits of the merger, or could otherwise adversely affect the business and financial results of the combined company. We expect to continue to incur substantial expenses related to the integration of Iora. We have incurred and expect to continue to incur substantial expenses in connection with integrating Iora's business, operations, networks, systems, technologies, policies and procedures of Iora with our business, operation, networks, systems, technologies, policies and procedures. While we have assumed that a certain level of integration expenses would be incurred, there are a number of factors beyond our control that could affect the total amount or the timing of our integration expenses. Many of the expenses that were and will be incurred, by their nature, are difficult to estimate accurately at the present time. In addition, the combined company may need significant additional capital in the form of equity or debt financing to implement or expand its business plan and there can be no assurance that such capital will be available to the combined company on terms acceptable to it, or at all. If the combined company issues additional capital stock in the future in connection with financing activities, stockholders will experience dilution of their ownership interests and the per share value of the combined company’s common stock may decline. 85 Due to these factors, the transaction and integration expenses could be greater or could be incurred over a longer period of time than we currently expect. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Recent Sale of Unregistered Securities and Use of Proceeds None. Issuer Purchases of Equity Securities None. Use of Proceeds from Registered Securities On January 30, 2020, our registration statement on Form S-1 (File No. 333- 235792) relating to the initial public offering of our common stock was declared effective by the SEC. Pursuant to such registration statement, we issued and sold an aggregate of 20,125,000 shares of our common stock at a price of $14.00 per share for aggregate cash proceeds of approximately $258.2 million, net of underwriting discounts and commissions and offering costs, which includes the full exercise by the underwriters of their option to purchase additional shares of common stock. No payments for offering expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities or (iii) any of our affiliates. J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC acted as joint-book running managers for the offering. There has been no material change in the expected use of the net proceeds from our initial public offering, as described in our final prospectus filed with the SEC on February 3, 2020 pursuant to Rule 424(b) under the Securities Act of 1933, as amended. Repurchase of Shares of Company Equity Securities None. Item 3. Defaults Upon Senior Securities. Not Applicable. Item 4. Mine Safety Disclosures. Not Applicable. Item 5. Other Information. None. 86 Item 6. Exhibits. Number Exhibit Description Form File No. Exhibit Filing Date Filed Herewith 3.1 Amended and Restated Certificate of Incorporation of the Registrant 8-K 001-39203 3.1 2/4/2020 3.2 Amended and Restated Bylaws of the Registrant 8-K 001-39203 3.2 2/4/2020 31.1 Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 31.2 Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 32.1† Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X 101.INS Inline XBRL Instance Document X 101.SCH Inline XBRL Taxonomy Schema Linkbase Document X 101.CAL Inline XBRL Taxonomy Definition Linkbase Document X 101.DEF Inline XBRL Taxonomy Calculation Linkbase Document X 101.LAB Inline XBRL Taxonomy Labels Linkbase Document X 101.PRE Inline XBRL Taxonomy Presentation Linkbase Document X 104 Cover Page Interactive Data File (formatted as inline XBRL and contained within Exhibit 101). † The certification attached as Exhibit 32.1 that accompanies this Quarterly Report on Form 10-Q, is deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of 1Life Healthcare, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing. 87 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. 1LIFE HEALTHCARE, INC. Date: May 4, 2022 By: /s/ Amir Dan Rubin Amir Dan Rubin Chief Executive Officer and President (Principal Executive Officer) Date: May 4, 2022 By: /s/ Bjorn Thaler Bjorn Thaler Chief Financial Officer (Principal Financial and Accounting Officer) 88

Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements 1 Condensed Consolidated Balance Sheets (Unaudited) 1 Condensed Consolidated Statements of Operations (Unaudited) 2 Condensed Consolidated Statements of Comprehensive Loss (Unaudited) 3 Condensed Consolidated Statements of Stockholders' Equity (Deficit) (Unaudited) 4 Condensed Consolidated Statements of Cash Flows (Unaudited) 6 Notes to Unaudited Condensed Consolidated Financial Statements (Unaudited) 7 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28 Item 3. Quantitative and Qualitative Disclosures About Market Risk 46 Item 4. Controls and Procedures 46 PART II. OTHER INFORMATION Item 1. Legal Proceedings 47 Item 1A. Risk Factors 47 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 92 Item 3. Defaults Upon Senior Securities 92 Item 4. Mine Safety Disclosures 92 Item 5. Other Information 92 Item 6. Exhibits 93 Signatures 94 Where You Can Find More Information Investors and others should note that we announce material financial and other information using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We also post supplemental materials on the “Events” section of our investor relations website at investor.onemedical.com. Except as specifically noted herein, information on or accessible through our website is not, and will not be deemed to be, a part of this Quarterly Report on Form 10-Q or incorporated by reference into any other filings we may make with the U.S. Securities and Exchange Commission (the “SEC”). We also use our Facebook, Twitter and LinkedIn accounts as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts, in addition to following our press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this Quarterly Report on Form 10-Q. These channels may be updated from time to time on our investor relations website. i PART I—FINANCIAL INFORMATION Item 1. Financial Statements. 1LIFE HEALTHCARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except par value amounts) (unaudited) June 30, 2022 December 31, 2021 Assets Current assets: Cash and cash equivalents $ 184,748 $ 341,971 Short-term marketable securities 162,874 111,671 Accounts receivable, net 153,155 103,498 Inventories 6,571 6,065 Prepaid expenses 28,555 28,055 Other current assets 24,429 21,767 Total current assets 560,332 613,027 Long-term marketable securities — 48,296 Restricted cash 3,785 3,801 Property and equipment, net 204,814 193,716 Right-of-use assets 272,966 256,293 Intangible assets, net 334,325 352,158 Goodwill 1,157,179 1,147,464 Other assets 7,518 12,277 Total assets $ 2,540,919 $ 2,627,032 Liabilities and Stockholders' Equity Current liabiliti Accounts payable $ 17,046 $ 18,725 Accrued expenses 76,289 72,672 Deferred revenue, current 57,651 47,928 Operating lease liabilities, current 36,465 31,152 Other current liabilities 29,030 31,632 Total current liabilities 216,481 202,109 Operating lease liabilities, non-current 291,596 269,641 Convertible senior notes 310,782 309,844 Deferred income taxes 60,199 73,875 Deferred revenue, non-current 25,768 29,317 Other non-current liabilities 11,611 13,663 Total liabilities 916,437 898,449 Commitments and contingencies (Note 13) Stockholders' Equity: Common stock, $ 0.001 par value, 1,000,000 and 1,000,000 shares authorized as of June 30, 2022 and December 31, 2021, respectively; 195,154 and 191,722 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively 195 193 Additional paid-in capital 2,428,684 2,346,781 Accumulated deficit ( 802,866 ) ( 618,198 ) Accumulated other comprehensive income ( 1,531 ) ( 193 ) Total stockholders' equity 1,624,482 1,728,583 Total liabilities and stockholders' equity $ 2,540,919 $ 2,627,032 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 1LIFE HEALTHCARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share amounts) (unaudited) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net reve Medicare revenue $ 131,594 $ — $ 259,016 $ — Commercial revenue 124,245 120,416 250,925 241,768 Total net revenue 255,839 120,416 509,941 241,768 Operating expens Medical claims expense 108,900 — 213,866 — Cost of care, exclusive of depreciation and amortization shown separately below 106,948 67,922 208,325 138,014 Sales and marketing 23,193 10,570 45,652 23,259 General and administrative 92,422 77,196 189,458 141,541 Depreciation and amortization 21,783 7,292 42,676 13,899 Total operating expenses 353,246 162,980 699,977 316,713 Loss from operations ( 97,407 ) ( 42,564 ) ( 190,036 ) ( 74,945 ) Other income (expense), n Interest income 364 79 521 184 Interest and other expense ( 3,682 ) ( 2,842 ) ( 8,801 ) ( 5,685 ) Total other income (expense), net ( 3,318 ) ( 2,763 ) ( 8,280 ) ( 5,501 ) Loss before income taxes ( 100,725 ) ( 45,327 ) ( 198,316 ) ( 80,446 ) Provision for (benefit from) income taxes ( 6,916 ) ( 4,040 ) ( 13,648 ) 159 Net loss $ ( 93,809 ) $ ( 41,287 ) $ ( 184,668 ) $ ( 80,605 ) Net loss per share — basic and diluted $ ( 0.48 ) $ ( 0.30 ) $ ( 0.95 ) $ ( 0.59 ) Weighted average common shares outstanding — basic and diluted 194,488 136,788 193,774 137,045 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 1LIFE HEALTHCARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Amounts in thousands) (unaudited) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net loss $ ( 93,809 ) $ ( 41,287 ) $ ( 184,668 ) $ ( 80,605 ) Other comprehensive l Net unrealized gain (loss) on marketable securities ( 305 ) ( 12 ) ( 1,338 ) — Comprehensive loss $ ( 94,114 ) $ ( 41,299 ) $ ( 186,006 ) $ ( 80,605 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 3 1LIFE HEALTHCARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Amounts in thousands) (unaudited) Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity (Deficit) Shares Amount Balances at December 31, 2021 191,722 $ 193 $ 2,346,781 $ ( 618,198 ) $ ( 193 ) $ 1,728,583 Exercise of stock options 579 1 2,234 2,235 Issuance of common stock for settlement of RSUs 442 — Issuance of common stock in acquisition 740 — Stock-based compensation expense 36,919 36,919 Net unrealized gain (loss) on marketable securities ( 1,033 ) ( 1,033 ) Net loss ( 90,859 ) ( 90,859 ) Balances at March 31, 2022 193,483 $ 194 $ 2,385,934 $ ( 709,057 ) $ ( 1,226 ) $ 1,675,845 Exercise of stock options 824 1 3,214 3,215 Issuance of common stock under the employee stock purchase plan 234 1,659 1,659 Issuance of common stock for settlement of RSUs 79 — Issuance of common stock in acquisition 534 — 5,541 5,541 Stock-based compensation expense 32,336 32,336 Net unrealized gain (loss) on marketable securities ( 305 ) ( 305 ) Net loss ( 93,809 ) ( 93,809 ) Balances at June 30, 2022 195,154 $ 195 $ 2,428,684 $ ( 802,866 ) $ ( 1,531 ) $ 1,624,482 4 1LIFE HEALTHCARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Amounts in thousands) (unaudited) Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity (Deficit) Shares Amount Balances at December 31, 2020 134,472 $ 134 $ 918,118 $ ( 369,785 ) $ 8 $ 548,475 Impact of adoption of ASU 2020-06 ( 73,393 ) 6,656 ( 66,737 ) Impact of adoption of ASC 326 ( 428 ) ( 428 ) Exercise of stock options 2,584 3 13,476 13,479 Issuance of common stock for settlement of RSUs 241 — Stock-based compensation expense 26,328 26,328 Net unrealized (gain) loss on marketable securities 12 12 Net loss ( 39,318 ) ( 39,318 ) Balances at March 31, 2021 137,297 $ 137 $ 884,529 $ ( 402,875 ) $ 20 $ 481,811 Exercise of stock options 353 1 2,627 2,628 Issuance of common stock under the employee stock purchase plan 107 2,972 2,972 Issuance of common stock for settlement of RSUs 17 — Stock-based compensation expense 26,332 26,332 Net unrealized (gain) loss on marketable securities ( 12 ) ( 12 ) Net loss ( 41,287 ) ( 41,287 ) Balances at June 30, 2021 137,774 $ 138 $ 916,460 $ ( 444,162 ) $ 8 $ 472,444 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 1LIFE HEALTHCARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (unaudited) Six Months Ended June 30, 2022 2021 Cash flows from operating activiti Net loss $ ( 184,668 ) $ ( 80,605 ) Adjustments to reconcile net loss to net cash used in operating activiti Provision for bad debts 270 105 Depreciation and amortization 42,676 13,899 Amortization of debt discount and issuance costs 938 937 Accretion of discounts and amortization of premiums on marketable securities, net 661 483 Reduction of operating lease right-of-use assets 16,053 8,609 Stock-based compensation 69,255 52,660 Deferred income taxes ( 13,676 ) — Other non-cash items 570 400 Changes in operating assets and liabilities, net of acquisitio Accounts receivable, net ( 49,571 ) 11,380 Inventories ( 481 ) 3,216 Prepaid expenses and other current assets 4,105 ( 21,261 ) Other assets 3,792 110 Accounts payable 121 1,234 Accrued expenses 4,546 6,772 Deferred revenue 5,793 6,765 Operating lease liabilities ( 13,143 ) ( 8,761 ) Other liabilities ( 2,119 ) 17,128 Net cash (used in) provided by operating activities ( 114,878 ) 13,071 Cash flows from investing activiti Purchases of property and equipment, net ( 34,188 ) ( 31,172 ) Purchases of marketable securities ( 54,906 ) ( 79,984 ) Proceeds from sales and maturities of marketable securities 50,000 498,977 Acquisitions of businesses, net of cash and restricted cash acquired ( 10,451 ) ( 9,695 ) Issuance of note receivable — ( 20,000 ) Net cash (used in) provided by investing activities ( 49,545 ) 358,126 Cash flows from financing activiti Proceeds from the exercise of stock options 5,450 16,107 Proceeds from employee stock purchase plan 1,659 2,972 Payment of principal portion of finance lease liability ( 27 ) ( 29 ) Net cash provided by financing activities 7,082 19,050 Net (decrease) increase in cash, cash equivalents and restricted cash ( 157,341 ) 390,247 Cash, cash equivalents and restricted cash at beginning of period 346,054 115,005 Cash, cash equivalents and restricted cash at end of period $ 188,713 $ 505,252 Supplemental disclosure of non-cash investing and financing activiti Purchases of property and equipment included in accounts payable and accrued expenses $ 7,732 $ 5,883 Equity consideration for business acquisition $ 5,541 $ — The accompanying notes are an integral part of these condensed consolidated financial statements. 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) (unaudited) 1. Nature of the Business and Basis of Presentation 1Life Healthcare, Inc. (“1Life”) was incorporated in Delaware on July 25, 2002. 1Life’s headquarters are located in San Francisco, California. 1Life has developed a modernized healthcare membership model based on direct consumer enrollment and third-party sponsorship across commercially insured and Medicare populations. Our membership model includes access to 24/7 digital health services paired with in-office care routinely covered by most health care payers, and allows the Company to engage in value-based care across all age groups, including through At-Risk arrangements as defined in Note 2 “Summary of Significant Accounting Policies” with Medicare Advantage payers and the Center for Medicare & Medicaid Services ("CMS"), in which the Company is responsible for managing a range of healthcare services and associated costs of its members. 1Life is also an administrative and managerial services company that provides services pursuant to contracts with physician-owned professional corporations (“One Medical PCs”) that provide medical services virtually and in-office. On September 1, 2021, 1Life completed the acquisition of Iora Health, Inc. ("Iora Health"), a human-centered, value-based primary care group with built-for-purpose technology focused on serving the Medicare population. Iora Health and Iora Senior Health, Inc. (“Iora Senior Health”) are administrative and managerial service companies that provide services pursuant to contracts with physician-owned professional corporations (“Iora PCs”, together with the One Medical PCs, the “PCs”) that provide medical services virtually and in-office. Iora Health is an administrative and managerial services company that provides services pursuant to contracts with Iora Health NE DCE, LLC, a limited liability company that participates in the Center for Medicare and Medicaid Services’ Global and Professional Direct Contracting Model (the “DCE entity”). Iora Health, Iora Senior Health, the Iora PCs and the DCE entity are collectively referred to herein as “Iora”. See Note 7 "Business Combinations" to the unaudited condensed consolidated financial statements. 1Life, Iora Health, Iora Senior Health, the PCs and the DCE entity are collectively referred to herein as the “Company”. 1Life and the One Medical PCs operate under the brand name One Medical. Proposed Acquisition by Amazon As more fully described in Note 16, on July 20, 2022, the Company entered into a definitive merger agreement (the "Merger Agreement") with Amazon.com, Inc. ("Amazon"), pursuant to which (and subject to the terms and conditions described in the Merger Agreement) the Company will merge with and into a wholly-owned subsidiary of Amazon ("Amazon Merger"). Subject to the terms and conditions of the Merger Agreement, Amazon will acquire the Company for $ 18 per share in an all-cash transaction, valued at approximately $ 3.9 billion, including the Company’s net debt. As a result of the Amazon Merger, the Company will become a wholly-owned subsidiary of Amazon. The consummation of the Amazon Merger is subject to a number of closing conditions, including, among others, the approval from our shareholders, and the receipt of certain regulatory approvals, as well as other customary closing conditions. Basis of Presentation The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Pursuant to these rules and regulations, the Company has condensed or omitted certain information and footnote disclosures it normally includes in its annual consolidated financial statements prepared in accordance with U.S. GAAP. The accompanying condensed consolidated financial statements include the accounts of 1Life, Iora Health and Iora Senior Health, their wholly owned subsidiaries, and variable interest entities (“VIE”) in which 1Life, Iora Health and Iora Senior Health have an interest and are the primary beneficiaries. See Note 3, “Variable Interest Entities”. All significant intercompany balances and transactions have been eliminated in consolidation. In management’s opinion, the Company has made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly state its condensed consolidated financial position, results of operations, comprehensive loss and cash flows. The Company’s interim period operating results do not necessarily indicate the results that 7 may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the SEC on February 23, 2022 (the “Form 10-K”). Use of Estimates The preparation of condensed consolidated financial statements and related disclosures in conformity with U.S. GAAP and regulations of the SEC requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Estimates include, but are not limited to, revenue recognition, liability for medical claims incurred in the period but not yet reported (“IBNR”), valuation of certain assets and liabilities acquired from business combinations, stock-based compensation, and determining the fair value of a reporting unit. Actual results could differ from these estimates and may result in material effects on the Company’s operating results and financial position. Due to the COVID-19 global pandemic, the global economy and financial markets have been disrupted and there continues to be a significant amount of uncertainty about the length and severity of the consequences caused by the pandemic. The Company has considered information available to it as of the date of issuance of these financial statements and is not aware of any specific events or circumstances that would require an update to its estimates or judgments, or an adjustment to the carrying value of its assets or liabilities. The accounting estimates and other matters assessed include, but were not limited to, allowance for credit losses, goodwill and other long-lived assets, and revenue recognition. These estimates may change as new events occur and additional information becomes available. Actual results could differ materially from these estimates. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020. Intended to provide economic relief to those impacted by the COVID-19 pandemic, the CARES Act includes various tax and lending provisions, among others. Under the CARES Act, the Company received an income grant from the Provider Relief Fund administered by the Department of Health and Human Services (“HHS”), which we recognized as Grant income during the six months ended June 30, 2021. The Company did not receive any income grant from the HHS for the three and six months ended June 30, 2022. See Note 5, "Revenue Recognition". Cash, Cash Equivalents and Restricted Cash The Company considers all short-term, highly liquid investments purchased with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash deposits are all in financial institutions in the United States. Cash and cash equivalents consist of cash on deposit, investments in money market funds and commercial paper. Restricted cash represents cash held under letters of credit for various leases and certain At-Risk arrangements. The expected duration of restrictions on the Company’s restricted cash generally ranges from 1 to 8 years. The reconciliation of cash, cash equivalents and restricted cash reported within the applicable balance sheet line items that sum to the total of the same such amount shown in the condensed consolidated statements of cash flows is as follows: June 30, December 31, June 30, December 31, 2022 2021 2021 2020 Cash and cash equivalents $ 184,748 $ 341,971 $ 503,238 $ 112,975 Restricted cash, current (included in other current assets) 180 282 119 119 Restricted cash, non-current 3,785 3,801 1,895 1,911 Total cash, cash equivalents, and restricted cash $ 188,713 $ 346,054 $ 505,252 $ 115,005 Concentration of Credit Risk and Significant Customers Financial instruments that potentially subject the Company to concentration of credit risk consist of cash, cash equivalents, marketable securities and accounts receivable. The Company’s cash balances with individual banking institutions might be in excess of federally insured limits. Cash equivalents are invested in highly rated money market funds and commercial paper. The Company’s marketable securities are invested in U.S. Treasury obligations and commercial paper. The Company is not exposed to any significant concentrations of credit risk from these financial instruments. The Company has not experienced any losses on its deposits of cash, cash equivalents or marketable securities. The Company grants unsecured credit to patients, most of whom reside in the service area of the One Medical or Iora facilities and are largely insured under third- 8 party payer agreements. The Company’s concentration of credit risk is limited by the diversity, geography and number of patients and payers. The table below presents the customers or payers that individually represented 10% or more of the Company’s accounts receivable, net balance as of June 30, 2022 and December 31, 2021. June 30, December 31, 2022 2021 Customer F 45 % 38 % Customer I 17 % 23 % * Represents percentages below 10% of the Company’s accounts receivable in the period. The table below presents the customers or payers that individually represented 10% or more of the Company’s net revenue for the three and six months ended June 30, 2022 and 2021. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Customer A * 12 % * 12 % Customer F * 12 % * 12 % Customer I 28 % N/A 27 % N/A Customer J 15 % N/A 17 % N/A * Represents percentages below 10% of the Company’s net revenue in the period. 2. Summary of Significant Accounting Policies The Company’s significant accounting policies are discussed in Note 2 “Summary of Significant Accounting Policies” in Item 15 of its Form 10-K for the fiscal year ended December 31, 2021. Recently Adopted Pronouncements as of June 30, 2022 In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance which requires annual disclosures that increase the transparency of transactions involving government grants, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on an entity’s financial statements. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2021. The Company adopted the standard on January 1, 2022 on a prospective basis. The adoption did not have a material impact to the Company's condensed consolidated financial statements. Recently Issued Accounting Pronouncements Not Yet Adopted as of June 30, 2022 There have been no recent accounting pronouncements or changes in accounting pronouncements that are of significance or potential significance to the Company as of June 30, 2022. 3. Variable Interest Entities 1Life, Iora Health and Iora Senior Health's agreements with the PCs generally consist of both Administrative Services Agreements (“ASAs”), which provide for various administrative and management services to be provided by 1Life, Iora Health or Iora Senior Health, respectively, to the PCs, and succession agreements, which provide for transition of ownership of the PCs under certain conditions ("Succession Agreements"). The ASAs typically provide that the term of the arrangements is ten to twenty years with automatic renewal for successive one-year terms, subject to termination by the contracting parties in certain specified circumstances. The outstanding voting equity instruments of the PCs are owned by nominee shareholders appointed by 1Life, Iora Health or Iora Senior Health (or the PC in one instance) under the terms of the Succession Agreements or other shareholders who are also subject to the terms of the Succession Agreements. 1Life, Iora Health and Iora Senior Health have the right to receive income as an ongoing administrative fee in an amount that represents the fair value of services rendered and has provided all financial support through loans to the PCs. 1Life, Iora Health and Iora Senior Health have exclusive responsibility for the provision of all nonmedical 9 services including facilities, technology and intellectual property required for the day-to-day operation and management of each of the PCs, and makes recommendations to the PCs in establishing the guidelines for the employment and compensation of the physicians and other employees of the PCs. In addition, the agreements provide that 1Life, Iora Health and Iora Senior Health have the right to designate a person(s) to purchase the stock of the PCs for a nominal amount in the event of a succession event. Based upon the provisions of these agreements, 1Life determined that the PCs are variable interest entities due to its equity holder having insufficient capital at risk, and 1Life has a variable interest in the PCs. The contractual arrangement to provide management services allows 1Life, Iora Health or Iora Senior Health to direct the economic activities that most significantly affect the PCs. Accordingly, 1Life, Iora Health or Iora Senior Health is the primary beneficiary of the PCs and consolidates the PCs under the VIE model. Furthermore, as a direct result of nominal initial equity contributions by the physicians, the financial support 1Life, Iora Health or Iora Senior Health provides to the PCs (e.g. loans) and the provisions of the nominee shareholder succession arrangements described above, the interests held by noncontrolling interest holders lack economic substance and do not provide them with the ability to participate in the residual profits or losses generated by the PCs. Therefore, all income and expenses recognized by the PCs are allocated to 1Life stockholders. The aggregate carrying value of the assets and liabilities included in the condensed consolidated balance sheets for the PCs after elimination of intercompany transactions and balances were $ 191,665 and $ 120,995 , respectively, as of June 30, 2022 and $ 129,474 and $ 115,744 , respectively, as of December 31, 2021. 4. Fair Value Measurements and Investments Fair Value Measurements The following tables present information about the Company’s financial assets measured at fair value on a recurring basis: Fair Value Measurements as of June 30, 2022 Usin Level 1 Level 2 Level 3 Total Cash equivalents: Money market fund $ 116,118 $ — $ — $ 116,118 Short-term marketable securiti U.S. Treasury obligations 129,403 — — 129,403 Commercial paper — 33,471 — 33,471 Total financial assets $ 245,521 $ 33,471 $ — $ 278,992 Fair Value Measurements as of December 31, 2021 Usin Level 1 Level 2 Level 3 Total Cash equivalents: Money market fund $ 315,817 $ — $ — $ 315,817 Short-term marketable securiti U.S. Treasury obligations 58,232 — — 58,232 Foreign government bonds — 5,012 — 5,012 Commercial paper — 48,427 — 48,427 Long-term marketable securiti U.S. Treasury obligations 48,296 — — 48,296 Total financial assets $ 422,345 $ 53,439 $ — $ 475,784 Our financial assets are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily available pricing sources for comparable instruments, identical instruments in less active markets, or models using market observable inputs. During the three and six months ended June 30, 2022 and 2021, there were no transfers between Level 1, Level 2 and Level 3. 10 Valuation of Convertible Senior Notes The Company has $ 316,250 aggregate principal amount outstanding of 3.0 % convertible senior notes due in 2025 (the “2025 Notes”). See Note 9, “Convertible Senior Notes” for details. The fair value of the 2025 Notes was $ 262,858 and $ 288,461 as of June 30, 2022 and December 31, 2021, respectively. The fair value was determined based on the closing trading price of the 2025 Notes as of the last day of trading for the period. The fair value of the 2025 Notes is primarily affected by the trading price of the Company's common stock and market interest rates. The fair value of the 2025 Notes is considered a Level 2 measurement as they are not actively traded. Investments At June 30, 2022 and December 31, 2021, the Company’s cash equivalents and marketable securities were as follows: June 30, 2022 Amortized cost Gross unrealized gains (losses) Fair value Cash equivalents: Money market fund $ 116,118 $ — $ 116,118 Total cash equivalents 116,118 — 116,118 Short-term marketable securiti U.S. Treasury obligations 130,934 ( 1,531 ) 129,403 Commercial paper 33,471 — 33,471 Total short-term marketable securities 164,405 ( 1,531 ) 162,874 Total cash equivalents and marketable securities $ 280,523 $ ( 1,531 ) $ 278,992 December 31, 2021 Amortized cost Gross unrealized gains (losses) Fair value Cash equivalents: Money market fund $ 315,817 $ — $ 315,817 Total cash equivalents 315,817 — 315,817 Short-term marketable securiti U.S. Treasury obligations 58,293 ( 61 ) 58,232 Foreign government bonds 5,013 ( 1 ) 5,012 Commercial paper 48,427 — 48,427 Total short-term marketable securities 111,733 ( 62 ) 111,671 Long-term marketable securiti U.S. Treasury obligations 48,427 ( 131 ) 48,296 Total cash equivalents and marketable securities $ 475,977 $ ( 193 ) $ 475,784 11 5. Revenue Recognition The following table summarizes the Company’s net revenue by primary Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net reve Capitated revenue $ 128,521 $ — $ 253,151 $ — Fee-for-service and other revenue 3,073 — 5,865 — Total Medicare revenue 131,594 — 259,016 — Partnership revenue 63,401 56,126 124,336 111,057 Net fee-for-service revenue 35,740 43,416 77,254 87,878 Membership revenue 25,104 20,874 49,335 41,070 Grant income — — — 1,763 Total commercial revenue 124,245 120,416 250,925 241,768 Total net revenue $ 255,839 $ 120,416 $ 509,941 $ 241,768 Net fee-for-service revenue (previously reported as net patient service revenue) is primarily generated from commercial third-party payers with which the One Medical entities have established contractual billing arrangements. The following table summarizes net fee-for-service revenue by Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net fee-for-service reve Commercial and government third-party payers $ 31,122 $ 39,608 $ 67,728 $ 81,843 Patients, including self-pay, insurance co-pays and deductibles 4,618 3,808 9,526 6,035 Net fee-for-service revenue $ 35,740 $ 43,416 $ 77,254 $ 87,878 The CARES Act was enacted on March 27, 2020 to provide economic relief to those impacted by the COVID-19 pandemic. The CARES Act includes various tax and lending provisions, among others. Under the CARES Act, the Company received an income grant of $ 1,763 from the Provider Relief Fund administered by the Health and Human Services ("HHS") during the six months ended June 30, 2021. The Company did no t receive any income grants from the HHS for the three and six months ended June 30, 2022. Management has concluded that the Company met conditions of the grant funds and has recognized it as Grant income for the six months ended June 30, 2021. During the three and six months ended June 30, 2022, the Company recognized revenue of $ 25,021 and $ 32,448 , which was included in the beginning deferred revenue balances as of April 1, 2022 and January 1, 2022, respectively. During the three and six months ended June 30, 2021, the Company recognized revenue of $ 20,041 and $ 26,187 , which was included in the beginning deferred revenue balances as of April 1, 2021 and January 1, 2021, respectively. As of June 30, 2022, a total of $ 5,296 is included within deferred revenue related to variable consideration, of which $ 4,103 is classified as non-current as it will not be recognized within the next twelve months. The estimate of variable consideration is based on the Company’s assessment of historical, current, and forecasted performance. 12 As summarized in the table below, the Company recorded contract assets and deferred revenue as a result of timing differences between the Company’s performance and the customer’s payment. June 30, December 31, 2022 2021 Balances from contracts with custome Capitated accounts receivable, net $ 32,278 $ 23,903 All other accounts receivable, net 120,877 79,595 Contract asset (included in other current assets) 291 458 Deferred revenue $ 83,419 $ 77,245 Capitated accounts receivable and payable related to At-Risk arrangements are recorded net in the condensed consolidated balance sheets when a legal right of offset exists. A right of offset exists when all of the following conditions are 1) each of two parties (the Company and the third-party payer) owes the other determinable amounts; 2) the reporting party (the Company) has the right to offset the amount owed with the amount owed by the other party (the third-party payer); 3) the reporting party (the Company) intends to offset; and 4) the right of offset is enforceable by law. The capitated accounts receivable and payable are recorded at the contract level and consist of the Company’s Capitated Revenue attributed from enrolled At-Risk members less actual paid medical claims expense. If the Capitated Revenue exceeds the actual medical claims expense at the end of the reporting period, such surplus is recorded as capitated accounts receivable within accounts receivable, net in the condensed consolidated balance sheets. If the actual medical claims expense exceeds the Capitated Revenue, such deficit is recorded as capitated accounts payable within other current liabilities in the condensed consolidated balance sheets. As of June 30, 2022, the Company has capitated accounts receivable, net, of $ 32,278 and capitated accounts payable, net, of $ 1,680 , representing amounts due from and to Medicare Advantage payers and CMS in At-Risk arrangements, respectively. The capitated accounts receivable and payable are presented net of IBNR claims liability and other adjustments. There were no significant prior period adjustments or changes to the assumptions used in estimating the IBNR claims liability as of June 30, 2022. The Company believes the amounts accrued to cover IBNR claims as of June 30, 2022 are adequate. Components of capitated accounts receivable, net is summarized be June 30, December 31 2022 2021 Capitated accounts receivable $ 91,561 $ 56,384 IBNR claims liability ( 57,286 ) ( 32,320 ) Other adjustments ( 1,997 ) ( 161 ) Capitated accounts receivable, net $ 32,278 $ 23,903 13 Components of capitated accounts payable, net is summarized be June 30, December 31 2022 2021 Capitated accounts (receivable), payable $ ( 6,245 ) $ 5,483 IBNR claims liability 7,761 1,438 Other adjustments 164 299 Capitated accounts payable, net $ 1,680 $ 7,220 Activity in IBNR claims liability from December 31, 2021 through June 30, 2022 is summarized be Amount Balance as of December 31, 2021 $ 33,078 Incurred related t Current period 215,332 Prior periods ( 1,466 ) 213,866 Paid related t Current period ( 152,738 ) Prior periods ( 29,159 ) ( 181,897 ) Balance as of June 30, 2022 $ 65,047 The Company does not disclose the value of remaining performance obligations for (i) contracts with an original contract term of one year or less, (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice when that amount corresponds directly with the value of services performed, and (iii) variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied distinct service that forms part of a single performance obligation. For those contracts that do not meet the above criteria, the Company’s remaining performance obligation as of June 30, 2022, is expected to be recognized as follows: Less than or equal to 12 months Greater than 12 months Total As of June 30, 2022 $ 15,193 $ 27,002 $ 42,195 6. Leases Most leases contain clauses for renewal at the Company’s option with renewal terms that generally extend the lease term from 1 to 7 years. Certain lease agreements contain options to terminate the lease before maturity. The Company does not have any lease contracts with the option to purchase as of June 30, 2022. The Company’s lease agreements do not contain any significant residual value guarantees or material restrictive covenants imposed by the leases. Certain of the Company’s furniture and fixtures and lab equipment are held under finance leases. Finance-lease-related assets are included in property and equipment, net in the condensed consolidated balance sheets and are immaterial as of June 30, 2022. The components of operating lease costs were as follows: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Operating lease costs $ 13,609 $ 7,856 $ 26,613 $ 15,189 Variable lease costs 2,449 1,222 4,496 2,533 Total lease costs $ 16,058 $ 9,078 $ 31,109 $ 17,722 14 Other information related to leases was as follows: Supplemental Cash Flow Information Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Cash paid for amounts included in the measurement of lease liabiliti Operating cash flows from operating leases $ 12,398 $ 7,973 $ 24,464 $ 15,828 Non-cash leases activity: Right-of-use lease assets obtained in exchange for new operating lease liabilities $ 14,477 $ 19,336 $ 32,726 $ 35,422 Lease Term and Discount Rate June 30, December 31, 2022 2021 Weighted-average remaining lease term (in years) 7.96 8.02 Weighted-average discount rate 6.61 % 6.55 % At the lease commencement date, the discount rate implicit in the lease is used to discount the lease liability if readily determinable. If not readily determinable or leases do not contain an implicit rate, the Company’s incremental borrowing rate is used as the discount rate. Management determines the appropriate incremental borrowing rates for each of its leases based on the remaining lease term at lease commencement. Future minimum lease payments under non-cancellable operating leases as of June 30, 2022 were as follows (excluding the effect of lease incentives to be received that are recorded in other current assets of $ 16,353 which serve to reduce total lease payments): June 30, 2022 Remainder of 2022 $ 27,674 2023 58,264 2024 56,601 2025 52,821 2026 49,304 Thereafter 183,019 Total lease payments 427,683 L interest ( 99,622 ) Total lease liabilities $ 328,061 7. Business Combinations Acquisition of Iora 15 On September 1, 2021 ("Acquisition Date"), 1Life acquired all outstanding equity and capital stock of Iora Health, a human-centered, value-based primary care group with built-for-purpose technology focused on serving the Medicare population, for an aggregate purchase consideration of $ 1,424,836 , which was paid through the issuance of 1Life common shares with a fair value of $ 1,313,312 , in part by cash of $ 62,881 , and in part by stock options of Iora assumed by 1Life towards pre-combination services of $ 48,643 . The preliminary purchase price allocations resulted in $ 1,118,198 of goodwill and $ 363,031 of acquired identifiable intangible assets related to Iora trade name and contracts in existing geographies valued using the income method. Subsequent to the Acquisition Date, the Company recorded $ 285 and $ 2,085 to goodwill during the measurement period for the three and six months ended June 30, 2022. Goodwill recorded in the acquisition is not expected to be deductible for tax purposes. Goodwill was primarily attributable to the planned growth in new geographies, synergies expected to be achieved in the combined operations of 1Life and Iora, and assembled workforce of Iora. The acquisition expanded the Company's reach to become a premier national human-centered, technology-powered, value-based primary care platform across all age groups. The acquisition allows the Company to participate in At-Risk arrangements with Medicare Advantage payers and CMS, in which the Company is responsible for managing a range of healthcare services and associated costs of its members. Preliminary Purchase Price Allocation The purchase price components are summarized in the following tab Consideration in 1Life common stock (1) $ 1,313,312 Cash consideration (2) 62,881 Stock options of Iora assumed by 1Life towards pre-combination services (3) 48,643 Total Purchase Price $ 1,424,836 (1) Represents the fair value of 53,583 shares of 1Life common stock transferred as consideration consisting of 53,146 shares issued and 437 shares to be issued to former Iora shareholders for outstanding Iora capital stock based on 77,687 Iora shares with the Exchange Ratio of 0.69 for a share of Iora and 1Life's stock price of $ 24.51 as of the closing date. The fair value of the 53,583 shares transferred as consideration was determined on the basis of the closing market price of the Company's common stock one business day prior to the Acquisition Date. (2) Included in the cash consideration • $ 5,993 for the settlement of vested phantom stock awards and cash bonuses contingent on the completion of the merger. Iora's unvested phantom stock awards, to the extent they relate to post-combination services, will be paid out and expensed as they vest subsequent to the acquisition and will be treated as stock-based compensation expense. • $ 30,253 of loans made by the Company to Iora prior to the Acquisition Date. • $ 5,391 of repayment of the existing Silicon Valley Bank (“SVB”) loan, which was not legally assumed as part of the merger. • The remainder of the cash consideration primarily relates to transaction expenses incurred by Iora and paid by the Company as of the closing date. (3) Represents the fair value of Iora’s equity awards assumed by 1Life for pre-combination services. Pursuant to the terms of the Iora Merger Agreement, Iora’s outstanding equity awards that are vested and unvested as of the effective time of the merger were replaced by 1Life equity awards with the same terms and conditions. The vested portion of the fair value of 1Life’s replacement equity awards issued represents consideration transferred, while the unvested portion represents post-combination compensation expense based on the vesting terms of the equity awards. The awards that include a provision for accelerated vesting upon a change of control are included in the vested consideration. The fair value of the stock options of Iora assumed by 1Life was determined by using a Black-Scholes option pricing model with the applicable assumptions as of the Acquisition Date. The fair value of the unvested stock awards, for which post-combination service is required, will be recorded as share-based compensation expense over the respective vesting period of each award. See Note 10, "Stock-Based Compensation". 16 The following table presents the preliminary purchase price allocation recorded in the Company's unaudited condensed consolidated balance sheet as of the Acquisition Date, updated to reflect measurement period adjustments as further described be Cash and cash equivalents acquired $ 17,808 Accounts receivable, net 20,166 Prepaid expenses and other current assets 3,043 Restricted cash 2,069 Property and equipment, net 29,565 Right-of-use assets 70,249 Intangible assets, net 363,031 Other assets (1) 7,405 Total assets 513,336 Accounts payable 1,974 Accrued expenses 9,819 Deferred revenue, current 5,989 Operating lease liabilities, current 6,617 Operating lease liabilities, non-current 63,558 Deferred revenue, non-current 24,316 Deferred income taxes 80,537 Other non-current liabilities (1) 13,888 Total liabilities 206,698 Net assets acquired 306,638 Estimated merger consideration 1,424,836 Estimated goodwill attributable to merger $ 1,118,198 (1) Included in the other assets was an escrow asset of $ 2,034 related to 1Life common stock held by a third-party escrow agent to be released to the former stockholders of Iora, less any amounts that would be necessary to satisfy any then pending and unsatisfied or unresolved claim for indemnification for any 1Life indemnifiable loss pursuant to the indemnity provisions of the Iora Merger Agreement. A corresponding indemnification liability of $ 9,600 was recorded in other non-current liabilities in the Company's unaudited condensed consolidated balance sheet. During the six months ended June 30, 2022, a reduction in escrow asset and indemnification liability of $ 1,013 and $ 3,383 , respectively was recorded as part of the measurement period adjustment. The indemnification asset is subject to remeasurement at each reporting date due to changes to the underlying value of the escrow shares until the shares are released from escrow, with the remeasurement adjustment reported in the Company's condensed consolidated statement of operations as interest and other expense. During the three and six months ended June 30, 2022, the fair value of the escrow asset had declined and the unrealized loss recorded was $ 841 and $ 3,118 , respectively. The Company allocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on the preliminary estimates of fair values, which were determined primarily using the income method based on estimates and assumptions made by management at the time of the Iora acquisition and are subject to change during the measurement period which is not expected to exceed one year. The Company has completed the valuation of acquired intangible assets and is in the process of finalizing certain tax related liabilities. Any adjustments to the preliminary purchase price allocation identified during the measurement period will be recognized in the period in which the adjustments are determined. The Company recognized a net deferred tax liability of $ 80,537 in this business combination that is included in long-term liabilities in the accompanying condensed consolidated balance sheet. This primarily related to identified intangible assets recorded in acquisition for which there is no tax basis. 17 Identifiable intangible assets are comprised of the followin Preliminary Fair Value Estimated Useful Life (in years) Intangible Ass Medicare Advantage contracts - existing geographies $ 298,000 9 CMS Direct Contracting contract - existing geographies 52,000 9 Trade n Iora 13,031 3 Total $ 363,031 Net tangible assets were valued at their respective carrying amounts as of the Acquisition Date, which approximated their fair values. Medicare Advantage contracts and CMS Direct Contracting contract represent the At-Risk arrangements that Iora has with Medicare Advantage plans or directly with CMS. Trade names represent the Company’s right to the Iora trade names and associated design. Loan Agreement Under the Iora Merger Agreement, 1Life and Iora have also entered into a Loan and Security Agreement on June 21, 2021. See Note 15 "Note Receivable" for more details. Iora had an existing credit facility with SVB, which is referred to as the SVB Facility. The SVB facility of $ 5,391 was repaid on September 1, 2021, of which $ 50 is related to the prepayment penalty. Repayment of the existing SVB loan is accounted for as part of the acquisition purchase consideration. Supplemental Unaudited Pro Forma Information The following unaudited pro forma financial information summarizes the combined results of operations for 1Life and Iora as if the companies were combined as of the beginning of fiscal year 2020. The unaudited pro forma information includes transaction and integration costs, adjustments to amortization and depreciation for intangible assets and property and equipment acquired, stock-based compensation costs and tax effects. The table below reflects the impact of material adjustments to the unaudited pro forma results for the three and six months ended June 30, 2021 that are directly attributable to the acquisiti Three Months Ended June 30, Six Months Ended June 30, Material Adjustments 2021 2021 (Decrease) / increase to expense as result of transaction costs $ ( 1,953 ) $ ( 5,190 ) (Decrease) / increase to expense as result of amortization and depreciation expenses 11,536 23,077 (Decrease) / increase to expense as a result of stock-based compensation costs 607 1,305 (Decrease) / increase to expense as result of changes in tax effects $ ( 3,144 ) $ ( 8,053 ) The unaudited pro forma information presented below is for informational purposes only and is not necessarily indicative of our condensed consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of fiscal year 2020 or the results of our future operations of the combined businesses. Three Months Ended June 30, Six Months Ended June 30, 2021 2021 Revenue $ 204,673 $ 388,293 Net Loss $ ( 74,752 ) $ ( 137,126 ) 18 Other Acquisitions On April 14, 2022, the Company completed an acquisition for an aggregate purchase consideration of $ 17,354 . The aggregate purchase consideration consisted of cash of $ 10,938 , the issuance of 1Life common shares with a fair value of $ 5,541 and contingent consideration with a fair value of $ 875 . The remaining purchase consideration consisted of the assumption of cash. The acquisition was accounted for as a business combination. The Company does not consider this acquisition to be material to the Company’s condensed consolidated financial statements. The preliminary purchase price allocation resulted in $ 11,800 of goodwill and $ 4,200 of acquired identifiable intangible assets related to customer relationships valued using the income approach. Intangible assets are being amortized over the useful lives of nine years . Acquisition-related costs were immaterial and were expensed as incurred in the condensed consolidated statements of operations. In 2021, the Company completed three other acquisitions for $ 9,908 of total cash consideration. The acquisitions were each accounted for as business combinations. The Company does not consider these acquisitions to be material, individually or in aggregate, to the Company’s condensed consolidated financial statements. The purchase price allocations resulted in $ 5,880 of goodwill and $ 3,921 of acquired identifiable intangible assets related to customer relationships valued using the income method. Intangible assets are being amortized over their respective useful lives of three or seven years . Acquisition-related costs were immaterial and were expensed as incurred in the condensed consolidated statements of operations. 8. Goodwill and Intangible Assets Goodwill During the second quarter ended June 30, 2022, broadly in line with the stock market declines, the Company’s common stock declined significantly and dropped below its equity book value, which triggered a goodwill impairment analysis under FASB Topic 350 Intangibles – Goodwill and Other . For the purposes of the impairment analysis, goodwill is tested at the entity level as the Company has only one reporting unit. In determining the fair value of the reporting unit, the Company uses a combination of the income approach and the market approach, with each method weighted equally. Under the income approach, fair value is determined based on our estimates of future after-tax cash flows, discounted using the appropriate weighted average cost of capital. Under the market approach, the fair value is derived based on the valuation multiples of comparable publicly traded companies. As of June 30, 2022, the fair value of the reporting unit significantly exceeded its net book value. There was no impairment charge for the three and six months ended June 30, 2022 or 2021. The underlying valuation techniques deployed in the analysis are highly judgmental and entail significant estimates, including but not limited to, future growth and profitability, discount rates, and selection of peer companies and valuation multiples. Estimates are made based on the information available at the time of the valuation. Future changes in estimates and assumptions could result in material changes in the valuation. Goodwill balances as of June 30, 2022 and December 31, 2021 were as follows: Goodwill Balance as of December 31, 2021 $ 1,147,464 Goodwill recorded in connection with acquisition 11,800 Measurement period adjustments ( 2,085 ) Balance as of June 30, 2022 $ 1,157,179 Intangible Assets The following summarizes the Company’s intangible assets and accumulated amortization as of June 30, 2022: 19 June 30, 2022 Original Cost Accumulated Amortization Net Book Value Medicare Advantage contracts - existing geographies $ 298,000 $ ( 27,593 ) $ 270,407 CMS Direct Contracting contract - existing geographies 52,000 ( 4,815 ) 47,185 Trade n Iora 13,031 ( 3,620 ) 9,411 Customer relationships 8,121 ( 799 ) 7,322 Total intangible assets $ 371,152 $ ( 36,827 ) $ 334,325 The following summarizes the Company’s intangible assets and accumulated amortization as of December 31, 2021: December 31, 2021 Original Cost Accumulated Amortization Net Book Value Medicare Advantage contracts - existing geographies $ 298,000 $ ( 11,037 ) $ 286,963 CMS Direct Contracting contract - existing geographies 52,000 ( 1,926 ) 50,074 Trade n Iora 13,031 ( 1,448 ) 11,583 Customer relationships 3,921 ( 383 ) 3,538 Total intangible assets $ 366,952 $ ( 14,794 ) $ 352,158 The Company recorded amortization expense of intangible assets of $ 11,074 and $ 22,033 for the three and six months ended June 30, 2022. The Company recorded amortization expense of intangible assets of $ 88 for the three and six months ended June 30, 2021. Purchased intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. As of June 30, 2022, estimated future amortization expense related to intangible assets were as follows: June 30, 2022 Remainder of 2022 $ 22,149 2023 44,297 2024 42,818 2025 39,880 2026 39,880 Thereafter 145,301 Total $ 334,325 9. Convertible Senior Notes In May 2020, the Company issued and sold $ 275,000 aggregate principal amount of 3.0 % convertible senior notes due 2025 in a private offering exempt from the registration requirements of the Securities Act of 1933, and in June 2020, the Company issued an additional $ 41,250 aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment option by the initial purchasers of the notes (the “2025 Notes”). The 2025 Notes are unsecured obligations and bear interest at a fixed rate of 3.0 % per annum, payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2020. The 2025 Notes will mature on June 15, 2025, unless earlier converted, redeemed or repurchased. The total net proceeds from the debt offering, after deducting the initial purchasers’ commissions and other issuance costs, were $ 306,868 . 20 Each $ 1 principal amount of the 2025 Notes will initially be convertible into 0.0225052 shares of the Company’s common stock, which is equivalent to an initial conversion price of $ 44.43 per share, subject to adjustment upon the occurrence of specified events but not for any accrued and unpaid interest. Holders may convert the 2025 Notes at their option at any time prior to the close of business on the business day immediately preceding March 15, 2025 only under the following circumstanc (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the trading price (as defined below) per $ 1 principal amount of the 2025 Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; (3) if the Company calls such 2025 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. It is the Company’s current intent to settle conversions through combination settlement comprising of cash and equity. On or after March 15, 2025 until the close of business on the business day immediately preceding the maturity date, holders may convert all or any portion of their 2025 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election and in accordance with the terms of the indenture governing the 2025 Notes. If the Company satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of the Company’s common stock, the amount of cash and shares of common stock, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 40 trading day observation period. In addition, following certain corporate events that occur prior to the maturity date or if the Company delivers a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 2025 Notes in connection with such a corporate event or notice of redemption, as the case may be. If the Company undergoes a fundamental change prior to the maturity date, holders of the 2025 Notes may require the Company to repurchase for cash all or any portion of their notes at a repurchase price equal to 100 % of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. If consummated, the Amazon Merger is expected to constitute both a “fundamental change” and a “make-whole fundamental change” (each as defined in the indenture governing the 2025 Notes). Upon the occurrence of a fundamental change, holders of the 2025 Notes may convert their 2025 Notes for a period and, subject to limited exceptions, may require the Company to repurchase for cash all or any portion of their 2025 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. With respect to a make-whole fundamental change, the $ 18 per share purchase price in the Amazon Merger is below the lowest stock price on the “make-whole” table included in the indenture governing the 2025 Notes and converting holders of the 2025 Notes will not receive additional conversion consideration in connection with any conversion of their 2025 Notes as a result of the make-whole fundamental change. In addition, if specific corporate events occur prior to the applicable maturity date, the Company will increase the conversion rate for a holder who elects to convert their 2025 Notes in connection with such a corporate event in certain circumstances. The Company may not redeem the 2025 Notes prior to June 20, 2023. The Company may redeem for cash all or any portion of the 2025 Notes, at the Company’s option, on or after June 20, 2023 and prior to March 15, 2025, if the last reported sale price of the Company’s common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100 % of the principal amount of the 2025 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the notes. During the three months ended June 30, 2022, the conditions allowing holders of the 2025 Notes to convert have not been met. The 2025 Notes are therefore not convertible as of June 30, 2022 and are classified in long term liabilities in the condensed consolidated balance sheet. The Company incurred issuance costs of $ 9,374 and amortizes the issuance costs to interest expense over the contractual term of the 2025 Notes at an effective interest rate of 0.65 %. 21 The net carrying amount of the 2025 Notes was as follows: June 30, December 31, 2022 2021 Liabiliti Principal $ 316,250 $ 316,250 Unamortized issuance costs ( 5,468 ) ( 6,406 ) Net carrying amount $ 310,782 $ 309,844 The following table sets forth the interest expense recognized related to the 2025 Not Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Contractual interest expense $ 2,372 $ 2,372 $ 4,744 $ 4,744 Amortization of issuance costs 468 468 937 937 Total interest expense related to the 2025 Notes $ 2,840 $ 2,840 $ 5,681 $ 5,681 10. Stock-Based Compensation Stock Incentive Plan The Company has the following stock-based compensation pla the 2007 Equity Incentive Plan (the “2007 Plan”), the 2017 Equity Incentive Plan (the “2017 Plan”), and the 2020 Equity Incentive Plan (the “2020 Plan”, and, together with the 2007 Plan and the 2017 Plan, the “Plans”). In January 2020, the Company’s stockholders approved the 2020 Plan, which took effect upon the execution of the underwriting agreement for the Company’s IPO in January 2020. The 2020 Plan is intended as the successor to and continuation of the 2007 Plan and the 2017 Plan. The number of shares of common stock reserved for issuance under the Company’s 2020 Plan will automatically increase on January 1 of each year, beginning on January 1, 2021, and continuing through and including January 1, 2030, by 4 % of the total number of shares of common stock outstanding on December 31 of the immediately preceding calendar year, or a lesser number of shares determined by the Company’s board prior to the applicable January 1st. The number of shares issuable under the Plans is adjusted for capitalization changes, forfeitures, expirations and certain share reacquisitions. The Plan provides for the grants of incentive stock options (“ISOs”), non-statutory stock options (“NSOs”), restricted stock awards, and restricted stock unit awards (“RSUs”). ISOs may be granted only to employees, including officers. All other awards may be granted to employees, including officers, non-employee directors and consultants. The 2020 Plan provides that grants of ISOs will be made at no less than the estimated fair value of common stock, as determined by the Board of Directors, at the date of grant. Stock options granted to employees and nonemployees under the Plans generally vest over 4 years. Options granted under the Plans generally expire 10 years after the date of grant. At June 30, 2022, 6,975 shares were available for future grants. 2020 Employee Stock Purchase Plan In January 2020, the Company’s stockholders approved the 2020 Employee Stock Purchase Plan (“ESPP”), which became effective upon the execution of the underwriting agreement for the Company’s IPO in January 2020. The ESPP provides for separate six-month offering periods beginning on May 16 and November 16 of each year. At June 30, 2022, 7,046 shares were available for future issuance. The stock-based compensation expense recognized for the ESPP was $ 177 and $ 602 during the three and six months ended June 30, 2022 and $ 591 and $ 1,212 during the three and six months ended June 30, 2021, respectively. 22 Stock Options The following table summarizes stock option activity under the Pla Number of Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Outstanding as of December 31, 2021 28,312 $ 19.32 7.57 $ 192,955 Granted 1,819 12.11 Exercised ( 1,403 ) 3.88 Canceled ( 630 ) 14.57 Outstanding as of June 30, 2022 28,098 $ 19.73 7.26 $ 37,185 Options exercisable as of June 30, 2022 12,228 $ 6.34 5.84 $ 35,355 Options vested and expected to vest as of June 30, 2022 18,179 $ 8.85 6.59 $ 37,157 At June 30, 2022 and 2021, there was $ 19,403 and $ 14,805 , respectively, in unrecognized compensation expense related to service-based options, net of forfeitures, that is expected to be recognized over a weighted-average period of 1.5 and 1.8 years, respectively. The fair value of stock option grants with service-based vesting conditions was $ 11,598 for the three and six months ended June 30, 2022, and $ 50 and $ 12,218 , respectively, for the three and six months ended June 30, 2021. Assumed Equity Awards As of the Acquisition Date, the Company assumed Iora’s outstanding equity awards related to stock options and phantom stock. The awards under the assumed equity plan were generally settled as follows: • Optio All Iora options outstanding on the close date were assumed by 1Life and converted into options to acquire shares of 1Life common stock. The vested and unvested options, to the extent related to pre-combination services were included in the consideration transferred. Iora’s unvested options, to the extent they relate to post-combination services, will be expensed as they vest post the acquisition and will be treated as stock-based compensation expense. See Note 7 "Business Combinations". • Phantom stoc Each Iora vested phantom stock award has been settled in cash. Each Iora unvested phantom stock award has been assumed by the Company and converted into the right to receive the unvested phantom cash award. Each unvested phantom cash award will remain subject to the same terms and conditions as were applicable to the underlying unvested phantom stock award immediately prior to the close date. The unvested phantom stock award is considered a liability-classified award as the settlement involves a cash payment upon the dates when these awards vest. The entire vested award and unvested phantom stock, to the extent they relate to pre-combination services, were included in the consideration transferred. Iora’s unvested phantom stock awards, to the extent they relate to post-combination services, will be expensed as they vest post acquisition and will be treated as stock-based compensation expense. See Note 7 "Business Combinations". As of the Acquisition Date, the estimated fair value of the assumed equity awards was $ 60,856 , of which $ 52,662 was allocated to the purchase price and the balance of $ 8,194 will be recognized as stock-based compensation expense over the remainder term of the assumed equity awards. The fair value of the assumed equity awards for service rendered through the Acquisition Date was recognized as a component of the acquisition consideration, with the remaining fair value related to post combination services to be recorded as stock-based compensation over the remaining vesting period. Market-based Stock Options During the year ended December 31, 2020, the Board of Directors (“Board”) approved the grant of a long-term market-based stock option (the “Performance Stock Option”) to the Company’s Chief Executive Officer and President. The Performance Stock Option was granted to acquire up to 8,645 shares of the Company’s common stock upon exercise. The Performance Stock Option consists of four separate tranches and each tranche will vest over a seven-year time period and only if the Company’s stock price sustains achievement of pre-determined increases for a period of 90 consecutive calendar days and 23 the Chief Executive Officer remains employed with the Company. The exercise price per share of the Stock Option is the closing price of a share of the Company’s common stock on the date of grant. The vesting of the Performance Stock Option can also be triggered upon a change in control. The following table presents additional information relating to each tranche of the Performance Stock Opti Tranche Stock Price Milestone Number of Options Tranche 1 $ 55 per share 1,330 Tranche 2 $ 70 per share 1,995 Tranche 3 $ 90 per share 2,660 Tranche 4 $ 110 per share 2,660 As of June 30, 2022, no stock price milestones have been achieved. Consequently, no shares subject to the Performance Stock Option have vested as of the date of this filing. The entire 8,645 shares granted are excluded from options vested and expected to vest from the options activity table presented above. The Company will recognize aggregate stock-based compensation expense of $ 197,469 over the derived service period of each tranche using the accelerated attribution method as long as the service-based vesting conditions are satisfied. If the market conditions are achieved sooner than the derived service period, the Company will adjust its stock-based compensation to reflect the cumula tive expense associated with the vested awards. The Company recorded stock-based compensation expense of $ 13,661 and $ 27,750 related to the award for the three and six months ended June 30, 2022, which is included in general and administrative on the condensed consolidated statements of operations. Unamortized stock-based compensation expense related to the award was $ 109,202 as of June 30, 2022. Restricted Stock Units The following table summarizes restricted stock unit activity under the 2020 Pl Number of Shares Grant Date Fair Value Unvested and outstanding as of December 31, 2021 3,249 $ 27.90 Granted 8,929 9.83 Vested ( 521 ) 31.94 Canceled and forfeited ( 734 ) 17.56 Unvested and outstanding as of June 30, 2022 10,923 $ 13.63 Stock-Based Compensation Expense Stock-based compensation expense was classified in the condensed consolidated statements of operations as follows: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Sales and marketing $ 1,325 $ 964 $ 2,268 $ 1,987 General and administrative 31,011 25,368 66,987 50,673 Total $ 32,336 $ 26,332 $ 69,255 $ 52,660 A tax benefit of $ 797 and $ 2,735 for the three and six months ended June 30, 2022, respectively, and $ 2,248 and $ 32,642 for the three and six months ended June 30, 2021, respectively, was included in the Company’s net operating loss carry-forward that could potentially reduce future tax liabilities. 11. Income Taxes The Company recorded an income tax benefit of $ 6,916 and $ 4,040 for the three months ended June 30, 2022 and 2021, respectively. This represents an effective tax rate for the respective periods of 6.9 % and 8.9 %, respectively. The Company reassessed the ability to realize deferred tax assets by considering the available positive and negative evidence. As of June 30, 2022, the Company maintains a full valuation allowance against its net deferred tax assets. Amortization of book identified 24 intangibles from the Iora acquisition resulted in a decrease to deferred tax liabilities; the associated income tax benefit during the period was $ 6,930 . The effective tax rate differs in 2022 from the federal statutory rate due to the change in need for valuation allowance and amortization of identified intangibles. The effective tax rate differs in 2021 from the federal statutory rate due to increased taxable income in profitable entities and the change in need for valuation allowance. 12. Net Loss Per Share Basic and diluted net loss per share were calculated as follows: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Numerato Net loss $ ( 93,809 ) $ ( 41,287 ) $ ( 184,668 ) $ ( 80,605 ) Denominato Weighted average common shares outstanding — basic and diluted 194,488 136,788 193,774 137,045 Net loss per share — basic and diluted $ ( 0.48 ) $ ( 0.30 ) $ ( 0.95 ) $ ( 0.59 ) The Company’s potentially dilutive securities, which include stock options, unvested RSUs, 2025 Notes and shares held in special indemnity escrow account in connection with Iora acquisition, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share for the periods indicated because including them would have had an anti-dilutive effec As of June 30, 2022 2021 Options to purchase common stock 28,098 25,754 Unvested restricted stock 10,922 2,053 2025 Notes (1) 7,117 7,117 Shares held in special indemnity escrow account in connection with Iora acquisition 405 — 46,542 34,924 (1) During the three months ended June 30, 2022, the conditions allowing holders of the 2025 Notes to convert have not been met. The 2025 Notes are therefore not convertible as of June 30, 2022. 13. Commitments and Contingencies Indemnification Agreements In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its Board of Directors and officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. As of June 30, 2022 and December 31, 2021, the Company has not incurred any material costs as a result of such indemnifications. Legal Matters In May 2018, a class action complaint was filed by two former members against the Company in the Superior Court of California for the County of San Francisco, or the Court, alleging that the Company made certain misrepresentations resulting 25 in them paying the Annual Membership Fee, or AMF, in violation of California’s Consumers Legal Remedies Act, California’s False Advertising Law and California’s Unfair Competition Law, and seeking damages and injunctive relief. Following certain trial court proceedings and certain appeals, arbitration proceedings, and court-ordered mediation proceedings, in June 2021, the parties filed a joint notice of settlement and request for stay before the appellate court in light of reaching a settlement in principle. The parties later executed a class action settlement agreement and release effective June 30, 2021, which requires trial court approval. A preliminary class settlement approval hearing was scheduled to take place in August 2021, but the trial court requested supplemental briefing and vacated the previously scheduled hearing. Plaintiffs filed their supplemental brief and supporting documents on October 12, 2021. The trial court granted the motion for preliminary approval on November 12, 2021. Pursuant to the terms of the settlement and the trial court’s order, the class notice phase took place in late February 2022. The final approval hearing for the settlement was held on July 25, 2022. On July 26, 2022, the court granted the motion for final approval of the class action settlement. A compliance hearing is currently scheduled for March 2, 2023. The settlement amount of $ 11,500 was recorded as other current liabilities in the condensed consolidated balance sheets as of June 30, 2021. The Company's insurers committed to pay $ 5,950 towards the settlement amount. The settlement amount, net of expected insurance recovery, of which $ 5,550 was recorded as general and administrative expenses in the condensed consolidated statements of operations for the three months ended June 30, 2021. Class payout is expected to occur in 2022. There was no material change to the liability amount or any incremental expenses incurred during the three months ended June 30, 2022. Government Inquiries and Investigations In March 2021, the Company received (i) requests for information and documents from the United States House Select Subcommittee on the Coronavirus Crisis, (ii) a request for information from the California Attorney General and the Alameda County District Attorney’s Office and (iii) a request for information and documents from the Federal Trade Commission relating to the Company’s provision of COVID-19 vaccinations. The Company has also received inquiries from state and local public health departments regarding its vaccine administration practices and has and may continue to receive additional requests for information from other governmental agencies relating to its provision of COVID-19 vaccinations. The Company is cooperating with these requests as well as requests received from other governmental agencies, including with respect to the Company's compensation practices and membership generation during the relevant periods. The majority staff of the Subcommittee released a memorandum of findings in December 2021. No further disclosures, testimony or other responses have been requested by the Subcommittee. In addition, in February 2022, the Federal Trade Commission advised us that they were closing their inquiry on our provision of COVID-19 vaccinations. The Company is unable to predict the outcomes or timeline of the residual government inquiries or if any additional requests, inquiries, investigations or other government actions may arise relating to such circumstances. Legal fees have been recorded as general and administrative expenses in the consolidated statements of operations. Sales and Use Tax During 2017 and 2018, a state jurisdiction engaged in an audit of 1Life’s sales and use tax records applicable to that jurisdiction from March 2011 through February 2017. The Company disputed the finding representing the majority of the state's proposed audit change and successfully overturned the sales tax assessment resulting from the audit in December 2021. The audit was closed and the payment, which was not material, was remitted during the first quarter ended March 31, 2022. In addition, from time to time, the Company has been and may be involved in various legal proceedings arising in the ordinary course of business. The Company currently believes that the outcome of these legal proceedings, either individually or in the aggregate, will not have a material effect on its consolidated financial position, results of operations or cash flows. 14. Related Party Transactions Certain of the Company’s investors are also affiliated with customers of the Company. Revenue recognized under contractual obligations from such customers was immaterial for the three and six months ended June 30, 2022 and June 30, 2021, respectively. The outstanding receivable balance from such customers was immaterial as of June 30, 2022 and December 31, 2021, respectively. 26 15. Note Receivable In connection with the Iora acquisition, on June 21, 2021, 1Life and Iora entered into a loan agreement under which the Company may advance secured loans to Iora to fund working capital, at Iora's request from time to time, in outstanding amounts not to exceed $ 75,000 in the aggregate. Amounts drawn under the loan agreement are secured by all assets of Iora and were subordinated to Iora's obligations under its then-existing credit facility with SVB. The loan agreement is effective through the maturity date of borrowed amounts under the loan agreement. Such maturity date is the later of 90 days following the earliest of certain maturity dates set forth in the SVB Facility. Amounts drawn bear interest at a rate equal to 10 % per year, payable monthly. As of the Acquisition Date, there was $ 30,000 drawn and outstanding under the loan agreement. Pursuant to the consummation of Iora's acquisition by 1Life, this note receivable was eliminated as part of intercompany eliminations. $ 30,253 of note receivable including accrued interests prior to the Acquisition Date was treated as purchase consideration. See Note 7 "Business Combinations" for additional details. 16. Proposed Acquisition by Amazon On July 20, 2022, the Company entered into the Merger Agreement with Amazon. Subject to the terms and conditions of the Merger Agreement, Amazon will acquire the Company for $ 18 per share in an all-cash transaction valued at approximately $ 3.9 billion, including the Company’s net debt. As a result of the Amazon Merger, the Company will become a wholly-owned subsidiary of Amazon. The consummation of the Amazon Merger is subject to a number of closing conditions, including, among others, the approval from our shareholders, and the receipt of certain regulatory approvals, as well as other customary closing conditions. Under the Merger Agreement, Amazon has agreed to provide senior unsecured interim debt financing to the Company in an aggregate principal amount of up to $ 300.0 million to be funded in up to ten tranches of $ 30.0 million per month, beginning on March 20, 2023 until the earlier of the closing of the Amazon Merger and the termination of the Merger Agreement pursuant to its terms, with a maturity date of 24 months after the termination of the Merger Agreement pursuant to its terms. The Company will agree to certain restrictive covenants and events of default customary for transactions of this type in connection with the debt financing, and other terms and conditions to be set forth in definitive agreements to be entered into by the parties in connection with the financing. 27 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “goal,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. In addition, statements including “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with our condensed consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report. This discussion includes both historical information and forward-looking statements based upon current expectations that involve risk, uncertainties and assumptions. Our results of operations include the results of operations of Iora since the close of our acquisition on September 1, 2021. Our actual results may differ materially from management’s expectations and those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, our ability to timely and successfully achieve the anticipated benefits and potential synergies of our acquisition of Iora Health, Inc. and the continuing impact of the COVID-19 pandemic and societal and governmental responses as well as those discussed in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. In addition, this Quarterly Report includes forward-looking statements about the occurrence of any event, change, or other circumstance that could delay or prevent closing of the proposed Amazon Merger or give rise to the termination of the Merger Agreement pertaining to the Amazon Merger. The forward-looking statements contained herein do not assume the consummation of the proposed transaction with Amazon unless specifically stated otherwise. Overview Our mission is to transform health care for all through our human-centered, technology-powered model. Our vision is to delight millions of members with better health and better care while reducing the total cost of care. We are a membership-based primary care platform with seamless digital health and inviting in-office care, convenient to where people work, shop, live and click. We are disrupting health care from within the existing ecosystem by simultaneously addressing the frustrations and unmet needs of key stakeholders, which include consumers, employers, providers, and health networks. We have developed a modernized healthcare membership model based on direct consumer enrollment and third-party sponsorship across commercially insured and Medicare populations. Our membership model includes seamless access to 24/7 digital health services paired with inviting in-office care routinely covered by most health care payers. Our technology drives high monthly active usage within our membership, promoting ongoing and longitudinal patient relationships for better health outcomes and high member retention. Our technology also helps our service-minded team in building trust and rapport with our members by facilitating proactive digital health outreach as well as responsive on-demand virtual and in-office care. Our digital health services and our well-appointed offices, which tend to be located in highly convenient locations, are staffed by a team of clinicians who are not paid on a fee-for-service basis, and therefore free of misaligned compensation incentives prevalent in health care. Additionally, we have developed clinically and digitally integrated partnerships with health networks, better coordinating more timely access to specialty care when needed by members. Together, this approach allows us to engage in value-based care across all age groups, including through At-Risk arrangements with Medicare Advantage payers and CMS, in which One Medical is responsible for managing a range of healthcare services and associated costs of our members. Our focus on simultaneously addressing the unfulfilled needs and frustrations of key stakeholders has allowed us to consistently grow the number of members we serve. As of June 30, 2022, we have grown to approximately 790,000 total members including 750,000 Consumer and Enterprise members and 40,000 At-Risk members, 204 medical offices in 25 markets, and have greater than 8,500 enterprise clients across the United States. 28 Proposed Acquisition by Amazon On July 20, 2022, we entered into the Merger Agreement with Amazon. Subject to the terms and conditions of the Merger Agreement, Amazon will acquire the Company for $18 per share in an all-cash transaction valued at approximately $3.9 billion, including the Company’s net debt. As a result of the Amazon Merger, subject to the terms and conditions of the Merger Agreement, the Company will merge with a subsidiary of Amazon and become a wholly-owned subsidiary of Amazon. The consummation of the Amazon Merger is subject to a number of closing conditions, including, among others, the approval from our shareholders, and the receipt of certain regulatory approvals, as well as other customary closing conditions. Under the Merger Agreement, Amazon has agreed to provide senior unsecured interim debt financing to the Company in an aggregate principal amount of up to $300.0 million to be funded in up to ten tranches of $30.0 million per month, beginning on March 20, 2023 until the earlier of the closing of the Amazon Merger and the termination of the Merger Agreement pursuant to its terms, with a maturity date of 24 months after the termination of the Merger Agreement pursuant to its terms. The Company will agree to certain restrictive covenants and events of default customary for transactions of this type in connection with the debt financing, and other terms and conditions to be set forth in definitive agreements to be entered into by the parties in connection with the financing. The Merger Agreement contains certain customary termination rights for the Company and Amazon. Upon termination of the Merger Agreement in accordance with its terms, under certain specified circumstances, Amazon will be obligated to pay to the Company a termination fee equal to $195.0 million in cash. If the Merger Agreement is terminated under other certain specified circumstances the Company will be obligated to pay to Amazon a termination fee equal to $136.0 million in cash. See the section titled “Risk Factors—Risks Related to our Proposed Transaction with Amazon” included under Part II, Item 1A of this Quarterly Report on Form 10-Q for more information regarding the risks associated with the Amazon Merger. Impact of COVID-19 on Our Business The COVID-19 pandemic has impacted and may continue to impact our operations, and net revenues, expenses, collectability of accounts receivables and other money owed, capital expenditures, liquidity, and overall financial condition. While we experienced negative impacts to our business from the COVID-19 pandemic during the first half of 2020, beginning in the second half of 2020 and through 2021, we believe the COVID-19 pandemic helped drive an increase in Consumer and Enterprise membership and increase in commercial revenue due to new and expanded service offerings, and an increase in our aggregate billable services primarily driven by COVID-19 related visits. For example, we believe COVID-19 caused our value proposition to resonate with a broader audience of consumers seeking access to primary care, as well as with a broader audience of employers focusing on safely reopening their workplaces and managing the ongoing health and well-being of employees and their families. As a result, we experienced increased demand for our memberships beginning in the second half of 2020 and through 2021. In addition, we expanded our service offering in part as a response to COVID-19 and launched several new billable services, includin • COVID-19 testing, and counseling across all of our markets, including in our offices and in several mobile COVID-19 testing sites; • COVID-19 vaccinations in select geographies; • Healthy Together, our COVID-19 screening and testing program for employers, schools and universities; • Mindset by One Medical, our behavioral health service integrated within primary care; • One Medical Now, an expansion of our 24/7 on-demand digital health solutions to employees of enterprise clients located in geographies where we are not yet physically present; and, • Remote Visits, where our providers perform typical primary care visits with our members remotely Towards the tail end of 2021, we started to experience a decline in COVID-related visits while we have not yet seen non-COVID-related primary care visits return to their pre-COVID levels, which negatively impacted our commercial revenue. Starting in the fourth quarter of 2021, the Omicron variant caused a spike in COVID-19 cases. This caused an increase in hospitalizations among At-Risk members, which negatively impacted our medical claims expense. We also saw an increase in the number of providers who were required to quarantine as a result of potential exposure to the virus, which caused some 29 supply constraint in our ability to meet member demand for appointments. The effects of the Omicron variant appeared to peak in mid-January 2022, and the impact has since decreased. However, future COVID-19 outbreaks or variants may cause additional reductions in visits and increased hospitalizations of At-Risk members, which may negatively impact our results of operations and cause our revenue and margins to fluctuate across periods. We believe some of the precautionary measures and challenges resulting from the COVID-19 pandemic may continue or be reinstated upon the occurrence of future outbreaks of variants. Such actions or events may present additional challenges to our business, financial condition and results of operations. As a result, we cannot assure you that any increase in membership, aggregate reimbursement and revenue or reduction in medical claims expense, or any increased trends in visits, are indicative of future results or will be sustained, including following the COVID-19 pandemic, or that we will not experience additional impacts associated with COVID-19, which could be significant. Our results may also continue to fluctuate across periods due to the future COVID-19 outbreaks or variants. Additionally, it is unclear what the impact of the COVID-19 pandemic will be on future utilization, medical expense patterns, and the associated impact on our business and results of operations. Our Business Model Our business is driven by growth in Consumer and Enterprise members, and At-Risk members (see also "Key Metrics and Non-GAAP Financial Measures"). We have developed a modernized membership model based on direct consumer enrollment and third-party sponsorship. Our membership model includes seamless access to 24/7 digital health paired with inviting in-office care routinely covered by most health care payers. Consumer and Enterprise members join either individually as consumers by paying an annual membership fee or are sponsored by a third party. At-Risk members are members for whom we are responsible for managing a range of healthcare services and associated costs. Digital health services are delivered via our mobile app and website, through such modalities as video and voice encounters, chat and messaging. Our in-office care is delivered in our medical offices, and as of June 30, 2022, we had 204 medical offices, compared to 124 medical offices as of June 30, 2021. We derive net revenue, consisting of Medicare revenue and commercial revenue, from multiple stakeholders, including consumers, employers and health networks such as health systems and government and private payers. Medicare Revenue Medicare revenue consists of (i) Capitated Revenue and (ii) fee-for-service and other revenue that is not generated from Consumer and Enterprise members. We generate Capitated Revenue from At-Risk arrangements with Medicare Advantage payers and CMS. Under these At-Risk arrangements, we generally receive capitated payments, consisting of each eligible member’s risk adjusted health care premium per member per month ("PMPM"), for managing a range of healthcare services and associated costs for such members. The risk adjusted health care premium PMPM is determined by payers and based on a variety of patients' factors such as age and demographic benchmarks, and further adjusted to reflect the underlying complexity of a member’s health conditions. These fees give us revenue economics that are contractually recurring in nature for a majority of our Medicare revenue. Capitated Revenue represents 98% of Medicare revenue and 50% of total net revenue, respectively, for the three months ended June 30, 2022 . We generate fee-for-service and other revenue from fee-for-service visits for Other Patients not covered under At-Risk arrangements and from certain payers for clinical start-up, administration, or on-going coordination of care activities associated with providing care to At-Risk members and other Medicare patients. Commercial Revenue Commercial revenue consists of (i) partnership revenue, (ii) net fee-for-service revenue and (iii) membership revenue. We generate our partnership revenue from (i) our health network partners with whom we have clinically and digitally integrated, on a PMPM basis, (ii) largely fixed price or fixed price per employee contracts with enterprise clients for medical services and (iii) COVID-19 on-site testing services for enterprise clients, schools and universities where we typically bill such customers a fixed price per service performed. For our health network arrangements that provide for PMPM payments, when our medical offices provide professional clinical services to covered members, we, as administrator, perform billing and collection services on behalf of the health network, and the health network receives the fees for services provided, including those paid by members’ insurance plans. In those circumstances, we earn and receive PMPM payments from the health network partners in lieu of per visit fees for services from member office visits. 30 Our net fee-for-service revenue primarily consists of reimbursements received from our members' or other patients' health insurance plans or those with billing rates based on our agreements with our health network partners for healthcare services delivered to Consumer and Enterprise members on a fee-for-service basis. We generate our membership revenue through the annual membership fees charged to either consumer members or enterprise clients, as well as fees paid for our One Medical Now service offering. As of June 30, 2022, our list price for new members for an annual consumer membership was $199. Our enterprise clients typically pay a discounted fee collected in advance, based on a rate per employee per month. Our membership fee revenue and partnership revenue are contractual and, with the exception of our COVID-19 on-site testing services, generally recurring in nature. Membership revenue and part nership revenue as a percentage of commercial revenue was 71% and 64% f or each of the three months ended June 30, 2022 and 2021, respectively. Membership revenue and part nership revenue as a percentage of total net revenue was 35% and 64% for t he three months ended June 30, 2022 and 2021, respectively. Key Factors Affecting Our Performance • Acquisition of Net New Members. Our ability to increase our membership will enable us to drive financial growth as members drive our commercial revenue and Medicare revenue. We believe that we have significant opportunities to increase members in our existing geographies through (i) new sales to consumers and enterprise clients, (ii) expansion of the number of enrolled members, including dependents, within our enterprise clients, (iii) expansion of the number of At-Risk members including Medicare Advantage participants or Medicare members for which we are at risk as a result of CMS' Direct Contracting Program, (iv) expansion of Medicare Advantage payers, with whom we contract and (v) adding other potential services. • Components of Revenue . Our ability to maintain or improve pricing levels for our memberships and the pricing under our contracts with health networks will also impact our total revenue. As of June 30, 2022, our list price for new members for an annual consumer membership was $199. Our enterprise clients typically pay a discounted fee collected in advance, based on a rate per employee per month. In geographies where our health network partners pay us on a PMPM basis for Consumer and Enterprise members, to the extent that the PMPM rate changes, our partnership revenue will change. Similarly, if the largely fixed price or number of employees covered by fixed price per employee arrangements change or the number of COVID-19 on-site tests or vaccinations changes, our partnership revenue will also change. Our net fee-for-service revenue is dependent on (i) our billing rates and third-party payer contracted rates through agreements with health networks, (ii) the mix of members who are commercially insured and (iii) the nature and frequency of visits. Our net fee-for-service revenue may also change based on the services we provide to commercially insured Other Patients as defined in "Key Metrics and Non-GAAP Financial Measures" below. Our Medicare revenue is dependent on (i) the percentage of members in At-Risk contracts, (ii) our contracted percentage of premium, (iii) our ability to accurately document the acuity of our At-Risk members, and (iv) the services we provide to Other Patients who are Medicare participants. In the future, we may add additional services for which we may charge in a variety of ways. To the extent the net amounts we charge our members, patients, partners, payers and clients change, our net revenue will also change. • Medical Claims Expense. The nature of our contracting with Medicare Advantage payers and CMS requires us to be financially responsible for a range of healthcare services of our At-Risk members. Our care model focuses on leveraging the primary care setting as a means of reducing unnecessary or avoidable health care costs and balancing the cost of care with the impact of our service on medical claims expense. We are liable for potentially large medical claims should we not effectively manage our At-Risk members’ health. We call the ratio between medical claims expense divided by Capitated Revenue the "Medical Claims Expense Ratio". As we sign up new At-Risk members, our Medical Claims Expense Ratio is likely to increase initially due to a potential increase in medical claims expense from a lag in improvement in health outcomes with member tenure. Similarly, there may be a lag in adequately documenting the health status of our members, resulting in different Capitated Revenue compared to what is indicated by the health status of an At-Risk member. We believe that the Medical Claims Expense Ratio for a given set of At-Risk members can improve over time as we help improve their health outcomes relative to their underlying health conditions, though 31 the ratio may fluctuate for any given customers or cohort of customers depending on future outbreaks or variants of COVID-19 and associated increases in medical claims expense. • Cost of Care, Exclusive of Depreciation and Amortization. Cost of care primarily includes our provider and support employee-related costs for both virtual and in-office care, occupancy costs, medical supplies, insurance and other operating costs. Providers include doctors of medicine, doctors of osteopathy, nurse practitioners, physician assistants and behavioral health specialists. Support employees include registered nurses, phlebotomists, health coaches, and administrative assistants assisting our members with all non-medical related services. Virtual care includes video visits and other synchronous and asynchronous communication via our app and website. A large portion of these costs are relatively fixed regardless of member utilization of our services. Our care model focuses on leveraging the primary care setting as a means of reducing unnecessary or avoidable health care costs and balancing the cost of care with the impact of increased service levels on medical claims expense. An increase in cost of care may help us in reducing total health care costs for our members. For Consumer and Enterprise members, this reduction in total health care costs typically accrues to the benefit of our enterprise clients or our members' health insurance plans through lower claims costs, or our members through lower deductibles, making our membership more competitive. For our At-Risk members, reductions in total health care costs typically accrue directly to us, to our health network partners such as Medicare Advantage payers and CMS, or to our At-Risk members, making our membership more competitive. As a result, we seek to balance the cost of care based on a variety of considerations. For example, cost of care as a percentage of net revenue may decrease if our net revenue increases. Similarly, our cost of care as a percentage of net revenue may increase if we decide to increase our investments in our providers or support employees to try to reduce our medical claims expense. As we open new offices, and expand into new geographies, we expect cost of care to increase. Our cost of care, exclusive of depreciation and amortization, also excludes stock-based compensation. • Care Margin. Care Margin is driven by net revenue, medical claims expense, and cost of care. We believe we can (i) improve revenue over time by signing up more members and increasing the revenue per member, (ii) reduce Medical Claims Expense Ratio over time from primary care engagement and population health management, improving member health and satisfaction, while reducing the need for avoidable and costly care, and (iii) reduce cost of care as a percentage of revenue by better leveraging our fixed cost base and technology. • Investments in Growth. We expect to continue to focus on long-term growth through investments in sales and marketing, technology research and development, and existing and new medical offices. We are working to enhance our digital health and technology offering and increase the potential breadth of our modernized platform solution. In particular, we plan to launch new offices and enter new geographies. As we expand to new geographies, we expect to make significant upfront investments in sales and marketing to establish brand awareness and acquire new members. Additionally, we intend to continue to invest in new offices in new and existing geographies. As we invest in new geographies, in the short term, we expect these activities to increase our operating expenses and cost of care; however, in the long term we anticipate that these investments will positively impact our results of operations. • Seasonality. Seasonality affects our business in a variety of ways. In the near term, we expect these typical seasonal trends to fluctuate due to future outbreaks or variants of the COVID-19 pandemic. Medicare Reve We recognize Capitated Revenue from At-Risk members ratably over their period of enrollment. We typically experience the largest portion of our At-Risk member growth in the first quarter, as the Medicare Advantage enrollment from the prior Medicare Annual Enrollment Period (“AEP”) becomes effective January 1. Throughout the remainder of year, we can continue to enroll new At-Risk members predominantly through (i) new Medicare Advantage enrollees joining us outside AEP, (ii) through expanding the Medicare Advantage plans we are participating in, and (iii) adding additional geographies where we participate in At-Risk arrangements. Commercial Revenue : Our partnership and membership revenue are predominantly driven by the number of Consumer and Enterprise members, and recognized ratably over the period of each contract. While Consumer and Enterprise members have the opportunity to buy memberships throughout the year, we typically experience the largest portion of our Consumer and Enterprise member growth in the first and fourth quarter of each year, when enterprise customers tend to make and implement decisions on their employee benefits. Our net fee-for-service revenue is typically 32 highest during the first and fourth quarter of each year, when we generally experience the highest levels of reimbursable visits. Medical Claims Expense: Medical claims expense is driven by our At-Risk members and varies seasonally depending on a number of factors, including the weather and the number of business days in a quarter. Typically, we experience higher utilization levels during the first and fourth quarter of the year. Key Metrics and Non-GAAP Financial Measures We review a number of operating and financial metrics, including members, Medical Claims Expense Ratio, Care Margin and Adjusted EBITDA, to evaluate our business, measure our performance, identify trends affecting our business, formulate our business plan and make strategic decisions. These key metrics are presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP. Care Margin and Adjusted EBITDA are not financial measures of, nor do they imply, profitability. We have not yet achieved profitability and, even in periods when our net revenue exceeds our cost of care, exclusive of depreciation and amortization, we may not be able to achieve or maintain profitability. The relationship of operating loss to cost of care, exclusive of depreciation and amortization is also not necessarily indicative of future performance. Other companies may not publish similar metrics, or may present similarly titled key metrics that are calculated differently. As a result, similarly titled measures presented by other companies may not be directly comparable to ours and these key metrics should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP, such as net loss. We provide investors and other users of our financial information with a reconciliation of Care Margin and Adjusted EBITDA to their most closely comparable GAAP financial measure. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view Care Margin and Adjusted EBITDA in conjunction with loss from operations and net loss, respectively. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (in thousands except for members) (in thousands except for members) Members (as of the end of the period) Consumer and Enterprise 750,000 621,000 750,000 621,000 At-Risk 40,000 — 40,000 — Total 790,000 621,000 790,000 621,000 Net revenue $ 255,839 $ 120,416 $ 509,941 $ 241,768 Medical Claims Expense Ratio 85 % N/A 84 % N/A Care Margin $ 39,991 $ 52,494 $ 87,750 $ 103,754 Adjusted EBITDA $ (38,535) $ 6,939 $ (67,479) $ 11,778 Members Members include both Consumer and Enterprise members as well as At-Risk members as defined below. Our number of members depends, in part, on our ability to successfully market our services directly to consumers including Medicare-eligible as well as non-Medicare eligible individuals, to Medicare Advantage health plans and Medicare Advantage enrollees, to employers that are not yet enterprise clients, as well as our activation rate within existing enterprise clients. We define estimated activation rate for any enterprise client at a given time as the percentage of eligible lives enrolled as members. While growth in the number of members is an important indicator of expected revenue growth, it also informs our management of the areas of our business that will require further investment to support expected future member growth. Member numbers as of the end of each period are rounded to the thousands. Consumer and Enterprise Members 33 A Consumer and Enterprise member is a person who has registered with us and has paid for membership for a period of at least one year or whose membership has been sponsored by an enterprise or other third party under an agreement having a term of at least one year. Consumer and Enterprise members do not include trial memberships, our virtual only One Medical Now users, or any temporary users. Our number of Consumer and Enterprise members depends, in part, on our ability to successfully market our services directly to consumers and to employers that are not yet enterprise clients and our activation rate within existing clients. Consumer and Enterprise members may include individuals who (i) Medicare-eligible and (ii) have paid for a membership or whose membership has been sponsored by an enterprise or other third party. Consumer and Enterprise members do not include any At-Risk members as defined below. Consumer and Enterprise members help drive commercial revenue. As of June 30, 2022, we had 750,000 Consumer and Enterprise members. At-Risk Members An At-Risk member is a person for whom we are responsible for managing a range of healthcare services and associated costs. At-Risk members help drive Medicare revenue. As of June 30, 2022, we had 40,000 At-Risk members. Members (in thousands)* * Number of members is shown as of the end of each period. Other Patients An “Other Patient” is a person who is neither a Consumer and Enterprise member nor an At-Risk member, and who has received digital or in-person care from us over the last twelve months. As of December 31, 2021, we had 21,000 Other Patients. Medical Claims Expense Ratio We define Medical Claims Expense Ratio as medical claims expense divided by Capitated Revenue. The nature of our contracting with Medicare Advantage payers and CMS requires us to be financially responsible for a range of healthcare services of our At-Risk members. Our care model focuses on leveraging the primary care setting as a means of reducing unnecessary or avoidable health care costs and balancing our cost of care with the impact of our service levels on medical claims expense. We are liable for potentially large medical claims should we not effectively manage our At-Risk members’ health. We therefore consider the Medical Claims Expense Ratio to be an important measure to monitor our performance. As we sign up new At-Risk members or open new offices to serve these members, our Medical Claims Expense Ratio is likely to increase initially due to a potential increase in medical claims expense from a lag in improvement in health outcomes with member tenure. Similarly, there may be a lag in adequately documenting the health status of our members, resulting in different Capitated Revenue compared to what is indicated by the health status of an At-Risk member. We believe that the Medical 34 Claims Expense Ratio for a given set of At-Risk members can improve over time as we help improve their health outcomes relative to their underlying health conditions, though the ratio may fluctuate for any given customers or cohort of customers depending on future outbreaks or variants of COVID-19 and associated increases in medical claims expense. The following table provides a calculation of the Medical Claims Expense Ratio for the three and six months ended June 30, 2022 and 2021. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (in thousands) (in thousands) Medical claims expense $ 108,900 $ — $ 213,866 $ — Capitated Revenue $ 128,521 $ — $ 253,151 $ — Medical Claims Expense Ratio 85 % N/A 84 % N/A Care Margin We define Care Margin as income or loss from operations excluding depreciation and amortization, general and administrative expense and sales and marketing expense. We consider Care Margin to be an important measure to monitor our performance, specific to the direct costs of delivering care. We believe this margin is useful to both us and investors to measure whether we are effectively pricing our services and managing the health care and associated costs, including medical claims expense and cost of care, of our At-Risk members successfully. The following table provides a reconciliation of loss from operations, the most closely comparable GAAP financial measure, to Care Margin: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (in thousands) (in thousands) Loss from operations $ (97,407) $ (42,564) $ (190,036) $ (74,945) Sales and marketing* 23,193 10,570 45,652 23,259 General and administrative* 92,422 77,196 189,458 141,541 Depreciation and amortization 21,783 7,292 42,676 13,899 Care Margin $ 39,991 $ 52,494 $ 87,750 $ 103,754 Care Margin as a percentage of net revenue 16 % 44 % 17 % 43 % * Includes stock-based compensation Adjusted EBITDA We define Adjusted EBITDA as net income or loss excluding interest income, interest and other expense, depreciation and amortization, stock-based compensation, provision for (benefit from) income taxes, certain legal or advisory costs, and acquisition and integration costs that we do not consider to be expenses incurred in the normal operation of the business. Such legal or advisory costs may include but are not limited to expenses with respect to evaluating potential business combinations, legal investigations, or settlements. Acquisition and integration costs include expenses incurred in connection with the closing and integration of acquisitions, which may vary significantly and are unique to each acquisition. We started to exclude prospectively from our presentation certain legal or advisory costs from the first quarter of 2021 and acquisition and integration costs from the second quarter of 2021, because amounts incurred in the prior periods were insignificant relative to our consolidated operations. We include Adjusted EBITDA in this Quarterly Report because it is an important measure upon which our management assesses and believes investors should assess our operating performance. We consider Adjusted EBITDA to be an important measure to both management and investors because it helps illustrate underlying trends in our business and our historical operating performance on a more consistent basis. Adjusted EBITDA has limitations as an analytical tool, includin 35 • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash used for capital expenditures for such replacements or for new capital expenditures; • Adjusted EBITDA does not include the dilution that results from stock-based compensation or any cash outflows included in stock-based compensation, including from our purchases of shares of outstanding common stock; and • Adjusted EBITDA does not reflect interest expense on our debt or the cash requirements necessary to service interest or principal payments. The following table provides a reconciliation of net loss, the most closely comparable GAAP financial measure, to Adjusted EBITDA, calculated as set forth above: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (in thousands) (in thousands) Net loss $ (93,809) $ (41,287) $ (184,668) $ (80,605) Interest income (364) (79) (521) (184) Interest and other expense 3,682 2,842 8,801 5,685 Depreciation and amortization 21,783 7,292 42,676 13,899 Stock-based compensation 32,336 26,332 69,255 52,660 Provision for (benefit from) income taxes (6,916) (4,040) (13,648) 159 Legal or advisory costs — 11,282 547 15,567 Acquisition and integration costs 4,753 4,597 10,079 4,597 Adjusted EBITDA $ (38,535) $ 6,939 $ (67,479) $ 11,778 Components of Our Results of Operations Net Revenue We generate net revenue through Medicare revenue and commercial revenue. We generate Medicare revenue from Capitated Revenue and fee-for-service and other revenue. We generate commercial revenue from partnership revenue, net fee-for-service revenue, and membership revenue. Capitated Revenue. We generate Capitated Revenue from At-Risk arrangements with payers including Medicare Advantage plans and CMS. Under these At-Risk arrangements, we receive capitated payments, consisting of each eligible member’s risk adjusted health care premium PMPM, for managing a range of healthcare services and associated costs for such members. The risk adjusted health care premium per month is determined by payers and based on a variety of a patient's factors such as age and demographic benchmarks, and further adjusted to reflect the underlying complexity of a member’s health conditions. Capitated Revenue is recognized in the month in which eligible members are entitled to receive healthcare benefits during the contract term. We expect our Capitated Revenue to increase as a percentage of total net revenue in future periods. Fee-For-Service and Other Revenue. We generate fee-for-service and other revenue from fee-for-service visits for Other Patients not covered under At-Risk arrangements and from certain payers for clinical start-up, administration, on-going coordination of care activities associated with providing care to At-Risk members and other Medicare patients. Partnership Revenue. We generate partnership revenue from (i) our health network partners on a PMPM basis, (ii) largely fixed price or fixed price per employee contracts with enterprise clients for medical services and (iii) COVID-19 on-site testing services for enterprise clients, schools and universities for which we typically bill such customers a fixed price per service performed. Under our partnership arrangements, we generally receive fees that are linked to PMPM, fixed price, fixed price per employee, fixed price per service, or capitation arrangements. All partnership revenue is recognized during the period in which we are obligated to provide professional clinical services to the member, employee, or participant, as applicable, and associated management, operational and administrative services to the health network partner, enterprise client, schools and universities. 36 Net fee-for-service revenue. We generate net fee-for-service revenue from providing primary care services to patients in our offices when we bill the member or their insurance plan on a fee-for-service basis as medical services are rendered. While significantly all of our patients are members, we occasionally also provide care to non-members. Membership Revenue. We generate membership revenue from the annual membership fees charged to either consumer members or enterprise clients, who purchase access to memberships for their employees and dependents. Membership revenue also includes fees we receive from enterprise clients for trial memberships or for access to our One Medical Now service offering. Membership revenue is recognized ratably over the contract period with the individual member or enterprise client. Grant Income. Under the CARES Act, we were eligible for and received grant income from the Provider Relief Fund administered by HHS during the six months ended June 30, 2021. The purpose of the payment is to reimburse us for healthcare-related expenses or lost revenues attributable to COVID-19. The following table summarizes our net revenue by primary source as a percentage of net revenue. Amounts may not sum due to rounding. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net reve Capitated revenue 50 % — % 50 % — % Fee-for-service and other revenue 1 % — % 1 % — % Total Medicare revenue 51 % — % 51 % — % Partnership revenue 25 % 47 % 24 % 46 % Net fee-for-service revenue 14 % 36 % 15 % 36 % Membership revenue 10 % 17 % 10 % 17 % Grant income — % — % — % 1 % Total commercial revenue 49 % 100 % 49 % 100 % Total net revenue 100 % 100 % 100 % 100 % Operating Expenses Medical Claims Expense Medical claims expenses primarily consist of certain third-party medical expenses paid by payers contractually on behalf of us, including costs for inpatient and outpatient services, certain pharmacy benefits and physician services but excludes cost of care, exclusive of depreciation and amortization. We expect our medical claims expense to increase in absolute dollars as our Capitated Revenue increases in future periods. Cost of Care, Exclusive of Depreciation and Amortization Cost of care primarily includes provider and support employee-related costs for both virtual and in-office care, occupancy costs, medical supplies, insurance and other operating costs. Providers include doctors of medicine, doctors of osteopathy, nurse practitioners, physician assistants, and behavioral health specialists. Support employees include registered nurses, phlebotomists, health coaches, and administrative assistants assisting our members with all non-medical related services. Virtual care includes video visits and other synchronous and asynchronous communication via our app and website. A large portion of these costs are relatively fixed regardless of member utilization of our services. As we open new offices, and expand into new geographies, we expect cost of care to increase. Our cost of care, exclusive of depreciation and amortization, also excludes stock-based compensation. Sales and Marketing Sales and marketing expenses consist of employee-related expenses, including salaries and related costs, commissions and stock-based compensation costs for our employees engaged in marketing, sales, account management and sales support. Sales and marketing expenses also include advertising production and delivery costs of communications materials that are 37 produced to generate greater awareness and engagement among our clients and members, third-party independent research, trade shows and brand messages and public relations costs. We expect our sales and marketing expenses to increase as we strategically invest to expand our business. We expect to hire additional sales personnel and related account management and sales support personnel to capture an increasing amount of our market opportunity. We also expect to continue our brand awareness and targeted marketing campaigns. As we scale our sales and marketing, we expect these expenses to increase in absolute dollars. General and Administrative General and administrative expenses include employee-related expenses, including salaries and related costs and stock-based compensation for all employees except sales and marketing teams, which are included in the sales and marketing expenses. In addition, general and administrative expenses include corporate technology, occupancy costs, legal and professional services expenses. We expect our general and administrative expenses to increase over time due to the additional costs associated with continuing to grow our business. Depreciation and Amortization Depreciation and amortization consist primarily of depreciation of property and equipment and amortization of capitalized software development costs. Other Income (Expense) Interest Income Interest income consists of income earned on our cash and cash equivalents, restricted cash and marketable securities. Interest and Other Expense Interest and other expense consists of interest costs associated with our notes payable issued pursuant to our convertible senior notes (the “2025 Notes”). Interest and other expense also consists of remeasurement adjustment related to our indemnification asset. Upon the close of the Iora acquisition, as part of the merger agreement (the "Iora Merger Agreement"), certain shares of our common stock were placed into a third-party escrow account to satisfy any then pending and unsatisfied or unresolved claim for indemnification for any indemnifiable loss incurred by us pursuant to the indemnity provisions of the Iora Merger Agreement. The indemnification asset is subject to remeasurement at each reporting date until the shares are released from escrow, with the remeasurement adjustment reported as interest and other expense in our condensed consolidated statement of operations. Provision for (Benefit from) Income Taxes We account for income taxes using an asset and liability approach. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances are provided when necessary to reduce net deferred tax assets to an amount that is more likely than not to be realized. In determining whether a valuation allowance for deferred tax assets is necessary, we analyze both positive and negative evidence related to the realization of deferred tax assets and inherent in that, assess the likelihood of sufficient future taxable income. We also consider the expected reversal of deferred tax liabilities and analyze the period in which these would be expected to reverse to determine whether the taxable temporary difference amounts serve as an adequate source of future taxable income to support the realizability of the deferred tax assets. 38 Results of Operations The following tables set forth our results of operations for the periods presented and as a percentage of our net revenue for those periods. Percentages presented in the following tables may not sum due to rounding. Comparison of the Three and Six Months Ended June 30, 2022 and 2021 Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Amount % of Revenue Amount % of Revenue Amount % of Revenue Amount % of Revenue (dollar amounts in thousands) (dollar amounts in thousands) Net reve Medicare revenue $ 131,594 51 % $ — — % $ 259,016 51 % $ — — % Commercial revenue 124,245 49 % 120,416 100 % 250,925 49 % 241,768 100 % Total net revenue 255,839 100 % 120,416 100 % 509,941 100 % 241,768 100 % Operating expens Medical claims expense 108,900 43 % — — % 213,866 42 % — — % Cost of care, exclusive of depreciation and amortization shown separately below 106,948 42 % 67,922 56 % 208,325 41 % 138,014 57 % Sales and marketing (1) 23,193 9 % 10,570 9 % 45,652 9 % 23,259 10 % General and administrative (1) 92,422 36 % 77,196 64 % 189,458 37 % 141,541 59 % Depreciation and amortization 21,783 9 % 7,292 6 % 42,676 8 % 13,899 6 % Total operating expenses 353,246 138 % 162,980 135 % 699,977 137 % 316,713 131 % Loss from operations (97,407) (38) % (42,564) (35) % (190,036) (37) % (74,945) (31) % Other income (expense), n Interest income 364 — % 79 — % 521 — % 184 — % Interest and other expense (3,682) (1) % (2,842) (2) % (8,801) (2) % (5,685) (2) % Total other income (expense), net (3,318) (1) % (2,763) (2) % (8,280) (2) % (5,501) (2) % Loss before income taxes (100,725) (39) % (45,327) (38) % (198,316) (39) % (80,446) (33) % Provision for (benefit from) income taxes (6,916) (3) % (4,040) (3) % (13,648) (3) % 159 — % Net loss $ (93,809) (37) % $ (41,287) (34) % $ (184,668) (36) % $ (80,605) (33) % (1) Includes stock-based compensation, as follows: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Amount % of Revenue Amount % of Revenue Amount % of Revenue Amount % of Revenue (dollar amounts in thousands) (dollar amounts in thousands) Sales and marketing $ 1,325 1 % $ 964 1 % $ 2,268 — % $ 1,987 1 % General and administrative 31,011 12 % 25,368 21 % 66,987 13 % 50,673 21 % Total $ 32,336 13 % $ 26,332 22 % $ 69,255 14 % $ 52,660 22 % 39 Net Revenue Three Months Ended June 30, Six Months Ended June 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (dollar amounts in thousands) (dollar amounts in thousands) Net reve Capitated revenue $ 128,521 $ — $ 128,521 nm $ 253,151 $ — $ 253,151 nm Fee-for-service and other revenue 3,073 — 3,073 nm 5,865 — 5,865 nm Total Medicare revenue 131,594 — 131,594 nm 259,016 — 259,016 nm Partnership revenue 63,401 56,126 7,275 13 % 124,336 111,057 13,279 12 % Net fee-for-service revenue 35,740 43,416 (7,676) (18) % 77,254 87,878 (10,624) (12) % Membership revenue 25,104 20,874 4,230 20 % 49,335 41,070 8,265 20 % Grant income — — — N/A — 1,763 (1,763) (100) % Total commercial revenue 124,245 120,416 3,829 3 % 250,925 241,768 9,157 4 % Total net revenue $ 255,839 $ 120,416 $ 135,423 112 % $ 509,941 $ 241,768 $ 268,173 111 % nm – not meaningful Medicare revenue increased $131.6 million for the three months ended June 30, 2022 compared to the same period in 2021. Medicare revenue increased $259.0 million for the six months ended June 30, 2022 compared to the same period in 2021. The increase was due to revenue contribution from our acquired Iora business. Commercial revenue increased $3.8 million, or 3%, for the three months ended June 30, 2022 compared to the same period in 2021. Commercial revenue increased $9.2 million, or 4% for the six months ended June 30, 2022 compared to the same period in 2021. The increase was primarily due to an increase in Consumer and Enterprise members by 129,000, or 21%, from 621,000 as of June 30, 2021 to 750,000 as of June 30, 2022, partially offset by a decrease in total billable visits. Partnership revenue increased $7.3 million, or 13%, for the three months ended June 30, 2022 compared to the same period in 2021. Partnership revenue increased $13.3 million, or 12%, for the six months ended June 30, 2022 compared to the same period in 2021. The increase was primarily a result of new and expanded partnerships with health networks, new and expanded on-site medical services for enterprise clients and an increase in Consumer and Enterprise members, partially offset by a decrease in COVID-19 on-site testing services for employers, schools and universities during the three and six months ended June 30, 2022. Net fee-for-service revenue decreased $7.7 million, or 18%, for the three months ended June 30, 2022 compared to the same period in 2021. Net fee-for-service revenue decreased $10.6 million, or 12%, for the six months ended June 30, 2022 compared to the same period in 2021. The decrease was primarily due to a decrease in total billable visits, partially offset by an increase in Consumer and Enterprise members for the three and six months ended June 30, 2022. Membership revenue increased $4.2 million, or 20%, for the three months ended June 30, 2022 compared to the same period in 2021. Membership revenue increased $8.3 million, or 20%, for the six months ended June 30, 2022 compared to the same period in 2021. The increase was primarily due to an increase in Consumer and Enterprise members of 129,000, or 21%, from 621,000 as of June 30, 2021 to 750,000 as of June 30, 2022. 40 Operating Expenses Medical claims expense Three Months Ended June 30, Six Months Ended June 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (dollar amounts in thousands) (dollar amounts in thousands) Medical claims expense $ 108,900 $ — $ 108,900 nm $ 213,866 $ — $ 213,866 nm Medical claims expense increased $108.9 million for the three months ended June 30, 2022 compared to the same period in 2021. Medical claims expense increased $213.9 million for the six months ended June 30, 2022 compared to the same period in 2021. The increase was due to medical claims expenses from our acquired Iora business. Cost of Care, Exclusive of Depreciation and Amortization Three Months Ended June 30, Six Months Ended June 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (dollar amounts in thousands) (dollar amounts in thousands) Cost of care, exclusive of depreciation and amortization $ 106,948 $ 67,922 $ 39,026 57 % $ 208,325 $ 138,014 $ 70,311 51 % The $39.0 million, or 57%, increase in cost of care, exclusive of depreciation and amortization, for the three months ended June 30, 2022 compared to the same period in 2021 was primarily due to increases in provider employee and support employee-related expenses of $32.1 million, occupancy costs of $10.1 million, and medical supply costs of $1.4 million. In addition to growth in our existing offices, we added 80 offices since June 30, 2021, bringing our total number of offices to 204 as of June 30, 2022. The cost of care and total offices in 2022 include offices from our acquired Iora business. The $70.3 million, or 51%, increase in cost of care, exclusive of depreciation and amortization, for the six months ended June 30, 2022 compared to the same period in 2021 was primarily due to increases in provider employee and support employee-related expenses of $48.2 million, occupancy costs of $18.4 million, and medical supply costs of $2.0 million. In addition to growth in our existing offices, we added 80 offices since June 30, 2021, bringing our total number of offices to 204 as of June 30, 2022. The cost of care and total offices in 2022 include offices from our acquired Iora business. Cost of care, exclusive of depreciation and amortization, as a percentage of net revenue decreased from 56% for the three months ended June 30, 2021 to 42% for the three months ended June 30, 2022. Cost of care, exclusive of depreciation and amortization, as a percentage of net revenue decreased from 57% for the six months ended June 30, 2021 to 41% for the six months ended June 30, 2022. The decrease was primarily due to the impact of our acquired Iora business. Sales and Marketing Three Months Ended June 30, Six Months Ended June 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (dollar amounts in thousands) (dollar amounts in thousands) Sales and marketing $ 23,193 $ 10,570 $ 12,623 119 % $ 45,652 $ 23,259 $ 22,393 96 % Sales and marketing expenses increased $12.6 million, or 119%, for the three months ended June 30, 2022 compared to the same period in 2021. This increase was primarily due to a $7.6 million increase in advertising expenses and a $4.2 million increase in employee-related expenses. The sales and marketing expenses in 2022 includes sales and marketing expenses from our acquired Iora business. Sales and marketing expenses increased $22.4 million, or 96%, for the six months ended June 30, 2022 compared to the same period in 2021. This increase was primarily due to a $13.4 million increase in advertising expenses and a $7.2 million 41 increase in employee-related expenses. The sales and marketing expenses in 2022 includes sales and marketing expenses from our acquired Iora business. General and Administrative Three Months Ended June 30, Six Months Ended June 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (dollar amounts in thousands) (dollar amounts in thousands) General and administrative $ 92,422 $ 77,196 $ 15,226 20 % $ 189,458 $ 141,541 $ 47,917 34 % The $15.2 million, or 20%, increase in general and administrative expenses for the three months ended June 30, 2022 compared to the same period in 2021 was primarily due to higher employee-related expenses of $23.0 million, as we expanded our team to support our growth, and a $2.1 million increase in enterprise software costs. The general and administrative expenses in 2022 includes general and administrative expenses from our acquired Iora business. The $47.9 million, or 34%, increase in general and administrative expenses for the six months ended June 30, 2022 compared to the same period in 2021 was primarily due to higher employee-related expense of $48.6 million, as we expanded our team to support our growth, and a $5.2 million increase in enterprise software costs. The general and administrative expenses in 2022 includes general and administrative expenses from our acquired Iora business. Depreciation and Amortization Three Months Ended June 30, Six Months Ended June 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (dollar amounts in thousands) (dollar amounts in thousands) Depreciation and amortization $ 21,783 $ 7,292 $ 14,491 199 % $ 42,676 $ 13,899 $ 28,777 207 % Depreciation and amortization expenses increased $14.5 million, or 199%, for the three months ended June 30, 2022 compared to the same period in 2021. Depreciation and amortization expenses increased $28.8 million, or 207%, for the six months ended June 30, 2022 compared to the same period in 2021. This increase was primarily due to depreciation and amortization expenses recognized related to new medical offices, capitalization of software development, upgraded office software, and the Iora acquisition during the three and six months ended June 30, 2022. Other Income (Expense) Interest Income Three Months Ended June 30, Six Months Ended June 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (dollar amounts in thousands) (dollar amounts in thousands) Interest income $ 364 $ 79 $ 285 361 % $ 521 $ 184 $ 337 183 % Interest income increased $0.3 million, or 361%, for the three months ended June 30, 2022 compared to the same period in 2021. Interest income increased $0.3 million, or 183% for the six months ended June 30, 2022. The increase was primarily due to higher interest yields, partially offset by higher amortization of premiums from marketable securities. Interest and Other Expense 42 Three Months Ended June 30, Six Months Ended June 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (dollar amounts in thousands) (dollar amounts in thousands) Interest and other expense $ (3,682) $ (2,842) $ (840) 30% $ (8,801) $ (5,685) $ (3,116) 55 % Interest and other expense increased $0.8 million, or 30%, for the three months ended June 30, 2022 compared to the same period in 2021. Interest and other expense increased $3.1 million, or 55%, for the six months ended June 30, 2022 compared to the same period in 2021. The increase was primarily due to an unrealized loss recorded for the indemnification asset recognized as a result of the Iora acquisition. Provision for (Benefit from) Income Taxes Three Months Ended June 30, Six Months Ended June 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (dollar amounts in thousands) (dollar amounts in thousands) Provision for (benefit from) income taxes $ (6,916) $ (4,040) $ (2,876) 71% $ (13,648) $ 159 $ (13,807) (8684) % Benefit from income taxes increased $2.9 million from $4.0 million for the three months ended June 30, 2021 to $6.9 million for the three months ended June 30, 2022 due primarily to amortization of identified intangibles. Provision for (benefit from) income taxes increased $13.8 million from a provision of $0.2 million for the six months ended June 30, 2021 to a benefit of $13.6 million for the six months ended June 30, 2022 due primarily to amortization of identified intangibles. Liquidity and Capital Resources Since our inception, we have financed our operations primarily with the issuance of the 2025 Notes, our initial public offering, the sale of redeemable convertible preferred stock, and to a lesser extent, the issuance of term notes under credit facilities. As of June 30, 2022, we had cash, cash equivalents and marketable securities of $347.6 million, compared to $501.9 million as of December 31, 2021. We believe that our existing cash, cash equivalents and marketable securities will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months. We believe we will meet longer-term expected future cash requirements and obligations through a combination of available cash, cash equivalents and marketable securities, cash flows from operating activities, and access to private and public financing sources, including the interim debt financing as described below. Our principal commitments consist of the principal amount of debt outstanding from convertible senior notes due June 2025 and obligations under our operating leases for office space. We expect capital expenditures to increase in future periods to support growth initiatives in existing and new markets. We may be required to seek additional equity or debt financing. Our future capital requirements will depend on many factors, including our pace of new member growth and expanded enterprise client and health network relationships, our pace and timing of expansion of new medical offices or services in existing and new markets, the timing and extent of spend to support the expansion of sales, marketing and development activities, acquisitions and related costs, and the impact of the COVID-19 pandemic. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition and results of operations would be harmed, and we may be forced to adjust our growth plans and capital expenditures as a result. See " Part II—Item 1A—Risk Factors — In order to support the growth of our business, we may need to incur additional indebtedness or seek capital through new equity or debt financings, which sources of additional capital may not be available to us on acceptable terms or at all.” In addition, given the uncertainty around the duration and extent of the COVID-19 pandemic, we cannot accurately predict at this time the future potential impact of the pandemic on our business, results of operations, financial condition or liquidity. There have been no material changes to our material cash requirements from contractual and other obligations as of June 30, 2022 as compared to those disclosed as of December 31, 2021 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on February 23, 2022. 43 On July 20, 2022, we entered into a Merger Agreement with Amazon. We have agreed to various covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time. Outside of certain limited exceptions, we may not take, agree, resolve, announce an intention, enter into any formal or informal agreement or otherwise make a commitment to do certain actions without Amazon's consent, including, but not limited t • acquiring businesses and disposing of significant assets; • incurring expenditures above specified thresholds; • entering into material contracts; • issuing additional equity or debt securities, or incurring additional indebtedness; and • repurchasing shares of our outstanding common stock. We do not believe these restrictions will prevent us from meeting our ongoing costs of operations, working capital needs, or capital expenditure requirements. Additionally, under the Merger Agreement, Amazon has agreed to provide senior unsecured interim debt financing to us in an aggregate principal amount of up to $300.0 million to be funded in up to ten tranches of $30.0 million per month, beginning on March 20, 2023 until the earlier of the closing of the Amazon Merger and the termination of the Merger Agreement pursuant to its terms, with a maturity date of 24 months after the termination of the Merger Agreement pursuant to its terms. We will agree to certain restrictive covenants and events of default customary for transactions of this type in connection with the interim debt financing, and other terms and conditions to be set forth in definitive agreements to be entered into by the parties in connection with the financing. Summary Statement of Cash Flows The following table summarizes our cash flows: Six Months Ended June 30, 2022 2021 Net cash (used in) provided by operating activities $ (114,878) $ 13,071 Net cash (used in) provided by investing activities (49,545) 358,126 Net cash provided by financing activities 7,082 19,050 Net (decrease) increase in cash, cash equivalents and restricted cash $ (157,341) $ 390,247 Cash Flows from Operating Activities For the six months ended June 30, 2022, our net cash used in operating activities was $114.9 million, resulting from our net loss of $184.7 million and cash used in working capital of $47.0 million, mostly offset by non-cash charges of $116.7 million. Cash used in our working capital consisted primarily of a $49.6 million increase in accounts receivable, a $13.1 million decrease in operating lease liabilities, a $2.1 million decrease in other liabilities, and a $0.5 million increase in inventory, partially offset by an increase of $5.8 million in deferred revenue, an increase of $4.7 million in accounts payable and accrued expenses, a decrease of $4.1 million in prepaid expenses and other current assets, and a decrease of $3.8 million in other assets. The changes in accounts receivable and deferred revenue are primarily due to timing of billing and cash collections from our health network partners and enterprise clients. The changes in accounts payable and accrued expenses are primarily related to timing of payments. 44 For the six months ended June 30, 2021, our net cash provided by operating activities was $13.1 million, resulting from net cash provided by our working capital of $16.6 million, partially offset by our net loss of $80.6 million as adjusted for non - cash charges of $77.1 million. The cash increase resulting from changes in our working capital consisted primarily of a $17.1 million increase in other liabilities, a $11.4 million decrease in accounts receivable, a $6.8 million increase in deferred revenue, a $3.2 million decrease in inventory and a $8.0 million increase in accounts payable and accrued expenses, partially offset by an increase of $21.3 million in prepaid expenses and other current assets and a decrease of $8.8 million in operating lease liabilities. The increase in prepaid expenses and other current assets is primarily due to a $6.0 million receivable from insurers related to a legal settlement recovery as described in Note 13 "Commitments and Contingencies" to our condensed consolidated financial statements. The increase in other liabilities is primarily due to a legal settlement liability of $11.5 million as described in Note 13 "Commitments and Contingencies". The changes in accounts receivable and deferred revenue are primarily due to timing of billing and cash collections from our health network partners and enterprise clients. Cash Flows from Investing Activities For the six months ended June 30, 2022, our net cash used in investing activities was $49.5 million, resulting primarily from purchases of marketable securities of $54.9 million, acquisition of medical practices of $10.5 million and purchases of property and equipment of $34.2 million related to leasehold improvements, computer equipment, and furniture and fixtures for new offices, remodels and improvements to existing offices, capitalization of internal-use software development costs, and office hardware and software. This was partially offset by sales and maturities of marketable securities of $50.0 million. For the six months ended June 30, 2021, our net cash provided by investing activities was $358.1 million, resulting primarily from sales and maturities of short-term marketable securities of $499.0 million, partially offset by purchases of short-term marketable securities of $80.0 million, purchases of property and equipment of $31.2 million related to leasehold improvements, computer equipment, and furniture and fixtures for new offices, remodels and improvements to existing offices, capitalization of internal-use software development costs, and office hardware and software, a $20.0 million loan receivable from Iora as described in Note 15 "Note Receivable", and cash used in business acquisitions of $9.7 million as described in Note 7 "Business Combinations". Cash Flows from Financing Activities For the six months ended June 30, 2022, our net cash provided by financing activities was $7.1 million, resulting primarily from exercise of stock options of $5.5 million and proceeds from our employee stock purchase plan of $1.7 million. For the six months ended June 30, 2021, our net cash provided by financing activities was $19.1 million, resulting primarily from exercise of stock options of $16.1 million and proceeds from our employee stock purchase plan of $3.0 million. Critical Accounting Policies and Significant Judgments and Estimates Our condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. During the six months ended June 30, 2022, there were no significant changes to our critical accounting policies and estimates as described in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 23, 2022. Recent Accounting Pronouncements Please see Note 2, “Summary of Significant Accounting Policies” to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. 45 Item 3. Quantitative and Qualitative Disclosures About Market Risk. Interest Rate Sensitivity We had cash and cash equivalents of $184.7 million as of June 30, 2022, compared to $342.0 million as of December 31, 2021, held primarily in cash deposits and money market funds for working capital purposes. We had marketable securities of $162.9 million as of June 30, 2022, compared to $160.0 million as of December 31, 2021, consisting of U.S. Treasury obligations, U.S. government agency securities, foreign government bonds and commercial paper. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes. All our investments are denominated in U.S. dollars. In May 2020, we issued the 2025 Notes which bear interest at a fixed rate of 3.0% per annum. As of June 30, 2022, the principal amount of debt outstanding from the 2025 Notes was $316.3 million. Our cash and cash equivalents, marketable securities and debt are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value negatively impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. We do not believe that an increase or decrease in interest rates of 100 basis points would have a material effect on our business, financial condition or results of operations. Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, as of June 30, 2022, that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitation on the Effectiveness of Internal Control The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting. 46 PART II—OTHER INFORMATION Item 1. Legal Proceedings. We are currently involved in, and may in the future become involved in, legal proceedings, claims and investigations in the ordinary course of our business, including medical malpractice and consumer claims. Although the results of these legal proceedings, claims and investigations cannot be predicted with certainty, we do not believe that the final outcome of any matters that we are currently involved in are reasonably likely to have a material adverse effect on our business, financial condition or results of operations. Regardless of final outcomes, however, any such proceedings, claims, and investigations may nonetheless impose a significant burden on management and employees and be costly to defend, with unfavorable preliminary or interim rulings. Please see Note 13, “Commitments and Contingencies” to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of our legal proceedings, claims and investigations. Item 1A. Risk Factors. Investing in our common stock involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below, as well as other information included in this Quarterly Report, including our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report, before making an investment decision. If any of the following risks actually occur, it could harm our business, prospects, operating results and financial condition. Unless otherwise indicated, references to our business being harmed in these risk factors will include harm to our business, reputation, financial condition, results of operations, net revenue and future prospects. In such event, the trading price of our common stock could decline and you might lose all or part of your investment. Risk Factor Summary Our business is subject to a number of risks and uncertainties which may prevent us from achieving our business and strategic objectives or may adversely impact our business, financial condition, results of operations, cash flows and prospects. These risks include but are not limited to the followin Risks Related to Our Proposed Transaction with Amazon • failure to complete, or delays in completing, the proposed Amazon Merger announced on July 21, 2022, could materially and adversely affect our results of operations and our stock price; and • uncertainty about the Amazon Merger or negative publicity related to the Amazon Merger may adversely affect relationships with our members, enterprise clients, health system partners, payers, suppliers and employees, whether or not the Amazon Merger is completed. Risks Related to Our Business and Our Industry • the impact of the ongoing COVID-19 pandemic; • our dependence on a limited number of key existing payers; • our reliance on reimbursements from certain third-party payers for the services we provide; • the impact of reviews and audits by CMS in accordance with Medicare's risk adjustment payment system; • the impact of assuming some or all of the risk that the cost of providing services will exceed our compensation for such services under certain third-party payer agreements; • the impact of reduced reimbursement rates paid by third-party payers, or federal or state healthcare programs due to rule changes or other restrictions; • the impact of regulatory or policy changes in Medicare or other federal or state healthcare programs; • our dependence on the success of our strategic relationships with third parties; • the impact of a decline in the prevalence of private health insurance coverage; • our ability to cost-effectively develop widespread brand awareness and to maintain our reputation and market acceptance for our healthcare services; 47 • our history of losses and uncertainty about our future profitability; • our ability to maintain and expand member utilization of our services; • our ability to compete effectively in the geographies in which we participate; • our ability to grow at the rates we historically have achieved; • the impact of current or future litigation against us, including medical liability claims and class actions; • our ability to attract and retain quality primary care providers to support our services; • fluctuations in our quarterly results and our ability to meet the expectations of securities analysts and investors; and • the loss of key members of our senior management team and our ability to attract and retain executive officers, employees, providers and medical support personnel. Risks Related to Government Regulation • the impact of healthcare reform legislation and changes in the healthcare industry and healthcare spending; • the impact of governmental or regulatory scrutiny of or challenge to our arrangements with health networks; • our dependence on our relationships with affiliated professional entities that we may not own, to provide healthcare services; • our ability to comply with rules related to billing and related documentation for healthcare services; and • our ability to comply with regulations governing the use and disclosure of personal information, including protected health information, or PHI. Risks Related to Information Technology • our reliance on internet infrastructure, bandwidth providers, other third parties and our own systems to provide a proprietary services platform to our members and providers; • our reliance on third-party vendors to host and maintain our technology platform; • any breaches of our systems or those of our vendors or unauthorized access to employee, contractor, member, client or partner data; • our ability to maintain and enhance our proprietary technology platform; and • our ability to optimize our technology solutions for members, integrate our systems with health network partners or resolve technical issues in a timely manner. Risks Related to Our Intellectual Property • our ability to obtain, maintain, protect and enforce our intellectual property rights. Risks Related to Our Acquisition of Iora • our ability to successfully integrate Iora's business and realize the benefits of the merger; and • the incurrence of substantial expenses related to the integration of Iora's business. Risks Related to Our Proposed Transaction with Amazon Failure to complete, or delays in completing, the proposed transaction with Amazon announced on July 21, 2022 could materially and adversely affect our results of operations and our stock price. On July 20, 2022, we entered into the Merger Agreement with Amazon pursuant to which, subject to the terms and conditions of the Merger Agreement, if all of the conditions to closing are satisfied or waived, we will merge with a subsidiary of Amazon and become a wholly-owned subsidiary of Amazon. Consummation of the Amazon Merger is subject to certain closing conditions and a number of the conditions are not within our control, and may prevent, delay, or otherwise materially adversely affect the completion of the transaction. We cannot predict with certainty whether and when any of the required closing conditions will be satisfied or if another uncertainty may arise and cannot assure you that we will be able to successfully consummate the proposed Amazon Merger as currently contemplated under the Merger Agreement or at all. Risks related to the failure of the proposed Amazon Merger to be consummated include, but are not limited to, the followin 48 • we may not be able to obtain the requisite approval of our stockholders to approve the Amazon Merger and related matters; • the Amazon Merger may be subject to certain legal restraints under U.S. antitrust law; • we would not realize any or all of the potential benefits of the Amazon Merger, including any synergies that could result from combining our financial and proprietary resources with those of Amazon, which could have a negative effect on the price of our common stock; • under some circumstances, we may be required to pay a termination fee to Amazon of $136.0 million; • we will remain liable for significant transaction costs, including legal, accounting, financial advisory, and other costs relating to the Amazon Merger regardless of whether the Amazon Merger is consummated; • we may experience negative reactions from financial markets or the trading price of our common stock may decline to the extent that the current market price for our stock reflects a market assumption that the Amazon Merger will be completed; • the attention of our management may have been diverted to the Amazon Merger; • we could be subject to litigation related to any failure to complete the Amazon Merger; • the potential loss of key personnel during the pendency of the Amazon Merger as employees and providers may experience uncertainty about their future roles with us following completion of the Amazon Merger; • the potential loss of, and negative reactions from m embers, enterprise clients, health system partners, payers, suppliers and other partners; and • under the Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to completing the Amazon Merger, which restrictions could adversely affect our ability to conduct our business as we otherwise would have done if we were not subject to these restrictions. The occurrence of any of these events individually or in combination could materially and adversely affect our business, results of operations, financial condition, and our stock price. If the Amazon Merger is not consummated and one or more of these events occur, such as p ayment of termination fees to Amazon or other significant transaction costs in connection with the proposed Amazon Merger, our cash balances and our ability to service payments under our outstanding 2025 Notes and other outstanding indebtedness at that time could be materially and adversely impacted and our options for sources of financing or refinancing could be more limited than if we had not pursued the proposed Amazon Merger. See "Risks Related to Our Outstanding Notes." If the Amazon Merger is not completed, there can be no assurance that these risks will not materialize and will not materially adversely affect our stock price, business, financial conditions, results of operations or cash flows. Uncertainty about the Amazon Merger or negative publicity related to the Amazon Merger may adversely affect relationships with our members, enterprise clients, health system partners, payers, suppliers and employees, whether or not the Amazon Merger is completed. In response to the announcement of the Amazon Merger, our existing or prospective members, enterprise clients, health system partners, payers, vendors, suppliers, landlords and other business partners may: • delay, defer, or cease their agreements or arrangements with, or providing products or services to, us or the combined company; • delay or defer other decisions concerning us or the combined company; or • seek alternative relationships with third parties or otherwise seek to change the terms on which they do business with us or the combined compan y. Any such delays or changes to terms could materially harm our business or, if the Amazon Merger is completed, the business of the combined company. 49 In addition, as a result of the Amazon Merger, our current and prospective employees could experience uncertainty about their future with us or the combined company. As a result, we may not be able to attract and retain key employees to the same extent that we have been in the past and key employees may depart because of issues relating to such uncertainty or a desire not to remain with Amazon following the completion of the Amazon Merger. The pendency of the Amazon Merger has resulted in and may continue to result in negative publicity and other adverse public statements about us and the proposed combination. Such negative publicity or adverse public statements, may also result in investigations by regulatory authorities, legislators and law enforcement officials or in legal claims. Addressing any adverse publicity, governmental scrutiny, investigation or enforcement or other legal proceedings is time consuming and expensive and can divert the time and attention of our senior management from the day-to-day operation of our business and execution of our other strategic initiatives. Further, regardless of the factual basis for the assertions being made or the ultimate outcome of any investigation or proceeding, any negative publicity can have an adverse impact on our reputation and on the morale and performance of our employees and on our relationships with regulatory authorities. It may also have an adverse impact on our ability to take timely advantage of various business and market opportunities. The direct and indirect effects of negative publicity, and the demands of responding to and addressing it, may have a material adverse effect on our business, financial condition, and results of operations. Losses of members, enterprise partners, health system partners, payers or other important strategic relationships from any of the events described above could have a material adverse effect on our business, results of operations, and financial condition. Such adverse effects could also be exacerbated by a delay in the completion of the Amazon Merger for any reason, including delays associated with obtaining requisite regulatory approvals or the approvals of our stockholders and/or Amazon’s stockholders. The Merger Agreement contains provisions that could discourage or deter a potential competing acquirer that might be willing to pay more to effect a business combination with us. Unless and until the Merger Agreement is terminated in accordance with its terms, subject to certain specified exceptions, we are not permitted to solicit, initiate, induce or knowingly encourage or knowingly facilitate any inquiries or the making of any proposal or offer that constitutes, or would reasonably be expected to lead to, an alternative transaction proposal or to engage in discussions or negotiations with third parties regarding any alternative transaction proposal. Such restrictions could discourage or deter a third party that may be willing to pay more than Amazon for the outstanding capital stock of One Medical from considering or proposing such an acquisition of One Medical. Lawsuits may be filed against us and the members of our board of directors arising out of the proposed Amazon Merger, which may delay or prevent the proposed Amazon Merger. Putative stockholder complaints, including stockholder class action complaints, and other complaints may be filed against us, our board of directors, Amazon, Amazon's board of directors, and others in connection with the transactions contemplated by the Merger Agreement. The outcome of litigation is uncertain, and we may not be successful in defending against any such future claims. Lawsuits that may be filed against us, our board of directors, Amazon, or Amazon's board of directors could delay or prevent the Amazon Merger, divert the attention of our management and employees from our day-to-day business, and otherwise adversely affect our business, results of operations, and financial condition. The ability to complete the Amazon Merger is subject to the receipt of consents and approvals from government entities, which may impose conditions that could have an adverse effect on us or the combined company or could cause either party to abandon the Amazon Merger. Completion of the Amazon Merger is conditioned upon, among other things, the expiration or termination of the required waiting period (and any extension thereof) applicable to the Amazon Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder, or the HSR Act, and any voluntary agreement with the United States Federal Trade Commission, or the FTC, or the Department of Justice Antitrust Division, or the DOJ, not to consummate the Amazon Merger or other transactions contemplated by the Merger Agreement. In deciding whether to grant antitrust approvals, the FTC or DOJ, and other regulatory agencies will consider the effect of the Amazon Merger on competition. The FTC, DOJ, or other regulatory agencies may condition their approval of the Amazon Merger on Amazon’s or our agreement to various requirements, limitations, or costs, or require divestitures or place restrictions on the conduct of Amazon’s business following the Amazon Merger. If we and Amazon agree to these requirements, limitations, costs, divestitures, or restrictions, the ability to realize the anticipated benefits of the Amazon Merger may be impaired. We cannot provide any assurance that we or Amazon will obtain the necessary approvals or that any of the requirements, limitations, costs, divestitures, or restrictions to which we might agree will not have a material adverse effect on Amazon following the Amazon Merger. In addition, these requirements, limitations, costs, divestitures, or restrictions may result in the delay or abandonment of the Amazon Merger. 50 At any time before or after consummation of the Amazon Merger, notwithstanding the termination or expiration of the waiting period under the HSR Act, the FTC or DOJ could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the completion of the Amazon Merger, seeking divestiture of substantial assets of one or both of the parties, requiring the parties to license or hold separate assets or terminate existing relationships and contractual rights, or requiring the parties to agree to other remedies. At any time before or after the completion of the Amazon Merger, and notwithstanding the termination or expiration of the waiting period under the HSR Act, any state or foreign jurisdiction could take such action under the antitrust laws as it deems necessary or desirable in the public interest. Such action could include seeking to enjoin the completion of the Amazon Merger, seeking divestiture of substantial assets of one or both of the parties, requiring the parties to license or hold separate assets or terminate existing relationships and contractual rights, or requiring the parties to agree to other remedies. Private parties may also seek to take legal action under the antitrust laws under certain circumstances, including by seeking to intervene in the regulatory process or litigate to enjoin or overturn regulatory approvals, any of which actions could significantly impede or even preclude obtaining required regulatory approvals. We cannot be certain that a challenge to the Amazon Merger will not be made or that, if a challenge is made, we will prevail . Risks Related to Our Business and Our Industry The ongoing coronavirus (COVID-19) pandemic has significantly impacted, and may continue to significantly impact our business, financial condition, results of operations and growth. The global COVID-19 pandemic and measures introduced by local, state and federal governments to contain the virus and mitigate its public health effects have significantly impacted and may continue to significantly impact our business, our industry and the global economy. While the full extent of the impacts of the COVID-19 pandemic may be difficult to predict or determine due to numerous evolving factors, including emerging variant strains of the virus and their degree of vaccine resistance as well as reinstatements or potential reinstatements of measures to curb the spread of COVID-19, we have seen and may continue to see adverse impacts on our operations, net revenues, expenses, collectability of accounts receivables and other money owed, capital expenditures, liquidity, and overall financial condition, including from: • reduced total billable visit volumes, temporary closures of certain offices, delays in openings of new medical offices, and delayed entry into new or expansion into existing geographies (in response to self-isolation practices, sustained remote work policies, quarantines, shelter-in-place requirements and similar government orders); • higher proportions of lower-revenue generating services and products, including billable remote visits, COVID-19 testing and COVID-19 vaccinations, which may not be reimbursable or have lower average reimbursements relative to traditional in-office visits; • deferral of healthcare by members and patients, which may result in difficulties completing comprehensive annual documentation of Medicare patient health conditions, future cost increases, deferred costs and inability to accurately estimate costs for incurred but not yet reported medical services claims for our At-Risk members, and may negatively impact the health of our patients; • increase in internal and third-party medical costs for care provided to At-Risk members suffering from COVID-19, which may be particularly significant given many of our members are under At-Risk arrangements in which we receive capitated payments and may be more pronounced as a result of future outbreaks or variants of COVID-19; • negative impacts to the business, results of operations and financial condition of our health network partners and their ability or willingness to continue to pay us a fixed price PMPM if they receive reduced visit revenue due to decreases in billable utilization; • inquiries, regulatory or governmental investigations or other disputes that result from our provision of COVID-19 vaccinations, arrangements entered into in reliance on related orders, laws and regulations, or the failure of various waivers for limitations of liability or other provisions under such orders, laws and regulations that apply to us; • supply, resource and capital constraints related to the treatment of COVID-19 patients and disruptions or delays in the delivery of materials and products in the supply chain for our offices and increased capital expenditures due to the need to buy incremental materials or services; • staffing shortages and increased risk for workers’ compensation claims; or 51 • increased costs, diversion of resources from managing our business and growth and reputational harm due to (i) implementation of new services and products in reliance on continuously evolving regulatory standards, (ii) alterations to our operations to address the changing needs of our members during the pandemic, or (iii) member or enterprise client dissatisfaction due to inaccurate results from testing or other services, overburdening of our medical offices and virtual care teams with inquiries and requests, which may result in longer phone wait times or service delays. Any continuation of the above factors and outcomes could harm our business, financial condition, results of operations and growth. We cannot assure you that our current billable volumes and membership levels will be sustained or that average reimbursement for billable services will return to pre-COVID-19 levels. As more of the U.S. population receives the COVID-19 vaccination, our COVID-19 testing volumes may also decline, which may negatively impact our membership and revenue. Further, while vaccines have become available in certain countries and many economies have reopened, new shelter-in-place, quarantine, executive order or related measures or practices may be reinstated by governments and authorities, including due to future waves of outbreak or emerging variant strains of COVID-19, such as the Delta and Omicron variant. Such measures and practices, if reinstated, could reduce our total billable volumes, negatively impact our health network partners and harm our results of operations, business and financial condition. We have continued to adjust many of our new programs to rapidly respond to the COVID-19 pandemic, including telehealth visits, testing and vaccine administration arrangements, in reliance on continuously evolving regulatory standards such as emergency orders, laws and regulations from federal, state and local authorities and the relaxation of certain licensure requirements and privacy restrictions for telehealth intended to permit health care providers to provide care and distribute COVID-19 vaccines to patients during the COVID-19 pandemic. To continue providing some of these new services and products, we will be required to comply with federal, state and local rules, mandates and guidelines, which are subject to rapid change and may vary across jurisdictions. We cannot assure you that such orders, laws, regulations, mandates or guidelines will continue to apply or that regulators or other governmental entities will agree with our interpretations of these orders, laws, regulations, mandates and guidelines. Failure to remain in compliance, or even the perception of non-compliance, may curtail or result in restrictions on our ability to provide any such services, result in time-consuming and potentially costly inquiries, disputes, or investigations (such as the vaccine inquiries discussed in Note 13, “Commitments and Contingencies” to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, or the Vaccine Inquiries, or inquiries from state and local public health departments), as well as damage to our reputation, any of which could harm our business, financial condition and results of operations. We are cooperating with the requests from the Vaccine Inquiries as well as requests received from other governmental agencies, including with respect to our compensation practices and membership generation during the relevant periods. We are unable to predict the outcome or timeline of any residual inquiries or if any additional requests, inquiries, investigations or other government actions may arise relating to such circumstances. The Vaccine Inquiries, together with any additional inquiries, regulatory or governmental investigations or other disputes that result from our provision of COVID-19 vaccinations or any other arrangements entered into in reliance on these orders, laws and regulations, or the failure or reversal of various waivers for limitations of liability or other provisions under such orders, laws and regulations to apply to us could require us to divert resources or adjust certain new programs to ensure compliance and harm our reputation, business, financial condition and results of operations. The pandemic has also resulted in, and may continue to result in, significant disruption of global financial markets, potentially reducing our ability to access capital and reducing the liquidity and value of our marketable securities, which could in the future negatively affect our liquidity. In addition, due to our At-Risk arrangements for the care of Medicare Advantage participants, the full impact of the COVID-19 pandemic may not be fully reflected in our results of operations and overall financial condition until future periods. The COVID-19 pandemic may continue to impact our operations, and net revenues, expenses, collectability of accounts receivables and other money owed, capital expenditures, liquidity, and overall financial condition. We are dependent upon a limited number of key existing payers and loss of contracts with those payers, disruptions in those relationships or the inability of such payers to maintain their contracts with CMS, could adversely affect our business, financial condition, results of operations and prospects. We are dependent on a concentrated number of third-party payers with whom we contract to provide services to At-Risk Members. Contracts with one such payer across multiple markets accounted for 28% of net revenue for the three months ended June 30, 2022. We believe that a majority of our net revenue will continue to be derived from a limited number of key payers, who may terminate their contracts with us for convenience on short-term notice, or upon the occurrence of certain events, some of which may not be within our control. The loss of any of our payer partners or the renegotiation of any of our payer contracts could adversely affect our operating results. In the ordinary course of business, we engage in active discussions and renegotiations with payers with respect to the services we provide and the terms of our payers' agreements. As the payers’ 52 businesses respond to market dynamics, regulatory developments and financial pressures, and as payers make strategic business decisions with respect to the lines of business they pursue and programs in which they participate, certain of our payers may seek to renegotiate or terminate their agreements with us. These discussions could result in reductions to the fees and changes to the scope of services contemplated by our original payer contracts and consequently could negatively impact our net revenue, business, financial condition, results of operations and prospects. Because we rely on a limited number of these payers for a substantial portion of our revenue, we depend on the creditworthiness of these payers. Our payers are subject to a number of risks, including reductions in payment rates from governmental programs, higher than expected health care costs and lack of predictability of financial results when entering new lines of business, particularly with high-risk populations. If the financial condition of our payer partners declines, our credit risk could increase. Should one or more of our significant payer partners declare bankruptcy, be declared insolvent or otherwise be restricted by state or federal laws or regulation from continuing in some or all of their operations, this could adversely affect our ongoing revenues, the collectability of our accounts receivable, our bad debt reserves and our net income. If a payer with which we contract loses its Medicare contracts with CMS, receives reduced or insufficient government reimbursement under the Medicare program, decides to discontinue its Medicare Advantage and/or commercial plans, decides to contract with another company to provide capitated care services to its patients, vertically integrates and/or acquires provider organizations and decides to directly provide care, or otherwise makes or announces an adjustment to its business or strategies, our contract with that payer could be at risk and we could lose revenue or members, and our stock price could decline. We are reliant upon reimbursements from certain third-party payers for the services we provide in our business and reliance on these third-party payers could lead to delays and uncertainties in the reimbursement process. We are reliant upon contracts with certain third-party payers in order to receive reimbursement for some of the services we provide to patients, including value-based contracts from health insurance plans. The reimbursement process is complex and can involve lengthy delays. Although we recognize certain revenue when we provide services to our patients, we may from time to time experience delays in receiving the associated capitation payments or, for our patients on fee-for-service arrangements, the reimbursement for the service provided. In addition, third-party payers may disallow, in whole or in part, requests for reimbursement based on determinations that the member is not eligible for coverage, certain amounts are not reimbursable under plan coverage or were for services provided that were not medically necessary or additional supporting documentation is necessary. Retroactive adjustments may change amounts realized from third-party payers. We are also subject to claims reviews and/or audits by such third-party payers, including governmental audits of our Medicare claims, and may be required to repay these payers if a finding is made that we were incorrectly reimbursed. See “—Noncompliance with billing and documentation requirements could result in non-payment or subject us to audits, billing or other compliance investigations by government authorities, private payers or health network partners.” Third-party payers are also increasingly focused on controlling health care costs, and such efforts, including any revisions to reimbursement policies, may further complicate and delay our reimbursement claims. Furthermore, our business may be adversely affected by legislative initiatives aimed at or having the effect of reducing health care costs associated with Medicare and other changes in reimbursement policies. Delays and uncertainties in the reimbursement process may adversely affect our collection of accounts receivable, increase the overall costs of collection and cause us to incur additional borrowing costs to support our liquidity needs, which could harm our business, financial condition and results of operations. A significant portion of our net revenue is based on Medicare’s risk adjustment payment system and is subject to review and audit, which could result in material adjustments to our results of operations. CMS has implemented a risk adjustment payment system for Medicare health plans to improve the accuracy of payments and establish appropriate compensation for Medicare plans that enroll and treat less healthy Medicare beneficiaries. CMS’ risk adjustment model bases a portion of the total CMS reimbursement payments on various clinical and demographic factors, including hospital inpatient diagnoses, diagnosis data from hospital outpatient facilities and physician visits, gender, age and Medicaid eligibility. CMS requires that all managed care companies and, indirectly, subcontracted providers like us, capture, collect and report the necessary diagnosis code information to CMS, which information is subject to review and audit for accuracy by CMS. This risk adjustment payment system has an indirect impact on the payments we receive from our contracted Medicare Advantage payers. Although we, and the payers with which we contract, have auditing and monitoring processes in place to collect and provide accurate risk adjustment data to CMS for these purposes, that program may not be sufficient to ensure accuracy. If the risk adjustment data submitted by us or our payers incorrectly overstates the health risk of our patients, we might be required to return to the payer or CMS, overpayments and/or be subject to penalties or sanctions, or if the data incorrectly understates the health risk of our members, we might be underpaid for the care that it must provide to its patients, any of which 53 could harm our reputation and have a negative impact on our results of operations and financial condition. CMS may also change the way that they measure risk and determine payment, and the impact of any such changes could harm our business. As a result of the COVID-19 pandemic, risk adjustment scores may also fall as a result of reduced data collection, decreased patient visits or delayed medical care and limitations on payments for certain telehealth services. As a result of the variability of factors affecting our patients’ risk scores, the actual payments we receive from our payers, after all adjustments, could be materially more or less than our estimates. Consequently, our estimate of our patients’ aggregate member risk scores for any period may result in favorable or unfavorable adjustments to our Medicare premium revenues, which may harm our results of operations. Under our At-Risk arrangements with certain third-party payers, we assume the risk that the cost of providing services will exceed our compensation for such services. A substantial portion of our net revenue consists of Capitated Revenue, which, in the case of third party payers or health insurance plans, is based on a pre-negotiated percentage of the premium that the payer receives from CMS. While there are variations specific to each agreement, we sometimes contract with payers to receive recurring PMPM revenue and assume the financial responsibility for the healthcare expenses of our patients. This type of contract is referred to as a “capitation” contract. CMS pays capitation using risk adjustment scores. See “–A significant portion of our net revenue is based on Medicare’s risk adjustment payment system and is subject to review and audit, which would result in material adjustments to our results of operations.” To the extent we encounter delays in documenting patients’ acuity or patients requiring more care than initially anticipated and/or the cost of care increases, aggregate fixed compensation amounts, or capitation payments, may be insufficient to cover the costs associated with treatment. If medical costs and expenses exceed estimates, except in very limited circumstances, we will not be able to increase the fee received under these capitation agreements during their then-current terms and we could suffer losses with respect to such agreements. In addition, while we maintain stop-loss insurance that helps protect us for medical claims per patient in excess of certain levels, future claims could exceed our applicable insurance coverage limits or potential increases in insurance premiums may require us to decrease our level of coverage. Changes in our anticipated ratio of medical expense to revenue can significantly impact our financial results. Accordingly, the failure to adequately predict and control medical costs and expenses and to make reasonable estimates and maintain adequate accruals for incurred but not reported claims could have a material adverse effect on our business, results of operations, financial condition and cash flows. Additionally, the Medicare expenses of our At-Risk members may be outside of our control in the event that such members take certain actions that increase such expenses, such as unnecessary hospital visits. These actions or events also make it more difficult for us to estimate medical expenses and may cause delays in reporting them to payers. Any delays or failures to adequately predict and control medical costs may also result in delayed negative impacts to our Capitated Revenue, including as compared to our estimates of cost of care and capitation payments. Historically, our medical costs and expenses as a percentage of revenue have fluctuated. Factors that may cause medical expenses to exceed estimates inclu • the health status of our At-Risk members; • higher levels of hospitalization among our At-Risk members; • higher than expected utilization of new or existing healthcare services or technologies; • an increase in the cost of healthcare services and supplies, whether as a result of inflation or otherwise; • changes to mandated benefits or other changes in healthcare laws, regulations and practices; • increased costs attributable to specialist physicians, hospitals and ancillary providers; • changes in the demographics of our At-Risk members and medical trends; • contractual or claims disputes with providers, hospitals or other service providers within and outside a health plan’s network; • the occurrence of catastrophes, major epidemics or pandemics, including COVID-19, or acts of terrorism; and • the reduction of health plan premiums. 54 If reimbursement rates paid by private third-party payers are reduced or if these third-party payers otherwise restrain our ability to obtain or provide services to patients, our business could be harmed. Private third-party payers, including health maintenance organizations, or HMOs, preferred provider organizations and other managed care plans, as well as medical groups and independent practice associations that contract with HMOs, pay for the services that we provide to many of our members. As a substantial proportion of our members are commercially insured or covered under Medicare Advantage plans with our contracted payers, if any third-party payers reduce their reimbursement rates or elect not to cover some or all of our services, our business may be harmed. Typically, our affiliated professional entities that provide medical services enter into contracts with certain of these payers either directly, or indirectly through certain of our health network partners, which allow them to participate in the payers’ respective networks and set forth reimbursement rates for services rendered thereunder. As a result, our ability to maintain or increase patient volumes covered by private third-party payers and to maintain and obtain favorable contracts with private third-party payers significantly affects our revenue and operating results. See also “—We are dependent upon a limited number of key existing payers and loss of contracts with those payers, disruptions in those relationships or the inability of such payers to maintain their contracts with CMS, could adversely affect our business, financial condition, results of operations and prospects.” Private third-party payers often use plan structures, such as narrow networks or tiered networks, to encourage or require members to use in-network providers. In-network providers typically provide services through private third-party payers for a lower negotiated rate or other less favorable terms. Private third-party payers generally attempt to limit the delivery of services out-of-network by requiring members to pay higher copayment, co-insurance and/or deductible amounts for out-of-network care. Additionally, private third-party payers have become increasingly aggressive in attempting to minimize the use of out-of-network providers by disallowing the assignment of payment from members to out-of-network providers (i.e., sending payments directly to members instead of to out-of-network providers), capping or establishing out-of-network benefits payable to members that do not cover billed charges for services, waiving out-of-pocket payment amounts and initiating litigation against out-of-network providers for interference with contractual relationships, insurance fraud and violation of state licensing and consumer protection laws. If we become out-of-network for payer products and networks, our business could be harmed and our revenue could be reduced because patients could stop using our services. If reimbursement rates paid by Medicare or other federal or state healthcare programs are reduced, if changes in the rules governing such programs occur, or if government payers otherwise restrain our ability to obtain or provide services to patients, our business, financial condition and results of operations could be harmed. A significant portion of our revenue comes from government healthcare programs, principally Medicare, either through Medicare Advantage plans or directly, including through the Center for Medicare and Medicaid Innovation's, or CMMI's, Global and Professional Direct Contracting Model, or the GPDC Model, which CMMI announced has been redesigned and renamed the ACO Realizing Equity, Access, and Community Health Model, or the ACO REACH Model, to take effect January 1, 2023 for both new applicants who are approved to participate and current GPDC Model participants that have maintained a strong compliance record and meet the requirements of the ACO REACH Model. In addition, many commercial payers base their reimbursement rates on the published Medicare rates or are themselves reimbursed by Medicare for the services we provide. As a result, our results of operations are, in part, dependent on the continuation of Medicare programs, including Medicare Advantage, the GPDC Model (through December 31, 2022) or the ACO REACH Model (starting January 1, 2023), as well as the levels of government funding provided therewith. Any changes that limit or reduce the GPDC Model or the ACO REACH Model, Medicare Advantage, or general Medicare reimbursement levels, such as reductions in or limitations of reimbursement amounts or rates under programs, reductions in funding of programs, expansion of benefits without adequate funding, elimination of coverage for certain benefits, or elimination of coverage for certain individuals or treatments under programs, could have a material adverse effect on our business, results of operations, financial condition and cash flows. The Medicare program and its reimbursement rates and rules, are also subject to frequent change. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative rulings or executive orders, interpretations and determinations, requirements for utilization review and government funding restrictions, each of which may materially and adversely affect the rates at which CMS reimburses us for our services, as well as affect the cost of providing service to patients and the timing of payments to our affiliated professional entities. Budget pressures often lead the federal government to reduce or place limits on reimbursement rates under Medicare. Implementation of these and other types of measures has in the past and could in the future result in substantial reductions in our revenue and operating margins. The final impact of the Medicare Advantage rates can vary from any estimate we may have and may be further impacted by the relative growth of our Medicare Advantage patient volumes across certain geographies as well as by the benefit plan designs submitted. It is possible that we may underestimate the impact of the Medicare Advantage rates on our business, which could have a material adverse effect on our business, results of operations, financial condition and cash flows. In addition, our Medicare 55 Advantage revenues may continue to be volatile in the future which could have a material adverse impact on our business, results of operations, financial condition and cash flows. In addition, CMS often changes the rules governing the Medicare program, including those governing reimbursement. Changes that could adversely affect our business inclu • administrative or legislative changes to base rates or the bases of payment; • limits on the services or types of providers for which Medicare will provide reimbursement; • changes in methodology for patient assessment and/or determination of payment levels; • the reduction or elimination of annual rate increases; or • an increase in co-payments or deductibles payable by beneficiaries. We are unable to predict the effect of recent and future policy changes on our operations. Recent legislative, judicial and executive efforts to enact further healthcare reform legislation have also caused many core aspects of the current U.S. healthcare system to be unclear. While specific changes and their timing are not yet apparent, enacted reforms and future legislative, regulatory, judicial, or executive changes, particularly any changes to the Medicare Advantage program, could have a material adverse effect on our business, results of operations, financial condition and cash flows. There is additional uncertainty around the future of the ACO REACH Model. The ACO REACH Model has been developed by CMS as a means to test various financial risk sharing arrangements in the Medicare program over a four-year period, from January 1, 2023 through December 31, 2026. CMS may make additional, material changes to the ACO REACH Model in the intervening years or, at the end of that four-year period, CMS may not extend or replace the ACO REACH Model with a similar program that we can participate in, which may have a material adverse effect on our business. The GPDC Model and the ACO REACH Model are new CMS programs and we therefore may not be able to realize the expected benefits of either model. In 2021, CMMI announced the GPDC Model to create value-based payment arrangements directly with Direct Contracting Entities, or DCEs, which is part of CMMI's’ strategy to test the next evolution of risk-sharing arrangement to produce value and high quality health care by permitting DCEs to participate in value-based care arrangements with beneficiaries in Medicare fee-for-service. The GPDC Model began its first performance period on April 1, 2021. Our wholly owned subsidiary, Iora Health NE DCE, LLC, was one of a limited number of companies chosen by CMMI as a DCE. In February 2022, CMS announced that the GPDC Model had been redesigned and renamed the ACO REACH Model, with such changes to take effect beginning January 1, 2023. Current Direct Contracting Entities, or DCEs, like us, will participate in the current GPDC Model until December 31, 2022. To participate in the ACO REACH Model, we must (i) agree to meet all of the ACO REACH requirements as of January 1, 2023, including new requirements related to corporate governance, health equity and data collection and reporting and (ii) maintain a strong compliance record during 2022, as determined by CMS. Given the recent enactment of the ACO REACH Model, we cannot assure you that we will be able to participate in and/or comply with the new requirements of the ACO REACH Model. We have no experience serving as an ACO under the new ACO REACH Model and may not be able to realize the expected benefits of the new model. For example, we may encounter difficulties calibrating our historical medical expense estimates to this new beneficiary population, which has not chosen to participate in risk-based care arrangements (unlike Medicare Advantage beneficiaries) and thus may utilize medical services differently than our current members. While we have invested and expect to continue to invest significant time and resources to meet the requirements of the GPDC Model and adapt to the ACO REACH Model, beneficiaries assigned to us under either model may not generate revenue as expected, initially or at all, and we cannot assure you that direct contracting will allow us to achieve the same financial outcomes on Medicare fee-for-service beneficiaries as we do on our existing patients. Additionally, adding new members 56 through either model will also require absorbing new members into our affiliated professional entities, which may strain resources or negatively affect our quality of care. We cannot assure you that our current participation in the GPDC Model will be successful or that we will be able to participate in the ACO REACH Model in the future. We also cannot assure you that our participation in either model will expand our total addressable market in the manner that we expect. Our business model and future growth are substantially dependent on the success of our strategic relationships with health network partners, enterprise clients and distribution partners. We will continue to substantially depend on our relationships with third parties, including health network partners, enterprise clients and distribution partners to grow our business. In particular, our growth depends on maintaining existing, and developing new, strategic affiliations with health network partners, including health systems and private and government payers. We also rely on a number of partners such as benefits enrollment platforms, professional employment organizations, consultants and other distribution partners in order to sell our solutions and services and enroll members onto our platform. Our agreements with our enterprise clients often provide for fees based on the number of members that are covered by such clients’ programs each month, known as capitation arrangements. Certain of our enterprise clients and partners also pay us a fixed fee per year regardless of the number of registered members. The number of individuals who register as members through our enterprise clients is often affected by factors outside of our control, such as plan endorsement by the employer, member outreach and retention initiatives. Enterprise clients may also prohibit us from engaging in direct outreach with employees as potential members, or we may be unsuccessful in spreading brand awareness among employees who perceive competitors as offering better solutions and services, which would decrease growth in membership and reduce our net revenue. Increasing rates of unemployment may also result in loss of members at our enterprise clients, and economic recessions or slowdowns can result in our enterprise clients terminating their employee sponsorship arrangements with us, longer sales cycles, and reduced or limited contract sizes as enterprise clients focus on general cost reductions in the face of macroeconomic uncertainty. In addition, during periods of economic slowdown, enterprise clients may face less competition for new hires or may not need to hire as many employees and as a result, they may not need to sponsor memberships with us as a means to attract new hires. Even if the geographies in which our enterprise clients operate experience growth, it is possible that such client’s program membership could fail to grow at similar rates, if at all. If the number of members covered by one or more of such clients’ programs were to be reduced, including due to benefits reductions or layoffs during and after the COVID-19 pandemic, it would lead to a reduction of membership fees, a decrease in our net fee-for-service revenue and partnership revenue, and may also result in the enterprise client electing not to renew our contract for another year. In addition, the growth forecasts of our clients are subject to significant uncertainty, including after the COVID-19 pandemic and any prolonged ensuing economic recession, and are based on assumptions and estimates that may prove to be inaccurate. Further, historical activation rates within a given enterprise client may not be indicative of future membership levels at that enterprise client or activation rates of similarly situated enterprise clients. High activation rates (i.e., the percentage of individuals eligible for membership who are enrolled as members) do not necessarily result in increased net fee-for-service revenue and do not typically result in increased membership revenue. Health network partnerships also comprise a significant portion of our revenue. For example, under certain health network partnership contracts, we closely collaborate with a health network on certain strategic initiatives such as the expansion of practice sites in a particular jurisdiction or service area, and clinical and digital integration between our primary care and their specialty care services. Our contracts with health network partners can sometimes be bespoke, with varying terms across health network partners. However, many contracts provide for fees on a PMPM basis or a fee-for-service basis. Under contracts providing for PMPM fees, when our medical offices provide professional clinical services to covered members, we, as administrator, perform billing and collection services on behalf of the health network, and the health network receives the fees for services provided, including those paid by members’ insurance plans. If we do not adequately satisfy the objectives of our partners or perform against contractual obligations, we may lose revenue under the applicable health network partner contract and the health network partner may become dissatisfied with the terms or our performance under the contract, which could result in its early termination or amendment, if permitted, and as a result, harm to our business and results of operations, including a reduction in net revenue. Even regardless of our performance under the contracts, we cannot guarantee that our health network partners will continue to be satisfied with the terms or circumstances under existing contracts, particularly given constraints and challenges posed by the COVID-19 pandemic. We have experienced contractual disputes and renegotiations, including with respect to delays in payments due to us, with health network partners in the past and may experience additional disputes and renegotiations in the future. In certain situations, we may need to take legal or other action to enforce our contractual rights, which may strain relationships with our partners, further delay payments owed to us, make us less attractive for potential or future partners and harm our business, results of operations and reputation. Certain contracts with health network partners can be exclusive in the applicable jurisdiction; as a result, in new potential geographies, should we pursue a health network partnership, we would need to successfully contract with a sufficiently competitively viable health network 57 partner, as we may not be able to terminate any such contract for several years without penalty or be able to partner with other health network partners in the same geographies due to competitive pressures or lack of counterparties. If we are unable to successfully continue our strategic relationships with our health network partners on terms favorable to us or at all, or if we do not successfully contract with health network partners in new jurisdictions, our business and results of operations could be harmed. Most of our enterprise clients and health network partners have no obligation to renew their agreements with us after the initial term expires. In addition, our health network partners and enterprise clients may negotiate terms less advantageous to us upon renewal, which may reduce our revenue from these entities. If our health network partners or enterprise clients fail to renew their contracts, or renew their contracts upon less favorable terms or at lower fee levels, our revenue may decline or our future revenue growth may be constrained. In addition, certain of our health network partners and enterprise clients may terminate their contracts with us early for various reasons. If a partner or customer terminates its contract early and revenue and cash flows expected from a partner or enterprise client are not realized in the time period expected or not realized at all, our business could be harmed. Identifying partners, and negotiating and documenting relationships with them, requires significant time and resources. Our competitors may be more effective in executing such relationships and performing against them. If we are unsuccessful in establishing or maintaining our relationships with third parties, our ability to compete in the marketplace or to grow our net revenue could be impaired and our results of operations may suffer. Even if we are successful, we cannot assure you that these relationships will result in increased member use of our solutions and services or increased net revenue. We conduct business in a heavily regulated industry, and any failure to comply with applicable healthcare laws and government regulations, could result in financial penalties, exclusion from participation in government healthcare programs and adverse publicity, or could require us to make significant operational changes, any of which could harm our business. The U.S. healthcare industry is heavily regulated and closely scrutinized by federal, state and local authorities. Comprehensive statutes and regulations govern the manner in which we provide and bill for services and collect reimbursement from governmental programs and private payers, our contractual relationships with our providers, vendors, health network partners, enterprise clients, members and patients, our marketing activities and other aspects of our operations. Of particular importance • state laws that prohibit general business corporations, such as us, from practicing medicine, controlling physicians’ medical decisions or engaging in practices such as splitting fees with physicians; • federal and state laws pertaining to non-physician practitioners, such as nurse practitioners and physician assistants, including requirements for physician supervision of such practitioners and licensure and reimbursement-related requirements; • Medicare and Medicaid billing and reimbursement rules and regulations; • the federal physician self-referral law, commonly referred to as the Stark Law, which, subject to certain exceptions, prohibits physicians from referring Medicare or Medicaid patients to an entity for the provision of certain “designated health services” if the physician or a member of the physician’s immediate family has a direct or indirect financial relationship (including an ownership interest or a compensation arrangement) with the entity; • the federal Anti-Kickback Statute, which, subject to certain exceptions known as “safe harbors,” prohibits the knowing and willful offer, payment, solicitation or receipt of any bribe, kickback, rebate or other remuneration, in cash or in kind, in return for the referral of an individual for, or the lease, purchase, order or recommendation of, items or services covered, in whole or in part, by government healthcare programs such as Medicare and Medicaid; • the federal False Claims Act, which imposes civil and criminal liability on individuals or entities that knowingly or recklessly submit false or fraudulent claims to Medicare, Medicaid, and other government-funded programs or make or cause to be made false statements in order to have a claim paid; • a provision of the Social Security Act that imposes criminal penalties on healthcare providers who fail to disclose or refund known overpayments; 58 • the criminal healthcare fraud provisions of the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, or collectively, HIPAA, and related rules that prohibit knowingly and willfully executing a scheme or artifice to defraud any healthcare benefit program or falsifying, concealing or covering up a material fact or making any material false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services; • the Civil Monetary Penalties Law, which prohibits the offering or giving of remuneration to Medicare and Medicaid beneficiaries that is likely to influence the beneficiary’s selection of a particular provider or supplier; • federal and state laws that prohibit providers from billing and receiving payment from Medicare and Medicaid for services unless the services are medically necessary, adequately and accurately documented, and billed using codes that accurately reflect the type and level of services rendered; • federal and state laws and policies related to healthcare providers’ licensure, certification, accreditation, Medicare and Medicaid program enrollment and reassignment of benefits; • federal and state laws and policies related to the prescribing and dispensing of pharmaceuticals and controlled substances; • state laws related to the advertising and marketing of services by healthcare providers; • federal and state laws related to confidentiality, privacy and security of personal information, including medical information and records, that limit the manner in which we may use and disclose that information, impose obligations to safeguard such information and require that we notify third parties in the event of a breach; • federal laws that impose civil administrative sanctions for, among other violations, inappropriate billing of services to government healthcare programs or employing or contracting with individuals who are excluded from participation in government healthcare programs; • laws and regulations limiting the use of funds in health savings accounts for individuals with high deductible health plans; • state laws pertaining to anti-kickback, fee splitting, self-referral and false claims, some of which are not limited to relationships involving government-funded programs; and • state laws governing healthcare entities that bear financial risk. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Achieving and sustaining compliance with these laws requires us to implement controls across our entire organization and it may prove costly and challenging to monitor and enforce compliance. In particular, given the prevalence of laws, rules and regulations restricting the corporate practice of medicine in certain of the states that we operate, we are prohibited from interfering with or inappropriately influencing providers’ professional judgment and are typically reliant on the providers and other healthcare professionals at our affiliated professional entities to operate in compliance with applicable laws related to the practice of medicine and the provision of healthcare services. The risk of our being found in violation of healthcare laws and regulations is increased by the fact that many of them have not been fully interpreted by regulatory authorities or the courts, and their provisions are sometimes complex and open to a variety of interpretations. Failure to comply with these laws and other laws can result in civil and criminal penalties such as fines, damages, recoupments of overpayments, imprisonment, loss of enrollment status and exclusion from the Medicare and Medicaid programs. To enforce compliance with the federal laws, the U.S. Department of Justice and the Office of Inspector General for the HHS regularly scrutinize healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. The operation of medical practices is also subject to various state laws enforced by state regulators, including state attorneys general, boards of professional licensure and departments of health. A review of our business by judicial, law enforcement, regulatory or accreditation authorities could result in challenges or actions against us that could harm our business and operations. Responding to and managing government investigations or any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses, divert resources and management’s attention from the operation of our business and result in adverse publicity. 59 Moreover, if one of our health system partners or another third party fails to comply with applicable laws and becomes the target of a government investigation, government authorities could require our cooperation in the investigation, which could cause us to incur additional legal expenses and result in adverse publicity. In addition, because of the potential for large monetary exposure under the federal False Claims Act, which provides for treble damages and penalties of $12,537 to $25,076 per false claim or statement (as of January 2022, and subject to annual adjustments for inflation), healthcare providers often resolve allegations without admissions of liability for significant amounts to avoid the uncertainty of treble damages that may be awarded in litigation proceedings. Such settlements often contain additional compliance and reporting requirements as part of a consent decree, settlement agreement or corporate integrity agreement. Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources to investigating healthcare providers’ compliance with the healthcare reimbursement rules and fraud and abuse laws. Further, our ability to provide our full range of services in each state is dependent upon a state’s treatment of telehealth and emerging technologies (such as digital health services), which are subject to changing political, regulatory and other influences. Many states have laws that limit or restrict the practice of telehealth, such as laws that require a provider to be licensed and/or physically located in the same state where the patient is located. Failure to comply with these laws could result in denials of reimbursement for our services (to the extent such services are billed), recoupments of prior payments, professional discipline for our providers or civil or criminal penalties. The laws, regulations and standards governing the provision of healthcare services may change significantly in the future and may harm our business and operations. For example, we have had to adapt our business as a result of the CARES Act and other emergency orders, laws and regulations enacted in response to the COVID-19 pandemic. We have also had to adapt our business in response to recent monkey pox outbreaks and new laws relating to abortion and reproductive rights which may impact our current healthcare practices. While some of these changes have allowed us to rapidly respond to evolving healthcare epidemics, they have also required us to adapt to new offerings, processes and procedures. We cannot assure you that such emergency orders, laws and regulations will continue to apply or that regulators or other governmental entities will agree with our interpretation of these arrangements under applicable law. The Vaccine Inquiries or any other regulatory or governmental investigations or other disputes as a result of these arrangements, or the failure of various waivers for limitations of liability or other provisions under such emergency orders, laws and regulations to apply to us could divert resources and harm our reputation, business, financial condition and results of operations. If the prevalence of private health insurance coverage declines, including due to a decline in the prevalence of employer-sponsored health care, our revenue may be reduced. We currently derive a significant portion of our revenue from members acquired under contracts with enterprise clients that purchase health care for their employees (either via insurance or self-funded benefit plans). A large part of the demand for our solutions and services among enterprise clients depends on the need of these employers to manage the costs of healthcare services that they pay on behalf of their employees. While the percentage of employers who are self-insured has been increasing over the past decade, this trend may not continue. Over time, employees may also increasingly decide to obtain their own insurance through state-sponsored insurance marketplaces rather than through their employers. While such employees may remain members, our reimbursement from providing services to these members would likely decrease. Employees who obtain their own insurance may also cancel their memberships, which may decrease the fees we receive under our contracts with health network partners as fewer members engage in their healthcare networks. If any of these trends accelerate, there is no guarantee that we would be able to compensate for the loss in revenue derived from enterprise clients and health network partners by increasing retail member acquisition. A decline in overall prevalence of private health insurance coverage, including due to the passage of healthcare reform proposals such as “Medicare for All,” could further harm our revenue, particularly if accompanied by a reduction in employer-sponsored health insurance. In addition, health network partners who rely on patient use of their networks, particularly specialty care, through our contracts with them, may become dissatisfied with the terms under the applicable contract and seek to amend or terminate, or elect not to renew, these contracts. In these cases, our business, financial condition and results of operations would be harmed. If we fail to cost-effectively develop widespread brand awareness and maintain our reputation, or if we fail to achieve and maintain market acceptance for our healthcare services, our business could suffer. We believe that developing and maintaining widespread awareness of our brand and maintaining our reputation for providing access to high quality and efficient health care in a cost-effective manner is critical to attracting new members, enterprise clients, and health network partners, maintaining existing members, clients and partners and thus growing our business and revenue. Market acceptance of our solutions and services and member acquisition depends on educating people, as 60 well as enterprise clients and health networks, as to the distinct features, ease-of-use, positive lifestyle impact, cost savings, quality, and other perceived benefits of our solutions and services as compared to traditional or competing healthcare access options and our ability to directly market our solutions or services to the employees of our enterprise clients. In particular, market acceptance is highly dependent on sufficient geographic market saturation of medical offices, whether we are in-network with payers, customization of healthcare services, and word of mouth and informal member referrals. While we are in-network with CMS and our health network partners, shortfalls in any of the above areas, the loss or dissatisfaction of a significant contingent of our members or patients, adverse media reports or negative feedback about our solutions and services may substantially harm our brand and reputation, inhibit widespread adoption of our solutions and services, reduce our revenue from enterprise clients and health networks, and impair our ability to attract new or maintain existing members and patients. Our brand promotion activities may not generate awareness or increase revenue and, even if they do, any increase in revenue may not offset the expenses we incur in building our brand. We also cannot guarantee the quality and efficiency of healthcare service, particularly specialty healthcare, from our health network partners, over which we have no control. Many of our health network partners are large institutions with significant operations across a wide network of patients and may be unable to provide consistent levels of service to our members. Patients who experience poor quality healthcare provision from such partners may impute such dissatisfaction to our solutions and services, which could negatively impact member retention and acquisition, reduce our revenue and harm our business. We have a history of losses, which we expect to continue, and we may never achieve or sustain profitability. We have incurred significant losses in each period since our inception. We incurred net losses of $184.7 million, $89.4 million and $254.6 million for the six months ended June 30, 2022 and the years ended December 31, 2020 and 2021 respectively. As of June 30, 2022, we had an accumulated deficit of $802.9 million. Our net losses and accumulated deficit reflect the substantial investments we made to acquire new health network partners and members, build our proprietary network of healthcare providers and develop our technology platform. We intend to continue scaling our business to increase our enterprise client, member and provider bases, broaden the scope of our health network and other partnerships and expand our applications of technology through which members can access our services. Accordingly, we anticipate that our cost of care and other operating expenses will continue to increase in the foreseeable future. Moreover, as we sign up new At-Risk members for whom we are responsible for managing a range of healthcare services and associated costs, our medical claims expense for such members may be higher relative to the Capitated Revenue earned or any excess revenue over medical claims expense may not be enough to cover our cost of care or other operating expenses. Our efforts to scale our business and manage the health of At-Risk members may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will be able to sustain or increase profitability. Our prior net losses, combined with our expected future net losses, have had and will continue to have a negative impact on our total (deficit) equity and working capital. As a result of these factors, we may need to raise additional capital through debt or equity financings in order to fund our operations, and such capital may not be available on reasonable terms, if at all. Our net revenue depends in part on the number of members enrolled or patient visits, and a decrease in member utilization of our services could harm our business, financial condition and results of operations. Historically, we have relied on patient visits for a substantial portion of our net revenue. For the six months ended June 30, 2022 and the years ended December 31, 2020 and 2021, net fee-for-service revenue accounted for 15%, 39% and 29% of our net revenue, respectively. As we develop additional digital health solutions through our mobile platform and continue providing and expanding availability of remote visits, we cannot guarantee that our members will consistently make in-office visits in addition to using our digital health solutions, particularly after the COVID-19 pandemic and as related shelter-in-place and quarantine measures and orders are relaxed or lifted. Further, it may be difficult for us to accurately forecast future patient in-office visits over time, which may vary across geographies and depend on patient demographics within a given market. In part due to the reduction of in-office visits observed due to COVID-19, we have introduced billable remote visits. We cannot predict with any certainty the number of remote billable services and their impact on our in-office visits. As remote billable services on average generate lower reimbursement than in-office visits, this may impact our operations and financial results. In addition, we will continue to rely on our reputation and recommendations from members and key enterprise clients to promote our solutions and services to potential new members. A substantial portion of our members hold subscriptions through their respective employers with which we have membership arrangements. The loss of any of our key enterprise clients, or a failure of some of them to renew or expand their arrangements with us, including due to cost-saving measures in the face of macroeconomic uncertainty, could have a significant impact on the growth rate of our revenue. Individual members may also decide not to renew their memberships due to reduced discretionary income as a result of inflationary pressures. If we are unable to attract and retain sufficient members in any given market, we may have reduced visits, which could harm our results of operations, reduce our revenue and harm our business. 61 In addition, under certain of our contracts with enterprise clients, we base our fees on the number of individuals to whom our clients provide benefits. Under certain of our health network partner agreements, we also collect fees from members who receive healthcare services within the health network partner’s network. Many factors, most of which we do not control, may lead to a decrease in the number of individuals covered by our enterprise clients, including, but not limited to, the followin • our proposed transaction with Amazon; • changes in the nature or operations of our enterprise clients or the failure of our enterprise clients to adopt or maintain effective business practices; • changes of control of our enterprise clients; • reduced demand in particular geographies; • shifts away from employer-sponsored health plans toward employee self-insurance; • macroeconomic uncertainty; • shifting regulatory climate and new or changing government regulations; and • increased competition or other changes in the benefits marketplace. If the number of members covered by our enterprise clients and health network partners decreases, our revenue will likely decrease. We operate in a competitive industry, and if we are not able to compete effectively our business would be harmed. The market for healthcare solutions and services is highly fragmented and intensely competitive, with direct and indirect competitors offering varying levels of impact to key stakeholders such as consumers, employers, providers, and health networks. We compete across various segments within the healthcare market and currently face competition from a range of companies and providers for market share and for quality providers and personnel, includin • traditional healthcare providers and medical practices nationally, regionally and locally, that offer similar services, often at lower prices, and that are continuing to develop additional products and becoming more sophisticated and effective; • health networks, including our health network partners, who employ or affiliate with primary care providers, unaffiliated freestanding outpatient centers and specialty hospitals (some of which are physician-owned); • episodic, consumer-driven point solutions such as telemedicine as well as urgent care providers, which may typically pay providers on a fee-for-service basis rather than the salary-based model we employ; • health care or expert medical service tools developed by well-financed health plans which may be provided to health plan customers at discounted prices; and • other companies providing healthcare-focused products and services, including companies offering specialized software and applications, technology platforms, care management and coordination, digital health, telehealth and telemedicine and health information exchange. Our competitive success and growth, which can be measured in part by retention of existing members and gaining of new members in both existing and target geographies, are contingent on our ability to simultaneously address the needs of key stakeholders efficiently while delivering superior outcomes at scale compared with competitors. Over the years, the number of freestanding specialty hospitals, surgery centers, emergency departments, urgent care centers and diagnostic imaging centers has increased significantly in the geographic areas in which we serve and may provide services similar to those we offer. Some of our existing and potential competitors may be larger, have greater name recognition, have longer operating histories, offer a broader array of services or a larger or more specialized medical staff, provide newer or more desirable facilities or have significantly greater resources than we do. Some of the clinics and medical offices that compete with us are also owned by government agencies or not-for-profit organizations that can finance capital expenditures and operations on a tax-exempt basis. In addition, our current or potential competitors may be acquired by third parties with greater available resources. As a result, 62 our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements and may have the ability to initiate or withstand substantial price competition. In light of the COVID-19 pandemic, existing or new competitors have developed or further invested in telemedicine and remote medicine programs and ventures, which would compete with our virtual care offerings. Also, current and potential competitors have established, and may in the future establish, cooperative relationships with vendors of complementary technologies or services to increase the availability of their solutions in the marketplace. Accordingly, new competitors or alliances may emerge that have greater market share, a larger member or patient base, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources and larger sales forces than we have, which could put us at a competitive disadvantage. Our competitors could also be better positioned to serve certain segments of the healthcare market, which would limit our member and patient growth. In light of these factors, even if our solution is more effective than those of our competitors, current or potential members, health network partners and enterprise clients may accept competitive solutions in lieu of purchasing our solution. Our enterprise clients or health network partners may also elect to terminate their arrangements with us and enter into arrangements with our competitors, particularly in primary care, to the extent they are more favorable from a fee or price perspective or provide greater exposure to, or volume of, patients. In addition, in any geographic area, we may enter into an exclusive contractual arrangement with a single health network partner, which could allow competitors to contract with other health network partners in the same area and gain market share for potential patients. Competitors may also be better positioned to contract with leading health network partners in our target geographies, including existing geographies, after our current contracts expire. If our competitors are better able to attract patients, contract with health network partners, recruit providers, expand services or obtain favorable managed care contracts at their facilities than we are, we may experience an overall decline in member volumes and net revenue. Competition from specialized providers, health plans, medical practices, digital health companies and other parties will result in continued member acquisition and patient visit and utilization volume pressure, which could negatively impact our revenue and market share. Competition in our industry also involves consumer perceptions of quality and pricing, rapidly changing technologies, evolving regulatory requirements and industry expectations, frequent new product and service introductions and changes in customer requirements. As access to hospital performance data on quality measures, patient satisfaction surveys, and standard charges for services increases, healthcare consumers also have more tools to compare competing providers. If any of our affiliated professional entities achieve poor results (or results that are lower than our competitors’) on quality measures or patient satisfaction surveys, or if our standard charges are or are perceived to be higher than our competitors, we may attract fewer members. Moreover, if we are unable to keep pace with the evolving needs of our clients, members and partners and continue to develop, enhance and market new applications and services in a timely and efficient manner, demand for our solutions and services may be reduced and our business and results of operations would be harmed. We cannot guarantee that we will possess the resources, either financial or personnel, for the research, design and development of new applications or services, or that we will be able to utilize these resources successfully and avoid technological or market obsolescence. Further, we cannot assure you that technological advances by one or more of our competitors or future competitors will not result in our present or future applications and services becoming uncompetitive or obsolete. If we are unable to successfully compete in the healthcare market, our business would be harmed. We may not grow at the rates we historically have achieved or at all, even if our key metrics may imply future growth, which could have a negative impact on our business, financial condition and results of operations. We have experienced significant growth in our recent history. Future revenue may not grow at these same rates or may decline. Our future growth will depend, in part, on our ability to grow members in existing geographies, expand into new geographies, expand our service offerings and grow our health network partnerships while maintaining high quality and efficient services. We are continually executing a number of growth initiatives, strategies and operating plans designed to enhance our business. For example, we are expanding our strategic relationships with health network partners to build integrated delivery networks for broad access to their networks of specialists and hospitals. The anticipated benefits from these efforts are based on several assumptions that may prove to be inaccurate. We may not be able to successfully complete these growth initiatives, strategies and operating plans and realize all of the benefits, including growth targets and cost savings, that we expect to achieve, or it may be more costly to do so than we anticipate. We can provide no assurances that even if our key metrics indicate future growth, we will continue to grow our revenue or to generate net income. Moreover, our continued implementation of these programs may disrupt our operations and performance. If, for any reason, the benefits we realize are less than our estimates or the implementation of these growth initiatives, strategies and operating plans negatively impact our operations or cost more or take longer to effectuate than we expect, or if our assumptions prove inaccurate, our business, financial condition and results of operations may be harmed. We also have limited experience operating our business at current scale under economic conditions characterized by high inflation or in economic recessions. We are currently operating in a more volatile inflationary environment due to macroeconomic conditions. Any future economic recessions may introduce new challenges to our business, which we may not be able to adequately anticipate and plan given our limited experience operating 63 our business at its current scale. Certain of our longer-term strategic initiatives may also be obstructed or have unintended effects in the event of an economic recession, which we may not be able to predict. If we fail to manage our growth effectively, our expenses could increase more than expected, our revenue may not increase proportionally or at all, and we may be unable to implement our business strategy. We have experienced significant growth in recent periods, which puts strain on our business, operations and employees. For example, we grew from 1,340 employees as of December 31, 2018 to 3,090 employees as of December 31, 2021 (including 791 employees from our acquisition of Iora). We have also increased our customer and membership bases significantly over the past two years. We anticipate that our operations will continue to rapidly expand. To manage our current and anticipated future growth effectively, we must continue to maintain and enhance our IT infrastructure, financial and accounting systems and controls. In particular, in order for our providers to provide quality healthcare services and longitudinal care to patients and avoid burn-out, we need to provide them with adequate IT and technology support, which requires sufficient staffing for these areas. In addition, as we expand in existing geographies and move into new geographies, we will need to attract and retain an increasing number of quality healthcare professionals and providers. Failure to retain a sufficient number of providers may result in overworking of existing personnel leading to burn-out or poor quality of healthcare services. In addition, our strategy is to provide longitudinal care to members and patients, which requires substantial time and attention from our providers. We must also attract, train and retain a significant number of qualified sales and marketing personnel, customer support personnel, professional services personnel, software engineers, technical personnel and management personnel, and the availability of such personnel, in particular software engineers, may be constrained. A key aspect to managing our growth is our ability to scale our capabilities to implement our solutions and services satisfactorily with respect to both large and demanding enterprise clients and health network partners as well as individual consumers. Large clients and partners often require specific features or functions unique to their membership base, which, at a time of significant growth or during periods of high demand, may strain our implementation capacity and hinder our ability to successfully provide our services to our clients and partners in a timely manner. We may also need to make further investments in our technology to decrease our costs. If we are unable to address the needs of our clients, partners or members, or our clients, partners or members are unsatisfied with the quality of our solutions or services, they may not renew their contracts or memberships, seek to cancel or terminate their relationship with us or may renew on less favorable terms, any of which could harm our business and results of operations. Failure to effectively manage our growth could also lead us to over-invest or under-invest in development and operations, result in weaknesses in our infrastructure, internal systems, processes or controls, give rise to operational mistakes, financial losses, loss of productivity or business opportunities and result in loss of employees and reduced productivity of remaining employees. In order to manage the increasing complexities of our business, we will need to continue to scale and adapt our operational, financial and management controls, as well as our reporting systems and procedures. We may not be able to successfully implement and scale improvements to our systems, processes and controls or in connection with third party software in a timely or efficient manner or in a manner that does not negatively affect our operating results. For example, we may not be able to effectively monitor certain extraordinary contract requirements or provisions that are individually negotiated as the number of transactions continues to grow. In addition, our systems and processes may not prevent or detect all errors, omissions, or fraud, including any fraudulent activities conducted or facilitated by our employees or the providers or staff at our affiliated professional entities. Any of these events could result in our expenses increasing more than expected, lack of growth or slower than expected growth in our revenue, and inability to implement our business strategies. The quality of our services may also suffer, which could negatively affect our reputation and harm our ability to attract and retain members, clients and partners. Investment of significant capital expenditures to support our growth may also divert financial resources from other projects such as the development of new applications and services. In particular, as we enter new geographies or seek to expand our presence in existing geographies, we will need to make upfront capital expenditures, including to lease and furnish medical office space, acquire medical equipment, staff providers at such medical offices and incur related expenses. As we do not recognize patient revenue until those offices open and begin receiving patients, our margins may be reduced during the periods in which such capital expenditures were incurred. Expansion in new or existing geographies can be lengthy and cost-intensive, and we may encounter difficulties or unanticipated issues during the process of opening such new medical offices. We cannot assure you that we will be able to open our planned new medical offices, in existing or new geographies, within our operating budgets and planned timelines, or at all. Cost overruns in the process of opening new offices can result in higher than expected cost of care, exclusive of depreciation and amortization, and operating expenses as compared to revenue in the applicable quarter. In addition, we cannot assure you that new medical offices will operate efficiently or be strategically placed to attract the optimal number of patients. If an office is underperforming for any reason, we could incur additional costs to relocate or shut down that office. 64 It is essential to our ongoing business that our affiliated professional entities attract and retain an appropriate number of quality primary care providers to support our services and that we maintain good relations with those providers. The success of our business depends in significant part on the number, availability and quality of licensed primary care providers employed or contracted by our affiliated professional entities. Providers employed or contracted with our affiliated professional entities are free to terminate their association at any time. In addition, although providers who own interests in affiliated professional entities are generally subject to agreements restricting them from owning an interest in competitive facilities or transferring their ownership interests in the affiliated professional entity without our consent, we may not learn of, or may be unsuccessful in preventing, our provider partners from acquiring interests in competitive facilities or making transfers without our consent. Moreover, in certain states in which we operate, such as California, non-competition and other restrictive covenants may be limited in their enforceability, particularly against physicians and providers. If we are unable to recruit and retain providers and other healthcare professionals, our business and results of operations could be harmed and our ability to grow could be impaired. In any particular geographical location, providers could demand higher payments or take other actions that could result in higher medical costs, less attractive service for our members or difficulty meeting regulatory or accreditation requirements. Our ability to develop and maintain satisfactory relationships with providers also may be negatively impacted by other factors not associated with us, such as changes in Medicare reimbursement levels and other pressures on healthcare providers and consolidation activity among hospitals, provider groups and healthcare providers. We may also experience attrition in our primary care providers due to our proposed Amazon Merger. We expect to encounter increased competition from health insurers and private equity companies seeking to acquire providers in the geographies where we operate practices and, where permitted by law, employ providers. In some geographies, provider recruitment and retention are affected by a shortage of providers and the difficulties that providers can experience in obtaining affordable malpractice insurance or finding insurers willing to provide such insurance. Providers may also leave our affiliated professional entities or perceive them as providing a poor quality of life if our affiliated professional entities do not adequately manage causes of provider burnout and workload, some of which we have little to no control over under the administrative services agreements, or ASAs. Our business is dependent on providing longitudinal and long-term care for members and requires providers to consistently follow members over time, track overall long-term health and, in certain geographies, be available 24/7 for virtual care questions and services. If we are unable to efficiently manage provider workload and capacity to provide longitudinal and long-term care, our providers may depart and our patients may experience lower quality of care, which would harm our business. Furthermore, our ability to recruit and employ providers is closely regulated. For example, the types, amount and duration of compensation and assistance we can provide to recruited providers are limited by the Stark law, the Anti-kickback Statute, state anti-kickback statutes and related regulations. If we are unable to attract and retain sufficient numbers of quality providers by providing adequate support personnel, technologically advanced equipment and facilities that meet the needs of those providers and their patients, memberships and patient visits may decrease, our enterprise clients may alter or terminate their membership contracts with us and our operating performance may decline. We incur significant upfront costs in our enterprise client and health network partner relationships, and if we are unable to maintain and grow these relationships over time, we are likely to fail to recover these costs, which could have a negative impact on our business, financial condition and results of operations. Our business model and growth depend heavily on achieving economies of scale because our initial upfront investment for any enterprise client or certain health network partners is costly and the associated revenue is recognized on a ratable basis. We devote significant resources to establishing relationships with our clients and partners and implementing our solutions and services. This is particularly so in the case of large enterprises that, to date, have contributed a large portion of our membership base and revenue as well as health network partners, who may require specific features or functions unique to their particular processes or under the terms of their contracts with us, including significant systems integration and interoperability undertakings. Accordingly, our results of operations will depend in substantial part on our ability to deliver a successful experience for these clients and related members and partners to persuade our clients and partners to maintain and grow their relationship with us over time. Additionally, as our business is growing significantly, our new customer and partner acquisition costs could outpace our revenue growth and we may be unable to reduce our total operating costs through economies of scale such that we are unable to achieve profitability. Our costs of doing business could also increase significantly due to labor shortages and inflationary pressures, which could increase the cost of labor, healthcare services and supplies and rental payments for our office locations. If we fail to achieve appropriate economies of scale or if we fail to manage or anticipate the evolution and in future periods, demand of our clients and partners, our business may be harmed. 65 Our marketing cycle can be long and unpredictable and requires considerable time and expense, which may cause our results of operations to fluctuate. The marketing cycle for our solutions and services from initial contact with a potential enterprise client or health network partner to contract execution and implementation varies widely by enterprise client or partner. Some of our partners undertake a significant and prolonged evaluation process, including to determine whether our solutions and services meet their unique healthcare needs, which evaluation can be complex given the size and scale of our clients and partners. Our contractual arrangements with our health network partners are often highly specific to each partner depending on their needs, the characteristics and patient demographics of the geographical region they serve, their growth plans and their operations, among other things. As a result, our marketing efforts to any new health network partner must be tailored to meet its specific strategic demands, which can be time consuming and require significant upfront cost. These efforts also must address interoperability between our IT infrastructure and systems and such partner’s systems, which can result in substantial cost without any assurance that we will ultimately enter into a contractual arrangement with any such partner. Our large enterprise clients often initially restrict direct access by us to their employees to curb information overflow. As a result, we may not be able to directly market our solutions and services to, and educate, employees at our enterprise clients until much later after execution of an agreement with such clients. This can result in limited membership acquisition at any such enterprise client for a significant period of time following contract execution, and we cannot assure you that we will be able to gain sufficient membership acquisition to justify our upfront investments. Further, even after contract execution with a particular enterprise client, we generally compete with other health service providers who market to the same employees at such enterprise client, and our marketing and employee education efforts may not be successful in winning members from other competing services, many of which are traditional healthcare models that employees are more familiar with. We also incur significant marketing costs to grow awareness of our solution and services in both existing and new geographical locations for potential new members. Our marketing efforts for member acquisition are dependent in part on word of mouth, which may take substantial time to spread. In addition, for both new and existing geographic locations, we will need to continuously open medical offices in targeted locations to build awareness, which is both time-intensive and requires substantial upfront fixed costs. If our substantial upfront marketing and implementation investments do not result in sufficient sales to justify our investments, it could harm our business and results of operations. We could experience losses or liability, including medical liability claims, causing us to incur significant expenses and requiring us to pay significant damages if not covered by insurance. Our business entails the risk of medical liability claims against our affiliated professional entities, their providers, and 1Life and its subsidiaries and we have in the past been subject to such claims in the ordinary course of business. Although 1Life, its subsidiaries, our affiliated professional entities and individual providers may carry insurance at the entity level and at the provider level covering medical malpractice claims in amounts that we believe are appropriate in light of the risks attendant to our business, successful medical liability claims could result in substantial damage awards that exceed the limits of our affiliated professional entities' insurance coverage. Professional liability insurance is expensive and insurance premiums may increase significantly in the future, particularly as we expand our services and as the professional liability insurance market becomes more challenging due to COVID-19. As a result, adequate professional liability insurance may not be available to our providers or to us in the future at acceptable costs or at all. Any claims made against us that are not fully covered by insurance could be costly to defend against, result in substantial damage awards against us and divert the attention of our management and our providers from our operations, which could harm our business. In addition, any claims may significantly harm our business or reputation. Moreover, we do not control the providers and other healthcare professionals at our affiliated professional entities with respect to the practice of medicine and the provision of healthcare services. While we seek to attract high quality professionals, the risk of liability, including through unexpected medical outcomes, is inherent in the healthcare industry, and negative outcomes may result for any of our members. We attempt to limit our liability to members, clients and partners by contract; however, the limitations of liability set forth in the contracts may not be enforceable or may not otherwise protect us from liability for damages. Additionally, we may be subject to claims that are not explicitly covered by such contractual limits. We also maintain general liability coverage for certain risks, claims and litigation proceedings. However, this coverage may not continue to be available on acceptable terms or in sufficient amounts to cover one or more large claims against us, and may include larger self-insured retentions or exclusions. In addition, the insurer might deny coverage for the claims we submit or disclaim coverage as to any future claim. Any liability claim brought against us, or any ensuing litigation, regardless of merit, could result in a substantial cost to us, divert management’s attention from operations and could also result in an increase of our insurance premiums and damage to our reputation. A successful claim not fully covered by our insurance could have a negative impact on our liquidity, financial condition, and results of operations. 66 Current or future litigation against us could be costly and time-consuming to defend. We are subject, and in the future may become subject from time to time, to legal proceedings and claims that arise in the ordinary course of business such as claims brought by our members, clients or partners in connection with commercial disputes, consumer class action claims, employment claims made by our current or former employees, technology errors or omissions, medical malpractice, professional negligence or other related actions or claims inherent in the provision of healthcare services as well as other litigation matters. In particular, as we grow our base of consumer members, we may be subject to an increasing number of consumer claims, disputes and class action complaints, including ongoing claims alleging misrepresentations with respect to our membership fees. While our membership terms generally require individual arbitration, we cannot assure you that such terms will be enforced, which may result, and has resulted in the past, in costly class action litigation. Litigation may result in substantial costs, settlement and judgments and may divert management’s attention and resources, which may substantially harm our business, financial condition and results of operations. Insurance may not cover such claims, may not provide sufficient payments to cover all of the costs to resolve one or more such claims and may not continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, thereby leading analysts or potential investors to reduce their expectations of our performance, which could reduce the market price of our common stock. Our labor costs could be negatively impacted by competition for staffing, the shortage of experienced nurses and providers and labor union activity. The operations of our affiliated professional entities are dependent on the efforts, abilities and experience of our management and medical support personnel, including nurses, therapists and lab technicians, as well as our providers. We compete with other healthcare providers in recruiting and retaining employees, and, like others in the healthcare industry, we continue to experience a shortage of nurses and providers in certain disciplines and geographic areas. As a result, from time to time, we may be required to enhance wages and benefits to recruit and retain experienced employees, make greater investments in education and training for newly licensed medical support personnel, or hire more expensive temporary or contract employees. Furthermore, state-mandated nurse-staffing ratios in California affect not only our labor costs, but, if we are unable to hire the necessary number of experienced nurses to meet the required ratios, they may also cause us to limit patient volumes, which would have a corresponding negative impact on our net revenue. In addition, while none of our employees are represented by a labor union as of June 30, 2022, our employees may seek to be represented by one or more labor unions in the future. If some or all of our employees were to become unionized, it could increase labor costs, among other expenses, and may require us to adjust our employee policies and protocols. Further, labor is subject to external factors that are beyond our control, including the competitive market for skilled workers and leaders in the healthcare industry, cost inflation, the COVID-19 pandemic and workforce participation rates. In general, our failure to recruit and retain qualified management, experienced nurses and other medical support personnel, or to control labor costs, could harm our business. In order to support the growth of our business, we may need to incur additional indebtedness or seek capital through new equity or debt financings, which sources of additional capital may not be available to us on acceptable terms or at all. Our operations have consumed substantial amounts of cash since inception and we intend to continue to make significant investments to support our business growth, respond to business challenges or opportunities, expand our services in new geographic locations, enhance our operating infrastructure and existing solutions and services and potentially acquire complementary businesses and technologies. For the six months ended June 30, 2022 and the years ended December 31, 2020 and 2021, our net cash used in operating activities was $114.9 million, $4.4 million and $88.6 million, respectively. As of June 30, 2022, we had $184.7 million of cash and cash equivalents and $162.9 million of marketable securities, which are held for working capital purposes. As of June 30, 2022, we had $316.3 million aggregate principal amount of debt outstanding under our convertible senior notes issued in May 2020, or the 2025 Notes. As of June 30, 2022, we have also deferred payroll taxes in the amount of $5.0 million and received $4.3 million in grants as part of the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, through the Provider Relief Fund, or PRF, of the U.S. Department of Health and Human Services, or HHS, to help offset the impact of increased healthcare related expenses and lost revenues attributable to the COVID-19 pandemic. We are not required to repay this grant, provided we attest to and comply with certain terms and conditions, including the use of PRF funds for only permitted purposes and only after funds from other sources obligated to reimburse recipients have been applied. If we are unable to attest to or comply with current or future terms and conditions, our ability to retain some or all of the PRF funds received may be impacted. Our future capital requirements may be significantly different from our current estimates and will depend on many factors, including our growth rate, membership renewal activity and growth, the timing and extent of spending to support 67 development efforts, the expansion of sales and marketing activities, the introduction of new or enhanced services, expansion of services to new geographic locations, addition of new health network partners and the continuing market acceptance of our healthcare services. Accordingly, we may need to engage in equity or debt financings or collaborative arrangements to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Moreover, while we are not restricted from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions under the terms of the indenture governing the 2025 Notes, such actions could have the effect of diminishing our ability to make payments on the notes when due. Any debt financing secured by us in the future could involve additional restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, during times of economic instability, including the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic, it has been difficult for many companies to obtain financing in the public markets or to obtain debt financing, and we may not be able to obtain additional financing on commercially reasonable terms, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, it could harm our business and growth prospects. Our revenues have historically been concentrated among our top customers, and the loss of any of these customers could reduce our revenues and adversely impact our operating results. Historically, our revenue has been concentrated among a small number of customers. In 2020 and 2021, our top three customers accounted for 35% and 32% of our net revenue, respectively. These customers included commercial payers and a health network partner. This customer mix may also shift in the near and medium term as a result of our recent acquisition of Iora. The loss of one or more of these customers could reduce our revenue, harm our results of operations and limit our growth. Our quarterly results may fluctuate significantly, which could adversely impact the value of our common stock. Our quarterly results of operations, including our net revenue, loss from operations, net loss and cash flows, have varied and may vary significantly in the future, and period-to-period comparisons of our results of operations may not be meaningful. Accordingly, our quarterly results should not be relied upon as an indication of future performance. Our quarterly financial results have fluctuated, and may fluctuate in the future, as a result of a variety of factors, many of which are outside of our control, including, without limitation, the followin • the addition or loss of health network partners or enterprise clients, including through acquisitions or consolidations of such entities; • the addition or loss of contracts with, or modification of contract terms with, payers, including the reduction of reimbursements for our services or the termination of our network contracts with payers; • seasonal and other variations in the timing and volume of patient visits, such as the historically higher volume of use of our service during peak cold and flu season months or due to COVID-19 outbreaks or variants; • fluctuations in unemployment rates resulting in reductions in total members; • slowdown in the overall economy resulting in losses of enterprise clients as they scale back on expenses; • new enterprise sponsorships and renewal of existing enterprise sponsorships and the timing thereof as well as enterprise and consumer member activation and renewal and timing thereof; • the timing of recognition of revenue; • the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure, including upfront capital expenditures and other costs related to expanding in existing or entering new geographical locations, as well as providing administrative and operational services to our affiliated professional entities under the ASAs; 68 • our ability to effectively estimate the potential costs of medical services incurred, including under our at-risk arrangements, and the adequacy of our reserves for such incurred but not reported claims for medical services, in either case including due to increased visits and costs following a future COVID-19 outbreak or variant, which could result in fluctuations in our quarterly results and may not accurately reflect the underlying performance of our business within a given period; • our ability to effectively manage the size and composition of our proprietary network of healthcare professionals relative to the level of demand for services from our members; • the timing and success of introductions of new applications and services by us or our competitors, including well-known competitors with significant market clout and perceived ability to compete favorably due to access to resources and overall market reputation; • changes in the competitive dynamics of our industry, including consolidation among competitors, health network partners or enterprise clients; and • the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill from acquired companies. Most of our net revenue in any given quarter is derived from contracts entered into with our partners and clients during previous quarters as well as membership fees that are recognized ratably over the term of each membership. Consequently, a decline in new or renewed contracts or memberships in any one quarter may not be fully reflected in our net revenue for that quarter. Such declines, however, would negatively affect our net revenue in future periods and the effect of loss of members, and potential changes in our rate of renewals or renewal terms, may not be fully reflected in our results of operations until future periods. While we encourage enterprise clients to purchase memberships off of their periodic enrollment cycle, we cannot guarantee that they will do so. Accordingly, the effect of changes in the industry impacting our business or loss of members may not be reflected in our short-term results of operations. In addition, revenues associated with our At-Risk arrangements are subject to significant estimation risk related to reserves for incurred but not reported claims. If the actual claims expense differs significantly from the estimated liability due to differences in utilization of healthcare services, the amount of charges and other factors, it could negatively impact our revenue and have a material adverse impact on our business, results of operations, financial condition and cash flows. For example, future outbreaks or variants of COVID-19 may significantly increase actual claims which are difficult to forecast or predict, and as a result, may cause estimated liability to differ significantly. Any fluctuation in our quarterly results may not accurately reflect the underlying performance of our business and could cause a decline in the trading price of our common stock. If we lose key members of our senior management team or are unable to attract and retain executive officers and employees we need to support our operations and growth, our business and growth may be harmed. Our success depends largely upon the continued services of our key executive officers, particularly our Chair, Chief Executive Officer and President and 1Life's Chief Medical Officer. These executive officers are at-will employees and therefore they may terminate employment with us at any time with no advance notice. We also do not maintain any key person life insurance policies. Further, we rely on our leadership team in the areas of research and development, marketing, services and general and administrative functions. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. The replacement of one or more of our executive officers or other key employees would likely involve significant time and costs and may significantly delay or prevent the achievement of our business objectives. We are particularly dependent on 1Life's Chief Medical Officer, who is the sole director and officer of many of the affiliated professional entities and is responsible for overseeing the operation of several of such entities, among other roles. While we have succession plans in place and have employment or service arrangements with a limited number of key executives, these measures do not guarantee that the services of these or suitable successor executives will continue to be available to us. To continue to execute our growth strategy, we also must attract and retain highly skilled personnel. Competition is intense for qualified professionals and we may not be successful in continuing to attract and retain qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled personnel with appropriate qualifications. The pool of qualified personnel with experience working in the healthcare market is limited overall. In addition, many of the companies with which we compete for experienced personnel have greater resources than we have. Further, labor is subject to external factors that are beyond our control, including the competitive market for skilled workers and leaders in the healthcare industry, cost inflation, the COVID-19 pandemic and 69 workforce participation rates. As a result, our success is dependent on our ability to evolve our culture, align our talent with our business needs, engage our employees and inspire our employees to be open to change, to innovate and to maintain member- and customer-focus when delivering our services. In addition, job candidates often consider the value of the stock options or other equity-based awards they are to receive in connection with their employment. Volatility in the price of our stock may, therefore, negatively impact our ability to attract or retain highly skilled personnel. Further, the requirement to expense stock options and other equity-based compensation may discourage us from granting the size or type of stock option or equity awards that job candidates require to join our company. Inflationary pressures, or stress over economic, geopolitical, or pandemic-related events such as those the global market is currently experiencing, may also result in employee attrition. Our business would be harmed if we fail to adequately plan for succession of our executives and senior management; or if we fail to effectively recruit, integrate, retain and develop key talent and/or align our talent with our business needs and the current rapidly changing environment. We may acquire other companies or technologies, which could divert our management’s attention, result in dilution to our stockholders and otherwise disrupt our operations and we may have difficulty integrating any such acquisitions successfully or realizing the anticipated benefits therefrom, any of which could harm our business. The Merger Agreement with Amazon provides for certain restrictions on our activities until the Effective Time or until the Merger Agreement is terminated, including restrictions on our ability to acquire any business. We may seek to acquire or invest in businesses, applications and services or technologies that we believe could complement or expand our business, enhance our technical capabilities or otherwise offer growth opportunities. For example, we recently completed our acquisition of Iora in an all-stock transaction and our stockholders incurred substantial dilution. For additional risks related to the acquisition of Iora, please refer to "—Risks Related to the Acquisition of Iora." The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated. We do not have a history of acquiring or investing in businesses, applications and services or technologies and may not have the experience or capabilities to successfully execute such transactions or integrate them following consummation. In addition, if we acquire additional businesses, we may not be able to integrate the acquired personnel, operations and technologies successfully, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including, but not limited t • inability to integrate or benefit from acquired technologies or services in a profitable manner; • lack of experience in making acquisitions and integrating acquired businesses or assets; • unanticipated costs or liabilities associated with the acquisition; • difficulty integrating the accounting systems, operations and personnel of the acquired business; • difficulties and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business; • diversion of management’s attention from other business concerns; • negative impacts to our existing relationships with enterprise clients or health network partners as a result of the acquisition; • the potential loss of key employees; • use of resources that are needed in other parts of our business; • deficiencies associated with the assets or companies we acquire or ineffective or inadequate controls, procedures or policies at any acquired business that were not identified in advance and may result in significant unanticipated costs; and • use of substantial portions of our available cash to consummate the acquisition. The effectiveness of our due diligence review of potential acquisitions and assessments of potential benefits or synergies are dependent upon the accuracy and completeness of statements and disclosures made or actions taken by the companies we 70 acquire or their representatives. We may fail to accurately forecast the financial impact of an acquisition transaction, including tax and accounting charges. In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our results of operations based on this impairment assessment process, which could harm our results of operations. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could harm our results of operations. In addition, if an acquired business fails to meet our expectations, our business may be harmed. The estimates of market opportunity and forecasts of market and revenue growth included in this Quarterly Report may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all. Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. In particular, the size and growth of the overall U.S. healthcare market is subject to significant variables, including a changing regulatory environment and population demographic, which can be difficult to measure, estimate or quantify. Our business depends on member acquisition and retention, which further drives revenue from our contracts with health network partners. Estimates and forecasts of these factors in any given market is difficult and affected by multiple variables such as population growth, concentration of enterprise clients and population density, among other things. Further, we cannot assure you that we will be able to sufficiently penetrate certain market segments included in our estimates and forecasts, including due to limited deployable capital, ineffective marketing efforts or the inability to develop sufficient presence in a given market to gain members or contract with employers and health network partners in that market. Once we acquire a consumer or enterprise member, apart from fixed annual membership fees and payments from health care partners, we primarily derive revenue from patient in-office visits, which may be difficult to forecast over time, particularly as our billable service mix continues to expand, including due to the COVID-19 pandemic. Finally, our contractual arrangements with health network partners typically have highly tailored capitation and other fee structures which vary across health network partners and are dependent on either the number of members that receive healthcare services in a health network partner’s network or the volume and expense of the care received by At-Risk members. As a result, we may not be able to accurately forecast revenue from our health network partners. For these reasons, the estimates and forecasts in this Quarterly Report relating to the size and expected growth of our target markets may prove to be inaccurate. Even if the markets in which we compete meet our size estimates and forecasted growth, our business could fail to grow at similar rates, if at all. Natural or man-made disasters and other similar events may significantly disrupt our business and negatively impact our business, financial condition and results of operations. Our offices and facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, extreme weather conditions (including adverse weather conditions caused by global climate change or otherwise), power outages, fires, floods, protests and civil unrest, nuclear disasters and acts of terrorism or other criminal activities, which may result in physical damage to our offices, temporary office closures and could render it difficult or impossible for us to operate our business for some period of time. In particular, certain of the facilities we lease to house our computer and telecommunications equipment are located in the San Francisco Bay Area, a region known for seismic activity, and our insurance coverage may not compensate us for losses that may occur in the event of an earthquake or other significant natural disaster. Any disruptions in our operations related to the repair or replacement of our offices, could negatively impact our business and results of operations and harm our reputation. Although we maintain an insurance policy covering damages to our property and, in certain situations, interruptions to our business, such insurance may not be available or sufficient to compensate for the different types of associated losses that may occur, including business interruption losses. Any such losses or damages could harm our business, financial condition and results of operations. In addition, our health network partners’ facilities may be harmed or rendered inoperable by such natural or man-made disasters, which may cause disruptions, difficulties or other negative effects on our business and operations. Risks Related to Government Regulation The impact of healthcare reform legislation and other changes in the healthcare industry and in healthcare spending is currently unknown, but may harm our business. Our revenue is dependent on the healthcare industry and could be affected by changes in healthcare spending and policy. The healthcare industry is subject to changing political, regulatory and other influences. The Patient Protection and Affordable Care Act, or ACA, made major changes in how health care is delivered and reimbursed, and increased access to health 71 insurance benefits to the uninsured and underinsured populations in the United States. ACA, among other things, increased the number of individuals with Medicaid and private insurance coverage. ACA has been subject to legislative and regulatory changes and court challenges and there is uncertainty regarding whether, when, and how ACA may be changed, the ultimate outcome of court challenges and how the law will be interpreted and implemented. Changes by Congress or government agencies could eliminate or alter provisions beneficial to us, while leaving in place provisions reducing our reimbursement or otherwise negatively impacting our business. In addition, current and prior healthcare reform proposals have included the concept of creating a single payer such as “Medicare for All” or a public option for health insurance. If enacted, these proposals could have an extensive impact on the healthcare industry, including us and may impact our business, financial condition, results of operations, cash flows and the trading price of our security. We are unable to predict whether such reforms may be enacted or their impact on our operations. We are also impacted by the Medicare Access and CHIP Reauthorization Act, under which physicians must choose to participate in one of two payment formulas, Merit-Based Incentive Payment System, or MIPS, or Alternative Payment Models, or APMs. Beginning in 2019, MIPS allows eligible physicians to receive upward or downward adjustments to their Medicare Part B payments based on certain quality and cost metrics, among other measures. As an alternative, physicians can choose to participate in an Advanced APM. Advanced APMs are exempt from the MIPS requirements, and physicians who are meaningful participants in APMs will receive bonus payments from Medicare pursuant to the law. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the number of individuals who qualify for health care coverage and amounts that federal and state governments and other third-party payers will pay for healthcare services, which could harm our business, financial condition and results of operations. Our arrangements with health networks may be subject to governmental or regulatory scrutiny or challenge. Some of our relationships with health networks involve risk arrangements, such as capitated payments designed to achieve alignment of financial incentives and to encourage close collaboration on clinical care for patients. Although we believe that our health network contracts involving capitated payments comply with the federal Anti-Kickback Statute and the Stark Law, we cannot assure you that regulators or other governmental entities will agree with our interpretation of these arrangements under applicable law. Our health network partnerships may be subject to scrutiny or investigation from time to time by regulators or other governmental entities, which may be lengthy, costly, and divert resources and our management’s attention from managing our business and growth. If our health network partnerships are challenged and found to violate the Anti-Kickback Statute or the Stark Law, we could incur substantial financial penalties, reimbursement denials, repayments or recoupments, or exclusion from participation in government healthcare programs, any of which could harm our business. Evolving government regulations may increase costs or negatively impact our results of operations. Our operations may be subject to direct and indirect adoption, expansion, revision or reinterpretation of various laws and regulations. In the event any such changes in law or interpretation impacts our services or contractual arrangements, we may be required to modify such services, or revise our arrangements, in a manner that undermines the attractiveness of services or may not preserve the same economics, or may be required to discontinue such arrangements. In each case, our revenue may decline and our business may be harmed. Compliance with changes in interpretation of laws and regulations may require us to change our practices at an undeterminable and possibly significant initial and recurring monetary expense. These additional monetary expenditures may increase future overhead, which could harm our results of operations. We have identified what we believe are areas of government regulation that, if changed, could be costly to us. These inclu fraud, waste and abuse laws; rules governing the practice of medicine by providers; licensure standards for primary care providers and behavioral health professionals; laws limiting the corporate practice of medicine and professional fee splitting; laws, regulations, and other requirements applicable to the Medicare program (including any CMMI programs in which we may participate); tax laws and regulations applicable to our annual membership fees; cybersecurity and privacy laws; laws and rules relating to the distinction between independent contractors and employees (including recent developments in California that have expanded the scope of workers that are treated as employees instead of independent contractors); and tax and other laws encouraging employer-sponsored health insurance and group benefits. There could be laws and regulations applicable to our business that we have not identified or that, if changed, may be costly to us, and we cannot predict all the ways in which implementation of such laws and regulations may affect us. 72 We are dependent on our relationships with affiliated professional entities that we may not own to provide healthcare services and our business would be harmed if those relationships were disrupted or if our arrangements with these affiliated professional entities become subject to legal challenges. The corporate practice of medicine prohibition exists in some form, by statute, regulation, board of medicine or attorney general guidance, or case law, in certain of the states in which we operate. These laws generally prohibit the practice of medicine by lay persons or entities and are intended to prevent unlicensed persons or entities from interfering with or inappropriately influencing providers’ professional judgment. As a result, many of our affiliated professional entities that deliver healthcare services to our members are wholly owned by providers licensed in their respective states, including Andrew Diamond, M.D., Ph.D., 1Life's Chief Medical Officer who oversees the operation of several of the affiliated professional entities as the sole director and officer of many of the affiliated professional entities. Under the ASAs between 1Life and/or its subsidiaries with each affiliated professional entity, we provide various administrative and operations support services in exchange for scheduled fees at the fair market value of our services provided to each affiliated professional entity. As a result, our ability to receive cash fees from the affiliated professional entities is limited to the fair market value of the services provided under the ASAs. To the extent our ability to receive cash fees from the affiliated professional entities is limited, our ability to use that cash for growth, debt service or other uses at the affiliated professional entity may be impaired and, as a result, our results of operations and financial condition may be adversely affected. Our ability to perform medical and digital health services in a particular U.S. state is directly dependent upon the applicable laws governing the practice of medicine, healthcare delivery and fee splitting in such locations, which are subject to changing political, regulatory and other influences. The extent to which a U.S. state considers particular actions or contractual relationships to constitute the practice of medicine is subject to change and to evolving interpretations by medical boards and state attorneys general, among others, each of which has broad discretion. There is a risk that U.S. state authorities in some jurisdictions may find that our contractual relationships with the affiliated professional entities, which govern the provision of medical and digital health services and the payment of administrative and operations support fees, violate laws prohibiting the corporate practice of medicine and fee splitting. Accordingly, we must monitor our compliance with laws in every jurisdiction in which we operate on an ongoing basis, and we cannot provide assurance that our activities and arrangements, if challenged, will be found to be in compliance with the law. Additionally, it is possible that the laws and rules governing the practice of medicine, including the provision of digital health services, and fee splitting in one or more jurisdictions may change in a manner adverse to our business. While the ASAs prohibit us from controlling, influencing or otherwise interfering with the practice of medicine at each affiliated professional entity, and provide that physicians retain exclusive control and responsibility for all aspects of the practice of medicine and the delivery of medical services, we cannot assure you that our contractual arrangements and activities with the affiliated professional entities will be free from scrutiny from U.S. state authorities, and we cannot guarantee that subsequent interpretation of the corporate practice of medicine and fee splitting laws will not circumscribe our business operations. State corporate practice of medicine doctrines also often impose penalties on physicians themselves for aiding the corporate practice of medicine, which could discourage providers from participating in our network of physicians. If a successful legal challenge or an adverse change in relevant laws were to occur, and we were unable to adapt our business model accordingly, our operations in affected jurisdictions would be disrupted, which could harm our business. Any material changes in our relationship with or among the affiliated professional entities, whether resulting from a dispute among the entities, a challenge from a governmental regulator, a change in government regulation, or the loss of these relationships or contracts with the affiliated professional entities, could impair our ability to provide services to our members and could harm our business. For example, our arrangements in place to help ensure an orderly succession of the owner or owners of certain of the affiliated professional entities upon the occurrence of certain events may be challenged, which may impact our relationship with the affiliated professional entities and harm our business and results of operations. The ASAs and these succession arrangements could also subject us to additional scrutiny by federal and state regulatory bodies regarding federal and state fraud and abuse laws. Any scrutiny, investigation or litigation with regard to our arrangement with the affiliated professional entities, and any resulting penalties, including monetary fines and restrictions on or mandated changes to our current business and operating arrangements, could harm our business. Noncompliance with billing and documentation requirements could result in non-payment or subject us to audits, billing or other compliance investigations by government authorities, private payers or health network partners. Payers typically have differing and complex billing and documentation requirements. If we fail to comply with these payer-specific requirements, we may not be paid for our services or payment may be substantially delayed or reduced. Moreover, federal and state laws, rules and regulations impose substantial penalties, including criminal and civil fines, monetary penalties, exclusion from participation in government healthcare programs and imprisonment, on entities or individuals (including any individual corporate officers or physicians deemed responsible) that fraudulently or wrongfully bill government-funded programs or other third-party payers for healthcare services. Both federal and state government agencies 73 have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies, as well as their executives and managers, with enforcement actions covering a variety of topics, including referral and billing practices. Further, the federal False Claims Act and a growing number of state laws allow private parties to bring qui tam or “whistleblower” lawsuits against companies for false billing violations. Some of our activities could become the subject of governmental investigations or inquiries. From time to time in the ordinary course of business, governmental agencies and private payers also conduct audits of healthcare providers like us. For example, as a result of our participation in the Medicare program, including through CMS’ Direct Contracting Program, we are also subject to various governmental inspections, reviews, audits and investigations to verify our compliance with the Medicare program and applicable laws and regulations. We also periodically conduct internal audits and reviews of our regulatory compliance and our health network partners can also conduct audits under their agreements with us. Such audits could result in the incurrence of additional costs and diversion of management’s time and attention. In addition, such audits could trigger repayment demands based on findings that our services were not medically necessary, were billed at an improper level or otherwise violated applicable billing requirements or contractual terms. Our failure to comply with rules related to billing or adverse findings from such audits could result in, among other penalti • non-payment for services rendered or recoupments or refunds of amounts previously paid for such services by our health network partners; • refunding amounts we have been paid pursuant to the Medicare program or from payers; • state or federal agencies imposing fines, penalties and other sanctions on us; • temporary suspension of payment from payers for new patients to the facility or agency; • decertification or exclusion from participation in the Medicare program or one or more payer networks; • self-disclosure of violations to applicable regulatory authorities; • damage to our reputation; • the revocation of a facility’s or agency’s license; and • loss of certain rights under, or termination of, our contracts with and health network partners. We will likely be required in the future to refund amounts that have been paid and/or pay fines and penalties as a result of these inspections, reviews, audits and investigations. If adverse inspections, reviews, audits or investigations occur and any of the results noted above occur, it could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our securities. Furthermore, the legal, document production and other costs associated with complying with these inspections, reviews, audits or investigations could be significant. Our use and disclosure of personal information, including PHI, is subject to federal and state privacy and security regulations, and our failure to comply with those regulations or to adequately secure such information we hold could result in significant liability or reputational harm and, in turn, substantial harm to our health network partner and enterprise client base, membership base and revenue. In the ordinary course of our business, we and third parties upon whom we rely receive, collect, store, process and use personal information as part of our business. Numerous state and federal laws and regulations inside the United States govern the collection, dissemination, use, privacy, confidentiality, security, availability and integrity of personal information including PHI. These laws and regulations include HIPAA, as amended by the HITECH Act, and its implementing regulations, as well as state privacy and data protection laws. HIPAA establishes a set of baseline national privacy and security standards for the protection of PHI, by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, which includes our affiliated professional entities, and the business associates with whom such covered entities contract for services that involve the use or disclosure of PHI, which includes 1Life and our affiliated professional entities. States may enforce more stringent privacy and data protection laws exceeding the requirements of HIPAA. Compliance with privacy, data protection and information security laws and regulations in the United States could cause us to incur substantial costs or require us to change our business practices and compliance procedures in a manner adverse to our business. We strive to comply with applicable laws, regulations, policies and other legal obligations relating to privacy, data 74 protection and information security. However, as the various regulatory frameworks for privacy, data protection and information security continue to develop, uncertainties exist as to their application, and it is possible that these or other actual or alleged obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules and subject our business practices to uncertainty. Penalties for violations of these laws vary. For example, penalties for violations of HIPAA and its implementing regulations are assessed at varying rates per violation, subject to a statutory cap for violations of the same standard in a single calendar year. Such penalties may be subject to periodic adjustments. However, a single breach incident can result in violations of multiple standards, which could result in significant fines. HIPAA also authorizes state attorneys general to file suit on behalf of their residents. Courts may award damages, costs and attorneys’ fees related to violations of HIPAA in such cases, which may be significant. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI. Any such penalties or lawsuits could harm our business, financial condition, results of operations and prospects. In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA covered entities or business associates for compliance with the HIPAA Privacy and Security Standards and Breach Notification Rule. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the civil monetary penalty fine or settlement paid by the violator. HIPAA further requires that patients be notified of any unauthorized acquisition, access, use or disclosure of their unsecured PHI that compromises the privacy or security of such information, with certain exceptions related to unintentional or inadvertent use or disclosure by employees or authorized individuals or where there is a good faith belief that the person who received the impermissible disclosure would not have been able to retain the information. HIPAA specifies that such notifications must be made “without unreasonable delay and in no case later than 60 calendar days after discovery of the breach.” If a breach affects 500 patients or more, it must be reported to HHS without unreasonable delay, and HHS will post the name of the breaching entity on its public web site. Breaches affecting 500 patients or more in the same state or jurisdiction must also be reported to the local media. If a breach involves fewer than 500 people, the covered entity must record it in a log and notify HHS at least annually. Any such notifications, including notifications to the public, could harm our business, financial condition, results of operations and prospects. Numerous other federal and state laws protect the confidentiality, privacy, availability, integrity and security of personal information, including health information. For example, various states, such as California and Massachusetts, have implemented privacy laws and regulations that in many cases are more restrictive than, and may not be preempted by, the HIPAA rules and may be subject to varying interpretations by courts and government agencies, creating complex compliance issues for us and our health network partners and enterprise clients and potentially exposing us to additional expense, adverse publicity and liability. The cost of compliance could be significant and require investments to enhance our technology and security infrastructure. In addition, in certain situations, regulators, partners, clients and consumers may disagree with our analysis of, and response to, data-related incidents and our execution of obligations under the laws, which may cause disputes, liability and negative publicity and harm our business, operations and prospects. In particular, some laws, such as the California Consumer Privacy Act of 2018, or CCPA, allow for a private right of action and statutory damages, which may motivate plaintiffs’ attorneys to file class action claims, which can be resource-intensive and costly to defend. If our security measures, some of which are managed by third parties, are breached or fail, and unauthorized access to personal information or PHI occurs, our reputation could be severely damaged, harming member, client and partner confidence and may result in members curtailing their use of our services. In addition, we could face litigation, significant damages for contract breach, significant penalties and regulatory actions for violation of HIPAA and other applicable laws or regulations and significant costs for remediation, notification to individuals and the public and measures to prevent future occurrences. Any potential security breach could also result in increased costs associated with liability for stolen assets or information, inaccessibility of systems or information, repairing system damage that may have been caused by such breaches, remediation offered to employees, contractors, health network partners, enterprise clients or members in an effort to maintain our business relationships after a breach and implementing measures to prevent future occurrences, including organizational changes, deploying additional personnel and protection technologies, training employees and engaging third-party experts and consultants. We outsource important aspects of the storage and transmission of personal information and PHI, and thus rely on third parties to manage functions that have material cybersecurity risks. We require our vendors who handle personal information and PHI to contractually commit to safeguarding personal information and PHI such as by signing information protection addenda and/or business associate agreements, as applicable, to the same extent that applies to us and require such vendors to 75 undergo security examinations. In addition, we periodically hire third-party security experts to assess and test our security posture. However, we cannot assure that these contractual measures and other safeguards will adequately protect us from the risks associated with the storage and transmission of employees’, contractors’, patients’ and members’ personal information and PHI. Any violation of applicable laws, regulations or policies by these parties, including violations that cause us to incur significant liability and put sensitive data at risk, could in turn harm our business. We also publish statements to our members that describe how we handle and protect personal information and PHI. If federal or state regulatory authorities or private litigants consider any portion of these statements to be untrue, we may be subject to claims of misrepresentation and/or deceptive practices, which could lead to significant liabilities and consequences, including, without limitation, significant costs of responding to investigations, defending against litigation, settling claims and complying with regulatory or court orders. As public and regulatory focus on privacy issues continues to increase, we expect that there will continue to be new laws, regulations and industry standards concerning privacy, data protection and information security. For example, the CCPA imposes obligations on businesses to which it applies. These obligations include, without limitation, providing specific disclosures in privacy notices, affording California residents certain rights related to their personal information, and requiring businesses subject to the CCPA to implement certain measures to effectuate California residents' rights to their personal information. The CCPA allows for statutory fines for noncompliance. The California Privacy Rights Act, or the CPRA, approved by California voters in November 2020 and expected to go into effect on January 1, 2023, builds upon the CCPA and affords consumers expanded privacy rights and protections. Colorado and Virginia passed similar consumer privacy laws expected to go into effect in 2023. The potential effects of state privacy, data protection and information security laws are far-reaching and will require us to modify our data processing practices and policies and to incur substantial costs and expenses to comply. Further, obligations under new laws and regulations may not be clear, creating uncertainty and risk despite our efforts to comply. If we fail, or are perceived to have failed, to address or comply with our privacy, data protection and information security obligations, we could be subject to governmental enforcement actions such as investigations, fines, penalties, audits, or inspections, class action or other litigation, contract breach claims, additional reporting requirements and/or oversight, bans on processing personal information, orders to destroy or not use personal information, reputational harm and imprisonment of company officials. Any significant change to applicable privacy, data protection and information security laws, regulations or industry practices regarding the collection, use, retention, security or disclosure of our members’ personal information, or regarding the manner in which the express or implied consent for the collection, use, retention or disclosure of such personal information is obtained, could increase our costs to comply and require us to modify our services and features, possibly in a material manner, which we may be unable to complete and may limit our ability to store and process the personal information of our members, optimize our operations or develop new services and features. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. Individuals may claim our call and text messaging services are not compliant with applicable law, including the Telephone Consumer Protection Act. We call and send short message service, or SMS, text messages to members and potential members who are eligible to use our service. While we obtain consent from these individuals to call and send text messages, federal or state regulatory authorities or private litigants may claim that the notices and disclosures we provide, form of consents we obtain or our call and SMS texting practices are not adequate to comply with, or violate applicable law, including the Telephone Consumer Protection Act, or TCPA. The TCPA imposes specific requirements relating to the marketing to individuals leveraging technology such as telephones, mobile devices and texts. TCPA violations can result in significant financial penalties as businesses can incur civil forfeiture penalties or criminal fines imposed by the Federal Communications Commission or be fined for each violation through private litigation or state attorneys general or other state actor enforcement. Class action suits are the most common method for private enforcement. Our call and SMS texting campaigns are potential sources of risk for class action lawsuits and liability for our company. Numerous class-action suits under federal and state laws have been filed in recent years against companies who conduct call and SMS texting programs, with many resulting in multi-million-dollar settlements to the plaintiffs. While we strive to adhere to strict policies and procedures, the Federal Communications Commission, as the agency that implements and enforces the TCPA, may disagree with our interpretation of the TCPA and subject us to penalties and other consequences for noncompliance. Determination by a court or regulatory agency that our call or SMS text messaging violate the TCPA could subject us to civil penalties, could require us to change some portions of our business and could otherwise harm our business. Even an unsuccessful challenge by members, consumers or regulatory authorities of our activities could result in adverse publicity and could require a costly response from and defense by us. 76 Negative publicity regarding the managed healthcare industry generally could adversely affect our results of operations or business. Negative publicity regarding the managed healthcare industry generally, or the Medicare Advantage program in particular, may result in increased regulation and legislative review of industry practices that further increase the costs of doing business and adversely affect our results of operations or business • requiring us to change our products and services provided to patients; • increasing the regulatory burdens under which we operate, which may increase the costs of providing services; • adversely affecting our ability to market our products or services through the imposition of further regulatory restrictions regarding the manner in which plans and providers market to Medicare Advantage enrollees; or • adversely affecting our ability to attract and retain patients. Risks Related to Information Technology We rely on internet infrastructure, bandwidth providers, other third parties and our own systems to provide proprietary service platforms to our members and providers, and any failure or interruption in the services provided by these third parties or our own systems could expose us to liability and hurt our reputation and relationships with members and clients. Our ability to maintain our proprietary service platform, including our digital health services and our electronic health records systems, is dependent on the development and maintenance of the infrastructure of the internet and other telecommunications services by third parties, including bandwidth and telecommunications equipment providers. This includes maintenance of a reliable network connection with the necessary speed, data capacity and security for providing reliable internet access and services and reliable telephone and facsimile services. We exercise limited control over these third-party providers. Our platforms are designed to operate without perceptible interruption in accordance with our service level commitments. We have, however, experienced limited interruptions in these systems in the past, including server failures that temporarily slowed down or diminished the performance of our platforms, and we may experience similar or more significant interruptions in the future. We do not currently maintain redundant systems or facilities for some of these services. Interruptions to third party systems or services, whether due to system failures, cyber incidents (the risk of which has been higher due to the significant increase in remote work across the technology industry as a result of the COVID-19 pandemic), ransomware, physical or electronic break-ins, phishing campaigns or other events, could affect the security or availability of our platforms or services and prevent or inhibit the ability of our members or providers to access our platforms or services. In the event of a catastrophic event with respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which could result in liability, substantial costs to remedy those problems or harm our relationship with our members and our business. Additionally, any disruption in the network access, telecommunications or co-location services provided by third-party providers or any failure of or by third-party providers’ systems or our own systems to handle current or higher volumes of use could significantly harm our business. The reliability and performance of our third-party providers’ systems and services may be harmed by increased usage or by ransomware, denial-of-service attacks or related cyber incidents, which has increased due to more opportunities created by remote work necessitated by the COVID-19 pandemic. Any errors, failures, interruptions or delays experienced in connection with these third-party services or our own systems could hurt our ability to deliver our services platform and damage our relationships with health network partners, enterprise clients and members and expose us to third-party liabilities, which could in turn harm our competitive position, business, financial condition, results of operations and prospects. We rely on third-party vendors to host and maintain our technology platform. We rely on third-party vendors to host and maintain our technology platform. Our ability to operate our business is dependent on maintaining our relationships with third-party vendors and entering into new relationships to meet the changing needs of our business. Any deterioration in our relationships with such vendors or our failure to enter into agreements with vendors in the future could significantly disrupt our operations or hinder our ability to execute our growth strategies. Because we rely on certain vendors to store and process our data, it is possible that, despite precautions taken at our vendors’ facilities, 77 the occurrence of a natural disaster, cyber incident, decision to close the facilities without adequate notice or other unanticipated problems could result in our non-compliance with data protection laws and regulations, loss of proprietary information, personal information, and other confidential information, and disruption to our technology platform. These service interruptions could also cause our platform to be unavailable to our health network partners, enterprise clients and members, and impair our ability to deliver services and negatively impact our relationships with new and existing health network partners, enterprise clients and members. Some of our vendor agreements may be unilaterally terminated by the vendor for convenience, including with respect to Amazon Web Services, and if such agreements are terminated, we may not be able to enter into similar relationships in the future on reasonable terms or at all. We may also incur substantial costs, delays and disruptions to our business in transitioning such services to ourselves or other third-party vendors. In addition, third-party vendors may not be able to provide the services required in order to meet the changing needs of our business. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. Failure or breach of our or our vendors' security measures or inability to meet applicable privacy and security obligations, as well as any instances of unauthorized access to our employees’, contractors’, members’, clients’ or partners’ data may result in disruption to our business and operations, incurrence of significant liabilities, loss of members, clients and partners and damage to our reputation. Our services and operations involve the storage and transmission of personal information and other sensitive data, including proprietary and confidential business data, trade secrets and intellectual property and the personal information (including health information) of employees, contractors, clients, partners, members and others. Because of the sensitivity of the information we store and transmit, the security features of our and our third-party vendors’ computer, network, and communications systems infrastructure are critical to the success of our business. A breach or failure of our or our third-party vendors’ security measures could result from a variety of circumstances and events, including, but not limited to, social engineering attacks (including through phishing attacks), malicious code (such as viruses and worms), malware (including as a result of advanced persistent threat intrusions), denial-of-service attacks (such as credential stuffing), ransomware attacks, supply-chain attacks, employee negligence or human errors, software bugs, server malfunction, software or hardware failures, loss of data or other information technology assets, adware, telecommunications failures, earthquakes, fire, flood, and other similar threats. Ransomware attacks, including those perpetrated by organized criminal threat actors, nation-states, and nation-state supported actors, are becoming increasingly prevalent and severe and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, strategic security objectives or applicable laws or regulations prohibiting payments. Similarly, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our information technology systems (including our services) or the third-party information technology systems that support us and our services. The COVID-19 pandemic and our remote workforce pose increased risks to our information technology systems and data, as more of our employees work from home, utilizing network connections outside our premises. Any of the previously identified or similar threats could cause a security incident. If our or our third-party vendors experience a security incident, it could result in unauthorized, unlawful or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of or access to data. A security incident could disrupt our (and third parties upon whom we rely) ability to provide our services. We may expend significant resources or modify our business activities in an effort to protect against security incidents. While we have implemented security measures designed to protect against a security incident, there can be no assurance that these measures will always be effective. We have not always been able in the past and may be unable in the future to detect vulnerabilities in our information technology systems because such threats and techniques change frequently, are often sophisticated in nature, and may not be detected until after a security incident has occurred. Some security incidents may remain undetected for an extended period of time. Despite our efforts to identify and remediate vulnerabilities, if any, in our information technology systems (including our products), our efforts may not be successful. Further, as cyber threats continue to evolve, we may be required to expend additional resources to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities and we may experience delays in developing and deploying remedial measures designed to address any such identified vulnerabilities. Certain privacy, data protection and information security obligations, whether imposed by law or by clients, partners or vendors with whom we work, may require us to implement and maintain specific security and data privacy measures, industry-standard or reasonable security measures to protect our information technology systems and data, and to provide certain end-user rights in connection with their data. Our vendors, clients, partners and members may also demand that we adopt additional 78 security or data privacy measures or make further security or data privacy investments, which may be costly and time-consuming. Such failures or breaches of our or our third-party vendors', clients' and partners' security or data privacy measures, or our or our third-party vendors’, clients' and partners' inability to effectively resolve such failures or breaches in a timely manner, could disrupt the operation of our technology and business, adversely affect customer, partner, member or investor confidence in us, result in breach of contract claims, severely damage our reputation and reduce the demand for our services. Under certain circumstances, it could also impact the availability of our mobile app or related updates on various software platforms. Applicable privacy, data protection and security information obligations may require us to notify relevant stakeholders of privacy and security incidents. Such disclosures are costly, and the disclosures or the failure to comply with such requirements, could lead to adverse impacts. In addition, we could face litigation, significant damages for contract breach or other breaches of law, significant monetary penalties, or regulatory actions for violation of applicable laws or regulations, and incur significant costs for remedial or preventive measures. Although we maintain insurance covering certain security and privacy damages and claim expenses, we may not carry insurance or maintain coverage sufficient to compensate for all liability. Adequate insurance may not be available in the future at acceptable costs or at all and coverage disputes could also occur with our insurers. If security and privacy claims are not fully covered by insurance, they could result in substantial costs to us, which could harm our business. Insurance coverage would also not address the reputational damage that could result from a security incident. If an actual or perceived breach or inadequacy of our or our third-party vendors’ security occurs, or if we or our third-party vendors are unable to effectively resolve a breach in a timely manner, we could lose current and potential members, partners and clients, which could harm our business, results of operations, financial condition and prospects. Our proprietary technology platforms may not operate properly, which could damage our reputation, subject us to claims or require us to divert application of our resources from other purposes, any of which could harm our business and growth. Our proprietary technology platforms provide members with the ability to, among other things, register for our services, request a visit (either scheduled or on demand) and communicate and interact with providers, and allows our providers to, among other things, chart patient notes, maintain medical records, and conduct visits (via video, phone or the internet). Proprietary software development is time-consuming, expensive and complex, and may involve unforeseen difficulties. We may encounter technical obstacles, and it is possible that we may discover additional problems that prevent our proprietary software from operating properly. Due to the COVID-19 pandemic, use of virtual care, including remote visits, has increased, which places a heavier demand on our technology platform and may cause performance levels to deteriorate. When we launch new features and functions within our technology platform, we could inadvertently introduce bugs or errors, including latent ones, into our platforms which could impact usability as well as technology and clinical operations. We continue to implement software with respect to a number of new applications and services. The operation of our technology also depends in part on the performance of third-party service providers. If our technology platform does not function reliably or fails to achieve member, provider, partner or client expectations in terms of performance, we may be required to divert resources allocated for other business purposes to address these issues, may suffer reputational harm, lose or fail to grow member usage, fail to retain or grow provider talent, members, partners and clients, and may be subject to liability claims. The information that we provide to our health network partners, enterprise clients and members could be inaccurate or incomplete, which could harm our business, financial condition and results of operations. We provide healthcare-related information for use by our health network partners, enterprise clients and members. Because data in the healthcare industry is fragmented in origin, inconsistent in format and often incomplete, the overall quality of data in the healthcare industry is poor, and we frequently discover data issues and errors. If the data that we provide to our health network partners, enterprise clients and members is incorrect or incomplete or if we make mistakes in the capture or input of this data, our reputation may suffer and our ability to attract and retain health network partners, enterprise clients and members may be harmed. In addition, a court or government agency may take the position that our storage and display of health information exposes us to personal injury liability or other liability for wrongful delivery or handling of healthcare services or erroneous health information, which could harm our business, financial condition and results of operations. If we cannot implement or optimize our technology solutions for members, integrate our systems with health network partners or resolve technical issues in a timely manner, we may lose clients and partners and our reputation may be harmed. Our health network partners utilize a variety of data formats, applications, systems and infrastructure. Moreover, each health network partner may have a unique technology ecosystem and infrastructure or have specific technology or certification requirements. To maintain our relationships with such partners and to continue to grow our business and membership, we may be required to meet such requirements and, in certain circumstances, our services must be seamlessly integrated and interoperable with our partners’ complex systems, which may cause us to incur significant upfront and maintenance costs. Additionally, we do not control our partners’ integration schedules. As a result, if our partners do not allocate the internal resources necessary to meet their integration responsibilities, which resources can be significant as many of them are large 79 healthcare institutions with substantial operations to manage, or if we face unanticipated integration difficulties, the integration may be delayed. In addition, competitors with more efficient operating models with lower integration costs could jeopardize our partner relationships. If the integration process with our partners is not executed successfully or if execution is delayed, we could incur significant costs, partners could become dissatisfied and decide not to continue a strategic contractual relationship with us beyond an initial period during their term commitment or, in some cases, revenue recognition could be delayed, any of which could harm our business and results of operations. Our members depend on our digital health platform, including our mobile app, web portal, and support services to access on-demand digital health services or schedule in-office visits. We may be unable to quickly accommodate increases in member technology usage, particularly as we increase the size of our membership base, grow our services and as the COVID-19 pandemic drives more member demand for our digital health services and virtual care. We also may be unable to modify the format of our technology solutions and support services to compete with developments from our competitors. If we are unable to further develop and enhance our technology solutions or maintain effective technical support services to address members’ needs or preferences in a timely fashion, our members, clients and partners may become dissatisfied, which could damage our ability to maintain or expand our membership and business. While any refunds or credits we have issued historically have not had a significant impact on net revenue, we cannot assure you as to whether we may need to issue additional refunds or credits for membership fees in the future as a result of member or client dissatisfaction. For example, our members expect on-demand healthcare services through our mobile app and rapid in-office visit scheduling. Failure to maintain these standards or negative publicity related to our technology solutions, regardless of its accuracy, may reduce our overall NPS, harm our reputation and cause us to lose current or potential members, enterprise clients or partners. In addition, our enterprise clients expect our technology solutions to facilitate long-term cost of care reductions through high employee digital engagement, which we market as potential benefits for employers in providing employees with One Medical memberships. If employers do not perceive our solutions and services as providing such efficiencies and cost savings, they may terminate their contracts with us or elect not to renew. Any such outcomes could also negatively affect our ability to contract with new enterprise clients through damage to our reputation. If any of these were to occur, our revenue may decline and our business, results of operations, financial condition and prospects could be harmed. Risks Related to Taxation and Accounting Standards Certain U.S. state tax authorities may assert that we have a state nexus and seek to impose state and local income taxes which could harm our results of operations. As of June 30, 2022, we are qualified to operate in, and file income tax returns in, 24 states as well as Washington, D.C. There is a risk that certain state tax authorities where we do not currently file a state income tax return could assert that we are liable for state and local income taxes based upon income or gross receipts allocable to such states. States are becoming increasingly aggressive in asserting a nexus for state income tax purposes. We could be subject to state and local taxation, including penalties and interest attributable to prior periods, if a state tax authority successfully asserts that our activities give rise to a nexus. Such tax assessments, penalties and interest to the extent the Company has taxable income in prior periods may adversely impact our results of operations. Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations. In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. As of December 31, 2021, we have $894.3 million of federal net operating loss carryforwards and $598.5 million of state and local net operating loss carryforwards. The federal net operating loss carryforwards of $687.1 million arising after 2017 carry forward indefinitely, but the deduction for these carryforwards is limited to 80% of post-2020 current-year taxable income. The federal net operating loss carryforwards of $136.7 million from prior years will begin to expire in 2025. The state and local net operating loss carryforwards begin to expire in 2024. The Company has identified $25.2 million and $31.0 million of the above federal and state net operating losses, respectively, in certain affiliated professional entities that will expire unused due to prior ownership changes. In addition, future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code, further limiting our ability to utilize NOLs arising prior to such ownership change in the future. There is also a risk that due to statutory or regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. We have recorded a full valuation allowance against the deferred tax assets attributable to our NOLs. 80 Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use or similar taxes for our membership, enterprise and other service offerings, which could negatively impact our results of operations. We do not collect sales and use and similar taxes in any states for our membership, enterprise and other service offerings based on our belief that our services are not subject to such taxes in any state. Sales and use and similar tax laws and rates vary greatly from state to state. Certain states in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest with respect to past services, and we may be required to collect such taxes for services in the future. We have received, and may in the future receive additional proposed assessments or determinations that we owe back taxes, penalties and interest for sales and use and similar taxes. If we are not successful in disputing such proposed assessments, we may be required to make payments in tax assessments, penalties or interest, and may be required to collect sales and use taxes in the future. Such tax assessments, penalties and interest or future requirements may negatively impact our results of operations. Our financial results may be adversely impacted by changes in accounting principles applicable to us. Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC and other various bodies formed to promulgate and interpret appropriate accounting principles. For example, in May 2014, the FASB issued accounting standards update No. 2014-09 (Topic 606), Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under GAAP and specifies that an entity should recognize revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services; this new accounting standard also impacted the recognition of sales commissions. Changes in accounting standards and interpretations or in our accounting assumptions and judgments could significantly impact our consolidated financial statements and our reported financial position and financial results may be harmed if our estimates or judgments prove to be wrong, assumptions change, or actual circumstances differ from those in our assumptions. Any difficulties in implementing these pronouncements could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm our business. If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be harmed. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on February 23, 2022. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, liability for medical claims incurred in the period but not yet reported (“IBNR”), valuation and related impairment recognition of intangible assets and goodwill, and stock-based compensation. Our results of operations may be harmed if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock. There are significant risks associated with estimating revenue under our At-Risk arrangements with certain payers, and if our estimates of revenues are materially inaccurate, it could negatively impact the timing and the amount of our revenue recognition or have a material adverse effect on our business, results of operations, financial condition and cash flows. We recognize revenue net of risk shares and adjustments in the month in which eligible members are entitled to receive healthcare benefits during the contract term. Due to reporting lag times and other factors, significant judgment is required to estimate risk adjustments to PMPM fees received from payers for At-Risk members. The billing and collection process with payers is complex due to ongoing insurance coverage changes, geographic coverage differences, differing interpretations of contract coverage and other payer issues, such as ensuring appropriate documentation. Determining applicable primary and secondary coverage for our patients, together with the changes in patient coverage that occur each month, requires complex, resource-intensive processes. Errors in determining the correct coordination of benefits may result in refunds to payers. Revenues associated with Medicare programs are also subject to estimation risk related to the amounts not paid by the primary government payer that will ultimately be collectible from other government programs paying secondary coverage, the patient’s commercial health insurance plan secondary coverage or the patient. Collections, refunds and payer retractions typically 81 continue to occur for up to three years and longer after services are provided. Inaccurate estimates of revenues could negatively impact the timing and the amount of our revenue recognition and have a material adverse impact on our business, results of operations, financial condition and cash flows. If our goodwill, intangible assets or other long-lived assets become impaired, we may be required to record a significant charge to earnings. Consummation of the acquisition of Iora resulted in us recognizing additional goodwill, intangible assets and other long-lived assets such as leases and fixed assets on our consolidated balance sheet. Intangible assets with finite lives will be amortized using the method that best reflects how their economic benefits are utilized or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over their estimated useful lives. Goodwill will not be amortized, but instead tested for potential impairment at least annually. Goodwill, intangible assets and other long-lived assets will also be tested for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If our goodwill, intangible assets or other long-lived assets are determined to be impaired in the future, we may be required to record additional significant, non-cash charges to earnings during the period in which the impairment is determined to have occurred. Risks Related to Our Intellectual Property If we are unable to obtain, maintain and enforce intellectual property protection for our business assets or if the scope of our intellectual property protection is not sufficiently broad, others may be able to develop and commercialize technology and solutions substantially similar to ours, and our ability to conduct business may be compromised. Our business depends on proprietary technology and other business assets, including software, processes, databases, confidential information and know-how, the protection of which is crucial to the success of our business. We rely on a combination of trademark, trade-secret and copyright laws, confidentiality policies and procedures, cybersecurity practices and contractual provisions to protect our intellectual property. We do not currently own any issued patents. Third parties, including our competitors, may have or obtain patents relating to technologies that overlap or compete with our technology, which they may assert against us to seek licensing fees or preclude the use of our technology. We may, over time, increase our investment in protecting our intellectual property through additional trademark, patent, copyright and other intellectual property filings, which could be expensive and time-consuming. Our efforts to register certain intellectual property may be challenged by third parties or through office actions, and may not ultimately be successful or may be abandoned. While our operations are currently based in the United States, we may also be required to protect our intellectual property in foreign jurisdictions, a process that can be prolonged and costly, and one that we may choose not to pursue in every instance. We may not be able to obtain protection for our technology and even if we are successful, it is expensive to maintain intellectual property rights and the costs of defending our rights could be substantial. Moreover, these measures may not be sufficient to offer us meaningful protection or provide us with any competitive advantage. Furthermore, changes to U.S. intellectual property laws may jeopardize the enforceability and validity of our intellectual property portfolio and harm our ability to obtain patent protection of certain inventions. If we are unable to adequately protect our intellectual property and other proprietary rights, our competitive position and our business could be harmed, as competitors may be able to commercialize similar offerings without having incurred the development and licensing costs that we have incurred. Any of our filed, owned or licensed intellectual property rights could be challenged, invalidated, circumvented, infringed, misappropriated or violated, our trade secrets and other confidential information could be disclosed in an unauthorized manner to third parties, which could result in costly redesign efforts, business disruptions, discontinuance of some of our offerings or other competitive harm. We may become involved in lawsuits to protect or enforce or defend our intellectual property rights, which could be expensive, time consuming and unsuccessful. Third parties, including our competitors, could infringe, misappropriate or otherwise violate our intellectual property rights. Monitoring unauthorized use of our intellectual property is difficult and costly. From time to time, we seek to analyze our competitors’ solutions and services, and may in the future seek to enforce our rights against potential infringement, misappropriation or violation of our intellectual property. However, the steps we have taken to protect our proprietary rights may not be adequate to enforce our rights as against such infringement, misappropriation or violation of our intellectual property. We may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Any inability to meaningfully enforce our intellectual property rights could harm our ability to compete and reduce demand for our services. 82 In recent years, companies are increasingly bringing and becoming subject to lawsuits and proceedings alleging infringement, misappropriation or violation of intellectual property rights, particularly patent rights. Our competitors and other third parties may hold patents or other intellectual property rights, which could be related to our business. We expect that we may receive in the future notices that claim we or our partners, clients or members using our solutions and services have misappropriated or misused other parties’ intellectual property rights, particularly as the number of competitors in our market grows and the functionality of applications amongst competitors overlaps. If we are found to infringe, misappropriate or violate another party’s intellectual property rights, we could be prohibited, including by court order, from further use of the intellectual property asset or be required to obtain a license from such third party to continue commercializing or using such technologies, solutions or services, which may not be available on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors and other third parties access to the same technologies licensed to us, and it could require us to make substantial licensing and royalty payments. Accordingly, we may be forced to design around such violated intellectual property, which may be expensive, time-consuming or infeasible. In addition, we could be found liable for significant monetary damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a patent or other intellectual property right. Claims that we have misappropriated the confidential information or trade secrets of third parties could similarly harm our business. Any adverse outcome in such cases could affect our competitive position, business, financial condition, results of operations and prospects. Litigation or other legal proceedings relating to intellectual property claims, regardless of merits and even if resolved in our favor, can be expensive, time consuming, and resource intensive. In addition, there could be public announcements of the results of hearings, motions, or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing, or other business activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of intellectual property proceedings could harm our ability to compete in the marketplace. In addition, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. If we fail to comply with our license obligations, if our license rights are challenged, or if we cannot license rights to use technologies on reasonable terms, we may experience business disruption, increased costs, or inability to commercialize certain services. We license certain intellectual property, including content, technologies and software from third parties, that are important to our business. In the future we may need to enter into additional agreements that provide us with licenses and rights to valuable intellectual property or technology. If we fail to comply with any of the obligations under our license agreements, or if our use or license rights are challenged, we may be required to pay damages, the licensor may have the right to terminate the license and the owner of the intellectual property asset may assert claims against us. Termination by the licensor or dispute with an owner of an intellectual property asset would cause us to lose valuable rights, and could disrupt or prevent us from providing our services, or adversely impact our ability to commercialize future solutions and services. In addition, our rights to certain technologies are licensed to us on a non-exclusive basis. The owners of these non-exclusively licensed technologies are therefore free to license them to third parties, including our competitors, on terms that may be superior to those offered to us, which could place us at a competitive disadvantage. Our licensors may also own or control intellectual property that has not been licensed to us and, as a result, we may be subject to claims, regardless of their merit, that we are infringing or otherwise violating the licensor’s rights. In addition, the agreements under which we license intellectual property or technology from third parties are generally complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property or technology, or increase what we believe to be our financial or other obligations under the relevant agreement. Moreover, the licensing or acquisition of third-party intellectual property rights is a competitive area, and established companies may have a competitive advantage over us due to their size, capital resources and greater development or commercialization capabilities. Companies that perceive us to be a competitor may also be unwilling to license or grant rights to us. Even if such licenses are available, we may be required to pay the licensor substantial fees or royalties. Such fees or royalties will become a cost of our operations and may affect our margins. If we are unable to obtain licenses on acceptable terms or at all, if any licenses are subsequently terminated, if our licensors fail to abide by the terms of the licenses, if our 83 licensors fail to prevent infringement by third parties, or if the licensed intellectual property rights are found to be invalid or unenforceable, we could be restricted from commercializing our solutions and services and may be required to incur substantial costs to seek or develop alternatives. Any of the foregoing could harm our business, financial condition, results of operations, and prospects. If our trademarks and trade names are not adequately protected, we may not be able to build and maintain name recognition in our markets of interest and our competitive position may be harmed. The registered or unregistered trademarks or trade names that we own may be challenged, infringed, circumvented, declared generic, lapsed or determined to be infringing on or dilutive of other marks. We may not be able to protect our rights in these trademarks and trade names, which we need in order to build and maintain name recognition with the public. In addition, third parties have filed, and may in the future file, for registration of trademarks similar or identical to our trademarks, thereby impeding our ability to build and maintain brand identity and possibly leading to market confusion. If they succeed in registering or developing common law rights in such trademarks, and if we are not successful in challenging such third-party rights, we may not be able to use these trademarks to develop or maintain brand recognition of our services or be required to expend substantial resources and expenses to rebrand. In addition, there could be potential trade name or trademark registration challenges or infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. If we are unable to establish or protect our trademarks and trade names, or if we are unable to build or maintain name recognition based on our trademarks and trade names, we may not be able to compete effectively, which could harm our competitive position, business, financial condition, results of operations and prospects. If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed. We rely heavily on trade secrets and confidentiality agreements to protect our unpatented know-how, technology, and other proprietary information, including our technology platform, and to maintain our competitive position. With respect to our technology platform, we consider trade secrets and know-how to be one of our primary sources of intellectual property. However, trade secrets and know-how can be difficult to protect. We seek to protect these trade secrets and other proprietary technology, in part, by implementing topical policies and processes and by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, contractors, consultants, advisors, clients, prospects, partners, and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. We cannot guarantee that we have entered into such agreements with each party that may have or have had access to our trade secrets or proprietary information. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive, and time-consuming, and the outcome is unpredictable. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets are misappropriated, improperly disclosed, or independently developed by a competitor or other third party, it could harm our competitive position, business, financial condition, results of operations, and prospects. We may be subject to claims that our employees, consultants, or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting ownership of what we regard as our own intellectual property. Many of our employees, consultants, and advisors are currently or were previously employed at other companies in our field, including our competitors or potential competitors. Although we try to ensure that our employees, consultants, and advisors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these individuals have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management. In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the 84 ownership of what we regard as our intellectual property. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. Our use of open source software could compromise our ability to offer our services and subject us to possible litigation. We use open source software in connection with our solutions and services. Companies that incorporate open source software into their solutions have, from time to time, faced claims challenging the use of open source software and compliance with open source license terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software or claiming noncompliance with open source licensing terms. Some open source software licenses require users who distribute software containing open source software to publicly disclose all or part of the source code to the licensee’s software that incorporates, links or uses such open source software, and make available to third parties for no cost, any derivative works of the open source code created by the licensee, which could include the licensee’s own valuable proprietary code. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose our proprietary source code or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur, or could be claimed to have occurred, in part because open source license terms are often ambiguous. There is little legal precedent in this area and any actual or claimed requirement to disclose our proprietary source code or pay damages for breach of contract could harm our business and could help third parties, including our competitors, develop solutions and services that are similar to or better than ours. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. Risks Related to Ownership of Our Common Stock Our stock price may be volatile, and the value of our common stock may decline. The market price of our common stock may be highly volatile and may fluctuate or decline substantially as a result of a variety of factors, some of which are beyond our control or are related in complex ways, includin • the timing of, and our ability to close, the potential Amazon Merger, as well as changes in factors that influence and the timing or likelihood of closing the potential Amazon Merger; • actual or anticipated fluctuations in our financial condition and operating results; • variance in our financial performance from expectations of securities analysts or investors; • changes in the pricing we offer our members; • changes in our projected operating and financial results; • the impact of COVID-19, including future outbreaks or variants, on our financial performance, financial condition and results of operations, and the financial performance and financial condition of our health network partners, our enterprise clients and others; • the impact of protests and civil unrest; • our relationships with our health network partners and any changes to or terminations of our contracts with the health network partners; • changes in laws or regulations applicable to our industry and our solutions and services; • announcements by us, our health network partners or our competitors of significant business developments, acquisitions, or new offerings; • publicity associated with issues with our services and technology platform; • our involvement in litigation, including medical malpractice claims and consumer class action claims; • any governmental investigations or inquiries into our business and operations or challenges to our relationships with our affiliated professional entities under the ASAs or to our relationships with health network partners; 85 • future sales of our common stock or other securities, by us or our stockholders; • changes in senior management or key personnel; • developments or disputes concerning our intellectual property or other proprietary rights, including allegations that we have infringed, misappropriated or otherwise violated any intellectual property of any third party; • changes in accounting standards, policies, guidelines, interpretations or principles; • actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally, including competition or perceived competition from well-known and established companies or entities; • our relationships with our health network partners and any changes to or terminations of our contracts with the health network partners; • the trading volume of our common stock, including effects of inflation; • changes in the anticipated future size and growth rate of our market; • rates of unemployment; and • general economic, regulatory and market conditions, including economic recessions or slowdowns and inflationary pressures. Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may negatively impact the market price of our common stock, which has recently been volatile. In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us, because companies reliant on technology solutions have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business. As a result of being a public company, we are obligated to maintain proper and effective internal control over financial reporting and any failure to maintain the adequacy of these internal controls may negatively impact investor confidence in our company and, as a result, the value of our common stock. We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of Nasdaq. In particular, we are required pursuant to Section 404 of the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, our independent registered public accounting firm is required to attest to the effectiveness of our internal control over financial reporting. The process of compiling the system and process documentation necessary to perform the evaluation required under Section 404 is costly and challenging. Also, we currently do not have an internal audit group, and we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and compile the system and process documentation necessary to support ongoing work to comply with Section 404. We have in the past identified material weaknesses in our internal control over financial reporting, and we cannot assure you that the measures we have taken will be sufficient to avoid potential future material weaknesses, that our remediated controls will continue to operate properly, or that our financial statements will be free from error. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business and we may discover weaknesses in our disclosure controls and internal control over financial reporting in the future. Any failure to develop or maintain effective internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. Accordingly, there could continue to be a possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could 86 decline, we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities and our access to the capital markets could be restricted in the future. A significant portion of our total outstanding common stock may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well. Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the public market, the market price of our common stock could decline significantly. All of our outstanding shares of common stock are eligible for sale in the public market, other than shares held by directors, executive officers and other affiliates that are subject to volume and other limitations under Rule 144 under the Securities Act. In addition, we have reserved shares for future issuance under our equity incentive plan. Certain holders of our common stock, or their transferees, also have rights, subject to some conditions, to require us to file one or more registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. If we were to register the resale of these shares, they could be freely sold in the public market without limitation. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline. Future sales and issuances of our capital stock or rights to purchase capital stock could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to decline. We may issue additional securities in the future and from time to time. Future sales and issuances of our capital stock or rights to purchase our capital stock could result in substantial dilution to our existing stockholders. We may sell or issue common stock, convertible securities and other equity securities in one or more transactions at prices and in a manner as we may determine from time to time, including in connection with future acquisitions or strategic transactions. If we sell any such securities in subsequent transactions, investors may be materially diluted. If securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business, our common stock price and trading volume could decline. Our stock price and trading volume will be heavily influenced by the way analysts and investors interpret our financial information and other disclosures. If securities or industry analysts do not publish research or reports about our business, delay publishing reports about our business or publish negative reports about our business, regardless of accuracy, or cease covering us, our common stock price and trading volume could decline. Even if our common stock is actively covered by analysts, we do not have any control over the analysts or the measures that analysts or investors may rely upon to forecast our future results. Over-reliance by analysts or investors on any particular metric to forecast our future results may result in forecasts that differ significantly from our own. Regardless of accuracy, unfavorable interpretations of our financial information and other public disclosures could have a negative impact on our stock price. If our financial performance fails to meet analyst estimates, for any of the reasons discussed above or otherwise, or one or more of the analysts who cover us downgrade our common stock or change their opinion of our common stock, our stock price would likely decline. We do not intend to pay dividends for the foreseeable future and, as a result, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock. We have never declared or paid any cash dividends on our capital stock, and we do not intend to pay any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and are restricted by the terms in the Merger Agreement with Amazon and may be further restricted by the terms of any outstanding debt obligations. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments. We incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices. As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. We expect such expenses to further increase now that we are no longer an emerging growth company. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of Nasdaq, and other 87 applicable securities rules and regulations impose various requirements on public companies. Furthermore, the senior members of our management team do not have significant experience with operating a public company. As a result, our management and other personnel will have to devote a substantial amount of time to compliance with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we will incur as a public company or the timing of such costs. If, notwithstanding our efforts, we fail to comply with new laws, regulations and standards, regulatory authorities may initiate legal proceedings against us and our business may be harmed. Failure to comply with these rules might also make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior management. Anti-takeover provisions in our charter documents, under Delaware law and under the indenture governing our 2025 Notes could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock. Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions tha • provide for a classified board of directors whose members serve staggered terms; • authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights, and preferences determined by our board of directors that may be senior to our common stock; • require that any action to be taken by our stockholders be affected at a duly called annual or special meeting and not by written consent; • specify that special meetings of our stockholders can be called only by our board of directors, the chairperson of our board of directors, or our chief executive officer; • establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors; • prohibit cumulative voting in the election of directors; • provide that our directors may be removed for cause only upon the vote of the holders of at least 66 2⁄3% of our outstanding shares of common stock; • provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and • require the approval of our board of directors or the holders of at least 66 2/3% of our outstanding shares of common stock to amend our bylaws and certain provisions of our certificate of incorporation. These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally, subject to certain exceptions, prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Furthermore, the indenture governing our 2025 Notes requires us to repurchase such notes for cash if we undergo certain fundamental changes and, in certain circumstances, to increase the conversion rate for a holder of our 2025 Notes. If consummated, the Amazon Merger is expected to constitute both a "fundamental change" and a “make-whole fundamental change” (each as defined in the indenture governing the 2025 Notes). Upon the occurrence of a fundamental change, holders of the 2025 Notes may convert their 2025 Notes for a period and, subject to limited exceptions, may require us to repurchase for cash all or any portion of their 88 2025 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. With respect to a make-whole fundamental change, the $18 per share purchase price in the Amazon Merger is below the lowest stock price on the “make-whole” table included in the indenture governing the 2025 Notes and converting holders of the 2025 Notes will not receive addition conversion consideration in connection with any conversion of their 2025 Notes as a result of the make-whole fundamental change. Any delay or prevention of the consummation of the Amazon Merger or any other change of control transaction or changes in our management could cause the market price of our common stock to decline. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common • any derivative action or proceeding brought on our behalf; • any action asserting a breach of fiduciary duty; • any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; and • any action asserting a claim against us that is governed by the internal-affairs doctrine. This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation further provides that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that such choice of forum provisions are facially valid and several state trial courts have enforced such provisions and required that suits asserting Securities Act claims be filed in federal court, there is no guarantee that courts of appeal will affirm the enforceability of such provisions and a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation. This may require significant additional costs associated with resolving such action in other jurisdictions and we cannot assure you that the provisions will be enforced by a court in those other jurisdictions. If a court were to find either exclusive forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with litigating Securities Act claims in state court, or both state and federal court, which could seriously harm our business, financial condition, results of operations, and prospects. These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could seriously harm our business. Risks Related to Our Outstanding Notes Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the 2025 Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or 89 more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. Regulatory actions and other events may adversely impact the trading price and liquidity of the 2025 Notes. We expect that many investors in, and potential purchasers of, the 2025 Notes will employ, or seek to employ, a convertible arbitrage strategy with respect to the notes. Investors would typically implement such a strategy by selling short the common stock underlying the 2025 Notes and dynamically adjusting their short position while continuing to hold the notes. Investors may also implement this type of strategy by entering into swaps on our common stock in lieu of or in addition to short selling the common stock. The SEC and other regulatory and self-regulatory authorities have implemented various rules and taken certain actions, and may in the future adopt additional rules and take other actions, that may impact those engaging in short selling activity involving equity securities (including our common stock). Such rules and actions include Rule 201 of SEC Regulation SHO, the adoption by the Financial Industry Regulatory Authority, Inc. and the national securities exchanges of a “Limit Up-Limit Down” program, the imposition of market-wide circuit breakers that halt trading of securities for certain periods following specific market declines, and the implementation of certain regulatory reforms required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Any governmental or regulatory action that restricts the ability of investors in, or potential purchasers of, the notes to effect short sales of our common stock, borrow our common stock or enter into swaps on our common stock could adversely impact the trading price and the liquidity of our 2025 Notes. We may not have the ability to raise the funds necessary to settle conversions of the 2025 Notes in cash or to repurchase the notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the 2025 Notes. Subject to limited exceptions, holders of the 2025 Notes will have the right to require us to repurchase all or a portion of their 2025 Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest, if any, as described under Note 9 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. If consummated, the Amazon Merger is expected to constitute a “fundamental change” (as defined in the indenture governing the 2025 Notes). Upon the occurrence of a fundamental change, holders of the 2025 Notes may convert their 2025 Notes for a period and, subject to limited exceptions, may require us to repurchase for cash all or any portion of their 2025 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, upon conversion of the 2025 Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the 2025 Notes being converted as described under Note 9 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of 2025 Notes surrendered therefor or 2025 Notes being converted. In addition, our ability to repurchase the 2025 Notes or to pay cash upon conversions of the 2025 Notes may be limited by law, by regulatory authority or by agreements governing our existing or future indebtedness. Our failure to repurchase 2025 Notes at a time when the repurchase is required by the indenture or to pay any cash payable on future conversions of the 2025 Notes as required by the indenture would constitute a default under the indenture governing the 2025 Notes. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our existing or future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the 2025 Notes or make cash payments upon conversions thereof. The conditional conversion feature of the 2025 Notes, if triggered, may adversely impact our financial condition and operating results. In the event the conditional conversion feature of the 2025 Notes is triggered, holders of 2025 Notes will be entitled to convert the 2025 Notes at any time during specified periods at their option. If consummated, the Amazon Merger is expected to constitute a “fundamental change” (as defined in the indenture governing the 2025 Notes), permitting holders of the 2025 Notes to convert their 2025 Notes for a period. If one or more holders elect to convert their 2025 Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely impact our liquidity. In addition, even if holders do not elect to convert their 2025 Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2025 Notes as a current rather than long-term liability, which would result in a significant reduction of our net working capital. 90 Risks Related to Our Acquisition of Iora We may be unable to successfully integrate Iora's business and realize the anticipated benefits of the merger. We will be required to devote significant management attention and resources to integrating our and Iora's business practices and operations to effectively realize synergies as a combined company, including opportunities to maintain members as they become Medicare eligible, sign up incremental members, reduce combined costs, and reduce combined capital expenditures compared to both companies’ standalone plans. Potential difficulties the combined company may encounter in the integration process include the followin • the inability to successfully combine our and Iora's businesses in a manner that permits the combined company to realize the growth, operations and cost synergies anticipated to result from the merger, which would result in the anticipated benefits of the merger, including projected financial targets, not being realized in the time frames currently anticipated, previously disclosed or at all; • lost patients or members, or a reduction in the increase in patients or members as a result of certain enterprise clients, patients, members or partners of either of the two companies deciding to terminate or reduce their business with the combined company or not to engage in business in the first place; • a reduction in the combined company’s ability to recruit or maintain providers; • an inability of the combined company to maintain its health network partnerships or payer contracts on substantially the same terms; • the complexities associated with managing the larger combined businesses and integrating personnel from the two companies, while at the same time attempting to (i) provide consistent, high quality services under a unified culture and (ii) focus on other ongoing transactions; • the additional complexities of combining two companies with different histories, regulatory restrictions, operating structures and markets; • the failure to retain key employees of either of the two companies; • compliance by us with additional regulatory regimes and with the rules and regulations of additional regulatory entities, including the Centers for Medicare and Medicaid Services, which we refer to as CMS; • potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the merger; and • performance shortfalls at one or both of the two companies as a result of the diversion of management’s attention caused by completing the merger and integrating the companies’ operations. For all these reasons, you should be aware that it is possible that the integration process could result in the distraction of the combined company’s management, the disruption of the combined company’s ongoing business or inconsistencies in the combined company’s services, standards, controls, procedures and policies, any of which could adversely affect the ability of the combined company to maintain relationships with enterprise clients, patients, members, vendors, partners, employees or providers or to achieve the anticipated benefits of the merger, or could otherwise adversely affect the business and financial results of the combined company. We expect to continue to incur substantial expenses related to the integration of Iora. We have incurred and expect to continue to incur substantial expenses in connection with integrating Iora's business, operations, networks, systems, technologies, policies and procedures of Iora with our business, operation, networks, systems, technologies, policies and procedures. While we have assumed that a certain level of integration expenses would be incurred, there are a number of factors beyond our control that could affect the total amount or the timing of our integration expenses. Many of the expenses that were and will be incurred, by their nature, are difficult to estimate accurately at the present time. In addition, the combined company 91 may need significant additional capital in the form of equity or debt financing to implement or expand its business plan and there can be no assurance that such capital will be available to the combined company on terms acceptable to it, or at all. If the combined company issues additional capital stock in the future in connection with financing activities, stockholders will experience dilution of their ownership interests and the per share value of the combined company’s common stock may decline. Due to these factors, the transaction and integration expenses could be greater or could be incurred over a longer period of time than we currently expect. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Recent Sale of Unregistered Securities and Use of Proceeds None. Issuer Purchases of Equity Securities None. Use of Proceeds from Registered Securities On January 30, 2020, our registration statement on Form S-1 (File No. 333- 235792) relating to the initial public offering of our common stock was declared effective by the SEC. Pursuant to such registration statement, we issued and sold an aggregate of 20,125,000 shares of our common stock at a price of $14.00 per share for aggregate cash proceeds of approximately $258.2 million, net of underwriting discounts and commissions and offering costs, which includes the full exercise by the underwriters of their option to purchase additional shares of common stock. No payments for offering expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities or (iii) any of our affiliates. J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC acted as joint-book running managers for the offering. There has been no material change in the expected use of the net proceeds from our initial public offering, as described in our final prospectus filed with the SEC on February 3, 2020 pursuant to Rule 424(b) under the Securities Act of 1933, as amended. Repurchase of Shares of Company Equity Securities None. Item 3. Defaults Upon Senior Securities. Not Applicable. Item 4. Mine Safety Disclosures. Not Applicable. Item 5. Other Information. None. 92 Item 6. Exhibits. Number Exhibit Description Form File No. Exhibit Filing Date Filed Herewith 2.1* Agreement and Plan of Merger, dated as of July 20, 2022, by and among 1Life Healthcare, Inc., Amazon.com, Inc. and Negroni Merger Sub, Inc. 8-K 001-39203 2.1 7/22/2022 3.1 Amended and Restated Certificate of Incorporation of the Registrant 8-K 001-39203 3.1 2/4/2020 3.2 Amended and Restated Bylaws of the Registrant 8-K 001-39203 3.2 2/4/2020 31.1 Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 31.2 Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 32.1† Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X 101.INS Inline XBRL Instance Document X 101.SCH Inline XBRL Taxonomy Schema Linkbase Document X 101.CAL Inline XBRL Taxonomy Definition Linkbase Document X 101.DEF Inline XBRL Taxonomy Calculation Linkbase Document X 101.LAB Inline XBRL Taxonomy Labels Linkbase Document X 101.PRE Inline XBRL Taxonomy Presentation Linkbase Document X 104 Cover Page Interactive Data File (formatted as inline XBRL and contained within Exhibit 101). *    Certain exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally to the SEC a copy of any omitted exhibits or schedules upon request. † The certification attached as Exhibit 32.1 that accompanies this Quarterly Report on Form 10-Q, is deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of 1Life Healthcare, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing. 93 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. 1LIFE HEALTHCARE, INC. Date: August 3, 2022 By: /s/ Amir Dan Rubin Amir Dan Rubin Chief Executive Officer and President (Principal Executive Officer) Date: August 3, 2022 By: /s/ Bjorn Thaler Bjorn Thaler Chief Financial Officer (Principal Financial and Accounting Officer) 94

Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements 1 Condensed Consolidated Balance Sheets (Unaudited) 1 Condensed Consolidated Statements of Operations (Unaudited) 2 Condensed Consolidated Statements of Comprehensive Loss (Unaudited) 3 Condensed Consolidated Statements of Stockholders' Equity (Deficit) (Unaudited) 4 Condensed Consolidated Statements of Cash Flows (Unaudited) 6 Notes to Unaudited Condensed Consolidated Financial Statements (Unaudited) 7 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28 Item 3. Quantitative and Qualitative Disclosures About Market Risk 47 Item 4. Controls and Procedures 47 PART II. OTHER INFORMATION Item 1. Legal Proceedings 48 Item 1A. Risk Factors 48 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 94 Item 3. Defaults Upon Senior Securities 94 Item 4. Mine Safety Disclosures 94 Item 5. Other Information 94 Item 6. Exhibits 95 Signatures 96 Where You Can Find More Information Investors and others should note that we announce material financial and other information using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We also post supplemental materials on the “Events” section of our investor relations website at investor.onemedical.com. Except as specifically noted herein, information on or accessible through our website is not, and will not be deemed to be, a part of this Quarterly Report on Form 10-Q or incorporated by reference into any other filings we may make with the U.S. Securities and Exchange Commission (the “SEC”). We also use our Facebook, Twitter and LinkedIn accounts as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts, in addition to following our press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this Quarterly Report on Form 10-Q. These channels may be updated from time to time on our investor relations website. i PART I—FINANCIAL INFORMATION Item 1. Financial Statements. 1LIFE HEALTHCARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except par value amounts) (unaudited) September 30, 2022 December 31, 2021 Assets Current assets: Cash and cash equivalents $ 139,506 $ 341,971 Short-term marketable securities 127,700 111,671 Accounts receivable, net 189,279 103,498 Inventories 7,772 6,065 Prepaid expenses 28,315 28,055 Other current assets 26,225 21,767 Total current assets 518,797 613,027 Long-term marketable securities — 48,296 Restricted cash 4,258 3,801 Property and equipment, net 212,128 193,716 Right-of-use assets 277,191 256,293 Intangible assets, net 323,251 352,158 Goodwill 1,157,308 1,147,464 Other assets 9,839 12,277 Total assets $ 2,502,772 $ 2,627,032 Liabilities and Stockholders' Equity Current liabiliti Accounts payable $ 22,843 $ 18,725 Accrued expenses 97,284 72,672 Deferred revenue, current 55,330 47,928 Operating lease liabilities, current 38,995 31,152 Other current liabilities 33,226 31,632 Total current liabilities 247,678 202,109 Operating lease liabilities, non-current 295,044 269,641 Convertible senior notes 311,250 309,844 Deferred income taxes 57,241 73,875 Deferred revenue, non-current 23,173 29,317 Other non-current liabilities 11,887 13,663 Total liabilities 946,273 898,449 Commitments and contingencies (Note 13) Stockholders' Equity: Common stock, $ 0.001 par value, 1,000,000 and 1,000,000 shares authorized as of September 30, 2022 and December 31, 2021, respectively; 196,233 and 191,722 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively 196 193 Additional paid-in capital 2,472,547 2,346,781 Accumulated deficit ( 914,903 ) ( 618,198 ) Accumulated other comprehensive income ( 1,341 ) ( 193 ) Total stockholders' equity 1,556,499 1,728,583 Total liabilities and stockholders' equity $ 2,502,772 $ 2,627,032 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 1LIFE HEALTHCARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share amounts) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net reve Medicare revenue $ 133,291 $ 30,462 $ 392,307 $ 30,462 Commercial revenue 128,078 120,871 379,003 362,639 Total net revenue 261,369 151,333 771,310 393,101 Operating expens Medical claims expense 102,216 26,085 316,082 26,085 Cost of care, exclusive of depreciation and amortization shown separately below 110,654 78,443 318,979 216,457 Sales and marketing 26,382 14,380 72,034 37,639 General and administrative 116,081 93,070 305,539 234,611 Depreciation and amortization 23,314 12,045 65,990 25,944 Total operating expenses 378,647 224,023 1,078,624 540,736 Loss from operations ( 117,278 ) ( 72,690 ) ( 307,314 ) ( 147,635 ) Other income (expense), n Interest income 630 535 1,151 719 Interest and other income (expense) 76 ( 4,464 ) ( 8,725 ) ( 10,149 ) Total other income (expense), net 706 ( 3,929 ) ( 7,574 ) ( 9,430 ) Loss before income taxes ( 116,572 ) ( 76,619 ) ( 314,888 ) ( 157,065 ) Provision for (benefit from) income taxes ( 4,535 ) 1,984 ( 18,183 ) 2,143 Net loss $ ( 112,037 ) $ ( 78,603 ) $ ( 296,705 ) $ ( 159,208 ) Net loss per share — basic and diluted $ ( 0.57 ) $ ( 0.51 ) $ ( 1.53 ) $ ( 1.11 ) Weighted average common shares outstanding — basic and diluted 195,624 153,700 194,412 142,990 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 1LIFE HEALTHCARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Amounts in thousands) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net loss $ ( 112,037 ) $ ( 78,603 ) $ ( 296,705 ) $ ( 159,208 ) Other comprehensive l Net unrealized gain (loss) on marketable securities 190 ( 4 ) ( 1,148 ) ( 4 ) Comprehensive loss $ ( 111,847 ) $ ( 78,607 ) $ ( 297,853 ) $ ( 159,212 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 3 1LIFE HEALTHCARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Amounts in thousands) (unaudited) Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity (Deficit) Shares Amount Balances at December 31, 2021 191,722 $ 193 $ 2,346,781 $ ( 618,198 ) $ ( 193 ) $ 1,728,583 Exercise of stock options 579 1 2,234 2,235 Issuance of common stock for settlement of RSUs 442 — Issuance of common stock in acquisition 740 — Stock-based compensation expense 36,919 36,919 Net unrealized gain (loss) on marketable securities ( 1,033 ) ( 1,033 ) Net loss ( 90,859 ) ( 90,859 ) Balances at March 31, 2022 193,483 $ 194 $ 2,385,934 $ ( 709,057 ) $ ( 1,226 ) $ 1,675,845 Exercise of stock options 824 1 3,214 3,215 Issuance of common stock under the employee stock purchase plan 234 1,659 1,659 Issuance of common stock for settlement of RSUs 79 — Issuance of common stock in acquisition 534 — 5,541 5,541 Stock-based compensation expense 32,336 32,336 Net unrealized gain (loss) on marketable securities ( 305 ) ( 305 ) Net loss ( 93,809 ) ( 93,809 ) Balances at June 30, 2022 195,154 $ 195 $ 2,428,684 $ ( 802,866 ) $ ( 1,531 ) $ 1,624,482 Exercise of stock options 924 1 5,367 5,368 Issuance of common stock for settlement of RSUs 155 — Stock-based compensation expense 38,496 38,496 Net unrealized gain (loss) on marketable securities 190 190 Net loss ( 112,037 ) ( 112,037 ) Balances at September 30, 2022 196,233 $ 196 $ 2,472,547 $ ( 914,903 ) $ ( 1,341 ) $ 1,556,499 4 1LIFE HEALTHCARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Amounts in thousands) (unaudited) Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity (Deficit) Shares Amount Balances at December 31, 2020 134,472 $ 134 $ 918,118 $ ( 369,785 ) $ 8 $ 548,475 Impact of adoption of ASU 2020-06 ( 73,393 ) 6,656 ( 66,737 ) Impact of adoption of ASC 326 ( 428 ) ( 428 ) Exercise of stock options 2,584 3 13,476 13,479 Issuance of common stock for settlement of RSUs 241 — Stock-based compensation expense 26,328 26,328 Net unrealized gain (loss) on marketable securities 12 12 Net loss ( 39,318 ) ( 39,318 ) Balances at March 31, 2021 137,297 $ 137 $ 884,529 $ ( 402,875 ) $ 20 $ 481,811 Exercise of stock options 353 1 2,627 2,628 Issuance of common stock under the employee stock purchase plan 107 2,972 2,972 Issuance of common stock for settlement of RSUs 17 — Stock-based compensation expense 26,332 26,332 Net unrealized gain (loss) on marketable securities ( 12 ) ( 12 ) Net loss ( 41,287 ) ( 41,287 ) Balances at June 30, 2021 137,774 $ 138 $ 916,460 $ ( 444,162 ) $ 8 $ 472,444 Exercise of stock options 647 1 3,355 3,356 Issuance of common stock for settlement of RSUs 16 — Issuance of common stock in acquisition 53,583 53 1,313,259 1,313,312 Equity awards assumed in acquisition 48,643 48,643 Stock-based compensation expense 28,534 28,534 Net unrealized gain (loss) on marketable securities ( 4 ) ( 4 ) Net loss ( 78,603 ) ( 78,603 ) Balances at September 30, 2021 192,020 $ 192 $ 2,310,251 $ ( 522,765 ) $ 4 $ 1,787,682 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 1LIFE HEALTHCARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (unaudited) Nine Months Ended September 30, 2022 2021 Cash flows from operating activiti Net loss $ ( 296,705 ) $ ( 159,208 ) Adjustments to reconcile net loss to net cash used in operating activiti Provision for bad debts ( 346 ) 551 Depreciation and amortization 65,990 25,944 Amortization of debt discount and issuance costs 1,406 1,406 Accretion of discounts and amortization of premiums on marketable securities, net 1,025 802 Reduction of operating lease right-of-use assets 24,942 14,312 Stock-based compensation 107,751 81,194 Deferred income taxes ( 16,634 ) 2,143 Other non-cash items 827 692 Changes in operating assets and liabilities, net of acquisitio Accounts receivable, net ( 85,079 ) ( 10,639 ) Inventories ( 1,682 ) 398 Prepaid expenses and other current assets 3,606 ( 19,833 ) Other assets 1,471 1,293 Accounts payable 7,049 144 Accrued expenses 25,232 31,560 Deferred revenue 877 6,261 Operating lease liabilities ( 21,776 ) ( 14,193 ) Other liabilities 2,364 21,841 Net cash used in operating activities ( 179,682 ) ( 15,332 ) Cash flows from investing activiti Purchases of property and equipment, net ( 54,801 ) ( 43,893 ) Purchases of marketable securities ( 54,906 ) ( 79,984 ) Proceeds from sales and maturities of marketable securities 85,000 528,965 Acquisitions of businesses, net of cash and restricted cash acquired ( 10,360 ) ( 23,257 ) Issuance of note receivable — ( 30,000 ) Net cash (used in) provided by investing activities ( 35,067 ) 351,831 Cash flows from financing activiti Proceeds from the exercise of stock options 10,818 19,463 Proceeds from employee stock purchase plan 1,659 2,972 Payment of principal portion of finance lease liability ( 38 ) ( 43 ) Payment received from acquisition related contingently returnable consideration 500 — Net cash provided by financing activities 12,939 22,392 Net (decrease) increase in cash, cash equivalents and restricted cash ( 201,810 ) 358,891 Cash, cash equivalents and restricted cash at beginning of period 346,054 115,005 Cash, cash equivalents and restricted cash at end of period $ 144,244 $ 473,896 Supplemental disclosure of non-cash investing and financing activiti Purchases of property and equipment included in accounts payable and accrued expenses $ 6,690 $ 8,860 Equity consideration for business acquisition $ 5,541 $ 1,361,955 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) (unaudited) 1. Nature of the Business and Basis of Presentation 1Life Healthcare, Inc. (“1Life”) was incorporated in Delaware on July 25, 2002. 1Life’s headquarters are located in San Francisco, California. 1Life has developed a modernized healthcare membership model based on direct consumer enrollment and third-party sponsorship across commercially insured and Medicare populations. Our membership model includes access to 24/7 digital health services paired with in-office care routinely covered by most health care payers, and allows the Company to engage in value-based care across all age groups, including through At-Risk arrangements as defined in Note 2 “Summary of Significant Accounting Policies” with Medicare Advantage payers and the Center for Medicare & Medicaid Services ("CMS"), in which the Company is responsible for managing a range of healthcare services and associated costs of its members. 1Life is also an administrative and managerial services company that provides services pursuant to contracts with physician-owned professional corporations (“One Medical PCs”) that provide medical services virtually and in-office. On September 1, 2021, 1Life completed the acquisition of Iora Health, Inc. ("Iora Health"), a human-centered, value-based primary care group with built-for-purpose technology focused on serving the Medicare population. Iora Health and Iora Senior Health, Inc. (“Iora Senior Health”) are administrative and managerial service companies that provide services pursuant to contracts with physician-owned professional corporations (“Iora PCs”, together with the One Medical PCs, the “PCs”) that provide medical services virtually and in-office. Iora Health is an administrative and managerial services company that provides services pursuant to contracts with Iora Health NE DCE, LLC, a limited liability company that participates in the Center for Medicare and Medicaid Services’ Global and Professional Direct Contracting Model (the “DCE entity”). Iora Health, Iora Senior Health, the Iora PCs and the DCE entity are collectively referred to herein as “Iora”. See Note 7 "Business Combinations" to the unaudited condensed consolidated financial statements. 1Life, Iora Health, Iora Senior Health, the PCs and the DCE entity are collectively referred to herein as the “Company”. 1Life and the One Medical PCs operate under the brand name One Medical. Proposed Acquisition by Amazon As more fully described in Note 16, on July 20, 2022, the Company entered into a definitive merger agreement (the "Merger Agreement") with Amazon.com, Inc. ("Amazon"), pursuant to which (and subject to the terms and conditions described in the Merger Agreement) the Company will merge with and into a wholly-owned subsidiary of Amazon ("Amazon Merger"). Subject to the terms and conditions of the Merger Agreement, Amazon will acquire the Company for $ 18 per share in an all-cash transaction, valued at approximately $ 3.9 billion, including the Company’s net debt. As a result of the Amazon Merger, the Company will become a wholly-owned subsidiary of Amazon. The consummation of the Amazon Merger is subject to a number of closing conditions, including, among others, the approval from our shareholders, and the receipt of certain regulatory approvals, as well as other customary closing conditions. Basis of Presentation The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Pursuant to these rules and regulations, the Company has condensed or omitted certain information and footnote disclosures it normally includes in its annual consolidated financial statements prepared in accordance with U.S. GAAP. The accompanying condensed consolidated financial statements include the accounts of 1Life, Iora Health and Iora Senior Health, their wholly owned subsidiaries, and variable interest entities (“VIE”) in which 1Life, Iora Health and Iora Senior Health have an interest and are the primary beneficiaries. See Note 3, “Variable Interest Entities”. All significant intercompany balances and transactions have been eliminated in consolidation. In management’s opinion, the Company has made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly state its condensed consolidated financial position, results of operations, comprehensive loss and cash flows. The Company’s interim period operating results do not necessarily indicate the results that 7 may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the SEC on February 23, 2022 (the “Form 10-K”). Use of Estimates The preparation of condensed consolidated financial statements and related disclosures in conformity with U.S. GAAP and regulations of the SEC requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Estimates include, but are not limited to, revenue recognition, liability for medical claims incurred in the period but not yet reported (“IBNR”), valuation of certain assets and liabilities acquired from business combinations, stock-based compensation, and determining the fair value of a reporting unit. Actual results could differ from these estimates and may result in material effects on the Company’s operating results and financial position. Due to the COVID-19 global pandemic, the global economy and financial markets have been disrupted and there continues to be a significant amount of uncertainty about the length and severity of the consequences caused by the pandemic. The Company has considered information available to it as of the date of issuance of these financial statements and is not aware of any specific events or circumstances that would require an update to its estimates or judgments, or an adjustment to the carrying value of its assets or liabilities. The accounting estimates and other matters assessed include, but were not limited to, allowance for credit losses, goodwill and other long-lived assets, and revenue recognition. These estimates may change as new events occur and additional information becomes available. Actual results could differ materially from these estimates. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020. Intended to provide economic relief to those impacted by the COVID-19 pandemic, the CARES Act includes various tax and lending provisions, among others. Under the CARES Act, the Company received an income grant from the Provider Relief Fund administered by the Department of Health and Human Services (“HHS”), which we recognized as Grant income during the nine months ended September 30, 2021. The Company did not receive any income grant from the HHS for the three and nine months ended September 30, 2022. See Note 5, "Revenue Recognition". Cash, Cash Equivalents and Restricted Cash The Company considers all short-term, highly liquid investments purchased with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash deposits are all in financial institutions in the United States. Cash and cash equivalents consist of cash on deposit, investments in money market funds and commercial paper. Restricted cash represents cash held under letters of credit for various leases and certain At-Risk arrangements. The expected duration of restrictions on the Company’s restricted cash generally ranges from 1 to 8 years. The reconciliation of cash, cash equivalents and restricted cash reported within the applicable balance sheet line items that sum to the total of the same such amount shown in the condensed consolidated statements of cash flows is as follows: September 30, December 31, September 30, December 31, 2022 2021 2021 2020 Cash and cash equivalents $ 139,506 $ 341,971 $ 469,813 $ 112,975 Restricted cash, current (included in other current assets) 480 282 119 119 Restricted cash, non-current 4,258 3,801 3,964 1,911 Total cash, cash equivalents, and restricted cash $ 144,244 $ 346,054 $ 473,896 $ 115,005 Concentration of Credit Risk and Significant Customers Financial instruments that potentially subject the Company to concentration of credit risk consist of cash, cash equivalents, marketable securities and accounts receivable. The Company’s cash balances with individual banking institutions might be in excess of federally insured limits. Cash equivalents are invested in highly rated money market funds and commercial paper. The Company’s marketable securities are invested in U.S. Treasury obligations and commercial paper. The Company is not exposed to any significant concentrations of credit risk from these financial instruments. The Company has not experienced any losses on its deposits of cash, cash equivalents or marketable securities. The Company grants unsecured credit to patients, most of whom reside in the service area of the One Medical or Iora facilities and are largely insured under third- 8 party payer agreements. The Company’s concentration of credit risk is limited by the diversity, geography and number of patients and payers. The table below presents the customers or payers that individually represented 10% or more of the Company’s accounts receivable, net balance as of September 30, 2022 and December 31, 2021. September 30, December 31, 2022 2021 Customer F 44 % 38 % Customer I 20 % 23 % The table below presents the customers or payers that individually represented 10% or more of the Company’s net revenue for the three and nine months ended September 30, 2022 and 2021. Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Customer A * * * 11 % Customer F * * * 11 % Customer I 29 % 13 % 28 % * Customer J 15 % * 16 % * * Represents percentages below 10% of the Company’s net revenue in the period. 2. Summary of Significant Accounting Policies The Company’s significant accounting policies are discussed in Note 2 “Summary of Significant Accounting Policies” in Item 15 of its Form 10-K for the fiscal year ended December 31, 2021. Recently Adopted Pronouncements as of September 30, 2022 In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance which requires annual disclosures that increase the transparency of transactions involving government grants, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on an entity’s financial statements. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2021. The Company adopted the standard on January 1, 2022 on a prospective basis. The adoption did not have a material impact to the Company's condensed consolidated financial statements. Recently Issued Accounting Pronouncements Not Yet Adopted as of September 30, 2022 There have been no recent accounting pronouncements or changes in accounting pronouncements that are of significance or potential significance to the Company as of September 30, 2022. 3. Variable Interest Entities 1Life, Iora Health and Iora Senior Health's agreements with the PCs generally consist of both Administrative Services Agreements (“ASAs”), which provide for various administrative and management services to be provided by 1Life, Iora Health or Iora Senior Health, respectively, to the PCs, and succession agreements, which provide for transition of ownership of the PCs under certain conditions ("Succession Agreements"). The ASAs typically provide that the term of the arrangements is ten to twenty years with automatic renewal for successive one-year terms, subject to termination by the contracting parties in certain specified circumstances. The outstanding voting equity instruments of the PCs are owned by nominee shareholders appointed by 1Life, Iora Health or Iora Senior Health (or the PC in one instance) under the terms of the Succession Agreements or other shareholders who are also subject to the terms of the Succession Agreements. 1Life, Iora Health and Iora Senior Health have the right to receive income as an ongoing administrative fee in an amount that represents the fair value of services rendered and has provided all financial support through loans to the PCs. 1Life, Iora Health and Iora Senior Health have exclusive responsibility for the provision of all nonmedical services including facilities, technology and intellectual property required for the day-to-day operation and management of each 9 of the PCs, and makes recommendations to the PCs in establishing the guidelines for the employment and compensation of the physicians and other employees of the PCs. In addition, the agreements provide that 1Life, Iora Health and Iora Senior Health have the right to designate a person(s) to purchase the stock of the PCs for a nominal amount in the event of a succession event. Based upon the provisions of these agreements, 1Life determined that the PCs are variable interest entities due to its equity holder having insufficient capital at risk, and 1Life has a variable interest in the PCs. The contractual arrangement to provide management services allows 1Life, Iora Health or Iora Senior Health to direct the economic activities that most significantly affect the PCs. Accordingly, 1Life, Iora Health or Iora Senior Health is the primary beneficiary of the PCs and consolidates the PCs under the VIE model. Furthermore, as a direct result of nominal initial equity contributions by the physicians, the financial support 1Life, Iora Health or Iora Senior Health provides to the PCs (e.g. loans) and the provisions of the nominee shareholder succession arrangements described above, the interests held by noncontrolling interest holders lack economic substance and do not provide them with the ability to participate in the residual profits or losses generated by the PCs. Therefore, all income and expenses recognized by the PCs are allocated to 1Life stockholders. The aggregate carrying value of the assets and liabilities included in the condensed consolidated balance sheets for the PCs after elimination of intercompany transactions and balances were $ 216,645 and $ 116,615 , respectively, as of September 30, 2022 and $ 129,474 and $ 115,744 , respectively, as of December 31, 2021. 4. Fair Value Measurements and Investments Fair Value Measurements The following tables present information about the Company’s financial assets measured at fair value on a recurring basis: Fair Value Measurements as of September 30, 2022 Usin Level 1 Level 2 Level 3 Total Cash equivalents: Money market fund $ 66,535 $ — $ — $ 66,535 Short-term marketable securiti U.S. Treasury obligations 104,205 — — 104,205 Commercial paper — 23,495 — 23,495 Total financial assets $ 170,740 $ 23,495 $ — $ 194,235 Fair Value Measurements as of December 31, 2021 Usin Level 1 Level 2 Level 3 Total Cash equivalents: Money market fund $ 315,817 $ — $ — $ 315,817 Short-term marketable securiti U.S. Treasury obligations 58,232 — — 58,232 Foreign government bonds — 5,012 — 5,012 Commercial paper — 48,427 — 48,427 Long-term marketable securiti U.S. Treasury obligations 48,296 — — 48,296 Total financial assets $ 422,345 $ 53,439 $ — $ 475,784 Our financial assets are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily available pricing sources for comparable instruments, identical instruments in less active markets, or models using market observable inputs. During the three and nine months ended September 30, 2022 and 2021, there were no transfers between Level 1, Level 2 and Level 3. 10 Valuation of Convertible Senior Notes The Company has $ 316,250 aggregate principal amount outstanding of 3.0 % convertible senior notes due in 2025 (the “2025 Notes”). See Note 9, “Convertible Senior Notes” for details. The fair value of the 2025 Notes was $ 307,256 and $ 288,461 as of September 30, 2022 and December 31, 2021, respectively. The fair value was determined based on the closing trading price of the 2025 Notes as of the last day of trading for the period. The fair value of the 2025 Notes is primarily affected by the trading price of the Company's common stock and market interest rates. The fair value of the 2025 Notes is considered a Level 2 measurement as they are not actively traded. Investments At September 30, 2022 and December 31, 2021, the Company’s cash equivalents and marketable securities were as follows: September 30, 2022 Amortized cost Gross unrealized gains (losses) Fair value Cash equivalents: Money market fund $ 66,535 $ — $ 66,535 Total cash equivalents 66,535 — 66,535 Short-term marketable securiti U.S. Treasury obligations 105,546 ( 1,341 ) 104,205 Commercial paper 23,495 — 23,495 Total short-term marketable securities 129,041 ( 1,341 ) 127,700 Total cash equivalents and marketable securities $ 195,576 $ ( 1,341 ) $ 194,235 December 31, 2021 Amortized cost Gross unrealized gains (losses) Fair value Cash equivalents: Money market fund $ 315,817 $ — $ 315,817 Total cash equivalents 315,817 — 315,817 Short-term marketable securiti U.S. Treasury obligations 58,293 ( 61 ) 58,232 Foreign government bonds 5,013 ( 1 ) 5,012 Commercial paper 48,427 — 48,427 Total short-term marketable securities 111,733 ( 62 ) 111,671 Long-term marketable securiti U.S. Treasury obligations 48,427 ( 131 ) 48,296 Total cash equivalents and marketable securities $ 475,977 $ ( 193 ) $ 475,784 11 5. Revenue Recognition The following table summarizes the Company’s net revenue by primary Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net reve Capitated revenue $ 130,811 $ 29,872 $ 383,962 $ 29,872 Fee-for-service and other revenue 2,480 590 8,345 590 Total Medicare revenue 133,291 30,462 392,307 30,462 Partnership revenue 66,173 54,547 190,509 165,604 Net fee-for-service revenue 35,797 44,835 113,051 132,713 Membership revenue 26,108 21,489 75,443 62,559 Grant income — — — 1,763 Total commercial revenue 128,078 120,871 379,003 362,639 Total net revenue $ 261,369 $ 151,333 $ 771,310 $ 393,101 Net fee-for-service revenue (previously reported as net patient service revenue) is primarily generated from commercial third-party payers with which the One Medical entities have established contractual billing arrangements. The following table summarizes net fee-for-service revenue by Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net fee-for-service reve Commercial and government third-party payers $ 31,797 $ 40,987 $ 99,525 $ 122,830 Patients, including self-pay, insurance co-pays and deductibles 4,000 3,848 13,526 9,883 Net fee-for-service revenue $ 35,797 $ 44,835 $ 113,051 $ 132,713 The CARES Act was enacted on March 27, 2020 to provide economic relief to those impacted by the COVID-19 pandemic. The CARES Act includes various tax and lending provisions, among others. Under the CARES Act, the Company received an income grant of $ 1,763 from the Provider Relief Fund administered by the Health and Human Services ("HHS") during the nine months ended September 30, 2021. The Company did no t receive any income grants from the HHS for the three and nine months ended September 30, 2022. Management has concluded that the Company met conditions of the grant funds and has recognized it as Grant income for the nine months ended September 30, 2021. During the three and nine months ended September 30, 2022, the Company recognized revenue of $ 24,963 and $ 42,953 , which was included in the beginning deferred revenue balances as of July 1, 2022 and January 1, 2022, respectively. During the three and nine months ended September 30, 2021, the Company recognized revenue of $ 19,116 and $ 32,330 , which was included in the beginning deferred revenue balances as of July 1, 2021 and January 1, 2021, respectively. As of September 30, 2022, a total of $ 4,918 is included within deferred revenue related to variable consideration, of which $ 3,783 is classified as non-current as it will not be recognized within the next twelve months. The estimate of variable consideration is based on the Company’s assessment of historical, current, and forecasted performance. 12 As summarized in the table below, the Company recorded contract assets and deferred revenue as a result of timing differences between the Company’s performance and the customer’s payment. September 30, December 31, 2022 2021 Balances from contracts with custome Capitated accounts receivable, net $ 47,451 $ 23,903 All other accounts receivable, net 141,828 79,595 Contract asset (included in other current assets) 1,655 458 Deferred revenue $ 78,503 $ 77,245 Capitated accounts receivable and payable related to At-Risk arrangements are recorded net in the condensed consolidated balance sheets when a legal right of offset exists. A right of offset exists when all of the following conditions are 1) each of two parties (the Company and the third-party payer) owes the other determinable amounts; 2) the reporting party (the Company) has the right to offset the amount owed with the amount owed by the other party (the third-party payer); 3) the reporting party (the Company) intends to offset; and 4) the right of offset is enforceable by law. The capitated accounts receivable and payable are recorded at the contract level and consist of the Company’s Capitated Revenue attributed from enrolled At-Risk members less actual paid medical claims expense. If the Capitated Revenue exceeds the actual medical claims expense at the end of the reporting period, such surplus is recorded as capitated accounts receivable within accounts receivable, net in the condensed consolidated balance sheets. If the actual medical claims expense exceeds the Capitated Revenue, such deficit is recorded as capitated accounts payable within other current liabilities in the condensed consolidated balance sheets. As of September 30, 2022, the Company has capitated accounts receivable, net, of $ 47,451 and capitated accounts payable, net, of $ 3,981 , representing amounts due from and to Medicare Advantage payers and CMS in At-Risk arrangements, respectively. The capitated accounts receivable and payable are presented net of IBNR claims liability and other adjustments. There were no significant prior period adjustments or changes to the assumptions used in estimating the IBNR claims liability as of September 30, 2022. The Company believes the amounts accrued to cover IBNR claims as of September 30, 2022 are adequate. Components of capitated accounts receivable, net is summarized be September 30, December 31, 2022 2021 Capitated accounts receivable $ 108,630 $ 56,384 IBNR claims liability ( 53,496 ) ( 32,320 ) Other adjustments ( 7,683 ) ( 161 ) Capitated accounts receivable, net $ 47,451 $ 23,903 13 Components of capitated accounts payable, net is summarized be September 30, December 31, 2022 2021 Capitated accounts (receivable), payable $ ( 10,359 ) $ 5,483 IBNR claims liability 16,914 1,438 Other adjustments ( 2,574 ) 299 Capitated accounts payable, net $ 3,981 $ 7,220 Activity in IBNR claims liability from December 31, 2021 through September 30, 2022 is summarized be Amount Balance as of December 31, 2021 $ 33,078 Incurred related t Current period 318,111 Prior periods ( 2,029 ) 316,082 Paid related t Current period ( 250,253 ) Prior periods ( 28,497 ) ( 278,750 ) Balance as of September 30, 2022 $ 70,410 The Company does not disclose the value of remaining performance obligations for (i) contracts with an original contract term of one year or less, (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice when that amount corresponds directly with the value of services performed, and (iii) variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied distinct service that forms part of a single performance obligation. For those contracts that do not meet the above criteria, the Company’s remaining performance obligation as of September 30, 2022, is expected to be recognized as follows: Less than or equal to 12 months Greater than 12 months Total As of September 30, 2022 $ 15,017 $ 23,605 $ 38,622 6. Leases Most leases contain clauses for renewal at the Company’s option with renewal terms that generally extend the lease term from 1 to 7 years. Certain lease agreements contain options to terminate the lease before maturity. The Company does not have any lease contracts with the option to purchase as of September 30, 2022. The Company’s lease agreements do not contain any significant residual value guarantees or material restrictive covenants imposed by the leases. Certain of the Company’s furniture and fixtures and lab equipment are held under finance leases. Finance-lease-related assets are included in property and equipment, net in the condensed consolidated balance sheets and are immaterial as of September 30, 2022. The components of operating lease costs were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Operating lease costs $ 14,471 $ 9,510 $ 41,084 $ 24,699 Variable lease costs 2,885 1,676 7,381 4,209 Total lease costs $ 17,356 $ 11,186 $ 48,465 $ 28,908 14 Other information related to leases was as follows: Supplemental Cash Flow Information Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Cash paid for amounts included in the measurement of lease liabiliti Operating cash flows from operating leases $ 13,738 $ 9,459 $ 38,202 $ 25,287 Non-cash leases activity: Right-of-use lease assets obtained in exchange for new operating lease liabilities $ 13,114 $ 90,076 $ 45,840 $ 125,498 Lease Term and Discount Rate September 30, December 31, 2022 2021 Weighted-average remaining lease term (in years) 7.84 8.02 Weighted-average discount rate 6.69 % 6.55 % At the lease commencement date, the discount rate implicit in the lease is used to discount the lease liability if readily determinable. If not readily determinable or leases do not contain an implicit rate, the Company’s incremental borrowing rate is used as the discount rate. Management determines the appropriate incremental borrowing rates for each of its leases based on the remaining lease term at lease commencement. Future minimum lease payments under non-cancellable operating leases as of September 30, 2022 were as follows (excluding the effect of lease incentives to be received that are recorded in other current assets of $ 16,607 which serve to reduce total lease payments): September 30, 2022 Remainder of 2022 $ 14,685 2023 60,773 2024 59,218 2025 55,019 2026 51,314 Thereafter 194,792 Total lease payments 435,801 L interest ( 101,762 ) Total lease liabilities $ 334,039 7. Business Combinations Acquisition of Iora 15 On September 1, 2021 ("Acquisition Date"), 1Life acquired all outstanding equity and capital stock of Iora Health, a human-centered, value-based primary care group with built-for-purpose technology focused on serving the Medicare population, for an aggregate purchase consideration of $ 1,424,836 , which was paid through the issuance of 1Life common shares with a fair value of $ 1,313,312 , in part by cash of $ 62,881 , and in part by stock options of Iora assumed by 1Life towards pre-combination services of $ 48,643 . The final purchase price allocations resulted in $ 1,118,456 of goodwill and $ 363,031 of acquired identifiable intangible assets related to Iora trade name and contracts in existing geographies valued using the income method. Subsequent to the Acquisition Date, the Company recorded $ 258 and $ 1,827 to goodwill during the measurement period for the three and nine months ended September 30, 2022. Goodwill recorded in the acquisition is not expected to be deductible for tax purposes. Goodwill was primarily attributable to the planned growth in new geographies, synergies expected to be achieved in the combined operations of 1Life and Iora, and assembled workforce of Iora. The acquisition expanded the Company's reach to become a premier national human-centered, technology-powered, value-based primary care platform across all age groups. The acquisition allows the Company to participate in At-Risk arrangements with Medicare Advantage payers and CMS, in which the Company is responsible for managing a range of healthcare services and associated costs of its members. Final Purchase Price Allocation The purchase price components are summarized in the following tab Consideration in 1Life common stock (1) $ 1,313,312 Cash consideration (2) 62,881 Stock options of Iora assumed by 1Life towards pre-combination services (3) 48,643 Total Purchase Price $ 1,424,836 (1) Represents the fair value of 53,583 shares of 1Life common stock transferred as consideration consisting of 53,146 shares issued and 437 shares to be issued to former Iora shareholders for outstanding Iora capital stock based on 77,687 Iora shares with the Exchange Ratio of 0.69 for a share of Iora and 1Life's stock price of $ 24.51 as of the closing date. The fair value of the 53,583 shares transferred as consideration was determined on the basis of the closing market price of the Company's common stock one business day prior to the Acquisition Date. (2) Included in the cash consideration • $ 5,993 for the settlement of vested phantom stock awards and cash bonuses contingent on the completion of the merger. Iora's unvested phantom stock awards, to the extent they relate to post-combination services, will be paid out and expensed as they vest subsequent to the acquisition and will be treated as stock-based compensation expense. • $ 30,253 of loans made by the Company to Iora prior to the Acquisition Date. • $ 5,391 of repayment of the existing Silicon Valley Bank (“SVB”) loan, which was not legally assumed as part of the merger. • The remainder of the cash consideration primarily relates to transaction expenses incurred by Iora and paid by the Company as of the closing date. (3) Represents the fair value of Iora’s equity awards assumed by 1Life for pre-combination services. Pursuant to the terms of the Iora Merger Agreement, Iora’s outstanding equity awards that are vested and unvested as of the effective time of the merger were replaced by 1Life equity awards with the same terms and conditions. The vested portion of the fair value of 1Life’s replacement equity awards issued represents consideration transferred, while the unvested portion represents post-combination compensation expense based on the vesting terms of the equity awards. The awards that include a provision for accelerated vesting upon a change of control are included in the vested consideration. The fair value of the stock options of Iora assumed by 1Life was determined by using a Black-Scholes option pricing model with the applicable assumptions as of the Acquisition Date. The fair value of the unvested stock awards, for which post-combination service is required, will be recorded as share-based compensation expense over the respective vesting period of each award. See Note 10, "Stock-Based Compensation". 16 The following table presents the final purchase price allocation recorded in the Company's unaudited condensed consolidated balance sheet as of the Acquisition Date, which reflects measurement period adjustments as further described be Cash and cash equivalents acquired $ 17,808 Accounts receivable, net 20,166 Prepaid expenses and other current assets 3,043 Restricted cash 2,069 Property and equipment, net 29,565 Right-of-use assets 70,249 Intangible assets, net 363,031 Other assets (1) 7,405 Total assets 513,336 Accounts payable 1,974 Accrued expenses 10,077 Deferred revenue, current 5,989 Operating lease liabilities, current 6,617 Operating lease liabilities, non-current 63,558 Deferred revenue, non-current 24,316 Deferred income taxes 80,537 Other non-current liabilities (1) 13,888 Total liabilities 206,956 Net assets acquired 306,380 Merger consideration 1,424,836 Estimated goodwill attributable to merger $ 1,118,456 (1) Included in the other assets was an escrow asset of $ 4,450 related to 1Life common stock held by a third-party escrow agent to be released to the former stockholders of Iora, less any amounts that would be necessary to satisfy any then pending and unsatisfied or unresolved claim for indemnification for any 1Life indemnifiable loss pursuant to the indemnity provisions of the Iora Merger Agreement. A corresponding indemnification liability of $ 9,600 was recorded in other non-current liabilities in the Company's unaudited condensed consolidated balance sheet. During the nine months ended September 30, 2022, a reduction in escrow asset and indemnification liability of $ 1,013 and $ 3,383 , respectively was recorded as part of the measurement period adjustment. The indemnification asset is subject to remeasurement at each reporting date due to changes to the underlying value of the escrow shares until the shares are released from escrow, with the remeasurement adjustment reported in the Company's condensed consolidated statement of operations as interest and other income (expense). During the three months ended September 30, 2022, the fair value of the escrow asset had increased and the unrealized gain recorded was $ 2,416 . During the nine months ended September 30, 2022, the fair value of the escrow asset had declined and the unrealized loss recorded was $ 702 . The unrealized gain or loss was reported in the Company's condensed consolidated statement of operations as interest and other income (expense). The Company allocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on the estimates of fair values, which were determined primarily using the income method based on estimates and assumptions made by management at the time of the Iora acquisition and during the measurement period. Any adjustments to the preliminary purchase price allocation identified during the measurement period have been recognized in the period in which the adjustments were determined. The Company recognized a net deferred tax liability of $ 80,537 in this business combination that is included in long-term liabilities in the accompanying condensed consolidated balance sheet. This primarily related to identified intangible assets recorded in acquisition for which there is no tax basis. 17 Identifiable intangible assets are comprised of the followin Fair Value Estimated Useful Life (in years) Intangible Ass Medicare Advantage contracts - existing geographies $ 298,000 9 CMS Direct Contracting contract - existing geographies 52,000 9 Trade n Iora 13,031 3 Total $ 363,031 Net tangible assets were valued at their respective carrying amounts as of the Acquisition Date, which approximated their fair values. Medicare Advantage contracts and CMS Direct Contracting contract represent the At-Risk arrangements that Iora has with Medicare Advantage plans or directly with CMS. Trade names represent the Company’s right to the Iora trade names and associated design. Loan Agreement Under the Iora Merger Agreement, 1Life and Iora have also entered into a Loan and Security Agreement on June 21, 2021. See Note 15 "Note Receivable" for more details. Iora had an existing credit facility with SVB, which is referred to as the SVB Facility. The SVB facility of $ 5,391 was repaid on September 1, 2021, of which $ 50 is related to the prepayment penalty. Repayment of the existing SVB loan is accounted for as part of the acquisition purchase consideration. Supplemental Unaudited Pro Forma Information The following unaudited pro forma financial information summarizes the combined results of operations for 1Life and Iora as if the companies were combined as of the beginning of fiscal year 2020. The unaudited pro forma information includes transaction and integration costs, adjustments to amortization and depreciation for intangible assets and property and equipment acquired, stock-based compensation costs and tax effects. The table below reflects the impact of material adjustments to the unaudited pro forma results for the three and nine months ended September 30, 2021 that are directly attributable to the acquisiti Three Months Ended September 30, Nine Months Ended September 30, Material Adjustments 2021 2021 (Decrease) / increase to expense as result of transaction costs $ ( 46,243 ) $ ( 51,433 ) (Decrease) / increase to expense as result of amortization and depreciation expenses 7,680 30,757 (Decrease) / increase to expense as a result of stock-based compensation costs 381 1,686 (Decrease) / increase to expense as result of changes in tax effects $ ( 2,012 ) $ ( 10,065 ) The unaudited pro forma information presented below is for informational purposes only and is not necessarily indicative of our condensed consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of fiscal year 2020 or the results of our future operations of the combined businesses. Three Months Ended September 30, Nine Months Ended September 30, 2021 2021 Revenue $ 216,115 $ 604,408 Net Loss $ ( 54,435 ) $ ( 191,560 ) 18 Other Acquisitions On April 14, 2022, the Company completed an acquisition for an aggregate purchase consideration of $ 17,263 . The aggregate purchase consideration consisted of cash of $ 10,847 , the issuance of 1Life common shares with a fair value of $ 5,541 and contingent consideration with a fair value of $ 875 . The remaining purchase consideration consisted of the assumption of cash. The acquisition was accounted for as a business combination. The Company does not consider this acquisition to be material to the Company’s condensed consolidated financial statements. The purchase price allocation resulted in $ 11,709 of goodwill and $ 4,200 of acquired identifiable intangible assets related to customer relationships valued using the income approach. Intangible assets are being amortized over the useful lives of nine years . Acquisition-related costs were immaterial and were expensed as incurred in the condensed consolidated statements of operations. Subsequent to the acquisition, the Company recorded $ 91 to goodwill for an adjustment of consideration transferred and $ 38 during the measurement period for the three months ended September 30, 2022. Goodwill recorded in the acquisition is not expected to be deductible for tax purposes. In 2021, the Company completed three other acquisitions for $ 9,908 of total cash consideration. The acquisitions were each accounted for as business combinations. The Company does not consider these acquisitions to be material, individually or in aggregate, to the Company’s condensed consolidated financial statements. The purchase price allocations resulted in $ 5,880 of goodwill and $ 3,921 of acquired identifiable intangible assets related to customer relationships valued using the income method. Intangible assets are being amortized over their respective useful lives of three or seven years . Acquisition-related costs were immaterial and were expensed as incurred in the condensed consolidated statements of operations. During the three months ended September 30, 2022 the Company received $ 847 of contingently returnable consideration from one of its acquirees. 8. Goodwill and Intangible Assets Goodwill In the second quarter of 2022, broadly in line with the stock market declines, the Company’s common stock declined significantly and dropped below its equity book value, which triggered a goodwill impairment analysis under FASB Topic 350 Intangibles – Goodwill and Other . For the purposes of the impairment analysis, goodwill is tested at the entity level as the Company has only one reporting unit. In determining the fair value of the reporting unit, the Company uses a combination of the income approach and the market approach, with each method weighted equally. Under the income approach, fair value is determined based on our estimates of future after-tax cash flows, discounted using the appropriate weighted average cost of capital. Under the market approach, the fair value is derived based on the valuation multiples of comparable publicly traded companies. As of June 30, 2022, the fair value of the reporting unit significantly exceeded its net book value and there was no impairment charge recorded. The underlying valuation techniques deployed in the analysis are highly judgmental and entail significant estimates, including but not limited to, future growth and profitability, discount rates, and selection of peer companies and valuation multiples. Estimates are made based on the information available at the time of the valuation. Future changes in estimates and assumptions could result in material changes in the valuation. During the three months ended September 30, 2022, the average trading price of the Company's stock was substantially higher than the net book value of equity as of September 30, 2022, As a result, there is no triggering event of the Company's reporting unit for goodwill impairment assessment during the three months ended September 30, 2022. Goodwill balances as of September 30, 2022 and December 31, 2021 were as follows: Goodwill Balance as of December 31, 2021 $ 1,147,464 Goodwill recorded in connection with acquisition 11,709 Measurement period adjustments ( 1,865 ) Balance as of September 30, 2022 $ 1,157,308 Intangible Assets The following summarizes the Company’s intangible assets and accumulated amortization as of September 30, 2022: 19 September 30, 2022 Original Cost Accumulated Amortization Net Book Value Medicare Advantage contracts - existing geographies $ 298,000 $ ( 35,870 ) $ 262,130 CMS Direct Contracting contract - existing geographies 52,000 ( 6,259 ) 45,741 Trade n Iora 13,031 ( 4,706 ) 8,325 Customer relationships 8,121 ( 1,066 ) 7,055 Total intangible assets $ 371,152 $ ( 47,901 ) $ 323,251 The following summarizes the Company’s intangible assets and accumulated amortization as of December 31, 2021: December 31, 2021 Original Cost Accumulated Amortization Net Book Value Medicare Advantage contracts - existing geographies $ 298,000 $ ( 11,037 ) $ 286,963 CMS Direct Contracting contract - existing geographies 52,000 ( 1,926 ) 50,074 Trade n Iora 13,031 ( 1,448 ) 11,583 Customer relationships 3,921 ( 383 ) 3,538 Total intangible assets $ 366,952 $ ( 14,794 ) $ 352,158 The Company recorded amortization expense of intangible assets of $ 11,074 and $ 33,107 for the three and nine months ended September 30, 2022, respectively. The Company recorded amortization expense of intangible assets of $ 3,747 and $ 3,835 for the three and nine months ended September 30, 2021, respectively. Purchased intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. As of September 30, 2022, estimated future amortization expense related to intangible assets were as follows: September 30, 2022 Remainder of 2022 $ 11,074 2023 44,297 2024 42,819 2025 39,880 2026 39,880 Thereafter 145,301 Total $ 323,251 9. Convertible Senior Notes In May 2020, the Company issued and sold $ 275,000 aggregate principal amount of 3.0 % convertible senior notes due 2025 in a private offering exempt from the registration requirements of the Securities Act of 1933, and in June 2020, the Company issued an additional $ 41,250 aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment option by the initial purchasers of the notes (the “2025 Notes”). The 2025 Notes are unsecured obligations and bear interest at a fixed rate of 3.0 % per annum, payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2020. The 2025 Notes will mature on June 15, 2025, unless earlier converted, redeemed or repurchased. The total net proceeds from the debt offering, after deducting the initial purchasers’ commissions and other issuance costs, were $ 306,868 . 20 Each $ 1 principal amount of the 2025 Notes will initially be convertible into 0.0225052 shares of the Company’s common stock, which is equivalent to an initial conversion price of $ 44.43 per share, subject to adjustment upon the occurrence of specified events but not for any accrued and unpaid interest. Holders may convert the 2025 Notes at their option at any time prior to the close of business on the business day immediately preceding March 15, 2025 only under the following circumstanc (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the trading price (as defined below) per $ 1 principal amount of the 2025 Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; (3) if the Company calls such 2025 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. It is the Company’s current intent to settle conversions through combination settlement comprising of cash and equity. On or after March 15, 2025 until the close of business on the business day immediately preceding the maturity date, holders may convert all or any portion of their 2025 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election and in accordance with the terms of the indenture governing the 2025 Notes. If the Company satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of the Company’s common stock, the amount of cash and shares of common stock, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 40 trading day observation period. In addition, following certain corporate events that occur prior to the maturity date or if the Company delivers a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 2025 Notes in connection with such a corporate event or notice of redemption, as the case may be. If the Company undergoes a fundamental change prior to the maturity date, holders of the 2025 Notes may require the Company to repurchase for cash all or any portion of their notes at a repurchase price equal to 100 % of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. If consummated, the Amazon Merger is expected to constitute both a “fundamental change” and a “make-whole fundamental change” (each as defined in the indenture governing the 2025 Notes). Upon the occurrence of a fundamental change, holders of the 2025 Notes may convert their 2025 Notes for a period and, subject to limited exceptions, may require the Company to repurchase for cash all or any portion of their 2025 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. With respect to a make-whole fundamental change, the $ 18 per share purchase price in the Amazon Merger is below the lowest stock price on the “make-whole” table included in the indenture governing the 2025 Notes and converting holders of the 2025 Notes will not receive additional conversion consideration in connection with any conversion of their 2025 Notes as a result of the make-whole fundamental change. In addition, if specific corporate events occur prior to the applicable maturity date, the Company will increase the conversion rate for a holder who elects to convert their 2025 Notes in connection with such a corporate event in certain circumstances. The Company may not redeem the 2025 Notes prior to June 20, 2023. The Company may redeem for cash all or any portion of the 2025 Notes, at the Company’s option, on or after June 20, 2023 and prior to March 15, 2025, if the last reported sale price of the Company’s common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100 % of the principal amount of the 2025 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the notes. During the three months ended September 30, 2022, the conditions allowing holders of the 2025 Notes to convert have not been met. The 2025 Notes are therefore not convertible as of September 30, 2022 and are classified in long term liabilities in the condensed consolidated balance sheet. The Company incurred issuance costs of $ 9,374 and amortizes the issuance costs to interest expense over the contractual term of the 2025 Notes at an effective interest rate of 0.65 %. 21 The net carrying amount of the 2025 Notes was as follows: September 30, December 31, 2022 2021 Liabiliti Principal $ 316,250 $ 316,250 Unamortized issuance costs ( 5,000 ) ( 6,406 ) Net carrying amount $ 311,250 $ 309,844 The following table sets forth the interest expense recognized related to the 2025 Not Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Contractual interest expense $ 2,372 $ 2,372 $ 7,116 $ 7,116 Amortization of issuance costs 469 469 1,406 1,406 Total interest expense related to the 2025 Notes $ 2,841 $ 2,841 $ 8,522 $ 8,522 10. Stock-Based Compensation Stock Incentive Plan The Company has the following stock-based compensation pla the 2007 Equity Incentive Plan (the “2007 Plan”), the 2017 Equity Incentive Plan (the “2017 Plan”), and the 2020 Equity Incentive Plan (the “2020 Plan”, and, together with the 2007 Plan and the 2017 Plan, the “Plans”). In January 2020, the Company’s stockholders approved the 2020 Plan, which took effect upon the execution of the underwriting agreement for the Company’s IPO in January 2020. The 2020 Plan is intended as the successor to and continuation of the 2007 Plan and the 2017 Plan. The number of shares of common stock reserved for issuance under the Company’s 2020 Plan will automatically increase on January 1 of each year, beginning on January 1, 2021, and continuing through and including January 1, 2030, by 4 % of the total number of shares of common stock outstanding on December 31 of the immediately preceding calendar year, or a lesser number of shares determined by the Company’s board prior to the applicable January 1st. The number of shares issuable under the Plans is adjusted for capitalization changes, forfeitures, expirations and certain share reacquisitions. The Plan provides for the grants of incentive stock options (“ISOs”), non-statutory stock options (“NSOs”), restricted stock awards, and restricted stock unit awards (“RSUs”). ISOs may be granted only to employees, including officers. All other awards may be granted to employees, including officers, non-employee directors and consultants. The 2020 Plan provides that grants of ISOs will be made at no less than the estimated fair value of common stock, as determined by the Board of Directors, at the date of grant. Stock options granted to employees and nonemployees under the Plans generally vest over 4 years. Options granted under the Plans generally expire 10 years after the date of grant. At September 30, 2022, 4,068 shares were available for future grants. 2020 Employee Stock Purchase Plan In January 2020, the Company’s stockholders approved the 2020 Employee Stock Purchase Plan (“ESPP”), which became effective upon the execution of the underwriting agreement for the Company’s IPO in January 2020. The ESPP provides for separate six-month offering periods beginning on May 16 and November 16 of each year. At September 30, 2022, 7,046 shares were available for future issuance. The stock-based compensation expense recognized for the ESPP was $ 255 and $ 857 during the three and nine months ended September 30, 2022 and $ 530 and $ 1,742 during the three and nine months ended September 30, 2021, respectively. 22 Stock Options The following table summarizes stock option activity under the Pla Number of Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Outstanding as of December 31, 2021 28,312 $ 19.32 7.57 $ 192,955 Granted 1,819 12.11 Exercised ( 2,327 ) 4.65 Canceled ( 728 ) 13.87 Outstanding as of September 30, 2022 27,076 $ 20.25 7.07 $ 161,677 Options exercisable as of September 30, 2022 12,223 $ 6.73 5.73 $ 134,932 Options vested and expected to vest as of September 30, 2022 17,409 $ 9.09 6.42 $ 157,576 At September 30, 2022 and 2021, there was $ 15,081 and $ 22,010 , respectively, in unrecognized compensation expense related to service-based options, net of forfeitures, that is expected to be recognized over a weighted-average period of 1.5 and 1.7 years, respectively. The fair value of stock option grants with service-based vesting conditions was $ 11,598 for the three and nine months ended September 30, 2022, and $ 67,507 and $ 79,725 , respectively, for the three and nine months ended September 30, 2021. Assumed Equity Awards As of the Acquisition Date, the Company assumed Iora’s outstanding equity awards related to stock options and phantom stock. The awards under the assumed equity plan were generally settled as follows: • Optio All Iora options outstanding on the close date were assumed by 1Life and converted into options to acquire shares of 1Life common stock. The vested and unvested options, to the extent related to pre-combination services were included in the consideration transferred. Iora’s unvested options, to the extent they relate to post-combination services, will be expensed as they vest post the acquisition and will be treated as stock-based compensation expense. See Note 7 "Business Combinations". • Phantom stoc Each Iora vested phantom stock award has been settled in cash. Each Iora unvested phantom stock award has been assumed by the Company and converted into the right to receive the unvested phantom cash award. Each unvested phantom cash award will remain subject to the same terms and conditions as were applicable to the underlying unvested phantom stock award immediately prior to the close date. The unvested phantom stock award is considered a liability-classified award as the settlement involves a cash payment upon the dates when these awards vest. The entire vested award and unvested phantom stock, to the extent they relate to pre-combination services, were included in the consideration transferred. Iora’s unvested phantom stock awards, to the extent they relate to post-combination services, will be expensed as they vest post acquisition and will be treated as stock-based compensation expense. See Note 7 "Business Combinations". As of the Acquisition Date, the estimated fair value of the assumed equity awards was $ 60,856 , of which $ 52,662 was allocated to the purchase price and the balance of $ 8,194 will be recognized as stock-based compensation expense over the remainder term of the assumed equity awards. The fair value of the assumed equity awards for service rendered through the Acquisition Date was recognized as a component of the acquisition consideration, with the remaining fair value related to post combination services to be recorded as stock-based compensation over the remaining vesting period. Market-based Stock Options During the year ended December 31, 2020, the Board of Directors (“Board”) approved the grant of a long-term market-based stock option (the “Performance Stock Option”) to the Company’s Chief Executive Officer and President. The Performance Stock Option was granted to acquire up to 8,645 shares of the Company’s common stock upon exercise. The Performance Stock Option consists of four separate tranches and each tranche will vest over a seven-year time period and only if the Company’s stock price sustains achievement of pre-determined increases for a period of 90 consecutive calendar days and 23 the Chief Executive Officer remains employed with the Company. The exercise price per share of the Stock Option is the closing price of a share of the Company’s common stock on the date of grant. The vesting of the Performance Stock Option can also be triggered upon a change in control. The following table presents additional information relating to each tranche of the Performance Stock Opti Tranche Stock Price Milestone Number of Options Tranche 1 $ 55 per share 1,330 Tranche 2 $ 70 per share 1,995 Tranche 3 $ 90 per share 2,660 Tranche 4 $ 110 per share 2,660 As of September 30, 2022, no stock price milestones have been achieved. Consequently, no shares subject to the Performance Stock Option have vested as of the date of this filing. The entire 8,645 shares granted are excluded from options vested and expected to vest from the options activity table presented above. The Company will recognize aggregate stock-based compensation expense of $ 197,469 over the derived service period of each tranche using the accelerated attribution method as long as the service-based vesting conditions are satisfied. If the market conditions are achieved sooner than the derived service period, the Company will adjust its stock-based compensation to reflect the cumula tive expense associated with the vested awards. The Company recorded stock-based compensation expense of $ 13,630 and $ 41,380 related to the award for the three and nine months ended September 30, 2022 and $ 15,089 and $ 44,939 for the three and nine months ended September 30, 2021, which were included in general and administrative on the condensed consolidated statements of operations. Unamortized stock-based compensation expense related to the award was $ 95,572 and $ 152,040 as of September 30, 2022 and 2021, respectively. Restricted Stock Units The following table summarizes restricted stock unit activity under the 2020 Pl Number of Shares Grant Date Fair Value Unvested and outstanding as of December 31, 2021 3,249 $ 27.90 Granted 12,355 11.53 Vested ( 676 ) 30.13 Canceled and forfeited ( 1,119 ) 16.38 Unvested and outstanding as of September 30, 2022 13,809 $ 14.08 Stock-Based Compensation Expense Stock-based compensation expense was classified in the condensed consolidated statements of operations as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Sales and marketing $ 1,706 $ 884 $ 3,974 $ 2,871 General and administrative 36,790 27,650 103,777 78,323 Total $ 38,496 $ 28,534 $ 107,751 $ 81,194 A tax benefit of $ 2,968 and $ 5,703 for the three and nine months ended September 30, 2022, respectively, and $ 1,181 and $ 33,823 for the three and nine months ended September 30, 2021, respectively, was included in the Company’s net operating loss carry-forward that could potentially reduce future tax liabilities. 11. Income Taxes The Company recorded an income tax benefit of $ 4,535 and an income tax provision of $ 1,984 for the three months ended September 30, 2022 and 2021, respectively. This represents an effective tax rate of 3.9 % and ( 2.6 )%, respectively. The Company reassessed the ability to realize deferred tax assets by considering the available positive and negative evidence. As of 24 September 30, 2022, the Company maintains a full valuation allowance against its net deferred tax assets. Amortization of book identified intangibles from the Iora acquisition resulted in a decrease to deferred tax liabilities; the associated income tax benefit during the period was $ 2,959 . The effective tax rate differs in 2022 from the federal statutory rate due to the change in need for valuation allowance and amortization of identified intangibles. The effective tax rate differs in 2021 from the federal statutory rate due to increased taxable income in profitable entities and the change in need for valuation allowance. 12. Net Loss Per Share Basic and diluted net loss per share were calculated as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Numerato Net loss $ ( 112,037 ) $ ( 78,603 ) $ ( 296,705 ) $ ( 159,208 ) Denominato Weighted average common shares outstanding — basic and diluted 195,624 153,700 194,412 142,990 Net loss per share — basic and diluted $ ( 0.57 ) $ ( 0.51 ) $ ( 1.53 ) $ ( 1.11 ) The Company’s potentially dilutive securities, which include stock options, unvested RSUs, 2025 Notes and shares held in special indemnity escrow account in connection with Iora acquisition, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share for the periods indicated because including them would have had an anti-dilutive effec As of September 30, 2022 2021 Options to purchase common stock 27,076 28,040 Unvested restricted stock 13,807 2,535 2025 Notes (1) 7,117 7,117 Shares held in special indemnity escrow account in connection with Iora acquisition 405 405 48,405 38,097 (1) During the three months ended September 30, 2022, the conditions allowing holders of the 2025 Notes to convert have not been met. The 2025 Notes are therefore not convertible as of September 30, 2022. 13. Commitments and Contingencies Indemnification Agreements In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its Board of Directors and officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. As of September 30, 2022 and December 31, 2021, the Company has not incurred any material costs as a result of such indemnifications. 25 Legal Matters In May 2018, a class action complaint was filed by two former members against the Company in the Superior Court of California for the County of San Francisco, or the Court, alleging that the Company made certain misrepresentations resulting in them paying the Annual Membership Fee, or AMF, in violation of California’s Consumers Legal Remedies Act, California’s False Advertising Law and California’s Unfair Competition Law, and seeking damages and injunctive relief. Following certain trial court proceedings and certain appeals, arbitration proceedings, and court-ordered mediation proceedings, in June 2021, the parties filed a joint notice of settlement and request for stay before the appellate court in light of reaching a settlement in principle. The parties later executed a class action settlement agreement and release effective June 30, 2021, which requires trial court approval. A preliminary class settlement approval hearing was scheduled to take place in August 2021, but the trial court requested supplemental briefing and vacated the previously scheduled hearing. Plaintiffs filed their supplemental brief and supporting documents on October 12, 2021. The trial court granted the motion for preliminary approval on November 12, 2021. Pursuant to the terms of the settlement and the trial court’s order, the class notice phase took place in late February 2022. The final approval hearing for the settlement was held on July 25, 2022. On July 26, 2022, the court granted the motion for final approval of the class action settlement. No appeals were filed. A compliance hearing is currently scheduled for March 2, 2023. The settlement amount of $ 11,500 was recorded as other current liabilities in the condensed consolidated balance sheets as of December 31, 2021. The Company's insurers committed to pay $ 5,950 towards the settlement amount. The settlement amount, net of expected insurance recovery, of which $ 5,550 was recorded as general and administrative expenses in the condensed consolidated statements of operations for the nine months ended September 30, 2021. The settlement fund was funded on October 3, 2022 and initial distribution of the settlement fund to recipients is expected to occur in 2022, with redistribution continuing into 2023. There was no material change to the liability amount or any incremental expenses incurred during the three and nine months ended September 30, 2022. Between August 10, 2022, and August 31, 2022, seven complaints were filed in federal court by purported stockholders of 1Life regarding the Amazon Merger. The aforementioned seven complaints are collectively referred to as the “Complaints.” The Complaints name as defendants 1Life and each member of the Board, collectively referred to as the “1Life Defendants.” The Complaints alleged violations of Section 14(a) of the Exchange Act against all 1Life Defendants and alleged violations of Section 20(a) of the Exchange Act against the members of the Board in connection with disclosures made by the 1Life Defendants related to the Merger. The Complaints sought, among other relief, (i) injunctive relief preventing the consummation of the Merger unless the 1Life Defendants disclosed certain information requested by the plaintiffs, (ii) rescission and/or rescissory damages in the event the Merger was consummated, and (iii) an award of plaintiffs’ expenses and attorneys’ fees. As of September 30, 2022, all seven of the Complaints had been voluntarily dismissed. Government Inquiries and Investigations In March 2021, the Company received (i) requests for information and documents from the United States House Select Subcommittee on the Coronavirus Crisis, (ii) a request for information from the California Attorney General and the Alameda County District Attorney’s Office and (iii) a request for information and documents from the Federal Trade Commission relating to the Company’s provision of COVID-19 vaccinations. The Company has also received inquiries from state and local public health departments regarding its vaccine administration practices and has and may continue to receive additional requests for information from other governmental agencies relating to its provision of COVID-19 vaccinations. The Company is cooperating with these requests as well as requests received from other governmental agencies, including with respect to the Company's compensation practices and membership generation during the relevant periods. The majority staff of the Subcommittee released a memorandum of findings in December 2021. No further disclosures, testimony or other responses have been requested by the Subcommittee. In addition, in February 2022, the Federal Trade Commission advised us that they were closing their inquiry on our provision of COVID-19 vaccinations. The Company is unable to predict the outcomes or timeline of the residual government inquiries or if any additional requests, inquiries, investigations or other government actions may arise relating to such circumstances. Legal fees have been recorded as general and administrative expenses in the consolidated statements of operations. Sales and Use Tax During 2017 and 2018, a state jurisdiction engaged in an audit of 1Life’s sales and use tax records applicable to that jurisdiction from March 2011 through February 2017. The Company disputed the finding representing the majority of the state's proposed audit change and successfully overturned the sales tax assessment resulting from the audit in December 2021. The audit was closed and the payment, which was not material, was remitted during the first quarter ended March 31, 2022. 26 In addition, from time to time, the Company has been and may be involved in various legal proceedings arising in the ordinary course of business. The Company currently believes that the outcome of these legal proceedings, either individually or in the aggregate, will not have a material effect on its consolidated financial position, results of operations or cash flows. 14. Related Party Transactions Certain of the Company’s investors are also affiliated with customers of the Company. Revenue recognized under contractual obligations from such customers was immaterial for the three and nine months ended September 30, 2022 and September 30, 2021, respectively. The outstanding receivable balance from such customers was immaterial as of September 30, 2022 and December 31, 2021, respectively. 15. Note Receivable In connection with the Iora acquisition, on June 21, 2021, 1Life and Iora entered into a loan agreement under which the Company may advance secured loans to Iora to fund working capital, at Iora's request from time to time, in outstanding amounts not to exceed $ 75,000 in the aggregate. Amounts drawn under the loan agreement are secured by all assets of Iora and were subordinated to Iora's obligations under its then-existing credit facility with SVB. The loan agreement is effective through the maturity date of borrowed amounts under the loan agreement. Such maturity date is the later of 90 days following the earliest of certain maturity dates set forth in the SVB Facility. Amounts drawn bear interest at a rate equal to 10 % per year, payable monthly. As of the Acquisition Date, there was $ 30,000 drawn and outstanding under the loan agreement. Pursuant to the consummation of Iora's acquisition by 1Life, this note receivable was eliminated as part of intercompany eliminations. $ 30,253 of note receivable including accrued interests prior to the Acquisition Date was treated as purchase consideration. See Note 7 "Business Combinations" for additional details. 16. Proposed Acquisition by Amazon On July 20, 2022, the Company entered into the Merger Agreement with Amazon. Subject to the terms and conditions of the Merger Agreement, Amazon will acquire the Company for $ 18 per share in an all-cash transaction valued at approximately $ 3.9 billion, including the Company’s net debt. As a result of the Amazon Merger, the Company will become a wholly-owned subsidiary of Amazon. The consummation of the Amazon Merger is subject to a number of closing conditions, including, among others, the approval from our shareholders, and the receipt of certain regulatory approvals, as well as other customary closing conditions. Under the Merger Agreement, Amazon has agreed to provide senior unsecured interim debt financing to the Company in an aggregate principal amount of up to $ 300.0 million to be funded in up to ten tranches of $ 30.0 million per month, beginning on March 20, 2023 until the earlier of the closing of the Amazon Merger and the termination of the Merger Agreement pursuant to its terms, with a maturity date of 24 months after the termination of the Merger Agreement pursuant to its terms. The Company will agree to certain restrictive covenants and events of default customary for transactions of this type in connection with the debt financing, and other terms and conditions to be set forth in definitive agreements to be entered into by the parties in connection with the financing. 27 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “goal,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. In addition, statements including “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with our condensed consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report. This discussion includes both historical information and forward-looking statements based upon current expectations that involve risk, uncertainties and assumptions. Our results of operations include the results of operations of Iora since the close of our acquisition on September 1, 2021. Our actual results may differ materially from management’s expectations and those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, our ability to timely and successfully achieve the anticipated benefits and potential synergies of our acquisition of Iora Health, Inc. and the continuing impact of the COVID-19 pandemic, societal and governmental responses and macroeconomic challenges and uncertainties, including inflationary pressures, as well as those discussed in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. In addition, this Quarterly Report includes forward-looking statements about the occurrence of any event, change, or other circumstance that could delay or prevent closing of the proposed Amazon Merger or give rise to the termination of the Merger Agreement pertaining to the Amazon Merger. The forward-looking statements contained herein do not assume the consummation of the proposed transaction with Amazon unless specifically stated otherwise. Overview Our mission is to transform health care for all through our human-centered, technology-powered model. Our vision is to delight millions of members with better health and better care while reducing the total cost of care. We are a membership-based primary care platform with seamless digital health and inviting in-office care, convenient to where people work, shop, live and click. We are disrupting health care from within the existing ecosystem by simultaneously addressing the frustrations and unmet needs of key stakeholders, which include consumers, employers, providers, and health networks. We have developed a modernized healthcare membership model based on direct consumer enrollment and third-party sponsorship across commercially insured and Medicare populations. Our membership model includes seamless access to 24/7 digital health services paired with inviting in-office care routinely covered by most health care payers. Our technology drives high monthly active usage within our membership, promoting ongoing and longitudinal patient relationships for better health outcomes and high member retention. Our technology also helps our service-minded team in building trust and rapport with our members by facilitating proactive digital health outreach as well as responsive on-demand virtual and in-office care. Our digital health services and our well-appointed offices, which tend to be located in highly convenient locations, are staffed by a team of clinicians who are not paid on a fee-for-service basis, and therefore free of misaligned compensation incentives prevalent in health care. Additionally, we have developed clinically and digitally integrated partnerships with health networks, better coordinating more timely access to specialty care when needed by members. Together, this approach allows us to engage in value-based care across all age groups, including through At-Risk arrangements with Medicare Advantage payers and CMS, in which One Medical is responsible for managing a range of healthcare services and associated costs of our members. Our focus on simultaneously addressing the unfulfilled needs and frustrations of key stakeholders has allowed us to consistently grow the number of members we serve. As of September 30, 2022, we have grown to approximately 815,000 total members including 775,000 Consumer and Enterprise members and 40,000 At-Risk members, 214 medical offices in 26 markets, and have greater than 8,500 enterprise clients across the United States. 28 Proposed Acquisition by Amazon On July 20, 2022, we entered into the Merger Agreement with Amazon. Subject to the terms and conditions of the Merger Agreement, Amazon will acquire the Company for $18 per share in an all-cash transaction valued at approximately $3.9 billion, including the Company’s net debt. As a result of the Amazon Merger, subject to the terms and conditions of the Merger Agreement, the Company will merge with a subsidiary of Amazon and become a wholly-owned subsidiary of Amazon. The consummation of the Amazon Merger is subject to a number of closing conditions, including, among others, the approval from our shareholders, and the receipt of certain regulatory approvals, as well as other customary closing conditions. Under the Merger Agreement, Amazon has agreed to provide senior unsecured interim debt financing to the Company in an aggregate principal amount of up to $300.0 million to be funded in up to ten tranches of $30.0 million per month, beginning on March 20, 2023 until the earlier of the closing of the Amazon Merger and the termination of the Merger Agreement pursuant to its terms, with a maturity date of 24 months after the termination of the Merger Agreement pursuant to its terms. The Company will agree to certain restrictive covenants and events of default customary for transactions of this type in connection with the debt financing, and other terms and conditions to be set forth in definitive agreements to be entered into by the parties in connection with the financing. The Merger Agreement contains certain customary termination rights for the Company and Amazon. Upon termination of the Merger Agreement in accordance with its terms, under certain specified circumstances, Amazon will be obligated to pay to the Company a termination fee equal to $195.0 million in cash. If the Merger Agreement is terminated under other certain specified circumstances the Company will be obligated to pay to Amazon a termination fee equal to $136.0 million in cash. See the section titled “Risk Factors—Risks Related to our Proposed Transaction with Amazon” included under Part II, Item 1A of this Quarterly Report on Form 10-Q for more information regarding the risks associated with the Amazon Merger. Impact of COVID-19 on Our Business The COVID-19 pandemic has impacted and may continue to impact our operations, and net revenues, expenses, collectability of accounts receivables and other money owed, capital expenditures, liquidity, and overall financial condition. While we experienced negative impacts to our business from the COVID-19 pandemic during the first half of 2020, beginning in the second half of 2020 and through 2021, we believe the COVID-19 pandemic helped drive an increase in Consumer and Enterprise membership and increase in commercial revenue due to new and expanded service offerings, and an increase in our aggregate billable services primarily driven by COVID-19 related visits. For example, we believe COVID-19 caused our value proposition to resonate with a broader audience of consumers seeking access to primary care, as well as with a broader audience of employers focusing on safely reopening their workplaces and managing the ongoing health and well-being of employees and their families. As a result, we experienced increased demand for our memberships beginning in the second half of 2020 and through 2021. In addition, we expanded our service offering in part as a response to COVID-19 and launched several new billable services, includin • COVID-19 testing, and counseling across all of our markets, including in our offices and in several mobile COVID-19 testing sites; • COVID-19 vaccinations in select geographies; • Healthy Together, our COVID-19 screening and testing program for employers, schools and universities; • Mindset by One Medical, our behavioral health service integrated within primary care; • One Medical Now, an expansion of our 24/7 on-demand digital health solutions to employees of enterprise clients located in geographies where we are not yet physically present; and, • Remote Visits, where our providers perform typical primary care visits with our members remotely Towards the tail end of 2021, we started to experience a decline in COVID-related visits while we have not yet seen non-COVID-related primary care visits return to their pre-COVID levels, which negatively impacted our commercial revenue. Starting in the fourth quarter of 2021, the Omicron variant caused a spike in COVID-19 cases. This caused an increase in hospitalizations among At-Risk members, which negatively impacted our medical claims expense. We also saw an increase in the number of providers who were required to quarantine as a result of potential exposure to the virus, which caused some 29 supply constraint in our ability to meet member demand for appointments. The effects of the Omicron variant appeared to peak in mid-January 2022, and the impact has since decreased. However, future COVID-19 outbreaks or variants may cause additional reductions in visits and increased hospitalizations of At-Risk members, which may negatively impact our results of operations and cause our revenue and margins to fluctuate across periods. We believe some of the precautionary measures and challenges resulting from the COVID-19 pandemic may continue or be reinstated upon the occurrence of future outbreaks of variants. Such actions or events may present additional challenges to our business, financial condition and results of operations. As a result, we cannot assure you that any increase in membership, aggregate reimbursement and revenue or reduction in medical claims expense, or any increased trends in visits, are indicative of future results or will be sustained, including following the COVID-19 pandemic, or that we will not experience additional impacts associated with COVID-19, which could be significant. Our results may also continue to fluctuate across periods due to the future COVID-19 outbreaks or variants. Additionally, it is unclear what the impact of the COVID-19 pandemic will be on future utilization, medical expense patterns, and the associated impact on our business and results of operations. Our Business Model Our business is driven by growth in Consumer and Enterprise members, and At-Risk members (see also "Key Metrics and Non-GAAP Financial Measures"). We have developed a modernized membership model based on direct consumer enrollment and third-party sponsorship. Our membership model includes seamless access to 24/7 digital health paired with inviting in-office care routinely covered by most health care payers. Consumer and Enterprise members join either individually as consumers by paying an annual membership fee or are sponsored by a third party. At-Risk members are members for whom we are responsible for managing a range of healthcare services and associated costs. Digital health services are delivered via our mobile app and website, through such modalities as video and voice encounters, chat and messaging. Our in-office care is delivered in our medical offices, and as of September 30, 2022, we had 214 medical offices, compared to 177 medical offices as of September 30, 2021. We derive net revenue, consisting of Medicare revenue and commercial revenue, from multiple stakeholders, including consumers, employers and health networks such as health systems and government and private payers. Medicare Revenue Medicare revenue consists of (i) Capitated Revenue and (ii) fee-for-service and other revenue that is not generated from Consumer and Enterprise members. We generate Capitated Revenue from At-Risk arrangements with Medicare Advantage payers and CMS. Under these At-Risk arrangements, we generally receive capitated payments, consisting of each eligible member’s risk adjusted health care premium per member per month ("PMPM"), for managing a range of healthcare services and associated costs for such members. The risk adjusted health care premium PMPM is determined by payers and based on a variety of patients' factors such as age and demographic benchmarks, and further adjusted to reflect the underlying complexity of a member’s health conditions. These fees give us revenue economics that are contractually recurring in nature for a majority of our Medicare revenue. Capitated Revenue represents 98% of Medicare revenue and 50% of total net revenue, respectively, for the three months ended September 30, 2022 and 98% and 20% for the three months ended September 30, 2021. We generate fee-for-service and other revenue from fee-for-service visits for Other Patients not covered under At-Risk arrangements and from certain payers for clinical start-up, administration, or on-going coordination of care activities associated with providing care to At-Risk members and other Medicare patients. Commercial Revenue Commercial revenue consists of (i) partnership revenue, (ii) net fee-for-service revenue and (iii) membership revenue. We generate our partnership revenue from (i) our health network partners with whom we have clinically and digitally integrated, on a PMPM basis, (ii) largely fixed price or fixed price per employee contracts with enterprise clients for medical services and (iii) COVID-19 on-site testing services for enterprise clients, schools and universities where we typically bill such customers a fixed price per service performed. For our health network arrangements that provide for PMPM payments, when our medical offices provide professional clinical services to covered members, we, as administrator, perform billing and collection services on behalf of the health network, and the health network receives the fees for services provided, including those paid by members’ insurance plans. In those circumstances, we earn and receive PMPM payments from the health network partners in lieu of per visit fees for services from member office visits. 30 Our net fee-for-service revenue primarily consists of reimbursements received from our members' or other patients' health insurance plans or those with billing rates based on our agreements with our health network partners for healthcare services delivered to Consumer and Enterprise members on a fee-for-service basis. We generate our membership revenue through the annual membership fees charged to either consumer members or enterprise clients, as well as fees paid for our One Medical Now service offering. As of September 30, 2022, our list price for new members for an annual consumer membership was $199. Our enterprise clients typically pay a discounted fee collected in advance, based on a rate per employee per month. Our membership fee revenue and partnership revenue are contractual and, with the exception of our COVID-19 on-site testing services, generally recurring in nature. Membership revenue and part nership revenue as a percentage of commercial revenue was 72% and 63% f or each of the three months ended September 30, 2022 and 2021, respectively. Membership revenue and part nership revenue as a percentage of total net revenue was 35% and 50% for t he three months ended September 30, 2022 and 2021, respectively. Key Factors Affecting Our Performance • Acquisition of Net New Members. Our ability to increase our membership will enable us to drive financial growth as members drive our commercial revenue and Medicare revenue. We believe that we have significant opportunities to increase members in our existing geographies through (i) new sales to consumers and enterprise clients, (ii) expansion of the number of enrolled members, including dependents, within our enterprise clients, (iii) expansion of the number of At-Risk members including Medicare Advantage participants or Medicare members for which we are at risk as a result of CMS' Direct Contracting Program, (iv) expansion of Medicare Advantage payers, with whom we contract and (v) adding other potential services. • Components of Revenue . Our ability to maintain or improve pricing levels for our memberships and the pricing under our contracts with health networks will also impact our total revenue. As of September 30, 2022, our list price for new members for an annual consumer membership was $199. Our enterprise clients typically pay a discounted fee collected in advance, based on a rate per employee per month. In geographies where our health network partners pay us on a PMPM basis for Consumer and Enterprise members, to the extent that the PMPM rate changes, our partnership revenue will change. Similarly, if the largely fixed price or number of employees covered by fixed price per employee arrangements change or the number of COVID-19 on-site tests or vaccinations changes, our partnership revenue will also change. Our net fee-for-service revenue is dependent on (i) our billing rates and third-party payer contracted rates through agreements with health networks, (ii) the mix of members who are commercially insured and (iii) the nature and frequency of visits. Our net fee-for-service revenue may also change based on the services we provide to commercially insured Other Patients as defined in "Key Metrics and Non-GAAP Financial Measures" below. Our Medicare revenue is dependent on (i) the percentage of members in At-Risk contracts, (ii) our contracted percentage of premium, (iii) our ability to accurately document the acuity of our At-Risk members, and (iv) the services we provide to Other Patients who are Medicare participants. In the future, we may add additional services for which we may charge in a variety of ways. To the extent the net amounts we charge our members, patients, partners, payers and clients change, our net revenue will also change. • Medical Claims Expense. The nature of our contracting with Medicare Advantage payers and CMS requires us to be financially responsible for a range of healthcare services of our At-Risk members. Our care model focuses on leveraging the primary care setting as a means of reducing unnecessary or avoidable health care costs and balancing the cost of care with the impact of our service on medical claims expense. We are liable for potentially large medical claims should we not effectively manage our At-Risk members’ health. We call the ratio between medical claims expense divided by Capitated Revenue the "Medical Claims Expense Ratio". As we sign up new At-Risk members, our Medical Claims Expense Ratio is likely to increase initially due to a potential increase in medical claims expense from a lag in improvement in health outcomes with member tenure. Similarly, there may be a lag in adequately documenting the health status of our members, resulting in different Capitated Revenue compared to what is indicated by the health status of an At-Risk member. We believe that the Medical Claims Expense Ratio for a given set of At-Risk members can improve over time as we help improve their health outcomes relative to their underlying health conditions, though 31 the ratio may fluctuate for any given customers or cohort of customers depending on future outbreaks or variants of COVID-19 and associated increases in medical claims expense. • Cost of Care, Exclusive of Depreciation and Amortization. Cost of care primarily includes our provider and support employee-related costs for both virtual and in-office care, occupancy costs, medical supplies, insurance and other operating costs. Providers include doctors of medicine, doctors of osteopathy, nurse practitioners, physician assistants and behavioral health specialists. Support employees include registered nurses, phlebotomists, health coaches, and administrative assistants assisting our members with all non-medical related services. Virtual care includes video visits and other synchronous and asynchronous communication via our app and website. A large portion of these costs are relatively fixed regardless of member utilization of our services. Our care model focuses on leveraging the primary care setting as a means of reducing unnecessary or avoidable health care costs and balancing the cost of care with the impact of increased service levels on medical claims expense. An increase in cost of care may help us in reducing total health care costs for our members. For Consumer and Enterprise members, this reduction in total health care costs typically accrues to the benefit of our enterprise clients or our members' health insurance plans through lower claims costs, or our members through lower deductibles, making our membership more competitive. For our At-Risk members, reductions in total health care costs typically accrue directly to us, to our health network partners such as Medicare Advantage payers and CMS, or to our At-Risk members, making our membership more competitive. As a result, we seek to balance the cost of care based on a variety of considerations. For example, cost of care as a percentage of net revenue may decrease if our net revenue increases. Similarly, our cost of care as a percentage of net revenue may increase if we decide to increase our investments in our providers or support employees to try to reduce our medical claims expense. As we open new offices, and expand into new geographies, we expect cost of care to increase. Our cost of care, exclusive of depreciation and amortization, also excludes stock-based compensation. • Care Margin. Care Margin is driven by net revenue, medical claims expense, and cost of care. We believe we can (i) improve revenue over time by signing up more members and increasing the revenue per member, (ii) reduce Medical Claims Expense Ratio over time from primary care engagement and population health management, improving member health and satisfaction, while reducing the need for avoidable and costly care, and (iii) reduce cost of care as a percentage of revenue by better leveraging our fixed cost base and technology. • Investments in Growth. We expect to continue to focus on long-term growth through investments in sales and marketing, technology research and development, and existing and new medical offices. We are working to enhance our digital health and technology offering and increase the potential breadth of our modernized platform solution. In particular, we plan to launch new offices and enter new geographies. As we expand to new geographies, we expect to make significant upfront investments in sales and marketing to establish brand awareness and acquire new members. Additionally, we intend to continue to invest in new offices in new and existing geographies. As we invest in new geographies, in the short term, we expect these activities to increase our operating expenses and cost of care; however, in the long term we anticipate that these investments will positively impact our results of operations. • Seasonality. Seasonality affects our business in a variety of ways. In the near term, we expect these typical seasonal trends to fluctuate due to future outbreaks or variants of the COVID-19 pandemic. Medicare Reve We recognize Capitated Revenue from At-Risk members ratably over their period of enrollment. We typically experience the largest portion of our At-Risk member growth in the first quarter, as the Medicare Advantage enrollment from the prior Medicare Annual Enrollment Period (“AEP”) becomes effective January 1. Throughout the remainder of year, we can continue to enroll new At-Risk members predominantly through (i) new Medicare Advantage enrollees joining us outside AEP, (ii) through expanding the Medicare Advantage plans we are participating in, and (iii) adding additional geographies where we participate in At-Risk arrangements. Commercial Revenue : Our partnership and membership revenue are predominantly driven by the number of Consumer and Enterprise members, and recognized ratably over the period of each contract. While Consumer and Enterprise members have the opportunity to buy memberships throughout the year, we typically experience the largest portion of our Consumer and Enterprise member growth in the first and fourth quarter of each year, when enterprise customers tend to make and implement decisions on their employee benefits. Our net fee-for-service revenue is typically 32 highest during the first and fourth quarter of each year, when we generally experience the highest levels of reimbursable visits. Medical Claims Expense: Medical claims expense is driven by our At-Risk members and varies seasonally depending on a number of factors, including the weather and the number of business days in a quarter. Typically, we experience higher utilization levels during the first and fourth quarter of the year. Key Metrics and Non-GAAP Financial Measures We review a number of operating and financial metrics, including members, Medical Claims Expense Ratio, Care Margin and Adjusted EBITDA, to evaluate our business, measure our performance, identify trends affecting our business, formulate our business plan and make strategic decisions. These key metrics are presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP. Care Margin and Adjusted EBITDA are not financial measures of, nor do they imply, profitability. We have not yet achieved profitability and, even in periods when our net revenue exceeds our cost of care, exclusive of depreciation and amortization, we may not be able to achieve or maintain profitability. The relationship of operating loss to cost of care, exclusive of depreciation and amortization is also not necessarily indicative of future performance. Other companies may not publish similar metrics, or may present similarly titled key metrics that are calculated differently. As a result, similarly titled measures presented by other companies may not be directly comparable to ours and these key metrics should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP, such as net loss. We provide investors and other users of our financial information with a reconciliation of Care Margin and Adjusted EBITDA to their most closely comparable GAAP financial measure. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view Care Margin and Adjusted EBITDA in conjunction with loss from operations and net loss, respectively. Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands except for members) (in thousands except for members) Members (as of the end of the period) Consumer and Enterprise 775,000 683,000 775,000 683,000 At-Risk 40,000 32,000 40,000 32,000 Total 815,000 715,000 815,000 715,000 Net revenue $ 261,369 $ 151,333 $ 771,310 $ 393,101 Medical Claims Expense Ratio 78 % 87 % 82 % 87 % Care Margin $ 48,499 $ 46,805 $ 136,249 $ 150,559 Adjusted EBITDA $ (39,755) $ (6,074) $ (107,234) $ 5,704 Members Members include both Consumer and Enterprise members as well as At-Risk members as defined below. Our number of members depends, in part, on our ability to successfully market our services directly to consumers including Medicare-eligible as well as non-Medicare eligible individuals, to Medicare Advantage health plans and Medicare Advantage enrollees, to employers that are not yet enterprise clients, as well as our activation rate within existing enterprise clients. We define estimated activation rate for any enterprise client at a given time as the percentage of eligible lives enrolled as members. While growth in the number of members is an important indicator of expected revenue growth, it also informs our management of the areas of our business that will require further investment to support expected future member growth. Member numbers as of the end of each period are rounded to the thousands. Consumer and Enterprise Members 33 A Consumer and Enterprise member is a person who has registered with us and has paid for membership for a period of at least one year or whose membership has been sponsored by an enterprise or other third party under an agreement having a term of at least one year. Consumer and Enterprise members do not include trial memberships, our virtual only One Medical Now users, or any temporary users. Our number of Consumer and Enterprise members depends, in part, on our ability to successfully market our services directly to consumers and to employers that are not yet enterprise clients and our activation rate within existing clients. Consumer and Enterprise members may include individuals who (i) Medicare-eligible and (ii) have paid for a membership or whose membership has been sponsored by an enterprise or other third party. Consumer and Enterprise members do not include any At-Risk members as defined below. Consumer and Enterprise members help drive commercial revenue. As of September 30, 2022, we had 775,000 Consumer and Enterprise members. At-Risk Members An At-Risk member is a person for whom we are responsible for managing a range of healthcare services and associated costs. At-Risk members help drive Medicare revenue. As of September 30, 2022, we had 40,000 At-Risk members. Members (in thousands)* * Number of members is shown as of the end of each period. Other Patients An “Other Patient” is a person who is neither a Consumer and Enterprise member nor an At-Risk member, and who has received digital or in-person care from us over the last twelve months. As of December 31, 2021, we had 21,000 Other Patients. Medical Claims Expense Ratio We define Medical Claims Expense Ratio as medical claims expense divided by Capitated Revenue. The nature of our contracting with Medicare Advantage payers and CMS requires us to be financially responsible for a range of healthcare services of our At-Risk members. Our care model focuses on leveraging the primary care setting as a means of reducing unnecessary or avoidable health care costs and balancing our cost of care with the impact of our service levels on medical claims expense. We are liable for potentially large medical claims should we not effectively manage our At-Risk members’ health. We therefore consider the Medical Claims Expense Ratio to be an important measure to monitor our performance. As we sign up new At-Risk members or open new offices to serve these members, our Medical Claims Expense Ratio is likely to increase initially due to a potential increase in medical claims expense from a lag in improvement in health outcomes with member tenure. Similarly, there may be a lag in adequately documenting the health status of our members, resulting in different Capitated Revenue compared to what is indicated by the health status of an At-Risk member. We believe that the Medical 34 Claims Expense Ratio for a given set of At-Risk members can improve over time as we help improve their health outcomes relative to their underlying health conditions, though the ratio may fluctuate for any given customers or cohort of customers depending on future outbreaks or variants of COVID-19 and associated increases in medical claims expense. The following table provides a calculation of the Medical Claims Expense Ratio for the three and nine months ended September 30, 2022 and 2021. Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) (in thousands) Medical claims expense $ 102,216 $ 26,085 $ 316,082 $ 26,085 Capitated Revenue $ 130,811 $ 29,872 $ 383,962 $ 29,872 Medical Claims Expense Ratio 78 % 87 % 82 % 87 % Care Margin We define Care Margin as income or loss from operations excluding depreciation and amortization, general and administrative expense and sales and marketing expense. We consider Care Margin to be an important measure to monitor our performance, specific to the direct costs of delivering care. We believe this margin is useful to both us and investors to measure whether we are effectively pricing our services and managing the health care and associated costs, including medical claims expense and cost of care, of our At-Risk members successfully. The following table provides a reconciliation of loss from operations, the most closely comparable GAAP financial measure, to Care Margin: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) (in thousands) Loss from operations $ (117,278) $ (72,690) $ (307,314) $ (147,635) Sales and marketing* 26,382 14,380 72,034 37,639 General and administrative* 116,081 93,070 305,539 234,611 Depreciation and amortization 23,314 12,045 65,990 25,944 Care Margin $ 48,499 $ 46,805 $ 136,249 $ 150,559 Care Margin as a percentage of net revenue 19 % 31 % 18 % 38 % * Includes stock-based compensation Adjusted EBITDA We define Adjusted EBITDA as net income or loss excluding interest income, interest and other income (expense), depreciation and amortization, stock-based compensation, provision for (benefit from) income taxes, certain legal or advisory costs, and acquisition and integration costs that we do not consider to be expenses incurred in the normal operation of the business. Such legal or advisory costs may include but are not limited to expenses with respect to evaluating potential business combinations, legal investigations, or settlements. Acquisition and integration costs include expenses incurred in connection with the closing and integration of acquisitions, which may vary significantly and are unique to each acquisition. We started to exclude prospectively from our presentation certain legal or advisory costs from the first quarter of 2021 and acquisition and integration costs from the second quarter of 2021, because amounts incurred in the prior periods were insignificant relative to our consolidated operations. We include Adjusted EBITDA in this Quarterly Report because it is an important measure upon which our management assesses and believes investors should assess our operating performance. We consider Adjusted EBITDA to be an important measure to both management and investors because it helps illustrate underlying trends in our business and our historical operating performance on a more consistent basis. Adjusted EBITDA has limitations as an analytical tool, includin 35 • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash used for capital expenditures for such replacements or for new capital expenditures; • Adjusted EBITDA does not include the dilution that results from stock-based compensation or any cash outflows included in stock-based compensation, including from our purchases of shares of outstanding common stock; and • Adjusted EBITDA does not reflect interest expense on our debt or the cash requirements necessary to service interest or principal payments. The following table provides a reconciliation of net loss, the most closely comparable GAAP financial measure, to Adjusted EBITDA, calculated as set forth above: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) (in thousands) Net loss $ (112,037) $ (78,603) $ (296,705) $ (159,208) Interest income (630) (535) (1,151) (719) Interest and other income (expense) (76) 4,464 8,725 10,149 Depreciation and amortization 23,314 12,045 65,990 25,944 Stock-based compensation 38,496 28,534 107,751 81,194 Provision for (benefit from) income taxes (4,535) 1,984 (18,183) 2,143 Legal or advisory costs (1) — 521 547 16,088 Acquisition and integration costs 15,713 25,516 25,792 30,113 Adjusted EBITDA $ (39,755) $ (6,074) $ (107,234) $ 5,704 (1) Approximately $5.6 million of the legal or advisory costs relate to a legal settlement during the nine months ended September 30, 2021. See Note 13 "Commitments and Contingencies" for additional details. Components of Our Results of Operations Net Revenue We generate net revenue through Medicare revenue and commercial revenue. We generate Medicare revenue from Capitated Revenue and fee-for-service and other revenue. We generate commercial revenue from partnership revenue, net fee-for-service revenue, and membership revenue. Capitated Revenue. We generate Capitated Revenue from At-Risk arrangements with payers including Medicare Advantage plans and CMS. Under these At-Risk arrangements, we receive capitated payments, consisting of each eligible member’s risk adjusted health care premium PMPM, for managing a range of healthcare services and associated costs for such members. The risk adjusted health care premium per month is determined by payers and based on a variety of a patient's factors such as age and demographic benchmarks, and further adjusted to reflect the underlying complexity of a member’s health conditions. Capitated Revenue is recognized in the month in which eligible members are entitled to receive healthcare benefits during the contract term. We expect our Capitated Revenue to increase as a percentage of total net revenue in future periods. Fee-For-Service and Other Revenue. We generate fee-for-service and other revenue from fee-for-service visits for Other Patients not covered under At-Risk arrangements and from certain payers for clinical start-up, administration, on-going coordination of care activities associated with providing care to At-Risk members and other Medicare patients. Partnership Revenue. We generate partnership revenue from (i) our health network partners on a PMPM basis, (ii) largely fixed price or fixed price per employee contracts with enterprise clients for medical services and (iii) COVID-19 on-site testing services for enterprise clients, schools and universities for which we typically bill such customers a fixed price per service performed. Under our partnership arrangements, we generally receive fees that are linked to PMPM, fixed price, fixed price per employee, fixed price per service, or capitation arrangements. All partnership revenue is recognized during the period in which we are obligated to provide professional clinical services to the member, employee, or participant, as applicable, and 36 associated management, operational and administrative services to the health network partner, enterprise client, schools and universities. Net fee-for-service revenue. We generate net fee-for-service revenue from providing primary care services to patients in our offices when we bill the member or their insurance plan on a fee-for-service basis as medical services are rendered. While significantly all of our patients are members, we occasionally also provide care to non-members. Membership Revenue. We generate membership revenue from the annual membership fees charged to either consumer members or enterprise clients, who purchase access to memberships for their employees and dependents. Membership revenue also includes fees we receive from enterprise clients for trial memberships or for access to our One Medical Now service offering. Membership revenue is recognized ratably over the contract period with the individual member or enterprise client. Grant Income. Under the CARES Act, we were eligible for and received grant income from the Provider Relief Fund administered by HHS during the nine months ended September 30, 2021. The purpose of the payment is to reimburse us for healthcare-related expenses or lost revenues attributable to COVID-19. The following table summarizes our net revenue by primary source as a percentage of net revenue. Amounts may not sum due to rounding. Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net reve Capitated revenue 50 % 20 % 50 % 8 % Fee-for-service and other revenue 1 % 0.4 % 1 % 0.2 % Total Medicare revenue 51 % 20 % 51 % 8 % Partnership revenue 25 % 36 % 25 % 42 % Net fee-for-service revenue 14 % 30 % 15 % 34 % Membership revenue 10 % 14 % 10 % 16 % Grant income — % — % — % 0.4 % Total commercial revenue 49 % 80 % 49 % 92 % Total net revenue 100 % 100 % 100 % 100 % Operating Expenses Medical Claims Expense Medical claims expenses primarily consist of certain third-party medical expenses paid by payers contractually on behalf of us, including costs for inpatient and outpatient services, certain pharmacy benefits and physician services but excludes cost of care, exclusive of depreciation and amortization. We expect our medical claims expense to increase in absolute dollars as our Capitated Revenue increases in future periods. Cost of Care, Exclusive of Depreciation and Amortization Cost of care primarily includes provider and support employee-related costs for both virtual and in-office care, occupancy costs, medical supplies, insurance and other operating costs. Providers include doctors of medicine, doctors of osteopathy, nurse practitioners, physician assistants, and behavioral health specialists. Support employees include registered nurses, phlebotomists, health coaches, and administrative assistants assisting our members with all non-medical related services. Virtual care includes video visits and other synchronous and asynchronous communication via our app and website. A large portion of these costs are relatively fixed regardless of member utilization of our services. As we open new offices, and expand into new geographies, we expect cost of care to increase. Our cost of care, exclusive of depreciation and amortization, also excludes stock-based compensation. 37 Sales and Marketing Sales and marketing expenses consist of employee-related expenses, including salaries and related costs, commissions and stock-based compensation costs for our employees engaged in marketing, sales, account management and sales support. Sales and marketing expenses also include advertising production and delivery costs of communications materials that are produced to generate greater awareness and engagement among our clients and members, third-party independent research, trade shows and brand messages and public relations costs. We expect our sales and marketing expenses to increase as we strategically invest to expand our business. We expect to hire additional sales personnel and related account management and sales support personnel to capture an increasing amount of our market opportunity. We also expect to continue our brand awareness and targeted marketing campaigns. As we scale our sales and marketing, we expect these expenses to increase in absolute dollars. General and Administrative General and administrative expenses include employee-related expenses, including salaries and related costs and stock-based compensation for all employees except sales and marketing teams, which are included in the sales and marketing expenses. In addition, general and administrative expenses include corporate technology, occupancy costs, legal and professional services expenses. We expect our general and administrative expenses to increase over time due to the additional costs associated with continuing to grow our business. Depreciation and Amortization Depreciation and amortization consist primarily of depreciation of property and equipment and amortization of capitalized software development costs. Other Income (Expense) Interest Income Interest income consists of income earned on our cash and cash equivalents, restricted cash and marketable securities. Interest and Other Income (Expense) Interest and other income (expense) consists of interest costs associated with our notes payable issued pursuant to our convertible senior notes (the “2025 Notes”). Interest and other income (expense) also consists of remeasurement adjustment related to our indemnification asset. Upon the close of the Iora acquisition, as part of the merger agreement (the "Iora Merger Agreement"), certain shares of our common stock were placed into a third-party escrow account to satisfy any then pending and unsatisfied or unresolved claim for indemnification for any indemnifiable loss incurred by us pursuant to the indemnity provisions of the Iora Merger Agreement. The indemnification asset is subject to remeasurement at each reporting date until the shares are released from escrow, with the remeasurement adjustment reported as interest and other income (expense) in our condensed consolidated statement of operations. Interest and other income (expense) also consists of the gain recognized upon the settlement of contingently returnable consideration. Provision for (Benefit from) Income Taxes We account for income taxes using an asset and liability approach. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances are provided when necessary to reduce net deferred tax assets to an amount that is more likely than not to be realized. In determining whether a valuation allowance for deferred tax assets is necessary, we analyze both positive and negative evidence related to the realization of deferred tax assets and inherent in that, assess the likelihood of sufficient future taxable income. We also consider the expected reversal of deferred tax liabilities and analyze the period in which these would be expected to reverse to determine whether the taxable temporary difference amounts serve as an adequate source of future taxable income to support the realizability of the deferred tax assets. 38 Results of Operations The following tables set forth our results of operations for the periods presented and as a percentage of our net revenue for those periods. Percentages presented in the following tables may not sum due to rounding. Comparison of the Three and Nine Months Ended September 30, 2022 and 2021 Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Amount % of Revenue Amount % of Revenue Amount % of Revenue Amount % of Revenue (dollar amounts in thousands) (dollar amounts in thousands) Net reve Medicare revenue $ 133,291 51 % $ 30,462 20 % $ 392,307 51 % $ 30,462 8 % Commercial revenue 128,078 49 % 120,871 80 % 379,003 49 % 362,639 92 % Total net revenue 261,369 100 % 151,333 100 % 771,310 100 % 393,101 100 % Operating expens Medical claims expense 102,216 39 % 26,085 17 % 316,082 41 % 26,085 7 % Cost of care, exclusive of depreciation and amortization shown separately below 110,654 42 % 78,443 52 % 318,979 41 % 216,457 55 % Sales and marketing (1) 26,382 10 % 14,380 10 % 72,034 9 % 37,639 10 % General and administrative (1) 116,081 44 % 93,070 62 % 305,539 40 % 234,611 60 % Depreciation and amortization 23,314 9 % 12,045 8 % 65,990 9 % 25,944 7 % Total operating expenses 378,647 145 % 224,023 148 % 1,078,624 140 % 540,736 138 % Loss from operations (117,278) (45) % (72,690) (48) % (307,314) (40) % (147,635) (38) % Other income (expense), n Interest income 630 — % 535 — % 1,151 — % 719 — % Interest and other income (expense) 76 — % (4,464) (3) % (8,725) (1) % (10,149) (3) % Total other income (expense), net 706 — % (3,929) (3) % (7,574) (1) % (9,430) (2) % Loss before income taxes (116,572) (45) % (76,619) (51) % (314,888) (41) % (157,065) (40) % Provision for (benefit from) income taxes (4,535) (2) % 1,984 1 % (18,183) (2) % 2,143 1 % Net loss $ (112,037) (43) % $ (78,603) (52) % $ (296,705) (38) % $ (159,208) (41) % (1) Includes stock-based compensation, as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Amount % of Revenue Amount % of Revenue Amount % of Revenue Amount % of Revenue (dollar amounts in thousands) (dollar amounts in thousands) Sales and marketing $ 1,706 1 % $ 884 1 % $ 3,974 1 % $ 2,871 1 % General and administrative 36,790 14 % 27,650 18 % 103,777 13 % 78,323 20 % Total $ 38,496 15 % $ 28,534 19 % $ 107,751 14 % $ 81,194 21 % 39 Net Revenue Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (dollar amounts in thousands) (dollar amounts in thousands) Net reve Capitated revenue $ 130,811 $ 29,872 $ 100,939 338 % $ 383,962 $ 29,872 $ 354,090 1185 % Fee-for-service and other revenue 2,480 590 1,890 320 % 8,345 590 7,755 1314 % Total Medicare revenue 133,291 30,462 102,829 338 % 392,307 30,462 361,845 1188 % Partnership revenue 66,173 54,547 11,626 21 % 190,509 165,604 24,905 15 % Net fee-for-service revenue 35,797 44,835 (9,038) (20) % 113,051 132,713 (19,662) (15) % Membership revenue 26,108 21,489 4,619 21 % 75,443 62,559 12,884 21 % Grant income — — — — % — 1,763 (1,763) (100) % Total commercial revenue 128,078 120,871 7,207 6 % 379,003 362,639 16,364 5 % Total net revenue $ 261,369 $ 151,333 $ 110,036 73 % $ 771,310 $ 393,101 $ 378,209 96 % Medicare revenue increased $102.8 million for the three months ended September 30, 2022 compared to the same period in 2021. Medicare revenue increased $361.8 million for the nine months ended September 30, 2022 compared to the same period in 2021. The increase was mainly due to three months of revenue contribution in the current quarter from our acquired Iora business as compared with one month of revenue contribution in 2021. Commercial revenue increased $7.2 million, or 6%, for the three months ended September 30, 2022 compared to the same period in 2021. Commercial revenue increased $16.4 million, or 5% for the nine months ended September 30, 2022 compared to the same period in 2021. The increase was primarily due to an increase in Consumer and Enterprise members by 92,000, or 13%, from 683,000 as of September 30, 2021 to 775,000 as of September 30, 2022, partially offset by a decrease in total billable visits. Partnership revenue increased $11.6 million, or 21%, for the three months ended September 30, 2022 compared to the same period in 2021. Partnership revenue increased $24.9 million, or 15%, for the nine months ended September 30, 2022 compared to the same period in 2021. The increase was primarily a result of new and expanded partnerships with health networks, new and expanded on-site medical services for enterprise clients and an increase in Consumer and Enterprise members, partially offset by a decrease in COVID-19 on-site testing services for employers, schools and universities during the three and nine months ended September 30, 2022. Net fee-for-service revenue decreased $9.0 million, or 20%, for the three months ended September 30, 2022 compared to the same period in 2021. Net fee-for-service revenue decreased $19.7 million, or 15%, for the nine months ended September 30, 2022 compared to the same period in 2021. The decrease was primarily due to a decrease in total billable visits, partially offset by an increase in Consumer and Enterprise members for the three and nine months ended September 30, 2022. Membership revenue increased $4.6 million, or 21%, for the three months ended September 30, 2022 compared to the same period in 2021. Membership revenue increased $12.9 million, or 21%, for the nine months ended September 30, 2022 compared to the same period in 2021. The increase was primarily due to an increase in Consumer and Enterprise members of 92,000, or 13%, from 683,000 as of September 30, 2021 to 775,000 as of September 30, 2022. 40 Operating Expenses Medical claims expense Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (dollar amounts in thousands) (dollar amounts in thousands) Medical claims expense $ 102,216 $ 26,085 $ 76,131 292% $ 316,082 $ 26,085 $ 289,997 1112% Medical claims expense increased $76.1 million for the three months ended September 30, 2022 compared to the same period in 2021. Medical claims expense increased $290.0 million for the nine months ended September 30, 2022 compared to the same period in 2021. The increase was mainly due to three months of medical claims expenses in the current quarter from our acquired Iora business as compared with one month of medical claims expenses in 2021. Cost of Care, Exclusive of Depreciation and Amortization Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (dollar amounts in thousands) (dollar amounts in thousands) Cost of care, exclusive of depreciation and amortization $ 110,654 $ 78,443 $ 32,211 41 % $ 318,979 $ 216,457 $ 102,522 47 % The $32.2 million, or 41%, increase in cost of care, exclusive of depreciation and amortization, for the three months ended September 30, 2022 compared to the same period in 2021 was primarily due to increases in provider employee and support employee-related expenses of $23.8 million, occupancy costs of $6.1 million, and medical supply costs of $1.1 million. In addition to growth in our existing offices, we added 37 offices since September 30, 2021, bringing our total number of offices to 214 as of September 30, 2022. The cost of care and total offices in 2022 include offices from our acquired Iora business. The $102.5 million, or 47%, increase in cost of care, exclusive of depreciation and amortization, for the nine months ended September 30, 2022 compared to the same period in 2021 was primarily due to increases in provider employee and support employee-related expenses of $72.0 million, occupancy costs of $24.5 million, and medical supply costs of $3.1 million. In addition to growth in our existing offices, we added 37 offices since September 30, 2021, bringing our total number of offices to 214 as of September 30, 2022. The cost of care and total offices in 2022 include offices from our acquired Iora business. Cost of care, exclusive of depreciation and amortization, as a percentage of net revenue decreased from 52% for the three months ended September 30, 2021 to 42% for the three months ended September 30, 2022. Cost of care, exclusive of depreciation and amortization, as a percentage of net revenue decreased from 55% for the nine months ended September 30, 2021 to 41% for the nine months ended September 30, 2022. The decrease was primarily due to the impact of our acquired Iora business. Sales and Marketing Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (dollar amounts in thousands) (dollar amounts in thousands) Sales and marketing $ 26,382 $ 14,380 $ 12,002 83 % $ 72,034 $ 37,639 $ 34,395 91 % Sales and marketing expenses increased $12.0 million, or 83%, for the three months ended September 30, 2022 compared to the same period in 2021. This increase was primarily due to a $6.4 million increase in advertising expenses and a 41 $4.6 million increase in employee-related expenses. The sales and marketing expenses in 2022 includes sales and marketing expenses from our acquired Iora business. Sales and marketing expenses increased $34.4 million, or 91%, for the nine months ended September 30, 2022 compared to the same period in 2021. This increase was primarily due to a $19.8 million increase in advertising expenses and a $11.8 million increase in employee-related expenses. The sales and marketing expenses in 2022 includes sales and marketing expenses from our acquired Iora business. General and Administrative Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (dollar amounts in thousands) (dollar amounts in thousands) General and administrative $ 116,081 $ 93,070 $ 23,011 25 % $ 305,539 $ 234,611 $ 70,928 30 % The $23.0 million, or 25%, increase in general and administrative expenses for the three months ended September 30, 2022 compared to the same period in 2021 was primarily due to higher employee-related expenses of $27.3 million, as we expanded our team to support our growth, and a $2.1 million increase in enterprise software costs. The general and administrative expenses in 2022 includes general and administrative expenses from our acquired Iora business. The $70.9 million, or 30%, increase in general and administrative expenses for the nine months ended September 30, 2022 compared to the same period in 2021 was primarily due to higher employee-related expense of $75.8 million, as we expanded our team to support our growth, and a $7.2 million increase in enterprise software costs. The general and administrative expenses in 2022 includes general and administrative expenses from our acquired Iora business. Depreciation and Amortization Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (dollar amounts in thousands) (dollar amounts in thousands) Depreciation and amortization $ 23,314 $ 12,045 $ 11,269 94 % $ 65,990 $ 25,944 $ 40,046 154 % Depreciation and amortization expenses increased $11.3 million, or 94%, for the three months ended September 30, 2022 compared to the same period in 2021. Depreciation and amortization expenses increased $40.0 million, or 154%, for the nine months ended September 30, 2022 compared to the same period in 2021. This increase was primarily due to depreciation and amortization expenses recognized related to new medical offices, capitalization of software development, upgraded office software, and the Iora acquisition during the three and nine months ended September 30, 2022. Other Income (Expense) Interest Income Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (dollar amounts in thousands) (dollar amounts in thousands) Interest income $ 630 $ 535 $ 95 18 % $ 1,151 $ 719 $ 432 60 % Interest income increased $0.1 million, or 18%, for the three months ended September 30, 2022 compared to the same period in 2021. Interest income increased $0.4 million, or 60% for the nine months ended September 30, 2022. The increase was primarily due to higher interest yields from investments and money market fund, and partially offset by a decrease in interest earned from a loan to Iora. 42 Interest and Other Income (Expense) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (dollar amounts in thousands) (dollar amounts in thousands) Interest and other income (expense) $ 76 $ (4,464) $ 4,540 (102)% $ (8,725) $ (10,149) $ 1,424 (14) % Interest and other income (expense) decreased $4.5 million, or 102%, for the three months ended September 30, 2022 compared to the same period in 2021. Interest and other income (expense) decreased $1.4 million, or 14%, for the nine months ended September 30, 2022 compared to the same period in 2021. The decrease was primarily due to $2.4 million unrealized gain recorded for the indemnification asset recognized as a result of the Iora acquisition and $0.5 million gain recorded for contingently returnable consideration related to an acquisition. Provision for (Benefit from) Income Taxes Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (dollar amounts in thousands) (dollar amounts in thousands) Provision for (benefit from) income taxes $ (4,535) $ 1,984 $ (6,519) (329)% $ (18,183) $ 2,143 $ (20,326) (948) % Provision for (benefit from) income taxes decreased $6.5 million from a provision of $2.0 million for the three months ended September 30, 2021 to a benefit of $4.5 million for the three months ended September 30, 2022. Provision for (benefit from) income taxes decreased $20.3 million from a provision of $2.1 million for the nine months ended September 30, 2021 to a benefit of $18.2 million for the nine months ended September 30, 2022. The decrease was primarily due to amortization of identified intangibles. Liquidity and Capital Resources Since our inception, we have financed our operations primarily with the issuance of the 2025 Notes, our initial public offering, the sale of redeemable convertible preferred stock, and to a lesser extent, the issuance of term notes under credit facilities. As of September 30, 2022, we had cash, cash equivalents and marketable securities of $267.2 million, compared to $501.9 million as of December 31, 2021. We believe that our existing cash, cash equivalents, marketable securities, and the interim debt funding from Amazon will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months. We believe we will meet longer-term expected future cash requirements and obligations through a combination of available cash, cash equivalents and marketable securities, cash flows from operating activities, and access to private and public financing sources, including the interim debt financing as described below. Our principal commitments consist of the principal amount of debt outstanding from convertible senior notes due June 2025 and obligations under our operating leases for office space. We expect capital expenditures to increase in future periods to support growth initiatives in existing and new markets. We may be required to seek additional equity or debt financing. Our future capital requirements will depend on many factors, including our pace of new member growth and expanded enterprise client and health network relationships, our pace and timing of expansion of new medical offices or services in existing and new markets, the timing and extent of spend to support the expansion of sales, marketing and development activities, acquisitions and related costs, and the impact of the COVID-19 pandemic. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition and results of operations would be harmed, and we may be forced to adjust our growth plans and capital expenditures as a result. See " Part II—Item 1A—Risk Factors — In order to support the growth of our business, we may need to incur additional indebtedness or seek capital through new equity or debt financings, which sources of additional capital may not be available to us on acceptable terms or at all.” 43 In addition, given the uncertainty around the duration and extent of the COVID-19 pandemic, we cannot accurately predict at this time the future potential impact of the pandemic on our business, results of operations, financial condition or liquidity. There have been no material changes to our material cash requirements from contractual and other obligations as of September 30, 2022 as compared to those disclosed as of December 31, 2021 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on February 23, 2022. On July 20, 2022, we entered into a Merger Agreement with Amazon. We have agreed to various covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time. Outside of certain limited exceptions, we may not take, agree, resolve, announce an intention, enter into any formal or informal agreement or otherwise make a commitment to do certain actions without Amazon's consent, including, but not limited t • acquiring businesses and disposing of significant assets; • incurring expenditures above specified thresholds; • entering into material contracts; • issuing additional equity or debt securities, or incurring additional indebtedness; and • repurchasing shares of our outstanding common stock. We do not believe these restrictions will prevent us from meeting our ongoing costs of operations, working capital needs, or capital expenditure requirements. Additionally, under the Merger Agreement, Amazon has agreed to provide senior unsecured interim debt financing to us in an aggregate principal amount of up to $300.0 million to be funded in up to ten tranches of $30.0 million per month, beginning on March 20, 2023 until the earlier of the closing of the Amazon Merger and the termination of the Merger Agreement pursuant to its terms, with a maturity date of 24 months after the termination of the Merger Agreement pursuant to its terms. We will agree to certain restrictive covenants and events of default customary for transactions of this type in connection with the interim debt financing, and other terms and conditions to be set forth in definitive agreements to be entered into by the parties in connection with the financing. Summary Statement of Cash Flows The following table summarizes our cash flows: Nine Months Ended September 30, 2022 2021 Net cash used in operating activities $ (179,682) $ (15,332) Net cash (used in) provided by investing activities (35,067) 351,831 Net cash provided by financing activities 12,939 22,392 Net (decrease) increase in cash, cash equivalents and restricted cash $ (201,810) $ 358,891 Cash Flows from Operating Activities For the nine months ended September 30, 2022, our net cash used in operating activities was $179.7 million, resulting from our net loss of $296.7 million and cash used in working capital of $67.9 million, mostly offset by non-cash charges of $185.0 million. Cash used in our working capital consisted primarily of a $85.1 million increase in accounts receivable, a $21.8 million decrease in operating lease liabilities, and a $1.7 million increase in inventory, partially offset by an increase of $25.2 million in accrued expenses, an increase of $7.0 million in accounts payable, a decrease of $3.6 million in prepaid expenses and other current assets, an increase of $2.4 million in other liabilities, a decrease of $1.5 million in other assets, and an increase of $0.9 million in deferred revenue. The changes in accounts receivable and deferred revenue are primarily due to timing of billing and cash collections from our health network partners and enterprise clients. The changes in accounts payable and accrued expenses are primarily related to timing of payments. 44 For the nine months ended September 30, 2021, our net cash used in operating activities was $15.3 million, resulting from our net loss of $159.2 million, mostly offset by non-cash charges of $127.0 million and cash provided by working capital of $16.8 million. Cash provided by our working capital consisted primarily of a $31.7 million increase in accounts payable and accrued expenses, a $21.8 million increase in other liabilities, a $6.3 million increase in deferred revenue, a $1.3 million decrease in other assets and a $0.4 million decrease in inventory, partially offset by an increase of $19.8 million in prepaid expenses and other current assets, a decrease of $14.2 million in operating lease liabilities, and an increase of $10.6 million in accounts receivable. The increase in accounts payable and accrued expenses is primarily due to Iora acquisition-related transaction expenses incurred but not yet paid. The increase in other liabilities is primarily due to an indemnification liability of $11.9 million recognized as part of the Iora acquisition as described in Note 7 "Business Combinations", and a legal settlement liability of $11.5 million as described in Note 13 "Commitments and Contingencies". The increase in prepaid expenses and other current assets is primarily due to $10.9 million prepaid income taxes and a $6.0 million receivable from insurers related to a legal settlement recovery as described in Note 13 "Commitments and Contingencies" to our condensed consolidated financial statements. The changes in accounts receivable and deferred revenue are primarily due to timing of billing and cash collections from our health network partners and enterprise clients. Cash Flows from Investing Activities For the nine months ended September 30, 2022, our net cash used in investing activities was $35.1 million, resulting primarily from purchases of marketable securities of $54.9 million, acquisition of medical practices of $10.4 million and purchases of property and equipment of $54.8 million related to leasehold improvements, computer equipment, and furniture and fixtures for new offices, remodels and improvements to existing offices, capitalization of internal-use software development costs, and office hardware and software. This was partially offset by sales and maturities of marketable securities of $85.0 million. For the nine months ended September 30, 2021, our net cash provided by investing activities was $351.8 million, resulting primarily from sales and maturities of short-term marketable securities of $529.0 million, partially offset by purchases of short-term marketable securities of $80.0 million, acquisition of business and issuance of note receivable of $53.3 million and purchases of property and equipment of $43.9 million related to leasehold improvements, computer equipment, and furniture and fixtures for new offices, remodels and improvements to existing offices, capitalization of internal-use software development costs, and office hardware and software. Cash Flows from Financing Activities For the nine months ended September 30, 2022, our net cash provided by financing activities was $12.9 million, resulting primarily from exercise of stock options of $10.8 million, proceeds from our employee stock purchase plan of $1.7 million, and payment received from acquisition related contingently returnable consideration of $0.5 million. For the nine months ended September 30, 2021, our net cash provided by financing activities was $22.4 million, resulting primarily from exercise of stock options of $19.5 million and proceeds from employee stock purchase plan of $3.0 million. Critical Accounting Policies and Significant Judgments and Estimates Our condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. During the nine months ended September 30, 2022, there were no significant changes to our critical accounting policies and estimates as described in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 23, 2022. 45 Recent Accounting Pronouncements Please see Note 2, “Summary of Significant Accounting Policies” to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. 46 Item 3. Quantitative and Qualitative Disclosures About Market Risk. Interest Rate Sensitivity We had cash and cash equivalents of $139.5 million as of September 30, 2022, compared to $342.0 million as of December 31, 2021, held primarily in cash deposits and money market funds for working capital purposes. We had marketable securities of $127.7 million as of September 30, 2022, compared to $160.0 million as of December 31, 2021, consisting of U.S. Treasury obligations, foreign government bonds and commercial paper. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes. All our investments are denominated in U.S. dollars. In May 2020, we issued the 2025 Notes which bear interest at a fixed rate of 3.0% per annum. As of September 30, 2022, the principal amount of debt outstanding from the 2025 Notes was $316.3 million. Our cash and cash equivalents, marketable securities and debt are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value negatively impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. We do not believe that an increase or decrease in interest rates of 100 basis points would have a material effect on our business, financial condition or results of operations. Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, as of September 30, 2022, that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitation on the Effectiveness of Internal Control The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting. 47 PART II—OTHER INFORMATION Item 1. Legal Proceedings. We are currently involved in, and may in the future become involved in, legal proceedings, claims and investigations in the ordinary course of our business, including medical malpractice and consumer claims. Although the results of these legal proceedings, claims and investigations cannot be predicted with certainty, we do not believe that the final outcome of any matters that we are currently involved in are reasonably likely to have a material adverse effect on our business, financial condition or results of operations. Regardless of final outcomes, however, any such proceedings, claims, and investigations may nonetheless impose a significant burden on management and employees and be costly to defend, with unfavorable preliminary or interim rulings. Please see Note 13, “Commitments and Contingencies” to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of our legal proceedings, claims and investigations. Item 1A. Risk Factors. Investing in our common stock involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below, as well as other information included in this Quarterly Report, including our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report, before making an investment decision. If any of the following risks actually occur, it could harm our business, prospects, operating results and financial condition. Unless otherwise indicated, references to our business being harmed in these risk factors will include harm to our business, reputation, financial condition, results of operations, net revenue and future prospects. In such event, the trading price of our common stock could decline and you might lose all or part of your investment. Risk Factor Summary Our business is subject to a number of risks and uncertainties which may prevent us from achieving our business and strategic objectives or may adversely impact our business, financial condition, results of operations, cash flows and prospects. These risks include but are not limited to the followin Risks Related to Our Proposed Transaction with Amazon • failure to complete, or delays in completing, the proposed Amazon Merger announced on July 21, 2022, could materially and adversely affect our results of operations and our stock price; and • uncertainty about the Amazon Merger or negative publicity related to the Amazon Merger may adversely affect relationships with our members, enterprise clients, health system partners, payers, suppliers and employees, whether or not the Amazon Merger is completed. Risks Related to Our Business and Our Industry • the impact of the ongoing COVID-19 pandemic; • our dependence on a limited number of key existing payers; • our reliance on reimbursements from certain third-party payers for the services we provide; • the impact of reviews and audits by CMS in accordance with Medicare's risk adjustment payment system; • the impact of assuming some or all of the risk that the cost of providing services will exceed our compensation for such services under certain third-party payer agreements; • the impact of reduced reimbursement rates paid by third-party payers, or federal or state healthcare programs due to rule changes or other restrictions; • the impact of regulatory or policy changes in Medicare or other federal or state healthcare programs; • our dependence on the success of our strategic relationships with third parties; 48 • the impact of a decline in the prevalence of private health insurance coverage; • our ability to cost-effectively develop widespread brand awareness and to maintain our reputation and market acceptance for our healthcare services; • our history of losses and uncertainty about our future profitability; • our ability to maintain and expand member utilization of our services; • our ability to compete effectively in the geographies in which we participate; • our ability to grow at the rates we historically have achieved; • the impact of current or future litigation against us, including medical liability claims and class actions; • our ability to attract and retain quality primary care providers to support our services; • fluctuations in our quarterly results and our ability to meet the expectations of securities analysts and investors; and • the loss of key members of our senior management team and our ability to attract and retain executive officers, employees, providers and medical support personnel. Risks Related to Government Regulation • the impact of healthcare reform legislation and changes in the healthcare industry and healthcare spending; • the impact of governmental or regulatory scrutiny of or challenge to our arrangements with health networks; • our dependence on our relationships with affiliated professional entities that we may not own, to provide healthcare services; • our ability to comply with rules related to billing and related documentation for healthcare services; and • our ability to comply with regulations governing the use and disclosure of personal information, including protected health information, or PHI. Risks Related to Information Technology • our reliance on internet infrastructure, bandwidth providers, other third parties and our own systems to provide a proprietary services platform to our members and providers; • our reliance on third-party vendors to host and maintain our technology platform; • any breaches of our systems or those of our vendors or unauthorized access to employee, contractor, member, client or partner data; • our ability to maintain and enhance our proprietary technology platform; and • our ability to optimize our technology solutions for members, integrate our systems with health network partners or resolve technical issues in a timely manner. Risks Related to Our Intellectual Property • our ability to obtain, maintain, protect and enforce our intellectual property rights. Risks Related to Our Acquisition of Iora • our ability to successfully integrate Iora's business and realize the benefits of the merger; and 49 • the incurrence of substantial expenses related to the integration of Iora's business. Risks Related to Our Proposed Transaction with Amazon Failure to complete, or delays in completing, the proposed transaction with Amazon announced on July 21, 2022 could materially and adversely affect our results of operations and our stock price. On July 20, 2022, we entered into the Merger Agreement with Amazon pursuant to which, subject to the terms and conditions of the Merger Agreement, if all of the conditions to closing are satisfied or waived, we will merge with a subsidiary of Amazon and become a wholly-owned subsidiary of Amazon. Consummation of the Amazon Merger is subject to certain closing conditions and a number of the conditions are not within our control, and may prevent, delay, or otherwise materially and adversely affect the completion of the transaction. We cannot predict with certainty whether and when any of the required closing conditions will be satisfied or if another uncertainty may arise and cannot assure you that we will be able to successfully consummate the proposed Amazon Merger as currently contemplated under the Merger Agreement or at all. Risks related to the failure of the proposed Amazon Merger to be consummated include, but are not limited to, the followin • the Amazon Merger may be subject to certain legal restraints under U.S. antitrust law; • we would not realize any or all of the potential benefits of the Amazon Merger, including any synergies that could result from combining our financial and proprietary resources with those of Amazon, which could have a negative effect on the price of our common stock; • under some circumstances, we may be required to pay a termination fee to Amazon of $136.0 million; • we will remain liable for significant transaction costs, including legal, accounting, financial advisory, and other costs relating to the Amazon Merger regardless of whether the Amazon Merger is consummated; • we may experience negative reactions from financial markets or the trading price of our common stock may decline to the extent that the current market price for our stock reflects a market assumption that the Amazon Merger will be completed; • the attention of our management may have been diverted to the Amazon Merger; • we could be subject to litigation related to any failure to complete the Amazon Merger; • the potential loss of key personnel during the pendency of the Amazon Merger as employees and providers may experience uncertainty about their future roles with us following completion of the Amazon Merger; • the potential loss of, and negative reactions from m embers, enterprise clients, health system partners, payers, suppliers and other partners; and • under the Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to completing the Amazon Merger, which restrictions could adversely affect our ability to conduct our business as we otherwise would have done if we were not subject to these restrictions. The occurrence of any of these events individually or in combination could materially and adversely affect our business, results of operations, financial condition, and our stock price. If the Amazon Merger is not consummated and one or more of these events occur, such as p ayment of termination fees to Amazon or other significant transaction costs in connection with the proposed Amazon Merger, our cash balances and our ability to service payments under our outstanding 2025 Notes and other outstanding indebtedness at that time could be materially and adversely impacted and our options for sources of financing or refinancing could be more limited than if we had not pursued the proposed Amazon Merger. See "Risks Related to Our Outstanding Notes." If the Amazon Merger is not completed, there can be no assurance that these risks will not materialize and will not materially and adversely affect our stock price, business, financial conditions, results of operations or cash flows. Uncertainty about the Amazon Merger or negative publicity related to the Amazon Merger may adversely affect relationships with our members, enterprise clients, health system partners, payers, suppliers and employees, whether or not the Amazon Merger is completed. 50 In response to the announcement of the Amazon Merger, our existing or prospective members, enterprise clients, health system partners, payers, vendors, suppliers, landlords and other business partners may: • delay, defer, or cease their agreements or arrangements with, or providing products or services to, us or the combined company; • delay or defer other decisions concerning us or the combined company; or • seek alternative relationships with third parties or otherwise seek to change the terms on which they do business with us or the combined compan y. Any such delays or changes to terms could materially harm our business or, if the Amazon Merger is completed, the business of the combined company. In addition, as a result of the Amazon Merger, our current and prospective employees could experience uncertainty about their future with us or the combined company. As a result, we may not be able to attract and retain key employees to the same extent that we have been in the past and key employees may depart because of issues relating to such uncertainty or a desire not to remain with Amazon following the completion of the Amazon Merger. The pendency of the Amazon Merger has resulted in and may continue to result in negative publicity and other adverse public statements about us and the proposed combination. Such negative publicity or adverse public statements, may also result in investigations by regulatory authorities, legislators and law enforcement officials or in legal claims. Addressing any adverse publicity, governmental scrutiny, investigation or enforcement or other legal proceedings is time consuming and expensive and can divert the time and attention of our senior management from the day-to-day operation of our business and execution of our other strategic initiatives. Further, regardless of the factual basis for the assertions being made or the ultimate outcome of any investigation or proceeding, any negative publicity can have an adverse impact on our reputation and on the morale and performance of our employees and on our relationships with regulatory authorities. It may also have an adverse impact on our ability to take timely advantage of various business and market opportunities. The direct and indirect effects of negative publicity, and the demands of responding to and addressing it, may have a material adverse effect on our business, financial condition, and results of operations. Losses of members, enterprise partners, health system partners, payers or other important strategic relationships from any of the events described above could have a material adverse effect on our business, results of operations, and financial condition. Such adverse effects could also be exacerbated by a delay in the completion of the Amazon Merger for any reason, including delays associated with obtaining requisite regulatory approvals. The Merger Agreement contains provisions that could discourage or deter a potential competing acquirer that might be willing to pay more to effect a business combination with us. Unless and until the Merger Agreement is terminated in accordance with its terms, subject to certain specified exceptions, we are not permitted to solicit, initiate, induce or knowingly encourage or knowingly facilitate any inquiries or the making of any proposal or offer that constitutes, or would reasonably be expected to lead to, an alternative transaction proposal or to engage in discussions or negotiations with third parties regarding any alternative transaction proposal. Such restrictions could discourage or deter a third party that may be willing to pay more than Amazon for the outstanding capital stock of One Medical from considering or proposing such an acquisition of One Medical. Lawsuits have been filed against us and the members of our board of directors arising out of the proposed Amazon Merger. Putative stockholder complaints, including stockholder class action complaints, and other complaints have been and may in the future be filed against us, our board of directors, Amazon, Amazon's board of directors, and others in connection with the transactions contemplated by the Merger Agreement. The outcome of litigation is uncertain, and we may not be successful in defending against any such future claims. Lawsuits that may be filed against us, our board of directors, Amazon, or Amazon's board of directors could divert the attention of our management and employees from our day-to-day business, and otherwise adversely affect our business, results of operations, and financial condition. The ability to complete the Amazon Merger is subject to the receipt of consents and approvals from government entities, which may impose conditions that could have an adverse effect on us or the combined company or could cause either party to abandon the Amazon Merger. 51 Completion of the Amazon Merger is conditioned upon, among other things, the expiration or termination of the required waiting period (and any extension thereof) applicable to the Amazon Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder, or the HSR Act, and any voluntary agreement with the United States Federal Trade Commission, or the FTC, or the Department of Justice Antitrust Division, or the DOJ, not to consummate the Amazon Merger or other transactions contemplated by the Merger Agreement. In deciding whether to grant antitrust approvals, the FTC or DOJ, and other regulatory agencies will consider the effect of the Amazon Merger on competition. The FTC, DOJ, or other regulatory agencies may condition their approval of the Amazon Merger on Amazon’s or our agreement to various requirements, limitations, or costs, or require divestitures or place restrictions on the conduct of Amazon’s business following the Amazon Merger. If we and Amazon agree to these requirements, limitations, costs, divestitures, or restrictions, the ability to realize the anticipated benefits of the Amazon Merger may be impaired. We cannot provide any assurance that we or Amazon will obtain the necessary approvals or that any of the requirements, limitations, costs, divestitures, or restrictions to which we might agree will not have a material adverse effect on Amazon following the Amazon Merger. In addition, these requirements, limitations, costs, divestitures, or restrictions may result in the delay or abandonment of the Amazon Merger. At any time before or after consummation of the Amazon Merger, notwithstanding the termination or expiration of the waiting period under the HSR Act, the FTC or DOJ could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the completion of the Amazon Merger, seeking divestiture of substantial assets of one or both of the parties, requiring the parties to license or hold separate assets or terminate existing relationships and contractual rights, or requiring the parties to agree to other remedies. At any time before or after the completion of the Amazon Merger, and notwithstanding the termination or expiration of the waiting period under the HSR Act, any state or foreign jurisdiction could take such action under the antitrust laws as it deems necessary or desirable in the public interest. Such action could include seeking to enjoin the completion of the Amazon Merger, seeking divestiture of substantial assets of one or both of the parties, requiring the parties to license or hold separate assets or terminate existing relationships and contractual rights, or requiring the parties to agree to other remedies. Private parties may also seek to take legal action under the antitrust laws under certain circumstances, including by seeking to intervene in the regulatory process or litigate to enjoin or overturn regulatory approvals, any of which actions could significantly impede or even preclude obtaining required regulatory approvals. We cannot be certain that a challenge to the Amazon Merger will not be made or that, if a challenge is made, we will prevail . Risks Related to Our Business and Our Industry The ongoing coronavirus (COVID-19) pandemic has significantly impacted, and may continue to significantly impact our business, financial condition, results of operations and growth. The global COVID-19 pandemic and measures introduced by local, state and federal governments to contain the virus and mitigate its public health effects have significantly impacted and may continue to significantly impact our business, our industry and the global economy. While the full extent of the impacts of the COVID-19 pandemic may be difficult to predict or determine due to numerous evolving factors, including emerging variant strains of the virus and their degree of vaccine resistance as well as reinstatements or potential reinstatements of measures to curb the spread of COVID-19, we have seen and may continue to see adverse impacts on our operations, net revenues, expenses, collectability of accounts receivables and other money owed, capital expenditures, liquidity, and overall financial condition, including from: • reduced total billable visit volumes, temporary closures of certain offices, delays in openings of new medical offices, and delayed entry into new or expansion into existing geographies (in response to self-isolation practices, sustained remote work policies, quarantines, shelter-in-place requirements and similar government orders); • higher proportions of lower-revenue generating services and products, including billable remote visits, COVID-19 testing and COVID-19 vaccinations, which may not be reimbursable or have lower average reimbursements relative to traditional in-office visits; • deferral of healthcare by members and patients, which may result in difficulties completing comprehensive annual documentation of Medicare patient health conditions, future cost increases, deferred costs and inability to accurately estimate costs for incurred but not yet reported medical services claims for our At-Risk members, and may negatively impact the health of our patients; 52 • increase in internal and third-party medical costs for care provided to At-Risk members suffering from COVID-19, which may be particularly significant given many of our members are under At-Risk arrangements in which we receive capitated payments and may be more pronounced as a result of future outbreaks or variants of COVID-19; • negative impacts to the business, results of operations and financial condition of our health network partners and their ability or willingness to continue to pay us a fixed price PMPM if they receive reduced visit revenue due to decreases in billable utilization; • inquiries, regulatory or governmental investigations or other disputes that result from our provision of COVID-19 vaccinations, arrangements entered into in reliance on related orders, laws and regulations, or the failure of various waivers for limitations of liability or other provisions under such orders, laws and regulations that apply to us; • supply, resource and capital constraints related to the treatment of COVID-19 patients and disruptions or delays in the delivery of materials and products in the supply chain for our offices and increased capital expenditures due to the need to buy incremental materials or services; • staffing shortages and increased risk for workers’ compensation claims; or • increased costs, diversion of resources from managing our business and growth and reputational harm due to (i) implementation of new services and products in reliance on continuously evolving regulatory standards, (ii) alterations to our operations to address the changing needs of our members during the pandemic, or (iii) member or enterprise client dissatisfaction due to inaccurate results from testing or other services, overburdening of our medical offices and virtual care teams with inquiries and requests, which may result in longer phone wait times or service delays. Any continuation of the above factors and outcomes could harm our business, financial condition, results of operations and growth. We cannot assure you that our current billable volumes and membership levels will be sustained or that average reimbursement for billable services will return to pre-COVID-19 levels. As more of the U.S. population receives the COVID-19 vaccination, our COVID-19 testing volumes may also decline, which may negatively impact our membership and revenue. Further, while vaccines have become available in certain countries and many economies have reopened, new shelter-in-place, quarantine, executive order or related measures or practices may be reinstated by governments and authorities, including due to future waves of outbreak or emerging variant strains of COVID-19, such as the Delta and Omicron variant. Such measures and practices, if reinstated, could reduce our total billable volumes, negatively impact our health network partners and harm our results of operations, business and financial condition. We have continued to adjust many of our new programs to rapidly respond to the COVID-19 pandemic, including telehealth visits, testing and vaccine administration arrangements, in reliance on continuously evolving regulatory standards such as emergency orders, laws and regulations from federal, state and local authorities and the relaxation of certain licensure requirements and privacy restrictions for telehealth intended to permit health care providers to provide care and distribute COVID-19 vaccines to patients during the COVID-19 pandemic. To continue providing some of these new services and products, we will be required to comply with federal, state and local rules, mandates and guidelines, which are subject to rapid change and may vary across jurisdictions. We cannot assure you that such orders, laws, regulations, mandates or guidelines will continue to apply or that regulators or other governmental entities will agree with our interpretations of these orders, laws, regulations, mandates and guidelines. Failure to remain in compliance, or even the perception of non-compliance, may curtail or result in restrictions on our ability to provide any such services, result in time-consuming and potentially costly inquiries, disputes, or investigations (such as the vaccine inquiries discussed in Note 13, “Commitments and Contingencies” to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, or the Vaccine Inquiries, or inquiries from state and local public health departments), as well as damage to our reputation, any of which could harm our business, financial condition and results of operations. We are cooperating with the requests from the Vaccine Inquiries as well as requests received from other governmental agencies, including with respect to our compensation practices and membership generation during the relevant periods. We are unable to predict the outcome or timeline of any residual inquiries or if any additional requests, inquiries, investigations or other government actions may arise relating to such circumstances. The Vaccine Inquiries, together with any additional inquiries, regulatory or governmental investigations or other disputes that result from our provision of COVID-19 vaccinations or any other arrangements entered into in reliance on these orders, laws and regulations, or the failure or reversal of various waivers for limitations of liability or other provisions under such orders, laws and regulations to apply to us could require us to divert resources or adjust certain new programs to ensure compliance and harm our reputation, business, financial condition and results of operations. 53 The pandemic has also resulted in, and may continue to result in, significant disruption of global financial markets, potentially reducing our ability to access capital and reducing the liquidity and value of our marketable securities, which could in the future negatively affect our liquidity. In addition, due to our At-Risk arrangements for the care of Medicare Advantage participants, the full impact of the COVID-19 pandemic may not be fully reflected in our results of operations and overall financial condition until future periods. The COVID-19 pandemic may continue to impact our operations, and net revenues, expenses, collectability of accounts receivables and other money owed, capital expenditures, liquidity, and overall financial condition. We are dependent upon a limited number of key existing payers and loss of contracts with those payers, disruptions in those relationships or the inability of such payers to maintain their contracts with CMS, could adversely affect our business, financial condition, results of operations and prospects. We are dependent on a concentrated number of third-party payers with whom we contract to provide services to At-Risk Members. Contracts with one such payer across multiple markets accounted for 29% of net revenue for the three months ended September 30, 2022. We believe that a majority of our net revenue will continue to be derived from a limited number of key payers, who may terminate their contracts with us for convenience on short-term notice, or upon the occurrence of certain events, some of which may not be within our control. The loss of any of our payer partners or the renegotiation of any of our payer contracts could adversely affect our operating results. In the ordinary course of business, we engage in active discussions and renegotiations with payers with respect to the services we provide and the terms of our payers' agreements. As the payers’ businesses respond to market dynamics, regulatory developments and financial pressures, and as payers make strategic business decisions with respect to the lines of business they pursue and programs in which they participate, certain of our payers may seek to renegotiate or terminate their agreements with us. These discussions could result in reductions to the fees and changes to the scope of services contemplated by our original payer contracts and consequently could negatively impact our net revenue, business, financial condition, results of operations and prospects. Because we rely on a limited number of these payers for a substantial portion of our revenue, we depend on the creditworthiness of these payers. Our payers are subject to a number of risks, including reductions in payment rates from governmental programs, higher than expected health care costs and lack of predictability of financial results when entering new lines of business, particularly with high-risk populations. If the financial condition of our payer partners declines, our credit risk could increase. Should one or more of our significant payer partners declare bankruptcy, be declared insolvent or otherwise be restricted by state or federal laws or regulation from continuing in some or all of their operations, this could adversely affect our ongoing revenues, the collectability of our accounts receivable, our bad debt reserves and our net income. If a payer with which we contract loses its Medicare contracts with CMS, receives reduced or insufficient government reimbursement under the Medicare program, decides to discontinue its Medicare Advantage and/or commercial plans, decides to contract with another company to provide capitated care services to its patients, vertically integrates and/or acquires provider organizations and decides to directly provide care, or otherwise makes or announces an adjustment to its business or strategies, our contract with that payer could be at risk and we could lose revenue or members, and our stock price could decline. We are reliant upon reimbursements from certain third-party payers for the services we provide in our business and reliance on these third-party payers could lead to delays and uncertainties in the reimbursement process. We are reliant upon contracts with certain third-party payers in order to receive reimbursement for some of the services we provide to patients, including value-based contracts from health insurance plans. The reimbursement process is complex and can involve lengthy delays. Although we recognize certain revenue when we provide services to our patients, we may from time to time experience delays in receiving the associated capitation payments or, for our patients on fee-for-service arrangements, the reimbursement for the service provided. In addition, third-party payers may disallow, in whole or in part, requests for reimbursement based on determinations that the member is not eligible for coverage, certain amounts are not reimbursable under plan coverage or were for services provided that were not medically necessary or additional supporting documentation is necessary. Retroactive adjustments may change amounts realized from third-party payers. We are also subject to claims reviews and/or audits by such third-party payers, including governmental audits of our Medicare claims, and may be required to repay these payers if a finding is made that we were incorrectly reimbursed. See “—Noncompliance with billing and documentation requirements could result in non-payment or subject us to audits, billing or other compliance investigations by government authorities, private payers or health network partners.” Third-party payers are also increasingly focused on controlling health care costs, and such efforts, including any revisions to reimbursement policies, may further complicate and delay our reimbursement claims. Furthermore, our business may be adversely affected by legislative initiatives aimed at or having the effect of reducing health care costs associated with Medicare and other changes in reimbursement policies. Delays and uncertainties in the reimbursement process may adversely affect our collection of accounts receivable, increase the overall costs of collection and cause us to incur additional borrowing costs to support our liquidity needs, which could harm our business, financial condition and results of operations. 54 A significant portion of our net revenue is based on Medicare’s risk adjustment payment system and is subject to review and audit, which could result in material adjustments to our results of operations. CMS has implemented a risk adjustment payment system for Medicare health plans to improve the accuracy of payments and establish appropriate compensation for Medicare plans that enroll and treat less healthy Medicare beneficiaries. CMS’ risk adjustment model bases a portion of the total CMS reimbursement payments on various clinical and demographic factors, including hospital inpatient diagnoses, diagnosis data from hospital outpatient facilities and physician visits, gender, age and Medicaid eligibility. CMS requires that all managed care companies and, indirectly, subcontracted providers like us, capture, collect and report the necessary diagnosis code information to CMS, which information is subject to review and audit for accuracy by CMS. This risk adjustment payment system has an indirect impact on the payments we receive from our contracted Medicare Advantage payers. Although we, and the payers with which we contract, have auditing and monitoring processes in place to collect and provide accurate risk adjustment data to CMS for these purposes, that program may not be sufficient to ensure accuracy. If the risk adjustment data submitted by us or our payers incorrectly overstates the health risk of our patients, we might be required to return to the payer or CMS, overpayments and/or be subject to penalties or sanctions, or if the data incorrectly understates the health risk of our members, we might be underpaid for the care that we must provide to our patients, any of which could harm our reputation and have a negative impact on our results of operations and financial condition. CMS may also change the way that they measure risk and determine payment, and the impact of any such changes could harm our business. As a result of the COVID-19 pandemic, risk adjustment scores may also fall as a result of reduced data collection, decreased patient visits or delayed medical care and limitations on payments for certain telehealth services. As a result of the variability of factors affecting our patients’ risk scores, the actual payments we receive from our payers, after all adjustments, could be materially more or less than our estimates. Consequently, our estimate of our patients’ aggregate member risk scores for any period may result in favorable or unfavorable adjustments to our Medicare premium revenues, which may harm our results of operations. Under our At-Risk arrangements with certain third-party payers, we assume the risk that the cost of providing services will exceed our compensation for such services. A substantial portion of our net revenue consists of Capitated Revenue, which, in the case of third party payers or health insurance plans, is based on a pre-negotiated percentage of the premium that the payer receives from CMS. While there are variations specific to each agreement, we sometimes contract with payers to receive recurring PMPM revenue and assume the financial responsibility for the healthcare expenses of our patients. This type of contract is referred to as a “capitation” contract. CMS pays capitation using risk adjustment scores. See “–A significant portion of our net revenue is based on Medicare’s risk adjustment payment system and is subject to review and audit, which would result in material adjustments to our results of operations.” To the extent we encounter delays in documenting patients’ acuity or patients requiring more care than initially anticipated and/or the cost of care increases, aggregate fixed compensation amounts, or capitation payments, may be insufficient to cover the costs associated with treatment. If medical costs and expenses exceed estimates, except in very limited circumstances, we will not be able to increase the fee received under these capitation agreements during their then-current terms and we could suffer losses with respect to such agreements. In addition, while we maintain stop-loss insurance that helps protect us for medical claims per patient in excess of certain levels, future claims could exceed our applicable insurance coverage limits or potential increases in insurance premiums may require us to decrease our level of coverage. Changes in our anticipated ratio of medical expense to revenue can significantly impact our financial results. Accordingly, the failure to adequately predict and control medical costs and expenses and to make reasonable estimates and maintain adequate accruals for incurred but not reported claims could have a material adverse effect on our business, results of operations, financial condition and cash flows. Additionally, the Medicare expenses of our At-Risk members may be outside of our control in the event that such members take certain actions that increase such expenses, such as unnecessary hospital visits. These actions or events also make it more difficult for us to estimate medical expenses and may cause delays in reporting them to payers. Any delays or failures to adequately predict and control medical costs may also result in delayed negative impacts to our Capitated Revenue, including as compared to our estimates of cost of care and capitation payments. Historically, our medical costs and expenses as a percentage of revenue have fluctuated. Factors that may cause medical expenses to exceed estimates inclu • the health status of our At-Risk members; 55 • higher levels of hospitalization among our At-Risk members; • higher than expected utilization of new or existing healthcare services or technologies; • an increase in the cost of healthcare services and supplies, whether as a result of inflation or otherwise; • changes to mandated benefits or other changes in healthcare laws, regulations and practices; • increased costs attributable to specialist physicians, hospitals and ancillary providers; • changes in the demographics of our At-Risk members and medical trends; • contractual or claims disputes with providers, hospitals or other service providers within and outside a health plan’s network; • the occurrence of catastrophes, major epidemics or pandemics, including COVID-19, or acts of terrorism; and • the reduction of health plan premiums. If reimbursement rates paid by private third-party payers are reduced or if these third-party payers otherwise restrain our ability to obtain or provide services to patients, our business could be harmed. Private third-party payers, including health maintenance organizations, or HMOs, preferred provider organizations and other managed care plans, as well as medical groups and independent practice associations that contract with HMOs, pay for the services that we provide to many of our members. As a substantial proportion of our members are commercially insured or covered under Medicare Advantage plans with our contracted payers, if any third-party payers reduce their reimbursement rates or elect not to cover some or all of our services, our business may be harmed. Typically, our affiliated professional entities that provide medical services enter into contracts with certain of these payers either directly, or indirectly through certain of our health network partners, which allow them to participate in the payers’ respective networks and set forth reimbursement rates for services rendered thereunder. As a result, our ability to maintain or increase patient volumes covered by private third-party payers and to maintain and obtain favorable contracts with private third-party payers significantly affects our revenue and operating results. See also “—We are dependent upon a limited number of key existing payers and loss of contracts with those payers, disruptions in those relationships or the inability of such payers to maintain their contracts with CMS, could adversely affect our business, financial condition, results of operations and prospects.” Private third-party payers often use plan structures, such as narrow networks or tiered networks, to encourage or require members to use in-network providers. In-network providers typically provide services through private third-party payers for a lower negotiated rate or other less favorable terms. Private third-party payers generally attempt to limit the delivery of services out-of-network by requiring members to pay higher copayment, co-insurance and/or deductible amounts for out-of-network care. Additionally, private third-party payers have become increasingly aggressive in attempting to minimize the use of out-of-network providers by disallowing the assignment of payment from members to out-of-network providers (i.e., sending payments directly to members instead of to out-of-network providers), capping or establishing out-of-network benefits payable to members that do not cover billed charges for services, waiving out-of-pocket payment amounts and initiating litigation against out-of-network providers for interference with contractual relationships, insurance fraud and violation of state licensing and consumer protection laws. If we become out-of-network for payer products and networks, our business could be harmed and our revenue could be reduced because patients could stop using our services. If reimbursement rates paid by Medicare or other federal or state healthcare programs are reduced, if changes in the rules governing such programs occur, or if government payers otherwise restrain our ability to obtain or provide services to patients, our business, financial condition and results of operations could be harmed. A significant portion of our revenue comes from government healthcare programs, principally Medicare, either through Medicare Advantage plans or directly, including through the Center for Medicare and Medicaid Innovation's, or CMMI's, Global and Professional Direct Contracting Model, or the GPDC Model, which CMMI announced has been redesigned and renamed the ACO Realizing Equity, Access, and Community Health Model, or the ACO REACH Model, to take effect January 1, 2023 for both new applicants who are approved to participate and current GPDC Model participants that have maintained a strong compliance record and meet the requirements of the ACO REACH Model. In addition, many commercial payers base their reimbursement rates on the published Medicare rates or are themselves reimbursed by Medicare for the services we 56 provide. As a result, our results of operations are, in part, dependent on the continuation of Medicare programs, including Medicare Advantage, the GPDC Model (through December 31, 2022) or the ACO REACH Model (starting January 1, 2023), as well as the levels of government funding provided therewith. Any changes that limit or reduce the GPDC Model or the ACO REACH Model, Medicare Advantage, or general Medicare reimbursement levels, such as reductions in or limitations of reimbursement amounts or rates under programs, reductions in funding of programs, expansion of benefits without adequate funding, elimination of coverage for certain benefits, or elimination of coverage for certain individuals or treatments under programs, could have a material adverse effect on our business, results of operations, financial condition and cash flows. The Medicare program and its reimbursement rates and rules, are also subject to frequent change. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative rulings or executive orders, interpretations and determinations, requirements for utilization review and government funding restrictions, each of which may materially and adversely affect the rates at which CMS reimburses us for our services, as well as affect the cost of providing service to patients and the timing of payments to our affiliated professional entities. Budget pressures often lead the federal government to reduce or place limits on reimbursement rates under Medicare. Implementation of these and other types of measures has in the past and could in the future result in substantial reductions in our revenue and operating margins. The final impact of the Medicare Advantage rates can vary from any estimate we may have and may be further impacted by the relative growth of our Medicare Advantage patient volumes across certain geographies as well as by the benefit plan designs submitted. It is possible that we may underestimate the impact of the Medicare Advantage rates on our business, which could have a material adverse effect on our business, results of operations, financial condition and cash flows. In addition, our Medicare Advantage revenues may continue to be volatile in the future which could have a material adverse impact on our business, results of operations, financial condition and cash flows. In addition, CMS often changes the rules governing the Medicare program, including those governing reimbursement. Changes that could adversely affect our business inclu • administrative or legislative changes to base rates or the bases of payment; • limits on the services or types of providers for which Medicare will provide reimbursement; • changes in methodology for patient assessment and/or determination of payment levels; • the reduction or elimination of annual rate increases; or • an increase in co-payments or deductibles payable by beneficiaries. We are unable to predict the effect of recent and future policy changes on our operations. Recent legislative, judicial and executive efforts to enact further healthcare reform legislation have also caused many core aspects of the current U.S. healthcare system to be unclear. While specific changes and their timing are not yet apparent, enacted reforms and future legislative, regulatory, judicial, or executive changes, particularly any changes to the Medicare Advantage program, could have a material adverse effect on our business, results of operations, financial condition and cash flows. There is additional uncertainty around the future of the ACO REACH Model. The ACO REACH Model has been developed by CMS as a means to test various financial risk sharing arrangements in the Medicare program over a four-year period, from January 1, 2023 through December 31, 2026. CMS may make additional, material changes to the ACO REACH Model in the intervening years or, at the end of that four-year period, CMS may not extend or replace the ACO REACH Model with a similar program that we can participate in, which may have a material adverse effect on our business. The GPDC Model and the ACO REACH Model are new CMS programs and we therefore may not be able to realize the expected benefits of either model. In 2021, CMMI announced the GPDC Model to create value-based payment arrangements directly with Direct Contracting Entities, or DCEs, which is part of CMMI's’ strategy to test the next evolution of risk-sharing arrangement to produce value and high quality health care by permitting DCEs to participate in value-based care arrangements with beneficiaries in Medicare fee-for-service. The GPDC Model began its first performance period on April 1, 2021. 57 Our wholly owned subsidiary, Iora Health NE DCE, LLC, was one of a limited number of companies chosen by CMMI as a DCE. In February 2022, CMS announced that the GPDC Model had been redesigned and renamed the ACO REACH Model, with such changes to take effect beginning January 1, 2023. Current DCEs, like us, will participate in the current GPDC Model until December 31, 2022. To participate in the ACO REACH Model, we must (i) agree to meet all of the ACO REACH requirements as of January 1, 2023, including new requirements related to corporate governance, health equity and data collection and reporting and (ii) maintain a strong compliance record during 2022, as determined by CMS. Given the recent enactment of the ACO REACH Model, we cannot assure you that we will be successful or able to comply with the new requirements of the ACO REACH Model. We have no experience serving as an ACO under the new ACO REACH Model and may not be able to realize the expected benefits of the new model. For example, we may encounter difficulties calibrating our historical medical expense estimates to this new beneficiary population, which has not chosen to participate in risk-based care arrangements (unlike Medicare Advantage beneficiaries) and thus may utilize medical services differently than our current members. While we have invested and expect to continue to invest significant time and resources to meet the requirements of the GPDC Model and adapt to the ACO REACH Model, beneficiaries assigned to us under either model may not generate revenue as expected, initially or at all, and we cannot assure you that direct contracting will allow us to achieve the same financial outcomes on Medicare fee-for-service beneficiaries as we do on our existing patients. Additionally, adding new members through either model will also require absorbing new members into our affiliated professional entities, which may strain resources or negatively affect our quality of care. We cannot assure you that our current participation in the GPDC Model will be successful or that we will be able to continue to participate in the ACO REACH Model in the future. We also cannot assure you that our participation in either model will expand our total addressable market in the manner that we expect. Our business model and future growth are substantially dependent on the success of our strategic relationships with health network partners, enterprise clients and distribution partners. We will continue to substantially depend on our relationships with third parties, including health network partners, enterprise clients and distribution partners to grow our business. In particular, our growth depends on maintaining existing, and developing new, strategic affiliations with health network partners, including health systems and private and government payers. We also rely on a number of partners such as benefits enrollment platforms, professional employment organizations, consultants and other distribution partners in order to sell our solutions and services and enroll members onto our platform. Our agreements with our enterprise clients often provide for fees based on the number of members that are covered by such clients’ programs each month, known as capitation arrangements. Certain of our enterprise clients and partners also pay us a fixed fee per year regardless of the number of registered members. The number of individuals who register as members through our enterprise clients is often affected by factors outside of our control, such as plan endorsement by the employer, member outreach and retention initiatives. Enterprise clients may also prohibit us from engaging in direct outreach with employees as potential members, or we may be unsuccessful in spreading brand awareness among employees who perceive competitors as offering better solutions and services, which would decrease growth in membership and reduce our net revenue. Increasing rates of unemployment may also result in loss of members at our enterprise clients, and economic recessions or slowdowns can result in our enterprise clients terminating their employee sponsorship arrangements with us, longer sales cycles, and reduced or limited contract sizes as enterprise clients focus on general cost reductions in the face of macroeconomic uncertainty. In addition, during periods of economic slowdown, enterprise clients may face less competition for new hires or may not need to hire as many employees and as a result, they may not need to sponsor memberships with us as a means to attract new hires. Even if the geographies in which our enterprise clients operate experience growth, it is possible that such client’s program membership could fail to grow at similar rates, if at all. If the number of members covered by one or more of such clients’ programs were to be reduced, including due to benefits reductions or layoffs during and after the COVID-19 pandemic, it would lead to a reduction of membership fees, a decrease in our net fee-for-service revenue and partnership revenue, and may also result in the enterprise client electing not to renew our contract for another year. In addition, the growth forecasts of our clients are subject to significant uncertainty, including after the COVID-19 pandemic and any prolonged ensuing economic recession, and are based on assumptions and estimates that may prove to be inaccurate. Further, historical activation rates within a given enterprise client may not be indicative of future membership levels at that enterprise client or activation rates of similarly situated enterprise clients. High activation rates (i.e., the percentage of individuals eligible for membership who are enrolled as members) do not necessarily result in increased net fee-for-service revenue and do not typically result in increased membership revenue. 58 Health network partnerships also comprise a significant portion of our revenue. For example, under certain health network partnership contracts, we closely collaborate with a health network on certain strategic initiatives such as the expansion of practice sites in a particular jurisdiction or service area, and clinical and digital integration between our primary care and their specialty care services. Our contracts with health network partners can sometimes be bespoke, with varying terms across health network partners. However, many contracts provide for fees on a PMPM basis or a fee-for-service basis. Under contracts providing for PMPM fees, when our medical offices provide professional clinical services to covered members, we, as administrator, perform billing and collection services on behalf of the health network, and the health network receives the fees for services provided, including those paid by members’ insurance plans. If we do not adequately satisfy the objectives of our partners or perform against contractual obligations, we may lose revenue under the applicable health network partner contract and the health network partner may become dissatisfied with the terms or our performance under the contract, which could result in its early termination or amendment, if permitted, and as a result, harm to our business and results of operations, including a reduction in net revenue. Even regardless of our performance under the contracts, we cannot guarantee that our health network partners will continue to be satisfied with the terms or circumstances under existing contracts, particularly given constraints and challenges posed by the COVID-19 pandemic. We have experienced contractual disputes and renegotiations, including with respect to delays in payments due to us, with health network partners in the past and may experience additional disputes and renegotiations in the future. In certain situations, we may need to take legal or other action to enforce our contractual rights, which may strain relationships with our partners, further delay payments owed to us, make us less attractive for potential or future partners and harm our business, results of operations and reputation. Certain contracts with health network partners can be exclusive in the applicable jurisdiction; as a result, in new potential geographies, should we pursue a health network partnership, we would need to successfully contract with a sufficiently competitively viable health network partner, as we may not be able to terminate any such contract for several years without penalty or be able to partner with other health network partners in the same geographies due to competitive pressures or lack of counterparties. If we are unable to successfully continue our strategic relationships with our health network partners on terms favorable to us or at all, or if we do not successfully contract with health network partners in new jurisdictions, our business and results of operations could be harmed. Most of our enterprise clients and health network partners have no obligation to renew their agreements with us after the initial term expires. In addition, our health network partners and enterprise clients may negotiate terms less advantageous to us upon renewal, which may reduce our revenue from these entities. If our health network partners or enterprise clients fail to renew their contracts, or renew their contracts upon less favorable terms or at lower fee levels, our revenue may decline or our future revenue growth may be constrained. In addition, certain of our health network partners and enterprise clients may terminate their contracts with us early for various reasons. If a partner or customer terminates its contract early and revenue and cash flows expected from a partner or enterprise client are not realized in the time period expected or not realized at all, our business could be harmed. Identifying partners, and negotiating and documenting relationships with them, requires significant time and resources. Our competitors may be more effective in executing such relationships and performing against them. If we are unsuccessful in establishing or maintaining our relationships with third parties, our ability to compete in the marketplace or to grow our net revenue could be impaired and our results of operations may suffer. Even if we are successful, we cannot assure you that these relationships will result in increased member use of our solutions and services or increased net revenue. We conduct business in a heavily regulated industry, and any failure to comply with applicable healthcare laws and government regulations, could result in financial penalties, exclusion from participation in government healthcare programs and adverse publicity, or could require us to make significant operational changes, any of which could harm our business. The U.S. healthcare industry is heavily regulated and closely scrutinized by federal, state and local authorities. Comprehensive statutes and regulations govern the manner in which we provide and bill for services and collect reimbursement from governmental programs and private payers, our contractual relationships with our providers, vendors, health network partners, enterprise clients, members and patients, our marketing activities and other aspects of our operations. Of particular importance • state laws that prohibit general business corporations, such as us, from practicing medicine, controlling physicians’ medical decisions or engaging in practices such as splitting fees with physicians; • federal and state laws pertaining to non-physician practitioners, such as nurse practitioners and physician assistants, including requirements for physician supervision of such practitioners and licensure and reimbursement-related requirements; 59 • Medicare and Medicaid billing and reimbursement rules and regulations; • the federal physician self-referral law, commonly referred to as the Stark Law, which, subject to certain exceptions, prohibits physicians from referring Medicare or Medicaid patients to an entity for the provision of certain “designated health services” if the physician or a member of the physician’s immediate family has a direct or indirect financial relationship (including an ownership interest or a compensation arrangement) with the entity; • the federal Anti-Kickback Statute, which, subject to certain exceptions known as “safe harbors,” prohibits the knowing and willful offer, payment, solicitation or receipt of any bribe, kickback, rebate or other remuneration, in cash or in kind, in return for the referral of an individual for, or the lease, purchase, order or recommendation of, items or services covered, in whole or in part, by government healthcare programs such as Medicare and Medicaid; • the federal False Claims Act, which imposes civil and criminal liability on individuals or entities that knowingly or recklessly submit false or fraudulent claims to Medicare, Medicaid, and other government-funded programs or make or cause to be made false statements in order to have a claim paid; • a provision of the Social Security Act that imposes criminal penalties on healthcare providers who fail to disclose or refund known overpayments; • the criminal healthcare fraud provisions of the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, or collectively, HIPAA, and related rules that prohibit knowingly and willfully executing a scheme or artifice to defraud any healthcare benefit program or falsifying, concealing or covering up a material fact or making any material false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services; • the Civil Monetary Penalties Law, which prohibits the offering or giving of remuneration to Medicare and Medicaid beneficiaries that is likely to influence the beneficiary’s selection of a particular provider or supplier; • federal and state laws that prohibit providers from billing and receiving payment from Medicare and Medicaid for services unless the services are medically necessary, adequately and accurately documented, and billed using codes that accurately reflect the type and level of services rendered; • federal and state laws and policies related to healthcare providers’ licensure, certification, accreditation, Medicare and Medicaid program enrollment and reassignment of benefits; • federal and state laws and policies related to the prescribing and dispensing of pharmaceuticals and controlled substances; • state laws related to the advertising and marketing of services by healthcare providers; • federal and state laws related to confidentiality, privacy and security of personal information, including medical information and records, that limit the manner in which we may use and disclose that information, impose obligations to safeguard such information and require that we notify third parties in the event of a breach; • federal laws that impose civil administrative sanctions for, among other violations, inappropriate billing of services to government healthcare programs or employing or contracting with individuals who are excluded from participation in government healthcare programs; • laws and regulations limiting the use of funds in health savings accounts for individuals with high deductible health plans; • state laws pertaining to anti-kickback, fee splitting, self-referral and false claims, some of which are not limited to relationships involving government-funded programs; and • state laws governing healthcare entities that bear financial risk. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Achieving and 60 sustaining compliance with these laws requires us to implement controls across our entire organization and it may prove costly and challenging to monitor and enforce compliance. In particular, given the prevalence of laws, rules and regulations restricting the corporate practice of medicine in certain of the states that we operate, we are prohibited from interfering with or inappropriately influencing providers’ professional judgment and are typically reliant on the providers and other healthcare professionals at our affiliated professional entities to operate in compliance with applicable laws related to the practice of medicine and the provision of healthcare services. The risk of our being found in violation of healthcare laws and regulations is increased by the fact that many of them have not been fully interpreted by regulatory authorities or the courts, and their provisions are sometimes complex and open to a variety of interpretations. Failure to comply with these laws and other laws can result in civil and criminal penalties such as fines, damages, recoupments of overpayments, imprisonment, loss of enrollment status and exclusion from the Medicare and Medicaid programs. To enforce compliance with the federal laws, the U.S. Department of Justice and the Office of Inspector General for the U.S. Department of Health and Human Services, or HHS, regularly scrutinize healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. The operation of medical practices is also subject to various state laws enforced by state regulators, including state attorneys general, boards of professional licensure and departments of health. A review of our business by judicial, law enforcement, regulatory or accreditation authorities could result in challenges or actions against us that could harm our business and operations. Responding to and managing government investigations or any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses, divert resources and management’s attention from the operation of our business and result in adverse publicity. Moreover, if one of our health system partners or another third party fails to comply with applicable laws and becomes the target of a government investigation, government authorities could require our cooperation in the investigation, which could cause us to incur additional legal expenses and result in adverse publicity. In addition, because of the potential for large monetary exposure under the federal False Claims Act, which provides for treble damages and penalties of $12,537 to $25,076 per false claim or statement (as of January 2022, and subject to annual adjustments for inflation), healthcare providers often resolve allegations without admissions of liability for significant amounts to avoid the uncertainty of treble damages that may be awarded in litigation proceedings. Such settlements often contain additional compliance and reporting requirements as part of a consent decree, settlement agreement or corporate integrity agreement. Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources to investigating healthcare providers’ compliance with the healthcare reimbursement rules and fraud and abuse laws. Further, our ability to provide our full range of services in each state is dependent upon a state’s treatment of telehealth and emerging technologies (such as digital health services), which are subject to changing political, regulatory and other influences. Many states have laws that limit or restrict the practice of telehealth, such as laws that require a provider to be licensed and/or physically located in the same state where the patient is located. Failure to comply with these laws could result in denials of reimbursement for our services (to the extent such services are billed), recoupments of prior payments, professional discipline for our providers or civil or criminal penalties. The laws, regulations and standards governing the provision of healthcare services may change significantly in the future and may harm our business and operations. For example, we have had to adapt our business as a result of the CARES Act and other emergency orders, laws and regulations enacted in response to the COVID-19 pandemic. We have also had to adapt our business in response to recent monkey pox outbreaks and new laws relating to abortion and reproductive rights which may impact our current healthcare practices. While some of these changes have allowed us to rapidly respond to evolving healthcare epidemics, they have also required us to adapt to new offerings, processes and procedures. We cannot assure you that such emergency orders, laws and regulations will continue to apply or that regulators or other governmental entities will agree with our interpretation of these arrangements under applicable law. The Vaccine Inquiries or any other regulatory or governmental investigations or other disputes as a result of these arrangements, or the failure of various waivers for limitations of liability or other provisions under such emergency orders, laws and regulations to apply to us could divert resources and harm our reputation, business, financial condition and results of operations. If the prevalence of private health insurance coverage declines, including due to a decline in the prevalence of employer-sponsored health care, our revenue may be reduced. We currently derive a significant portion of our revenue from members acquired under contracts with enterprise clients that purchase health care for their employees (either via insurance or self-funded benefit plans). A large part of the demand for our solutions and services among enterprise clients depends on the need of these employers to manage the costs of healthcare services that they pay on behalf of their employees. While the percentage of employers who are self-insured has been increasing over the past decade, this trend may not continue. Over time, employees may also increasingly decide to obtain their own 61 insurance through state-sponsored insurance marketplaces rather than through their employers. While such employees may remain members, our reimbursement from providing services to these members would likely decrease. Employees who obtain their own insurance may also cancel their memberships, which may decrease the fees we receive under our contracts with health network partners as fewer members engage in their healthcare networks. If any of these trends accelerate, there is no guarantee that we would be able to compensate for the loss in revenue derived from enterprise clients and health network partners by increasing retail member acquisition. A decline in overall prevalence of private health insurance coverage, including due to the passage of healthcare reform proposals such as “Medicare for All,” could further harm our revenue, particularly if accompanied by a reduction in employer-sponsored health insurance. In addition, health network partners who rely on patient use of their networks, particularly specialty care, through our contracts with them, may become dissatisfied with the terms under the applicable contract and seek to amend or terminate, or elect not to renew, these contracts. In these cases, our business, financial condition and results of operations would be harmed. If we fail to cost-effectively develop widespread brand awareness and maintain our reputation, or if we fail to achieve and maintain market acceptance for our healthcare services, our business could suffer. We believe that developing and maintaining widespread awareness of our brand and maintaining our reputation for providing access to high quality and efficient health care in a cost-effective manner is critical to attracting new members, enterprise clients, and health network partners, maintaining existing members, clients and partners and thus growing our business and revenue. Market acceptance of our solutions and services and member acquisition depends on educating people, as well as enterprise clients and health networks, as to the distinct features, ease-of-use, positive lifestyle impact, cost savings, quality, and other perceived benefits of our solutions and services as compared to traditional or competing healthcare access options and our ability to directly market our solutions or services to the employees of our enterprise clients. In particular, market acceptance is highly dependent on sufficient geographic market saturation of medical offices, whether we are in-network with payers, customization of healthcare services, and word of mouth and informal member referrals. While we are in-network with CMS and our health network partners, shortfalls in any of the above areas, the loss or dissatisfaction of a significant contingent of our members or patients, adverse media reports or negative feedback about our solutions and services may substantially harm our brand and reputation, inhibit widespread adoption of our solutions and services, reduce our revenue from enterprise clients and health networks, and impair our ability to attract new or maintain existing members and patients. Our brand promotion activities may not generate awareness or increase revenue and, even if they do, any increase in revenue may not offset the expenses we incur in building our brand. We also cannot guarantee the quality and efficiency of healthcare service, particularly specialty healthcare, from our health network partners, over which we have no control. Many of our health network partners are large institutions with significant operations across a wide network of patients and may be unable to provide consistent levels of service to our members. Patients who experience poor quality healthcare provision from such partners may impute such dissatisfaction to our solutions and services, which could negatively impact member retention and acquisition, reduce our revenue and harm our business. We have a history of losses, which we expect to continue, and we may never achieve or sustain profitability. We have incurred significant losses in each period since our inception. We incurred net losses of $296.7 million, $89.4 million and $254.6 million for the nine months ended September 30, 2022 and the years ended December 31, 2020 and 2021 respectively. As of September 30, 2022, we had an accumulated deficit of $914.9 million. Our net losses and accumulated deficit reflect the substantial investments we made to acquire new health network partners and members, build our proprietary network of healthcare providers and develop our technology platform. We intend to continue scaling our business to increase our enterprise client, member and provider bases, broaden the scope of our health network and other partnerships and expand our applications of technology through which members can access our services. Accordingly, we anticipate that our cost of care and other operating expenses will continue to increase in the foreseeable future. Moreover, as we sign up new At-Risk members for whom we are responsible for managing a range of healthcare services and associated costs, our medical claims expense for such members may be higher relative to the Capitated Revenue earned or any excess revenue over medical claims expense may not be enough to cover our cost of care or other operating expenses. Our efforts to scale our business and manage the health of At-Risk members may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will be able to sustain or increase profitability. Our prior net losses, combined with our expected future net losses, have had and will continue to have a negative impact on our total (deficit) equity and working capital. As a result of these factors, we may need to raise additional capital through debt or equity financings in order to fund our operations, and such capital may not be available on reasonable terms, if at all. 62 Our net revenue depends in part on the number of members enrolled or patient visits, and a decrease in member utilization of our services could harm our business, financial condition and results of operations. Historically, we have relied on patient visits for a substantial portion of our net revenue. For the nine months ended September 30, 2022 and the years ended December 31, 2020 and 2021, net fee-for-service revenue accounted for 15%, 39% and 29% of our net revenue, respectively. As we develop additional digital health solutions through our mobile platform and continue providing and expanding availability of remote visits, we cannot guarantee that our members will consistently make in-office visits in addition to using our digital health solutions, particularly after the COVID-19 pandemic and as related shelter-in-place and quarantine measures and orders are relaxed or lifted. Further, it may be difficult for us to accurately forecast future patient in-office visits over time, which may vary across geographies and depend on patient demographics within a given market. In part due to the reduction of in-office visits observed due to COVID-19, we have introduced billable remote visits. We cannot predict with any certainty the number of remote billable services and their impact on our in-office visits. As remote billable services on average generate lower reimbursement than in-office visits, this may impact our operations and financial results. In addition, we will continue to rely on our reputation and recommendations from members and key enterprise clients to promote our solutions and services to potential new members. A substantial portion of our members hold subscriptions through their respective employers with which we have membership arrangements. The loss of any of our key enterprise clients, or a failure of some of them to renew or expand their arrangements with us, including due to cost-saving measures in the face of macroeconomic uncertainty, could have a significant impact on the growth rate of our revenue. Individual members may also decide not to renew their memberships due to reduced discretionary income as a result of inflationary pressures. If we are unable to attract and retain sufficient members in any given market, we may have reduced visits, which could harm our results of operations, reduce our revenue and harm our business. In addition, under certain of our contracts with enterprise clients, we base our fees on the number of individuals to whom our clients provide benefits. Under certain of our health network partner agreements, we also collect fees from members who receive healthcare services within the health network partner’s network. Many factors, most of which we do not control, may lead to a decrease in the number of individuals covered by our enterprise clients, including, but not limited to, the followin • our proposed transaction with Amazon; • changes in the nature or operations of our enterprise clients or the failure of our enterprise clients to adopt or maintain effective business practices; • changes of control of our enterprise clients; • reduced demand in particular geographies; • shifts away from employer-sponsored health plans toward employee self-insurance; • macroeconomic uncertainty; • shifting regulatory climate and new or changing government regulations; and • increased competition or other changes in the benefits marketplace. If the number of members covered by our enterprise clients and health network partners decreases, our revenue will likely decrease. We operate in a competitive industry, and if we are not able to compete effectively our business would be harmed. The market for healthcare solutions and services is highly fragmented and intensely competitive, with direct and indirect competitors offering varying levels of impact to key stakeholders such as consumers, employers, providers, and health networks. We compete across various segments within the healthcare market and currently face competition from a range of companies and providers for market share and for quality providers and personnel, includin • traditional healthcare providers and medical practices nationally, regionally and locally, that offer similar services, often at lower prices, and that are continuing to develop additional products and becoming more sophisticated and effective; 63 • health networks, including our health network partners, who employ or affiliate with primary care providers, unaffiliated freestanding outpatient centers and specialty hospitals (some of which are physician-owned); • episodic, consumer-driven point solutions such as telemedicine as well as urgent care providers, which may typically pay providers on a fee-for-service basis rather than the salary-based model we employ; • health care or expert medical service tools developed by well-financed health plans which may be provided to health plan customers at discounted prices; and • other companies providing healthcare-focused products and services, including companies offering specialized software and applications, technology platforms, care management and coordination, digital health, telehealth and telemedicine and health information exchange. Our competitive success and growth, which can be measured in part by retention of existing members and gaining of new members in both existing and target geographies, are contingent on our ability to simultaneously address the needs of key stakeholders efficiently while delivering superior outcomes at scale compared with competitors. Over the years, the number of freestanding specialty hospitals, surgery centers, emergency departments, urgent care centers and diagnostic imaging centers has increased significantly in the geographic areas in which we serve and may provide services similar to those we offer. Some of our existing and potential competitors may be larger, have greater name recognition, have longer operating histories, offer a broader array of services or a larger or more specialized medical staff, provide newer or more desirable facilities or have significantly greater resources than we do. Some of the clinics and medical offices that compete with us are also owned by government agencies or not-for-profit organizations that can finance capital expenditures and operations on a tax-exempt basis. In addition, our current or potential competitors may be acquired by third parties with greater available resources. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements and may have the ability to initiate or withstand substantial price competition. In light of the COVID-19 pandemic, existing or new competitors have developed or further invested in telemedicine and remote medicine programs and ventures, which would compete with our virtual care offerings. Also, current and potential competitors have established, and may in the future establish, cooperative relationships with vendors of complementary technologies or services to increase the availability of their solutions in the marketplace. Accordingly, new competitors or alliances may emerge that have greater market share, a larger member or patient base, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources and larger sales forces than we have, which could put us at a competitive disadvantage. Our competitors could also be better positioned to serve certain segments of the healthcare market, which would limit our member and patient growth. In light of these factors, even if our solution is more effective than those of our competitors, current or potential members, health network partners and enterprise clients may accept competitive solutions in lieu of purchasing our solution. Our enterprise clients or health network partners may also elect to terminate their arrangements with us and enter into arrangements with our competitors, particularly in primary care, to the extent they are more favorable from a fee or price perspective or provide greater exposure to, or volume of, patients. In addition, in any geographic area, we may enter into an exclusive contractual arrangement with a single health network partner, which could allow competitors to contract with other health network partners in the same area and gain market share for potential patients. Competitors may also be better positioned to contract with leading health network partners in our target geographies, including existing geographies, after our current contracts expire. If our competitors are better able to attract patients, contract with health network partners, recruit providers, expand services or obtain favorable managed care contracts at their facilities than we are, we may experience an overall decline in member volumes and net revenue. Competition from specialized providers, health plans, medical practices, digital health companies and other parties will result in continued member acquisition and patient visit and utilization volume pressure, which could negatively impact our revenue and market share. Competition in our industry also involves consumer perceptions of quality and pricing, rapidly changing technologies, evolving regulatory requirements and industry expectations, frequent new product and service introductions and changes in customer requirements. As access to hospital performance data on quality measures, patient satisfaction surveys, and standard charges for services increases, healthcare consumers also have more tools to compare competing providers. If any of our affiliated professional entities achieve poor results (or results that are lower than our competitors’) on quality measures or patient satisfaction surveys, or if our standard charges are or are perceived to be higher than our competitors, we may attract fewer members. Moreover, if we are unable to keep pace with the evolving needs of our clients, members and partners and continue to develop, enhance and market new applications and services in a timely and efficient manner, demand for our solutions and services may be reduced and our business and results of operations would be harmed. We cannot guarantee that we will possess the resources, either financial or personnel, for the research, design and development of new applications or services, or that we will be able to utilize these resources successfully and avoid technological or market obsolescence. Further, 64 we cannot assure you that technological advances by one or more of our competitors or future competitors will not result in our present or future applications and services becoming uncompetitive or obsolete. If we are unable to successfully compete in the healthcare market, our business would be harmed. We may not grow at the rates we historically have achieved or at all, even if our key metrics may imply future growth, which could have a negative impact on our business, financial condition and results of operations. We have experienced significant growth in our recent history. Future revenue may not grow at these same rates or may decline. Our future growth will depend, in part, on our ability to grow members in existing geographies, expand into new geographies, expand our service offerings and grow our health network partnerships while maintaining high quality and efficient services. We are continually executing a number of growth initiatives, strategies and operating plans designed to enhance our business. For example, we are expanding our strategic relationships with health network partners to build integrated delivery networks for broad access to their networks of specialists and hospitals. The anticipated benefits from these efforts are based on several assumptions that may prove to be inaccurate. We may not be able to successfully complete these growth initiatives, strategies and operating plans and realize all of the benefits, including growth targets and cost savings, that we expect to achieve, or it may be more costly to do so than we anticipate. We can provide no assurances that even if our key metrics indicate future growth, we will continue to grow our revenue or to generate net income. Moreover, our continued implementation of these programs may disrupt our operations and performance. If, for any reason, the benefits we realize are less than our estimates or the implementation of these growth initiatives, strategies and operating plans negatively impact our operations or cost more or take longer to effectuate than we expect, or if our assumptions prove inaccurate, our business, financial condition and results of operations may be harmed. We also have limited experience operating our business at current scale under economic conditions characterized by high inflation or in economic recessions. We are currently operating in a more volatile inflationary environment due to macroeconomic conditions. Any future economic recessions may introduce new challenges to our business, which we may not be able to adequately anticipate and plan given our limited experience operating our business at its current scale. Certain of our longer-term strategic initiatives may also be obstructed or have unintended effects in the event of an economic recession, which we may not be able to predict. If we fail to manage our growth effectively, our expenses could increase more than expected, our revenue may not increase proportionally or at all, and we may be unable to implement our business strategy. We have experienced significant growth in recent periods, which puts strain on our business, operations and employees. For example, we grew from 1,340 employees as of December 31, 2018 to 3,090 employees as of December 31, 2021 (including 791 employees from our acquisition of Iora). We have also increased our customer and membership bases significantly over the past two years. We anticipate that our operations will continue to rapidly expand. To manage our current and anticipated future growth effectively, we must continue to maintain and enhance our IT infrastructure, financial and accounting systems and controls. In particular, in order for our providers to provide quality healthcare services and longitudinal care to patients and avoid burn-out, we need to provide them with adequate IT and technology support, which requires sufficient staffing for these areas. In addition, as we expand in existing geographies and move into new geographies, we will need to attract and retain an increasing number of quality healthcare professionals and providers. Failure to retain a sufficient number of providers may result in overworking of existing personnel leading to burn-out or poor quality of healthcare services. In addition, our strategy is to provide longitudinal care to members and patients, which requires substantial time and attention from our providers. We must also attract, train and retain a significant number of qualified sales and marketing personnel, customer support personnel, professional services personnel, software engineers, technical personnel and management personnel, and the availability of such personnel, in particular software engineers, may be constrained. A key aspect to managing our growth is our ability to scale our capabilities to implement our solutions and services satisfactorily with respect to both large and demanding enterprise clients and health network partners as well as individual consumers. Large clients and partners often require specific features or functions unique to their membership base, which, at a time of significant growth or during periods of high demand, may strain our implementation capacity and hinder our ability to successfully provide our services to our clients and partners in a timely manner. We may also need to make further investments in our technology to decrease our costs. If we are unable to address the needs of our clients, partners or members, or our clients, partners or members are unsatisfied with the quality of our solutions or services, they may not renew their contracts or memberships, seek to cancel or terminate their relationship with us or may renew on less favorable terms, any of which could harm our business and results of operations. Failure to effectively manage our growth could also lead us to over-invest or under-invest in development and operations, result in weaknesses in our infrastructure, internal systems, processes or controls, give rise to operational mistakes, financial losses, loss of productivity or business opportunities and result in loss of employees and reduced productivity of remaining employees. In order to manage the increasing complexities of our business, we will need to continue to scale and 65 adapt our operational, financial and management controls, as well as our reporting systems and procedures. We may not be able to successfully implement and scale improvements to our systems, processes and controls or in connection with third party software in a timely or efficient manner or in a manner that does not negatively affect our operating results. For example, we may not be able to effectively monitor certain extraordinary contract requirements or provisions that are individually negotiated as the number of transactions continues to grow. In addition, our systems and processes may not prevent or detect all errors, omissions, or fraud, including any fraudulent activities conducted or facilitated by our employees or the providers or staff at our affiliated professional entities. Any of these events could result in our expenses increasing more than expected, lack of growth or slower than expected growth in our revenue, and inability to implement our business strategies. The quality of our services may also suffer, which could negatively affect our reputation and harm our ability to attract and retain members, clients and partners. Investment of significant capital expenditures to support our growth may also divert financial resources from other projects such as the development of new applications and services. In particular, as we enter new geographies or seek to expand our presence in existing geographies, we will need to make upfront capital expenditures, including to lease and furnish medical office space, acquire medical equipment, staff providers at such medical offices and incur related expenses. As we do not recognize patient revenue until those offices open and begin receiving patients, our margins may be reduced during the periods in which such capital expenditures were incurred. Expansion in new or existing geographies can be lengthy and cost-intensive, and we may encounter difficulties or unanticipated issues during the process of opening such new medical offices. We cannot assure you that we will be able to open our planned new medical offices, in existing or new geographies, within our operating budgets and planned timelines, or at all. Cost overruns in the process of opening new offices can result in higher than expected cost of care, exclusive of depreciation and amortization, and operating expenses as compared to revenue in the applicable quarter. In addition, we cannot assure you that new medical offices will operate efficiently or be strategically placed to attract the optimal number of patients. If an office is underperforming for any reason, we could incur additional costs to relocate or shut down that office. It is essential to our ongoing business that our affiliated professional entities attract and retain an appropriate number of quality primary care providers to support our services and that we maintain good relations with those providers. The success of our business depends in significant part on the number, availability and quality of licensed primary care providers employed or contracted by our affiliated professional entities. Providers employed or contracted with our affiliated professional entities are free to terminate their association at any time. In addition, although providers who own interests in affiliated professional entities are generally subject to agreements restricting them from owning an interest in competitive facilities or transferring their ownership interests in the affiliated professional entity without our consent, we may not learn of, or may be unsuccessful in preventing, our provider partners from acquiring interests in competitive facilities or making transfers without our consent. Moreover, in certain states in which we operate, such as California, non-competition and other restrictive covenants may be limited in their enforceability, particularly against physicians and providers. If we are unable to recruit and retain providers and other healthcare professionals, our business and results of operations could be harmed and our ability to grow could be impaired. In any particular geographical location, providers could demand higher payments or take other actions that could result in higher medical costs, less attractive service for our members or difficulty meeting regulatory or accreditation requirements. Our ability to develop and maintain satisfactory relationships with providers also may be negatively impacted by other factors not associated with us, such as changes in Medicare reimbursement levels and other pressures on healthcare providers and consolidation activity among hospitals, provider groups and healthcare providers. We may also experience attrition in our primary care providers due to our proposed Amazon Merger. We expect to encounter increased competition from health insurers and private equity companies seeking to acquire providers in the geographies where we operate practices and, where permitted by law, employ providers. In some geographies, provider recruitment and retention are affected by a shortage of providers and the difficulties that providers can experience in obtaining affordable malpractice insurance or finding insurers willing to provide such insurance. Providers may also leave our affiliated professional entities or perceive them as providing a poor quality of life if our affiliated professional entities do not adequately manage causes of provider burnout and workload, some of which we have little to no control over under the administrative services agreements, or ASAs. Our business is dependent on providing longitudinal and long-term care for members and requires providers to consistently follow members over time, track overall long-term health and, in certain geographies, be available 24/7 for virtual care questions and services. If we are unable to efficiently manage provider workload and capacity to provide longitudinal and long-term care, our providers may depart and our patients may experience lower quality of care, which would harm our business. Furthermore, our ability to recruit and employ providers is closely regulated. For example, the types, amount and duration of compensation and assistance we can provide to recruited providers are limited by the Stark law, the Anti-kickback Statute, state anti-kickback statutes and related regulations. If we are unable to attract and retain sufficient numbers of quality providers by providing adequate support personnel, technologically advanced equipment 66 and facilities that meet the needs of those providers and their patients, memberships and patient visits may decrease, our enterprise clients may alter or terminate their membership contracts with us and our operating performance may decline. We incur significant upfront costs in our enterprise client and health network partner relationships, and if we are unable to maintain and grow these relationships over time, we are likely to fail to recover these costs, which could have a negative impact on our business, financial condition and results of operations. Our business model and growth depend heavily on achieving economies of scale because our initial upfront investment for any enterprise client or certain health network partners is costly and the associated revenue is recognized on a ratable basis. We devote significant resources to establishing relationships with our clients and partners and implementing our solutions and services. This is particularly so in the case of large enterprises that, to date, have contributed a large portion of our membership base and revenue as well as health network partners, who may require specific features or functions unique to their particular processes or under the terms of their contracts with us, including significant systems integration and interoperability undertakings. Accordingly, our results of operations will depend in substantial part on our ability to deliver a successful experience for these clients and related members and partners to persuade our clients and partners to maintain and grow their relationship with us over time. Additionally, as our business is growing significantly, our new customer and partner acquisition costs could outpace our revenue growth and we may be unable to reduce our total operating costs through economies of scale such that we are unable to achieve profitability. Our costs of doing business could also increase significantly due to labor shortages and inflationary pressures, which could increase the cost of labor, healthcare services and supplies and rental payments for our office locations. If we fail to achieve appropriate economies of scale or if we fail to manage or anticipate the evolution and in future periods, demand of our clients and partners, our business may be harmed. Our marketing cycle can be long and unpredictable and requires considerable time and expense, which may cause our results of operations to fluctuate. The marketing cycle for our solutions and services from initial contact with a potential enterprise client or health network partner to contract execution and implementation varies widely by enterprise client or partner. Some of our partners undertake a significant and prolonged evaluation process, including to determine whether our solutions and services meet their unique healthcare needs, which evaluation can be complex given the size and scale of our clients and partners. Our contractual arrangements with our health network partners are often highly specific to each partner depending on their needs, the characteristics and patient demographics of the geographical region they serve, their growth plans and their operations, among other things. As a result, our marketing efforts to any new health network partner must be tailored to meet its specific strategic demands, which can be time consuming and require significant upfront cost. These efforts also must address interoperability between our IT infrastructure and systems and such partner’s systems, which can result in substantial cost without any assurance that we will ultimately enter into a contractual arrangement with any such partner. Our large enterprise clients often initially restrict direct access by us to their employees to curb information overflow. As a result, we may not be able to directly market our solutions and services to, and educate, employees at our enterprise clients until much later after execution of an agreement with such clients. This can result in limited membership acquisition at any such enterprise client for a significant period of time following contract execution, and we cannot assure you that we will be able to gain sufficient membership acquisition to justify our upfront investments. Further, even after contract execution with a particular enterprise client, we generally compete with other health service providers who market to the same employees at such enterprise client, and our marketing and employee education efforts may not be successful in winning members from other competing services, many of which are traditional healthcare models that employees are more familiar with. We also incur significant marketing costs to grow awareness of our solution and services in both existing and new geographical locations for potential new members. Our marketing efforts for member acquisition are dependent in part on word of mouth, which may take substantial time to spread. In addition, for both new and existing geographic locations, we will need to continuously open medical offices in targeted locations to build awareness, which is both time-intensive and requires substantial upfront fixed costs. If our substantial upfront marketing and implementation investments do not result in sufficient sales to justify our investments, it could harm our business and results of operations. We could experience losses or liability, including medical liability claims, causing us to incur significant expenses and requiring us to pay significant damages if not covered by insurance. Our business entails the risk of medical liability claims against our affiliated professional entities, their providers, and 1Life and its subsidiaries and we have in the past been subject to such claims in the ordinary course of business. Although 1Life, its subsidiaries, our affiliated professional entities and individual providers may carry insurance at the entity level and at the provider level covering medical malpractice claims in amounts that we believe are appropriate in light of the risks attendant to our business, successful medical liability claims could result in substantial damage awards that exceed the limits of our 67 affiliated professional entities' insurance coverage. Professional liability insurance is expensive and insurance premiums may increase significantly in the future, particularly as we expand our services and as the professional liability insurance market becomes more challenging due to COVID-19. As a result, adequate professional liability insurance may not be available to our providers or to us in the future at acceptable costs or at all. Any claims made against us that are not fully covered by insurance could be costly to defend against, result in substantial damage awards against us and divert the attention of our management and our providers from our operations, which could harm our business. In addition, any claims may significantly harm our business or reputation. Moreover, we do not control the providers and other healthcare professionals at our affiliated professional entities with respect to the practice of medicine and the provision of healthcare services. While we seek to attract high quality professionals, the risk of liability, including through unexpected medical outcomes, is inherent in the healthcare industry, and negative outcomes may result for any of our members. We attempt to limit our liability to members, clients and partners by contract; however, the limitations of liability set forth in the contracts may not be enforceable or may not otherwise protect us from liability for damages. Additionally, we may be subject to claims that are not explicitly covered by such contractual limits. We also maintain general liability coverage for certain risks, claims and litigation proceedings. However, this coverage may not continue to be available on acceptable terms or in sufficient amounts to cover one or more large claims against us, and may include larger self-insured retentions or exclusions. In addition, the insurer might deny coverage for the claims we submit or disclaim coverage as to any future claim. Any liability claim brought against us, or any ensuing litigation, regardless of merit, could result in a substantial cost to us, divert management’s attention from operations and could also result in an increase of our insurance premiums and damage to our reputation. A successful claim not fully covered by our insurance could have a negative impact on our liquidity, financial condition, and results of operations. Current or future litigation against us could be costly and time-consuming to defend. We are subject, and in the future may become subject from time to time, to legal proceedings and claims that arise in the ordinary course of business such as claims brought by our members, clients or partners in connection with commercial disputes, consumer class action claims, employment claims made by our current or former employees, technology errors or omissions, medical malpractice, professional negligence or other related actions or claims inherent in the provision of healthcare services as well as other litigation matters. In particular, as we grow our base of consumer members, we may be subject to an increasing number of consumer claims, disputes and class action complaints, including ongoing claims alleging misrepresentations with respect to our membership fees. While our membership terms generally require individual arbitration, we cannot assure you that such terms will be enforced, which may result, and has resulted in the past, in costly class action litigation. Litigation may result in substantial costs, settlement and judgments and may divert management’s attention and resources, which may substantially harm our business, financial condition and results of operations. Insurance may not cover such claims, may not provide sufficient payments to cover all of the costs to resolve one or more such claims and may not continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, thereby leading analysts or potential investors to reduce their expectations of our performance, which could reduce the market price of our common stock. Our labor costs could be negatively impacted by competition for staffing, the shortage of experienced nurses and providers and labor union activity. The operations of our affiliated professional entities are dependent on the efforts, abilities and experience of our management and medical support personnel, including nurses, therapists and lab technicians, as well as our providers. We compete with other healthcare providers in recruiting and retaining employees, and, like others in the healthcare industry, we continue to experience a shortage of nurses and providers in certain disciplines and geographic areas. As a result, from time to time, we may be required to enhance wages and benefits to recruit and retain experienced employees, make greater investments in education and training for newly licensed medical support personnel, or hire more expensive temporary or contract employees. Furthermore, state-mandated nurse-staffing ratios in California affect not only our labor costs, but, if we are unable to hire the necessary number of experienced nurses to meet the required ratios, they may also cause us to limit patient volumes, which would have a corresponding negative impact on our net revenue. In addition, while none of our employees are represented by a labor union as of September 30, 2022, our employees may seek to be represented by one or more labor unions in the future. If some or all of our employees were to become unionized, it could increase labor costs, among other expenses, and may require us to adjust our employee policies and protocols. Further, labor is subject to external factors that are beyond our control, including the competitive market for skilled workers and leaders in the healthcare industry, cost inflation, the COVID-19 pandemic and workforce participation rates. In general, our failure to recruit and retain qualified management, experienced nurses and other medical support personnel, or to control labor costs, could harm our business. 68 In order to support the growth of our business, we may need to incur additional indebtedness or seek capital through new equity or debt financings, which sources of additional capital may not be available to us on acceptable terms or at all. Our operations have consumed substantial amounts of cash since inception and we intend to continue to make significant investments to support our business growth, respond to business challenges or opportunities, expand our services in new geographic locations, enhance our operating infrastructure and existing solutions and services and potentially acquire complementary businesses and technologies. For the nine months ended September 30, 2022 and the years ended December 31, 2020 and 2021, our net cash used in operating activities was $179.7 million, $4.4 million and $88.6 million, respectively. As of September 30, 2022, we had $139.5 million of cash and cash equivalents and $127.7 million of marketable securities, which are held for working capital purposes. As of September 30, 2022, we had $316.3 million aggregate principal amount of debt outstanding under our convertible senior notes issued in May 2020, or the 2025 Notes. As of September 30, 2022, we have also deferred payroll taxes in the amount of $5.0 million and received $4.3 million in grants as part of the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, through the Provider Relief Fund, or PRF of HHS, to help offset the impact of increased healthcare related expenses and lost revenues attributable to the COVID-19 pandemic. We are not required to repay this grant, provided we attest to and comply with certain terms and conditions, including the use of PRF funds for only permitted purposes and only after funds from other sources obligated to reimburse recipients have been applied. If we are unable to attest to or comply with current or future terms and conditions, our ability to retain some or all of the PRF funds received may be impacted. Our future capital requirements may be significantly different from our current estimates and will depend on many factors, including our growth rate, membership renewal activity and growth, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new or enhanced services, expansion of services to new geographic locations, addition of new health network partners and the continuing market acceptance of our healthcare services. Accordingly, we may need to engage in equity or debt financings or collaborative arrangements to secure additional funds. The Merger Agreement with Amazon contains certain covenants that may restrict or limit our ability to raise capital, including through a debt financing. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Moreover, recapitalizing our debt or taking a number of other actions under the terms of the indenture governing the 2025 Notes, such actions could have the effect of diminishing our ability to make payments on the notes when due. Any debt financing secured by us in the future could involve additional restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, during times of economic instability, including the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic, it has been difficult for many companies to obtain financing in the public markets or to obtain debt financing, and we may not be able to obtain additional financing on commercially reasonable terms, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, it could harm our business and growth prospects. Our revenues have historically been concentrated among our top customers, and the loss of any of these customers could reduce our revenues and adversely impact our operating results. Historically, our revenue has been concentrated among a small number of customers. In 2020 and 2021, our top three customers accounted for 35% and 32% of our net revenue, respectively. These customers included commercial payers and a health network partner. This customer mix may also shift in the near and medium term as a result of our acquisition of Iora. The loss of one or more of these customers could reduce our revenue, harm our results of operations and limit our growth. Our quarterly results may fluctuate significantly, which could adversely impact the value of our common stock. Our quarterly results of operations, including our net revenue, loss from operations, net loss and cash flows, have varied and may vary significantly in the future, and period-to-period comparisons of our results of operations may not be meaningful. Accordingly, our quarterly results should not be relied upon as an indication of future performance. Our quarterly financial results have fluctuated, and may fluctuate in the future, as a result of a variety of factors, many of which are outside of our control, including, without limitation, the followin • the addition or loss of health network partners or enterprise clients, including through acquisitions or consolidations of such entities; 69 • the addition or loss of contracts with, or modification of contract terms with, payers, including the reduction of reimbursements for our services or the termination of our network contracts with payers; • seasonal and other variations in the timing and volume of patient visits, such as the historically higher volume of use of our service during peak cold and flu season months or due to COVID-19 outbreaks or variants; • fluctuations in unemployment rates resulting in reductions in total members; • slowdown in the overall economy resulting in losses of enterprise clients as they scale back on expenses; • new enterprise sponsorships and renewal of existing enterprise sponsorships and the timing thereof as well as enterprise and consumer member activation and renewal and timing thereof; • the timing of recognition of revenue; • the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure, including upfront capital expenditures and other costs related to expanding in existing or entering new geographical locations, as well as providing administrative and operational services to our affiliated professional entities under the ASAs; • our ability to effectively estimate the potential costs of medical services incurred, including under our at-risk arrangements, and the adequacy of our reserves for such incurred but not reported claims for medical services, in either case including due to increased visits and costs following a future COVID-19 outbreak or variant, which could result in fluctuations in our quarterly results and may not accurately reflect the underlying performance of our business within a given period; • our ability to effectively manage the size and composition of our proprietary network of healthcare professionals relative to the level of demand for services from our members; • the timing and success of introductions of new applications and services by us or our competitors, including well-known competitors with significant market clout and perceived ability to compete favorably due to access to resources and overall market reputation; • changes in the competitive dynamics of our industry, including consolidation among competitors, health network partners or enterprise clients; and • the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill from acquired companies. Most of our net revenue in any given quarter is derived from contracts entered into with our partners and clients during previous quarters as well as membership fees that are recognized ratably over the term of each membership. Consequently, a decline in new or renewed contracts or memberships in any one quarter may not be fully reflected in our net revenue for that quarter. Such declines, however, would negatively affect our net revenue in future periods and the effect of loss of members, and potential changes in our rate of renewals or renewal terms, may not be fully reflected in our results of operations until future periods. While we encourage enterprise clients to purchase memberships off of their periodic enrollment cycle, we cannot guarantee that they will do so. Accordingly, the effect of changes in the industry impacting our business or loss of members may not be reflected in our short-term results of operations. In addition, revenues associated with our At-Risk arrangements are subject to significant estimation risk related to reserves for incurred but not reported claims. If the actual claims expense differs significantly from the estimated liability due to differences in utilization of healthcare services, the amount of charges and other factors, it could negatively impact our revenue and have a material adverse impact on our business, results of operations, financial condition and cash flows. For example, future outbreaks or variants of COVID-19 may significantly increase actual claims which are difficult to forecast or predict, and as a result, may cause estimated liability to differ significantly. Any fluctuation in our quarterly results may not accurately reflect the underlying performance of our business and could cause a decline in the trading price of our common stock. 70 If we lose key members of our senior management team or are unable to attract and retain executive officers and employees we need to support our operations and growth, our business and growth may be harmed. Our success depends largely upon the continued services of our key executive officers, particularly our Chair, Chief Executive Officer and President and 1Life's Chief Medical Officer. These executive officers are at-will employees and therefore they may terminate employment with us at any time with no advance notice. We also do not maintain any key person life insurance policies. Further, we rely on our leadership team in the areas of research and development, marketing, services and general and administrative functions. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. The replacement of one or more of our executive officers or other key employees would likely involve significant time and costs and may significantly delay or prevent the achievement of our business objectives. We are particularly dependent on 1Life's Chief Medical Officer, who is the sole director and officer of many of the affiliated professional entities and is responsible for overseeing the operation of several of such entities, among other roles. While we have succession plans in place and have employment or service arrangements with a limited number of key executives, these measures do not guarantee that the services of these or suitable successor executives will continue to be available to us. To continue to execute our growth strategy, we also must attract and retain highly skilled personnel. Competition is intense for qualified professionals and we may not be successful in continuing to attract and retain qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled personnel with appropriate qualifications. The pool of qualified personnel with experience working in the healthcare market is limited overall. In addition, many of the companies with which we compete for experienced personnel have greater resources than we have. Further, labor is subject to external factors that are beyond our control, including the competitive market for skilled workers and leaders in the healthcare industry, cost inflation, the COVID-19 pandemic and workforce participation rates. As a result, our success is dependent on our ability to evolve our culture, align our talent with our business needs, engage our employees and inspire our employees to be open to change, to innovate and to maintain member- and customer-focus when delivering our services. In addition, job candidates often consider the value of the stock options or other equity-based awards they are to receive in connection with their employment. Volatility in the price of our stock may, therefore, negatively impact our ability to attract or retain highly skilled personnel. Further, the requirement to expense stock options and other equity-based compensation may discourage us from granting the size or type of stock option or equity awards that job candidates require to join our company. Inflationary pressures, or stress over economic, geopolitical, or pandemic-related events such as those the global market is currently experiencing, may also result in employee attrition. Our business would be harmed if we fail to adequately plan for succession of our executives and senior management; or if we fail to effectively recruit, integrate, retain and develop key talent and/or align our talent with our business needs and the current rapidly changing environment. We may acquire other companies or technologies, which could divert our management’s attention, result in dilution to our stockholders and otherwise disrupt our operations and we may have difficulty integrating any such acquisitions successfully or realizing the anticipated benefits therefrom, any of which could harm our business. The Merger Agreement with Amazon provides for certain restrictions on our activities until the Effective Time or until the Merger Agreement is terminated, including restrictions on our ability to acquire any business. We may seek to acquire or invest in businesses, applications and services or technologies that we believe could complement or expand our business, enhance our technical capabilities or otherwise offer growth opportunities. For example, we completed our acquisition of Iora in an all-stock transaction and our stockholders incurred substantial dilution. For additional risks related to the acquisition of Iora, please refer to "—Risks Related to the Acquisition of Iora." The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated. We have limited experience acquiring or investing in businesses, applications and services or technologies and may not have the experience or capabilities to successfully execute such transactions or integrate them following consummation. In addition, if we acquire additional businesses, we may not be able to integrate the acquired personnel, operations and technologies successfully, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including, but not limited t • inability to integrate or benefit from acquired technologies or services in a profitable manner; • lack of experience in making acquisitions and integrating acquired businesses or assets; 71 • unanticipated costs or liabilities associated with the acquisition; • difficulty integrating the accounting systems, operations and personnel of the acquired business; • difficulties and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business; • diversion of management’s attention from other business concerns; • negative impacts to our existing relationships with enterprise clients or health network partners as a result of the acquisition; • the potential loss of key employees; • use of resources that are needed in other parts of our business; • deficiencies associated with the assets or companies we acquire or ineffective or inadequate controls, procedures or policies at any acquired business that were not identified in advance and may result in significant unanticipated costs; and • use of substantial portions of our available cash to consummate the acquisition. The effectiveness of our due diligence review of potential acquisitions and assessments of potential benefits or synergies are dependent upon the accuracy and completeness of statements and disclosures made or actions taken by the companies we acquire or their representatives. We may fail to accurately forecast the financial impact of an acquisition transaction, including tax and accounting charges. In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our results of operations based on this impairment assessment process, which could harm our results of operations. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could harm our results of operations. In addition, if an acquired business fails to meet our expectations, our business may be harmed. The estimates of market opportunity and forecasts of market and revenue growth included in this Quarterly Report may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all. Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. In particular, the size and growth of the overall U.S. healthcare market is subject to significant variables, including a changing regulatory environment and population demographic, which can be difficult to measure, estimate or quantify. Our business depends on member acquisition and retention, which further drives revenue from our contracts with health network partners. Estimates and forecasts of these factors in any given market is difficult and affected by multiple variables such as population growth, concentration of enterprise clients and population density, among other things. Further, we cannot assure you that we will be able to sufficiently penetrate certain market segments included in our estimates and forecasts, including due to limited deployable capital, ineffective marketing efforts or the inability to develop sufficient presence in a given market to gain members or contract with employers and health network partners in that market. Once we acquire a consumer or enterprise member, apart from fixed annual membership fees and payments from health care partners, we primarily derive revenue from patient in-office visits, which may be difficult to forecast over time, particularly as our billable service mix continues to expand, including due to the COVID-19 pandemic. Finally, our contractual arrangements with health network partners typically have highly tailored capitation and other fee structures which vary across health network partners and are dependent on either the number of members that receive healthcare services in a health network partner’s network or the volume and expense of the care received by At-Risk members. As a result, we may not be able to accurately forecast revenue from our health network partners. For these reasons, the estimates and forecasts in this Quarterly Report relating to the size and expected growth of our target markets may prove to be inaccurate. Even if the markets in which we compete meet our size estimates and forecasted growth, our business could fail to grow at similar rates, if at all. Natural or man-made disasters and other similar events may significantly disrupt our business and negatively impact our business, financial condition and results of operations. 72 Our offices and facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, extreme weather conditions (including adverse weather conditions caused by global climate change or otherwise), power outages, fires, floods, protests and civil unrest, nuclear disasters and acts of terrorism or other criminal activities, which may result in physical damage to our offices, temporary office closures and could render it difficult or impossible for us to operate our business for some period of time. In particular, certain of the facilities we lease to house our computer and telecommunications equipment are located in the San Francisco Bay Area, a region known for seismic activity, and our insurance coverage may not compensate us for losses that may occur in the event of an earthquake or other significant natural disaster. Any disruptions in our operations related to damage to, or repair or replacement of our offices, could negatively impact our business and results of operations and harm our reputation. Although we maintain an insurance policy covering damages to our property and, in certain situations, interruptions to our business, such insurance may not be available or sufficient to compensate for the different types of associated losses that may occur, including business interruption losses. Any such losses or damages could harm our business, financial condition and results of operations. In addition, our health network partners’ facilities may be harmed or rendered inoperable by such natural or man-made disasters, which may cause disruptions, difficulties or other negative effects on our business and operations. Risks Related to Government Regulation The impact of healthcare reform legislation and other changes in the healthcare industry and in healthcare spending is currently unknown, but may harm our business. Our revenue is dependent on the healthcare industry and could be affected by changes in healthcare spending and policy. The healthcare industry is subject to changing political, regulatory and other influences. The Patient Protection and Affordable Care Act, or ACA, made major changes in how health care is delivered and reimbursed, and increased access to health insurance benefits to the uninsured and underinsured populations in the United States. ACA, among other things, increased the number of individuals with Medicaid and private insurance coverage. ACA has been subject to legislative and regulatory changes and court challenges and there is uncertainty regarding whether, when, and how ACA may be changed, the ultimate outcome of court challenges and how the law will be interpreted and implemented. Changes by Congress or government agencies could eliminate or alter provisions beneficial to us, while leaving in place provisions reducing our reimbursement or otherwise negatively impacting our business. In addition, current and prior healthcare reform proposals have included the concept of creating a single payer such as “Medicare for All” or a public option for health insurance. If enacted, these proposals could have an extensive impact on the healthcare industry, including us and may impact our business, financial condition, results of operations, cash flows and the trading price of our security. We are unable to predict whether such reforms may be enacted or their impact on our operations. We are also impacted by the Medicare Access and CHIP Reauthorization Act, under which physicians must choose to participate in one of two payment formulas, Merit-Based Incentive Payment System, or MIPS, or Alternative Payment Models, or APMs. Beginning in 2019, MIPS allows eligible physicians to receive upward or downward adjustments to their Medicare Part B payments based on certain quality and cost metrics, among other measures. As an alternative, physicians can choose to participate in an Advanced APM. Advanced APMs are exempt from the MIPS requirements, and physicians who are meaningful participants in APMs will receive bonus payments from Medicare pursuant to the law. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the number of individuals who qualify for health care coverage and amounts that federal and state governments and other third-party payers will pay for healthcare services, which could harm our business, financial condition and results of operations. Our arrangements with health networks may be subject to governmental or regulatory scrutiny or challenge. Some of our relationships with health networks involve risk arrangements, such as capitated payments designed to achieve alignment of financial incentives and to encourage close collaboration on clinical care for patients. Although we believe that our health network contracts involving capitated payments comply with the federal Anti-Kickback Statute and the Stark Law, we cannot assure you that regulators or other governmental entities will agree with our interpretation of these arrangements under applicable law. Our health network partnerships may be subject to scrutiny or investigation from time to time by regulators or other governmental entities, which may be lengthy, costly, and divert resources and our management’s attention from managing our business and growth. If our health network partnerships are challenged and found to violate the Anti-Kickback Statute or the Stark Law, we could incur substantial financial penalties, reimbursement denials, repayments or recoupments, or exclusion from participation in government healthcare programs, any of which could harm our business. 73 Evolving government regulations may increase costs or negatively impact our results of operations. Our operations may be subject to direct and indirect adoption, expansion, revision or reinterpretation of various laws and regulations. In the event any such changes in law or interpretation impacts our services or contractual arrangements, we may be required to modify such services, or revise our arrangements, in a manner that undermines the attractiveness of services or may not preserve the same economics, or may be required to discontinue such arrangements. In each case, our revenue may decline and our business may be harmed. Compliance with changes in interpretation of laws and regulations may require us to change our practices at an undeterminable and possibly significant initial and recurring monetary expense. These additional monetary expenditures may increase future overhead, which could harm our results of operations. We have identified what we believe are areas of government regulation that, if changed, could be costly to us. These inclu fraud, waste and abuse laws; rules governing the practice of medicine by providers; licensure standards for primary care providers and behavioral health professionals; laws limiting the corporate practice of medicine and professional fee splitting; laws, regulations, and other requirements applicable to the Medicare program (including any CMMI programs in which we may participate); tax laws and regulations applicable to our annual membership fees; cybersecurity and privacy laws; laws and rules relating to the distinction between independent contractors and employees (including recent developments in California that have expanded the scope of workers that are treated as employees instead of independent contractors); and tax and other laws encouraging employer-sponsored health insurance and group benefits. There could be laws and regulations applicable to our business that we have not identified or that, if changed, may be costly to us, and we cannot predict all the ways in which implementation of such laws and regulations may affect us. We are dependent on our relationships with affiliated professional entities that we may not own to provide healthcare services and our business would be harmed if those relationships were disrupted or if our arrangements with these affiliated professional entities become subject to legal challenges. The corporate practice of medicine prohibition exists in some form, by statute, regulation, board of medicine or attorney general guidance, or case law, in certain of the states in which we operate. These laws generally prohibit the practice of medicine by lay persons or entities and are intended to prevent unlicensed persons or entities from interfering with or inappropriately influencing providers’ professional judgment. As a result, many of our affiliated professional entities that deliver healthcare services to our members are wholly owned by providers licensed in their respective states, including Andrew Diamond, M.D., Ph.D., 1Life's Chief Medical Officer who oversees the operation of several of the affiliated professional entities as the sole director and officer of many of the affiliated professional entities. Under the ASAs between 1Life and/or its subsidiaries with each affiliated professional entity, we provide various administrative and operations support services in exchange for scheduled fees at the fair market value of our services provided to each affiliated professional entity. As a result, our ability to receive cash fees from the affiliated professional entities is limited to the fair market value of the services provided under the ASAs. To the extent our ability to receive cash fees from the affiliated professional entities is limited, our ability to use that cash for growth, debt service or other uses at the affiliated professional entity may be impaired and, as a result, our results of operations and financial condition may be adversely affected. Our ability to perform medical and digital health services in a particular U.S. state is directly dependent upon the applicable laws governing the practice of medicine, healthcare delivery and fee splitting in such locations, which are subject to changing political, regulatory and other influences. The extent to which a U.S. state considers particular actions or contractual relationships to constitute the practice of medicine is subject to change and to evolving interpretations by medical boards and state attorneys general, among others, each of which has broad discretion. There is a risk that U.S. state authorities in some jurisdictions may find that our contractual relationships with the affiliated professional entities, which govern the provision of medical and digital health services and the payment of administrative and operations support fees, violate laws prohibiting the corporate practice of medicine and fee splitting. Accordingly, we must monitor our compliance with laws in every jurisdiction in which we operate on an ongoing basis, and we cannot provide assurance that our activities and arrangements, if challenged, will be found to be in compliance with the law. Additionally, it is possible that the laws and rules governing the practice of medicine, including the provision of digital health services, and fee splitting in one or more jurisdictions may change in a manner adverse to our business. While the ASAs prohibit us from controlling, influencing or otherwise interfering with the practice of medicine at each affiliated professional entity, and provide that physicians retain exclusive control and responsibility for all aspects of the practice of medicine and the delivery of medical services, we cannot assure you that our contractual arrangements and activities with the affiliated professional entities will be free from scrutiny from U.S. state authorities, and we cannot guarantee that subsequent interpretation of the corporate practice of medicine and fee splitting laws will not circumscribe our business operations. State corporate practice of medicine doctrines also often impose penalties on physicians themselves for aiding the corporate practice of medicine, which could discourage providers from participating in our network of 74 physicians. If a successful legal challenge or an adverse change in relevant laws were to occur, and we were unable to adapt our business model accordingly, our operations in affected jurisdictions would be disrupted, which could harm our business. Any material changes in our relationship with or among the affiliated professional entities, whether resulting from a dispute among the entities, a challenge from a governmental regulator, a change in government regulation, or the loss of these relationships or contracts with the affiliated professional entities, could impair our ability to provide services to our members and could harm our business. For example, our arrangements in place to help ensure an orderly succession of the owner or owners of certain of the affiliated professional entities upon the occurrence of certain events may be challenged, which may impact our relationship with the affiliated professional entities and harm our business and results of operations. The ASAs and these succession arrangements could also subject us to additional scrutiny by federal and state regulatory bodies regarding federal and state fraud and abuse laws. Any scrutiny, investigation or litigation with regard to our arrangement with the affiliated professional entities, and any resulting penalties, including monetary fines and restrictions on or mandated changes to our current business and operating arrangements, could harm our business. Noncompliance with billing and documentation requirements could result in non-payment or subject us to audits, billing or other compliance investigations by government authorities, private payers or health network partners. Payers typically have differing and complex billing and documentation requirements. If we fail to comply with these payer-specific requirements, we may not be paid for our services or payment may be substantially delayed or reduced. Moreover, federal and state laws, rules and regulations impose substantial penalties, including criminal and civil fines, monetary penalties, exclusion from participation in government healthcare programs and imprisonment, on entities or individuals (including any individual corporate officers or physicians deemed responsible) that fraudulently or wrongfully bill government-funded programs or other third-party payers for healthcare services. Both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies, as well as their executives and managers, with enforcement actions covering a variety of topics, including referral and billing practices. Further, the federal False Claims Act and a growing number of state laws allow private parties to bring qui tam or “whistleblower” lawsuits against companies for false billing violations. Some of our activities could become the subject of governmental investigations or inquiries. From time to time in the ordinary course of business, governmental agencies and private payers also conduct audits of healthcare providers like us. For example, as a result of our participation in the Medicare program, including through CMS’ Direct Contracting Program, we are also subject to various governmental inspections, reviews, audits and investigations to verify our compliance with the Medicare program and applicable laws and regulations. We also periodically conduct internal audits and reviews of our regulatory compliance and our health network partners can also conduct audits under their agreements with us. Such audits could result in the incurrence of additional costs and diversion of management’s time and attention. In addition, such audits could trigger repayment demands based on findings that our services were not medically necessary, were billed at an improper level or otherwise violated applicable billing requirements or contractual terms. Our failure to comply with rules related to billing or adverse findings from such audits could result in, among other penalti • non-payment for services rendered or recoupments or refunds of amounts previously paid for such services by our health network partners; • refunding amounts we have been paid pursuant to the Medicare program or from payers; • state or federal agencies imposing fines, penalties and other sanctions on us; • temporary suspension of payment from payers for new patients to the facility or agency; • decertification or exclusion from participation in the Medicare program or one or more payer networks; • self-disclosure of violations to applicable regulatory authorities; • damage to our reputation; • the revocation of a facility’s or agency’s license; and • loss of certain rights under, or termination of, our contracts with health network partners. 75 We will likely be required in the future to refund amounts that have been paid and/or pay fines and penalties as a result of these inspections, reviews, audits and investigations. If adverse inspections, reviews, audits or investigations occur and any of the results noted above occur, it could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our securities. Furthermore, the legal, document production and other costs associated with complying with these inspections, reviews, audits or investigations could be significant. Our use and disclosure of personal information, including PHI, is subject to federal and state privacy and security regulations, and our failure to comply with those regulations or to adequately secure such information we hold could result in significant liability or reputational harm and, in turn, substantial harm to our health network partner and enterprise client base, membership base and revenue. In the ordinary course of our business, we and third parties upon whom we rely receive, collect, store, process and use personal information as part of our business. Numerous state and federal laws and regulations inside the United States govern the collection, dissemination, use, privacy, confidentiality, security, availability and integrity of personal information including PHI. These laws and regulations include HIPAA, as amended by the HITECH Act, and its implementing regulations, as well as state privacy and data protection laws. HIPAA establishes a set of baseline national privacy and security standards for the protection of PHI, by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, which includes our affiliated professional entities, and the business associates with whom such covered entities contract for services that involve the use or disclosure of PHI, which includes 1Life and our affiliated professional entities. States may enforce more stringent privacy and data protection laws exceeding the requirements of HIPAA. Compliance with privacy, data protection and information security laws and regulations in the United States could cause us to incur substantial costs or require us to change our business practices and compliance procedures in a manner adverse to our business. We strive to comply with applicable laws, regulations, policies and other legal obligations relating to privacy, data protection and information security. However, as the various regulatory frameworks for privacy, data protection and information security continue to develop, uncertainties exist as to their application, and it is possible that these or other actual or alleged obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules and subject our business practices to uncertainty. Penalties for violations of these laws vary. For example, penalties for violations of HIPAA and its implementing regulations are assessed at varying rates per violation, subject to a statutory cap for violations of the same standard in a single calendar year. Such penalties may be subject to periodic adjustments. However, a single breach incident can result in violations of multiple standards, which could result in significant fines. HIPAA also authorizes state attorneys general to file suit on behalf of their residents. Courts may award damages, costs and attorneys’ fees related to violations of HIPAA in such cases, which may be significant. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI. Any such penalties or lawsuits could harm our business, financial condition, results of operations and prospects. In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA covered entities or business associates for compliance with the HIPAA Privacy and Security Standards and Breach Notification Rule. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the civil monetary penalty fine or settlement paid by the violator. HIPAA further requires that patients be notified of any unauthorized acquisition, access, use or disclosure of their unsecured PHI that compromises the privacy or security of such information, with certain exceptions related to unintentional or inadvertent use or disclosure by employees or authorized individuals or where there is a good faith belief that the person who received the impermissible disclosure would not have been able to retain the information. HIPAA specifies that such notifications must be made “without unreasonable delay and in no case later than 60 calendar days after discovery of the breach.” If a breach affects 500 patients or more, it must be reported to HHS without unreasonable delay, and HHS will post the name of the breaching entity on its public web site. Breaches affecting 500 patients or more in the same state or jurisdiction must also be reported to the local media. If a breach involves fewer than 500 people, the covered entity must record it in a log and notify HHS at least annually. Any such notifications, including notifications to the public, could harm our business, financial condition, results of operations and prospects. Numerous other federal and state laws protect the confidentiality, privacy, availability, integrity and security of personal information, including health information. For example, various states, such as California and Massachusetts, have implemented privacy laws and regulations that in many cases are more restrictive than, and may not be preempted by, the HIPAA rules and may be subject to varying interpretations by courts and government agencies, creating complex compliance 76 issues for us and our health network partners and enterprise clients and potentially exposing us to additional expense, adverse publicity and liability. The cost of compliance could be significant and require investments to enhance our technology and security infrastructure. In addition, in certain situations, regulators, partners, clients and consumers may disagree with our analysis of, and response to, data-related incidents and our execution of obligations under the laws, which may cause disputes, liability and negative publicity and harm our business, operations and prospects. In particular, some laws, such as the California Consumer Privacy Act of 2018, or CCPA, allow for a private right of action and statutory damages, which may motivate plaintiffs’ attorneys to file class action claims, which can be resource-intensive and costly to defend. If our security measures, some of which are managed by third parties, are breached or fail, and unauthorized access to personal information or PHI occurs, our reputation could be severely damaged, harming member, client and partner confidence and may result in members curtailing their use of our services. In addition, we could face litigation, significant damages for contract breach, significant penalties and regulatory actions for violation of HIPAA and other applicable laws or regulations and significant costs for remediation, notification to individuals and the public and measures to prevent future occurrences. Any potential security breach could also result in increased costs associated with liability for stolen assets or information, inaccessibility of systems or information, repairing system damage that may have been caused by such breaches, remediation offered to employees, contractors, health network partners, enterprise clients or members in an effort to maintain our business relationships after a breach and implementing measures to prevent future occurrences, including organizational changes, deploying additional personnel and protection technologies, training employees and engaging third-party experts and consultants. We outsource important aspects of the storage and transmission of personal information and PHI, and thus rely on third parties to manage functions that have material cybersecurity risks. We require our vendors who handle personal information and PHI to contractually commit to safeguarding personal information and PHI such as by signing information protection addenda and/or business associate agreements, as applicable, to the same extent that applies to us and require such vendors to undergo security examinations. In addition, we periodically hire third-party security experts to assess and test our security posture. However, we cannot assure that these contractual measures and other safeguards will adequately protect us from the risks associated with the storage and transmission of employees’, contractors’, patients’ and members’ personal information and PHI. Any violation of applicable laws, regulations or policies by these parties, including violations that cause us to incur significant liability and put sensitive data at risk, could in turn harm our business. We also publish statements to our members that describe how we handle and protect personal information and PHI. If federal or state regulatory authorities or private litigants consider any portion of these statements to be untrue, we may be subject to claims of misrepresentation and/or deceptive practices, which could lead to significant liabilities and consequences, including, without limitation, significant costs of responding to investigations, defending against litigation, settling claims and complying with regulatory or court orders. As public and regulatory focus on privacy issues continues to increase, we expect that there will continue to be new laws, regulations and industry standards concerning privacy, data protection and information security. For example, the CCPA imposes obligations on businesses to which it applies. These obligations include, without limitation, providing specific disclosures in privacy notices, affording California residents certain rights related to their personal information, and requiring businesses subject to the CCPA to implement certain measures to effectuate California residents' rights to their personal information. The CCPA allows for statutory fines for noncompliance. The California Privacy Rights Act, or the CPRA, approved by California voters in November 2020 and expected to go into effect on January 1, 2023, builds upon the CCPA and affords consumers expanded privacy rights and protections. Colorado and Virginia passed similar consumer privacy laws expected to go into effect in 2023. The potential effects of state privacy, data protection and information security laws are far-reaching and will require us to modify our data processing practices and policies and to incur substantial costs and expenses to comply. Further, obligations under new laws and regulations may not be clear, creating uncertainty and risk despite our efforts to comply. If we fail, or are perceived to have failed, to address or comply with our privacy, data protection and information security obligations, we could be subject to governmental enforcement actions such as investigations, fines, penalties, audits, or inspections, class action or other litigation, contract breach claims, additional reporting requirements and/or oversight, bans on processing personal information, orders to destroy or not use personal information, reputational harm and imprisonment of company officials. Any significant change to applicable privacy, data protection and information security laws, regulations or industry practices regarding the collection, use, retention, security or disclosure of our members’ personal information, or regarding the manner in which the express or implied consent for the collection, use, retention or disclosure of such personal information is obtained, could increase our costs to comply and require us to modify our services and features, possibly in a material manner, which we may be unable to complete and may limit our ability to store and process the personal information of our members, 77 optimize our operations or develop new services and features. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. If we or our affiliated professional entities fail to comply with applicable data interoperability and information blocking rules, our business could be adversely affected. In March 2020, HHS, the Office of the National Coordinator for Health Information Technology, or ONC, and CMS finalized and issued complementary rules that are intended to clarify provisions of the 21st Century Cures Act regarding interoperability and information blocking. The rules include changes to ONC’s health IT certification program and create significant new requirements for healthcare providers and health IT developers. For example, an ONC rule that went into effect in April 2021, prohibits healthcare providers, health IT developers of certified health IT, health information exchanges or health information networks from engaging in practices that are likely to interfere with, prevent, materially discourage, or otherwise inhibit the access, exchange or use of electronic health information, also known as “information blocking.” Additional requirements under the final rules have and may continue to come into effect in 2022 and 2023. We may be required to expend significant resources or to modify our services and features in order to comply with these new rules. Failure to comply with these rules could result in significant fines, withdrawal of health IT certifications and negative publicity, which could have a material adverse effect on our business, results of operations and financial condition. Individuals may claim our call and text messaging services are not compliant with applicable law, including the Telephone Consumer Protection Act. We call and send short message service, or SMS, text messages to members and potential members who are eligible to use our service. While we obtain consent from these individuals to call and send text messages, federal or state regulatory authorities or private litigants may claim that the notices and disclosures we provide, form of consents we obtain or our call and SMS texting practices are not adequate to comply with, or violate applicable law, including the Telephone Consumer Protection Act, or TCPA. The TCPA imposes specific requirements relating to the marketing to individuals leveraging technology such as telephones, mobile devices and texts. TCPA violations can result in significant financial penalties as businesses can incur civil forfeiture penalties or criminal fines imposed by the Federal Communications Commission or be fined for each violation through private litigation or state attorneys general or other state actor enforcement. Class action suits are the most common method for private enforcement. Our call and SMS texting campaigns are potential sources of risk for class action lawsuits and liability for our company. Numerous class-action suits under federal and state laws have been filed in recent years against companies who conduct call and SMS texting programs, with many resulting in multi-million-dollar settlements to the plaintiffs. While we strive to adhere to strict policies and procedures, the Federal Communications Commission, as the agency that implements and enforces the TCPA, may disagree with our interpretation of the TCPA and subject us to penalties and other consequences for noncompliance. Determination by a court or regulatory agency that our call or SMS text messaging violate the TCPA could subject us to civil penalties, could require us to change some portions of our business and could otherwise harm our business. Even an unsuccessful challenge by members, consumers or regulatory authorities of our activities could result in adverse publicity and could require a costly response from and defense by us. Negative publicity regarding the managed healthcare industry generally could adversely affect our results of operations or business. Negative publicity regarding the managed healthcare industry generally, or the Medicare Advantage program in particular, may result in increased regulation and legislative review of industry practices that further increase the costs of doing business and adversely affect our results of operations or business • requiring us to change our products and services provided to patients; • increasing the regulatory burdens under which we operate, which may increase the costs of providing services; • adversely affecting our ability to market our products or services through the imposition of further regulatory restrictions regarding the manner in which plans and providers market to Medicare Advantage enrollees; or • adversely affecting our ability to attract and retain patients. Risks Related to Information Technology 78 We rely on internet infrastructure, bandwidth providers, other third parties and our own systems to provide proprietary service platforms to our members and providers, and any failure or interruption in the services provided by these third parties or our own systems could expose us to liability and hurt our reputation and relationships with members and clients. Our ability to maintain our proprietary service platform, including our digital health services and our electronic health records systems, is dependent on the development and maintenance of the infrastructure of the internet and other telecommunications services by third parties, including bandwidth and telecommunications equipment providers. This includes maintenance of a reliable network connection with the necessary speed, data capacity and security for providing reliable internet access and services and reliable telephone and facsimile services. We exercise limited control over these third-party providers. Our platforms are designed to operate without perceptible interruption in accordance with our service level commitments. We have, however, experienced limited interruptions in these systems in the past, including server failures that temporarily slowed down or diminished the performance of our platforms, and we may experience similar or more significant interruptions in the future. We do not currently maintain redundant systems or facilities for some of these services. Interruptions to third party systems or services, whether due to system failures, cyber incidents (the risk of which has been higher due to the significant increase in remote work across the technology industry as a result of the COVID-19 pandemic), ransomware, physical or electronic break-ins, phishing campaigns or other events, could affect the security or availability of our platforms or services and prevent or inhibit the ability of our members or providers to access our platforms or services. In the event of a catastrophic event with respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which could result in liability, substantial costs to remedy those problems or harm our relationship with our members and our business. Additionally, any disruption in the network access, telecommunications or co-location services provided by third-party providers or any failure of or by third-party providers’ systems or our own systems to handle current or higher volumes of use could significantly harm our business. The reliability and performance of our third-party providers’ systems and services may be harmed by increased usage or by ransomware, denial-of-service attacks or related cyber incidents, which has increased due to more opportunities created by remote work necessitated by the COVID-19 pandemic. Any errors, failures, interruptions or delays experienced in connection with these third-party services or our own systems could hurt our ability to deliver our services platform and damage our relationships with health network partners, enterprise clients and members and expose us to third-party liabilities, which could in turn harm our competitive position, business, financial condition, results of operations and prospects. We rely on third-party vendors to host and maintain our technology platform. We rely on third-party vendors to host and maintain our technology platform. Our ability to operate our business is dependent on maintaining our relationships with third-party vendors and entering into new relationships to meet the changing needs of our business. Any deterioration in our relationships with such vendors or our failure to enter into agreements with vendors in the future could significantly disrupt our operations or hinder our ability to execute our growth strategies. Because we rely on certain vendors to store and process our data, it is possible that, despite precautions taken at our vendors’ facilities, the occurrence of a natural disaster, cyber incident, decision to close the facilities without adequate notice or other unanticipated problems could result in our non-compliance with data protection laws and regulations, loss of proprietary information, personal information, and other confidential information, and disruption to our technology platform. These service interruptions could also cause our platform to be unavailable to our health network partners, enterprise clients and members, and impair our ability to deliver services and negatively impact our relationships with new and existing health network partners, enterprise clients and members. Some of our vendor agreements may be unilaterally terminated by the vendor for convenience, including with respect to Amazon Web Services, and if such agreements are terminated, we may not be able to enter into similar relationships in the future on reasonable terms or at all. We may also incur substantial costs, delays and disruptions to our business in transitioning such services to ourselves or other third-party vendors. In addition, third-party vendors may not be able to provide the services required in order to meet the changing needs of our business. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. Failure or breach of our or our vendors' security measures or inability to meet applicable privacy and security obligations, as well as any instances of unauthorized access to our employees’, contractors’, members’, clients’ or partners’ data may result in disruption to our business and operations, incurrence of significant liabilities, loss of members, clients and partners and damage to our reputation. 79 Our services and operations involve the storage and transmission of personal information and other sensitive data, including proprietary and confidential business data, trade secrets and intellectual property and the personal information (including health information) of employees, contractors, clients, partners, members and others. Because of the sensitivity of the information we store and transmit, the security features of our and our third-party vendors’ computer, network, and communications systems infrastructure are critical to the success of our business. A breach or failure of our or our third-party vendors’ security measures could result from a variety of circumstances and events, including, but not limited to, social engineering attacks (including through phishing attacks), malicious code (such as viruses and worms), malware (including as a result of advanced persistent threat intrusions), denial-of-service attacks (such as credential stuffing), ransomware attacks, supply-chain attacks, employee negligence or human errors, software bugs, server malfunction, software or hardware failures, loss of data or other information technology assets, adware, telecommunications failures, earthquakes, fire, flood, and other similar threats. Ransomware attacks, including those perpetrated by organized criminal threat actors, nation-states, and nation-state supported actors, are becoming increasingly prevalent and severe and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, strategic security objectives or applicable laws or regulations prohibiting payments. Similarly, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our information technology systems (including our services) or the third-party information technology systems that support us and our services. The COVID-19 pandemic and our remote workforce pose increased risks to our information technology systems and data, as more of our employees work from home, utilizing network connections outside our premises. Any of the previously identified or similar threats could cause a security incident. If our or our third-party vendors experience a security incident, it could result in unauthorized, unlawful or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of or access to data. A security incident could disrupt our (and third parties upon whom we rely) ability to provide our services. We may expend significant resources or modify our business activities in an effort to protect against security incidents. While we have implemented security measures designed to protect against a security incident, there can be no assurance that these measures will always be effective. We have not always been able in the past and may be unable in the future to detect vulnerabilities in our information technology systems because such threats and techniques change frequently, are often sophisticated in nature, and may not be detected until after a security incident has occurred. Some security incidents may remain undetected for an extended period of time. Despite our efforts to identify and remediate vulnerabilities, if any, in our information technology systems (including our products), our efforts may not be successful. Further, as cyber threats continue to evolve, we may be required to expend additional resources to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities and we may experience delays in developing and deploying remedial measures designed to address any such identified vulnerabilities. Certain privacy, data protection and information security obligations, whether imposed by law or by clients, partners or vendors with whom we work, may require us to implement and maintain specific security and data privacy measures, industry-standard or reasonable security measures to protect our information technology systems and data, and to provide certain end-user rights in connection with their data. Our vendors, clients, partners and members may also demand that we adopt additional security or data privacy measures or make further security or data privacy investments, which may be costly and time-consuming. Such failures or breaches of our or our third-party vendors', clients' and partners' security or data privacy measures, or our or our third-party vendors’, clients' and partners' inability to effectively resolve such failures or breaches in a timely manner, could disrupt the operation of our technology and business, adversely affect customer, partner, member or investor confidence in us, result in breach of contract claims, severely damage our reputation and reduce the demand for our services. Under certain circumstances, it could also impact the availability of our mobile app or related updates on various software platforms. Applicable privacy, data protection and security information obligations may require us to notify relevant stakeholders of privacy and security incidents. Such disclosures are costly, and the disclosures or the failure to comply with such requirements, could lead to adverse impacts. In addition, we could face litigation, significant damages for contract breach or other breaches of law, significant monetary penalties, or regulatory actions for violation of applicable laws or regulations, and incur significant costs for remedial or preventive measures. Although we maintain insurance covering certain security and privacy damages and claim expenses, we may not carry insurance or maintain coverage sufficient to compensate for all liability. Adequate insurance may not be available in the future at acceptable costs or at all and coverage disputes could also occur with our insurers. If security and privacy claims are not fully covered by insurance, they could result in substantial costs to us, which could harm our business. Insurance coverage would also not address the reputational damage that could result from a security incident. If an actual or perceived breach or inadequacy of our or our third-party vendors’ security occurs, or if we or our third-party vendors are unable to effectively resolve a breach in a timely manner, we could lose current and potential members, partners and clients, which could harm our business, results of operations, financial condition and prospects. 80 Our proprietary technology platforms may not operate properly, which could damage our reputation, subject us to claims or require us to divert application of our resources from other purposes, any of which could harm our business and growth. Our proprietary technology platforms provide members with the ability to, among other things, register for our services, request a visit (either scheduled or on demand) and communicate and interact with providers, and allows our providers to, among other things, chart patient notes, maintain medical records, and conduct visits (via video, phone or the internet). Proprietary software development is time-consuming, expensive and complex, and may involve unforeseen difficulties. We may encounter technical obstacles, and it is possible that we may discover additional problems that prevent our proprietary software from operating properly. Due to the COVID-19 pandemic, use of virtual care, including remote visits, has increased, which places a heavier demand on our technology platform and may cause performance levels to deteriorate. When we launch new features and functions within our technology platform, we could inadvertently introduce bugs or errors, including latent ones, into our platforms which could impact usability as well as technology and clinical operations. We continue to implement software with respect to a number of new applications and services. The operation of our technology also depends in part on the performance of third-party service providers. If our technology platform does not function reliably or fails to achieve member, provider, partner or client expectations in terms of performance, we may be required to divert resources allocated for other business purposes to address these issues, may suffer reputational harm, lose or fail to grow member usage, fail to retain or grow provider talent, members, partners and clients, and may be subject to liability claims. The information that we provide to our health network partners, enterprise clients and members could be inaccurate or incomplete, which could harm our business, financial condition and results of operations. We provide healthcare-related information for use by our health network partners, enterprise clients and members. Because data in the healthcare industry is fragmented in origin, inconsistent in format and often incomplete, the overall quality of data in the healthcare industry is poor, and we frequently discover data issues and errors. If the data that we provide to our health network partners, enterprise clients and members is incorrect or incomplete or if we make mistakes in the capture or input of this data, our reputation may suffer and our ability to attract and retain health network partners, enterprise clients and members may be harmed. In addition, a court or government agency may take the position that our storage and display of health information exposes us to personal injury liability or other liability for wrongful delivery or handling of healthcare services or erroneous health information, which could harm our business, financial condition and results of operations. If we cannot implement or optimize our technology solutions for members, integrate our systems with health network partners or resolve technical issues in a timely manner, we may lose clients and partners and our reputation may be harmed. Our health network partners utilize a variety of data formats, applications, systems and infrastructure. Moreover, each health network partner may have a unique technology ecosystem and infrastructure or have specific technology or certification requirements. To maintain our relationships with such partners and to continue to grow our business and membership, we may be required to meet such requirements and, in certain circumstances, our services must be seamlessly integrated and interoperable with our partners’ complex systems, which may cause us to incur significant upfront and maintenance costs. Additionally, we do not control our partners’ integration schedules. As a result, if our partners do not allocate the internal resources necessary to meet their integration responsibilities, which resources can be significant as many of them are large healthcare institutions with substantial operations to manage, or if we face unanticipated integration difficulties, the integration may be delayed. In addition, competitors with more efficient operating models with lower integration costs could jeopardize our partner relationships. If the integration process with our partners is not executed successfully or if execution is delayed, we could incur significant costs, partners could become dissatisfied and decide not to continue a strategic contractual relationship with us beyond an initial period during their term commitment or, in some cases, revenue recognition could be delayed, any of which could harm our business and results of operations. Our members depend on our digital health platform, including our mobile app, web portal, and support services to access on-demand digital health services or schedule in-office visits. We may be unable to quickly accommodate increases in member technology usage, particularly as we increase the size of our membership base, grow our services and as the COVID-19 pandemic drives more member demand for our digital health services and virtual care. We also may be unable to modify the format of our technology solutions and support services to compete with developments from our competitors. If we are unable to further develop and enhance our technology solutions or maintain effective technical support services to address members’ needs or preferences in a timely fashion, our members, clients and partners may become dissatisfied, which could damage our ability to maintain or expand our membership and business. While any refunds or credits we have issued historically have not had a significant impact on net revenue, we cannot assure you as to whether we may need to issue additional refunds or credits for membership fees in the future as a result of member or client dissatisfaction. For example, our members expect on-demand healthcare services through our mobile app and rapid in-office visit scheduling. Failure to maintain these standards or negative publicity related to our technology solutions, regardless of its accuracy, may reduce our overall NPS, harm our reputation and 81 cause us to lose current or potential members, enterprise clients or partners. In addition, our enterprise clients expect our technology solutions to facilitate long-term cost of care reductions through high employee digital engagement, which we market as potential benefits for employers in providing employees with One Medical memberships. If employers do not perceive our solutions and services as providing such efficiencies and cost savings, they may terminate their contracts with us or elect not to renew. Any such outcomes could also negatively affect our ability to contract with new enterprise clients through damage to our reputation. If any of these were to occur, our revenue may decline and our business, results of operations, financial condition and prospects could be harmed. Risks Related to Taxation and Accounting Standards Certain U.S. state tax authorities may assert that we have a state nexus and seek to impose state and local income taxes which could harm our results of operations. As of September 30, 2022, we are qualified to operate in, and file income tax returns in, 24 states as well as Washington, D.C. There is a risk that certain state tax authorities where we do not currently file a state income tax return could assert that we are liable for state and local income taxes based upon income or gross receipts allocable to such states. States are becoming increasingly aggressive in asserting a nexus for state income tax purposes. We could be subject to state and local taxation, including penalties and interest attributable to prior periods, if a state tax authority successfully asserts that our activities give rise to a nexus. Such tax assessments, penalties and interest to the extent the Company has taxable income in prior periods may adversely impact our results of operations. Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations. In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. As of December 31, 2021, we have $894.3 million of federal net operating loss carryforwards and $598.5 million of state and local net operating loss carryforwards. The federal net operating loss carryforwards of $687.1 million arising after 2017 carry forward indefinitely, but the deduction for these carryforwards is limited to 80% of post-2020 current-year taxable income. The federal net operating loss carryforwards of $136.7 million from prior years will begin to expire in 2025. The state and local net operating loss carryforwards begin to expire in 2024. The Company has identified $25.2 million and $31.0 million of the above federal and state net operating losses, respectively, in certain affiliated professional entities that will expire unused due to prior ownership changes. In addition, future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code, further limiting our ability to utilize NOLs arising prior to such ownership change in the future. There is also a risk that due to statutory or regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. We have recorded a full valuation allowance against the deferred tax assets attributable to our NOLs. Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use or similar taxes for our membership, enterprise and other service offerings, which could negatively impact our results of operations. We do not collect sales and use and similar taxes in any states for our membership, enterprise and other service offerings based on our belief that our services are not subject to such taxes in any state. Sales and use and similar tax laws and rates vary greatly from state to state. Certain states in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest with respect to past services, and we may be required to collect such taxes for services in the future. We have received, and may in the future receive additional proposed assessments or determinations that we owe back taxes, penalties and interest for sales and use and similar taxes. If we are not successful in disputing such proposed assessments, we may be required to make payments in tax assessments, penalties or interest, and may be required to collect sales and use taxes in the future. Such tax assessments, penalties and interest or future requirements may negatively impact our results of operations. Our financial results may be adversely impacted by changes in accounting principles applicable to us. Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC and other various bodies formed to promulgate and interpret appropriate accounting principles. For example, in May 2014, the FASB issued accounting standards update No. 2014-09 (Topic 606), Revenue from 82 Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under GAAP and specifies that an entity should recognize revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services; this new accounting standard also impacted the recognition of sales commissions. Changes in accounting standards and interpretations or in our accounting assumptions and judgments could significantly impact our consolidated financial statements and our reported financial position and financial results may be harmed if our estimates or judgments prove to be wrong, assumptions change, or actual circumstances differ from those in our assumptions. Any difficulties in implementing these pronouncements could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm our business. If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be harmed. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Judgments and Estimates” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on February 23, 2022. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, liability for medical claims incurred in the period but not yet reported (“IBNR”), valuation and related impairment recognition of intangible assets and goodwill, and stock-based compensation. Our results of operations may be harmed if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock. There are significant risks associated with estimating revenue under our At-Risk arrangements with certain payers, and if our estimates of revenues are materially inaccurate, it could negatively impact the timing and the amount of our revenue recognition or have a material adverse effect on our business, results of operations, financial condition and cash flows. We recognize revenue net of risk shares and adjustments in the month in which eligible members are entitled to receive healthcare benefits during the contract term. Due to reporting lag times and other factors, significant judgment is required to estimate risk adjustments to PMPM fees received from payers for At-Risk members. The billing and collection process with payers is complex due to ongoing insurance coverage changes, geographic coverage differences, differing interpretations of contract coverage and other payer issues, such as ensuring appropriate documentation. Determining applicable primary and secondary coverage for our patients, together with the changes in patient coverage that occur each month, requires complex, resource-intensive processes. Errors in determining the correct coordination of benefits may result in refunds to payers. Revenues associated with Medicare programs are also subject to estimation risk related to the amounts not paid by the primary government payer that will ultimately be collectible from other government programs paying secondary coverage, the patient’s commercial health insurance plan secondary coverage or the patient. Collections, refunds and payer retractions typically continue to occur for up to three years and longer after services are provided. Inaccurate estimates of revenues could negatively impact the timing and the amount of our revenue recognition and have a material adverse impact on our business, results of operations, financial condition and cash flows. If our goodwill, intangible assets or other long-lived assets become impaired, we may be required to record a significant charge to earnings. Consummation of the acquisition of Iora resulted in us recognizing additional goodwill, intangible assets and other long-lived assets such as leases and fixed assets in our consolidated balance sheet. Intangible assets with finite lives will be amortized using the method that best reflects how their economic benefits are utilized or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over their estimated useful lives. Goodwill will not be amortized, but instead tested for potential impairment at least annually. Goodwill, intangible assets and other long-lived assets will also be tested for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If our goodwill, intangible assets or other long-lived assets are determined to be impaired in the future, we may be required to record additional significant, non-cash charges to earnings during the period in which the impairment is determined to have occurred. Risks Related to Our Intellectual Property 83 If we are unable to obtain, maintain and enforce intellectual property protection for our business assets or if the scope of our intellectual property protection is not sufficiently broad, others may be able to develop and commercialize technology and solutions substantially similar to ours, and our ability to conduct business may be compromised. Our business depends on proprietary technology and other business assets, including software, processes, databases, confidential information and know-how, the protection of which is crucial to the success of our business. We rely on a combination of trademark, trade-secret and copyright laws, confidentiality policies and procedures, cybersecurity practices and contractual provisions to protect our intellectual property. We do not currently own any issued patents. Third parties, including our competitors, may have or obtain patents relating to technologies that overlap or compete with our technology, which they may assert against us to seek licensing fees or preclude the use of our technology. We may, over time, increase our investment in protecting our intellectual property through additional trademark, patent, copyright and other intellectual property filings, which could be expensive and time-consuming. Our efforts to register certain intellectual property may be challenged by third parties or through office actions, and may not ultimately be successful or may be abandoned. While our operations are currently based in the United States, we may also be required to protect our intellectual property in foreign jurisdictions, a process that can be prolonged and costly, and one that we may choose not to pursue in every instance. We may not be able to obtain protection for our technology and even if we are successful, it is expensive to maintain intellectual property rights and the costs of defending our rights could be substantial. Moreover, these measures may not be sufficient to offer us meaningful protection or provide us with any competitive advantage. Furthermore, changes to U.S. intellectual property laws may jeopardize the enforceability and validity of our intellectual property portfolio and harm our ability to obtain patent protection of certain inventions. If we are unable to adequately protect our intellectual property and other proprietary rights, our competitive position and our business could be harmed, as competitors may be able to commercialize similar offerings without having incurred the development and licensing costs that we have incurred. Any of our filed, owned or licensed intellectual property rights could be challenged, invalidated, circumvented, infringed, misappropriated or violated, our trade secrets and other confidential information could be disclosed in an unauthorized manner to third parties, which could result in costly redesign efforts, business disruptions, discontinuance of some of our offerings or other competitive harm. We may become involved in lawsuits to protect or enforce or defend our intellectual property rights, which could be expensive, time consuming and unsuccessful. Third parties, including our competitors, could infringe, misappropriate or otherwise violate our intellectual property rights. Monitoring unauthorized use of our intellectual property is difficult and costly. From time to time, we seek to analyze our competitors’ solutions and services, and may in the future seek to enforce our rights against potential infringement, misappropriation or violation of our intellectual property. However, the steps we have taken to protect our proprietary rights may not be adequate to enforce our rights as against such infringement, misappropriation or violation of our intellectual property. We may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Any inability to meaningfully enforce our intellectual property rights could harm our ability to compete and reduce demand for our services. In recent years, companies are increasingly bringing and becoming subject to lawsuits and proceedings alleging infringement, misappropriation or violation of intellectual property rights, particularly patent rights. Our competitors and other third parties may hold patents or other intellectual property rights, which could be related to our business. We expect that we may receive in the future notices that claim we or our partners, clients or members using our solutions and services have misappropriated or misused other parties’ intellectual property rights, particularly as the number of competitors in our market grows and the functionality of applications amongst competitors overlaps. If we are found to infringe, misappropriate or violate another party’s intellectual property rights, we could be prohibited, including by court order, from further use of the intellectual property asset or be required to obtain a license from such third party to continue commercializing or using such technologies, solutions or services, which may not be available on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors and other third parties access to the same technologies licensed to us, and it could require us to make substantial licensing and royalty payments. Accordingly, we may be forced to design around such violated intellectual property, which may be expensive, time-consuming or infeasible. In addition, we could be found liable for significant monetary damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a patent or other intellectual property right. Claims that we have misappropriated the confidential information or trade secrets of third parties could similarly harm our business. Any adverse outcome in such cases could affect our competitive position, business, financial condition, results of operations and prospects. 84 Litigation or other legal proceedings relating to intellectual property claims, regardless of merits and even if resolved in our favor, can be expensive, time consuming, and resource intensive. In addition, there could be public announcements of the results of hearings, motions, or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing, or other business activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of intellectual property proceedings could harm our ability to compete in the marketplace. In addition, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. If we fail to comply with our license obligations, if our license rights are challenged, or if we cannot license rights to use technologies on reasonable terms, we may experience business disruption, increased costs, or inability to commercialize certain services. We license certain intellectual property, including content, technologies and software from third parties, that are important to our business. In the future we may need to enter into additional agreements that provide us with licenses and rights to valuable intellectual property or technology. If we fail to comply with any of the obligations under our license agreements, or if our use or license rights are challenged, we may be required to pay damages, the licensor may have the right to terminate the license and the owner of the intellectual property asset may assert claims against us. Termination by the licensor or dispute with an owner of an intellectual property asset would cause us to lose valuable rights, and could disrupt or prevent us from providing our services, or adversely impact our ability to commercialize future solutions and services. In addition, our rights to certain technologies are licensed to us on a non-exclusive basis. The owners of these non-exclusively licensed technologies are therefore free to license them to third parties, including our competitors, on terms that may be superior to those offered to us, which could place us at a competitive disadvantage. Our licensors may also own or control intellectual property that has not been licensed to us and, as a result, we may be subject to claims, regardless of their merit, that we are infringing or otherwise violating the licensor’s rights. In addition, the agreements under which we license intellectual property or technology from third parties are generally complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property or technology, or increase what we believe to be our financial or other obligations under the relevant agreement. Moreover, the licensing or acquisition of third-party intellectual property rights is a competitive area, and established companies may have a competitive advantage over us due to their size, capital resources and greater development or commercialization capabilities. Companies that perceive us to be a competitor may also be unwilling to license or grant rights to us. Even if such licenses are available, we may be required to pay the licensor substantial fees or royalties. Such fees or royalties will become a cost of our operations and may affect our margins. If we are unable to obtain licenses on acceptable terms or at all, if any licenses are subsequently terminated, if our licensors fail to abide by the terms of the licenses, if our licensors fail to prevent infringement by third parties, or if the licensed intellectual property rights are found to be invalid or unenforceable, we could be restricted from commercializing our solutions and services and may be required to incur substantial costs to seek or develop alternatives. Any of the foregoing could harm our business, financial condition, results of operations, and prospects. If our trademarks and trade names are not adequately protected, we may not be able to build and maintain name recognition in our markets of interest and our competitive position may be harmed. The registered or unregistered trademarks or trade names that we own may be challenged, infringed, circumvented, declared generic, lapsed or determined to be infringing on or dilutive of other marks. We may not be able to protect our rights in these trademarks and trade names, which we need in order to build and maintain name recognition with the public. In addition, third parties have filed, and may in the future file, for registration of trademarks similar or identical to our trademarks, thereby impeding our ability to build and maintain brand identity and possibly leading to market confusion. If they succeed in registering or developing common law rights in such trademarks, and if we are not successful in challenging such third-party rights, we may not be able to use these trademarks to develop or maintain brand recognition of our services or be required to expend substantial resources and expenses to rebrand. In addition, there could be potential trade name or trademark registration challenges or infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. If we are unable to establish or protect our trademarks and trade 85 names, or if we are unable to build or maintain name recognition based on our trademarks and trade names, we may not be able to compete effectively, which could harm our competitive position, business, financial condition, results of operations and prospects. If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed. We rely heavily on trade secrets and confidentiality agreements to protect our unpatented know-how, technology, and other proprietary information, including our technology platform, and to maintain our competitive position. With respect to our technology platform, we consider trade secrets and know-how to be one of our primary sources of intellectual property. However, trade secrets and know-how can be difficult to protect. We seek to protect these trade secrets and other proprietary technology, in part, by implementing topical policies and processes and by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, contractors, consultants, advisors, clients, prospects, partners, and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. We cannot guarantee that we have entered into such agreements with each party that may have or have had access to our trade secrets or proprietary information. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive, and time-consuming, and the outcome is unpredictable. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets are misappropriated, improperly disclosed, or independently developed by a competitor or other third party, it could harm our competitive position, business, financial condition, results of operations, and prospects. We may be subject to claims that our employees, consultants, or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting ownership of what we regard as our own intellectual property. Many of our employees, consultants, and advisors are currently or were previously employed at other companies in our field, including our competitors or potential competitors. Although we try to ensure that our employees, consultants, and advisors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these individuals have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management. In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. Our use of open source software could compromise our ability to offer our services and subject us to possible litigation. We use open source software in connection with our solutions and services. Companies that incorporate open source software into their solutions have, from time to time, faced claims challenging the use of open source software and compliance with open source license terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software or claiming noncompliance with open source licensing terms. Some open source software licenses require users who distribute software containing open source software to publicly disclose all or part of the source code to the licensee’s software that incorporates, links or uses such open source software, and make available to third parties for no cost, any derivative works of the open source code created by the licensee, which could include the licensee’s own valuable proprietary code. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose our proprietary source code or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur, or could be claimed to have occurred, in part because open source license terms are often ambiguous. There is little legal precedent in this area and any actual or claimed requirement to disclose our proprietary source code or pay damages for breach of contract could harm our business and could help third parties, including our competitors, 86 develop solutions and services that are similar to or better than ours. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. Risks Related to Ownership of Our Common Stock Our stock price may be volatile, and the value of our common stock may decline. The market price of our common stock may be highly volatile and may fluctuate or decline substantially as a result of a variety of factors, some of which are beyond our control or are related in complex ways, includin • the timing of, and our ability to close, the potential Amazon Merger, as well as changes in factors that influence and the timing or likelihood of closing the potential Amazon Merger; • actual or anticipated fluctuations in our financial condition and operating results; • variance in our financial performance from expectations of securities analysts or investors; • changes in the pricing we offer our members; • changes in our projected operating and financial results; • the impact of COVID-19, including future outbreaks or variants, on our financial performance, financial condition and results of operations, and the financial performance and financial condition of our health network partners, our enterprise clients and others; • the impact of protests and civil unrest; • our relationships with our health network partners and any changes to or terminations of our contracts with the health network partners; • changes in laws or regulations applicable to our industry and our solutions and services; • announcements by us, our health network partners or our competitors of significant business developments, acquisitions, or new offerings; • publicity associated with issues with our services and technology platform; • our involvement in litigation, including medical malpractice claims and consumer class action claims; • any governmental investigations or inquiries into our business and operations or challenges to our relationships with our affiliated professional entities under the ASAs or to our relationships with health network partners; • future sales of our common stock or other securities, by us or our stockholders; • changes in senior management or key personnel; • developments or disputes concerning our intellectual property or other proprietary rights, including allegations that we have infringed, misappropriated or otherwise violated any intellectual property of any third party; • changes in accounting standards, policies, guidelines, interpretations or principles; • actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally, including competition or perceived competition from well-known and established companies or entities; • our relationships with our health network partners and any changes to or terminations of our contracts with the health network partners; • the trading volume of our common stock, including effects of inflation; 87 • changes in the anticipated future size and growth rate of our market; • rates of unemployment; and • general economic, regulatory and market conditions, including economic recessions or slowdowns and inflationary pressures. Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may negatively impact the market price of our common stock, which has recently been volatile. In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us, because companies reliant on technology solutions have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business. As a result of being a public company, we are obligated to maintain proper and effective internal control over financial reporting and any failure to maintain the adequacy of these internal controls may negatively impact investor confidence in our company and, as a result, the value of our common stock. We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of Nasdaq. In particular, we are required pursuant to Section 404 of the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, our independent registered public accounting firm is required to attest to the effectiveness of our internal control over financial reporting. The process of compiling the system and process documentation necessary to perform the evaluation required under Section 404 is costly and challenging. Also, we currently do not have an internal audit group, and we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and compile the system and process documentation necessary to support ongoing work to comply with Section 404. We have in the past identified material weaknesses in our internal control over financial reporting, and we cannot assure you that the measures we have taken will be sufficient to avoid potential future material weaknesses, that our remediated controls will continue to operate properly, or that our financial statements will be free from error. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business and we may discover weaknesses in our disclosure controls and internal control over financial reporting in the future. Any failure to develop or maintain effective internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. Accordingly, there could continue to be a possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities and our access to the capital markets could be restricted in the future. A significant portion of our total outstanding common stock may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well. Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the public market, the market price of our common stock could decline significantly. All of our outstanding shares of common stock are eligible for sale in the public market, other than shares held by directors, executive officers and other affiliates, which may be resold in the public market but remain subject to volume and other limitations under Rule 144 under the Securities Act. In addition, we have reserved shares for future issuance under our equity incentive plan. Certain holders of our common stock, or their transferees, also have rights, subject to some conditions, to require us to file one or more registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. If we were to register the resale of these shares, they could be freely sold in the public 88 market without limitation. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline. Future sales and issuances of our capital stock or rights to purchase capital stock could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to decline. We may issue additional securities in the future and from time to time. Future sales and issuances of our capital stock or rights to purchase our capital stock could result in substantial dilution to our existing stockholders. We may sell or issue common stock, convertible securities and other equity securities in one or more transactions at prices and in a manner as we may determine from time to time, including in connection with future acquisitions or strategic transactions. If we sell any such securities in subsequent transactions, investors may be materially diluted. If securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business, our common stock price and trading volume could decline. Our stock price and trading volume will be heavily influenced by the way analysts and investors interpret our financial information and other disclosures. If securities or industry analysts do not publish research or reports about our business, delay publishing reports about our business or publish negative reports about our business, regardless of accuracy, or cease covering us, our common stock price and trading volume could decline. Even if our common stock is actively covered by analysts, we do not have any control over the analysts or the measures that analysts or investors may rely upon to forecast our future results. Over-reliance by analysts or investors on any particular metric to forecast our future results may result in forecasts that differ significantly from our own. Regardless of accuracy, unfavorable interpretations of our financial information and other public disclosures could have a negative impact on our stock price. If our financial performance fails to meet analyst estimates, for any of the reasons discussed above or otherwise, or one or more of the analysts who cover us downgrade our common stock or change their opinion of our common stock, our stock price would likely decline. We do not intend to pay dividends for the foreseeable future and, as a result, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock. We have never declared or paid any cash dividends on our capital stock, and we do not intend to pay any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and are restricted by the terms in the Merger Agreement with Amazon and may be further restricted by the terms of any outstanding debt obligations. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments. We incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices. As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. We expect such expenses to further increase now that we are no longer an emerging growth company. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of Nasdaq, and other applicable securities rules and regulations impose various requirements on public companies. Furthermore, the senior members of our management team do not have significant experience with operating a public company. As a result, our management and other personnel will have to devote a substantial amount of time to compliance with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we will incur as a public company or the timing of such costs. If, notwithstanding our efforts, we fail to comply with new laws, regulations and standards, regulatory authorities may initiate legal proceedings against us and our business may be harmed. Failure to comply with these rules might also make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior management. 89 Anti-takeover provisions in our charter documents, under Delaware law and under the indenture governing our 2025 Notes could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock. Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions tha • provide for a classified board of directors whose members serve staggered terms; • authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights, and preferences determined by our board of directors that may be senior to our common stock; • require that any action to be taken by our stockholders be affected at a duly called annual or special meeting and not by written consent; • specify that special meetings of our stockholders can be called only by our board of directors, the chairperson of our board of directors, or our chief executive officer; • establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors; • prohibit cumulative voting in the election of directors; • provide that our directors may be removed for cause only upon the vote of the holders of at least 66 2⁄3% of our outstanding shares of common stock; • provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and • require the approval of our board of directors or the holders of at least 66 2/3% of our outstanding shares of common stock to amend our bylaws and certain provisions of our certificate of incorporation. These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally, subject to certain exceptions, prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Furthermore, the indenture governing our 2025 Notes requires us to repurchase such notes for cash if we undergo certain fundamental changes and, in certain circumstances, to increase the conversion rate for a holder of our 2025 Notes. If consummated, the Amazon Merger is expected to constitute both a "fundamental change" and a “make-whole fundamental change” (each as defined in the indenture governing the 2025 Notes). Upon the occurrence of a fundamental change, holders of the 2025 Notes may convert their 2025 Notes for a period and, subject to limited exceptions, may require us to repurchase for cash all or any portion of their 2025 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. With respect to a make-whole fundamental change, the $18 per share purchase price in the Amazon Merger is below the lowest stock price on the “make-whole” table included in the indenture governing the 2025 Notes and converting holders of the 2025 Notes will not receive addition conversion consideration in connection with any conversion of their 2025 Notes as a result of the make-whole fundamental change. Any delay or prevention of the consummation of the Amazon Merger or any other change of control transaction or changes in our management could cause the market price of our common stock to decline. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents. 90 Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common • any derivative action or proceeding brought on our behalf; • any action asserting a breach of fiduciary duty; • any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; and • any action asserting a claim against us that is governed by the internal-affairs doctrine. This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation further provides that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that such choice of forum provisions are facially valid and several state trial courts have enforced such provisions and required that suits asserting Securities Act claims be filed in federal court, there is no guarantee that courts of appeal will affirm the enforceability of such provisions and a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation. This may require significant additional costs associated with resolving such action in other jurisdictions and we cannot assure you that the provisions will be enforced by a court in those other jurisdictions. If a court were to find either exclusive forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with litigating Securities Act claims in state court, or both state and federal court, which could seriously harm our business, financial condition, results of operations, and prospects. These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could seriously harm our business. Risks Related to Our Outstanding Notes Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the 2025 Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. Regulatory actions and other events may adversely impact the trading price and liquidity of the 2025 Notes. We expect that many investors in, and potential purchasers of, the 2025 Notes will employ, or seek to employ, a convertible arbitrage strategy with respect to the notes. Investors would typically implement such a strategy by selling short the common stock underlying the 2025 Notes and dynamically adjusting their short position while continuing to hold the notes. Investors may also implement this type of strategy by entering into swaps on our common stock in lieu of or in addition to short selling the common stock. 91 The SEC and other regulatory and self-regulatory authorities have implemented various rules and taken certain actions, and may in the future adopt additional rules and take other actions, that may impact those engaging in short selling activity involving equity securities (including our common stock). Such rules and actions include Rule 201 of SEC Regulation SHO, the adoption by the Financial Industry Regulatory Authority, Inc. and the national securities exchanges of a “Limit Up-Limit Down” program, the imposition of market-wide circuit breakers that halt trading of securities for certain periods following specific market declines, and the implementation of certain regulatory reforms required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Any governmental or regulatory action that restricts the ability of investors in, or potential purchasers of, the notes to effect short sales of our common stock, borrow our common stock or enter into swaps on our common stock could adversely impact the trading price and the liquidity of our 2025 Notes. We may not have the ability to raise the funds necessary to settle conversions of the 2025 Notes in cash or to repurchase the notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the 2025 Notes. Subject to limited exceptions, holders of the 2025 Notes will have the right to require us to repurchase all or a portion of their 2025 Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest, if any, as described under Note 9 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. If consummated, the Amazon Merger is expected to constitute a “fundamental change” (as defined in the indenture governing the 2025 Notes). Upon the occurrence of a fundamental change, holders of the 2025 Notes may convert their 2025 Notes for a period and, subject to limited exceptions, may require us to repurchase for cash all or any portion of their 2025 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, upon conversion of the 2025 Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the 2025 Notes being converted as described under Note 9 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of 2025 Notes surrendered therefor or 2025 Notes being converted. In addition, our ability to repurchase the 2025 Notes or to pay cash upon conversions of the 2025 Notes may be limited by law, by regulatory authority or by agreements governing our existing or future indebtedness. Our failure to repurchase 2025 Notes at a time when the repurchase is required by the indenture or to pay any cash payable on future conversions of the 2025 Notes as required by the indenture would constitute a default under the indenture governing the 2025 Notes. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our existing or future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the 2025 Notes or make cash payments upon conversions thereof. The conditional conversion feature of the 2025 Notes, if triggered, may adversely impact our financial condition and operating results. In the event the conditional conversion feature of the 2025 Notes is triggered, holders of 2025 Notes will be entitled to convert the 2025 Notes at any time during specified periods at their option. If consummated, the Amazon Merger is expected to constitute a “fundamental change” (as defined in the indenture governing the 2025 Notes), permitting holders of the 2025 Notes to convert their 2025 Notes for a period. If one or more holders elect to convert their 2025 Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely impact our liquidity. In addition, even if holders do not elect to convert their 2025 Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2025 Notes as a current rather than long-term liability, which would result in a significant reduction of our net working capital. Risks Related to Our Acquisition of Iora We may be unable to successfully integrate Iora's business and realize the anticipated benefits of the merger. We will be required to devote significant management attention and resources to integrating our and Iora's business practices and operations to effectively realize synergies as a combined company, including opportunities to maintain members as they become Medicare eligible, sign up incremental members, reduce combined costs, and reduce combined capital expenditures compared to both companies’ standalone plans. Potential difficulties the combined company may encounter in the integration process include the followin 92 • the inability to successfully combine our and Iora's businesses in a manner that permits the combined company to realize the growth, operations and cost synergies anticipated to result from the merger, which would result in the anticipated benefits of the merger, including projected financial targets, not being realized in the time frames currently anticipated, previously disclosed or at all; • lost patients or members, or a reduction in the increase in patients or members as a result of certain enterprise clients, patients, members or partners of either of the two companies deciding to terminate or reduce their business with the combined company or not to engage in business in the first place; • a reduction in the combined company’s ability to recruit or maintain providers; • an inability of the combined company to maintain its health network partnerships or payer contracts on substantially the same terms; • the complexities associated with managing the larger combined businesses and integrating personnel from the two companies, while at the same time attempting to (i) provide consistent, high quality services under a unified culture and (ii) focus on other ongoing transactions; • the additional complexities of combining two companies with different histories, regulatory restrictions, operating structures and markets; • the failure to retain key employees of either of the two companies; • compliance by us with additional regulatory regimes and with the rules and regulations of additional regulatory entities, including the Centers for Medicare and Medicaid Services, which we refer to as CMS; • potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the merger; and • performance shortfalls at one or both of the two companies as a result of the diversion of management’s attention caused by completing the merger and integrating the companies’ operations. For all these reasons, you should be aware that it is possible that the integration process could result in the distraction of the combined company’s management, the disruption of the combined company’s ongoing business or inconsistencies in the combined company’s services, standards, controls, procedures and policies, any of which could adversely affect the ability of the combined company to maintain relationships with enterprise clients, patients, members, vendors, partners, employees or providers or to achieve the anticipated benefits of the merger, or could otherwise adversely affect the business and financial results of the combined company. We expect to continue to incur substantial expenses related to the integration of Iora. We have incurred and expect to continue to incur substantial expenses in connection with integrating Iora's business, operations, networks, systems, technologies, policies and procedures of Iora with our business, operation, networks, systems, technologies, policies and procedures. While we have assumed that a certain level of integration expenses would be incurred, there are a number of factors beyond our control that could affect the total amount or the timing of our integration expenses. Many of the expenses that were and will be incurred, by their nature, are difficult to estimate accurately at the present time. In addition, the combined company may need significant additional capital in the form of equity or debt financing to implement or expand its business plan and there can be no assurance that such capital will be available to the combined company on terms acceptable to it, or at all. If the combined company issues additional capital stock in the future in connection with financing activities, stockholders will experience dilution of their ownership interests and the per share value of the combined company’s common stock may decline. Due to these factors, the transaction and integration expenses could be greater or could be incurred over a longer period of time than we currently expect. 93 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Recent Sale of Unregistered Securities and Use of Proceeds None. Issuer Purchases of Equity Securities None. Use of Proceeds from Registered Securities On January 30, 2020, our registration statement on Form S-1 (File No. 333- 235792) relating to the initial public offering of our common stock was declared effective by the SEC. Pursuant to such registration statement, we issued and sold an aggregate of 20,125,000 shares of our common stock at a price of $14.00 per share for aggregate cash proceeds of approximately $258.2 million, net of underwriting discounts and commissions and offering costs, which includes the full exercise by the underwriters of their option to purchase additional shares of common stock. No payments for offering expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities or (iii) any of our affiliates. J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC acted as joint-book running managers for the offering. There has been no material change in the expected use of the net proceeds from our initial public offering, as described in our final prospectus filed with the SEC on February 3, 2020 pursuant to Rule 424(b) under the Securities Act of 1933, as amended. Repurchase of Shares of Company Equity Securities None. Item 3. Defaults Upon Senior Securities. Not Applicable. Item 4. Mine Safety Disclosures. Not Applicable. Item 5. Other Information. None. 94 Item 6. Exhibits. Number Exhibit Description Form File No. Exhibit Filing Date Filed Herewith 2.1* Agreement and Plan of Merger, dated as of July 20, 2022, by and among 1Life Healthcare, Inc., Amazon.com, Inc. and Negroni Merger Sub, Inc. 8-K 001-39203 2.1 7/22/2022 3.1 Amended and Restated Certificate of Incorporation of the Registrant 8-K 001-39203 3.1 2/4/2020 3.2 Amended and Restated Bylaws of the Registrant 8-K 001-39203 3.2 2/4/2020 31.1 Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 31.2 Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 32.1† Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X 101.INS Inline XBRL Instance Document X 101.SCH Inline XBRL Taxonomy Schema Linkbase Document X 101.CAL Inline XBRL Taxonomy Definition Linkbase Document X 101.DEF Inline XBRL Taxonomy Calculation Linkbase Document X 101.LAB Inline XBRL Taxonomy Labels Linkbase Document X 101.PRE Inline XBRL Taxonomy Presentation Linkbase Document X 104 Cover Page Interactive Data File (formatted as inline XBRL and contained within Exhibit 101). *    Certain exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally to the SEC a copy of any omitted exhibits or schedules upon request. † The certification attached as Exhibit 32.1 that accompanies this Quarterly Report on Form 10-Q, is deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of 1Life Healthcare, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing. 95 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. 1LIFE HEALTHCARE, INC. Date: November 2, 2022 By: /s/ Bjorn Thaler Bjorn Thaler Chief Financial Officer (Principal Financial Officer) Date: November 2, 2022 By: /s/ Vikas Agarwal Vikas Agarwal Chief Accounting Officer (Principal Accounting Officer) 96

Page PART I Item 1. Business 1 Item 1A. Risk Factors 18 Item 1B. Unresolved Staff Comments 61 Item 2. Properties 61 Item 3. Legal Proceedings 61 Item 4. Mine Safety Disclosures 61 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 62 Item 6. Selected Financial Data 64 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 65 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 86 Item 8. Financial Statements and Supplementary Data 86 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 86 Item 9A. Controls and Procedures 86 Item 9B. Other Information 87 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 87 PART III Item 10. Directors, Executive Officers and Corporate Governance 88 Item 11. Executive Compensation 95 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 121 Item 13. Certain Relationships and Related Transactions, and Director Independence 123 Item 14. Principal Accounting Fees and Services 125 PART IV Item 15. Exhibits, Financial Statement Schedules 127 Item 16 Form 10-K Summary 129 i Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the "safe harbor" created by those sections. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "goal," "would," "expect," "plan," "anticipate," "believe," "estimate," "project," "predict," "potential," and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties, and other factors in this Annual Report on Form 10-K in greater detail under the heading "Risk Factors," including, among other thi • the timing of, and our ability to close, our potential merger with Amazon.com, Inc.("Amazon", and such proposed merger, the "Amazon Merger"), as well as changes in factors that influence and the timing or likelihood of closing the potential Amazon Merger; • the impact of the uncertainty of the potential Amazon Merger on our business or any related negative press; • actual or anticipated fluctuations in our financial condition and operating results; • variance in our financial performance from expectations of securities analysts or investors; • changes in our projected operating and financial results; • changes in the pricing we offer our members; • our relationships with our health network partners and enterprise clients and any changes to or terminations of our contracts with the health network partners or enterprise clients; • changes in laws or regulations applicable to our solutions and services; • the impact of COVID-19 on our financial performance, financial condition and results of operations, and the financial performance and financial condition of our health network partners, our enterprise clients, and others; • announcements by us or our competitors of significant business or strategic developments, acquisitions or new offerings; • actual or anticipated developments in our business, our competitors' businesses or the competitive landscape generally; • publicity associated with issues with our services and technology platforms; • our involvement in litigation, including medical malpractice claims and consumer class actions; • any governmental investigations or inquiries into our business and operations or challenges to our relationships with our affiliated professional entities under the Administrative Services Agreements ("ASAs"); • future sales of our common stock or other securities, by us or our stockholders; • changes in senior management or key personnel; • developments or disputes concerning our intellectual property or other proprietary rights; • changes in accounting standards, policies, guidelines, interpretations or principles; • the trading volume of our common stock; • general economic, regulatory and market conditions, including labor shortages, inflationary pressures and any future actions taken in an effort to mitigate the effects of inflation, which could increase our costs of doing business and cause our stock price to be volatile; • our estimates of our market opportunity and changes in the anticipated future size and growth rate of our market; ii • our ability to retain and recruit key personnel and expand our sales force; • the ability of our affiliated professional entities to attract and retain high quality providers; • our ability to fund our working capital requirements; • our compliance with, and the cost of, federal, state and foreign regulatory requirements; and • our ability to successfully integrate and realize the anticipated benefits and synergies of our past or future strategic acquisitions, including our acquisition of Iora Health, Inc. ("Iora"). These risks are not exhaustive. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements as predictions of future events. Also, these forward-looking statements represent our current beliefs, estimates and assumptions only as of the date of this filing, and information contained in this filing should not be relied upon as representing our estimates as of any subsequent date. You should read this Annual Report on Form 10-K completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. In addition, statements including "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the filing date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. In this report, unless otherwise indicated or the context otherwise requires, (i) all references to "One Medical," "we," "us," "our" or the "Company" mean 1Life Healthcare, Inc., its subsidiaries, and its consolidated affiliated professional entities, (ii) all references to "1Life" refer to 1Life Healthcare, Inc. and not to its consolidated affiliated professional entities, and (iii) all references to "affiliated professional entities" refer to the professional entities affiliated with 1Life or its subsidiaries through administrative services agreements. 1Life and its affiliated professional entities conduct business under the "One Medical" brand. Risk Factor Summary Our business is subject to a number of risks and uncertainties which may prevent us from achieving our business and strategic objectives or may adversely impact our business, financial condition, results of operations, cash flows, and prospects. These risks include but are not limited to the followin Risks Related to Our Proposed Transaction with Amazon • failure to complete, or delays in completing, the proposed Amazon Merger announced on July 21, 2022, could materially and adversely affect our results of operations and our stock price; and • uncertainty about the Amazon Merger or negative publicity related to the Amazon Merger may adversely affect relationships with our members, enterprise clients, health system partners, payers, suppliers and employees, whether or not the Amazon Merger is completed. Risks Related to Our Business and Our Industry • the impact of the COVID-19 pandemic; • our dependence on a limited number of key existing payers; • our reliance on reimbursements from certain third-party payers for the services we provide; • the impact of reviews and audits by CMS in accordance with Medicare's risk adjustment payment system; iii • the impact of assuming some or all of the risk that the cost of providing services will exceed our compensation for such services under certain third-party payer agreements; • the impact of reduced reimbursement rates paid by third-party payers, or federal or state healthcare programs due to rule changes or other restrictions; • the impact of regulatory or policy changes in Medicare or other federal or state healthcare programs; • our dependence on the success of our strategic relationships with third parties; • the impact of a decline in the prevalence of private health insurance coverage; • our ability to cost-effectively develop widespread brand awareness and to maintain our reputation and market acceptance for our healthcare services; • our history of losses and uncertainty about our future profitability; • our ability to maintain and expand member utilization of our services; • our ability to compete effectively in the geographies in which we participate; • our ability to grow at the rates we historically have achieved; • the impact of current or future litigation against us, including medical liability claims and class actions; • our ability to attract and retain quality primary care providers to support our services; • fluctuations in our quarterly results and our ability to meet the expectations of securities analysts and investors; and • the loss of key members of our senior management team and our ability to attract and retain executive officers, employees, providers and medical support personnel. Risks Related to Government Regulation • the impact of healthcare reform legislation and changes in the healthcare industry and healthcare spending; • the impact of governmental or regulatory scrutiny of or challenge to our arrangements with health networks; • our dependence on our relationships with affiliated professional entities that we may not own, to provide healthcare services; • our ability to comply with rules related to billing and related documentation for healthcare services; and • our ability to comply with regulations governing the use and disclosure of personal information, including protected health information, or PHI. Risks Related to Information Technology • our reliance on internet infrastructure, bandwidth providers, other third parties and our own systems to provide a proprietary services platform to our members and providers; • our reliance on third-party vendors to host and maintain our technology platform; • any breaches of our systems or those of our vendors or unauthorized access to employee, contractor, member, client or partner data; • our ability to maintain and enhance our proprietary technology platform; and • our ability to optimize our technology solutions for members, integrate our systems with health network partners or resolve technical issues in a timely manner. iv Risks Related to Our Intellectual Property • our ability to obtain, maintain, protect and enforce our intellectual property rights. Risks Related to Our Acquisition of Iora • our ability to successfully integrate Iora's business and realize the benefits of the merger; and • the incurrence of substantial expenses related to the integration of Iora's business. v PART I Item 1. Business. Overview Our mission is to transform health care for all through our human-centered, technology-powered model. Our vision is to delight millions of members with better health and better care while reducing the total cost of care. We are a membership-based primary care platform with seamless digital health and inviting in-office care, convenient to where people work, shop, live, and click. We are disrupting health care from within the existing ecosystem by simultaneously addressing the frustrations and unmet needs of key stakeholders, which include consumers, employers, providers, and health networks. As of December 31, 2022, we have grown to approximately 836,000 total members including 796,000 Consumer and Enterprise members and 40,000 At-Risk members, and we operated 221 medical offices in 27 markets across the United States. The current state of the healthcare ecosystem leaves key stakeholders frustrated and with unmet needs. • Consumers. According to a 2020 report, 71% of consumers are dissatisfied with their healthcare experience, in part due to limited after-hours and digital access, long wait times for appointments, extended in-office delays, short and impersonal visits, uninviting medical offices in inconvenient locations, constrained access to specialists, and a lack of care coordination across clinical settings. • Employers. Employers find their health benefit offerings often underperforming on such fundamental objectives as attracting and engaging employees, improving employee productivity, reducing absenteeism, producing better health outcomes, increasing the safety of the workplace through screening and treating communicable diseases such as COVID-19, or managing health care costs. • Providers. Within primary care, according to a 2022 Mayo Clinic report, 63% of U.S. physicians show symptoms of burnout, driven in part by misaligned fee-for-service compensation approaches incentivizing short transactional interactions, and excessive administrative tasks associated with burdensome electronic health record ("EHR") systems, and convoluted insurance procedures. • Health Networks. Health systems, as well as private and government payers, have been looking to develop coordinated networks of care to better attract patients, increase attributable lives, and better integrate primary care with specialty services for improved patient outcomes and lower costs. Yet even with major investments in provider groups, care management programs and technology systems, health networks have struggled to deliver on these objectives. The U.S. commercial primary care and Medicare market together is estimated to be approximately $870 billion in 2021, including approximately $170 billion for the commercially insured population and $700 billion for the Medicare population. We estimate that the 27 markets in which we are physically present plus the two markets we are planning to launch in 2023 represent approximately $55 billion in primary care spend within the commercially insured population, and $220 billion for the Medicare population. We expect our total addressable market to grow as we further expand into additional geographies, offer additional services, serve additional populations, and explore alternative risk-sharing reimbursement models. For example, we believe we can further expand our physical presence across the United States. The 50 largest metropolitan statistical areas in the U.S. represent an estimated market opportunity of approximately $80 billion within the commercially insured population, and $330 billion for the Medicare population. In addition, some employees of our enterprise customers can access our digital services nationally, providing us with additional growth potential and improving our ability to expand our physical footprint. We have developed a modernized healthcare membership model based on direct consumer enrollment and third-party sponsorship across commercially insured and Medicare populations. Our membership model includes seamless access to 24/7 digital health services paired with inviting in-office care routinely covered by most health care payers. Our technology drives high monthly active usage within our membership, promoting ongoing and longitudinal patient relationships for better health outcomes, and high member retention. Our technology also helps our service-minded team in building trust and rapport with our members by facilitating proactive digital health outreach as well as responsive on-demand virtual and in-office care. Our digital health services and our well-appointed offices, which tend to be located in highly convenient locations, are staffed by a team of clinicians who are not paid on a fee-for-service basis, and therefore free of misaligned compensation incentives prevalent in health care. Additionally, we have developed clinically and digitally integrated partnerships with health networks, better coordinating more timely access to specialty care when needed by members. Together, this approach allows us to engage 1 in value-based care across all age groups, including through At-Risk arrangements with Medicare Advantage payers and the Center for Medicare & Medicaid Services ("CMS"), in which One Medical is responsible for managing a range of healthcare services and associated costs of our members. • Consumers. We delight consumers with a superior experience as evidenced by our average Net Promoter Score, or NPS, of 90 across our membership base over the twelve months ended December 31, 2022 and our key primary care-related Healthcare Effectiveness Data and Information Set ("HEDIS") quality measures. NPS measures the willingness of consumers to recommend a company's products or services to others. We use NPS as a proxy for gauging our members' overall satisfaction with us or our providers and loyalty to us. We calculate our NPS based on survey data using the standard method of subtracting the percentage of members who respond that they are not likely to recommend us or our providers from the percentage of members that respond that they are likely to recommend our providers, with responses based on a scale of 0 to 10. The resulting NPS is an index that ranges from a low of -100 to a high of 100. Our technology platforms advance consumer engagement and health through proactive digital health screenings, post-visit digital follow-ups, real-time access to medical records, and around-the-clock availability of our friendly and knowledgeable providers. Our technology platforms also provide insights for our care teams across our populations that aid in our care delivery. Our members receive access to 24/7 on-demand digital and virtual health services with quick response times. Members also have access to scheduled virtual visits as well as inviting in-office care in convenient locations with same day or next day appointments from a warm and caring staff. In addition to supporting members with routine and preventative primary, chronic and acute care, we provide lab and immunization services, COVID-19 testing and care, behavioral health, women's health, men's health, LGBTQ+ care, pediatrics, geriatrics, sports medicine, lifestyle, and well-being programs. • Employers . We support more than 9,000 enterprise clients across a diverse set of industries in achieving key goals of their health benefits offerings such as attracting and engaging employees, improving employee productivity and well-being, and delivering higher levels of value-based care. We are also helping them increase the safety of their workplace through screening for, treating, and immunizing against communicable diseases such as COVID-19. With real-time video and phone consults available typically within minutes, and same and next day in-office appointments, we have demonstrated a 41% reduction in emergency room visits and total employer cost savings of 8% or more based on a 2018 report. Additionally, a peer-reviewed study published in the Journal of American Medical Association (JAMA) Network Open in 2020 linked our membership-based, primary care model combining virtual, near-site, and work-site services with 45% lower total medical and prescription claims costs for one employer, including 54% lower spending on specialty care, 43% lower spending on surgery, 33% lower spending on emergency department care, and 26% lower spending on prescriptions. Since then, we have further evolved our service offering, including scheduled virtual visits or behavioral health visits, which we believe provides additional value to employers and their employees. We have also launched a 24/7 virtual only service offering which is available exclusively to employees of our employer customers in geographies where we do not yet have a physical presence. This service offering allows employers to provide One Medical to all of their employees regardless of their location, while providing us with better insights about employer demographics and potential future demand for our other offerings. Employers typically cover our membership fee for their employees, with over 85% of employers also covering their employees’ dependents’ memberships as of December 31, 2022. Employers can add our services at any point during the year, as our services typically fit within their existing health benefits offerings and are typically covered under an employer’s routine health insurance benefit program, allowing for seamless and quick implementation. Within enterprise clients, we estimate that our median activation rate as of December 31, 2022, was over 40%, which we believe we can increase over time. We define estimated activation rate for any enterprise client at a given time as the percentage of eligible lives enrolled as members. Some of our enterprise clients offer membership benefits to the dependents of their employees, for which we assume eligible lives include one dependent per employee. • Providers. Our culture, technology, team-based approach, and salaried provider model help address the fundamental issues driving physician burnout. Our culture allows us to attract and retain top board-certified physicians and premier team members. We are focused on continuing to increase our diversity amongst providers so that our provider base reflects the diversity of the communities and members we serve. Our proprietary technology platforms allow for meaningful reductions in desktop medicine burdens, which are the excessive administrative hassles associated with the use of EHRs. Our support team takes on many of the administrative burdens for scheduling and insurance coordination. Our in-office and virtual medical teams jointly deliver 2 longitudinal health care. Our salary-based provider compensation model incentivizes delivery of the right care at the right time, without the adverse financial incentives that fee-for-service or compensation systems can have on clinical decision-making. • Health Networks. Health networks partner with us for consumer-driven care, direct-to-employer relationships, coordinated networks of attributable lives, and At-Risk arrangements where we are responsible for managing a range of healthcare services and associated costs for our members. Through our partnerships, we connect our primarily working-age, commercially insured membership base with health networks without the costs and risks these health networks typically face in the development of their own primary care networks. In our Medicare business, we partner with health care payers to enable members to access our service and enter into At-Risk arrangements where we are responsible for managing a range of healthcare services and associated costs of our members. We clinically and digitally integrate with our health network partners to advance more seamless member access to partner specialists and facilities when needed, while supporting reductions in duplicative testing and excessive delays often seen across uncoordinated healthcare settings. Such coordinated care can deliver better service levels and outcomes for consumers, while advancing employee productivity and value-based care to employers and our payer partners. We believe our model is highly scalable. Our business is driven by growth in Consumer and Enterprise members, and At-Risk members (see also Part II, Item 7 to this Annual Report, "Management's Discussion and Analysis — Key Metrics and Non-GAAP Financial Measures"). We have developed a modernized membership model based on direct consumer enrollment and third-party sponsorship. Our membership model includes seamless access to 24/7 digital health paired with inviting in-office care routinely covered by most health care payers. Consumer and Enterprise members join either individually as consumers by paying an annual membership fee or are sponsored by a third party. At-Risk members are members for whom we are responsible for managing a range of healthcare services and associated costs. Digital health services are delivered via our mobile app and website, through such modalities as video and voice encounters, chat and messaging. We are physically present in 27 markets as of December 31, 2022, comprised of Atlanta, Austin, Birmingham, Boston, Cape Cod, Charlotte, Chicago, Columbus, Dallas, Denver, Greensboro, Hanover, Houston, Huntsville, Kansas City, Los Angeles, Miami, New York, Orange County, Phoenix, Portland, Raleigh-Durham, San Diego, the San Francisco Bay Area, Seattle, Tucson, and Washington, D.C., and serve patients across all stages of life, from the working-age, commercially-insured population and associated dependents to the Medicare populations. For the twelve months ended December 31, 2022, we retained 9 out of every 10 of our consumer, enterprise (as measured by contract value), and At-Risk members. We grew our total membership by 207% from December 31, 2017 through December 31, 2022. We derive net revenue, consisting of Medicare revenue and commercial revenue, from multiple stakeholders, including (i) consumers, (ii) enterprise clients such as employers, schools, and universities, and (iii) health networks such as health systems and private and government payers. We generate Medicare revenue from (i) Capitated Revenue from At-Risk arrangements with Medicare Advantage payers and CMS, and (ii) fee-for-service and other revenue from fee-for-service visits for Other Patients not covered under At-Risk arrangements and from certain payers for clinical start-up, administration, or on-going coordination of care activities associated with providing care to At-Risk members and other Medicare patients. We generate commercial revenue from (i) partnership revenue from our health system partners with whom we have clinically and digitally integrated, primarily on a per member per month (“PMPM”) basis, largely fixed price or fixed price per employee contracts with enterprise clients for medical services and COVID-19 on-site testing services for enterprise clients, schools, and universities where we typically bill such customers a fixed price per service performed, (ii) net fee-for-service revenue from reimbursements received from our members' or other patients' health insurance plans or those with billing rates based on our agreements with our health network partners for healthcare services delivered to Consumer and Enterprise members on a fee-for-service basis, and (iii) membership revenue through the annual membership fees charged to either consumer members or enterprise clients, as well as fees paid for our One Medical Now service offering. Industry Challenges and Our Opportunity The current state of the healthcare ecosystem leaves key stakeholders frustrated and with unmet needs, delivering suboptimal results for consumers, employers, providers, and health networks. We believe that these unmet needs represent a significant opportunity for us. 3 Consumers According to a 2020 report, approximately 71% of consumers are dissatisfied with their healthcare experience. Similarly, a 2022 report reported that 60% of Americans have had an outright negative healthcare experience. Their frustrations include long lead times to schedule physician appointments and long waits once checked-in at provider offices. Appointments often occur in crowded medical offices and are typically short in duration, affording limited time to develop deeper provider-patient relationships. Opportunities to engage with providers before and after visits, as well as during nights and weekends, are often limited or non-existent, even though healthcare needs are not constrained to the operating hours of provider offices. Care delivered is also often uncoordinated with providers, leaving consumers to navigate their own way through a complex system. Employers To attract and retain staff, employers are making significant investments in health benefits; yet, as commercial insurance costs have reached record highs, employers and employees remain frustrated. Barriers to accessing timely care during the day and after business hours cause employees to miss work and lose productivity. As a result, many employees self-direct to higher cost settings such as emergency rooms. Additionally, uncoordinated care across primary care, specialty care, and behavioral health settings creates frustration and causes excessive spending. According to a 2022 report by Health Affairs, as of 2021, U.S. health care expenditures exceeded $3.8 trillion, with one-third estimated to be wasteful expenditures. Providers By predominantly compensating primary care providers on volume, the prevalent fee-for-service approach seen within the industry incentivizes short and transactional medical encounters, often with insufficient time to address underlying issues related to acute care, chronic disease, and behavioral health issues. Such fee-for-service compensation may also incentivize greater referrals to specialists for more time-intensive cases, even when such patients could otherwise be treated effectively within primary care. Management of preventive care and chronic conditions through longitudinal relationships is typically less-reimbursed, if paid for at all. In addition, providers often find themselves performing excessive administrative tasks that could be better performed by other staff or eliminated altogether. They suffer from rising administrative time spent populating data into cumbersome EHR systems, and documentation hassles associated with insurance procedures. These dynamics contribute to lower job satisfaction and provider burnout. Health Networks While many health networks have sought to better integrate primary care with specialty and hospital care, they may underperform on service, access, and coordination of care. This is partly due to their internal incentive systems, processes, and technologies, which are typically focused on addressing high revenue specialty care, rather than best supporting primary care. Moreover, primary care networks can be very costly to develop, and can require significant ongoing investments to operate, while often underperforming on strategic and financial objectives. According to the American Hospital Association's Futurescan survey of hospital CEOs and leaders published in 2019, 75% of hospital and health systems operate their primary care networks at a loss or are willing to do so, with 76% of health system leaders indicating they are pursuing or are likely to pursue external relationships to advance their physician networks and better serve consumers. We have developed a human-centered, technology-powered primary care model that simultaneously addresses the aforementioned frustrations and unmet needs of key stakeholders. As we continue to deploy our model at scale, we disrupt the healthcare ecosystem from within its current structure through ou • modernized healthcare membership model based on direct consumer enrollment and third-party sponsorship; • seamless care delivery that integrates across multiple digital and in-person modalities; • inviting offices with high quality service in convenient locations; • partnerships with health networks, including alignment with payers; • premier salaried medical group; • advanced technology-powered systems; and • service-oriented team implementing Lean processes. 4 Our Value Proposition Our modernized human-centered and technology-powered primary care model simultaneously addresses the frustrations and unmet needs faced by key stakeholders. Value Proposition for Consumers • Greater engagement for better health and better care. We regularly and proactively engage our members digitally and in-person. Members can digitally access medical information, prescriptions, lab results and other health data, and can reach out to our team regarding medical issues or health questions around-the-clock. Members may receive digital health status check-ins before and after office encounters, and our technology facilitates further follow-up with our providers. • Unique digital health experience. Our dedicated and compassionate providers and other team members deliver 24/7 digital care. Members engage through our website or mobile app in timely synchronous and asynchronous interactions, selecting their communication modality of choice, including messaging, text, voice and video. Our in-house virtual team delivers 24/7 service to address health concerns and administrative questions, coordinating with our in-office providers through a common EHR that is shared across digital and in-office settings. • Superior in-office care experience. We are focused on providing kind and attentive in-person care in aesthetically pleasing offices with contemporary interior designs. We offer same- or next-day appointments with minimal wait upon arrival in locations convenient to where consumers work, shop and live. Members enter into first-name relationships with providers who greet them upon arrival and walk them out upon appointment completion. Our approach allows for more time to thoroughly address a broader array of issues and to develop deeper relationships than traditional primary care settings. • Longitudinal approach to care. Our approach treats the whole person by including the physical, mental, social, emotional, and administrative needs of our members. In addition to supporting members with routine and preventative primary, chronic and acute care, we provide lab and immunization services, COVID-19 testing and care, behavioral health, women's health, men's health, LGBTQ+ care, pediatrics, geriatrics, sports medicine, lifestyle, and well-being programs. We proactively reach out to members to assess their health status and mental wellness and follow up with reminders on key health initiatives. These initiatives support the health of our members with the goal of avoiding more costly care in the future. • Greater care coordination. We can serve as a trusted advisor to our members and, through our administrative teams and technology, help them better navigate the healthcare ecosystem. Our health network partnerships further advance clinically and digitally integrated care across primary, specialty, and acute care settings by streamlining access to leading specialists and reducing delays and duplicative tests. • Improved health outcomes. We help drive better health outcomes for our members, as reflected in our key primary care-related HEDIS quality metrics. To prevent avoidable conditions and advance health, we can conduct population health initiatives such as proactively screening for cancers, chronic diseases, anxiety, and depression. • COVID-19 . We offer COVID-19 testing and counseling across all of our markets, and also administer COVID-19 vaccines in select geographies. Value Proposition for Employers • Differentiated and highly valued employee benefit. We believe our model enhances the benefits offering of employers, improving their recruitment and retention of talent. • Increased workforce productivity. We reduce time away from work as well as employee distraction related to illness, injury or other medical conditions by providing quick and convenient access to care for employees and dependents, including virtual care. With longer appointments, we address more needs in our primary care setting, reducing avoidable referrals and additional time away from work. Additionally, our ability to facilitate timely specialist appointments with our health network partners further reduces an employee's distraction while waiting for specialty care. 5 • Reduced costs. We reduce health care costs by increasing employee productivity and providing value-based care, substituting higher cost emergency room and specialty services with lower-cost primary care. We help avoid unnecessary testing and higher cost branded prescriptions through best practice clinical protocols embedded in our technology. For example, we have demonstrated a 41% reduction in emergency room visits and total employer cost savings of 8% or more. A peer-reviewed study published in JAMA Network Open in 2020 linked our membership-based, primary care model combining virtual, near-site, and work-site services with 45% lower total medical and prescription claims costs for one employer. • Insights on improving employee health and value-based care. We support population health improvement and medical cost assessment by analyzing anonymized aggregated health record information and employee health engagement patterns. We work with employers to better understand the health needs of their employees as well as to review overall utilization patterns. Our aggregated anonymized EHR information allows for timelier and deeper insights to help employers improve their health benefits programs and achieve higher levels of value. Value Proposition for Providers • More fulfilling way to practice. Our providers develop meaningful relationships with our members over time, allowing them to help improve healthy behaviors and better coordinate member health needs. Their relationships with members are more longitudinal and less transactional. Our providers are also supported by our technology platforms which enable them to practice at the top of their license while serving patients throughout all stages of life, making their work more professionally rewarding while reducing factors driving burnout. • Team-based approach across care modalities. Our in-office providers and our virtual team collaborate for longitudinal health care across time and settings. Our virtual care team and administrative specialists reduce our in-office providers' workloads while promoting 24/7 care. Providers can better focus on caring for patients during clinical interactions, while excessive administrative tasks can be handled by other team members. • Purpose-built technology platforms . Our proprietary technology platforms are developed with significant provider input and are purpose-built for primary care. For example, our technology is focused on capturing and surfacing the most meaningful clinical insights in a workflow that is intuitive to providers. Our platform meaningfully reduces administrative workloads by intelligently automating, streamlining, and routing tasks across our network to the most appropriate team member, resulting in faster response times while freeing up providers to focus on caring for members. • Salaried model with flexible work schedules. Our salaried model avoids adverse fee-for-service and capitation incentives, and does not financially reward or penalize our providers based on utilization. It supports the delivery of the right amount of care in the best setting without impacting provider take-home pay. Additionally, we have flexible work arrangements and opportunities to practice in office or virtually. We believe this results in a better quality of life and work-life balance. With a growing presence in markets across the country, we also increasingly offer providers mobility opportunities. Value Proposition for Health Networks • Expansion of health networks. Our partnership model allows health networks to augment their existing primary care and network strategies, without significant additional investment in capital, technology or management resources. Partnering with us can be a more effective, expeditious, economical, and less risky way of developing a coordinated network of attributable lives. Additionally, our model can better position health networks with consumers and employers by focusing on consumer-driven care and facilitating direct-to-employer relationships. • Attractive member base. Health networks look to partner with us to proactively establish relationships with our largely commercially-insured members. • Coordinated care. We clinically and digitally integrate our modernized primary care model with our health network partners' provider networks, better coordinating care for members across a continuum of settings. We digitally integrate EHR information, avoiding duplicative testing often seen when patients are referred across care settings. Through better coordination, we provide members with more seamless access to specialty care when needed. We simultaneously reduce excessive health network administrative costs by linking our referral processes 6 and digital technologies with health network partners. This coordination of care can lead to better experiences and outcomes for members, as well as reduced costs. • Value-Based Care. Our primary care model focuses on providing the right care at the right time, thereby reducing the need for costly and potentially unnecessary medical care which is often prevalent in the current fee-for-service healthcare system. As a result, we enter into At-Risk arrangements with payers such as Medicare Advantage plans and CMS, where we are responsible for managing a range of healthcare services and associated costs of our members. Our Competitive Strengths We believe the following are our key competitive strengths. Modernized Membership-Based Model Our membership-based model supports ongoing and longitudinal relationships where we can serve as trusted advisors to our members and as partners to our enterprise clients and health networks. Our model also generates stable revenue which is recurring in nature. By having an enrolled population of members, we can proactively reach out to members to encourage adherence to treatment protocols or to check in on their care needs. The relationship inherent in a membership model is very different than the traditional model of transactional patient care visits, where a provider typically only engages with a patient if the patient comes in for a visit. We proactively engage with our members on a regular basis through our digital platform and in our welcoming offices, and believe we are better able to develop long-term connections and relationships with them. Extraordinary Customer Experience Our human-centered approach is focused on providing a superior experience to our members, as evidenced by the bundling of services within our membership model, the way we hire and train our team, the culture of caring we foster, our easy-to-use technology, our 24/7 digital health, our inviting in-office care, our compassionate and salaried providers, and our streamlined Lean processes, which allows us to more efficiently and effectively serve our members. Whether members call, click, or visit, they experience outstanding service, as evidenced by our average NPS of 90 across our membership base over the twelve months ended December 31, 2022. See "Overview" section above for a description of how we calculate NPS. Our virtual care is available around-the-clock. Our inviting medical offices are well-appointed and modern, and our providers and staff are very friendly and trained in customer service. We are committed to not keeping members waiting long, if at all, and our longer appointments provide our team with more time to address member needs. Our technology is designed to promote frictionless access, ease of use, and high engagement. We look to address the whole-person needs of our members, providing physical and mental health services, lab services, and coordinating specialty services with health network partners. Our administrative staff is available to answer benefits questions and help navigate the healthcare ecosystem on behalf of our members. Simultaneously Addressing the Needs of Consumers, Employers, Providers and Health Networks Our modernized model simultaneously addresses the frustrations and unmet needs of key stakeholders, transforming health care from within the current ecosystem. For consumers, we deliver an extraordinary experience and superior results, including on key primary care-related HEDIS quality measures. For employers, we help improve employee productivity through frictionless access to virtual and in-office care and reduce medical costs by avoiding unnecessary emergency room and specialty visits. For providers, we create a more engaging and manageable primary care work environment by leveraging a salaried model and our proprietary technology. With health networks, we clinically integrate to expand their connections to commercially insured enrollees, and we are in-network with most health insurance plans in all of our markets. Our ability to lower medical costs for our members also allows us to enter into value-based arrangements with select health networks such as Medicare Advantage health plans and CMS. Accordingly, we believe our model delivers differentiated value to all key stakeholders simultaneously within the current healthcare ecosystem. Engaged, Salaried Providers Delivering Best-in-Class Care We offer an outstanding environment to practice primary care, as reflected in our high provider retention rates and strong engagement scores. Our salaried compensation approach allows our providers to deliver patient-centered care without impacting their pay as might be the case under fee-for-service compensation approaches. Our providers also have significantly fewer EHR tasks to complete due to our proprietary technology that is purpose-built for primary care, freeing up their time to focus on delivering outstanding clinical care. 7 Proprietary Technology Platforms Our ability to simultaneously deliver significant value to key stakeholders is deeply rooted in our purpose-built, modernized technology platforms. Our proprietary technology powers all aspects of our company: engaging members, supporting providers, and advancing business objectives. Our technology allows us to proactively engage members with personalized clinical outreach and improve health through online scheduling, virtual provider visits, and ready access to health information. Our technology also supports providers by leveraging machine learning to reduce and re-route tasks that needlessly create administrative burdens while supporting team-based care. This allows providers to spend more time delivering clinical care, while facilitating higher levels of member responsiveness. Our technology also advances operational efficiencies, as our product designers and engineers collaborate closely with clinical and operational team members to observe and optimize workflows in ways that support better tracking of our members' health and outcomes. Our platform is built on a modern cloud-based technology stack, employing Agile development cycles and a DevOps approach to infrastructure. Our modular, service-oriented architecture utilizes Application Programming Interface ("API") standards for ease of implementing new functionalities and integrating with external systems. Operating Platform for High Performance at Scale Our approach for operating and scaling our platform is based on leading process improvement and management practices. We leverage Lean methodologies for process improvement, human-centered design thinking, behavioral design, and Agile methodologies for software development to deliver high performance levels at scale. Our operational processes, software development and staffing models, including our virtual medical team, are designed to work together to create efficiencies and uniquely achieve our objectives. Moreover, we standardize our processes and practices so we can efficiently deliver consistent outcomes at scale across existing and new markets, which we believe will further drive our financial performance. Highly Experienced Management Team Our management team has extensive experience working with leading health systems, health plans, technology companies, service organizations, consumer brands, and enterprise-sales-driven companies. Our leadership embodies our cultural alignment around our behavioral tenants of being human-centered, team-based, unbounded in thinking, driven to excel, and intellectually curious. Our leaders help organize teams of clinicians, technologists, and staff to regularly engage together in designing processes and software to further advance our objectives. Accordingly, our Company is well positioned to execute on our objectives and advance an outstanding workplace environment. Our Growth Strategies To transform health care at scale, we can pursue growth through the following avenues. Grow membership in existing markets We have significant opportunities to increase members in our existing geographies through (i) new sales to consumers and enterprise clients, (ii) expansion of the number of enrolled members, including dependents, within our enterprise clients, (iii) expansion of the number of At-Risk members, including Medicare Advantage participants or Medicare members for which we are at risk as a result of CMS' Direct Contracting Program (now redesigned and renamed the ACO REACH Program), (iv) expansion of Medicare Advantage payers, with whom we contract, and (v) adding other potential services. As of December 31, 2022, we had more than 9,000 enterprise clients. Of our 796,000 Consumer and Enterprise members as of December 31, 2022, 64% were from our enterprise clients. Within enterprise clients, our median activation rate as of December 31, 2022 was over 40%. We believe the number of clients, the number of eligible lives and enrolled members will increase over time as our brand awareness grows and our customer relationships mature. We define estimated activation rate for any enterprise client at a given time as the percentage of eligible lives enrolled as members. Some of our enterprise clients offer membership benefits to the dependents of their employees, for which we assume eligible lives include one dependent per employee. Additionally, while the percentage of enterprise clients offering our services to dependents of their employees has grown from 67% in 2016 to over 85% as of December 31, 2022, we believe we have continued room to further grow the number of enterprise clients offering membership benefits to dependent of their employees. Furthermore, as we continue to scale our presence, we anticipate an increasing number of larger national and regional employers will look to partner with us for our services. As of December 31, 2022, we also had approximately 40,000 At-Risk members and partnered with 10 Medicare Advantage payers across our 10 geographies where we have At-Risk members. 8 Expand into new markets We are physically present in 27 markets with plans to enter two new markets in 2023. We assess potential markets using a variety of metrics, including population demographics and density, employer presence, potential health network partners, and other factors. In addition, we offer One Medical Now, a service offering that provides 24/7 access to unlimited virtual care nationwide, which is sold to new and existing enterprise clients to cover employees in geographies where we are not yet physically present. We do not count employees who have access to or use One Medical Now as members, but we believe this new virtual offering may help us enroll new members in a new geography if and when we decide to offer our in-person offering. We believe some or all of our service offerings are viable in most geographies across the United States. As of December 31, 2022, our At-Risk offering was available in 10 markets, and our commercial offering was available in 21 markets. We expect to continue to expand our At-Risk offering into markets where we currently only have a commercial offering, as well as our commercial offering into markets where we currently only have an At-Risk offering. In addition, we plan to enter new U.S. markets to continue to grow our business. Given our service offering, we can expand our Medicare Advantage offering throughout the year and are not beholden to the annual Medicare enrollment cycle. Grow health network partnerships To accelerate our growth and presence, we can extend existing health network partnerships into new markets where our partners may also have a presence, or we can enter into new health network partnerships in new or existing markets. In 2022, we entered into two markets with new health network partners, and added additional Medicare Advantage payers to our health network partnerships. Expand services and populations We currently provide services to members across all stages of life. In addition to supporting members with routine and preventative primary, chronic and acute care, we typically provide lab and immunization services, women's health, men's health, LGBTQ+ care, pediatrics, geriatrics, sports medicine, lifestyle, and well-being programs. In addition, we expanded our service offering in part as a response to COVID-19 and launched several new billable services, includin • COVID-19 testing and counseling across all of our markets; • COVID-19 vaccines in select geographies; • Mindset by One Medical, our behavioral health service integrated within primary care; • One Medical Now, an expansion of our 24/7 on-demand digital health solutions to employees of enterprise clients located in geographies where we are not yet physically present; and, • Remote Visits, where our providers perform typical primary care visits with our members remotely. Competition We compete in a highly fragmented primary care market with direct and indirect competitors that offer varying services to key stakeholders such as consumers, employers, providers, and health networks. Our competitive success is contingent on our ability to simultaneously address the needs of key stakeholders efficiently and with superior outcomes at scale. We expect to face increasing competition, both from current competitors, who may be well-established and enjoy greater resources or other strategic advantages to compete for some or all key stakeholders in our markets, as well as new entrants into our market. We believe our most direct competition today is from primary care providers who are employed by or affiliated with health networks. We also face competition from direct-to-consumer solutions or employer-focused on-site primary care offerings. These competitors may be narrower in their competitive footprint and may not address all the key stakeholders we serve simultaneously. Our indirect competitors also include episodic point solutions such as telemedicine offerings as well as urgent care providers. These offerings may typically pay providers on a fee-for-service basis rather than the salaried model we employ. Given the size of the healthcare industry and the extent of unmet needs, we expect additional competition, potentially from new companies, including smaller emerging companies which could introduce new solutions and services, as well as other incumbent players in the healthcare industry or from other industries who could develop, or acquire, their own offerings and may have substantial resources and relationships to leverage. In particular, in light of the COVID-19 pandemic, existing or new competitors have developed or further invested in telemedicine and remote medicine programs and ventures, which would compete with our virtual care offerings. With the emergence of new technologies and market entrants, we expect to face 9 increasing competition over time, which we believe will generally increase awareness of the need for modernized primary care models and other innovative solutions in the United States and globally. The principal competitive factors in our industry inclu • patient engagement, satisfaction, and utilization; • convenience, accessibility, and availability; • brand awareness and reputation; • technology capabilities including interoperability with legacy enterprise and health network infrastructures; • ability to address the needs of employers and payers; • ability to attract and retain quality providers; • ability to reduce costs; • level of participation in insurance plans; • alignment with health networks; • domain expertise in health care, technology, sales, and service; • scalability of models; and • operational execution abilities. We believe that we compete favorably with our competitors on the basis of these factors and we believe the offerings of competitors inadequately address the needs of key stakeholders simultaneously or fail to do so at scale. Sales and Marketing Our sales and marketing initiatives focus on member growth through three primary avenu directly acquiring consumer and Medicare members, working with Medicare agents and brokers, and signing agreements with employers that sponsor employee memberships as part of their benefits packages. We use sales and marketing strategies to reach consumers, Medicare eligibles, as well as enterprise benefits leaders. Enterprise marketing and sales strategies also include account-based marketing, business development initiatives, and client service teams focused on customer acquisition, employee enrollment, and member engagement. With a growing national model, we aspire to be the most loved brand in health care. We anchor our brand messaging on how we delight our members with human-centered, technology-powered care. Consumer Sales & Marketing When we market and sell directly to individuals who are not Medicare eligible, we initially focus on increasing brand awareness, followed by performance marketing targeted toward member enrollment. Our marketing strategy in new markets is primarily centered on increasing overall brand awareness, familiarity, consideration, and ultimately enrollment. To achieve these objectives, we showcase our model via direct mail, print, digital, out-of-home, broadcast, and social media advertising. We also develop thought leadership content such as whitepapers, eBooks, and blog posts, and use public relations to secure earned media placements. Additionally, we participate in industry conferences, and may partner with media outlets, event venues, and local businesses to increase brand awareness. As brand awareness increases in more established markets, we shift our efforts to performance marketing focused on both customer acquisition and engagement. Our performance marketing initiatives include customized task-based in-app messages and email communications to drive engagement among members, in addition to more targeted advertisements through direct mail, Google Search, YouTube, and social media for member acquisition. 10 Enterprise Sales & Marketing Our in-house enterprise sales force is organized by geography and customer size. To support our sales force, we segment market data to help with prospect qualification and leverage publicly available and trade organization material to focus on enterprise clients who we believe value health outcomes and medical cost reduction targets. The sales analytics team further supports our value to employers with population health data and medical cost assessment. Additionally, our client services team actively manages our customer accounts through in-depth reporting on metrics such as NPS, member activation, utilization, engagement, and value. We also work with channel partners such as health plans, payroll, and professional employer organizations to reach enterprise clients, including small and midsize businesses and early stage new businesses. Additionally, we partner with select regional and national benefits brokers and consultants to educate potential customers on our offerings. After onboarding new enterprise accounts, we shift our focus to enrolling and engaging employees. These efforts include on-site visits to employers, enterprise email communications, and social media and other forms of performance marketing. Medicare Sales & Marketing Our growth strategy to the Medicare population is focused on balancing brand awareness and lead generation through paid media, organic activities, community/broker outreach, and an increasing focus on new channel growth primarily with telesales vendors. We create brand awareness through TV, radio, print, and out of home advertising, which is focused on telling our story and highlighting relationship-based care. We also add a variety of digital media and direct mail to drive lead generation and patient acquisition. We build fully integrated campaigns that vary by market based on market penetration, objectives, and market response rates to different initiatives. In addition to paid media, we focus on organic media through Search Engine Optimization ("SEO") work, online reviews, and driving word of mouth through our patient base. We also deploy a field sales team who manages community outreach and local presence. This team works with agents and brokers to educate them on our care model. They also look for opportunities to connect with prospects directly in the communities we serve. Lastly, we have utilized third party telesales vendors to help drive new sales. Intellectual Property We believe that our intellectual property rights are important to our business. We rely on a combination of trademarks, service marks, copyrights, trade secrets, and patent applications to protect our proprietary technology and other intellectual property. As of December 31, 2022, we exclusively own 15 registered trademarks in the United States, including One Medical, Iora and other marks, with additional registrations currently pending. In addition, we have registered domain names for websites that we use or may use in our business. As of December 31, 2022, we had no issued patents and two pending patent applications in the United States. Currently, we do not have patent protection for any of our proprietary technology, including our technology platforms, mobile app or web portal. As of December 31, 2022, we have registered copyright ownership of the Healthy Together Playbook, an important part of our Healthy Together return-to-work program helping employers to safely bring their workforce back together amidst the pandemic as well as patient and provider materials. We seek to control access to and distribution of our proprietary information, including our algorithms, source and object code, designs, and business processes, through security measures and contractual restrictions. We seek to limit access to our confidential and proprietary information on a "need to know" basis and enter into confidentiality and nondisclosure agreements with our employees, consultants, customers, vendors, and others that may receive or otherwise have access to any confidential or proprietary information. We have company policies relating to intellectual property protection and we train our workforce on the same from time to time. We also obtain written invention assignment agreements from our employees, consultants, and vendors that assign to us all right, interest, and title to inventions and work product developed during their employment or service engagement with us. In the normal course of business, we provide our intellectual property to external parties through licensing or restricted use agreements. We have established a system of security measures to help protect our computer systems from security breaches and computer viruses. We have employed various technology and process-based methods, such as clustered and multi-layer firewalls, intrusion detection systems, vulnerability assessments, threat intelligence, content filtering, endpoint security (including anti-malware and detection response capabilities), email security mechanisms, and access control mechanisms. We also use encryption techniques for data at rest and in transit. Government Regulation 11 The healthcare industry and the practice of medicine are governed by an extensive and complex framework of federal and state laws, which continue to evolve and change over time. The costs and resources necessary to comply with these laws are high. Our profitability depends in part upon our ability, and that of our affiliated professional entities and their providers, to operate in compliance with applicable laws and to maintain all applicable licenses. A review of our operations by courts or regulatory authorities could result in determinations that could adversely affect our operations, or the healthcare regulatory environment could change in a way that restricts our operations. Practice of Medicine Corporate Practice of Medicine and Fee-Splitting We contract with our affiliated professional entities, who in turn employ or retain physicians and other medical providers to deliver professional clinical services to patients. We typically enter into ASAs with our affiliated professional entities pursuant to which we provide them with a wide range of administrative services and receive payment from the affiliated professional entity. These administrative services arrangements are subject to state laws, including those in certain of the states where we operate, which prohibit the practice of medicine by, and/or the splitting of professional fees with, non-professional persons or entities such as general business corporations. Corporate practice of medicine and fee-splitting prohibitions vary widely from state to state. In addition, such prohibitions are subject to broad powers of interpretation and enforcement by state regulators. Our failure to comply could lead to adverse action against us and/or our providers by courts or state agencies, civil or criminal penalties, loss of provider licenses, or the need to restructure our business model and/or physician relationships, any of which could harm our business. Practice of Medicine and Provider Licensing The practice of medicine by our affiliated professional entities is subject to various federal, state, and local laws and requirements, including, among other things, laws relating to the practice of medicine (including remote care), quality and adequacy of care, non-physician personnel (including advanced practitioners and non-clinicians), supervisory requirements, behavioral health, medical equipment, and the prescribing and dispensing of pharmaceuticals and controlled substances. Telehealth Provider Licensing, Medical Practice, Certification, and Related Laws and Guidelines Providers who provide professional medical services to a patient via telehealth must, in most instances, hold a valid license to practice medicine in the state in which the patient is located, unless there are applicable exceptions. Federal and state laws also limit the ability of providers to prescribe pharmaceuticals and controlled substances via telehealth. We have established systems for ensuring that our affiliated providers are appropriately licensed under applicable state law and that their provision of telehealth to our members occurs in each instance in compliance with applicable rules governing telehealth. Failure to comply with these laws and regulations could lead to adverse action against our providers, which could harm our business model and/or physician relationships and have a negative impact on our business. Other Healthcare Laws The False Claims Act and its implementing regulations include several separate criminal penalties for making false or fraudulent claims to non-governmental payers. The healthcare fraud statute prohibits knowingly and recklessly executing a scheme or artifice to defraud any healthcare benefit program, which includes private payers. Violation of this statute is a felony and may result in fines, imprisonment, or exclusion from government healthcare programs. The false statements statute prohibits knowingly and willfully falsifying, concealing, or covering up a material fact by any trick, scheme, or device, or making any materially false, fictitious, or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items, or services. Violation of this statute is a felony and may result in fines or imprisonment. This statute could be used by the government to assert criminal liability if a healthcare provider knowingly fails to refund an overpayment. The federal government engages in significant civil and criminal enforcement efforts against healthcare companies under the False Claims Act and other civil and criminal statutes. False Claims Act investigations can be initiated not only by the government, but by private parties through qui tam (or whistleblower) lawsuits. Penalties for False Claims Act violations include fines ranging from $12,537 to $25,076 per false claim or statement (as of May 2022, and subject to annual adjustments for inflation), plus up to three times the amount of damages sustained by the federal government. Violations of the False Claims Act violations can also result in exclusion from participation in government healthcare programs. In addition, many states have adopted analogous or similar fraud and false claims laws. 12 In addition, the Civil Monetary Penalties Law imposes civil administrative sanctions for, among other violations, (1) inappropriate billing of services to government healthcare programs, (2) employing or contracting with individuals or entities who are excluded from participation in government healthcare programs, and (3) offering or providing Medicare or Medicaid beneficiaries with any remuneration, including full or partial waivers of co-payments and deductibles, that are likely to influence the beneficiary's selection of a particular provider, practitioner or supplier (subject to an exception for non-routine, unadvertised co-payment and deductible waivers based on individualized determinations of financial need or exhaustion of reasonable collection efforts). State and Federal Health Information Privacy and Security Laws We must comply with various federal and state laws related to the privacy and security of personal information, including health information. In particular, the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act (the "HITECH Act"), and its implementing regulations, establishes privacy and security standards that limit the use and disclosure of protected health information, or PHI, and requires the implementation of administrative, physical, and technical safeguards to ensure the confidentiality, integrity, and availability of PHI. The affiliated professional entities are regulated as covered entities under HIPAA. HIPAA's requirements are also directly applicable to the contractors, agents, and other business associates of covered entities that create, receive, maintain, or transmit PHI in connection with their provision of services to covered entities. 1Life and its subsidiaries are business associates of the affiliated professional entities, health network partners, and other covered entities when performing certain administrative services on their behalf. We are also subject to the HIPAA breach notification rule, which requires covered entities to notify affected individuals of breaches of unsecured PHI. In addition, covered entities must notify the Secretary of Health and Human Services, or HHS, Office of Civil Rights, or OCR, and the local media if a breach affects more than 500 individuals. Breaches affecting fewer than 500 individuals must be reported to OCR on an annual basis. The HIPAA regulations also require business associates to notify the covered entity of breaches by the business associate. Violations of HIPAA can result in significant civil and criminal penalties and a single breach incident can result in violations of multiple standards. Many states in which we operate have their own laws protecting the privacy and security of personal information, including health information. We must comply with such laws in the states where we do business in addition to our obligations under HIPAA. In some states, such as California, state privacy laws are even more protective than HIPAA. It may sometimes be necessary to modify our operations and procedures to comply with these more stringent state laws. State data privacy and security laws are subject to change, and we could be subject to financial penalties and sanctions if we fail to comply with these laws. In addition to federal and state laws protecting the privacy and security of personal information, we may be subject to other types of federal and state privacy laws, including laws that prohibit unfair privacy and security practices and deceptive statements about privacy and security, along with laws that impose specific requirements on certain types of activities, such as data security and texting. Federal and State Fraud and Abuse Laws Federal Stark Law We are subject to the federal physician self-referral law, commonly known as the Stark Law, which prohibits physicians from referring Medicare or Medicaid patients to an entity for the provision of certain "designated health services" if the referring physician or a member of the physician's immediate family has a direct or indirect financial relationship (including an ownership interest or a compensation arrangement) with the entity, unless an exception applies. The Stark Law is a strict liability statute, which means intent to violate the law is not required. In addition, the government and some courts have taken the position that claims presented in violation of various fraud, waste, and abuse laws, including the Stark Law, can be considered a predicate legal violation to submission of a false claim under the federal False Claims Act (described below) on the grounds that a provider impliedly certifies compliance with all applicable laws and rules when submitting claims for reimbursement. Penalties for violating the Stark Law may inclu denial of payment for services ordered in violation of the law, recoupments of monies paid for such services, civil penalties for each violation and three times the dollar value of each such service, and exclusion from participation in government healthcare programs. Violations of the Stark Law could have a material adverse effect on our business, financial condition, and results of operations. 13 Federal Anti-Kickback Statute We are also subject to the federal Anti-Kickback Statute, which, subject to certain exceptions known as "safe harbors," prohibits the knowing and willful offer, payment, solicitation or receipt of any bribe, kickback, rebate or other remuneration, in cash or in kind, in return for, or to induce, the (1) the referral of a person covered by government healthcare programs, (2) the furnishing or arranging for the furnishing of items or services reimbursable under government healthcare programs, or (3) the purchasing, leasing, ordering, or arranging or recommending the purchasing, leasing, or ordering, of any item or service reimbursable under government healthcare programs. Federal courts have held that the Anti-Kickback Statute can be violated if just one purpose of a payment is to induce referrals. Actual knowledge of this statute or specific intent to violate it is not required, which makes it easier for the government to prove that a defendant had the state of mind required for a violation. In addition to a few statutory exceptions, the Human Services Office of Inspector General, or OIG, has promulgated safe harbor regulations that outline categories of activities that are deemed protected from prosecution under the Anti-Kickback Statute, provided all applicable criteria are met. The failure of a financial relationship to meet all of the applicable safe harbor criteria does not necessarily mean that the particular arrangement violates the Anti-Kickback Statute, but business arrangements that do not fully satisfy all elements of a safe harbor may result in increased scrutiny by OIG and other enforcement authorities. Violations of the Anti-Kickback Statute can result in exclusion from government healthcare programs as well as civil and criminal penalties, including fines of $50,000 per violation and three times the amount of the unlawful remuneration. Violations of the Anti-Kickback Statute could have a material adverse effect on our business, financial condition, and results of operations. State Fraud, Waste and Abuse Laws Several states in which we operate have also adopted similar fraud, waste, and abuse laws to those described above. The scope and content of these laws vary from state to state and are enforced by state courts and regulatory authorities. Some states' fraud and abuse laws, known as "all-payer laws," are not limited to government healthcare programs, but apply more broadly to items or services reimbursed by any payer, including commercial insurers. Liability under state fraud, waste, and abuse laws could result in fines, penalties, and restrictions on our ability to operate in those jurisdictions. Our Health Network Partnerships Our health network partnerships include health system partners and arrangements with private and government payers. Health System Partners We have entered into strategic partnership arrangements with each of our health system partners under which we and the health system partner create a clinically integrated care delivery model that coordinates our network of affiliated primary care practices with the health system partner's healthcare system to better deliver coordinated care for members, improve operational efficiencies, and deliver value to employers and other players. Fee Structure Under most of the strategic partnership arrangements, the health system partners contract with one or more of our affiliated professional entities for professional clinical services and contract with 1Life for management, operational and administrative services, including billing and collection services and designing and managing the day-to-day administration of the business aspects of the primary care practices. Under these arrangements, when our medical offices provide professional clinical services to covered members, we, as administrator, perform billing and collection services on behalf of the health system, and the health system receives the fees for the services provided, including those paid by members' insurance plans. In return for these professional clinical, management, operational and administrative services, we receive (i) fees from these health system partners primarily on a PMPM basis, which may be based on various factors such as visit rates, other primary care relationships our health system partners may have and the rates these health system partners receive from payers or (ii) fee-for-service payments based on our health system partners' health insurance contracts. Term and Termination The term of each strategic partnership arrangement is typically five or more years and automatically renews for additional two- to five-year terms unless either we or the health system partners decide not to renew. We or the health system partners generally may terminate a strategic partnership arrangement with 90 days' notice upon certain events such as uncured breach, mutual consent or a change in law that conflicts with the applicable arrangement. The strategic partnership arrangements generally may be terminated immediately upon certain events such as bankruptcy, exclusion, and, in some cases, business combinations involving us and a specified competing health system. Certain health system partners may also terminate 14 upon their determination that we no longer meet their criteria for clinical partnership or the values or mission of the health system partner. Exclusivity and Non-Solicitation Under the terms of strategic partnership arrangements, we typically cannot enter into a similar arrangement with direct competitors to the health system partner within the territory covered by the strategic partnership arrangement. Additionally, the terms of some of the strategic partnership arrangements include a mutual non-solicitation clause, prohibiting us and our health system partners from soliciting each other's employees during the term of the arrangement and for one year following its expiration, subject to certain customary recruiting practices. Clinic Commitments and Development Fees Pursuant to each strategic partnership arrangement, we typically commit to open an initial number of clinics, ranging from low single digits to mid-teen double digits depending on the area covered, within the initial term. Our health system partners pay us certain development fees for the opening of each clinic. Arrangements with Private and Government Payers We have entered into At-Risk arrangements with a variety of Medicare payers such as private Medicare health plans including large national and regional payers, as well as with CMS, in which we receive a PMPM fee and are responsible for managing a range of healthcare services and associated costs of our members. Our At-Risk arrangements with private payers are generally managed on a region by region basis and we typically enter into a separate contract in each region with a payer's local affiliate. The PMPM fee that we receive is determined in part by these payers and is based on a variety of patient factors such as age and demographic benchmarks, and further adjusted to reflect the underlying complexity of a patient’s health conditions (acuity). Under certain contracts, we may also adjust the PMPM fees for a percentage share of any additional gross capitated revenues and associated medical claims expense generated by the provision of healthcare services not directly provided by us. Private Payer Arrangements Our At-Risk arrangements with private payers generally range from two to 11 years and will typically renew automatically for additional one- to two-year terms unless either we or the private payer decide not to renew. In general, at the end of an initial term, we or the private payer may terminate an arrangement with not less than 120 days’ notice. Also, we or the private payer generally may terminate an arrangement immediately upon certain events such as bankruptcy and exclusion or with 60 days' notice upon certain events such as uncured breach, mutual consent, or a change in law that conflicts with the applicable arrangement. ACO REACH Program ( formerly CMS' Direct Contracting Program ) with CMS We have entered into an agreement with CMS to participate in the ACO REACH Program. The ACO REACH Program is a new payment model in which CMS contracts directly with a limited number of organizations as Accountable Care Organizations, or ACOs, and is part of CMS’ strategy to improve quality of care and care coordination for traditional Medicare beneficiaries through value-based care models. We are one of this limited group of companies chosen by CMS to be an ACO and participate in the Global Risk component of the Program, which started on April 1, 2021 and will be tested over six years. The ACO REACH Program allows traditional Medicare beneficiaries to align to us in an At-Risk model in which we receive a capitated, per member per month payment for managing the health of the enrolled member that is based on a CMS benchmark. Our Enterprise Client Agreements We enter into contractual arrangements with our enterprise clients pursuant to which our clients purchase memberships from us for their employees and, in certain circumstances, we provide on-site and near-site clinics and health services. The transaction price for memberships under most of these contracts is determined on a per employee per month basis, based on the number of employees eligible for membership established at the beginning of each contract period. Our contracts with enterprise clients typically have one- to three-year terms. 15 Human Capital Resources Employee Well-Being and Culture We recognize that to be successful in our mission to transform healthcare, we need to take care of our teams as much as we take care of the members we serve. We reinforce this through our culture and team-based approach to longitudinal care as well as our salaried provider model, which eliminates the volume-based, fee-for-service compensation model commonly seen in our industry that could drive provider burnout. We also offer flexible work arrangements and opportunities to practice in-office or virtually. We believe this results in a better quality of life and work-life balance. To assist us with tracking the levels of engagement and satisfaction of our team members, we conduct annual team member engagement surveys to assess their views on the Company’s employee well-being, work-life blend, career advancement opportunities, inclusion and learning and development opportunities. We also provide our team members with confidential channels to voice their concerns. The feedback that we collect from these surveys and from alternative channels are used to assess employee engagement, our Company culture and our workplace environment as well as to refine and implement programs and processes for our team members. Our commitment to a team-based, collaborative environment and the values and benefits we provide to employees contributed to us being named by Forbes and Statista as one of America's Best Midsize Employers of 2022. We believe our culture embodies five distinct qualities which we refer to as our DNA: Human-Centered. We stay humble and empathetic, putting people at the heart of everything we build and every decision we make. Team-Based. We communicate effectively, respect our teammates, and make the difficult tradeoffs that foster the success of the organization. Intellectually Curious. We know we don't know everything; we're always eager to learn, and we're never afraid to question the status quo. Unbounded-Thinking. By staying open minded, creative and positive, we aim to push beyond constraints that have stymied those before us. Driven to Excel. In our quest to be the best Primary Care group in the country, we focus on getting things done and pay attention to the little details that matter. Training and Development We believe in ensuring that all team members have access to tools to help them grow their careers and have focused our training and development on two primary areas: professional/career and leader development. We have invested in an array of internally generated and externally sourced learning resources, including a range of in-person, virtual and self-directed learning opportunities for our team members to help them develop the skills and competencies to further their career at One Medical. Compensation and Benefits We are committed to fair and equitable compensation practices and, as a primary care company, we take a comprehensive approach to curating benefits for our employees to enable them to thrive personally and professionally. We also offer benefits that support an employee's mental, physical, financial and family well-being. Qualifying employees have access to a variety of benefits, including, medical, dental and vision coverage, childcare benefits, flexible spending accounts, financial wellness and planning, paid time-off and parental leave, life and disability insurance, 401(k) plan matching contributions and resources for health and wellness, including complimentary One Medical membership and access to One Medical Virtual Coaching and various employee assistance programs. We also offer a four-week Company-paid sabbatical to qualifying team members who reach five and 10 years of service with us to allow team members to pursue personal and professional development. In response to the COVID-19 pandemic, we have also implemented special paid-time-off policies for employees who need to quarantine due to exposure to COVID-19. 16 Diversity and Inclusion We also recognize the importance of having a diverse and inclusive environment as part of our mission of transforming healthcare. We maintain a Diversity, Equity, Inclusion and Justice Committee to encourage best practices to foster diversity, equity, inclusion and social justice in the workplace. To help support career development for our Black, Indigenous and People of Color, or BIPOC, team members, we have implemented mentorship programs and have also implemented training programs to help advance our culture of diversity, inclusion, equity, and justice. We have established a Health Equity Domain Working Group that provides expertise on clinical best practices and education in a manner that respects the diversity of our patients and acknowledges the social determinants of health that impact their health. As of December 31, 2022, we had 3,698 full-time employees and none of our employees were represented by labor unions or covered by collective bargaining agreements. We consider our relationship with our employees to be good and we have not experienced any work stoppages due to labor disagreements. Information about our Executive Officers The names, ages as of December 31, 2022, and certain other information for each of our executive officers is as follows: Name Age Position Amir Dan Rubin 53 Chair, Chief Executive Officer and President Bjorn B. Thaler 46 Chief Financial Officer Andrew S. Diamond, M.D., Ph.D.* 52 Chief Medical Officer Lisa A. Mango 55 General Counsel and Corporate Secretary * Employee of One Medical Group, Inc., a consolidated One Medical PC. Dr. Diamond provides services to us pursuant to contractual arrangements with our Company and One Medical Group, Inc Amir Dan Rubin has served as our Chief Executive Officer and President and as a member or Chair of our board of directors since September 2017. From January 2016 to August 2017, he served as an Executive Vice President at UnitedHealth Group, a publicly traded healthcare company. From January 2011 to January 2016, he served as President and Chief Executive Officer of Stanford Health Care, a private healthcare system associated with Stanford University. Mr. Rubin earned a B.A. in Economics with a minor in Business from the University of California, Berkeley, an M.H.S.A. in Health Services Administration from the University of Michigan, and an M.B.A. in Business Administration from the Ross School of Business at the University of Michigan. We believe that Mr. Rubin’s business expertise and his daily insight into corporate matters as our Chief Executive Officer and President qualify him to serve on our board of directors. Bjorn Thaler has served as our Chief Financial Officer since April 2019. From November 2018 to March 2019, he was a Senior Vice President at CVS Health Corporation, a publicly traded retail pharmacy company. From September 2011 to November 2018, he was a Managing Director, and later a Vice President, at Aetna Inc., a managed healthcare company and now a subsidiary of CVS Health Corporation. Mr. Thaler earned a Master of Law at the University of Vienna, Faculty of Law, Austria, an International M.B.A. at the Darla Moore School of Business at the University of South Carolina and an International Master of Business from the Vienna University of Economics and Business, Austria. Andrew S. Diamond, M.D., Ph.D., has served as the Chief Medical Officer since September 2019, and as the National Medical Director since July 2016, of One Medical Group, Inc., a consolidated One Medical PC. From September 2012 to July 2016, Dr. Diamond served as a physician and in various director roles at One Medical Group, Inc., including as Regional Medical Director, West. Dr. Diamond earned a B.S. in Biological Sciences from Stanford University and an M.D. and Ph.D. from the University of Colorado Health Sciences Center. Lisa A. Mango has served as our General Counsel since June 2018. She previously served as our Vice President and Assistant General Counsel from January 2016 to June 2018. From April 2004 to January 2016, she served as a Senior Director and Senior Corporate Counsel at Autodesk, Inc. a publicly traded software company. Ms. Mango earned a B.A. in Public Policy from Duke University and a J.D. from the University of Texas School of Law. 17 Corporate and Available Information We were incorporated under the laws of the state of Delaware in July 2002 under the name 1Life Healthcare, Inc. Our principal executive offices are located at One Embarcadero Center, Suite 1900, San Francisco, California 94111. Our telephone number is (415) 814-0927. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, are available free of charge on or through our website, http://www.one medical.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (the "SEC"). The SEC's website, http://www.sec.gov, contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Investors and others should note that we announce material financial and other information using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We also post supplemental materials on the "Events" section of our investor relations website at investor.onemedical.com. Except as specifically noted herein, information contained on or accessible through our website is not incorporated into, and does not form a part of, this Annual Report on Form 10-K or any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. We also use our Facebook, Twitter and LinkedIn accounts as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts, in addition to following our press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this Annual Report on Form 10-K. These channels may be updated from time to time on our investor relations website. Item 1A. Risk Factors. Investing in our common stock involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below, as well as other information included in this Annual Report, including our consolidated financial statements and related notes included elsewhere in this Annual Report, before making an investment decision. If any of the following risks actually occur, it could harm our business, prospects, operating results and financial condition. Unless otherwise indicated, references to our business being harmed in these risk factors will include harm to our business, reputation, financial condition, results of operations, net revenue and future prospects. In such event, the trading price of our common stock could decline and you might lose all or part of your investment. Risks Related to Our Proposed Transaction with Amazon Failure to complete, or delays in completing, the proposed transaction with Amazon announced on July 21, 2022 could materially and adversely affect our results of operations and our stock price. On July 20, 2022, we entered into a definitive merger agreement (the "Merger Agreement") with Amazon pursuant to which, subject to the terms and conditions of the Merger Agreement, if all of the conditions to closing are satisfied or waived, we will merge with a subsidiary of Amazon and become a wholly-owned indirect subsidiary of Amazon. Consummation of the Amazon Merger is subject to certain closing conditions and a number of the conditions are not within our control, and may prevent, delay, or otherwise materially and adversely affect the completion of the transaction. We cannot predict with certainty whether and when any of the required closing conditions will be satisfied or if another uncertainty may arise and cannot assure you that we will be able to successfully consummate the proposed Amazon Merger as currently contemplated under the Merger Agreement or at all. Risks related to the failure of the proposed Amazon Merger to be consummated include, but are not limited to, the followin • the Amazon Merger may be subject to certain legal restraints under U.S. antitrust law; • we would not realize any or all of the potential benefits of the Amazon Merger, including any synergies that could result from combining our financial and proprietary resources with those of Amazon, which could have a negative effect on the price of our common stock; • under some circumstances, we may be required to pay a termination fee to Amazon of $136.0 million; 18 • we will remain liable for significant transaction costs, including legal, accounting, financial advisory, and other costs relating to the Amazon Merger regardless of whether the Amazon Merger is consummated; • we may experience negative reactions from financial markets or the trading price of our common stock may decline to the extent that the current market price for our stock reflects a market assumption that the Amazon Merger will be completed; • the attention of our management may have been diverted to the Amazon Merger; • we could be subject to litigation related to any failure to complete the Amazon Merger; • the potential loss of key personnel during the pendency of the Amazon Merger as employees and providers may experience uncertainty about their future roles with us following completion of the Amazon Merger; • the potential loss of, and negative reactions from m embers, enterprise clients, health system partners, payers, suppliers, and other partners; and • under the Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to completing the Amazon Merger, which restrictions could adversely affect our ability to conduct our business as we otherwise would have done if we were not subject to these restrictions. The occurrence of any of these events individually or in combination could materially and adversely affect our business, results of operations, financial condition, and our stock price. If the Amazon Merger is not consummated and one or more of these events occur, such as p ayment of termination fees to Amazon or other significant transaction costs in connection with the proposed Amazon Merger, our cash balances and our ability to service payments under our convertible senior notes issued in May 2020 (the "2025 Notes") and other outstanding indebtedness at that time, including any borrowed amounts under our loan agreement with Amazon, could be materially and adversely impacted and our options for sources of financing or refinancing could be more limited than if we had not pursued the proposed Amazon Merger. See "Risks Related to Our Outstanding Notes." If the Amazon Merger is not completed, there can be no assurance that these risks will not materialize and will not materially and adversely affect our stock price, business, financial conditions, results of operations or cash flows. Uncertainty about the Amazon Merger or negative publicity related to the Amazon Merger may adversely affect relationships with our members, enterprise clients, health system partners, payers, suppliers and employees, whether or not the Amazon Merger is completed. In response to the announcement of the Amazon Merger, our existing or prospective members, enterprise clients, health system partners, payers, vendors, suppliers, landlords, and other business partners may: • delay, defer, or cease their agreements or arrangements with, or providing products or services to, us or the combined company; • delay or defer other decisions concerning us or the combined company; or • seek alternative relationships with third parties or otherwise seek to change the terms on which they do business with us or the combined compan y. Any such delays or changes to terms could materially harm our business or, if the Amazon Merger is completed, the business of the combined company. In addition, as a result of the Amazon Merger, our current and prospective employees could experience uncertainty about their future with us or the combined company. As a result, we may not be able to attract and retain key employees to the same extent that we have been in the past and key employees may depart because of issues relating to such uncertainty or a desire not to remain with Amazon following the completion of the Amazon Merger. The pendency of the Amazon Merger has resulted in and may continue to result in negative publicity and other adverse public statements about us and the proposed combination. Such negative publicity or adverse public statements, may also result in investigations by regulatory authorities, legislators, and law enforcement officials or in legal claims. Addressing any adverse publicity, governmental scrutiny, investigation or enforcement or other legal proceedings is time consuming and expensive and can divert the time and attention of our senior management from the day-to-day operation of our business and execution of our other strategic initiatives. Further, regardless of the factual basis for the assertions being made or the ultimate outcome of any investigation or proceeding, any negative publicity can have an adverse impact on our reputation and on the morale and 19 performance of our employees and on our relationships with regulatory authorities. It may also have an adverse impact on our ability to take timely advantage of various business and market opportunities. The direct and indirect effects of negative publicity, and the demands of responding to and addressing it, may have a material adverse effect on our business, financial condition, and results of operations. Losses of members, enterprise partners, health system partners, payers or other important strategic relationships from any of the events described above could have a material adverse effect on our business, results of operations, and financial condition. Such adverse effects could also be exacerbated by a delay in the completion of the Amazon Merger for any reason, including delays associated with obtaining requisite regulatory approvals. The Merger Agreement contains provisions that could discourage or deter a potential competing acquirer that might be willing to pay more to effect a business combination with us. Unless and until the Merger Agreement is terminated in accordance with its terms, subject to certain specified exceptions, we are not permitted to solicit, initiate, induce or knowingly encourage or knowingly facilitate any inquiries or the making of any proposal or offer that constitutes, or would reasonably be expected to lead to, an alternative transaction proposal or to engage in discussions or negotiations with third parties regarding any alternative transaction proposal. Such restrictions could discourage or deter a third party that may be willing to pay more than Amazon for the outstanding capital stock of One Medical from considering or proposing such an acquisition of One Medical. Lawsuits have been filed against us and the members of our board of directors arising out of the proposed Amazon Merger. Putative stockholder complaints, including stockholder class action complaints, and other complaints have been and may in the future be filed against us, our board of directors, Amazon, Amazon's board of directors, and others in connection with the transactions contemplated by the Merger Agreement. The outcome of litigation is uncertain, and we may not be successful in defending against any such future claims. Lawsuits that may be filed against us, our board of directors, Amazon, or Amazon's board of directors could divert the attention of our management and employees from our day-to-day business, and otherwise adversely affect our business, results of operations, and financial condition. The ability to complete the Amazon Merger is subject to the receipt of consents and approvals from government entities, which may impose conditions that could have an adverse effect on us or the combined company or could cause the Amazon Merger not to be completed within the expected timeframe, if at all. There can be no assurance that the Amazon Merger will be completed in the expected timeframe, or at all. Completion of the Amazon Merger is conditioned upon, among other things, the expiration or termination of the required waiting period (and any extension thereof) applicable to the Amazon Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder (the "HSR Act"), and any voluntary agreement with the United States Federal Trade Commission (the "FTC"), or the Department of Justice Antitrust Division (the "DOJ"), not to consummate the Amazon Merger or other transactions contemplated by the Merger Agreement. In deciding whether to grant antitrust approvals, the FTC or DOJ, and other regulatory agencies will consider the effect of the Amazon Merger on competition or potential competition. The FTC, DOJ, or other regulatory agencies may condition their approval of the Amazon Merger on Amazon’s or our agreement to various requirements, limitations, or costs, or require divestitures or place restrictions on the conduct of Amazon’s business following the Amazon Merger. If we and Amazon agree to these requirements, limitations, costs, divestitures, or restrictions, the ability to realize the anticipated benefits of the Amazon Merger may be impaired. We cannot provide any assurance that we or Amazon will obtain the necessary approvals or that any of the requirements, limitations, costs, divestitures, or restrictions to which we might agree will not have a material adverse effect on Amazon following the Amazon Merger. In addition, these requirements, limitations, costs, divestitures, or restrictions may result in the delay of or failure to close the Amazon Merger. At any time before or after consummation of the Amazon Merger, notwithstanding the termination or expiration of the waiting period under the HSR Act, the FTC, DOJ or any state or foreign jurisdiction could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the completion of the Amazon Merger, seeking divestiture of substantial assets of one or both of the parties, requiring the parties to license or hold separate assets or terminate existing relationships and contractual rights, or requiring the parties to agree to other remedies. Private parties may also seek to take legal action under the antitrust laws under certain circumstances, including by seeking to intervene in the regulatory process or litigate to enjoin or overturn regulatory approvals, any of which actions could significantly impede or even preclude obtaining required regulatory approvals. We cannot be certain that a challenge to the Amazon Merger will not be made or that, if a challenge is made, we will prevail . Risks Related to Our Business and Our Industry 20 The coronavirus (COVID-19) pandemic has significantly impacted, and may continue to significantly impact our business, financial condition, results of operations and growth. The global COVID-19 pandemic and measures introduced by local, state and federal governments to contain the virus and mitigate its public health effects have significantly impacted and may continue to significantly impact our business, our industry and the global economy. While the full extent of the impacts of the COVID-19 pandemic may be difficult to predict or determine due to numerous evolving factors, we have seen and may continue to see adverse impacts on our operations, net revenues, expenses, collectability of accounts receivables and other money owed, capital expenditures, liquidity, and overall financial condition, including from: • reduced total billable visit volumes, temporary closures of certain offices, delays in openings of new medical offices, and delayed entry into new or expansion into existing geographies (in response to self-isolation practices, sustained remote work policies, quarantines, shelter-in-place requirements, and similar government orders); • higher proportions of lower-revenue generating services and products, including billable remote visits, COVID-19 testing, and COVID-19 vaccinations, which may not be reimbursable or have lower average reimbursements relative to traditional in-office visits; • deferral of healthcare by members and patients, which may result in difficulties completing comprehensive annual documentation of Medicare patient health conditions, future cost increases, deferred costs, and inability to accurately estimate costs for incurred but not yet reported medical services claims for our At-Risk members, and may negatively impact the health of our patients; • increase in internal and third-party medical costs for care provided to At-Risk members suffering from COVID-19, which may be particularly significant given many of our members are under At-Risk arrangements in which we receive capitated payments and may be more pronounced as a result of potential future outbreaks or variants of COVID-19; • negative impacts to the business, results of operations and financial condition of our health network partners and their ability or willingness to continue to pay us a fixed price PMPM if they receive reduced visit revenue due to decreases in billable utilization; • inquiries, regulatory or governmental investigations or other disputes that result from our provision of COVID-19 vaccinations, arrangements entered into in reliance on related orders, laws, and regulations, or the failure of various waivers for limitations of liability or other provisions under such orders, laws, and regulations that apply to us; • supply, resource and capital constraints related to the treatment of COVID-19 patients and disruptions or delays in the delivery of materials and products in the supply chain for our offices and increased capital expenditures due to the need to buy incremental materials or services; • staffing shortages and increased risk for workers’ compensation claims; or • increased costs, diversion of resources from managing our business and growth and reputational harm due to (i) implementation of new services and products in reliance on continuously evolving regulatory standards, (ii) alterations to our operations to address the changing needs of our members during the pandemic, or (iii) member or enterprise client dissatisfaction due to inaccurate results from testing or other services, overburdening of our medical offices and virtual care teams with inquiries and requests, which may result in longer phone wait times or service delays. Any continuation of the above factors and outcomes could harm our business, financial condition, results of operations, and growth. We cannot assure you that our current billable volumes and membership levels will be sustained or that average reimbursement for billable services will return to pre-COVID-19 levels. As more of the U.S. population receives the COVID-19 vaccination, our COVID-19 testing volumes have also declined, which may negatively impact our membership and revenue. Further, new shelter-in-place, quarantine, executive order or related measures or practices may be reinstated by governments and authorities, including due to future waves of outbreak or emerging variant strains of COVID-19. Such measures and practices, if reinstated, could reduce our total billable volumes, negatively impact our health network partners and harm our results of operations, business, and financial condition. We have adjusted many of our new programs to rapidly respond to the COVID-19 pandemic, including telehealth visits, testing and vaccine administration arrangements, in reliance on continuously evolving regulatory standards such as emergency 21 orders, laws and regulations from federal, state, and local authorities, and the relaxation of certain licensure requirements and privacy restrictions for telehealth intended to permit health care providers to provide care and distribute COVID-19 vaccines to patients during the COVID-19 pandemic. To continue providing some of these new services and products, we will be required to comply with federal, state, and local rules, mandates, and guidelines, which are subject to rapid change and may vary across jurisdictions. We cannot assure you that such orders, laws, regulations, mandates, or guidelines will continue to apply or that regulators or other governmental entities will agree with our interpretations of these orders, laws, regulations, mandates, and guidelines. Failure to remain in compliance, or even the perception of non-compliance, may curtail or result in restrictions on our ability to provide any such services, result in time-consuming and potentially costly inquiries, disputes, or investigations (such as the vaccine inquiries discussed in Note 17, “Commitments and Contingencies” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K (the "Vaccine Inquiries"), or inquiries from state and local public health departments), as well as damage to our reputation, any of which could harm our business, financial condition, and results of operations. We have cooperated with the requests from the Vaccine Inquiries as well as requests received from other governmental agencies, including with respect to our compensation practices and membership generation during the relevant periods. We are unable to predict the outcome or timeline of any residual inquiries or if any additional requests, inquiries, investigations or other government actions may arise relating to such circumstances. The Vaccine Inquiries, together with any additional inquiries, regulatory or governmental investigations or other disputes that result from our provision of COVID-19 vaccinations or any other arrangements entered into in reliance on these orders, laws and regulations, or the failure or reversal of various waivers for limitations of liability or other provisions under such orders, laws and regulations to apply to us could require us to divert resources or adjust certain new programs to ensure compliance and harm our reputation, business, financial condition, and results of operations. The pandemic has also resulted in, and may continue to result in, significant disruption of global financial markets, potentially reducing our ability to access capital and reducing the liquidity and value of our marketable securities, which could in the future negatively affect our liquidity. In addition, due to our At-Risk arrangements for the care of Medicare Advantage participants, the full impact of the COVID-19 pandemic may not be fully reflected in our results of operations and overall financial condition until future periods. The COVID-19 pandemic may continue to impact our operations, and net revenues, expenses, collectability of accounts receivables and other money owed, capital expenditures, liquidity, and overall financial condition. We are dependent upon a limited number of key existing payers and loss of contracts with those payers, disruptions in those relationships or the inability of such payers to maintain their contracts with CMS, could adversely affect our business, financial condition, results of operations and prospects. We are dependent on a concentrated number of third-party payers with whom we contract to provide services to At-Risk members. Contracts with one such payer across multiple markets accounted for 27% of net revenue for the twelve months ended December 31, 2022. We believe that a majority of our net revenue will continue to be derived from a limited number of key payers, who may terminate their contracts with us for convenience on short-term notice, or upon the occurrence of certain events, some of which may not be within our control. The loss of any of our payer partners or the renegotiation of any of our payer contracts could adversely affect our operating results. In the ordinary course of business, we engage in active discussions and renegotiations with payers with respect to the services we provide and the terms of our payers' agreements. As the payers’ businesses respond to market dynamics, regulatory developments and financial pressures, and as payers make strategic business decisions with respect to the lines of business they pursue and programs in which they participate, certain of our payers may seek to renegotiate or terminate their agreements with us. These discussions could result in reductions to the fees and changes to the scope of services contemplated by our original payer contracts and consequently could negatively impact our net revenue, business, financial condition, results of operations, and prospects. Because we rely on a limited number of these payers for a substantial portion of our revenue, we depend on the creditworthiness of these payers. Our payers are subject to a number of risks, including reductions in payment rates from governmental programs, higher than expected health care costs and lack of predictability of financial results when entering new lines of business, particularly with high-risk populations. If the financial condition of our payer partners declines, our credit risk could increase. Should one or more of our significant payer partners declare bankruptcy, be declared insolvent or otherwise be restricted by state or federal laws or regulation from continuing in some or all of their operations, this could adversely affect our ongoing revenues, the collectability of our accounts receivable, our bad debt reserves and our net income. If a payer with which we contract loses its Medicare contracts with CMS, receives reduced or insufficient government reimbursement under the Medicare program, decides to discontinue its Medicare Advantage and/or commercial plans, decides to contract with another company to provide capitated care services to its patients, vertically integrates and/or acquires provider organizations and decides to directly provide care, or otherwise makes or announces an adjustment to its business or strategies, our contract with that payer could be at risk and we could lose revenue or members, and our stock price could decline. 22 We are reliant upon reimbursements from certain third-party payers for the services we provide in our business and reliance on these third-party payers could lead to delays and uncertainties in the reimbursement process. We are reliant upon contracts with certain third-party payers to receive reimbursement for some of the services we provide to patients, including value-based contracts from health insurance plans. The reimbursement process is complex and can involve lengthy delays. Although we recognize certain revenue when we provide services to our patients, we may from time to time experience delays in receiving the associated capitation payments or, for our patients on fee-for-service arrangements, the reimbursement for the service provided. In addition, third-party payers may disallow, in whole or in part, requests for reimbursement based on determinations that the member is not eligible for coverage, certain amounts are not reimbursable under plan coverage or were for services provided that were not medically necessary or additional supporting documentation is necessary. Retroactive adjustments may change amounts realized from third-party payers. We are also subject to claims reviews and/or audits by such third-party payers, including governmental audits of our Medicare claims, and may be required to repay these payers if a finding is made that we were incorrectly reimbursed. See “—Noncompliance with billing and documentation requirements could result in non-payment or subject us to audits, billing or other compliance investigations by government authorities, private payers or health network partners.” Third-party payers are also increasingly focused on controlling health care costs, and such efforts, including any revisions to reimbursement policies, may further complicate and delay our reimbursement claims. Furthermore, our business may be adversely affected by legislative initiatives aimed at or having the effect of reducing health care costs associated with Medicare and other changes in reimbursement policies. Delays and uncertainties in the reimbursement process may adversely affect our collection of accounts receivable, increase the overall costs of collection and cause us to incur additional borrowing costs to support our liquidity needs, which could harm our business, financial condition, and results of operations. A significant portion of our net revenue is based on Medicare’s risk adjustment payment system and is subject to review and audit, which could result in material adjustments to our results of operations. CMS has implemented a risk adjustment payment system for Medicare health plans to improve the accuracy of payments and establish appropriate compensation for Medicare plans that enroll and treat less healthy Medicare beneficiaries. CMS’ risk adjustment model bases a portion of the total CMS reimbursement payments on various clinical and demographic factors, including hospital inpatient diagnoses, diagnosis data from hospital outpatient facilities and physician visits, gender, age, and Medicaid eligibility. CMS requires that all managed care companies and, indirectly, subcontracted providers like us, capture, collect and report the necessary diagnosis code information to CMS, which information is subject to review and audit for accuracy by CMS. This risk adjustment payment system has an indirect impact on the payments we receive from our contracted Medicare Advantage payers. Although we, and the payers with which we contract, have auditing and monitoring processes in place to collect and provide accurate risk adjustment data to CMS for these purposes, that program may not be sufficient to ensure accuracy. If the risk adjustment data submitted by us or our payers incorrectly overstates the health risk of our patients, we might be required to return to the payer or CMS, overpayments and/or be subject to penalties or sanctions, or if the data incorrectly understates the health risk of our members, we might be underpaid for the care that we must provide to our patients, any of which could harm our reputation and have a negative impact on our results of operations and financial condition. CMS may also change the way that they measure risk and determine payment, and the impact of any such changes could harm our business. As a result of the COVID-19 pandemic, risk adjustment scores may also fall as a result of reduced data collection, decreased patient visits or delayed medical care and limitations on payments for certain telehealth services. As a result of the variability of factors affecting our patients’ risk scores, the actual payments we receive from our payers, after all adjustments, could be materially more or less than our estimates. Consequently, our estimate of our patients’ aggregate member risk scores for any period may result in favorable or unfavorable adjustments to our Medicare premium revenues, which may harm our results of operations. Under our At-Risk arrangements with certain third-party payers, we assume the risk that the cost of providing services will exceed our compensation for such services. A substantial portion of our net revenue consists of Capitated Revenue, which, in the case of third party payers or health insurance plans, is based on a pre-negotiated percentage of the premium that the payer receives from CMS. While there are variations specific to each agreement, we sometimes contract with payers to receive recurring PMPM revenue and assume the financial responsibility for the healthcare expenses of our patients. This type of contract is referred to as a “capitation” contract. CMS pays capitation using risk adjustment scores. See “–A significant portion of our net revenue is based on Medicare’s risk adjustment payment system and is subject to review and audit, which would result in material adjustments to our results of operations.” To the extent we encounter delays in documenting patients’ acuity or patients requiring more care than initially anticipated and/or the cost of care increases, aggregate fixed compensation amounts, or capitation payments, may be 23 insufficient to cover the costs associated with treatment. If medical costs and expenses exceed estimates, except in very limited circumstances, we will not be able to increase the fee received under these capitation agreements during their then-current terms and we could suffer losses with respect to such agreements. In addition, while we maintain stop-loss insurance that helps protect us for medical claims per patient in excess of certain levels, future claims could exceed our applicable insurance coverage limits or potential increases in insurance premiums may require us to decrease our level of coverage. Changes in our anticipated ratio of medical expense to revenue can significantly impact our financial results. Accordingly, the failure to adequately predict and control medical costs and expenses and to make reasonable estimates and maintain adequate accruals for incurred but not reported claims could have a material adverse effect on our business, results of operations, financial condition and cash flows. Additionally, the Medicare expenses of our At-Risk members may be outside of our control in the event that such members take certain actions that increase such expenses, such as unnecessary hospital visits. These actions or events also make it more difficult for us to estimate medical expenses and may cause delays in reporting them to payers. Any delays or failures to adequately predict and control medical costs may also result in delayed negative impacts to our Capitated Revenue, including as compared to our estimates of cost of care and capitation payments. Historically, our medical costs and expenses as a percentage of revenue have fluctuated. Factors that may cause medical expenses to exceed estimates inclu • the health status of our At-Risk members; • higher levels of hospitalization among our At-Risk members; • higher than expected utilization of new or existing healthcare services or technologies; • an increase in the cost of healthcare services and supplies, whether as a result of inflation or otherwise; • changes to mandated benefits or other changes in healthcare laws, regulations, and practices; • increased costs attributable to specialist physicians, hospitals, and ancillary providers; • changes in the demographics of our At-Risk members and medical trends; • contractual or claims disputes with providers, hospitals or other service providers within and outside a health plan’s network; • the occurrence of catastrophes, major epidemics or pandemics, including COVID-19, or acts of terrorism; and • the reduction of health plan premiums. If reimbursement rates paid by private third-party payers are reduced or if these third-party payers otherwise restrain our ability to obtain or provide services to patients, our business could be harmed. Private third-party payers, including health maintenance organizations ("HMOs"), preferred provider organizations and other managed care plans, as well as medical groups and independent practice associations that contract with HMOs, pay for the services that we provide to many of our members. As a substantial proportion of our members are commercially insured or covered under Medicare Advantage plans with our contracted payers, if any third-party payers reduce their reimbursement rates or elect not to cover some or all of our services, our business may be harmed. Typically, our affiliated professional entities that provide medical services enter into contracts with certain of these payers either directly, or indirectly through certain of our health network partners, which allow them to participate in the payers’ respective networks and set forth reimbursement rates for services rendered thereunder. As a result, our ability to maintain or increase patient volumes covered by private third-party payers and to maintain and obtain favorable contracts with private third-party payers significantly affects our revenue and operating results. See also “—We are dependent upon a limited number of key existing payers and loss of contracts with those payers, disruptions in those relationships or the inability of such payers to maintain their contracts with CMS, could adversely affect our business, financial condition, results of operations, and prospects.” Private third-party payers often use plan structures, such as narrow networks or tiered networks, to encourage or require members to use in-network providers. In-network providers typically provide services through private third-party payers for a lower negotiated rate or other less favorable terms. Private third-party payers generally attempt to limit the delivery of services out-of-network by requiring members to pay higher co-payment, co-insurance and/or deductible amounts for out-of-network care. Additionally, private third-party payers have become increasingly aggressive in attempting to minimize the use of out-of-network providers by disallowing the assignment of payment from members to out-of-network providers (i.e., sending 24 payments directly to members instead of to out-of-network providers), capping or establishing out-of-network benefits payable to members that do not cover billed charges for services, waiving out-of-pocket payment amounts and initiating litigation against out-of-network providers for interference with contractual relationships, insurance fraud and violation of state licensing and consumer protection laws. If we become out-of-network for payer products and networks, our business could be harmed and our revenue could be reduced because patients could stop using our services. If reimbursement rates paid by Medicare or other federal or state healthcare programs are reduced, if changes in the rules governing such programs occur, or if government payers otherwise restrain our ability to obtain or provide services to patients, our business, financial condition and results of operations could be harmed.\ A significant portion of our revenue comes from government healthcare programs, principally Medicare, either through Medicare Advantage plans or directly, including through the Center for Medicare and Medicaid Innovation's ("CMMI's"), Global and Professional Direct Contracting Program (the "GPDC Program"), which CMMI announced has been redesigned and renamed the ACO Realizing Equity, Access, and Community Health Program (the "ACO REACH Program "), which took effect January 1, 2023. In addition, many commercial payers base their reimbursement rates on the published Medicare rates or are themselves reimbursed by Medicare for the services we provide. As a result, our results of operations are, in part, dependent on the continuation of Medicare programs, including Medicare Advantage and the ACO REACH Program (starting January 1, 2023), as well as the levels of government funding provided therewith. Any changes that limit or reduce the ACO REACH Program , Medicare Advantage, or general Medicare reimbursement levels, such as reductions in or limitations of reimbursement amounts or rates under programs, reductions in funding of programs, expansion of benefits without adequate funding, elimination of coverage for certain benefits, or elimination of coverage for certain individuals or treatments under programs, could have a material adverse effect on our business, results of operations, financial condition, and cash flows. The Medicare program and its reimbursement rates and rules, are also subject to frequent change. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative rulings or executive orders, interpretations and determinations, requirements for utilization review and government funding restrictions, each of which may materially and adversely affect the rates at which CMS reimburses us for our services, as well as affect the cost of providing service to patients and the timing of payments to our affiliated professional entities. Budget pressures often lead the federal government to reduce or place limits on reimbursement rates under Medicare. Implementation of these and other types of measures has in the past and could in the future result in substantial reductions in our revenue and operating margins. The final impact of the Medicare Advantage rates can vary from any estimate we may have and may be further impacted by the relative growth of our Medicare Advantage patient volumes across certain geographies as well as by the benefit plan designs submitted. It is possible that we may underestimate the impact of the Medicare Advantage rates on our business, which could have a material adverse effect on our business, results of operations, financial condition, and cash flows. In addition, our Medicare Advantage revenues may continue to be volatile in the future which could have a material adverse impact on our business, results of operations, financial condition, and cash flows. In addition, CMS often changes the rules governing the Medicare program, including those governing reimbursement. Changes that could adversely affect our business inclu • administrative or legislative changes to base rates or the bases of payment; • limits on the services or types of providers for which Medicare will provide reimbursement; • changes in methodology for patient assessment and/or determination of payment levels; • the reduction or elimination of annual rate increases; or • an increase in co-payments or deductibles payable by beneficiaries. We are unable to predict the effect of recent and future policy changes on our operations. Recent legislative, judicial and executive efforts to enact further healthcare reform legislation have also caused many core aspects of the current U.S. healthcare system to be unclear. While specific changes and their timing are not yet apparent, enacted reforms and future legislative, regulatory, judicial, or executive changes, particularly any changes to the Medicare Advantage program, could have a material adverse effect on our business, results of operations, financial condition, and cash flows. There is additional uncertainty around the future of the ACO REACH Program. The ACO REACH Program has been developed by CMS as a means to test various financial risk sharing arrangements in the Medicare program over a four-year period, from January 1, 2023 through December 31, 2026. CMS may make additional, material changes to the ACO REACH 25 Program in the intervening years or, at the end of that four-year period, CMS may not extend or replace the ACO REACH Program with a similar program that we are eligible to participate in, which may have a material adverse effect on our business. The ACO REACH Program is a new CMS program and we therefore may not be able to realize its expected benefits. In 2022, CMMI announced the GPDC Program was being renamed and rebranded to ACO REACH as of January 1, 2023 and would continue to be part of CMMIs’ strategy to test the next evolution of risk-sharing arrangements to produce value and high quality health care by permitting accountable care organizations ("ACOs") to participate in value-based care arrangements with beneficiaries in Medicare fee-for-service. The ACO REACH Program began its first performance period on January 1, 2023. We currently have two entities participating in the Global track of the ACO REACH Program. Given the recent enactment of the ACO REACH Program, we cannot assure you that we will be successful or able to comply with the new requirements of the ACO REACH Program and we may not be able to realize the expected benefits of the new program. For example, we may encounter difficulties calibrating our historical medical expense estimates to this new beneficiary population, which has not chosen to participate in risk-based care arrangements (unlike Medicare Advantage beneficiaries) and thus may utilize medical services differently than our current members. While we have invested and expect to continue to invest significant time and resources to meet the requirements of and adapt to the ACO REACH Program, beneficiaries assigned to us under the ACO REACH Program may not generate revenue as expected, initially or at all, and we cannot assure you that the model will allow us to achieve the same financial outcomes on Medicare fee-for-service beneficiaries as we do on our existing patients. Additionally, adding new members through the ACO REACH Program will also require absorbing new members into our affiliated professional entities, which may strain resources or negatively affect our quality of care. We cannot assure you that our current participation in the ACO REACH Program will be successful or that we will be able to continue to participate in the ACO REACH Program in the future. We also cannot assure you that our participation in the ACO REACH Program will expand our total addressable market in the manner that we expect. Our business model and future growth are substantially dependent on the success of our strategic relationships with health network partners, enterprise clients, and distribution partners. We will continue to substantially depend on our relationships with third parties, including health network partners, enterprise clients and distribution partners to grow our business. In particular, our growth depends on maintaining existing, and developing new, strategic affiliations with health network partners, including health systems and private and government payers. We also rely on a number of partners such as benefits enrollment platforms, professional employment organizations, consultants and other distribution partners in order to sell our solutions and services and enroll members onto our platform. Our agreements with our enterprise clients often provide for fees based on the number of members that are covered by such clients’ programs each month, known as capitation arrangements. Certain of our enterprise clients and partners also pay us a fixed fee per year regardless of the number of registered members. The number of individuals who register as members through our enterprise clients is often affected by factors outside of our control, such as plan endorsement by the employer, member outreach and retention initiatives. Enterprise clients may also prohibit us from engaging in direct outreach with employees as potential members, or we may be unsuccessful in spreading brand awareness among employees who perceive competitors as offering better solutions and services, which would decrease growth in membership and reduce our net revenue. Increasing rates of unemployment may also result in loss of members at our enterprise clients, and economic recessions or slowdowns can result in our enterprise clients terminating their employee sponsorship arrangements with us, longer sales cycles, and reduced or limited contract sizes as enterprise clients focus on general cost reductions in the face of macroeconomic uncertainty. In addition, during periods of economic slowdown, enterprise clients may face less competition for new hires or may not need to hire as many employees and as a result, they may not need to sponsor memberships with us as a means to attract new hires. Even if the geographies in which our enterprise clients operate experience growth, it is possible that such client’s program membership could fail to grow at similar rates, if at all. If the number of members covered by one or more of such clients’ programs were to be reduced, including due to benefits reductions or layoffs during and after the COVID-19 pandemic, it would lead to a reduction of membership fees, a decrease in our net fee-for-service revenue and partnership revenue, and may also result in the enterprise client electing not to renew our contract for another year. In addition, the growth forecasts of our clients are subject to significant uncertainty, including after the COVID-19 pandemic and any prolonged ensuing economic recession, and are based on assumptions and estimates that may prove to be inaccurate. Further, historical activation rates within a given enterprise client may not be indicative of future membership levels at that enterprise client or activation rates of similarly situated enterprise clients. High activation rates (i.e., the percentage of individuals eligible for membership who are enrolled as members) do not necessarily result in increased net fee-for-service revenue and do not typically result in increased membership revenue. 26 Health network partnerships also comprise a significant portion of our revenue. For example, under certain health network partnership contracts, we closely collaborate with a health network on certain strategic initiatives such as the expansion of practice sites in a particular jurisdiction or service area, and clinical and digital integration between our primary care and their specialty care services. Our contracts with health network partners can sometimes be bespoke, with varying terms across health network partners. However, many contracts provide for fees on a PMPM basis or a fee-for-service basis. Under contracts providing for PMPM fees, when our medical offices provide professional clinical services to covered members, we, as administrator, perform billing and collection services on behalf of the health network, and the health network receives the fees for services provided, including those paid by members’ insurance plans. If we do not adequately satisfy the objectives of our partners or perform against contractual obligations, we may lose revenue under the applicable health network partner contract and the health network partner may become dissatisfied with the terms or our performance under the contract, which could result in its early termination or amendment, if permitted, and as a result, harm to our business and results of operations, including a reduction in net revenue. Even regardless of our performance under the contracts, we cannot guarantee that our health network partners will continue to be satisfied with the terms or circumstances under existing contracts, particularly given constraints and challenges posed by the COVID-19 pandemic. We have experienced contractual disputes and renegotiations, including with respect to delays in payments due to us, with health network partners in the past and may experience additional disputes and renegotiations in the future. In certain situations, we may need to take legal or other action to enforce our contractual rights, which may strain relationships with our partners, further delay payments owed to us, make us less attractive for potential or future partners and harm our business, results of operations, and reputation. Certain contracts with health network partners can be exclusive in the applicable jurisdiction; as a result, in new potential geographies, should we pursue a health network partnership, we would need to successfully contract with a sufficiently competitively viable health network partner, as we may not be able to terminate any such contract for several years without penalty or be able to partner with other health network partners in the same geographies due to competitive pressures or lack of counterparties. If we are unable to successfully continue our strategic relationships with our health network partners on terms favorable to us or at all, or if we do not successfully contract with health network partners in new jurisdictions, our business and results of operations could be harmed. Most of our enterprise clients and health network partners have no obligation to renew their agreements with us after the initial term expires. In addition, our health network partners and enterprise clients may negotiate terms less advantageous to us upon renewal, which may reduce our revenue from these entities. If our health network partners or enterprise clients fail to renew their contracts, or renew their contracts upon less favorable terms or at lower fee levels, our revenue may decline or our future revenue growth may be constrained. In addition, certain of our health network partners and enterprise clients may terminate their contracts with us early for various reasons. If a partner or customer terminates its contract early and revenue and cash flows expected from a partner or enterprise client are not realized in the time period expected or not realized at all, our business could be harmed. Identifying partners, and negotiating and documenting relationships with them, requires significant time and resources. Our competitors may be more effective in executing such relationships and performing against them. If we are unsuccessful in establishing or maintaining our relationships with third parties, our ability to compete in the marketplace or to grow our net revenue could be impaired and our results of operations may suffer. Even if we are successful, we cannot assure you that these relationships will result in increased member use of our solutions and services or increased net revenue. We conduct business in a heavily regulated industry, and any failure to comply with applicable healthcare laws and government regulations, could result in financial penalties, exclusion from participation in government healthcare programs and adverse publicity, or could require us to make significant operational changes, any of which could harm our business. The U.S. healthcare industry is heavily regulated and closely scrutinized by federal, state and local authorities. Comprehensive statutes and regulations govern the manner in which we provide and bill for services and collect reimbursement from governmental programs and private payers, our contractual relationships with our providers, vendors, health network partners, enterprise clients, members and patients, our marketing activities and other aspects of our operations. Of particular importance • state laws that prohibit general business corporations, such as us, from practicing medicine, controlling physicians’ medical decisions or engaging in practices such as splitting fees with physicians; • federal and state laws pertaining to non-physician practitioners, such as nurse practitioners and physician assistants, including requirements for physician supervision of such practitioners and licensure and reimbursement-related requirements; • Medicare and Medicaid billing and reimbursement rules and regulations; 27 • the federal physician self-referral law, commonly referred to as the Stark Law, which, subject to certain exceptions, prohibits physicians from referring Medicare or Medicaid patients to an entity for the provision of certain “designated health services” if the physician or a member of the physician’s immediate family has a direct or indirect financial relationship (including an ownership interest or a compensation arrangement) with the entity; • the federal Anti-Kickback Statute, which, subject to certain exceptions known as “safe harbors,” prohibits the knowing and willful offer, payment, solicitation or receipt of any bribe, kickback, rebate or other remuneration, in cash or in kind, in return for the referral of an individual for, or the lease, purchase, order or recommendation of, items or services covered, in whole or in part, by government healthcare programs such as Medicare and Medicaid; • the federal False Claims Act, which imposes civil and criminal liability on individuals or entities that knowingly or recklessly submit false or fraudulent claims to Medicare, Medicaid, and other government-funded programs or make or cause to be made false statements in order to have a claim paid; • a provision of the Social Security Act that imposes criminal penalties on healthcare providers who fail to disclose or refund known overpayments; • the criminal healthcare fraud provisions of the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations (collectively, "HIPAA"), and related rules that prohibit knowingly and willfully executing a scheme or artifice to defraud any healthcare benefit program or falsifying, concealing or covering up a material fact or making any material false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services; • the Civil Monetary Penalties Law, which prohibits the offering or giving of remuneration to Medicare and Medicaid beneficiaries that is likely to influence the beneficiary’s selection of a particular provider or supplier; • federal and state laws that prohibit providers from billing and receiving payment from Medicare and Medicaid for services unless the services are medically necessary, adequately and accurately documented, and billed using codes that accurately reflect the type and level of services rendered; • federal and state laws and policies related to healthcare providers’ licensure, certification, accreditation, Medicare and Medicaid program enrollment and reassignment of benefits; • federal and state laws and policies related to the prescribing and dispensing of pharmaceuticals and controlled substances; • state laws related to the advertising and marketing of services by healthcare providers; • federal and state laws related to confidentiality, privacy and security of personal information, including medical information and records, that limit the manner in which we may use and disclose that information, impose obligations to safeguard such information and require that we notify third parties in the event of a breach; • federal laws that impose civil administrative sanctions for, among other violations, inappropriate billing of services to government healthcare programs or employing or contracting with individuals who are excluded from participation in government healthcare programs; • laws and regulations limiting the use of funds in health savings accounts for individuals with high deductible health plans; • state laws pertaining to anti-kickback, fee splitting, self-referral, and false claims, some of which are not limited to relationships involving government-funded programs; and • state laws governing healthcare entities that bear financial risk. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Achieving and sustaining compliance with these laws requires us to implement controls across our entire organization and it may prove costly 28 and challenging to monitor and enforce compliance. In particular, given the prevalence of laws, rules and regulations restricting the corporate practice of medicine in certain of the states that we operate, we are prohibited from interfering with or inappropriately influencing providers’ professional judgment and are typically reliant on the providers and other healthcare professionals at our affiliated professional entities to operate in compliance with applicable laws related to the practice of medicine and the provision of healthcare services. The risk of our being found in violation of healthcare laws and regulations is increased by the fact that many of them have not been fully interpreted by regulatory authorities or the courts, and their provisions are sometimes complex and open to a variety of interpretations. Failure to comply with these laws and other laws can result in civil and criminal penalties such as fines, damages, recoupments of overpayments, imprisonment, loss of enrollment status, and exclusion from the Medicare and Medicaid programs. To enforce compliance with the federal laws, the U.S. Department of Justice and the Office of Inspector General for the U.S. Department of Health and Human Services ("HHS"), regularly scrutinize healthcare providers, which has led to a number of investigations, prosecutions, convictions, and settlements in the healthcare industry. The operation of medical practices is also subject to various state laws enforced by state regulators, including state attorneys general, boards of professional licensure and departments of health. A review of our business by judicial, law enforcement, regulatory or accreditation authorities could result in challenges or actions against us that could harm our business and operations. Responding to and managing government investigations or any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses, divert resources and management’s attention from the operation of our business and result in adverse publicity. Moreover, if one of our health system partners or another third party fails to comply with applicable laws and becomes the target of a government investigation, government authorities could require our cooperation in the investigation, which could cause us to incur additional legal expenses and result in adverse publicity. In addition, because of the potential for large monetary exposure under the federal False Claims Act, which provides for treble damages and penalties of $12,537 to $25,076 per false claim or statement (as of May 2022, and subject to annual adjustments for inflation), healthcare providers often resolve allegations without admissions of liability for significant amounts to avoid the uncertainty of treble damages that may be awarded in litigation proceedings. Such settlements often contain additional compliance and reporting requirements as part of a consent decree, settlement agreement or corporate integrity agreement. Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources to investigating healthcare providers’ compliance with the healthcare reimbursement rules and fraud and abuse laws. Further, our ability to provide our full range of services in each state is dependent upon a state’s treatment of telehealth and emerging technologies (such as digital health services), which are subject to changing political, regulatory, and other influences. Many states have laws that limit or restrict the practice of telehealth, such as laws that require a provider to be licensed and/or physically located in the same state where the patient is located. Failure to comply with these laws could result in denials of reimbursement for our services (to the extent such services are billed), recoupments of prior payments, professional discipline for our providers or civil or criminal penalties. The laws, regulations and standards governing the provision of healthcare services may change significantly in the future and may harm our business and operations. For example, we have had to adapt our business as a result of the CARES Act and other emergency orders, laws, and regulations enacted in response to the COVID-19 pandemic. We have also had to adapt our business in response to new laws relating to abortion and reproductive rights which may impact our current healthcare practices. While some of these changes have allowed us to rapidly respond to evolving situations, they have also required us to adapt to new offerings, processes, and procedures. We cannot assure you that such emergency orders, laws, and regulations will continue to apply or that regulators or other governmental entities will agree with our interpretation of these matters under applicable law. The Vaccine Inquiries or any other regulatory or governmental investigations or other disputes as a result of these arrangements, or the failure of various waivers for limitations of liability or other provisions under such emergency orders, laws, and regulations to apply to us could divert resources and harm our reputation, business, financial condition, and results of operations. If the prevalence of private health insurance coverage declines, including due to a decline in the prevalence of employer-sponsored health care, our revenue may be reduced. We currently derive a significant portion of our revenue from members acquired under contracts with enterprise clients that purchase health care for their employees (either via insurance or self-funded benefit plans). A large part of the demand for our solutions and services among enterprise clients depends on the need of these employers to manage the costs of healthcare services that they pay on behalf of their employees. While the percentage of employers who are self-insured has been increasing over the past decade, this trend may not continue. Over time, employees may also increasingly decide to obtain their own insurance through state-sponsored insurance marketplaces rather than through their employers. While such employees may remain members, our reimbursement from providing services to these members would likely decrease. Employees who obtain their own insurance may also cancel their memberships, which may decrease the fees we receive under our contracts with 29 health network partners as fewer members engage in their healthcare networks. If any of these trends accelerate, there is no guarantee that we would be able to compensate for the loss in revenue derived from enterprise clients and health network partners by increasing retail member acquisition. A decline in overall prevalence of private health insurance coverage, including due to the passage of healthcare reform proposals such as “Medicare for All,” could further harm our revenue, particularly if accompanied by a reduction in employer-sponsored health insurance. In addition, health network partners who rely on patient use of their networks, particularly specialty care, through our contracts with them, may become dissatisfied with the terms under the applicable contract and seek to amend or terminate, or elect not to renew, these contracts. In these cases, our business, financial condition, and results of operations would be harmed. If we fail to cost-effectively develop widespread brand awareness and maintain our reputation, or if we fail to achieve and maintain market acceptance for our healthcare services, our business could suffer. We believe that developing and maintaining widespread awareness of our brand and maintaining our reputation for providing access to high quality and efficient health care in a cost-effective manner is critical to attracting new members, enterprise clients, and health network partners, maintaining existing members, clients and partners, and thus growing our business and revenue. Market acceptance of our solutions and services and member acquisition depends on educating people, as well as enterprise clients and health networks, as to the distinct features, ease-of-use, positive lifestyle impact, cost savings, quality, and other perceived benefits of our solutions and services as compared to traditional or competing healthcare access options, and our ability to directly market our solutions or services to the employees of our enterprise clients. In particular, market acceptance is highly dependent on sufficient geographic market saturation of medical offices, whether we are in-network with payers, customization of healthcare services, and word of mouth and informal member referrals. While we are in-network with CMS and our health network partners, shortfalls in any of the above areas, the loss or dissatisfaction of a significant contingent of our members or patients, adverse media reports or negative feedback about our solutions and services may substantially harm our brand and reputation, inhibit widespread adoption of our solutions and services, reduce our revenue from enterprise clients and health networks, and impair our ability to attract new or maintain existing members and patients. Our brand promotion activities may not generate awareness or increase revenue and, even if they do, any increase in revenue may not offset the expenses we incur in building our brand. We also cannot guarantee the quality and efficiency of healthcare service, particularly specialty healthcare, from our health network partners, over which we have no control. Many of our health network partners are large institutions with significant operations across a wide network of patients and may be unable to provide consistent levels of service to our members. Patients who experience poor quality healthcare provision from such partners may impute such dissatisfaction to our solutions and services, which could negatively impact member retention and acquisition, reduce our revenue and harm our business. We have a history of losses, which we expect to continue, and we may never achieve or sustain profitability. We have incurred significant losses in each period since our inception. We incurred net losses of $254.6 million and $397.8 million for the years ended December 31, 2021 and 2022, respectively. As of December 31, 2022, we had an accumulated deficit of $1.016 billion. Our net losses and accumulated deficit reflect the substantial investments we made to acquire new health network partners and members, build our proprietary network of healthcare providers, and develop our technology platform. We intend to continue scaling our business to increase our enterprise client, member and provider bases, broaden the scope of our health network and other partnerships, and expand our applications of technology through which members can access our services. Accordingly, we anticipate that our cost of care and other operating expenses will continue to increase in the foreseeable future. Moreover, as we sign up new At-Risk members for whom we are responsible for managing a range of healthcare services and associated costs, our medical claims expense for such members may be higher relative to the Capitated Revenue earned or any excess revenue over medical claims expense may not be enough to cover our cost of care or other operating expenses. Our efforts to scale our business and manage the health of At-Risk members may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will be able to sustain or increase profitability. Our prior net losses, combined with our expected future net losses, have had and will continue to have a negative impact on our total (deficit) equity and working capital. As a result of these factors, we may need to raise additional capital through debt or equity financings in order to fund our operations, and such capital may not be available on reasonable terms, if at all. Our net revenue depends in part on the number of members enrolled or patient visits, and a decrease in member utilization of our services could harm our business, financial condition and results of operations. Historically, we have relied on patient visits for a substantial portion of our net revenue. For the years ended December 31, 2021 and 2022, net fee-for-service revenue accounted for 29% and 15% of our net revenue, respectively. As we develop additional digital health solutions through our mobile platform and continue providing and expanding availability of remote visits, we cannot guarantee that our members will consistently make in-office visits in addition to using our digital 30 health solutions. Further, it may be difficult for us to accurately forecast future patient in-office visits over time, which may vary across geographies and depend on patient demographics within a given market. In part due to the reduction of in-office visits observed due to COVID-19, we have introduced billable remote visits. We cannot predict with any certainty the number of remote billable services and their impact on our in-office visits. As remote billable services on average generate lower reimbursement than in-office visits, this may impact our operations and financial results. In addition, we will continue to rely on our reputation and recommendations from members and key enterprise clients to promote our solutions and services to potential new members. A substantial portion of our members hold subscriptions through their respective employers with which we have membership arrangements. The loss of any of our key enterprise clients, or a failure of some of them to renew or expand their arrangements with us, including due to cost-saving measures in the face of macroeconomic uncertainty, could have a significant impact on the growth rate of our revenue. Individual members may also decide not to renew their memberships due to reduced discretionary income as a result of inflationary pressures. If we are unable to attract and retain sufficient members in any given market, we may have reduced visits, which could harm our results of operations, reduce our revenue, and harm our business. In addition, under certain of our contracts with enterprise clients, we base our fees on the number of individuals to whom our clients provide benefits. Under certain of our health network partner agreements, we also collect fees from members who receive healthcare services within the health network partner’s network. Many factors, most of which we do not control, may lead to a decrease in the number of individuals covered by our enterprise clients, including, but not limited to, the followin • our proposed transaction with Amazon; • changes in the nature or operations of our enterprise clients or the failure of our enterprise clients to adopt or maintain effective business practices; • changes of control of our enterprise clients; • reduced demand in particular geographies; • shifts away from employer-sponsored health plans toward employee self-insurance; • macroeconomic uncertainty; • shifting regulatory climate and new or changing government regulations; and • increased competition or other changes in the benefits marketplace. If the number of members covered by our enterprise clients and health network partners decreases, our revenue will likely decrease. We operate in a competitive industry, and if we are not able to compete effectively our business would be harmed. The market for healthcare solutions and services is highly fragmented and intensely competitive, with direct and indirect competitors offering varying levels of impact to key stakeholders such as consumers, employers, providers, and health networks. We compete across various segments within the healthcare market and currently face competition from a range of companies and providers for market share and for quality providers and personnel, includin • traditional healthcare providers and medical practices nationally, regionally and locally, that offer similar services, often at lower prices, and that are continuing to develop additional products and becoming more sophisticated and effective; • health networks, including our health network partners, who employ or affiliate with primary care providers, unaffiliated freestanding outpatient centers and specialty hospitals (some of which are physician-owned); • episodic, consumer-driven point solutions such as telemedicine as well as urgent care providers, which may typically pay providers on a fee-for-service basis rather than the salary-based model we employ; • health care or expert medical service tools developed by well-financed health plans which may be provided to health plan customers at discounted prices; and 31 • other companies providing healthcare-focused products and services, including companies offering specialized software and applications, technology platforms, care management and coordination, digital health, telehealth and telemedicine, and health information exchange. Our competitive success and growth, which can be measured in part by retention of existing members and gaining of new members in both existing and target geographies, are contingent on our ability to simultaneously address the needs of key stakeholders efficiently while delivering superior outcomes at scale compared with competitors. Over the years, the number of freestanding specialty hospitals, surgery centers, emergency departments, urgent care centers, and diagnostic imaging centers has increased significantly in the geographic areas in which we serve and may provide services similar to those we offer. Some of our existing and potential competitors may be larger, have greater name recognition, have longer operating histories, offer a broader array of services or a larger or more specialized medical staff, provide newer or more desirable facilities or have significantly greater resources than we do. Some of the clinics and medical offices that compete with us are also owned by government agencies or not-for-profit organizations that can finance capital expenditures and operations on a tax-exempt basis. In addition, our current or potential competitors may be acquired by third parties with greater available resources. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements and may have the ability to initiate or withstand substantial price competition. Driven in part by the COVID-19 pandemic, existing or new competitors have developed or further invested in telemedicine and remote medicine programs and ventures, which would compete with our virtual care offerings. Also, current and potential competitors have established, and may in the future establish, cooperative relationships with vendors of complementary technologies or services to increase the availability of their solutions in the marketplace. Accordingly, new competitors or alliances may emerge that have greater market share, a larger member or patient base, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources, and larger sales forces than we have, which could put us at a competitive disadvantage. Our competitors could also be better positioned to serve certain segments of the healthcare market, which would limit our member and patient growth. In light of these factors, even if our solution is more effective than those of our competitors, current or potential members, health network partners, and enterprise clients may accept competitive solutions in lieu of purchasing our solution. Our enterprise clients or health network partners may also elect to terminate their arrangements with us and enter into arrangements with our competitors, particularly in primary care, to the extent they are more favorable from a fee or price perspective or provide greater exposure to, or volume of, patients. In addition, in any geographic area, we may enter into an exclusive contractual arrangement with a single health network partner, which could allow competitors to contract with other health network partners in the same area and gain market share for potential patients. Competitors may also be better positioned to contract with leading health network partners in our target geographies, including existing geographies, after our current contracts expire. If our competitors are better able to attract patients, contract with health network partners, recruit providers, expand services or obtain favorable managed care contracts at their facilities than we are, we may experience an overall decline in member volumes and net revenue. Competition from specialized providers, health plans, medical practices, digital health companies, and other parties will result in continued member acquisition and patient visit and utilization volume pressure, which could negatively impact our revenue and market share. Competition in our industry also involves consumer perceptions of quality and pricing, rapidly changing technologies, evolving regulatory requirements and industry expectations, frequent new product and service introductions and changes in customer requirements. As access to hospital performance data on quality measures, patient satisfaction surveys, and standard charges for services increases, healthcare consumers also have more tools to compare competing providers. If any of our affiliated professional entities achieve poor results (or results that are lower than our competitors’) on quality measures or patient satisfaction surveys, or if our standard charges are or are perceived to be higher than our competitors, we may attract fewer members. Moreover, if we are unable to keep pace with the evolving needs of our clients, members, and partners and continue to develop, enhance, and market new applications and services in a timely and efficient manner, demand for our solutions and services may be reduced and our business and results of operations would be harmed. We cannot guarantee that we will possess the resources, either financial or personnel, for the research, design, and development of new applications or services, or that we will be able to utilize these resources successfully and avoid technological or market obsolescence. Further, we cannot assure you that technological advances by one or more of our competitors or future competitors will not result in our present or future applications and services becoming uncompetitive or obsolete. If we are unable to successfully compete in the healthcare market, our business would be harmed. We may not grow at the rates we historically have achieved or at all, even if our key metrics may imply future growth, which could have a negative impact on our business, financial condition, and results of operations. We have experienced significant growth in our recent history. Future revenue may not grow at these same rates or may decline. Our future growth will depend, in part, on our ability to grow members in existing geographies, expand into new geographies, expand our service offerings, and grow our health network partnerships while maintaining high quality and efficient services. We are continually executing a number of growth initiatives, strategies, and operating plans designed to 32 enhance our business. For example, we are expanding our strategic relationships with health network partners to build integrated delivery networks for broad access to their networks of specialists and hospitals. The anticipated benefits from these efforts are based on several assumptions that may prove to be inaccurate. We may not be able to successfully complete these growth initiatives, strategies, and operating plans and realize all of the benefits, including growth targets and cost savings, that we expect to achieve, or it may be more costly to do so than we anticipate. We can provide no assurances that even if our key metrics indicate future growth, we will continue to grow our revenue or to generate net income. Moreover, our continued implementation of these programs may disrupt our operations and performance. If, for any reason, the benefits we realize are less than our estimates or the implementation of these growth initiatives, strategies, and operating plans negatively impact our operations or cost more or take longer to effectuate than we expect, or if our assumptions prove inaccurate, our business, financial condition, and results of operations may be harmed. We also have limited experience operating our business under economic conditions characterized by high inflation or in economic recessions. We are currently operating in a more volatile inflationary environment due to macroeconomic conditions. Any future economic recessions may introduce new challenges to our business, for which we may not be able to adequately anticipate and plan . Certain of our longer-term strategic initiatives may also be obstructed or have unintended effects in the event of an economic recession, which we may not be able to predict. If we fail to manage our growth effectively, our expenses could increase more than expected, our revenue may not increase proportionally or at all, and we may be unable to implement our business strategy. We have experienced significant growth in recent periods, which puts strain on our business, operations and employees. For example, we grew from 1,340 employees as of December 31, 2018 to 3,698 employees as of December 31, 2022. We have also increased our customer and membership bases significantly over the past few years. We anticipate that our operations will continue to rapidly expand. To manage our current and anticipated future growth effectively, we must continue to maintain and enhance our IT infrastructure, financial and accounting systems and controls. In particular, in order for our providers to provide quality healthcare services and longitudinal care to patients and avoid burn-out, we need to provide them with adequate IT and technology support, which requires sufficient staffing for these areas. In addition, as we expand in existing geographies and move into new geographies, we will need to attract and retain an increasing number of quality healthcare professionals and providers. Failure to retain a sufficient number of providers may result in overworking of existing personnel leading to burn-out or poor quality of healthcare services. In addition, our strategy is to provide longitudinal care to members and patients, which requires substantial time and attention from our providers. We must also attract, train and retain a significant number of qualified sales and marketing personnel, customer support personnel, professional services personnel, software engineers, technical personnel, and management personnel, and the availability of such personnel, in particular software engineers, may be constrained. A key aspect to managing our growth is our ability to scale our capabilities to implement our solutions and services satisfactorily with respect to both large and demanding enterprise clients and health network partners as well as individual consumers. Large clients and partners often require specific features or functions unique to their membership base, which, at a time of significant growth or during periods of high demand, may strain our implementation capacity and hinder our ability to successfully provide our services to our clients and partners in a timely manner. We may also need to make further investments in our technology to decrease our costs. If we are unable to address the needs of our clients, partners or members, or our clients, partners or members are unsatisfied with the quality of our solutions or services, they may not renew their contracts or memberships, seek to cancel or terminate their relationship with us or may renew on less favorable terms, any of which could harm our business and results of operations. Failure to effectively manage our growth could also lead us to over-invest or under-invest in development and operations, result in weaknesses in our infrastructure, internal systems, processes or controls, give rise to operational mistakes, financial losses, loss of productivity or business opportunities, and result in loss of employees and reduced productivity of remaining employees. In order to manage the increasing complexities of our business, we will need to continue to scale and adapt our operational, financial and management controls, as well as our reporting systems and procedures. We may not be able to successfully implement and scale improvements to our systems, processes and controls or in connection with third party software in a timely or efficient manner or in a manner that does not negatively affect our operating results. For example, we may not be able to effectively monitor certain extraordinary contract requirements or provisions that are individually negotiated as the number of transactions continues to grow. In addition, our systems and processes may not prevent or detect all errors, omissions, or fraud, including any fraudulent activities conducted or facilitated by our employees or the providers or staff at our affiliated professional entities. Any of these events could result in our expenses increasing more than expected, lack of growth or slower than expected growth in our revenue, and inability to implement our business strategies. The quality of our services may also suffer, which could negatively affect our reputation and harm our ability to attract and retain members, clients, and partners. Investment of significant capital expenditures to support our growth may also divert financial resources from other projects such as the development of new applications and services. In particular, as we enter new geographies or seek to expand our presence in existing geographies, we will need to make upfront capital expenditures, including to lease and furnish medical 33 office space, acquire medical equipment, staff providers at such medical offices and incur related expenses. As we do not recognize patient revenue until those offices open and begin receiving patients, our margins may be reduced during the periods in which such capital expenditures were incurred. Expansion in new or existing geographies can be lengthy and cost-intensive, and we may encounter difficulties or unanticipated issues during the process of opening such new medical offices. We cannot assure you that we will be able to open our planned new medical offices, in existing or new geographies, within our operating budgets and planned timelines, or at all. Cost overruns in the process of opening new offices can result in higher than expected cost of care, exclusive of depreciation and amortization, and operating expenses as compared to revenue in the applicable quarter. In addition, we cannot assure you that new medical offices will operate efficiently or be strategically placed to attract the optimal number of patients. If an office is underperforming for any reason, we could incur additional costs to relocate or shut down that office. It is essential to our ongoing business that our affiliated professional entities attract and retain an appropriate number of quality primary care providers to support our services and that we maintain good relations with those providers. The success of our business depends in significant part on the number, availability, and quality of licensed primary care providers employed or contracted by our affiliated professional entities. Providers employed or contracted with our affiliated professional entities are free to terminate their association at any time. In addition, although providers who own interests in affiliated professional entities are generally subject to agreements restricting them from owning an interest in competitive facilities or transferring their ownership interests in the affiliated professional entity without our consent, we may not learn of, or may be unsuccessful in preventing, our provider partners from acquiring interests in competitive facilities or making transfers without our consent. Moreover, in certain states in which we operate, such as California, non-competition and other restrictive covenants may be limited in their enforceability, particularly against physicians and providers. If we are unable to recruit and retain providers and other healthcare professionals, our business and results of operations could be harmed and our ability to grow could be impaired. In any particular geographical location, providers could demand higher payments or take other actions that could result in higher medical costs, less attractive service for our members or difficulty meeting regulatory or accreditation requirements. Our ability to develop and maintain satisfactory relationships with providers also may be negatively impacted by other factors not associated with us, such as changes in Medicare reimbursement levels and other pressures on healthcare providers and consolidation activity among hospitals, provider groups, and healthcare providers. We may also experience attrition in our primary care providers due to our proposed Amazon Merger. We expect to encounter increased competition from health insurers and private equity companies seeking to acquire providers in the geographies where we operate practices and, where permitted by law, employ providers. In some geographies, provider recruitment and retention are affected by a shortage of providers and the difficulties that providers can experience in obtaining affordable malpractice insurance or finding insurers willing to provide such insurance. Providers may also leave our affiliated professional entities or perceive them as providing a poor quality of life if our affiliated professional entities do not adequately manage causes of provider burnout and workload, some of which we have little to no control over under the administrative services agreements ("ASAs"). Our business is dependent on providing longitudinal and long-term care for members and requires providers to consistently follow members over time, track overall long-term health and, in certain geographies, be available 24/7 for virtual care questions and services. If we are unable to efficiently manage provider workload and capacity to provide longitudinal and long-term care, our providers may depart and our patients may experience lower quality of care, which would harm our business. Furthermore, our ability to recruit and employ providers is closely regulated. For example, the types, amount and duration of compensation and assistance we can provide to recruited providers are limited by the Stark law, the Anti-kickback Statute, state anti-kickback statutes and related regulations. If we are unable to attract and retain sufficient numbers of quality providers by providing adequate support personnel, technologically advanced equipment and facilities that meet the needs of those providers and their patients, memberships and patient visits may decrease, our enterprise clients may alter or terminate their membership contracts with us and our operating performance may decline. We incur significant upfront costs in our enterprise client and health network partner relationships, and if we are unable to maintain and grow these relationships over time, we are likely to fail to recover these costs, which could have a negative impact on our business, financial condition and results of operations. Our business model and growth depend heavily on achieving economies of scale because our initial upfront investment for any enterprise client or certain health network partners is costly and the associated revenue is recognized on a ratable basis. We devote significant resources to establishing relationships with our clients and partners and implementing our solutions and services. This is particularly so in the case of large enterprises that, to date, have contributed a large portion of our membership base and revenue as well as health network partners, who may require specific features or functions unique to their particular processes or under the terms of their contracts with us, including significant systems integration and interoperability undertakings. Accordingly, our results of operations will depend in substantial part on our ability to deliver a successful experience for these clients and related members and partners to persuade our clients and partners to maintain and grow their relationship with us over time. Additionally, as our business is growing significantly, our new customer and partner acquisition 34 costs could outpace our revenue growth and we may be unable to reduce our total operating costs through economies of scale such that we are unable to achieve profitability. Our costs of doing business could also increase significantly due to labor shortages and inflationary pressures, which could increase the cost of labor, healthcare services and supplies and rental payments for our office locations. If we fail to achieve appropriate economies of scale or if we fail to manage or anticipate the evolution and in future periods, demand of our clients and partners, our business may be harmed. Our marketing cycle can be long and unpredictable and requires considerable time and expense, which may cause our results of operations to fluctuate. The marketing cycle for our solutions and services from initial contact with a potential enterprise client or health network partner to contract execution and implementation varies widely by enterprise client or partner. Some of our partners undertake a significant and prolonged evaluation process, including to determine whether our solutions and services meet their unique healthcare needs, which evaluation can be complex given the size and scale of our clients and partners. Our contractual arrangements with our health network partners are often highly specific to each partner depending on their needs, the characteristics and patient demographics of the geographical region they serve, their growth plans and their operations, among other things. As a result, our marketing efforts to any new health network partner must be tailored to meet its specific strategic demands, which can be time consuming and require significant upfront cost. These efforts also must address interoperability between our IT infrastructure and systems and such partner’s systems, which can result in substantial cost without any assurance that we will ultimately enter into a contractual arrangement with any such partner. Our large enterprise clients often initially restrict direct access by us to their employees to curb information overflow. As a result, we may not be able to directly market our solutions and services to, and educate, employees at our enterprise clients until much later after execution of an agreement with such clients. This can result in limited membership acquisition at any such enterprise client for a significant period of time following contract execution, and we cannot assure you that we will be able to gain sufficient membership acquisition to justify our upfront investments. Further, even after contract execution with a particular enterprise client, we generally compete with other health service providers who market to the same employees at such enterprise client, and our marketing and employee education efforts may not be successful in winning members from other competing services, many of which are traditional healthcare models that employees are more familiar with. We also incur significant marketing costs to grow awareness of our solution and services in both existing and new geographical locations for potential new members. Our marketing efforts for member acquisition are dependent in part on word of mouth, which may take substantial time to spread. In addition, for both new and existing geographic locations, we will need to continuously open medical offices in targeted locations to build awareness, which is both time-intensive and requires substantial upfront fixed costs. If our substantial upfront marketing and implementation investments do not result in sufficient sales to justify our investments, it could harm our business and results of operations. We could experience losses or liability, including medical liability claims, causing us to incur significant expenses and requiring us to pay significant damages if not covered by insurance. Our business entails the risk of medical liability claims against our affiliated professional entities, their providers, and 1Life and its subsidiaries and we have in the past been subject to such claims in the ordinary course of business. Although 1Life, its subsidiaries, our affiliated professional entities and individual providers may carry insurance at the entity level and at the provider level covering medical malpractice claims in amounts that we believe are appropriate in light of the risks attendant to our business, successful medical liability claims could result in substantial damage awards that exceed the limits of our affiliated professional entities' insurance coverage. Professional liability insurance is expensive and insurance premiums may increase significantly in the future, particularly as we expand our services and as the professional liability insurance market becomes more challenging due to COVID-19. As a result, adequate professional liability insurance may not be available to our providers or to us in the future at acceptable costs or at all. Any claims made against us that are not fully covered by insurance could be costly to defend against, result in substantial damage awards against us and divert the attention of our management and our providers from our operations, which could harm our business. In addition, any claims may significantly harm our business or reputation. Moreover, we do not control the providers and other healthcare professionals at our affiliated professional entities with respect to the practice of medicine and the provision of healthcare services. While we seek to attract high quality professionals, the risk of liability, including through unexpected medical outcomes, is inherent in the healthcare industry, and negative outcomes may result for any of our members. We attempt to limit our liability to members, clients and partners by contract; however, the limitations of liability set forth in the contracts may not be enforceable or may not otherwise protect us from liability for damages. Additionally, we may be subject to claims that are not explicitly covered by such contractual limits. We also maintain general liability coverage for certain risks, claims and litigation proceedings. However, this coverage may not continue to be available on acceptable terms or in sufficient amounts to cover one or more large claims against us, and may include larger self-insured retentions or exclusions. In addition, the insurer might deny coverage for the claims we submit 35 or disclaim coverage as to any future claim. Any liability claim brought against us, or any ensuing litigation, regardless of merit, could result in a substantial cost to us, divert management’s attention from operations and could also result in an increase of our insurance premiums and damage to our reputation. A successful claim not fully covered by our insurance could have a negative impact on our liquidity, financial condition, and results of operations. Current or future litigation against us could be costly and time-consuming to defend. We are subject, and in the future may become subject from time to time, to legal proceedings and claims that arise in the ordinary course of business such as claims brought by our members, clients or partners in connection with commercial disputes, consumer class action claims, employment claims made by our current or former employees, technology errors or omissions, medical malpractice, professional negligence or other related actions or claims inherent in the provision of healthcare services as well as other litigation matters. In particular, as we grow our base of consumer members, we may be subject to an increasing number of consumer claims, disputes and class action complaints, including ongoing claims alleging misrepresentations with respect to our membership fees. While our membership terms generally require individual arbitration, we cannot assure you that such terms will be enforced, which may result, and has resulted in the past, in costly class action litigation. Litigation may result in substantial costs, settlement and judgments and may divert management’s attention and resources, which may substantially harm our business, financial condition and results of operations. Insurance may not cover such claims, may not provide sufficient payments to cover all of the costs to resolve one or more such claims and may not continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, thereby leading analysts or potential investors to reduce their expectations of our performance, which could reduce the market price of our common stock. Our labor costs could be negatively impacted by competition for staffing, the shortage of experienced nurses and providers and labor union activity. The operations of our affiliated professional entities are dependent on the efforts, abilities and experience of our management and medical support personnel, including nurses, therapists and lab technicians, as well as our providers. We compete with other healthcare providers in recruiting and retaining employees, and, like others in the healthcare industry, we continue to experience a shortage of nurses and providers in certain disciplines and geographic areas. As a result, from time to time, we may be required to enhance wages and benefits to recruit and retain experienced employees, make greater investments in education and training for newly licensed medical support personnel, or hire more expensive temporary or contract employees. Furthermore, state-mandated nurse-staffing ratios in California affect not only our labor costs, but, if we are unable to hire the necessary number of experienced nurses to meet the required ratios, they may also cause us to limit patient volumes, which would have a corresponding negative impact on our net revenue. In addition, while none of our employees are represented by a labor union as of December 31, 2022, our employees may seek to be represented by one or more labor unions in the future. If some or all of our employees were to become unionized, it could increase labor costs, among other expenses, and may require us to adjust our employee policies and protocols. Further, labor is subject to external factors that are beyond our control, including the competitive market for skilled workers and leaders in the healthcare industry, cost inflation, the COVID-19 pandemic and workforce participation rates. In general, our failure to recruit and retain qualified management, experienced nurses and other medical support personnel, or to control labor costs, could harm our business. In order to support the growth of our business, we may need to incur additional indebtedness or seek capital through new equity or debt financings, which sources of additional capital may not be available to us on acceptable terms or at all. Our operations have consumed substantial amounts of cash since inception and we intend to continue to make significant investments to support our business growth, respond to business challenges or opportunities, expand our services in new geographic locations, enhance our operating infrastructure and existing solutions and services and potentially acquire complementary businesses and technologies. For the years ended December 31, 2021 and 2022, our net cash used in operating activities was $88.6 million and $211.8 million, respectively. As of December 31, 2022, we had $215.4 million of cash and cash equivalents and $47.0 million of marketable securities, which are held for working capital purposes. As of December 31, 2022, we had $316.3 million aggregate principal amount of debt outstanding under our 3.0% convertible senior notes due in May 2025 (the "2025 Notes"). As of December 31, 2022, we have also deferred payroll taxes in the amount of $5.0 million and received $4.3 million in grants as part of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), through the Provider Relief Fund ("PRF") of HHS, to help offset the impact of increased healthcare related expenses and lost revenues attributable to the COVID-19 pandemic. We are not required to repay this grant, provided we attest to and comply with certain terms and conditions, including the use of PRF funds for only permitted purposes and only after funds from other sources obligated to reimburse recipients have been applied. If we are unable to attest to or comply with current or future terms and conditions, our ability to retain some or all of the PRF funds received may be impacted. 36 Our future capital requirements may be significantly different from our current estimates and will depend on many factors, including our growth rate, membership renewal activity and growth, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new or enhanced services, expansion of services to new geographic locations, addition of new health network partners and the continuing market acceptance of our healthcare services. Accordingly, we may need to engage in equity or debt financings or collaborative arrangements to secure additional funds. The Merger Agreement with Amazon contains certain covenants that may restrict or limit our ability to raise capital, including through a debt financing. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Moreover, refinancing our debt or taking a number of other actions under the terms of the indenture governing the 2025 Notes could have the effect of diminishing our ability to make payments on the notes when due. Any debt financing secured by us in the future, including pursuant to the Loan Agreement with Amazon, could involve additional restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital, incur additional debt and to pursue business opportunities, including potential acquisitions or other strategic transactions. In addition, during times of economic instability or volatility in, the credit and financial markets in the United States and worldwide, it has been difficult for many companies to obtain financing in the public markets or to obtain debt financing, and we may not be able to obtain additional financing on commercially reasonable terms, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, it could harm our business and growth prospects. Our revenues have historically been concentrated among our top customers, and the loss of any of these customers could reduce our revenues and adversely impact our operating results. Historically, our revenue has been concentrated among a small number of customers. In 2021 and 2022, our top three customers accounted for 32% and 43% of our net revenue, respectively. These customers included commercial payers and a health network partner. The loss of one or more of these customers could reduce our revenue, harm our results of operations and limit our growth. Our quarterly results may fluctuate significantly, which could adversely impact the value of our common stock. Our quarterly results of operations, including our net revenue, loss from operations, net loss and cash flows, have varied and may vary significantly in the future, and period-to-period comparisons of our results of operations may not be meaningful. Accordingly, our quarterly results should not be relied upon as an indication of future performance. Our quarterly financial results have fluctuated, and may fluctuate in the future, as a result of a variety of factors, many of which are outside of our control, including, without limitation, the followin • the addition or loss of health network partners or enterprise clients, including through acquisitions or consolidations of such entities; • the addition or loss of contracts with, or modification of contract terms with, payers, including the reduction of reimbursements for our services or the termination of our network contracts with payers; • seasonal and other variations in the timing and volume of patient visits, such as the historically higher volume of use of our service during peak cold and flu season months or due to COVID-19; • fluctuations in unemployment rates resulting in reductions in total members; • slowdown in the overall economy resulting in losses of enterprise clients as they scale back on expenses; • new enterprise sponsorships and renewal of existing enterprise sponsorships and the timing thereof as well as enterprise and consumer member activation and renewal and timing thereof; • the timing of recognition of revenue; • the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure, including upfront capital expenditures and other costs related to expanding in existing or entering new geographical locations, as well as providing administrative and operational services to our affiliated professional entities under the ASAs; 37 • our ability to effectively estimate the potential costs of medical services incurred, including under our at-risk arrangements, and the adequacy of our reserves for such incurred but not reported claims for medical services, in either case including due to increased visits and costs following a future COVID-19 outbreak, which could result in fluctuations in our quarterly results and may not accurately reflect the underlying performance of our business within a given period; • our ability to effectively manage the size and composition of our proprietary network of healthcare professionals relative to the level of demand for services from our members; • the timing and success of introductions of new applications and services by us or our competitors, including well-known competitors with significant market clout and perceived ability to compete favorably due to access to resources and overall market reputation; • changes in the competitive dynamics of our industry, including consolidation among competitors, health network partners or enterprise clients; and • the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill from acquired companies. Most of our net revenue in any given quarter is derived from contracts entered into with our partners and clients during previous quarters as well as membership fees that are recognized ratably over the term of each membership. Consequently, a decline in new or renewed contracts or memberships in any one quarter may not be fully reflected in our net revenue for that quarter. Such declines, however, would negatively affect our net revenue in future periods and the effect of loss of members, and potential changes in our rate of renewals or renewal terms, may not be fully reflected in our results of operations until future periods. While we encourage enterprise clients to purchase memberships off of their periodic enrollment cycle, we cannot guarantee that they will do so. Accordingly, the effect of changes in the industry impacting our business or loss of members may not be reflected in our short-term results of operations. In addition, revenues associated with our At-Risk arrangements are subject to significant estimation risk related to reserves for incurred but not reported claims. If the actual claims expense differs significantly from the estimated liability due to differences in utilization of healthcare services, the amount of charges and other factors, it could negatively impact our revenue and have a material adverse impact on our business, results of operations, financial condition and cash flows. For example, future outbreaks of COVID-19 may significantly increase actual claims which are difficult to forecast or predict, and as a result, may cause estimated liability to differ significantly. Any fluctuation in our quarterly results may not accurately reflect the underlying performance of our business and could cause a decline in the trading price of our common stock. If we lose key members of our senior management team or are unable to attract and retain executive officers and employees we need to support our operations and growth, our business and growth may be harmed. Our success depends largely upon the continued services of our key executive officers, particularly our Chair, Chief Executive Officer and President and 1Life's Chief Medical Officer. These executive officers are at-will employees and therefore they may terminate employment with us at any time with no advance notice. We also do not maintain any key person life insurance policies. Further, we rely on our leadership team in the areas of research and development, marketing, services and general and administrative functions. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. The replacement of one or more of our executive officers or other key employees would likely involve significant time and costs and may significantly delay or prevent the achievement of our business objectives. We are particularly dependent on 1Life's Chief Medical Officer, who is the sole director and officer of many of the affiliated professional entities and is responsible for overseeing the operation of several of such entities, among other roles. While we have succession plans in place and have employment or service arrangements with a limited number of key executives, these measures do not guarantee that the services of these or suitable successor executives will continue to be available to us. To continue to execute our growth strategy, we also must attract and retain highly skilled personnel. Competition is intense for qualified professionals and we may not be successful in continuing to attract and retain qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled personnel with appropriate qualifications. The pool of qualified personnel with experience working in the healthcare market is limited overall. In addition, many of the companies with which we compete for experienced personnel have greater resources than we have. Further, labor is subject to external factors that are beyond our control, including the competitive market for skilled workers and leaders in the healthcare industry, cost inflation, the COVID-19 pandemic and workforce participation rates. As a result, our success is dependent on our ability to evolve our culture, align our talent with our 38 business needs, engage our employees and inspire our employees to be open to change, to innovate and to maintain member- and customer-focus when delivering our services. In addition, job candidates often consider the value of the stock options or other equity-based awards they are to receive in connection with their employment. Volatility in the price of our stock may, therefore, negatively impact our ability to attract or retain highly skilled personnel. Further, the requirement to expense stock options and other equity-based compensation may discourage us from granting the size or type of stock option or equity awards that job candidates require to join our company. Inflationary pressures, or stress over economic, geopolitical, or pandemic-related events such as those the global market is currently experiencing, may also result in employee attrition. Our business would be harmed if we fail to adequately plan for succession of our executives and senior management; or if we fail to effectively recruit, integrate, retain and develop key talent and/or align our talent with our business needs and the current rapidly changing environment. We may acquire other companies or technologies, which could divert our management’s attention, result in dilution to our stockholders and otherwise disrupt our operations and we may have difficulty integrating any such acquisitions successfully or realizing the anticipated benefits therefrom, any of which could harm our business. The Merger Agreement with Amazon provides for certain restrictions on our activities until the Effective Time (as defined in the Merger Agreement) or until the Merger Agreement is terminated, including restrictions on our ability to acquire any business. We may seek to acquire or invest in businesses, applications and services or technologies that we believe could complement or expand our business, enhance our technical capabilities or otherwise offer growth opportunities. For example, we completed our acquisition of Iora in an all-stock transaction and our stockholders incurred substantial dilution. For additional risks related to the acquisition of Iora, please refer to "—Risks Related to the Acquisition of Iora." The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated. We have limited experience acquiring or investing in businesses, applications and services or technologies and may not have the experience or capabilities to successfully execute such transactions or integrate them following consummation. In addition, if we acquire additional businesses, we may not be able to integrate the acquired personnel, operations and technologies successfully, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including, but not limited t • inability to integrate or benefit from acquired technologies or services in a profitable manner; • limited experience in making acquisitions and integrating acquired businesses or assets; • unanticipated costs or liabilities associated with the acquisition; • difficulty integrating the accounting systems, operations and personnel of the acquired business; • difficulties and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business; • diversion of management’s attention from other business concerns; • negative impacts to our existing relationships with enterprise clients or health network partners as a result of the acquisition; • the potential loss of key employees; • use of resources that are needed in other parts of our business; • deficiencies associated with the assets or companies we acquire or ineffective or inadequate controls, procedures or policies at any acquired business that were not identified in advance and may result in significant unanticipated costs; and • use of substantial portions of our available cash to consummate the acquisition. The effectiveness of our due diligence review of potential acquisitions and assessments of potential benefits or synergies are dependent upon the accuracy and completeness of statements and disclosures made or actions taken by the companies we acquire or their representatives. We may fail to accurately forecast the financial impact of an acquisition transaction, including tax and accounting charges. In addition, a significant portion of the purchase price of companies we acquire may be allocated to 39 acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our results of operations based on this impairment assessment process, which could harm our results of operations. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could harm our results of operations. In addition, if an acquired business fails to meet our expectations, our business may be harmed. The estimates of market opportunity and forecasts of market and revenue growth included in this Annual Report may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all. Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. In particular, the size and growth of the overall U.S. healthcare market is subject to significant variables, including a changing regulatory environment and population demographic, which can be difficult to measure, estimate or quantify. Our business depends on member acquisition and retention, which further drives revenue from our contracts with health network partners. Estimates and forecasts of these factors in any given market is difficult and affected by multiple variables such as population growth, concentration of enterprise clients and population density, among other things. Further, we cannot assure you that we will be able to sufficiently penetrate certain market segments included in our estimates and forecasts, including due to limited deployable capital, ineffective marketing efforts or the inability to develop sufficient presence in a given market to gain members or contract with employers and health network partners in that market. Once we acquire a consumer or enterprise member, apart from fixed annual membership fees and payments from health care partners, we primarily derive revenue from patient in-office visits, which may be difficult to forecast over time, particularly as our billable service mix continues to expand. Finally, our contractual arrangements with health network partners typically have highly tailored capitation and other fee structures which vary across health network partners and are dependent on either the number of members that receive healthcare services in a health network partner’s network or the volume and expense of the care received by At-Risk members. As a result, we may not be able to accurately forecast revenue from our health network partners. For these reasons, the estimates and forecasts in this Annual Report relating to the size and expected growth of our target markets may prove to be inaccurate. Even if the markets in which we compete meet our size estimates and forecasted growth, our business could fail to grow at similar rates, if at all. Natural or man-made disasters and other similar events may significantly disrupt our business and negatively impact our business, financial condition and results of operations. Our offices and facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, extreme weather conditions (including adverse weather conditions caused by global climate change or otherwise), power outages, fires, floods, protests and civil unrest, nuclear disasters and acts of terrorism or other criminal activities, which may result in physical damage to our offices, temporary office closures and could render it difficult or impossible for us to operate our business for some period of time. In particular, certain of the facilities we lease to house our computer and telecommunications equipment are located in the San Francisco Bay Area, a region known for seismic activity, and our insurance coverage may not compensate us for losses that may occur in the event of an earthquake or other significant natural disaster. Any disruptions in our operations related to damage to, or repair or replacement of our offices, could negatively impact our business and results of operations and harm our reputation. Although we maintain an insurance policy covering damages to our property and, in certain situations, interruptions to our business, such insurance may not be available or sufficient to compensate for the different types of associated losses that may occur, including business interruption losses. Any such losses or damages could harm our business, financial condition and results of operations. In addition, our health network partners’ facilities may be harmed or rendered inoperable by such natural or man-made disasters, which may cause disruptions, difficulties or other negative effects on our business and operations. Risks Related to Government Regulation The impact of healthcare reform legislation and other changes in the healthcare industry and in healthcare spending is currently unknown, but may harm our business. Our revenue is dependent on the healthcare industry and could be affected by changes in healthcare spending and policy. The healthcare industry is subject to changing political, regulatory and other influences. The Patient Protection and Affordable Care Act ("ACA"), made major changes in how health care is delivered and reimbursed, and increased access to health insurance benefits to the uninsured and underinsured populations in the United States. ACA, among other things, increased the number of individuals with Medicaid and private insurance coverage. 40 ACA has been subject to legislative and regulatory changes and court challenges and there is uncertainty regarding whether, when, and how ACA may be changed, the ultimate outcome of court challenges and how the law will be interpreted and implemented. Changes by Congress or government agencies could eliminate or alter provisions beneficial to us, while leaving in place provisions reducing our reimbursement or otherwise negatively impacting our business. In addition, current and prior healthcare reform proposals have included the concept of creating a single payer such as “Medicare for All” or a public option for health insurance. If enacted, these proposals could have an extensive impact on the healthcare industry, including us and may impact our business, financial condition, results of operations, cash flows and the trading price of our security. We are unable to predict whether such reforms may be enacted or their impact on our operations. We are also impacted by the Medicare Access and CHIP Reauthorization Act, under which physicians must choose to participate in one of two payment formulas, Merit-Based Incentive Payment System ("MIPS"), or Alternative Payment Models ("APMs"). Beginning in 2019, MIPS allows eligible physicians to receive upward or downward adjustments to their Medicare Part B payments based on certain quality and cost metrics, among other measures. As an alternative, physicians can choose to participate in an Advanced APM. Advanced APMs are exempt from the MIPS requirements, and physicians who are meaningful participants in APMs will receive bonus payments from Medicare pursuant to the law. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the number of individuals who qualify for health care coverage and amounts that federal and state governments and other third-party payers will pay for healthcare services, which could harm our business, financial condition and results of operations. Our arrangements with health networks may be subject to governmental or regulatory scrutiny or challenge. Some of our relationships with health networks involve risk arrangements, such as capitated payments designed to achieve alignment of financial incentives and to encourage close collaboration on clinical care for patients. Although we believe that our health network contracts involving capitated payments comply with the federal Anti-Kickback Statute and the Stark Law, we cannot assure you that regulators or other governmental entities will agree with our interpretation of these arrangements under applicable law. Our health network partnerships may be subject to scrutiny or investigation from time to time by regulators or other governmental entities, which may be lengthy, costly, and divert resources and our management’s attention from managing our business and growth. If our health network partnerships are challenged and found to violate the Anti-Kickback Statute or the Stark Law, we could incur substantial financial penalties, reimbursement denials, repayments or recoupments, or exclusion from participation in government healthcare programs, any of which could harm our business. Evolving government regulations may increase costs or negatively impact our results of operations. Our operations may be subject to direct and indirect adoption, expansion, revision or reinterpretation of various laws and regulations. In the event any such changes in law or interpretation impacts our services or contractual arrangements, we may be required to modify such services, or revise our arrangements, in a manner that undermines the attractiveness of services or may not preserve the same economics, or may be required to discontinue such arrangements. In each case, our revenue may decline and our business may be harmed. Compliance with changes in interpretation of laws and regulations may require us to change our practices at an undeterminable and possibly significant initial and recurring monetary expense. These additional monetary expenditures may increase future overhead, which could harm our results of operations. We have identified what we believe are areas of government regulation that, if changed, could be costly to us. These inclu fraud, waste and abuse laws; rules governing the practice of medicine by providers; licensure standards for primary care providers and behavioral health professionals; laws limiting the corporate practice of medicine and professional fee splitting; laws, regulations, and other requirements applicable to the Medicare program (including any CMMI programs in which we may participate); tax laws and regulations applicable to our annual membership fees; cybersecurity and privacy laws; laws and rules relating to the distinction between independent contractors and employees (including developments in California that have expanded the scope of workers that are treated as employees instead of independent contractors); and tax and other laws encouraging employer-sponsored health insurance and group benefits. There could be laws and regulations applicable to our business that we have not identified or that, if changed, may be costly to us, and we cannot predict all the ways in which implementation of such laws and regulations may affect us. We are dependent on our relationships with affiliated professional entities that we may not own to provide healthcare services and our business would be harmed if those relationships were disrupted or if our arrangements with these affiliated professional entities become subject to legal challenges. The corporate practice of medicine prohibition exists in some form, by statute, regulation, board of medicine or attorney general guidance, or case law, in certain of the states in which we operate. These laws generally prohibit the practice of medicine by lay persons or entities and are intended to prevent unlicensed persons or entities from interfering with or inappropriately influencing providers’ professional judgment. As a result, many of our affiliated professional entities that 41 deliver healthcare services to our members are wholly owned by providers licensed in their respective states, including Andrew Diamond, M.D., Ph.D., 1Life's Chief Medical Officer who oversees the operation of several of the affiliated professional entities as the sole director and officer of many of the affiliated professional entities. Under the ASAs between 1Life and/or its subsidiaries with each affiliated professional entity, we provide various administrative and operations support services in exchange for scheduled fees at the fair market value of our services provided to each affiliated professional entity. As a result, our ability to receive cash fees from the affiliated professional entities is limited to the fair market value of the services provided under the ASAs. To the extent our ability to receive cash fees from the affiliated professional entities is limited, our ability to use that cash for growth, debt service or other uses at the affiliated professional entity may be impaired and, as a result, our results of operations and financial condition may be adversely affected. Our ability to perform medical and digital health services in a particular U.S. state is directly dependent upon the applicable laws governing the practice of medicine, healthcare delivery and fee splitting in such locations, which are subject to changing political, regulatory and other influences. The extent to which a U.S. state considers particular actions or contractual relationships to constitute the practice of medicine is subject to change and to evolving interpretations by medical boards and state attorneys general, among others, each of which has broad discretion. There is a risk that U.S. state authorities in some jurisdictions may find that our contractual relationships with the affiliated professional entities, which govern the provision of medical and digital health services and the payment of administrative and operations support fees, violate laws prohibiting the corporate practice of medicine and fee splitting. Accordingly, we must monitor our compliance with laws in every jurisdiction in which we operate on an ongoing basis, and we cannot provide assurance that our activities and arrangements, if challenged, will be found to be in compliance with the law. Additionally, it is possible that the laws and rules governing the practice of medicine, including the provision of digital health services, and fee splitting in one or more jurisdictions may change in a manner adverse to our business. While the ASAs prohibit us from controlling, influencing or otherwise interfering with the practice of medicine at each affiliated professional entity, and provide that physicians retain exclusive control and responsibility for all aspects of the practice of medicine and the delivery of medical services, we cannot assure you that our contractual arrangements and activities with the affiliated professional entities will be free from scrutiny from U.S. state authorities, and we cannot guarantee that subsequent interpretation of the corporate practice of medicine and fee splitting laws will not circumscribe our business operations. State corporate practice of medicine doctrines also often impose penalties on physicians themselves for aiding the corporate practice of medicine, which could discourage providers from participating in our network of physicians. If a successful legal challenge or an adverse change in relevant laws were to occur, and we were unable to adapt our business model accordingly, our operations in affected jurisdictions would be disrupted, which could harm our business. Any material changes in our relationship with or among the affiliated professional entities, whether resulting from a dispute among the entities, a challenge from a governmental regulator, a change in government regulation, or the loss of these relationships or contracts with the affiliated professional entities, could impair our ability to provide services to our members and could harm our business. For example, our arrangements in place to help ensure an orderly succession of the owner or owners of certain of the affiliated professional entities upon the occurrence of certain events may be challenged, which may impact our relationship with the affiliated professional entities and harm our business and results of operations. The ASAs and these succession arrangements could also subject us to additional scrutiny by federal and state regulatory bodies regarding federal and state fraud and abuse laws. Any scrutiny, investigation or litigation with regard to our arrangement with the affiliated professional entities, and any resulting penalties, including monetary fines and restrictions on or mandated changes to our current business and operating arrangements, could harm our business. Noncompliance with billing and documentation requirements could result in non-payment or subject us to audits, billing or other compliance investigations by government authorities, private payers or health network partners. Payers typically have differing and complex billing and documentation requirements. If we fail to comply with these payer-specific requirements, we may not be paid for our services or payment may be substantially delayed or reduced. Moreover, federal and state laws, rules and regulations impose substantial penalties, including criminal and civil fines, monetary penalties, exclusion from participation in government healthcare programs and imprisonment, on entities or individuals (including any individual corporate officers or physicians deemed responsible) that fraudulently or wrongfully bill government-funded programs or other third-party payers for healthcare services. Both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies, as well as their executives and managers, with enforcement actions covering a variety of topics, including referral and billing practices. Further, the federal False Claims Act and a growing number of state laws allow private parties to bring qui tam or “whistleblower” lawsuits against companies for false billing violations. Some of our activities could become the subject of governmental investigations or inquiries. From time to time in the ordinary course of business, governmental agencies and private payers also conduct audits of healthcare providers like us. For example, as a result of our participation in the Medicare program, including through CMS' ACO REACH Program, we are also subject to various governmental inspections, reviews, audits and investigations to verify our compliance with the Medicare program and applicable laws and regulations. We also periodically conduct internal audits 42 and reviews of our regulatory compliance and our health network partners can also conduct audits under their agreements with us. Such audits could result in the incurrence of additional costs and diversion of management’s time and attention. In addition, such audits could trigger repayment demands based on findings that our services were not medically necessary, were billed at an improper level or otherwise violated applicable billing requirements or contractual terms. Our failure to comply with rules related to billing or adverse findings from such audits could result in, among other penalti • non-payment for services rendered or recoupments or refunds of amounts previously paid for such services by our health network partners; • refunding amounts we have been paid pursuant to the Medicare program or from payers; • state or federal agencies imposing fines, penalties and other sanctions on us; • temporary suspension of payment from payers for new patients to the facility or agency; • decertification or exclusion from participation in the Medicare program or one or more payer networks; • self-disclosure of violations to applicable regulatory authorities; • damage to our reputation; • the revocation of a facility’s or agency’s license; and • loss of certain rights under, or termination of, our contracts with health network partners. We will likely be required in the future to refund amounts that have been paid and/or pay fines and penalties as a result of these inspections, reviews, audits and investigations. If adverse inspections, reviews, audits or investigations occur and any of the results noted above occur, it could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our securities. Furthermore, the legal, document production and other costs associated with complying with these inspections, reviews, audits or investigations could be significant. Our use and disclosure of personal information, including PHI, is subject to federal and state privacy and security regulations, and our failure to comply with those regulations or to adequately secure such information we hold could result in significant liability or reputational harm and, in turn, substantial harm to our health network partner and enterprise client base, membership base and revenue. In the ordinary course of our business, we and third parties upon whom we rely receive, collect, store, process and use personal information as part of our business. Numerous state and federal laws and regulations inside the United States govern the collection, dissemination, use, privacy, confidentiality, security, availability and integrity of personal information including PHI. These laws and regulations include HIPAA, as amended by the HITECH Act, and its implementing regulations, as well as state privacy and data protection laws. HIPAA establishes a set of baseline national privacy and security standards for the protection of PHI, by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, which includes our affiliated professional entities, and the business associates with whom such covered entities contract for services that involve the use or disclosure of PHI, which includes 1Life and our affiliated professional entities. States may enforce more stringent privacy and data protection laws exceeding the requirements of HIPAA. Compliance with privacy, data protection and information security laws and regulations in the United States could cause us to incur substantial costs or require us to change our business practices and compliance procedures in a manner adverse to our business. We strive to comply with applicable laws, regulations, policies and other legal obligations relating to privacy, data protection and information security. However, as the various regulatory frameworks for privacy, data protection and information security continue to develop and as regulatory guidance evolves, uncertainties exist as to their application, and it is possible that these or other actual or alleged obligations may be interpreted and applied in a manner that is inconsistent from our interpretation, or from one jurisdiction to another, and may conflict with other rules and subject our business practices to uncertainty. Penalties for violations of these laws vary. For example, penalties for violations of HIPAA and its implementing regulations are assessed at varying rates per violation, subject to a statutory cap for violations of the same standard in a single calendar year. Such penalties may be subject to periodic adjustments. However, a single breach incident can result in violations of multiple standards, which could result in significant fines. HIPAA also authorizes state attorneys general to file suit on behalf of their residents. Courts may award damages, costs and attorneys’ fees related to violations of HIPAA in such cases, which may be significant. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for 43 violations of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI. Any such penalties or lawsuits could harm our business, financial condition, results of operations and prospects. In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA covered entities or business associates for compliance with the HIPAA Privacy and Security Standards and Breach Notification Rule. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the civil monetary penalty fine or settlement paid by the violator. HIPAA further requires that patients be notified of any unauthorized acquisition, access, use or disclosure of their unsecured PHI that compromises the privacy or security of such information, with certain exceptions related to unintentional or inadvertent use or disclosure by employees or authorized individuals or where there is a good faith belief that the person who received the impermissible disclosure would not have been able to retain the information. HIPAA specifies that such notifications must be made “without unreasonable delay and in no case later than 60 calendar days after discovery of the breach.” If a breach affects 500 patients or more, it must be reported to HHS without unreasonable delay, and HHS will post the name of the breaching entity on its public web site. Breaches affecting 500 patients or more in the same state or jurisdiction must also be reported to the local media. If a breach involves fewer than 500 people, the covered entity must record it in a log and notify HHS at least annually. Any such notifications, including notifications to the public, could harm our business, financial condition, results of operations and prospects. Numerous other federal and state laws protect the confidentiality, privacy, availability, integrity and security of personal information, including health information. For example, various states, such as California and Massachusetts, have implemented privacy laws and regulations that in many cases are more restrictive than, and may not be preempted by, the HIPAA rules and may be subject to varying interpretations by courts and government agencies, creating complex compliance issues for us and our health network partners and enterprise clients and potentially exposing us to additional expense, adverse publicity and liability. The cost of compliance could be significant and require investments to enhance our technology and security infrastructure. In addition, in certain situations, regulators, partners, clients and consumers may disagree with our analysis of, and response to, data-related incidents and our execution of obligations under the laws, which may cause disputes, liability and negative publicity and harm our business, operations and prospects. In particular, some laws, such as the California Consumer Privacy Act of 2018 ("CCPA"), and the California Privacy Rights Act of 2020 ("CPRA"), allow for a private right of action and statutory damages, which may motivate plaintiffs’ attorneys to file class action claims, which can be resource-intensive and costly to defend. If our security measures, some of which are managed by third parties, are breached or fail, and unauthorized access to personal information or PHI occurs, our reputation could be severely damaged, harming member, client and partner confidence and may result in members curtailing their use of our services. In addition, we could face litigation, significant damages for contract breach, significant penalties and regulatory actions for violation of HIPAA and other applicable laws or regulations and significant costs for remediation, notification to individuals and the public and measures to prevent future occurrences. Any potential security breach could also result in increased costs associated with liability for stolen assets or information, inaccessibility of systems or information, repairing system damage that may have been caused by such breaches, remediation offered to employees, contractors, health network partners, enterprise clients or members in an effort to maintain our business relationships after a breach and implementing measures to prevent future occurrences, including organizational changes, deploying additional personnel and protection technologies, training employees and engaging third-party experts and consultants. We outsource important aspects of the storage and transmission of personal information and PHI, and thus rely on third parties to manage functions that have material cybersecurity risks. We require our vendors who handle personal information and PHI to contractually commit to safeguarding personal information and PHI such as by signing information protection addenda and/or business associate agreements, as applicable, to the same extent that applies to us and require such vendors to undergo security examinations. In addition, we periodically hire third-party security experts to assess and test our security posture. However, we cannot assure you that these contractual measures and other safeguards will adequately protect us from the risks associated with the storage and transmission of employees’, contractors’, patients’ and members’ personal information and PHI. Any violation of applicable laws, regulations or policies by these parties, including violations that cause us to incur significant liability and put sensitive data at risk, could in turn harm our business. We also publish statements to our members that describe how we handle and protect personal information and PHI. If federal or state regulatory authorities or private litigants consider any portion of these statements to be untrue, we may be subject to claims of misrepresentation and/or deceptive practices, which could lead to significant liabilities and consequences, including, without limitation, significant costs of responding to investigations, defending against litigation, settling claims and complying with regulatory or court orders. 44 As public and regulatory focus on privacy issues continues to increase, we expect that there will continue to be new laws, regulations and industry standards concerning privacy, data protection and information security. For example, the CCPA requires companies to, without limitation, provide specific disclosures in privacy notices, afford California residents certain rights related to their personal information, and requires businesses subject to the CCPA to implement certain measures to effectuate California residents' rights to their personal information. The CCPA allows for statutory fines for noncompliance. The CPRA which went into effect on January 1, 2023, builds upon the CCPA, affords consumers expanded privacy rights and protections and expands the CCPA's scope to include rights for a covered business's employees and independent contractors, as well. Further the CPRA establishes a new agency in California, the California Privacy Protection Agency, solely focused on implementing and enforcing California's data privacy laws. Colorado and Virginia have passed similar consumer privacy laws that have or are expected to go into effect in 2023. The potential effects of state privacy, data protection and information security laws are far-reaching and could require us to modify our data processing practices and policies and to incur substantial costs and expenses to comply. Further, obligations under new laws and regulations may not be clear, creating uncertainty and risk despite our efforts to comply. If we fail, or are perceived to have failed, to address or comply with our privacy, data protection and information security obligations, we could be subject to governmental enforcement actions such as investigations, fines, penalties, audits, or inspections, class action or other litigation, contract breach claims, additional reporting requirements and/or oversight, bans on processing personal information, orders to destroy or not use personal information, reputational harm and imprisonment of company officials. Any significant change to applicable privacy, data protection and information security laws, regulations or industry practices regarding the collection, use, retention, security or disclosure of our members’ personal information, or regarding the manner in which the express or implied consent for the collection, use, retention or disclosure of such personal information is obtained, could increase our costs to comply and require us to modify our services and features, possibly in a material manner, which we may be unable to complete and may limit our ability to store and process the personal information of our members, optimize our operations or develop new services and features. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. If we or our affiliated professional entities fail to comply with applicable data interoperability and information blocking rules, our business could be adversely affected. In March 2020, HHS, the Office of the National Coordinator for Health Information Technology ("ONC"), and CMS finalized and issued complementary rules that are intended to clarify provisions of the 21st Century Cures Act regarding interoperability and information blocking. The rules include changes to ONC’s health information technology ("IT") certification program and create significant new requirements for healthcare providers and health IT developers. For example, an ONC rule that went into effect in April 2021 prohibits healthcare providers, health IT developers of certified health IT, health information exchanges or health information networks from engaging in practices that are likely to interfere with, prevent, materially discourage, or otherwise inhibit the access, exchange or use of electronic health information, also known as “information blocking.” Additional requirements under the final rules have and may continue to come into effect in 2023. We may be required to expend significant resources or to modify our services and features in order to comply with these new rules. Failure to comply with these rules could result in significant fines, withdrawal of health IT certifications and negative publicity, among other consequences, which could have a material adverse effect on our business, results of operations and financial condition. Individuals may claim our call and text messaging services are not compliant with applicable law, including the Telephone Consumer Protection Act. We call and send short message service, or SMS, text messages to members and potential members who are eligible to use our service. While we obtain required consent from these individuals to call and send text messages, federal or state regulatory authorities or private litigants may claim that the notices and disclosures we provide, form of consents we obtain or our call and SMS texting practices are not adequate to comply with, or violate applicable law, including the Telephone Consumer Protection Act ("TCPA"). The TCPA imposes specific requirements relating to the marketing to individuals leveraging technology such as telephones, mobile devices and texts. TCPA violations can result in significant financial penalties as businesses can incur civil forfeiture penalties or criminal fines imposed by the Federal Communications Commission or be fined for each violation through private litigation or state attorneys general or other state actor enforcement. Class action suits are the most common method for private enforcement. Our call and SMS texting campaigns are potential sources of risk for class action lawsuits and liability for our company. Numerous class-action suits under federal and state laws have been filed in recent years against companies who conduct call and SMS texting programs, with many resulting in multi-million-dollar settlements to the plaintiffs. While we strive to adhere to strict policies and procedures, the Federal Communications Commission, as the agency that implements and enforces the TCPA, may disagree with our interpretation of the TCPA and subject us to penalties and other consequences for noncompliance. Determination by a court or regulatory 45 agency that our call or SMS text messaging violate the TCPA could subject us to civil penalties, could require us to change some portions of our business and could otherwise harm our business. Even an unsuccessful challenge by members, consumers or regulatory authorities of our activities could result in adverse publicity and could require a costly response from and defense by us. Negative publicity regarding the managed healthcare industry generally could adversely affect our results of operations or business. Negative publicity regarding the managed healthcare industry generally, or the Medicare Advantage program in particular, may result in increased regulation and legislative review of industry practices that further increase the costs of doing business and adversely affect our results of operations or business • requiring us to change our products and services provided to patients; • increasing the regulatory burdens under which we operate, which may increase the costs of providing services; • adversely affecting our ability to market our products or services through the imposition of further regulatory restrictions regarding the manner in which plans and providers market to Medicare Advantage enrollees; or • adversely affecting our ability to attract and retain patients. Risks Related to Information Technology We rely on internet infrastructure, bandwidth providers, other third parties and our own systems to provide proprietary service platforms to our members and providers, and any failure or interruption in the services provided by these third parties or our own systems could expose us to liability and hurt our reputation and relationships with members and clients. Our ability to maintain our proprietary service platform, including our digital health services and our electronic health records systems, is dependent on the development and maintenance of the infrastructure of the internet and other telecommunications services by third parties, including bandwidth and telecommunications equipment providers. This includes maintenance of a reliable network connection with the necessary speed, data capacity and security for providing reliable internet access and services and reliable telephone and facsimile services. We exercise limited control over these third-party providers. Our platforms are designed to operate without perceptible interruption in accordance with our service level commitments. We have, however, experienced limited interruptions in these systems in the past, including server failures that temporarily slowed down or diminished the performance of our platforms, and we may experience similar or more significant interruptions in the future. We do not currently maintain redundant systems or facilities for some of these services. Interruptions to third party systems or services, whether due to system failures, cyber incidents (the risk of which has been higher due to the significant increase in remote work across the technology industry as a result of the COVID-19 pandemic), ransomware, physical or electronic break-ins, phishing campaigns or other events, could affect the security or availability of our platforms or services and prevent or inhibit the ability of our members or providers to access our platforms or services. In the event of a catastrophic event with respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which could result in liability, substantial costs to remedy those problems or harm our relationship with our members and our business. Additionally, any disruption in the network access, telecommunications or co-location services provided by third-party providers or any failure of or by third-party providers’ systems or our own systems to handle current or higher volumes of use could significantly harm our business. The reliability and performance of our third-party providers’ systems and services may be harmed by increased usage or by ransomware, denial-of-service attacks or related cyber incidents, which has increased due to more opportunities created by remote work. Any errors, failures, interruptions or delays experienced in connection with these third-party services or our own systems could hurt our ability to deliver our services platform and damage our relationships with health network partners, enterprise clients and members and expose us to third-party liabilities, which could in turn harm our competitive position, business, financial condition, results of operations and prospects. We rely on third-party vendors to host and maintain our technology platform. We rely on third-party vendors to host and maintain our technology platform. Our ability to operate our business is dependent on maintaining our relationships with third-party vendors and entering into new relationships to meet the changing needs of our business. Any deterioration in our relationships with such vendors or our failure to enter into agreements with vendors in the future could significantly disrupt our operations or hinder our ability to execute our growth strategies. Because 46 we rely on certain vendors to store and process our data, it is possible that, despite precautions taken at our vendors’ facilities, the occurrence of a natural disaster, cyber incident, decision to close the facilities without adequate notice or other unanticipated problems could result in our non-compliance with data protection laws and regulations, loss of proprietary information, personal information, and other confidential information, and disruption to our technology platform. These service interruptions could also cause our platform to be unavailable to our health network partners, enterprise clients and members, and impair our ability to deliver services and negatively impact our relationships with new and existing health network partners, enterprise clients and members. Some of our vendor agreements may be unilaterally terminated by the vendor for convenience, including with respect to Amazon Web Services, and if such agreements are terminated, we may not be able to enter into similar relationships in the future on reasonable terms or at all. We may also incur substantial costs, delays and disruptions to our business in transitioning such services to ourselves or other third-party vendors. In addition, third-party vendors may not be able to provide the services required in order to meet the changing needs of our business. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. Failure or breach of our or our vendors' security measures or inability to meet applicable privacy and security obligations, as well as any instances of unauthorized access to our employees’, contractors’, members’, clients’ or partners’ data may result in disruption to our business and operations, incurrence of significant liabilities, loss of members, clients and partners and damage to our reputation. Our services and operations involve the storage and transmission of personal information and other sensitive data, including proprietary and confidential business data, trade secrets and intellectual property and the personal information (including health information) of employees, contractors, clients, partners, members and others. Because of the sensitivity of the information we store and transmit, the security features of our and our third-party vendors’ computer, network, and communications systems infrastructure are critical to the success of our business. A breach or failure of our or our third-party vendors’ security measures could result from a variety of circumstances and events, including, but not limited to, social engineering attacks (including through phishing attacks), malicious code (such as viruses and worms), malware (including as a result of advanced persistent threat intrusions), denial-of-service attacks (such as credential stuffing), ransomware attacks, supply-chain attacks, employee negligence or human errors, software bugs, server malfunction, software or hardware failures, loss of data or other information technology assets, adware, telecommunications failures, earthquakes, fire, flood, and other similar threats. Ransomware attacks, including those perpetrated by organized criminal threat actors, nation-states, and nation-state supported actors, are becoming increasingly prevalent and severe and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, strategic security objectives or applicable laws or regulations prohibiting payments. Similarly, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our information technology systems (including our services) or the third-party information technology systems that support us and our services. Our remote workforce also poses increased risks to our information technology systems and data, as more of our employees work from home, utilizing network connections outside our premises. Any of the previously identified or similar threats could cause a security incident. If our or our third-party vendors experience a security incident, it could result in unauthorized, unlawful or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of or access to data. A security incident could disrupt our (and third parties upon whom we rely) ability to provide our services. We may expend significant resources or modify our business activities in an effort to protect against security incidents. While we have implemented security measures designed to protect against a security incident, there can be no assurance that these measures will always be effective. We have not always been able in the past and may be unable in the future to detect vulnerabilities in our information technology systems because such threats and techniques change frequently, are often sophisticated in nature, and may not be detected until after a security incident has occurred. Some security incidents may remain undetected for an extended period of time. Despite our efforts to identify and remediate vulnerabilities, if any, in our information technology systems (including our products), our efforts may not be successful. Further, as cyber threats continue to evolve, we may be required to expend additional resources to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities and we may experience delays in developing and deploying remedial measures designed to address any such identified vulnerabilities. Certain privacy, data protection and information security obligations, whether imposed by law or by clients, partners or vendors with whom we work, may require us to implement and maintain specific security and data privacy measures, industry-standard or reasonable security measures to protect our information technology systems and data, and to provide certain end-user rights in connection with their data. Our vendors, clients, partners and members may also demand that we adopt additional security or data privacy measures or make further security or data privacy investments, which may be costly and time- 47 consuming. Such failures or breaches of our or our third-party vendors', clients' and partners' security or data privacy measures, or our or our third-party vendors’, clients' and partners' inability to effectively resolve such failures or breaches in a timely manner, could disrupt the operation of our technology and business, adversely affect customer, partner, member or investor confidence in us, result in breach of contract claims, severely damage our reputation and reduce the demand for our services. Under certain circumstances, it could also impact the availability of our mobile app or related updates on various software platforms. Applicable privacy, data protection and security information obligations may require us to notify relevant stakeholders of privacy and security incidents. Such disclosures are costly, and the disclosures or the failure to comply with such requirements, could lead to adverse impacts. In addition, we could face litigation, significant damages for contract breach or other breaches of law, significant monetary penalties, or regulatory actions for violation of applicable laws or regulations, and incur significant costs for remedial or preventive measures. Although we maintain insurance covering certain security and privacy damages and claim expenses, we may not carry insurance or maintain coverage sufficient to compensate for all liability. Adequate insurance may not be available in the future at acceptable costs or at all and coverage disputes could also occur with our insurers. If security and privacy claims are not fully covered by insurance, they could result in substantial costs to us, which could harm our business. Insurance coverage would also not address the reputational damage that could result from a security incident. If an actual or perceived breach or inadequacy of our or our third-party vendors’ security occurs, or if we or our third-party vendors are unable to effectively resolve a breach in a timely manner, we could lose current and potential members, partners and clients, which could harm our business, results of operations, financial condition and prospects. Our proprietary technology platforms may not operate properly, which could damage our reputation, subject us to claims or require us to divert application of our resources from other purposes, any of which could harm our business and growth. Our proprietary technology platforms provide members with the ability to, among other things, register for our services, request a visit (either scheduled or on demand) and communicate and interact with providers, and allows our providers to, among other things, chart patient notes, maintain medical records, and conduct visits (via video, phone or the internet). Proprietary software development is time-consuming, expensive and complex, and may involve unforeseen difficulties. We may encounter technical obstacles, and it is possible that we may discover additional problems that prevent our proprietary software from operating properly. Due to the COVID-19 pandemic, use of virtual care, including remote visits, has increased, which places a heavier demand on our technology platform and may cause performance levels to deteriorate. When we launch new features and functions within our technology platform, we could inadvertently introduce bugs or errors, including latent ones, into our platforms which could impact usability as well as technology and clinical operations. We continue to implement software with respect to a number of new applications and services. The operation of our technology also depends in part on the performance of third-party service providers. If our technology platform does not function reliably or fails to achieve member, provider, partner or client expectations in terms of performance, we may be required to divert resources allocated for other business purposes to address these issues, may suffer reputational harm, lose or fail to grow member usage, fail to retain or grow provider talent, members, partners and clients, and may be subject to liability claims. The information that we provide to our health network partners, enterprise clients and members could be inaccurate or incomplete, which could harm our business, financial condition and results of operations. We provide healthcare-related information for use by our health network partners, enterprise clients and members. Because data in the healthcare industry is fragmented in origin, inconsistent in format and often incomplete, the overall quality of data in the healthcare industry is poor, and we frequently discover data issues and errors. If the data that we provide to our health network partners, enterprise clients and members is incorrect or incomplete or if we make mistakes in the capture or input of this data, our reputation may suffer and our ability to attract and retain health network partners, enterprise clients and members may be harmed. In addition, a court or government agency may take the position that our storage and display of health information exposes us to personal injury liability or other liability for wrongful delivery or handling of healthcare services or erroneous health information, which could harm our business, financial condition and results of operations. If we cannot implement or optimize our technology solutions for members, integrate our systems with health network partners or resolve technical issues in a timely manner, we may lose clients and partners and our reputation may be harmed. Our health network partners utilize a variety of data formats, applications, systems and infrastructure. Moreover, each health network partner may have a unique technology ecosystem and infrastructure or have specific technology or certification requirements. To maintain our relationships with such partners and to continue to grow our business and membership, we may be required to meet such requirements and, in certain circumstances, our services must be seamlessly integrated and interoperable with our partners’ complex systems, which may cause us to incur significant upfront and maintenance costs. Additionally, we do not control our partners’ integration schedules. As a result, if our partners do not allocate the internal resources necessary to meet their integration responsibilities, which resources can be significant as many of them are large healthcare institutions with substantial operations to manage, or if we face unanticipated integration difficulties, the integration may be delayed. In addition, competitors with more efficient operating models with lower integration costs could jeopardize our 48 partner relationships. If the integration process with our partners is not executed successfully or if execution is delayed, we could incur significant costs, partners could become dissatisfied and decide not to continue a strategic contractual relationship with us beyond an initial period during their term commitment or, in some cases, revenue recognition could be delayed, any of which could harm our business and results of operations. Our members depend on our digital health platform, including our mobile app, web portal, and support services to access on-demand digital health services or schedule in-office visits. We may be unable to quickly accommodate increases in member technology usage, particularly as we increase the size of our membership base, grow our services and as the COVID-19 pandemic drives more member demand for our digital health services and virtual care. We also may be unable to modify the format of our technology solutions and support services to compete with developments from our competitors. If we are unable to further develop and enhance our technology solutions or maintain effective technical support services to address members’ needs or preferences in a timely fashion, our members, clients and partners may become dissatisfied, which could damage our ability to maintain or expand our membership and business. While any refunds or credits we have issued historically have not had a significant impact on net revenue, we cannot assure you as to whether we may need to issue additional refunds or credits for membership fees in the future as a result of member or client dissatisfaction. For example, our members expect on-demand healthcare services through our mobile app and rapid in-office visit scheduling. Failure to maintain these standards or negative publicity related to our technology solutions, regardless of its accuracy, may reduce our overall NPS, harm our reputation and cause us to lose current or potential members, enterprise clients or partners. In addition, our enterprise clients expect our technology solutions to facilitate long-term cost of care reductions through high employee digital engagement, which we market as potential benefits for employers in providing employees with One Medical memberships. If employers do not perceive our solutions and services as providing such efficiencies and cost savings, they may terminate their contracts with us or elect not to renew. Any such outcomes could also negatively affect our ability to contract with new enterprise clients through damage to our reputation. If any of these were to occur, our revenue may decline and our business, results of operations, financial condition and prospects could be harmed. Risks Related to Taxation and Accounting Standards Certain U.S. state tax authorities may assert that we have a state nexus and seek to impose state and local income taxes which could harm our results of operations. As of December 31, 2022, we are qualified to operate in, and file income tax returns in, 24 states as well as Washington, D.C. There is a risk that certain state tax authorities where we do not currently file a state income tax return could assert that we are liable for state and local income taxes based upon income or gross receipts allocable to such states. States are becoming increasingly aggressive in asserting a nexus for state income tax purposes. We could be subject to state and local taxation, including penalties and interest attributable to prior periods, if a state tax authority successfully asserts that our activities give rise to a nexus. Such tax assessments, penalties and interest to the extent the Company has taxable income in prior periods may adversely impact our results of operations. Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations. In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended (the "Code"), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses, or net operating loss ("NOLs"), to offset future taxable income. A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. As of December 31, 2022, we have $1.205 billion of federal net operating loss carryforwards and $1.225 billion of state and local net operating loss carryforwards. The federal net operating loss carryforwards of $997.8 million arising after 2017 carry forward indefinitely, but the deduction for these carryforwards is limited to offset 80% of current-year taxable income. The federal net operating loss carryforwards of $207.1 million from pre-2018 will begin to expire in 2025. The state and local net operating loss carryforwards begin to expire in 2024. The Company has identified $25.2 million and $31.0 million of the above federal and state net operating losses, respectively, in certain affiliated professional entities that will expire unused due to prior ownership changes. In addition, future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code, further limiting our ability to utilize NOLs arising prior to such ownership change in the future. There is also a risk that due to statutory or regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. We have recorded a full valuation allowance against the deferred tax assets attributable to our NOLs. 49 Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use or similar taxes for our membership, enterprise and other service offerings, which could negatively impact our results of operations. We do not collect sales and use and similar taxes in any states for our membership, enterprise and other service offerings based on our belief that our services are not subject to such taxes in any state. Sales and use and similar tax laws and rates vary greatly from state to state. Certain states in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest with respect to past services, and we may be required to collect such taxes for services in the future. We have received, and may in the future receive additional proposed assessments or determinations that we owe back taxes, penalties and interest for sales and use and similar taxes. If we are not successful in disputing such proposed assessments, we may be required to make payments in tax assessments, penalties or interest, and may be required to collect sales and use taxes in the future. Such tax assessments, penalties and interest or future requirements may negatively impact our results of operations. Our financial results may be adversely impacted by changes in accounting principles applicable to us. Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board ("FASB"), the SEC and other various bodies formed to promulgate and interpret appropriate accounting principles. For example, in May 2014, the FASB issued accounting standards update No. 2014-09 (Topic 606), Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under GAAP and specifies that an entity should recognize revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services; this new accounting standard also impacted the recognition of sales commissions. Changes in accounting standards and interpretations or in our accounting assumptions and judgments could significantly impact our consolidated financial statements and our reported financial position and financial results may be harmed if our estimates or judgments prove to be wrong, assumptions change, or actual circumstances differ from those in our assumptions. Any difficulties in implementing these pronouncements could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm our business. If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be harmed. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Judgments and Estimates” in Part II, Item 7 of this Annual Report on Form 10-K. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, liability for medical claims incurred in the period but not yet reported (“IBNR”), valuation and related impairment recognition of intangible assets and goodwill, and stock-based compensation. Our results of operations may be harmed if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock. There are significant risks associated with estimating revenue under our At-Risk arrangements with certain payers, and if our estimates of revenues are materially inaccurate, it could negatively impact the timing and the amount of our revenue recognition or have a material adverse effect on our business, results of operations, financial condition and cash flows. We recognize revenue net of risk shares and adjustments in the month in which eligible members are entitled to receive healthcare benefits during the contract term. Since the start of 2020, we have expanded our at-risk payer relationships from one major payer to 10 Medicare Advantage payers and the Direct Contracting Program with CMS (ACO REACH as of January 1, 2023) by the end of 2022 across the 10 geographies where we have At-Risk members. Due to reporting lag times and other factors, significant judgment is required to estimate risk adjustments to PMPM fees received from such payers for At-Risk members. The billing and collection process with payers is complex due to ongoing insurance coverage changes, geographic coverage differences, differing interpretations of contract coverage and other payer issues, such as ensuring appropriate documentation. Determining applicable primary and secondary coverage for our patients, together with the changes in patient coverage that occur each month, requires complex, resource-intensive processes. Errors in determining the correct coordination of benefits may result in refunds to payers. Revenues associated with Medicare programs are also subject to estimation risk related to the amounts not paid by the primary government payer that will ultimately be collectible from other government programs paying secondary coverage, the patient’s commercial health insurance plan secondary coverage or the patient. Collections, refunds and payer retractions typically continue to occur for up to three years and longer after services are 50 provided. Inaccurate estimates of revenues could negatively impact the timing and the amount of our revenue recognition and have a material adverse impact on our business, results of operations, financial condition and cash flows. If our goodwill, intangible assets or other long-lived assets become impaired, we may be required to record a significant charge to earnings. Consummation of the acquisition of Iora resulted in us recognizing additional goodwill, intangible assets and other long-lived assets such as leases and fixed assets in our consolidated balance sheet. Intangible assets with finite lives will be amortized using the method that best reflects how their economic benefits are utilized or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over their estimated useful lives. Goodwill will not be amortized, but instead tested for potential impairment at least annually. Goodwill, intangible assets and other long-lived assets will also be tested for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If our goodwill, intangible assets or other long-lived assets are determined to be impaired in the future, we may be required to record additional significant, non-cash charges to earnings during the period in which the impairment is determined to have occurred. Risks Related to Our Intellectual Property If we are unable to obtain, maintain and enforce intellectual property protection for our business assets or if the scope of our intellectual property protection is not sufficiently broad, others may be able to develop and commercialize technology and solutions substantially similar to ours, and our ability to conduct business may be compromised. Our business depends on proprietary technology and other business assets, including software, processes, databases, confidential information and know-how, the protection of which is crucial to the success of our business. We rely on a combination of trademark, trade-secret and copyright laws, confidentiality policies and procedures, cybersecurity practices and contractual provisions to protect our intellectual property. We do not currently own any issued patents. Third parties, including our competitors, may have or obtain patents relating to technologies that overlap or compete with our technology, which they may assert against us to seek licensing fees or preclude the use of our technology. We may, over time, increase our investment in protecting our intellectual property through additional trademark, patent, copyright and other intellectual property filings, which could be expensive and time-consuming. Our efforts to register certain intellectual property may be challenged by third parties or through office actions, and may not ultimately be successful or may be abandoned. While our operations are currently based in the United States, we may also be required to protect our intellectual property in foreign jurisdictions, a process that can be prolonged and costly, and one that we may choose not to pursue in every instance. We may not be able to obtain protection for our technology and even if we are successful, it is expensive to maintain intellectual property rights and the costs of defending our rights could be substantial. Moreover, these measures may not be sufficient to offer us meaningful protection or provide us with any competitive advantage. Furthermore, changes to U.S. intellectual property laws may jeopardize the enforceability and validity of our intellectual property portfolio and harm our ability to obtain patent protection of certain inventions. If we are unable to adequately protect our intellectual property and other proprietary rights, our competitive position and our business could be harmed, as competitors may be able to commercialize similar offerings without having incurred the development and licensing costs that we have incurred. Any of our filed, owned or licensed intellectual property rights could be challenged, invalidated, circumvented, infringed, misappropriated or violated, our trade secrets and other confidential information could be disclosed in an unauthorized manner to third parties, which could result in costly redesign efforts, business disruptions, discontinuance of some of our offerings or other competitive harm. We may become involved in lawsuits to protect or enforce or defend our intellectual property rights, which could be expensive, time consuming and unsuccessful. Third parties, including our competitors, could infringe, misappropriate or otherwise violate our intellectual property rights. Monitoring unauthorized use of our intellectual property is difficult and costly. From time to time, we seek to analyze our competitors’ solutions and services, and may in the future seek to enforce our rights against potential infringement, misappropriation or violation of our intellectual property. However, the steps we have taken to protect our proprietary rights may not be adequate to enforce our rights as against such infringement, misappropriation or violation of our intellectual property. We may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Any inability to meaningfully enforce our intellectual property rights could harm our ability to compete and reduce demand for our services. In recent years, companies are increasingly bringing and becoming subject to lawsuits and proceedings alleging infringement, misappropriation or violation of intellectual property rights, particularly patent rights. Our competitors and other third parties may hold patents or other intellectual property rights, which could be related to our business. We expect that we 51 may receive in the future notices that claim we or our partners, clients or members using our solutions and services have misappropriated or misused other parties’ intellectual property rights, particularly as the number of competitors in our market grows and the functionality of applications amongst competitors overlaps. If we are found to infringe, misappropriate or violate another party’s intellectual property rights, we could be prohibited, including by court order, from further use of the intellectual property asset or be required to obtain a license from such third party to continue commercializing or using such technologies, solutions or services, which may not be available on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors and other third parties access to the same technologies licensed to us, and it could require us to make substantial licensing and royalty payments. Accordingly, we may be forced to design around such violated intellectual property, which may be expensive, time-consuming or infeasible. In addition, we could be found liable for significant monetary damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a patent or other intellectual property right. Claims that we have misappropriated the confidential information or trade secrets of third parties could similarly harm our business. Any adverse outcome in such cases could affect our competitive position, business, financial condition, results of operations and prospects. Litigation or other legal proceedings relating to intellectual property claims, regardless of merits and even if resolved in our favor, can be expensive, time consuming, and resource intensive. In addition, there could be public announcements of the results of hearings, motions, or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing, or other business activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of intellectual property proceedings could harm our ability to compete in the marketplace. In addition, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. If we fail to comply with our license obligations, if our license rights are challenged, or if we cannot license rights to use technologies on reasonable terms, we may experience business disruption, increased costs, or inability to commercialize certain services. We license certain intellectual property, including content, technologies and software from third parties, that are important to our business. In the future we may need to enter into additional agreements that provide us with licenses and rights to valuable intellectual property or technology. If we fail to comply with any of the obligations under our license agreements, or if our use or license rights are challenged, we may be required to pay damages, the licensor may have the right to terminate the license and the owner of the intellectual property asset may assert claims against us. Termination by the licensor or dispute with an owner of an intellectual property asset would cause us to lose valuable rights, and could disrupt or prevent us from providing our services, or adversely impact our ability to commercialize future solutions and services. In addition, our rights to certain technologies are licensed to us on a non-exclusive basis. The owners of these non-exclusively licensed technologies are therefore free to license them to third parties, including our competitors, on terms that may be superior to those offered to us, which could place us at a competitive disadvantage. Our licensors may also own or control intellectual property that has not been licensed to us and, as a result, we may be subject to claims, regardless of their merit, that we are infringing or otherwise violating the licensor’s rights. In addition, the agreements under which we license intellectual property or technology from third parties are generally complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property or technology, or increase what we believe to be our financial or other obligations under the relevant agreement. Moreover, the licensing or acquisition of third-party intellectual property rights is a competitive area, and established companies may have a competitive advantage over us due to their size, capital resources and greater development or commercialization capabilities. Companies that perceive us to be a competitor may also be unwilling to license or grant rights to us. Even if such licenses are available, we may be required to pay the licensor substantial fees or royalties. Such fees or royalties will become a cost of our operations and may affect our margins. If we are unable to obtain licenses on acceptable terms or at all, if any licenses are subsequently terminated, if our licensors fail to abide by the terms of the licenses, if our licensors fail to prevent infringement by third parties, or if the licensed intellectual property rights are found to be invalid or unenforceable, we could be restricted from commercializing our solutions and services and may be required to incur substantial costs to seek or develop alternatives. Any of the foregoing could harm our business, financial condition, results of operations, and prospects. 52 If our trademarks and trade names are not adequately protected, we may not be able to build and maintain name recognition in our markets of interest and our competitive position may be harmed. The registered or unregistered trademarks or trade names that we own may be challenged, infringed, circumvented, declared generic, lapsed or determined to be infringing on or dilutive of other marks. We may not be able to protect our rights in these trademarks and trade names, which we need in order to build and maintain name recognition with the public. In addition, third parties have filed, and may in the future file, for registration of trademarks similar or identical to our trademarks, thereby impeding our ability to build and maintain brand identity and possibly leading to market confusion. If they succeed in registering or developing common law rights in such trademarks, and if we are not successful in challenging such third-party rights, we may not be able to use these trademarks to develop or maintain brand recognition of our services or be required to expend substantial resources and expenses to rebrand. In addition, there could be potential trade name or trademark registration challenges or infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. If we are unable to establish or protect our trademarks and trade names, or if we are unable to build or maintain name recognition based on our trademarks and trade names, we may not be able to compete effectively, which could harm our competitive position, business, financial condition, results of operations and prospects. If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed. We rely heavily on trade secrets and confidentiality agreements to protect our unpatented know-how, technology, and other proprietary information, including our technology platform, and to maintain our competitive position. With respect to our technology platform, we consider trade secrets and know-how to be one of our primary sources of intellectual property. However, trade secrets and know-how can be difficult to protect. We seek to protect these trade secrets and other proprietary technology, in part, by implementing topical policies and processes and by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, contractors, consultants, advisors, clients, prospects, partners, and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. We cannot guarantee that we have entered into such agreements with each party that may have or have had access to our trade secrets or proprietary information. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive, and time-consuming, and the outcome is unpredictable. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets are misappropriated, improperly disclosed, or independently developed by a competitor or other third party, it could harm our competitive position, business, financial condition, results of operations, and prospects. We may be subject to claims that our employees, consultants, or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting ownership of what we regard as our own intellectual property. Many of our employees, consultants, and advisors are currently or were previously employed at other companies in our field, including our competitors or potential competitors. Although we try to ensure that our employees, consultants, and advisors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these individuals have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management. In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. Our use of open source software could compromise our ability to offer our services and subject us to possible litigation. We use open source software in connection with our solutions and services. Companies that incorporate open source software into their solutions have, from time to time, faced claims challenging the use of open source software and compliance 53 with open source license terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software or claiming noncompliance with open source licensing terms. Some open source software licenses require users who distribute software containing open source software to publicly disclose all or part of the source code to the licensee’s software that incorporates, links or uses such open source software, and make available to third parties for no cost, any derivative works of the open source code created by the licensee, which could include the licensee’s own valuable proprietary code. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose our proprietary source code or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur, or could be claimed to have occurred, in part because open source license terms are often ambiguous. There is little legal precedent in this area and any actual or claimed requirement to disclose our proprietary source code or pay damages for breach of contract could harm our business and could help third parties, including our competitors, develop solutions and services that are similar to or better than ours. Any of the foregoing could harm our competitive position, business, financial condition, results of operations and prospects. Risks Related to Ownership of Our Common Stock Our stock price may be volatile, and the value of our common stock may decline. The market price of our common stock may be highly volatile and may fluctuate or decline substantially as a result of a variety of factors, some of which are beyond our control or are related in complex ways, includin • the timing of, and our ability to close, the potential Amazon Merger, as well as changes in factors that influence and the timing or likelihood of closing the potential Amazon Merger; • actual or anticipated fluctuations in our financial condition and operating results; • variance in our financial performance from expectations of securities analysts or investors; • changes in the pricing we offer our members; • changes in our projected operating and financial results; • the impact of COVID-19, including future outbreaks or variants, on our financial performance, financial condition and results of operations, and the financial performance and financial condition of our health network partners, our enterprise clients and others; • the impact of protests and civil unrest; • our relationships with our health network partners and any changes to or terminations of our contracts with the health network partners; • changes in laws or regulations applicable to our industry and our solutions and services; • announcements by us, our health network partners or our competitors of significant business developments, acquisitions, or new offerings; • publicity associated with issues with our services and technology platform; • our involvement in litigation, including medical malpractice claims and consumer class action claims; • any governmental investigations or inquiries into our business and operations or challenges to our relationships with our affiliated professional entities under the ASAs or to our relationships with health network partners; • future sales of our common stock or other securities, by us or our stockholders; • changes in senior management or key personnel; • developments or disputes concerning our intellectual property or other proprietary rights, including allegations that we have infringed, misappropriated or otherwise violated any intellectual property of any third party; 54 • changes in accounting standards, policies, guidelines, interpretations or principles; • actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally, including competition or perceived competition from well-known and established companies or entities; • the trading volume of our common stock, including effects of inflation; • changes in the anticipated future size and growth rate of our market; • rates of unemployment; and • general economic, regulatory and market conditions, including economic recessions or slowdowns and inflationary pressures. Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may negatively impact the market price of our common stock, which has in the past been volatile. Securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us, because companies reliant on technology solutions have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business. As a result of being a public company, we are obligated to maintain proper and effective internal control over financial reporting and any failure to maintain the adequacy of these internal controls may negatively impact investor confidence in our company and, as a result, the value of our common stock. We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Sarbanes-Oxley Act and the rules and regulations of Nasdaq. In particular, we are required pursuant to Section 404 of the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, our independent registered public accounting firm is required to attest to the effectiveness of our internal control over financial reporting. The process of compiling the system and process documentation necessary to perform the evaluation required under Section 404 is costly and challenging. Also, we currently do not have an internal audit group, and we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and compile the system and process documentation necessary to support ongoing work to comply with Section 404. We have in the past identified material weaknesses in our internal control over financial reporting, and we cannot assure you that the measures we have taken will be sufficient to avoid potential future material weaknesses, that our remediated controls will continue to operate properly, or that our financial statements will be free from error. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business and we may discover weaknesses in our disclosure controls and internal control over financial reporting in the future. Any failure to develop or maintain effective internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. Accordingly, there could continue to be a possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities and our access to the capital markets could be restricted in the future. A significant portion of our total outstanding common stock may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well. Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the public market, the market price of our common stock could decline significantly. All of our outstanding shares of common stock are eligible for sale in the public market, other than shares held by directors, executive officers and other affiliates, which may be resold in the public market but remain subject to volume and other limitations under Rule 144 under the Securities Act. In addition, we have reserved shares for future issuance under our equity incentive plan. 55 Certain holders of our common stock, or their transferees, also have rights, subject to some conditions, to require us to file one or more registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. If we were to register the resale of these shares, they could be freely sold in the public market without limitation. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline. Future sales and issuances of our capital stock or rights to purchase capital stock could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to decline. We may issue additional securities in the future and from time to time. Future sales and issuances of our capital stock or rights to purchase our capital stock could result in substantial dilution to our existing stockholders. We may sell or issue common stock, convertible securities and other equity securities in one or more transactions at prices and in a manner as we may determine from time to time, including in connection with future acquisitions or strategic transactions. If we sell any such securities in subsequent transactions, investors may be materially diluted. If securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business, our common stock price and trading volume could decline. Our stock price and trading volume will be heavily influenced by the way analysts and investors interpret our financial information and other disclosures. If securities or industry analysts do not publish research or reports about our business, delay publishing reports about our business or publish negative reports about our business, regardless of accuracy, or cease covering us, our common stock price and trading volume could decline. Even if our common stock is actively covered by analysts, we do not have any control over the analysts or the measures that analysts or investors may rely upon to forecast our future results. Over-reliance by analysts or investors on any particular metric to forecast our future results may result in forecasts that differ significantly from our own. Regardless of accuracy, unfavorable interpretations of our financial information and other public disclosures could have a negative impact on our stock price. If our financial performance fails to meet analyst estimates, for any of the reasons discussed above or otherwise, or one or more of the analysts who cover us downgrade our common stock or change their opinion of our common stock, our stock price would likely decline. We do not intend to pay dividends for the foreseeable future and, as a result, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock. We have never declared or paid any cash dividends on our capital stock, and we do not intend to pay any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and are restricted by the terms in the Merger Agreement with Amazon and may be further restricted by the terms of any outstanding debt obligations. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments. We incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices. As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. We expect such expenses to further increase now that we are no longer an emerging growth company. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of Nasdaq, and other applicable securities rules and regulations impose various requirements on public companies. Furthermore, the senior members of our management team do not have significant experience with operating a public company. As a result, our management and other personnel will have to devote a substantial amount of time to compliance with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we will incur as a public company or the timing of such costs. If, notwithstanding our efforts, we fail to comply with new laws, regulations and standards, regulatory authorities may initiate legal proceedings against us and our business may be harmed. Failure to comply with these rules might also make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior management. 56 Anti-takeover provisions in our charter documents, under Delaware law and under the indenture governing our 2025 Notes could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock. Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions tha • provide for a classified board of directors whose members serve staggered terms; • authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights, and preferences determined by our board of directors that may be senior to our common stock; • require that any action to be taken by our stockholders be affected at a duly called annual or special meeting and not by written consent; • specify that special meetings of our stockholders can be called only by our board of directors, the chairperson of our board of directors, or our chief executive officer; • establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors; • prohibit cumulative voting in the election of directors; • provide that our directors may be removed for cause only upon the vote of the holders of at least 66 2⁄3% of our outstanding shares of common stock; • provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and • require the approval of our board of directors or the holders of at least 66 2/3% of our outstanding shares of common stock to amend our bylaws and certain provisions of our certificate of incorporation. These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally, subject to certain exceptions, prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Furthermore, the indenture governing our 2025 Notes requires us to repurchase such notes for cash if we undergo certain fundamental changes and, in certain circumstances, to increase the conversion rate for a holder of our 2025 Notes. If consummated, the Amazon Merger is expected to constitute both a "fundamental change" and a “make-whole fundamental change” (each as defined in the indenture governing the 2025 Notes). Upon the occurrence of a fundamental change, holders of the 2025 Notes may convert their 2025 Notes for a period and, subject to limited exceptions, may require us to repurchase for cash all or any portion of their 2025 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. With respect to a make-whole fundamental change, the $18 per share purchase price in the Amazon Merger is below the lowest stock price on the “make-whole” table included in the indenture governing the 2025 Notes and converting holders of the 2025 Notes will not receive additional conversion consideration in connection with any conversion of their 2025 Notes as a result of the make-whole fundamental change. Any delay or prevention of the consummation of the Amazon Merger or any other change of control transaction or changes in our management could cause the market price of our common stock to decline. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common 57 • any derivative action or proceeding brought on our behalf; • any action asserting a breach of fiduciary duty; • any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; and • any action asserting a claim against us that is governed by the internal-affairs doctrine. This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation further provides that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that such choice of forum provisions are facially valid and several state trial courts have enforced such provisions and required that suits asserting Securities Act claims be filed in federal court, there is no guarantee that courts of appeal will affirm the enforceability of such provisions and a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation. This may require significant additional costs associated with resolving such action in other jurisdictions and we cannot assure you that the provisions will be enforced by a court in those other jurisdictions. If a court were to find either exclusive forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with litigating Securities Act claims in state court, or both state and federal court, which could seriously harm our business, financial condition, results of operations, and prospects. These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could seriously harm our business. Risks Related to Our Outstanding Notes Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the 2025 Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. Regulatory actions and other events may adversely impact the trading price and liquidity of the 2025 Notes. We expect that many investors in, and potential purchasers of, the 2025 Notes will employ, or seek to employ, a convertible arbitrage strategy with respect to the notes. Investors would typically implement such a strategy by selling short the common stock underlying the 2025 Notes and dynamically adjusting their short position while continuing to hold the notes. Investors may also implement this type of strategy by entering into swaps on our common stock in lieu of or in addition to short selling the common stock. The SEC and other regulatory and self-regulatory authorities have implemented various rules and taken certain actions, and may in the future adopt additional rules and take other actions, that may impact those engaging in short selling activity involving equity securities (including our common stock). Such rules and actions include Rule 201 of SEC Regulation SHO, the adoption by the Financial Industry Regulatory Authority, Inc. and the national securities exchanges of a “Limit Up-Limit Down” program, the imposition of market-wide circuit breakers that halt trading of securities for certain periods following 58 specific market declines, and the implementation of certain regulatory reforms required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Any governmental or regulatory action that restricts the ability of investors in, or potential purchasers of, the notes to effect short sales of our common stock, borrow our common stock or enter into swaps on our common stock could adversely impact the trading price and the liquidity of our 2025 Notes. We may not have the ability to raise the funds necessary to settle conversions of the 2025 Notes in cash or to repurchase the notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the 2025 Notes. Subject to limited exceptions, holders of the 2025 Notes will have the right to require us to repurchase all or a portion of their 2025 Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest, if any, as described under Note 12 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. If consummated, the Amazon Merger is expected to constitute a “fundamental change” (as defined in the indenture governing the 2025 Notes). In addition, upon conversion of the 2025 Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the 2025 Notes being converted as described under Note 12 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of 2025 Notes surrendered therefor or 2025 Notes being converted. In addition, our ability to repurchase the 2025 Notes or to pay cash upon conversions of the 2025 Notes may be limited by law, by regulatory authority or by agreements governing our existing or future indebtedness. Our failure to repurchase 2025 Notes at a time when the repurchase is required by the indenture or to pay any cash payable on future conversions of the 2025 Notes as required by the indenture would constitute a default under the indenture governing the 2025 Notes. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our existing or future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the 2025 Notes or make cash payments upon conversions thereof. The conditional conversion feature of the 2025 Notes, if triggered, may adversely impact our financial condition and operating results. In the event the conditional conversion feature of the 2025 Notes is triggered, holders of 2025 Notes will be entitled to convert the 2025 Notes at any time during specified periods at their option. If one or more holders elect to convert their 2025 Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely impact our liquidity. If consummated, the Amazon Merger is expected to constitute a “fundamental change” (as defined in the indenture governing the 2025 Notes), permitting holders of the 2025 Notes to convert their 2025 Notes for a period. In addition, even if holders do not elect to convert their 2025 Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2025 Notes as a current rather than long-term liability, which would result in a significant reduction of our net working capital. Risks Related to Our Acquisition of Iora We may be unable to successfully integrate Iora's business and realize the anticipated benefits of the merger. We will be required to devote significant management attention and resources to integrating our and Iora's business practices and operations to effectively realize synergies as a combined company, including opportunities to maintain members as they become Medicare eligible, sign up incremental members, reduce combined costs, and reduce combined capital expenditures compared to both companies’ standalone plans. Potential difficulties the combined company may encounter in the integration process include the followin • the inability to successfully combine our and Iora's businesses in a manner that permits the combined company to realize the growth, operations and cost synergies anticipated to result from the merger, which would result in the anticipated benefits of the merger, including projected financial targets, not being realized in the time frames currently anticipated, previously disclosed or at all; • lost patients or members, or a reduction in the increase in patients or members as a result of certain enterprise clients, patients, members or partners of either of the two companies deciding to terminate or reduce their business with the combined company or not to engage in business in the first place; • a reduction in the combined company’s ability to recruit or maintain providers; 59 • an inability of the combined company to maintain its health network partnerships or payer contracts on substantially the same terms; • the complexities associated with managing the larger combined businesses and integrating personnel from the two companies, while at the same time attempting to (i) provide consistent, high quality services under a unified culture and (ii) focus on other ongoing transactions; • the additional complexities of combining two companies with different histories, regulatory restrictions, operating structures and markets; • the failure to retain key employees of either of the two companies; • compliance by us with additional regulatory regimes and with the rules and regulations of additional regulatory entities, including the Centers for Medicare and Medicaid Services, which we refer to as CMS; • potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the merger; and • performance shortfalls at one or both of the two companies as a result of the diversion of management’s attention caused by completing the merger and integrating the companies’ operations. For all these reasons, you should be aware that it is possible that the integration process could result in the distraction of the combined company’s management, the disruption of the combined company’s ongoing business or inconsistencies in the combined company’s services, standards, controls, procedures and policies, any of which could adversely affect the ability of the combined company to maintain relationships with enterprise clients, patients, members, vendors, partners, employees or providers or to achieve the anticipated benefits of the merger, or could otherwise adversely affect the business and financial results of the combined company. We expect to continue to incur substantial expenses related to the integration of Iora. We have incurred and expect to continue to incur substantial expenses in connection with integrating Iora's business, operations, networks, systems, technologies, policies and procedures of Iora with our business, operations, networks, systems, technologies, policies and procedures. While we have assumed that a certain level of integration expenses would be incurred, there are a number of factors beyond our control that could affect the total amount or the timing of our integration expenses. Many of the expenses that were and will be incurred, by their nature, are difficult to estimate accurately at the present time. In addition, the combined company may need significant additional capital in the form of equity or debt financing to implement or expand its business plan and there can be no assurance that such capital will be available to the combined company on terms acceptable to it, or at all. If the combined company issues additional capital stock in the future in connection with financing activities, stockholders will experience dilution of their ownership interests and the per share value of the combined company’s common stock may decline. Due to these factors, the transaction and integration expenses could be greater or could be incurred over a longer period of time than we currently expect. 60 Item 1B. Unresolved Staff Comments. None. Item 2. Properties. Our headquarters are located in San Francisco, California and consist of approximately 60,874 square feet of leased space. Our lease on this space expires on July 31, 2029. As of December 31, 2022, we also leased approximately 1,003,303 square feet of clinical space for our subsidiaries and affiliated professional entities including pursuant to our ASAs. We believe that our headquarters and other offices are adequate for our immediate needs and that additional or substitute space is available if needed to accommodate growth and expansion. Item 3. Legal Proceedings. We are currently involved in, and may in the future become involved in, legal proceedings, claims and investigations in the ordinary course of our business, including medical malpractice and consumer claims. Although the results of these legal proceedings, claims and investigations cannot be predicted with certainty, we do not believe that the final outcome of any matters that we are currently involved in are reasonably likely to have a material adverse effect on our business, financial condition or results of operations. Regardless of final outcomes, however, any such proceedings, claims, and investigations may nonetheless impose a significant burden on management and employees and be costly to defend, with unfavorable preliminary or interim rulings. Please see Note 17, "Commitments and Contingencies" to our consolidated financial statements in Part IV, Item 15 of this Annual Report on Form 10-K for a discussion of our legal proceedings. Item 4. Mine Safety Disclosures. Not applicable. 61 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our common stock has been listed on the Nasdaq Global Select Market under the symbol "ONEM" since January 31, 2020. Prior to that, there was no public trading market for our common stock. Holders of Record As of the close of business on February 13, 2023, there were approximately 323 stockholders of record of our common stock. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities. Dividend Policy We have never declared or paid cash dividends on our capital stock and do not intend to declare or pay any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to support operations and to finance the growth and development of our business. Any future determination to pay dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend upon, among other factors, our results of operations, financial condition, contractual restrictions and capital requirements. Our future ability to pay cash dividends on our capital stock may be limited by the terms of any future debt or preferred securities. Stock Performance Graph The following graph compares the 23-month total stockholder return on our common stock with the comparable cumulative returns of the Standard & Poor's 500 Stock Index ("S&P 500") and the S&P Health Care Index ("S&P Health Care"). This graph assumes that on January 31, 2020, the initial trading day of our common stock on Nasdaq, $100 was invested in our common stock and in each of the other two indices and assumes the reinvestment of any dividends. However, no dividends have been declared on our common stock to date. The stock price performance on the following graph represents past performance and is not necessarily indicative of possible future stock price performance. 62 1/31/20 (1) 3/31/2020 6/30/2020 9/30/2020 12/31/2020 3/31/2021 6/30/2021 9/30/2021 12/31/2021 3/31/2022 6/30/2022 9/30/2022 12/31/2022 1Life Healthcare Inc $ 100.00 $ 82.24 $ 164.57 $ 128.50 $ 197.78 $ 177.07 $ 149.80 $ 91.75 $ 79.61 $ 50.20 $ 35.52 $ 77.71 $ 75.71 S&P 500 $ 100.00 $ 80.43 $ 96.96 $ 105.61 $ 118.45 $ 125.76 $ 136.51 $ 137.31 $ 152.45 $ 145.44 $ 122.02 $ 116.06 $ 124.84 S&P Health Care $ 100.00 $ 89.77 $ 101.97 $ 107.95 $ 116.62 $ 120.32 $ 130.44 $ 132.31 $ 147.09 $ 143.30 $ 134.83 $ 127.85 $ 144.21 (1) $100 invested on January 31, 2020 in shares and in indices The information above shall not be deemed "soliciting material" or to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities under that section, and shall not be incorporated by reference into any of our other filings under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, regardless of any general incorporation language in those filings. Recent Sales of Unregistered Securities None. Issuer Purchases of Equity Securities None. Use of Proceeds from Registered Securities On January 30, 2020, our registration statement on Form S-1 (File No. 333-235792) relating to the initial public offering of our common stock was declared effective by the SEC. Pursuant to such registration statement, we issued and sold an aggregate of 20,125,000 shares of our common stock at a price of $14.00 per share for aggregate cash proceeds of approximately $258.2 million, net of underwriting discounts and commissions and offering costs, which includes the full exercise by the underwriters of their option to purchase additional shares of common stock. No payments for offering expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% 63 or more of any class of our equity securities, or (iii) any of our affiliates. J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC acted as joint-bookrunning managers for the offering. There has been no material change in the expected use of the net proceeds from our initial public offering, as described in our final prospectus filed with the SEC on February 3, 2020 pursuant to Rule 424(b) under the Securities Act of 1933, as amended. Item 6. Reserved 64 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with our consolidated financial statements and accompanying notes included elsewhere in this Annual Report. This discussion includes both historical information and forward-looking statements based upon current expectations that involve risks, uncertainties and assumptions. We have omitted discussion of 2020 results where it would be redundant to the discussion previously included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021. Our results of operations include the results of operations of Iora for the period from the close of our acquisition on September 1, 2021 onward. Our actual results may differ materially from management’s expectations and those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, our ability to timely and successfully achieve the anticipated benefits and potential synergies of our acquisition of Iora Health, Inc. and the continuing impact of the COVID-19 pandemic, societal and governmental responses and macroeconomic challenges and uncertainties. including inflationary pressures, as well as those discussed in “Risk Factors” and elsewhere in this Annual Report on Form 10-K. In addition, this Annual Report includes forward-looking statements about the occurrence of any event, change, or other circumstance that could delay or prevent closing of the proposed Amazon Merger or give rise to the termination of the Merger Agreement pertaining to the Amazon Merger. The forward-looking statements contained herein do not assume the consummation of the proposed transaction with Amazon unless specifically stated otherwise. Overview Our mission is to transform health care for all through our human-centered, technology-powered model. Our vision is to delight millions of members with better health and better care while reducing the total cost of care. We are a membership-based primary care platform with seamless digital health and inviting in-office care, convenient to where people work, shop, live, and click. We are disrupting health care from within the existing ecosystem by simultaneously addressing the frustrations and unmet needs of key stakeholders, which include consumers, employers, providers, and health networks. We have developed a modernized healthcare membership model based on direct consumer enrollment and third-party sponsorship across commercially insured and Medicare populations. Our membership model includes seamless access to 24/7 digital health services paired with inviting in-office care routinely covered by most health care payers. Our technology drives high monthly active usage within our membership, promoting ongoing and longitudinal patient relationships for better health outcomes and high member retention. Our technology also helps our service-minded team in building trust and rapport with our members by facilitating proactive digital health outreach as well as responsive on-demand virtual and in-office care. Our digital health services and our well-appointed offices, which tend to be located in highly convenient locations, are staffed by a team of clinicians who are not paid on a fee-for-service basis, and therefore free of misaligned compensation incentives prevalent in health care. Additionally, we have developed clinically and digitally integrated partnerships with health networks, better coordinating more timely access to specialty care when needed by members. Together, this approach allows us to engage in value-based care across all age groups, including through At-Risk arrangements with Medicare Advantage payers and CMS, in which One Medical is responsible for managing a range of healthcare services and associated costs of our members. Our focus on simultaneously addressing the unfulfilled needs and frustrations of key stakeholders has allowed us to consistently grow the number of members we serve. From December 31, 2016 through December 31, 2022, inclusive of our acquisition of Iora, we grew our membership by 207%. During the twelve months ended December 31, 2022 as compared to the twelve months ended December 31, 2017, inclusive of our acquisition of Iora, our net revenue grew 491%, our digital interactions grew 243%, and the number of in-office visits grew 52%. As of December 31, 2022, we have grown to approximately 836,000 total members including 796,000 Consumer and Enterprise members and 40,000 At-Risk members, 221 medical offices in 27 markets, and have greater than 9,000 enterprise clients across the United States. Proposed Acquisition by Amazon On July 20, 2022, we entered into the Merger Agreement with Amazon. Subject to the terms and conditions of the Merger Agreement, Amazon will acquire the Company for $18 per share in an all-cash transaction valued at approximately $3.9 billion, including the Company’s net debt. As a result of the Amazon Merger, subject to the terms and conditions of the Merger Agreement, the Company will merge with a subsidiary of Amazon and become a wholly-owned indirect subsidiary of Amazon. The consummation of the Amazon Merger is subject to a number of closing conditions, including, among others, the receipt of certain regulatory approvals, as well as other customary closing conditions. Under the Merger Agreement, and pursuant to an Interim Loan and Guaranty Agreement (the "Loan Agreement"), Amazon has agreed to provide senior unsecured interim debt financing to the Company in an aggregate principal amount of up to $300.0 million to be funded in up to ten tranches of $30.0 million per month, beginning on March 20, 2023 until the earlier 65 of the closing of the Amazon Merger and the termination of the Merger Agreement pursuant to its terms, with a maturity date of 24 months after the termination of the Merger Agreement pursuant to its terms. Among other terms and conditions, the Company has agreed to certain restrictive covenants and events of default customary for transactions of this type in connection with the debt financing. We intend to draw on the Loan Agreement, beginning March 2023, if the Amazon Merger has not closed prior to that date. The Merger Agreement contains certain customary termination rights for the Company and Amazon. Upon termination of the Merger Agreement in accordance with its terms, under certain specified circumstances, Amazon will be obligated to pay to the Company a termination fee equal to $195.0 million in cash. If the Merger Agreement is terminated under other certain specified circumstances the Company will be obligated to pay to Amazon a termination fee equal to $136.0 million in cash. See the section titled “Risk Factors—Risks Related to our Proposed Transaction with Amazon” included under Part I, Item 1A of this Annual Report on Form 10-K for more information regarding the risks associated with the Amazon Merger. Impact of COVID-19 on Our Business The COVID-19 pandemic has impacted and may continue to impact our operations, and net revenues, expenses, collectability of accounts receivables and other money owed, capital expenditures, liquidity, and overall financial condition. If some of the precautionary measures related to the COVID-19 pandemic are reinstated or some of the challenges related to the COVID-19 pandemic resurface, such actions or events may present additional challenges to our business, financial condition, and results of operations. As a result, we cannot assure you that our recent increase in membership, aggregate reimbursement, and revenue are indicative of future results or will be sustained, including following the COVID-19 pandemic, or that we will not experience additional impacts associated with COVID-19, which could be significant. Additionally, it is unclear what the impact of the COVID-19 pandemic will be on future utilization, medical expense patterns, and the associated impact on our business. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020. Intended to provide economic relief to those impacted by the COVID-19 pandemic, the CARES Act includes various tax and lending provisions, among others. Under the CARES Act, we received income grants of $1.8 million and $2.6 million from the Provider Relief Fund administered by the Department of Health and Human Services (“HHS”), which we recognized as Grant income during the years ended December 31, 2021 and 2020, respectively. The Company did not receive any income grants from HHS during the year ended December 31, 2022. Please see Note 5, "Revenue Recognition" to our consolidated financial statements in Part IV, Item 15 of this Annual Report on Form 10-K. Acquisition of Iora On September 1, 2021, we acquired all outstanding equity and capital stock of Iora Health, Inc. ("Iora"), a human-centered, value-based primary care group with built-for-purpose technology focused on serving the Medicare population, for an aggregate purchase consideration of approximately $1.4 billion. Iora developed an innovative, technology-enabled, and relationship-based health care delivery model designed to provide value-based primary care and aims to deliver superior health outcomes and lower overall health care costs primarily for the Medicare population. During 2021, we incurred approximately $39.5 million expenses related to this transaction. Our results of operations include the activity of Iora beginning from the close of our acquisition on September 1, 2021. See Note 8, "Business Combinations" to our consolidated financial statements in Part IV, Item 15 of this Annual Report on Form 10-K. Our Business Model Our business is driven by growth in Consumer and Enterprise members, and At-Risk members (see also "Key Metrics and Non-GAAP Financial Measures"). We have developed a modernized membership model based on direct consumer enrollment and third-party sponsorship. Our membership model includes seamless access to 24/7 digital health paired with inviting in-office care routinely covered by most health care payers. Consumer and Enterprise members join either individually as consumers by paying an annual membership fee or are sponsored by a third party. At-Risk members are members for whom we are responsible for managing a range of healthcare services and associated costs. Digital health services are delivered via our mobile app and website, through such modalities as video and voice encounters, chat, and messaging. Our in-office care is delivered in our medical offices, and, as of December 31, 2022, we had 221 medical offices, compared to 182 medical offices as of December 31, 2021. We derive net revenue, consisting of Medicare revenue and commercial revenue, from multiple stakeholders, including consumers, employers, and health networks such as health systems and government and private payers. 66 Medicare Revenue Medicare revenue consists of (i) Capitated Revenue and (ii) fee-for-service and other revenue that is not generated from Consumer and Enterprise members. We generate Capitated Revenue from At-Risk arrangements with Medicare Advantage payers and CMS. Under these At-Risk arrangements, we generally receive capitated payments, consisting of each eligible member’s risk adjusted health care premium PMPM, for managing a range of healthcare services and associated costs for such members. The risk adjusted health care premium PMPM is determined by payers and based on a variety of patients' factors such as age and demographic benchmarks, and further adjusted to reflect the underlying complexity of a member’s health conditions. These fees give us revenue economics that are contractually recurring in nature for a majority of our Medicare revenue. Capitated Revenue represents 98% of Medicare revenue and 49% of total net revenue, respectively, for the year ended December 31, 2022. We generate fee-for-service and other revenue from fee-for-service visits for Other Patients not covered under At-Risk arrangements and from certain payers for clinical start-up, administration, or on-going coordination of care activities associated with providing care to At-Risk members and other Medicare patients. Commercial Revenue Commercial revenue consists of (i) partnership revenue, (ii) net fee-for-service revenue, and (iii) membership revenue. We generate our partnership revenue from (i) our health network partners with whom we have clinically and digitally integrated, primarily on a PMPM basis, (ii) largely fixed price or fixed price per employee contracts with enterprise clients for medical services, and (iii) COVID-19 on-site testing services for enterprise clients, schools and universities where we typically bill such customers a fixed price per service performed. For our health network arrangements that provide for PMPM payments, when our medical offices provide professional clinical services to covered members, we, as administrator, perform billing and collection services on behalf of the health network, and the health network receives the fees for services provided, including those paid by members’ insurance plans. In those circumstances, we earn and receive payments from the health network partners in lieu of per visit fees for services from member office visits. See “Business—Our Health Network Partnerships” in Part I, Item 1 of this Annual Report on Form 10-K. Our net fee-for-service revenue primarily consists of reimbursements received from our members' or other patients' health insurance plans or those with billing rates based on our agreements with our health network partners for healthcare services delivered to Consumer and Enterprise members on a fee-for-service basis. We generate our membership revenue through the annual membership fees charged to either consumer members or enterprise clients, as well as fees paid for our One Medical Now service offering. As of December 31, 2022, our list price for new members for an annual consumer membership was $199. Our enterprise clients typically pay a discounted fee collected in advance, based on a rate per employee per month. Our membership fee revenue and partnership revenue are contractual and, with the exception of our COVID-19 on-site testing services, generally recurring in nature. Membership revenue and part nership revenue as a percentage of commercial revenue was 70% and 63% for the years ended December 31, 2022 and 2021, respectively. Membership revenue and part nership revenue as a percentage of total net revenue was 34% and 50% for the years ended December 31, 2022 and 2021, respectively. Key Factors Affecting Our Performance • Acquisition of Net New Members. Our ability to increase our membership will enable us to drive financial growth as members drive our commercial revenue and Medicare revenue. We believe that we have significant opportunities to increase members in our existing geographies through (i) new sales to consumers and enterprise clients, (ii) expansion of the number of enrolled members, including dependents, within our enterprise clients, (iii) expansion of the number of At-Risk members, including Medicare Advantage participants or Medicare members for which we are at risk as a result of CMS' Direct Contracting Program (now redesigned and renamed the ACO REACH Program), (iv) expansion of Medicare Advantage payers, with whom we contract, and (v) adding other potential services. 67 • Components of Revenue. Our ability to maintain or improve pricing levels for our memberships and the pricing under our contracts with health networks will also impact our total revenue. As of December 31, 2022, our list price for new members for an annual consumer membership was $199. Our enterprise clients typically pay a discounted fee collected in advance, based on a rate per employee per month. In geographies where our health network partners pay us on a PMPM basis for Consumer and Enterprise members, to the extent that the PMPM rate changes, our partnership revenue will change. Similarly, if the largely fixed price or number of employees covered by fixed price per employee arrangements change, our partnership revenue will also change. Our net fee-for-service revenue is dependent on (i) our billing rates and third-party payer contracted rates through agreements with health networks, (ii) the mix of members who are commercially insured, and (iii) the nature and frequency of visits. Our net fee-for-service revenue may also change based on the services we provide to commercially insured Other Patients as defined in "Key Metrics and Non-GAAP Financial Measures" below. Our Medicare revenue is dependent on (i) the percentage of members in at-risk contracts, (ii) our contracted percentage of premium, (iii) our ability to accurately document the acuity of our At-Risk members, and (iv) the services we provide to Other Patients who are Medicare participants. In the future, we may add additional services for which we may charge in a variety of ways. To the extent the net amounts we charge our members, patients, partners, payers, and clients change, our net revenue will also change. • Medical Claims Expense. The nature of our contracting with Medicare Advantage payers and CMS requires us to be financially responsible for a range of healthcare services of our At-Risk members. Our care model focuses on leveraging the primary care setting as a means of reducing unnecessary or avoidable health care costs and balancing the cost of care with the impact of our service on medical claims expense. We are liable for potentially large medical claims should we not effectively manage our At-Risk members’ health. We call the ratio between medical claims expense divided by Capitated Revenue the "Medical Claims Expense Ratio". As we sign up new At-Risk members, our Medical Claims Expense Ratio is likely to increase initially due to a potential increase in medical claims expense from a lag in improvement in health outcomes with member tenure. Similarly, there may be a lag in adequately documenting the health status of our members, resulting in different Capitated Revenue compared to what is indicated by the health status of an At-Risk member. We believe that the Medical Claims Expense Ratio for a given set of At-Risk members can improve over time as we help improve their health outcomes relative to their underlying health conditions. • Cost of Care, Exclusive of Depreciation and Amortization. Cost of care primarily includes our provider and support employee-related costs for both virtual and in-office care, occupancy costs, medical supplies, insurance and other operating costs. Providers include doctors of medicine, doctors of osteopathy, nurse practitioners, physician assistants, and behavioral health specialists. Support employees include registered nurses, phlebotomists, health coaches, and administrative assistants assisting our members with all non-medical related services. Virtual care includes video visits and other synchronous and asynchronous communication via our app and website. A large portion of these costs are relatively fixed regardless of member utilization of our services. Our care model focuses on leveraging the primary care setting as a means of reducing unnecessary or avoidable health care costs and balancing the cost of care with the impact of increased service levels on medical claims expense. An increase in cost of care may help us in reducing total health care costs for our members. For Consumer and Enterprise members, this reduction in total health care costs typically accrues to the benefit of our enterprise clients or our members' health insurance plans through lower claims costs, or our members through lower deductibles, making our membership more competitive. For our At-Risk members, reductions in total health care costs typically accrue directly to us, to our health network partners such as Medicare Advantage payers and CMS, or to our At-Risk members, making our membership more competitive. As a result, we seek to balance the cost of care based on a variety of considerations. For example, cost of care as a percentage of net revenue may decrease if our net revenue increases. Similarly, our cost of care as a percentage of net revenue may increase if we decide to increase our investments in our providers or support employees to try to reduce our medical claims expense. As we open new offices, and expand into new geographies, we expect cost of care to increase. Our cost of care, exclusive of depreciation and amortization, also excludes stock-based compensation. • Care Margin. Care Margin is driven by net revenue, medical claims expense, and cost of care. We believe we can (i) improve revenue over time by signing up more members and increasing the revenue per member, (ii) reduce Medical Claims Expense Ratio over time from primary care engagement and population health management, improving member health and satisfaction, while reducing the need for avoidable and costly care, and (iii) reduce cost of care as a percentage of revenue by better leveraging our fixed cost base and technology. • Investments in Growth. We expect to continue to focus on long-term growth through investments in sales and marketing, technology research and development, and existing and new medical offices. We are working to enhance our digital health and technology offering and increase the potential breadth of our modernized platform solution. In particular, we plan to launch new offices and enter new geographies. As we expand to new 68 geographies, we expect to make significant upfront investments in sales and marketing to establish brand awareness and acquire new members. Additionally, we intend to continue to invest in new offices in new and existing geographies. As we invest in new geographies, in the short term, we expect these activities to increase our operating expenses and cost of care; however, in the long term we anticipate that these investments will positively impact our results of operations. • Seasonality. Seasonality affects our business in a variety of ways, including seasonal trends such as influenza and COVID-19. Medicare Reve We recognize Capitated Revenue from At-Risk members ratably over their period of enrollment. We typically experience the largest portion of our At-Risk member growth in the first quarter, as the Medicare Advantage enrollment from the prior Medicare Annual Enrollment Period (“AEP”) becomes effective January 1. Throughout the remainder of the year, we can continue to enroll new At-Risk members predominantly through (i) new Medicare Advantage enrollees joining us outside AEP, (ii) through expanding the Medicare Advantage plans we are participating in, (iii) adding additional geographies where we participate in At-Risk arrangements, and (iv) aligning additional Medicare patients to us as part of our ACO REACH participation. Commercial Revenue : Our partnership and membership revenue are predominantly driven by the number of Consumer and Enterprise members, and recognized ratably over the period of each contract. While Consumer and Enterprise members have the opportunity to buy memberships throughout the year, we typically experience the largest portion of our Consumer and Enterprise member growth in the first and fourth quarter of each year, when enterprise customers tend to make and implement decisions on their employee benefits. Our net fee-for-service revenue is typically highest during the first and fourth quarter of each year, when we generally experience the highest levels of reimbursable visits. Medical Claims Expense: Medical claims expense is driven by our At-Risk members and varies seasonally depending on a number of factors, including the weather and the number of business days in a quarter. Typically, we experience higher utilization levels during the first and fourth quarter of the year. Key Metrics and Non-GAAP Financial Measures We review a number of operating and financial metrics, including members, Medical Claims Expense Ratio, Care Margin and Adjusted EBITDA, to evaluate our business, measure our performance, identify trends affecting our business, formulate our business plan and make strategic decisions. These key metrics are presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP. Care Margin and Adjusted EBITDA are not financial measures of, nor do they imply, profitability. We have not yet achieved profitability and, even in periods when our net revenue exceeds our cost of care, exclusive of depreciation and amortization, we may not be able to achieve or maintain profitability. The relationship of operating loss to cost of care, exclusive of depreciation and amortization is also not necessarily indicative of future performance. Other companies may not publish similar metrics, or may present similarly titled key metrics that are calculated differently. As a result, similarly titled measures presented by other companies may not be directly comparable to ours and these key metrics should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP, such as net loss. We provide investors and other users of our financial information with a reconciliation of Care Margin and Adjusted EBITDA to their most closely comparable GAAP financial measure. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view Care Margin and Adjusted EBITDA in conjunction with loss from operations and net loss, respectively. Year Ended December 31, 2022 2021 2020 (in thousands except for members) Members (as of the end of the period) Consumer and Enterprise 796,000 703,000 549,000 At-Risk 40,000 33,000 — Total 836,000 736,000 549,000 Net revenue $ 1,045,547 $ 623,315 $ 380,223 Care margin $ 184,389 $ 188,133 $ 145,264 Adjusted EBITDA $ (144,101) $ (34,858) $ (13,890) 69 Members Members include both Consumer and Enterprise members as well as At-Risk members as defined below. Our number of members depends, in part, on our ability to successfully market our services directly to consumers including Medicare-eligible as well as non-Medicare eligible individuals, to Medicare Advantage health plans and Medicare Advantage enrollees, to employers that are not yet enterprise clients, as well as our activation rate within existing enterprise clients. We define estimated activation rate for any enterprise client at a given time as the percentage of eligible lives enrolled as members. While growth in the number of members is an important indicator of expected revenue growth, it also informs our management of the areas of our business that will require further investment to support expected future member growth. Member numbers as of the end of each period are rounded to the thousands. Consumer and Enterprise Members A Consumer and Enterprise member is a person who has registered with us and has paid for membership for a period of at least one year or whose membership has been sponsored by an enterprise or other third party under an agreement having a term of at least one year. Consumer and Enterprise members do not include trial memberships, our virtual only One Medical Now users, or any temporary users. Our number of Consumer and Enterprise members depends, in part, on our ability to successfully market our services directly to consumers and to employers that are not yet enterprise clients and our activation rate within existing clients. Consumer and Enterprise members may include individuals who (i) Medicare-eligible and (ii) have paid for a membership or whose membership has been sponsored by an enterprise or other third party. Consumer and Enterprise members do not include any At-Risk members as defined below. Consumer and Enterprise members help drive commercial revenue. As of December 31, 2022, we had 796,000 Consumer and Enterprise members. At-Risk Members An At-Risk member is a person for whom we are responsible for managing a range of healthcare services and associated costs. At-Risk members help drive Medicare revenue. As of December 31, 2022, we had 40,000 At-Risk members. Members (in thousands)* * Number of members is shown as of the end of each period. Other Patients An “Other Patient” is a person who is neither a Consumer and Enterprise member nor an At-Risk member, and who has received digital or in-person care from us over the last twelve months. As of December 31, 2022, we had 7,000 Other Patients. 70 Medical Claims Expense Ratio We define Medical Claims Expense Ratio as medical claims expense divided by Capitated Revenue. The nature of our contracting with Medicare Advantage payers and CMS requires us to be financially responsible for a range of healthcare services of our At-Risk members. Our care model focuses on leveraging the primary care setting as a means of reducing unnecessary or avoidable health care costs and balancing our cost of care with the impact of our service levels on medical claims expense. We are liable for potentially large medical claims should we not effectively manage our At-Risk members’ health. We therefore consider the Medical Claims Expense Ratio to be an important measure to monitor our performance. As we sign up new At-Risk members or open new offices to serve these members, our Medical Claims Expense Ratio is likely to increase initially due to a potential increase in medical claims expense from a lag in improvement in health outcomes with member tenure. Similarly, there may be a lag in adequately documenting the health status of our members, resulting in different Capitated Revenue compared to what is indicated by the health status of an At-Risk member. See "Risk Factors—Risks Related to Taxation and Accounting Standards" included under Part I, Item 1A of this Annual Report on Form 10-K for additional information on risks related to estimates and judgments about liability for medical claims that are incurred but not yet reported. We believe that the Medical Claims Expense Ratio for a given set of At-Risk members can improve over time as we help improve their health outcomes relative to their underlying health conditions. The following table provides a calculation of the Medical Claims Expense Ratio for the years ended December 31, 2022 and 2021: Year Ended December 31, 2022 2021 (in thousands) (in thousands) Medical claims expense $ 419,659 $ 116,543 Capitated Revenue $ 517,395 $ 126,609 Medical Claims Expense Ratio 81 % 92 % Medical Claims Expense Ratio Cohort Trends: 2018 (and prior) to 2022 The following graph presents the historical Medical Claims Expense Ratio and includes our performance in the ACO Reach Program beginning in 2022. We believe the 2018 and prior to 2022 cohorts are a fair representation of our overall patient population because they include patients across geographies and demographics. (1) The 2022 performance year data includes Medicare Advantage and the ACO REACH Program (formerly CMS' Direct Contracting Program). 71 The following graph presents our At-Risk members by sign-up year and includes members from the ACO REACH Program beginning in 2022. We believe the 2018 and prior to 2022 cohorts are a fair representation of our overall patient population because they include patients across geographies and demographics. (1) The 2022 performance year data includes Medicare Advantage and the ACO REACH Program (formerly CMS' Direct Contracting Program). Care Margin We define Care Margin as income or loss from operations excluding depreciation and amortization, general and administrative expense, and sales and marketing expense. We consider Care Margin to be an important measure to monitor our performance, specific to the direct costs of delivering care. We believe this margin is useful to both us and investors to measure whether we are effectively pricing our services and managing the health care and associated costs, including medical claims expense and cost of care, of our At-Risk members successfully. The following table provides a reconciliation of loss from operations, the most closely comparable GAAP financial measure, to Care Margin: Year Ended December 31, 2022 2021 2020 (in thousands) Loss from operations $ (419,695) $ (243,484) $ (71,359) Sales and marketing* 97,065 61,994 36,967 General and administrative* 415,834 323,127 157,282 Depreciation and amortization 91,185 46,496 22,374 Care margin $ 184,389 $ 188,133 $ 145,264 Care margin as a percentage of net revenue 18 % 30 % 38 % * Includes stock-based compensation 72 Adjusted EBITDA We define Adjusted EBITDA as net income or loss excluding interest income, interest and other income (expense), depreciation and amortization, stock-based compensation, change in the fair value of our redeemable convertible preferred stock warrant liability, provision for (benefit from) income taxes, certain legal or advisory costs, and acquisition and integration costs that we do not consider to be expenses incurred in the normal operation of the business. Such legal or advisory costs may include but are not limited to expenses with respect to evaluating potential business combinations, legal investigations, or settlements. Acquisition and integration costs include expenses incurred in connection with the closing and integration of acquisitions, which may vary significantly and are unique to each acquisition. We started to exclude prospectively from our presentation certain legal or advisory costs from the first quarter of 2021 and acquisition and integration costs from the second quarter of 2021, because amounts incurred in the prior periods were insignificant relative to our consolidated operations. We include Adjusted EBITDA in this Annual Report because it is an important measure upon which our management assesses and believes investors should assess our operating performance. We consider Adjusted EBITDA to be an important measure to both management and investors because it helps illustrate underlying trends in our business and our historical operating performance on a more consistent basis. Adjusted EBITDA has limitations as an analytical tool, includin • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash used for capital expenditures for such replacements or for new capital expenditures; • Adjusted EBITDA does not include the dilution that results from stock-based compensation or any cash outflows included in stock-based compensation, including from our purchases of shares of outstanding common stock; and • Adjusted EBITDA does not reflect interest expense on our debt or the cash requirements necessary to service interest or principal payments. The following table provides a reconciliation of net loss, the most closely comparable GAAP financial measure, to Adjusted EBITDA, calculated as set forth above: Year Ended December 31, 2022 2021 2020 (in thousands) Net loss $ (397,847) $ (254,641) $ (89,421) Interest income (2,015) (798) (1,809) Interest and other income (expense) 11,681 13,757 13,434 Depreciation and amortization 91,185 46,496 22,374 Stock-based compensation 146,916 112,298 35,095 Change in fair value of redeemable convertible preferred stock warrant liability — — 6,560 Provision for (benefit from) income taxes (31,514) (1,802) (123) Legal or advisory costs (1) (2) 547 16,514 — Acquisition and integration costs 36,946 33,318 — Adjusted EBITDA $ (144,101) $ (34,858) $ (13,890) (1) Approximately $5.6 million of the legal or advisory costs relate to a legal settlement during the year ended December 31, 2021. See Note 17 "Commitments and Contingencies". (2) Amount excludes approximately $1.2 million of legal or advisory costs incurred during the year ended December 31, 2020. We began excluding certain legal or advisory costs from Adjusted EBITDA starting from the first quarter of 2021. 73 Components of Our Results of Operations Net Revenue We generate net revenue through Medicare revenue and commercial revenue. We generate Medicare revenue from Capitated Revenue, and fee-for-service and other revenue. We generate commercial revenue from partnership revenue, net fee-for-service revenue, and membership revenue. Capitated Revenue. We generate Capitated Revenue from At-Risk arrangements with payers including Medicare Advantage plans and CMS. Under these At-Risk arrangements, we receive capitated payments, consisting of each eligible member’s risk adjusted health care premium per month, for managing a range of healthcare services and associated costs for such members. The risk adjusted health care premium per month is determined by payers and based on a variety of a patient's factors such as age and demographic benchmarks, and further adjusted to reflect the underlying complexity of a member’s health conditions. Capitated Revenue is recognized in the month in which eligible members are entitled to receive healthcare benefits during the contract term. We expect our Capitated Revenue to increase as a percentage of total net revenue in future periods. Fee-For-Service and Other Revenue. We generate fee-for-service and other revenue from fee-for-service visits for Other Patients not covered under At-Risk arrangements and from certain payers for clinical start-up, administration, and on-going coordination of care activities associated with providing care to At-Risk members and other Medicare patients. Partnership Revenue. We generate partnership revenue from (i) our health network partners primarily on a PMPM basis, (ii) largely fixed price or fixed price per employee contracts with enterprise clients for medical services, and (iii) COVID-19 on-site testing services for enterprise clients, schools and universities for which we typically bill such customers a fixed price per service performed. Under our partnership arrangements, we generally receive fees that are linked to PMPM, fixed price, fixed price per employee, fixed price per service or capitation arrangements. All partnership revenue is recognized during the period in which we are obligated to provide professional clinical services to the member, employee or participant, as applicable, and associated management, operational, and administrative services to the health network partner, enterprise client, schools, and universities. Net fee-for-service revenue. We generate net fee-for-service revenue from providing primary care services to patients in our offices when we bill the member or their insurance plan on a fee-for-service basis as medical services are rendered. While significantly all of our patients are members, we occasionally also provide care to non-members. Membership Revenue. We generate membership revenue from the annual membership fees charged to either consumer members or enterprise clients, who purchase access to memberships for their employees and dependents. Membership revenue also includes fees we receive from enterprise clients for trial memberships or for access to our One Medical Now service offering. Membership revenue is recognized ratably over the contract period with the individual member or enterprise client. Grant Income. Under the CARES Act, we were eligible for and received grant income from the Provider Relief Fund administered by HHS during the years ended December 31, 2021 and 2020. The purpose of the payment is to reimburse us for healthcare-related expenses or lost revenues attributable to COVID-19. The Company did not receive any income grants from the HHS for the year-ended December 31, 2022. The following table summarizes our Company's net revenue by primary source as a percentage of net revenue. Amounts may not sum due to rounding. 74 Year Ended December 31, 2022 2021 2020 Net reve Capitated revenue 49 % 20 % — % Fee-for-service and other revenue 1 % 0.5 % — % Total Medicare revenue 51 % 21 % — % Partnership revenue 25 % 36 % 42 % Net fee-for-service revenue 15 % 29 % 39 % Membership revenue 10 % 14 % 18 % Grant income — % 0.3 % 0.7 % Total commercial revenue 49 % 79 % 100 % Total net revenue 100 % 100 % 100 % Operating Expenses Medical Claims Expense Medical claims expenses primarily consist of certain third-party medical expenses paid by payers contractually on behalf of us, including costs for inpatient and outpatient services, certain pharmacy benefits and physician services but excludes cost of care, exclusive of depreciation and amortization. We expect our medical claims expense to increase in absolute dollars as our Capitated Revenue increases in future periods. Cost of Care, Exclusive of Depreciation and Amortization Cost of care primarily includes provider and support employee-related costs for both virtual and in-office care, occupancy costs, medical supplies, insurance, and other operating costs. Providers include doctors of medicine, doctors of osteopathy, nurse practitioners, physician assistants, and behavioral health specialists. Support employees include registered nurses, phlebotomists, health coaches, and administrative assistants assisting our members with all non-medical related services. Virtual care includes video visits and other synchronous and asynchronous communication via our app and website. A large portion of these costs are relatively fixed regardless of member utilization of our services. As we open new offices, and expand into new geographies, we expect cost of care to increase. Our cost of care, exclusive of depreciation and amortization, also excludes stock-based compensation. Sales and Marketing Sales and marketing expenses consist of employee-related expenses, including salaries and related costs, commissions and stock-based compensation costs for our employees engaged in marketing, sales, account management, and sales support. Sales and marketing expenses also include advertising production and delivery costs of communications materials that are produced to generate greater awareness and engagement among our clients and members, third-party independent research, trade shows and brand messages and public relations costs. We expect our sales and marketing expenses to increase as we strategically invest to expand our business. We expect to hire additional sales personnel and related account management and sales support personnel to capture an increasing amount of our market opportunity. We also expect to continue our brand awareness and targeted marketing campaigns. As we scale our sales and marketing, we expect these expenses to increase in absolute dollars. General and Administrative General and administrative expenses include employee-related expenses, including salaries and related costs and stock-based compensation for all employees, except sales and marketing teams, which are included in the sales and marketing expenses. In addition, general and administrative expenses include corporate technology, occupancy costs, legal, and professional services expenses. We expect our general and administrative expenses to increase over time due to the additional costs associated with continuing to grow our business. 75 Depreciation and Amortization Depreciation and amortization consist primarily of depreciation of property and equipment and amortization of capitalized software development costs. Other Income (Expense) Interest Income Interest income consists of income earned on our cash and cash equivalents, restricted cash, and marketable securities. Interest and Other Income (Expense) Interest and other income (expense) consists of interest costs associated with our notes payable issued pursuant to our convertible senior notes (the “2025 Notes”). Interest and other income (expense) also consists of remeasurement adjustment related to our indemnification asset. Upon the close of the Iora acquisition, as part of the merger agreement (the "Iora Merger Agreement"), certain shares of our common stock were placed into a third-party escrow account to satisfy any then pending and unsatisfied or unresolved claim for indemnification for any indemnifiable loss incurred by us pursuant to the indemnity provisions of the Iora Merger Agreement. The indemnification asset is subject to remeasurement at each reporting date until the shares are released from escrow, with the remeasurement adjustment reported as interest and other income (expense) in our consolidated statement of operations. Interest and other income (expense) also consists of the gain recognized upon the settlement of contingent consideration. Change in Fair Value of Redeemable Convertible Preferred Stock Warrant Liability Prior to our initial public offering in January 2020, we classified our redeemable convertible preferred stock warrants as a liability in our consolidated balance sheets. We remeasured the redeemable convertible preferred stock warrant liability to fair value at each reporting date and recognized changes in the fair value of the redeemable convertible preferred stock warrant liability as a component of other income (expense), net in our consolidated statements of operations. Upon the closing of our initial public offering, the warrants to purchase shares of redeemable convertible preferred stock became exercisable for shares of common stock, at which time we adjusted the redeemable convertible preferred stock warrant liability to fair value prior to reclassifying the redeemable convertible preferred stock warrant liability to additional paid-in capital. As a result, following the closing of our initial public offering, the warrants are no longer subject to fair value accounting. Provision for (Benefit from) Income Taxes We account for income taxes using an asset and liability approach. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances are provided when necessary to reduce net deferred tax assets to an amount that is more likely than not to be realized. In determining whether a valuation allowance for deferred tax assets is necessary, we analyze both positive and negative evidence related to the realization of deferred tax assets and inherent in that, assess the likelihood of sufficient future taxable income. We also consider the expected reversal of deferred tax liabilities and analyze the period in which these would be expected to reverse to determine whether the taxable temporary difference amounts serve as an adequate source of future taxable income to support the realizability of the deferred tax assets. Net Loss Attributable to Noncontrolling Interest In September 2014, we entered into a joint venture agreement with a healthcare system to jointly operate physician-owned primary care offices in a market. We had the responsibility for the provision of medical services and for the day-to-day operation and management of the offices, including the establishment of guidelines for the employment and compensation of the physicians. Based upon this and other provisions of the operating agreement that indicated that we directed the economic activities that most significantly affect the economic performance of the joint venture, we determined that the joint venture was a variable interest entity and we were the primary beneficiary. Accordingly, we consolidated the joint venture and the healthcare system’s interest was shown within equity (deficit) as noncontrolling interest. The healthcare system’s share of earnings was recorded in the consolidated statements of operations as net loss attributable to noncontrolling interest. 76 Effective April 1, 2020, we terminated the joint venture agreement with the healthcare system and transferred our ownership interest in the joint venture to the healthcare system. As a result, we determined that the joint venture no longer met the definition of a variable interest entity and accordingly, we determined that the joint venture was no longer required to be consolidated under the variable interest entity model. The joint venture was deconsolidated in the consolidated financial statements as of April 1, 2020 and we derecognized all assets and liabilities of the joint venture. We did not record a gain or loss in association with the deconsolidation as we did not retain any noncontrolling interest in the joint venture and no consideration was transferred as a result of the ownership interest transfer to the healthcare system. The consolidated statement of operations for the year ended December 31, 2020 includes the operations of the joint venture through the date of deconsolidation. The consolidated balance sheets as of December 31, 2022 and December 31, 2021 and the consolidated statement of operations for the years ended December 31, 2022 and 2021 do not include the operations of the joint venture. Results of Operations The following tables set forth our results of operations for the periods presented and as a percentage of our net revenue for those periods. Percentages presented in the following tables may not sum due to rounding. Year Ended December 31, 2022 2021 Amount % of Revenue Amount % of Revenue (dollar amounts in thousands) Net reve Medicare revenue $ 528,909 51 % $ 129,979 21 % Commercial revenue 516,638 49 % 493,336 79 % Total net revenue 1,045,547 100 % 623,315 100 % Operating expens Medical claims expense 419,659 40 % 116,543 19 % Cost of care, exclusive of depreciation and amortization shown separately below 441,499 42 % 318,639 51 % Sales and marketing (1) 97,065 9 % 61,994 10 % General and administrative (1) 415,834 40 % 323,127 52 % Depreciation and amortization 91,185 9 % 46,496 7 % Total operating expenses 1,465,242 140 % 866,799 139 % Loss from operations (419,695) (40) % (243,484) (39) % Other income (expense), n Interest income 2,015 — % 798 — % Interest and other income (expense) (11,681) (1) % (13,757) (2) % Total other income (expense), net (9,666) (1) % (12,959) (2) % Loss before income taxes (429,361) (41) % (256,443) (41) % Provision for (benefit from) income taxes (31,514) (3) % (1,802) — % Net loss $ (397,847) (38) % $ (254,641) (41) % (1) Includes stock-based compensation, as follows: Year Ended December 31, 2022 2021 Amount % of Revenue Amount % of Revenue (dollar amounts in thousands) Sales and marketing $ 3,618 — % $ 4,136 1 % General and administrative 143,298 14 % 108,162 17 % Total $ 146,916 14 % $ 112,298 18 % 77 Comparison of the Years Ended December 31, 2022 and 2021 Net Revenue Year Ended December 31, 2022 2021 Change % Change (dollar amounts in thousands) Net reve Capitated revenue $ 517,395 $ 126,609 $ 390,786 309 % Fee-for-service and other revenue 11,514 3,370 8,144 242 % Total Medicare revenue 528,909 129,979 398,930 307 % Partnership revenue 257,309 224,051 33,258 15 % Net fee-for-service revenue 157,239 181,811 (24,572) (14) % Membership revenue 102,090 85,711 16,379 19 % Grant income — 1,763 (1,763) (100) % Total commercial revenue 516,638 493,336 23,302 5 % Total net revenue $ 1,045,547 $ 623,315 $ 422,232 68 % Medicare revenue increased $398.9 million for the year ended December 31, 2022 compared to the same period in 2021. The increase was mainly due to (i) twelve months of revenue contribution in 2022 from our acquired Iora business as compared with four months of revenue contribution in 2021; (ii) an increase in the number of At-Risk members in 2022 compared to 2021; and (iii) an increase in PMPM fees. Commercial revenue increased $23.3 million, or 5%, for the year ended December 31, 2022 compared to the same period in 2021. The increase was primarily due to an increase in Consumer and Enterprise members by 93,000, or 13%, from 703,000 as of December 31, 2021 to 796,000 as of December 31, 2022, partially offset by a decrease in total billable visits, driven by a reduction in COVID-19 related visits. Partnership revenue increased $33.3 million, or 15%, for the year ended December 31, 2022 compared to the same period in 2021. The increase was primarily a result of the new and expanded partnerships with health networks, new and expanded on-site medical services for enterprise clients and an increase in Consumer and Enterprise members, partially offset by a decrease in COVID-19 on-site testing services for employers, schools and universities during the year ended December 31, 2022. Net fee-for-service revenue decreased $24.6 million, or 14%, for the year ended December 31, 2022 compared to the same period in 2021. The decrease was primarily due to a decrease in total billable visits, driven by a reduction in COVID-19 related visits. Membership revenue increased $16.4 million, or 19%, for the year ended December 31, 2022 compared to the same period in 2021. The increase was primarily due to an increase in Consumer and Enterprise members by 93,000, or 13%, from 703,000 as of December 31, 2021 to 796,000 as of December 31, 2022, as well as an increase in revenue realized per member. 78 Operating Expenses Medical claims expense Year Ended December 31, 2022 2021 $ Change % Change (dollar amounts in thousands) Medical claims expense $ 419,659 $ 116,543 $ 303,116 260 % Medical claims expense increased $303.1 million, or 260%, for the year ended December 31, 2022 compared to the same period in 2021. The increase was mainly due to (i) twelve months of medical claims expenses in the current year from our acquired Iora business as compared with four months of medical claims expenses in 2021 and (ii) an increase in the number of At-risk members in 2022 compared to 2021. Cost of Care, Exclusive of Depreciation and Amortization Year Ended December 31, 2022 2021 Change % Change (dollar amounts in thousands) Cost of care, exclusive of depreciation and amortization $ 441,499 $ 318,639 $ 122,860 39 % The $122.9 million, or 39%, increase in cost of care, exclusive of depreciation and amortization, for the year ended December 31, 2022 compared to the same period in 2021 was primarily due to increases in provider employees and support employee-related expenses of $86.9 million, occupancy costs of $28.9 million, and medical supply costs of $2.4 million. This was partially offset by a decrease in COVID-19 testing sites and related security expenses of $3.7 million . In addition to growth in our existing offices, we added 39 offices during the year, bringing our total number of offices to 221 as of December 31, 2022. The cost of care in 2022 includes a full year of expenses for offices acquired as part of the Iora acquisition, as compared with four months of such expenses in 2021. Cost of care, exclusive of depreciation and amortization, as a percentage of net revenue decreased from 51% for the year ended December 31, 2021 to 42% for the year ended December 31, 2022. The decrease was primarily due to the impact of our acquired Iora business. Sales and Marketing Year Ended December 31, 2022 2021 Change % Change (dollar amounts in thousands) Sales and marketing $ 97,065 $ 61,994 $ 35,071 57 % Sales and marketing expenses increased $35.1 million, or 57%, for the year ended December 31, 2022 compared to the same period in 2021. This increase was primarily due to a $19.8 million increase in advertising expenses and a $11.8 million increase in employee-related expenses. The sales and marketing expenses in 2022 includes a full year of sales and marketing expenses from our acquired Iora business as compared with four months of such expenses in 2021. General and Administrative 79 Year Ended December 31, 2022 2021 Change % Change (dollar amounts in thousands) General and administrative $ 415,834 $ 323,127 $ 92,707 29 % The $92.7 million, or 29%, increase in general and administrative expenses for the year ended December 31, 2022 compared to the same period in 2021 was primarily due to higher employee-related expenses of $96.0 million, as we expanded our team to support our growth, a $8.4 million increase in enterprise software costs, and $7.5 million increase in travel and employee costs. The increase was partially offset by a decrease of $26.3 million in legal and professional services costs. The general and administrative expenses in 2022 includes a full year of general and administrative expenses from our acquired Iora business as compared with four months of such expenses in 2021. Depreciation and Amortization Year Ended December 31, 2022 2021 Change % Change (dollar amounts in thousands) Depreciation and amortization $ 91,185 $ 46,496 $ 44,689 96 % Depreciation and amortization expenses increased $44.7 million, or 96%, for the year ended December 31, 2022 compared to the same period in 2021. This increase was primarily due to amortization expenses recognized related to intangible assets acquired through the Iora acquisition, depreciation expenses recognized related to new medical offices, capitalization of software development, and upgraded office software during the year ended December 31, 2022. The depreciation and amortization expenses in 2022 include a full year of depreciation and amortization expenses from our acquired Iora business as compared with four months of such expenses in 2021. Other Income (Expense) Interest Income Year Ended December 31, 2022 2021 Change % Change (dollar amounts in thousands) Interest income $ 2,015 $ 798 $ 1,217 153 % Interest income increased $1.2 million, or 153%, for the year ended December 31, 2022 compared to the same period in 2021. The increase was primarily due to higher interest yields from investments and money market funds, and partially offset by a decrease in interest earned from a loan to Iora entered into prior to the date of the acquisition. Interest and Other Income (Expense) Year Ended December 31, 2022 2021 Change % Change (dollar amounts in thousands) Interest and other income (expense) $ (11,681) $ (13,757) $ 2,076 (15) % Interest and other income (expense) decreased $2.1 million, or 15%, for the year ended December 31, 2022 compared to the same period in 2021. The decrease was primarily due to $1.6 million net unrealized gain recorded for the indemnification asset recognized as a result of the Iora acquisition and $0.5 million gain recorded for contingent consideration related to an acquisition. 80 Provision for (Benefit from) Income Taxes Year Ended December 31, 2022 2021 Change % Change (dollar amounts in thousands) Provision for (benefit from) income taxes $ (31,514) $ (1,802) $ (29,712) 1649 % The provision for (benefit from) income taxes increased $29.7 million from a benefit of $1.8 million for the year ended December 31, 2021 to a benefit of $31.5 million for the year ended December 31, 2022. The increase was primarily due to impact of amortization on book basis of identified intangibles and changes in need for valuation allowance. Liquidity and Capital Resources Since our inception, we have financed our operations primarily with the issuance of the 2025 Notes, our initial public offering, the sale of redeemable convertible preferred stock and, to a lesser extent, the issuance of term notes under credit facilities. As of December 31, 2022, we had cash, cash equivalents and marketable securities of $262.4 million, compared to $501.9 million as of December 31, 2021. We believe that our existing cash, cash equivalents, marketable securities and the Loan Agreement from Amazon will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months. We believe we will meet longer-term expected future cash requirements and obligations through a combination of available cash, cash equivalents, and marketable securities, cash flows from operating activities, and access to private and public financing sources, including the Loan Agreement from Amazon as described below. Our principal commitments consist of the principal amount of debt outstanding from convertible senior notes due June 2025 and obligations under our operating leases for office space. We expect capital expenditures to increase in future periods to support growth initiatives in existing and new markets. We may be required to seek additional equity or debt financing. Our future capital requirements will depend on many factors, including our pace of new member growth and expanded enterprise client and health network relationships, our pace and timing of expansion of new medical offices or services in existing and new markets, and the timing and extent of spend to support the expansion of sales, marketing and development activities, acquisitions and related costs. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition, and results of operations would be harmed. See "Part I—Item 1A—Risk Factors — In order to support the growth of our business, we may need to incur additional indebtedness or seek capital through new equity or debt financings, which sources of additional capital may not be available to us on acceptable terms or at all.” On July 20, 2022, we entered into a Merger Agreement with Amazon. We have agreed to various covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time. Outside of certain limited exceptions, we may not take, agree, resolve, announce an intention, enter into any formal or informal agreement or otherwise make a commitment to do certain actions without Amazon's consent, including, but not limited t • acquiring businesses and disposing of significant assets; • incurring expenditures above specified thresholds; • entering into material contracts; • issuing additional equity or debt securities, or incurring additional indebtedness; and • repurchasing shares of our outstanding common stock. We do not believe these restrictions will prevent us from meeting our ongoing costs of operations, working capital needs, or capital expenditure requirements. Additionally, under the Loan Agreement, Amazon has agreed to provide senior unsecured interim debt financing to us in an aggregate principal amount of up to $300.0 million to be funded in up to ten tranches of $30.0 million per month, beginning on March 20, 2023 until the earliest of (i) the 24-month anniversary of the termination of the Merger in accordance with the terms of the Merger Agreement, (ii) if the Merger has not occurred and the Company does not refinance all of its convertible senior notes, January 1, 2025, (iii) 120 days prior to the maturity date of any indebtedness used to finance the existing 81 convertible senior notes, and (iv) July 22, 2026. The proceeds will be used for working capital funding requirements and other general corporate purposes of the Company. The Company's material cash requirements include the following contractual and other obligatio Debt In May 2020, we issued $275.0 million aggregate principal amount of 3.0% convertible senior notes due June 2025 in a private offering and in June 2020, an additional $41.2 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment option by the initial purchasers. The 2025 Notes are unsecured obligations and bear interest at a fixed rate of 3.0% per annum, payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2020. As of December 31, 2022, the principal amount of debt outstanding from the 2025 Notes was $316.3 million. Total interest expense associated with the convertible senior notes is $23.7 million, of which $9.5 million is due within 12 months. Leases We have operating lease arrangements for medical offices and our headquarter office facilities. As of December 31, 2022, we had fixed lease payment obligations of $456.6 million, with $63.3 million payable within 12 months. Other Purchase Obligations Our other purchase obligations primarily consist of non-cancelable purchase obligations related to professional and technology services and non-cancelable purchase obligations to acquire capital assets. We did not have non-cancellable purchase obligations as of December 31, 2022. Summary Statement of Cash Flows The following table summarizes our cash flows: Year Ended December 31, 2022 2021 Net cash used in operating activities $ (211,803) $ (88,566) Net cash provided by investing activities 27,015 291,804 Net cash provided by financing activities 61,826 27,811 Net (decrease) increase in cash, cash equivalents and restricted cash $ (122,962) $ 231,049 Cash Flows from Operating Activities For the year ended December 31, 2022, our net cash used in operating activities was $211.8 million, resulting from our net loss of $397.8 million and net cash used in our working capital of $59.3 million, partially offset by adjustments for non-cash charges of $245.4 million. Cash used in our working capital consisted primarily of a $32.6 million increase in accounts receivables, net, a $30.2 million decrease in operating lease liabilities, a $20.5 million decrease in other liabilities, a $6.6 million decrease in deferred revenue, and a $1.9 million increase in inventory, partially offset by a decrease of $18.6 million in prepaid expenses and other current assets, an increase of $12.5 million in accrued expenses and accounts payable, and a decrease of $1.3 million in other assets. The decrease in other liabilities is mainly due to settlement of a legal liability of $11.5 million. The changes in accounts receivable and deferred revenue are primarily due to timing of billing and cash collections from our health network partners and enterprise clients. The net increase in accrued expenses and accounts payable is primarily related to timing of payments for accrued compensation and accrued interest on our 2025 Notes. For the year ended December 31, 2021, our net cash used in operating activities was $88.6 million, resulting from our net loss of $254.6 million and net cash used by our working capital of $15.7 million, partially offset by adjustments for non-cash charges of $181.7 million. Cash used by our working capital consisted primarily of a $19.0 million increase in prepaid expenses and other current assets, a $20.9 million decrease in operating lease liabilities, and a $16.5 million increase in accounts receivables, net, partially offset by an increase of $20.3 million in other liabilities, an increase of $14.3 million in accrued expenses and accounts payable, an increase of $3.4 million in deferred revenue, and a decrease of $2.8 million in inventory and 82 other assets. The increase in prepaid expenses and other current assets is primarily due to $8.9 million prepaid income taxes and a $6.0 million receivable from insurers related to a legal settlement recovery as described in Note 17 "Commitments and Contingencies" to our consolidated financial statements. The increase in other liabilities is primarily due to an indemnification liability of $13.0 million recognized as part of the Iora acquisition as described in Note 8 "Business Combinations", and a legal settlement liability of $11.5 million as described in Note 17 "Commitments and Contingencies". The changes in accounts receivable and deferred revenue are primarily due to timing of billing and cash collections from our health network partners and enterprise clients. The net increase in accounts payable and accrued expenses is primarily related to timing of payments for accrued compensation and accrued interest on our 2025 Notes. Cash Flows from Investing Activities For the year ended December 31, 2022, our net cash provided by investing activities was $27.0 million, resulting primarily from sales and maturities of marketable securities of $166.0 million, partially offset by purchases of marketable securities of $54.9 million, acquisition of business of $10.4 million, and purchases of property and equipment of $73.7 million related to leasehold improvements, computer equipment, and furniture and fixtures for new offices, remodels and improvements to existing offices, capitalization of internal-use software development costs, and office hardware and software. For the year ended December 31, 2021, our net cash provided by investing activities was $291.8 million, resulting primarily from sales and maturities of marketable securities of $624.0 million, partially offset by purchases of marketable securities of $215.3 million, acquisition of business and issuance of note receivable of $53.3 million and purchases of property and equipment of $63.6 million related to leasehold improvements, computer equipment, and furniture and fixtures for new offices, remodels and improvements to existing offices, capitalization of internal-use software development costs, and office hardware and software. Cash Flows from Financing Activities For the year ended December 31, 2022, our net cash provided by financing activities was $61.8 million, resulting primarily from exercise of stock options of $58.9 million and proceeds from employee stock purchase plan of $2.5 million, and payment received from acquisition related contingent consideration of $0.5 million. For the year ended December 31, 2021, our net cash provided by financing activities was $27.8 million, resulting primarily from exercise of stock options of $22.8 million and proceeds from employee stock purchase plan of $5.1 million. Critical Accounting Policies and Significant Judgments and Estimates Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. While our significant accounting policies are described in greater detail in Note 2, "Summary of Significant Accounting Policies," to our consolidated financial statements included in this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements. Business Combinations Accounting for business combinations requires us to allocate the fair value of purchase considerations to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values, which were determined primarily using the income method. The excess of the fair value of purchase consideration over the fair values of these identified assets and liabilities is recorded as goodwill. Such valuations require us to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, revenue growth rates, medical claims expense, cost of care expenses, operating expenses, trademark royalty rate, contributory asset charges, discount rate, contract terms, and useful life from acquired payer contracts with Medicare Advantage plans and CMS. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Allocation of purchase consideration to identifiable assets and liabilities affects our amortization expense, as acquired finite-lived intangible assets are amortized over the useful 83 life, whereas any indefinite lived intangible assets, including goodwill, are not amortized. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. Revenue Recognition We recognize revenue from contracts with customers using the five-step method described in Note 2 of the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We generate net revenue through Medicare revenue and commercial revenue. We generate Medicare revenue primarily from Capitated At-Risk arrangements with Medicare Advantage payers and CMS. We generate commercial revenue from partnership revenue, net fee-for-service revenue, and membership revenue. We recognize partnership revenue from contracts with health systems to provide professional clinical services and the associated management and administrative services. Our contracts with health systems contain multiple performance obligations which require an allocation of the transaction price to each performance obligation based on their relative standalone selling price. We determine standalone selling price, or SSP, for all our performance obligations using observable inputs, such as standalone sales and historical contract pricing. SSP is consistent with our overall pricing objectives, taking into consideration the type of services. SSP also reflects the amount we would charge for that performance obligation if it were sold separately in a standalone sale, and the price we would sell to similar customers in similar circumstances. We review the contract terms and conditions to evaluate the timing and amount of revenue recognition, the related contract balances, and our remaining performance obligations. For our contracts with health systems, we estimate the variable consideration related to customer rebates or discounts based on our assessment of historical, current and forecasted performance. These evaluations require significant judgment that could affect the timing and amount of revenue recognized. The transaction price for our capitated At-Risk arrangements with payers including Medicare Advantage payers and CMS is variable as it primarily includes PMPM fees for our At-Risk members. PMPM fees can fluctuate throughout the contract based on the health status (acuity) of each individual member. In certain contracts, PMPM fees also include “risk adjustments” for items such as risk shares. The adjustment to the PMPM fees must be estimated due to reporting lag times, and requires significant judgment. These are estimated using the expected value methodology based on historical data and actuarial inputs. Final adjustments related to the contracts may take up to 18 months due to reserves for claims incurred but not reported. The Capitated Revenue, net of risk shares and adjustments, is recognized in the month in which eligible members are entitled to receive healthcare benefits during the contract term. Subsequent changes in PMPM fees and the amount of revenue to be recognized are reflected through subsequent period adjustments to properly recognize the ultimate capitation amount. For our capitated revenue arrangements, we concluded that we are the principal, and report revenues on a gross basis. In this assessment, we consider if we obtain control of the specified services before they are transferred to our customers, as well as other indicators such as the party primarily responsible for fulfillment. Medical Claims Expense Medical claims expenses are costs for third-party health care service providers that provide medical care to our At-Risk members for which we are contractually obligated to pay through our At-Risk arrangements. The IBNR claims liability is recorded at the contract level and consist of the Company’s Capitated Revenue attributed from enrolled At-Risk members less actual paid medical claims expense. If the Capitated Revenue exceeds the actual medical claims expense at the end of the reporting period, such surplus is recorded as capitated accounts receivable within accounts receivable, net in the consolidated balance sheets. If the actual medical claims expense exceeds the Capitated Revenue, such deficit is recorded as capitated accounts payable within other current liabilities in the consolidated balance sheets. Actual claims expense will differ from the estimated liability due to factors in estimated and actual member utilization of healthcare services, the amount of charges and other factors. We assess our estimates with an independent actuarial expert to ensure our estimates represent the best, most reasonable estimate given the data available to us at the time the estimates are made. The actuarial models consider significant assumptions such as completion factors and per member per month claim trends, as well as other factors such as health care professional contract rate changes, membership volume and demographics, the introduction of new technologies and benefit plan changes. 84 Stock-Based Compensation We measure stock-based awards granted to employees and directors based on their fair value on the date of the grant and recognize compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. For stock option awards issued with market-based vesting conditions, the grant date fair value is determined based on multiple stock price paths developed through the use of a Monte Carlo simulation that incorporates into the valuation the possibility that the market condition may not be satisfied. A Monte Carlo simulation requires the use of various assumptions, including the underlying stock price, volatility, and the risk-free interest rate as of the valuation date, corresponding to the length of the time remaining in the performance period, and expected dividend yield. The expected term represents the derived service period for the respective tranches, which is the longer of the explicit service period or the period in which the market conditions are expected to be met. Stock-based compensation expense associated with market-based awards is recognized over the derived requisite service using the accelerated attribution method, regardless of whether the market conditions are achieved. If the related market conditions are achieved earlier than the derived service period, the stock-based compensation expense will be recognized as a cumulative catch-up expense from the grant date to that point in time in achieving the share price goal. We continue to use judgment in evaluating the expected volatility and expected term utilized in our stock-based compensation expense calculation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may refine our estimates of expected volatility and expected term, which could materially impact our future stock-based compensation expense. Recent Accounting Pronouncements Please see Note 2, "Summary of Significant Accounting Policies" to our consolidated financial statements in Part IV, Item 15 of this Annual Report on Form 10-K. 85 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Interest Rate Sensitivity We had cash and cash equivalents of $215.4 million as of December 31, 2022, compared to $342.0 million as of December 31, 2021, held primarily in cash deposits and money market funds for working capital purposes. We had marketable securities of $47.0 million as of December 31, 2022, compared to $160.0 million as of December 31, 2021, consisting of U.S. Treasury obligations, foreign government bonds, and commercial paper. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes. All our investments are denominated in U.S. dollars. In May 2020, we issued the 2025 Notes which bear interest at a fixed rate of 3.0% per annum. As of December 31, 2022, the principal amount of debt outstanding from the 2025 Notes was $316.3 million. Our cash and cash equivalents, marketable securities, and debt are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value negatively impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. We do not believe that an increase or decrease in interest rates of 100 basis points would have a material effect on our business, financial condition or results of operations. Item 8. Financial Statements and Supplementary Data. All information required by this item is included in Item 15 of this Annual Report on Form 10-K and is incorporated into this item by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, as of December 31, 2022, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Management's Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our management, with the participation of our Chief Executive Officer and Chief Financial Officer and the oversight of our audit committee, has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2022. In assessing the effectiveness of our internal control over financial reporting, our management used the framework established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2022. 86 The effectiveness of our internal control over financial reporting as of December 31, 2022, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which can be found Part IV Item 15 of this Annual Report on Form 10-K. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitation on the Effectiveness of Internal Control The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting. Item 9B. Other Information. None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. 87 PART III Item 10. Directors, Executive Officers and Corporate Governance. For information required by this Item relating to our executive officers, see "Information about our Executive Officers" in Part I, Item 1 of this Annual Report on Form 10-K. The following table sets forth the names, ages as of December 31, 2022, and certain other information for each of our directo Name Age Position Amir Dan Rubin 53 Chair, Chief Executive Officer and President Paul R. Auvil(1) 59 Director Mark S. Blumenkranz, M.D.(1) 72 Director Bruce W. Dunlevie(3)* 66 Director Kalen F. Holmes, Ph.D.(2) 56 Director David P. Kennedy(2) 52 Director Freda Lewis-Hall, M.D.(3) 67 Director Robert R. Schmidt(2) 40 Director Scott C. Taylor(1) 58 Director Mary Ann Tocio(3) 74 Director (1) Member of the audit and compliance committee (2) Member of the compensation committee (3) Member of the nominating and corporate governance committee * Lead Independent Director Directors Amir Dan Rubin. See the section titled "Information about our Executive Officers" for Mr. Rubin’s biographical information. Paul R. Auvil has served as a member of our board of directors since September 2019. Since March 2007, Mr. Auvil has served as the Chief Financial Officer of Proofpoint, Inc., a provider of security-as-a-service solutions. From September 2006 to March 2007, Mr. Auvil was an entrepreneur-in-residence with Benchmark Capital, a venture capital firm. From 2002 to July 2006, he served as the Chief Financial Officer at VMware, Inc., a computing virtualization company. From 2007 to 2017, Mr. Auvil served on the board of directors of Quantum Corporation, a data storage company. From 2009 to 2017, Mr. Auvil served on the board of directors for Marin Software, Inc., a cloud-based ad management platform company. From 2009 to 2010, Mr. Auvil served on the board of directors of OpenTV Corp., a provider of interactive television software and services. Mr. Auvil earned an A.B. in Engineering Sciences and a Bachelor of Engineering degree from Dartmouth College, and a Master of Management from the Kellogg Graduate School of Management at Northwestern University. We believe Mr. Auvil is qualified to serve on our board of directors because of his financial and accounting experience and his service on the boards of directors of several companies. Mark S. Blumenkranz, M.D. has served as a member of our board of directors since November 2019. Since October 2015, Dr. Blumenkranz has served as the managing director of Lagunita Biosciences LLC, a healthcare investment company. From September 2019 to June 2022, Dr. Blumenkranz served as the chief executive officer of Kedalion Therapeutics Inc., an ophthalmic drug development company. From 1997 to August 2015, he served as the H.J. Smead Professor and Chairman of the Department of Ophthalmology at Stanford University School of Medicine and as the inaugural director of the Byers Eye Institute, a nationally-recognized eye care center. From January 2015 to August 2015, Dr. Blumenkranz served on the board of directors of Presbia PLC, a medical device company. From July 2006 to February 2017, Dr. Blumenkranz served on the board of directors of Adverum Biotechnologies Inc., a biotechnology company. He also serves on the board of directors of biopharmaceutical companies IVERIC bio, Inc. and Kala Pharmaceuticals, Inc. as well as several private biotechnology and medical device companies. Dr. Blumenkranz earned an A.B. in Biology, an M.M.S. in Biochemical Pharmacology and an M.D. from Brown University. He received his surgical internship and ophthalmology residency training at the Stanford University School of Medicine and his fellowship training in vitreoretinal surgery at the Bascom Palmer Eye Institute at the University of Miami School of Medicine. We believe that Dr. Blumenkranz is qualified to serve as a member of our board of directors 88 because of his experience as a director and founder of several biotechnology companies, as well as his significant expertise in medical practice. Bruce W. Dunlevie has served as a member of our board of directors since June 2007. He has been a General Partner of venture capital firm Benchmark since its founding in May 1995. Mr. Dunlevie also serves on the board of directors and compensation committee of WeWork Inc., and previously served as a member of the board of directors of ServiceSource International, a publicly traded analytics company, and Marin Software, a publicly traded digital advertising company. He earned a B.A. in History from Rice University and an M.B.A. from the Stanford Graduate School of Business. We believe that Mr. Dunlevie is qualified to serve as a member of our board of directors because of his extensive experience in healthcare and technology and his service on publicly traded company boards. Kalen F. Holmes, Ph.D., has served as a member of our board of directors since January 2017. From November 2009 to February 2013, Dr. Holmes served as Executive Vice President of Partner Resources at Starbucks Corporation, a publicly traded retail beverage company. Dr. Holmes has also served on the board of directors of Red Robin Gourmet Burgers, Inc., a publicly traded restaurant company since August 2016 and the board of directors of Zumiez Inc., a publicly traded clothing store, from December 2014 to June 2022. Dr. Holmes earned a B.A. in Psychology from the University of Texas and an M.A. and Ph.D. in Industrial and Organizational Psychology from the University of Houston. We believe that Dr. Holmes is qualified to serve as a member of our board of directors because of her public company management and board experience. David P. Kennedy has served as a member of our board of directors since June 2007. Mr. Kennedy co-founded Serent Capital, a private equity firm, in 2008 and was one of its general partners until October 2020, when he became a partner emeritus. Mr. Kennedy led all of Serent’s healthcare investments from its inception through October 2020 and has served on the boards of several privately held companies. Mr. Kennedy currently serves on the board of Vector Acquisition Corporation II, a special purpose acquisition company. From September 2020 to August 2021, Mr. Kennedy served on the board of Vector Acquisition Corporation, a special purpose acquisition company (now RocketLab USA, Inc.). Mr. Kennedy earned a B.Comm. in Finance, an M.B.S. in International Marketing from University College Dublin, an M.A. in International Policy Studies and an M.B.A. from Stanford University. We believe that Mr. Kennedy is qualified to serve as a member of our board of directors because of his experience in healthcare investing. Freda Lewis-Hall, M.D., DFAPA has served as a member of our board of directors since November 2019. Dr. Lewis-Hall served as Senior Medical Advisor to the chief executive officer at Pfizer Inc., a biopharmaceutical company, from January 2020 until her retirement in March 2020. From January 2019 to December 2019, Dr. Lewis-Hall served as Chief Patient Officer and Executive Vice President of Pfizer. From June 2009 until December 2018, Dr. Lewis-Hall served as Pfizer’s Chief Medical Officer. Prior to joining Pfizer in 2009, Dr. Lewis-Hall held various senior leadership positions including Chief Medical Officer and Executive Vice President, Medicines Development at Vertex Pharmaceuticals Incorporated, a biopharmaceutical company, from June 2008 to May 2009; and Senior Vice President, U.S. Pharmaceuticals, Medical Affairs for Bristol-Myers Squibb Company from 2003 until May 2008. Between 1994 and 2003, Dr. Lewis-Hall held leadership roles across several multinational pharmaceutical corporations, including Pharmacia and Eli Lilly. Dr. Lewis-Hall currently serves on the board of directors of Exact Sciences Corporation, a molecular diagnostics company, SpringWorks Therapeutics, Inc., a biopharmaceutical company and Pyxis Oncology, Inc., a preclinical oncology company. From December 2014 to May 2017, she served on the board of directors of Tenet Healthcare Corporation, a healthcare services company.  Dr. Lewis-Hall serves on the advisory board of the Dell Medical School. She also served on the board of the Patient Centered Outcomes Research Institute from 2010 to 2020. Dr. Lewis-Hall earned a B.A. in Natural Sciences from Johns Hopkins University and an M.D. from Howard University College of Medicine. We believe that Dr. Lewis-Hall is qualified to serve on our board of directors based on her expertise and experience in the biopharmaceutical industry and her leadership experience as a senior executive at various biopharmaceutical companies. Robert R. Schmidt has served as a member of our board of directors since August 2018. Mr. Schmidt is a Managing Director at The Carlyle Group Inc., or Carlyle, a private equity firm, where he focuses on investment opportunities in the healthcare sector since joining Carlyle in August 2011. Since February 2019, Mr. Schmidt has served on the board of QuidelOrtho (formerly Ortho Clinical Diagnostics), a medical diagnostic company. In addition, Mr. Schmidt serves on the boards of several privately held healthcare companies. Mr. Schmidt earned a B.S.C.E. in Finance and Management from the Wharton School at the University of Pennsylvania and an M.B.A. from Harvard Business School. We believe that Mr. Schmidt is qualified to serve as a member of our board of directors because of his extensive experience in healthcare investing. Scott C. Taylor has served as a member of our board of directors since June 2021. From 2007 to 2020, Mr. Taylor served as Executive Vice President, General Counsel and Corporate Secretary of Symantec Corporation (now NortonLifeLock, Inc.), a cybersecurity software and services company. Prior to Symantec, Mr. Taylor was Chief Administrative Officer, Senior Vice President and General Counsel of Phoenix Technologies Ltd., a system software company, from 2002 to 2007. Mr. Taylor currently serves as a director of Ziff Davis, Inc. (formerly J2 Global Inc.), a Web-based communications and cloud services company, Piper Sandler Companies, an investment bank and institutional securities firm, and Western Technology Investment, a venture-debt firm. Previously, Mr. Taylor served as a director of DigiCert Inc., VirnetX, Inc. and VeriSign Japan K.K. Mr. 89 Taylor holds a juris doctorate from George Washington University, and a bachelor’s degree in International Relations from Stanford University. We believe Mr. Taylor is qualified to serve on our board of directors because of his public company management and board experience. Mary Ann Tocio has served as a member of our board of directors since September 2021. Ms. Tocio served as President and Chief Operating Officer of Bright Horizons Family Solutions, Inc., an employer-sponsored child care provider (“Bright Horizons”), from June 2000 until her retirement in June 2015. From January 1992 to May 2000, Ms. Tocio held several executive positions at Bright Horizons, including as Chief Operating Officer and Vice President and General Manager of Child Care Operations. Prior to Bright Horizons, Ms. Tocio was the Senior Vice President of Operations for Health Stop Medical Management, Inc., a provider of urgent care services. Ms. Tocio currently serves as a member of the board of directors of Bright Horizons, Burlington Stores, Inc., a national off-price retailer, and previously served on the board of Civitas Solutions, Inc. (The MENTOR Network), a provider of health and human services, from October 2015 to March 2019 and the board of Mac-Gray Corporation, a laundry services company, from November 2006 to June 2013. Ms. Tocio holds a Master of Business Administration from Simmons College School of Management and graduated from Lawrence Memorial School of Nursing. We believe that Ms. Tocio is qualified to serve on our board of directors based on her leadership and multi-site operational experience and substantial public company board experience. Family Relationships There are no family relationships among any of the directors or executive officers. Composition of Our Board of Directors The primary responsibilities of our board of directors are to provide oversight, strategic guidance, counseling and direction to our management. Our board of directors meets on a regular basis and additionally as required. Our board of directors currently consists of ten directors. Our amended and restated certificate of incorporation provides that the authorized number of directors may be changed only by resolution approved by a majority of our board of directors. In accordance with our amended and restated certificate of incorporation, our board of directors is divided into three classes with staggered three-year terms. At each annual meeting of stockholders, the successors to directors whose terms are expiring will be elected to serve from the time of election and qualification until the third annual meeting following election. Our directors are divided among the three classes as follows: • the Class I directors are Messrs. Dunlevie, Kennedy and Taylor and their terms will expire at the annual meeting of stockholders to be held in 2024; • the Class II directors are Mr. Auvil and Drs. Blumenkranz and Holmes and their terms will expire at the annual meeting of stockholders to be held in 2025; and • the Class III directors are Dr. Lewis-Hall, Messrs. Rubin and Schmidt and Ms. Tocio and their terms will expire at the annual meeting of stockholders to be held in 2023. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change in control. Board Leadership Structure Mr. Rubin currently serves as our Chief Executive Officer, President and the Chairperson of our board of directors. Mr. Rubin brings Company-specific experience and expertise in healthcare while our non-management directors bring experience, oversight and expertise from outside of our Company. Since Mr. Rubin is not an "independent" director pursuant to the Nasdaq listing standards, in September 2019, we appointed Mr. Bruce W. Dunlevie to serve as our lead independent director. Mr. Dunlevie presides over executive sessions of our independent directors and serves as a liaison between our Chief Executive Officer, President and Chairperson and our independent directors. He also performs such additional duties as our board of directors may otherwise determine and delegate. In addition, each of our board committees is comprised of independent directors which provide strong independent leadership for each of these committees. Our independent directors generally meet in executive session after each meeting of the board of directors. At each such meeting, the presiding director for each executive session of our board of directors is either (i) the lead independent director or (ii) chosen by the independent directors. Our board of directors will continue to evaluate this leadership 90 structure on an ongoing basis based on factors such as the experience of the applicable individuals and the current business environment. Board Meetings and Committees Our board of directors may establish the authorized number of directors from time to time by resolution. Our board of directors currently consists of ten members. During our fiscal year ended December 31, 2022, our board of directors held fourteen meetings (including regularly scheduled and special meetings), and each director attended at least 75% of the aggregate of (i) the total number of meetings of our board of directors held during the period for which he or she had been a director and (ii) the total number of meetings held by all committees of our board of directors on which he or she served during the periods that he or she served. Although our corporate governance guidelines do not have a formal policy regarding attendance by members of our board of directors at annual meetings of stockholders, we encourage, but do not require, our directors to attend. All members of our board of directors then serving in such capacity attended our 2022 annual meeting of stockholders. Our board of directors has established an audit and compliance committee, a compensation committee and a nominating and corporate governance committee. The composition and responsibilities of each of the committees of our board of directors are described below. Each committee of our board of directors has a written charter approved by our board of directors. Copies of each charter are posted in the “Investor Relations—Governance” portion of our website at www.onemedical.com. The reference to our website address does not constitute incorporation by reference of the information contained at or available or accessible through our website, and you should not consider it to be a part of this annual report. Members serve on these committees until their resignation or until otherwise determined by our board of directors. Our board of directors may establish other committees as it deems necessary or appropriate from time to time. Audit and Compliance Committee Our audit and compliance committee consists of Dr. Blumenkranz and Messrs. Auvil and Taylor. Our board of directors has determined that each member of the audit and compliance committee satisfies the independence requirements under Nasdaq listing standards and Rule 10A-3(b)(1) of the Exchange Act. The chairperson of our audit and compliance committee is Mr. Auvil. Our board of directors has determined that Mr. Auvil is an “audit committee financial expert” within the meaning of SEC regulations. Each member of our audit and compliance committee can read and understand fundamental financial statements in accordance with applicable requirements. In arriving at these determinations, our board of directors has examined each audit and compliance committee member’s scope of experience and the nature of their employment. The primary purpose of the audit and compliance committee is to discharge the responsibilities of our board of directors with respect to our corporate accounting and financial reporting processes, systems of internal control and financial statement audits, and to oversee our independent registered public accounting firm. Specific responsibilities of our audit and compliance committee inclu • helping our board of directors oversee our corporate accounting and financial reporting processes; • managing the selection, engagement, qualifications, independence and performance of a qualified firm to serve as the independent registered public accounting firm to audit our consolidated financial statements; • discussing the scope and results of the audit with the independent registered public accounting firm, and reviewing, with management and the independent accountants, our interim and year-end operating results; • reviewing our risk assessment and risk management processes; • reviewing significant cybersecurity concerns involving our Company, including information security, data privacy and related regulatory matters and compliance; • developing procedures for employees to submit concerns anonymously about questionable accounting or audit matters; • reviewing related person transactions; • obtaining and reviewing a report by the independent registered public accounting firm at least annually that describes our internal quality control procedures, any material issues with such procedures, and any steps taken to deal with such issues when required by applicable law; and 91 • approving or, as permitted, pre-approving, audit and permissible non-audit services to be performed by the independent registered public accounting firm. Our audit and compliance committee held eight meetings during fiscal year 2022. Compensation Committee Our compensation committee consists of Dr. Holmes and Messrs. Kennedy and Schmidt. The chairperson of our compensation committee is Dr. Holmes. Our board of directors has determined that each member of the compensation committee is independent under the listing standards of Nasdaq, and a “non-employee director” as defined in Rule 16b-3 promulgated under the Exchange Act. The primary purpose of our compensation committee is to discharge the responsibilities of our board of directors in overseeing our compensation policies, plans and programs and to review and determine the compensation to be paid to our executive officers, directors and other senior management, as appropriate. Specific responsibilities of our compensation committee inclu • reviewing and approving the compensation of our chief executive officer and other executive officers; • reviewing and recommending to our board of directors the compensation of our directors; • administering our equity incentive plans and other benefit programs; • reviewing, adopting, amending and terminating incentive compensation and equity plans, severance agreements, profit sharing plans, bonus plans, change-of-control protections and any other compensatory arrangements for our executive officers and other senior management; and • reviewing and establishing general policies relating to compensation and benefits of our employees, including our overall compensation philosophy. Our compensation committee held eight meetings during fiscal year 2022. Compensation Committee Interlocks and Insider Participation None of the members of the compensation committee is currently or has been at any time one of our officers or employees. None of our executive officers currently serves, or has served during the last fiscal year, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee. Nominating and Corporate Governance Committee Our nominating and corporate governance committee consists of Dr. Lewis-Hall, Ms. Tocio and Mr. Dunlevie. The chairperson of our nominating and corporate governance committee is Mr. Dunlevie. Our board of directors has determined that each member of the nominating and corporate governance committee is independent under the listing standards of Nasdaq. Specific responsibilities of our nominating and corporate governance committee inclu • identifying and evaluating candidates, including the nomination of incumbent directors for reelection and nominees recommended by stockholders, to serve on our board of directors; • considering and making recommendations to our board of directors regarding the composition and chairperson of the committees of our board of directors; • developing and making recommendations to our board of directors regarding corporate governance guidelines and matters; • overseeing periodic evaluations of the board of directors’ performance, including committees of the board of directors; and 92 • overseeing and periodically reviewing the Company’s environmental, social and governance activities, programs and public disclosure. Our nominating and corporate governance committee held four meetings during fiscal year 2022. Corporate Governance Guidelines and Code of Business Conduct and Ethics Our board of directors has adopted corporate governance guidelines that address items such as the qualifications and responsibilities of our directors and director candidates and corporate governance policies and standards applicable to us in general. Our code of business conduct and ethics is available under the “Investor Relations—Governance” section of our website at www.onemedical.com. In addition, we intend to post on our website all disclosures that are required by law or the listing standards of Nasdaq concerning any amendments to, or waivers from, any provision of the code. The reference to our website address does not constitute incorporation by reference of the information contained in or available or accessible through our website, and you should not consider it to be a part of this annual report. Delinquent Section 16(a) Reports Section 16(a) of the Exchange Act requires that our executive officers, directors, and persons who own more than 10% of our common stock file reports of ownership and changes of ownership with the SEC. Such directors, executive officers and 10% stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. SEC regulations require us to identify in this annual report anyone who filed a required report late during the most recent fiscal year. Based on our review of forms we received, or written representations from reporting persons stating that they were not required to file these forms, we believe that during 2022, all Section 16(a) filing requirements were satisfied on a timely basis, except with respect to the failure to timely file a Form 4 for Lisa A. Mango and Andrew S. Diamond, filed with the SEC on October 6, 2022 and October 25, 2022, respectively. Such late filings did not result in any liability under Section 16(b) of the Exchange Act. Risk Management Management is responsible for the day-to-day management of risks the Company faces, while our board of directors, as a whole and assisted by its committees, has responsibility for the oversight of risk management. In its risk oversight role, our board of directors has the responsibility to satisfy itself that the risk management processes designed and implemented by management are appropriate and functioning as designed. Our board of directors is responsible for risk oversight. Our board of directors believes that it is essential for effective risk management and oversight that there be open communication between management and our board of directors. Our board of directors meets with our Chief Executive Officer and President and other members of the senior management team at quarterly meetings of our board of directors, where, among other topics, they discuss strategy and risks facing the Company, as well as at such other times as they deem appropriate. In connection with its reviews of the operations of our business, our full board of directors addresses holistically the primary risks associated with our business, as well as the key risk areas monitored by its committees, including cybersecurity and privacy risks. Our board of directors appreciates the evolving nature of our business and industry and is actively involved in monitoring new threats and risks as they emerge. In particular, our board of directors is committed to the prevention, timely detection, and mitigation of the effects of cybersecurity threats or incidents. Further, our board of directors has closely monitored the COVID-19 pandemic, its effects on our business, and related risk mitigation strategies. Our audit and compliance committee assists our board of directors in fulfilling its oversight responsibilities with respect to risk management in the areas of internal control over financial reporting, disclosure controls and procedures, and legal and regulatory compliance, and discusses with management and the independent auditor guidelines and policies with respect to risk assessment and risk management. Our audit and compliance committee also reviews our major financial risk exposures, including cybersecurity and data privacy risks, and the steps management has taken to monitor and control these exposures. Our audit and compliance committee also monitors certain key risks on a regular basis throughout the fiscal year, such as risk associated with internal control over financial reporting and liquidity risk. Our compensation committee assesses risks created by the incentives inherent in our compensation policies. Our nominating and corporate governance committee assists our board of directors in fulfilling its oversight responsibilities with respect to the management of risk associated with board organization, membership and structure, and corporate governance. Our full board of directors also reviews strategic and operational risk in the context of reports from the management team, receives reports on all significant committee activities at each regular meeting, and evaluates the risks inherent in significant transactions. 93 Stockholder and Other Interested Party Communications The board of directors provides to every stockholder and any other interested parties the ability to communicate with the board of directors as a whole, and with individual directors on the board of directors, through an established process for stockholder communication. For a communication directed to the board of directors as a whole, stockholders and other interested parties may send such communication to our General Counsel via U.S. Mail or Expedited Delivery Service t 1Life Healthcare, Inc., One Embarcadero Center, Suite 1900, San Francisco, CA 94111, Attn: Board of Directors c/o General Counsel. For a stockholder or other interested party communication directed to an individual director in his or her capacity as a member of the board of directors, stockholders and other interested parties may send such communication to the attention of the individual director via U.S. Mail or Expedited Delivery Service t 1Life Healthcare, Inc., One Embarcadero Center, Suite 1900, San Francisco, CA 94111, Attn: [Name of Individual Director]. Our General Counsel, in consultation with appropriate members of our board of directors as necessary, will review all incoming communications and, if appropriate, all such communications will be forwarded to the appropriate member or members of our board of directors, or if none is specified, to the Chairperson of our board of directors. 94 Item 11. Executive Compensation. Compensation Discussion and Analysis In this Compensation Discussion and Analysis, or CD&A, we provide an overview of the philosophy and objectives of our executive compensation program, as well as a description of its material components. This CD&A is intended to be read in conjunction with the tables that immediately follow this section, which provide further historical compensation information for our named executive officers, or NEOs. Our NEOs for the year ended December 31, 2022 we Name Position Amir Dan Rubin Chair, President, and Chief Executive Officer Bjorn Thaler Chief Financial Officer Andrew S. Diamond Chief Medical Officer Lisa A. Mango General Counsel and Secretary Executive Summary In the past year we have continued to perform, innovate, and grow, delivering on our vision of better health and better care, while helping to reduce the total cost of care, to our key stakeholders and consumers. Despite the headwinds resulting from macroeconomic uncertainty and the continuing COVID-19 pandemic, we believe our human-centered and technology-powered model is transforming and disrupting the healthcare industry and ecosystem. We have much to be proud of in 2022 as we continued to achieve significant financial and operational results: Net Revenue $1,045.5 million 68% year-over-year Care Margin (1) $184.4 million 18% of Net Revenue Adjusted EBITDA (1) $(144.1) million (14)% of Net Revenue Ending Membership Count (2) 836,000 14% year-over-year July 2022: Signing of Merger Agreement with Amazon (1) To supplement our consolidated financial statements, which are prepared in accordance with GAAP, we provide investors with certain non-GAAP financial measures, including Care Margin and Adjusted EBITDA, to evaluate our business. For a full reconciliation of each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP, please see the section titled “Part II, Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Metrics and Non-GAAP Financial Measures” of this Annual Report on Form 10-K for the fiscal year ended December 31, 2022. (2) For details on how we calculate members, please see “Part II, Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Metrics and 95 Non-GAAP Financial Measures — Members” of this Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Key 2022 Compensation Decisions In 2022, we reviewed several compensation-related decisions to ensure the motivational and retentive aspects of our pay program while strengthening the alignment of management interests with those of our stockholders. Highlights of these reviews inclu Base Salary Following a review of market data and consultation with its independent executive compensation consultant, the Compensation Committee determined not to increase base salary for any of our NEOs and not to make adjustments to the annual cash incentives for our NEOs for fiscal year 2022. Long-Term Incentive Compensation In January 2022, our Compensation Committee granted ongoing long-term incentive compensation opportunities to our named executive officers (other than our Chief Executive Officer (“CEO”)) in the form of annual equity awards comprising time-based stock options and RSUs, with aggregate grant date fair values ranging from approximately $2.0 million to approximately $4.7 million. Our CEO did not receive an annual equity award in 2022, since he received a long-term performance option grant in December 2020 which was granted in lieu of annual equity awards over subsequent years. 2022 Retention Equity Grants In August 2022, following the signing of the Amazon Merger Agreement, our Compensation Committee approved a one-time award of RSUs to all of the named executive officers (the “Retention RSUs”). As the pendency of an acquisition can often result in a period of uncertainty, our Compensation Committee determined that the Retention RSUs were appropriate and necessary to incentivize the executive team to continue with the Company through the consummation of the proposed transaction and for a reasonable period following a potential closing in order to support the successful integration of the two businesses. These equity grants consisted of RSUs vesting over a four-year period, with 50% of the shares subject to the Retention RSUs vesting on the first anniversary of the grant date, 20% vesting on the second anniversary of the grant date, and 15% vesting on each of the third and fourth anniversaries of the grant date. The Retention RSUs are described further in the section below titled “Elements of our Compensation Plan—Long-Term Equity Incentives—2022 Retention Equity Grants.” Results of Advisory Vote On Executive Compensation; Stockholder Outreach We held a stockholder advisory vote on executive compensation in 2022, commonly referred to as a “say-on-pay vote,” which resulted in stockholder approval by over 86% of the votes cast on the advisory proposal. We take the views of our stockholders seriously and view this vote result as an indication that the principles of our executive compensation program are supported by our stockholders. Our Board is committed to robust engagement with stockholders and we regularly conduct engagement and outreach efforts in order to communicate with existing and prospective stockholders, research analysts and others. Following our 2022 annual meeting of our stockholders, our Board, and in particular our Nominating and Corporate Governance Committee, studied our voting results to help evaluate the effectiveness of our current governance practices and policies and identify potential areas of stockholder concerns. Prior to the signing of the Merger Agreement with Amazon in July 2022, we also had frequent contact with current and potential stockholders and analysts, including one-on-one phone calls, conference calls, video chats and in-person meetings and also held conference calls accessible to all stockholders following each of our quarterly earnings releases. These discussions and events covered key topics such as our business results and outlook, and our strategy, among other matters. We continue to believe that engagement with, and feedback from, our stockholders is important and consider appropriate actions with respect to our pay program as a result of feedback from those engagement efforts. Compensation Program and Practices Compensation Philosophy and Objectives Our executive compensation program is designed t 96 • attract premier talent at the executive level in line with our organizational aspirations to transform healthcare; • target a market comparable range of total direct compensation compared to companies with which we compete for talent; • support a pay-for-performance culture while encouraging team and organizational objectives; and • promote financial sustainability. Compensation Elements We believe that the design and structure of our pay program supports our business strategy, reflects our pay for performance approach, and aligns our executive officers’ focus and interests with those of our stockholders. All elements of our compensation program have been carefully chosen and utilized in order to ensure that the value received and realizable for our executives is aligned with our overall corporate performance. Element Objective Strategic Role Base Salary • Provides only fixed pay element • Set to be competitive with our peers, while reflecting our executive’s responsibilities, demonstrated performance, skills and experience • Attracts, retains and rewards high-performing executives through market competitive pay and industry norms Annual Cash Incentives • Variable compensation • Rewards achievement of annual financial objectives (Revenue and Adjusted EBITDA), as well as individual performance (for NEOs other than the CEO and Chief Financial Officer) • With respect to our Chief Medical Officer, achievement is rewarded based on individual performance goals tied to clinical metrics, including our Company’s Quality of Care (HEDIS) and member satisfaction ratings • Drives company-wide and individual performance • Rewards annual performance • Motivates executives to achieve performance objectives that are key to our annual operating and strategic plans Long-Term Equity Incentives • Variable compensation • Annual equity awards are typically a mix of stock options and RSUs (for NEOs other than the CEO, who received 100% performance stock options in 2020 and did not receive any annual equity award grants in 2022) • Vesting generally occurs over four years, which helps with long-term alignment • Our CEO received a multiyear performance option grant in 2020 that vests based on our stock price performance over a seven-year performance period (see “—2020 CEO Long-Term Performance Option Grant” below) • Our executives will only realize value from the stock options when our stock price increases • Motivates executives to focus on sustained long-term growth • Aligns executive interests and stockholder interests • Enhances retention of key employees Target Pay Mix Our executive compensation program is designed to pay for performance, drive the creation of long-term stockholder value, deliver compensation that is competitively positioned among our peers, and align with the pursuit and achievement of both our short-term and long-term strategic goals. To achieve this, our Compensation Committee does not apply a specific formula for allocating total compensation among the various components. Instead, our Compensation Committee uses its 97 judgment, in consultation with our Compensation Committee’s independent executive compensation consultant, to establish a mix of base salary, short-term, and long-term incentive compensation for each NEO. As can be seen in the graphs below, a large percentage of executive pay is variable and “at-risk” (98% for the CEO, using an annualized equity value of his 2020 front-loaded performance option grant, which is further described below under “2020 CEO Long-Term Performance Option Grant”; 88% on average for other NEOs), meaning that value will only be received by the executive if corporate and stock price performance are strong. The balance between these components may change from year to year based on corporate strategy and objectives, the pendency of the Amazon Merger and other considerations. For 2022, our NEOs had the following target pay mix, excluding the Retention RSUs: Note: “At Risk” pay consists of target short-term incentives as well as annual long-term equity incentive awards for 2022. Values for the equity awards for our CEO in 2022 represent one-seventh of the value of our CEO’s 2020 front-loaded performance option grant, which is further described below under “2020 CEO Long-Term Performance Option Grant.” Key Governance Practices Our compensation governance practices for our executives are designed to support sound risk management and align incentives with our stockholders. They aim to, among othe ☑    Align executive pay with performance ☑    Balance risk and rewards in our compensation program ☑    Maintain a robust Insider Trading Policy ☑    Adopt only “double-trigger” Change in Control provisions ☑    Avoid golden parachute excise tax gross ups ☑    Engage an independent executive compensation consultant ☑    Conduct an annual compensation risk assessment ☑    Prohibit hedging and pledging of Company stock We also hold an annual advisory “say on pay vote” and have adopted stock ownership guidelines for our CEO. We believe these practices help enhance alignment with our stockholders and enable us to evaluate whether the principles of our executive compensation program are supported by our stockholders . Compensation Determination Process Role of Our Compensation Committee Our Compensation Committee is responsible for the compensation programs for our executive officers and reports to our Board on its discussions, decisions, and other actions. Our Compensation Committee typically reviews our executive officers’ overall compensation packages, incentive design and compensation policies and practices on an annual basis or more frequently as it deems appropriate. The Compensation Committee may form and delegate authority to one or more subcommittees as it deems appropriate. 98 Role of CEO and Management Our CEO typically makes recommendations to our Compensation Committee regarding compensation for the executive officers that report to him. Our CEO makes recommendations (other than with respect to himself) regarding base salary, and short-term and long-term compensation, including equity incentives, for our executive officers based on our results, an executive officer's individual contribution toward these results, the executive officer's role and performance of his or her duties and his or her achievement of individual goals. Our Compensation Committee then reviews the CEO’s recommendations and other data, including various compensation survey data and publicly available data of our peers prior to finalizing decisions. While our CEO typically attends meetings of our Compensation Committee, our Compensation Committee meets outside the presence of our CEO when discussing his compensation and when discussing certain other matters as well. Role of Our Independent Compensation Consultant Our Compensation Committee is authorized to retain the services of one or more executive compensation advisors, as it sees fit, in connection with the establishment of our executive compensation programs and related policies. During 2022, our Compensation Committee retained Aon’s Human Capital Solutions practice, a division of Aon plc (“Aon”), due in part to its extensive analytical and compensation expertise relating to healthcare and technology companies. Aon has advised our Compensation Committee and provided market data and analysis on an ongoing basis. Among other things, Aon assisted in developing an appropriate group of peer companies to help us determine the appropriate level of overall compensation for our executive officers, as well as to assess each separate element of compensation, with a goal of ensuring that the compensation we offer to our executive officers, individually as well as in the aggregate, is competitive and fair. Our Compensation Committee conducted a specific review of its relationship with Aon in the past year and determined that Aon’s work for our Compensation Committee did not raise any conflicts of interest. Peer Group With assistance from our independent compensation consultant, our Compensation Committee reviews the compensation practices of our peers and other market data to assess the competitiveness of the compensation components for our NEOs. This benchmarking data is used by our Compensation Committee primarily to ascertain competitive total compensation levels (including base salary, annual cash incentives, long-term equity incentives, and employee benefits) with comparable companies. Other considerations include peer performance, market factors, our performance and individual contributions and responsibilities. The key qualitative and quantitative considerations that influenced the development of the 2022 peer group we • Industry: publicly traded healthcare technology with a consumer retail focus; • Reve range of approximately $200 million to $1.25 billion, based on One Medical’s fiscal year 2021 projected revenue at that time; • Market Capitalizati target companies with a market capitalization between approximately $2 billion and $18 billion, based on One Medical’s 30-day average market capitalization of $5.5 billion as of April 16, 2021; • Business Sta companies that completed their IPO within the past five years where possible; and • Geograp companies within the broader United States market, with a focus on companies headquartered in the San Francisco Bay Area in California. 99 Based on these criteria, our Compensation Committee, in consultation with management and our independent compensation consultant, approved the following companies in May 2021 as our peer group for 2022: American Well* AppFolio eHealth Evolent Health* GoodRx* Guardant Health* Health Catalyst HealthEquity HMS Inovalon NextGen Healthcare Oak Street Health* Progyny Tabula Rasa HealthCare Teladoc Health Zuora * New for 2022 peer group Change Healthcare and Livongo Health, companies included in the 2021 peer group, were removed from the 2022 peer group because they entered into merger agreements with other companies. Element s of our Compensation Plan Base Salary Base salary represents the fixed portion of the compensation of our executive officers and is an important element of compensation for attracting and retaining highly talented individuals. We typically review and determine base salaries for each executive annually on a case-by-case basis, with consideration given to each officer’s experience, expertise and performance, as well as market compensation levels for similar positions. Following a review of market data and consultation with its independent executive compensation consultant, the Compensation Committee determined not to increase base salary for any of our NEOs for fiscal year 2022. Executive 2021 Base Salary 2022 Base Salary Percentage Adjustment Amir Dan Rubin $650,000 $650,000 —% Bjorn Thaler $400,000 $400,000 —% Andrew S. Diamond $400,000 $400,000 —% Lisa A. Mango $375,000 $375,000 —% Annual Cash Incentives Through our Executive Annual Incentive Plan (the “Annual Incentive Plan”), our executive officers are eligible to annually receive performance-based cash incentives, which are designed to provide appropriate incentives to our executives to achieve defined financial and company performance goals, as well as individual performance goals in the case of certain NEOs. Each executive’s target cash incentive amount is expressed as a percentage of base salary and intended to be commensurate with the executive’s position and responsibilities. Following a review of market data and consultation with its independent executive compensation consultant, the Compensation Committee determined to apply the following annual cash incentive design for our named executive officers for fiscal year 2022: Executive 2022 Base Salary Target Annual Incentive (As a % of Base Salary) ($) Amir Dan Rubin $650,000 110% $715,000 Bjorn Thaler $400,000 100% $400,000 Andrew S. Diamond $400,000 60% $240,000 Lisa A. Mango $375,000 50% $187,500 100 Performance Objectives Annual incentives for our executive officers are based on the achievement of corporate and individual performance objectives. For 2022, annual cash incentives included three components for all participants, except the CEO, CFO and Chief Medical Officer. These objectives includ • Revenue; • Adjusted EBITDA; and • Individual performance goals. Following a review of market data and consultation with its independent executive compensation consultant, the Compensation Committee determined to maintain the same program for annual cash incentives for our named executive officers as was in place during fiscal year 2021. For the CEO and CFO, annual incentives were split evenly between Revenue and Adjusted EBITDA, as per Compensation Committee recommendations, without an individual performance measure. For the other NEOs, weightings were as follows: Executive Revenue Adjusted EBITDA Individual Performance Amir Dan Rubin 50% 50% — Bjorn Thaler 50% 50% — Andrew S. Diamond (1) — — 100% Lisa A. Mango 50% 25% 25% (1)     Given Dr. Diamond’s involvement in clinical patient care, his individual performance goals were tied to clinical metrics, including our quality of care metrics, member satisfaction, provider retention and recruitment. The metrics were chosen to encapsulate key business drivers as well as to enable continued growth and enhancement of One Medical’s business. Revenue goals directly reflect enterprise and consumer member growth, member activation and retention, partnerships with health networks, visits and new services. Adjusted EBITDA reflects cost of care, and selling, general and administrative (SG&A) expense management. All executives may earn between 0% and 150% of target, based on performance. Annually, our Compensation Committee or Board determines the actual cash payout to be awarded to each of our eligible executive officers by evaluating the achievement levels of our Company and financial performance goals based on financial metrics reviewed by our Audit and Compliance Committee and the achievement levels on any individual metrics. Our CEO determines the achievement levels of individual performance goals for eligible executive officers. Our Compensation Committee retains discretion to adjust awards based upon any other factors it determines to be relevant. 2022 Earned Cash Incentives Executive Target Annual Incentive Percent Achieved (weighted %) 2022 Earned Annual Incentive ($) Amir Dan Rubin $715,000 64% $454,025 Bjorn Thaler $400,000 64% $254,000 Andrew S. Diamond $240,000 82% $196,800 Lisa A. Mango $187,500 87% $163,125 Long-Term Equity Incentives We believe equity awards are a critical element of our executive compensation program as they provide an incentive for our executives to focus on driving growth in our stock price and long-term stockholder value creation. Further, these equity awards help us to attract and retain key talent in a competitive market. Specifically, the granting of stock options helps ensure that the interests of our executive officers are aligned with those of our stockholders as the options only have value if the value 101 of our Company’s stock increases after the date the option is granted. The granting of time-based RSUs also provide a strong retention incentive for our executive officers by providing a moderate reward for growth in the value of our common stock. 2022 Annual Equity Grants In January 2022, our NEOs, other than our CEO (who received the Performance Option described below in 2020), received the following annual equity awards, consisting of stock options and RSUs, under our 2020 Equity Incentive Pl Executive Stock Options(1) ($) RSUs(1) ($) Amir Dan Rubin — — Bjorn Thaler $4,040,513 $672,655 Andrew S. Diamond $1,443,039 $560,552 Lisa A. Mango $1,443,039 $560,552 (1)     The amounts reported in this column do not reflect dollar amounts actually received by the NEO. Instead, the amounts represent the aggregate grant date fair value of RSUs and stock options, as applicable, computed in accordance with Accounting Standards Codification, Topic No. 718 (“ASC Topic 718”), as disclosed in Note 14 to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2022. As required by SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. In the case of stock options, our NEOs will only realize compensation to the extent the trading price of our common stock is greater than the exercise price of such stock options. The amounts reported in this column reflect the accounting cost for these RSUs and stock options, as applicable, and do not correspond to the actual economic value that may be received by the NEOs upon vesting or settlement of RSUs or the exercise of the stock options or any sale of the underlying shares of common stock, as applicable. The options vest and become exercisable in equal monthly installments over four years, and the RSUs will vest in equal annual installments over four years, in each case, subject to the NEO’s continued employment through each applicable vesting date. 2020 CEO Long-Term Performance Option Grant As previously disclosed, in December 2020, our CEO, Mr. Rubin, received a multi-year performance-based stock option grant to acquire up to 8,645,823 shares of our common stock (the “Performance Option Grant”). The Performance Option Grant is subject to a seven-year performance and vesting period, and vests only upon the sustained achievement of pre-determined increases in our Company’s stock price over the seven-year period, as further described below. The exercise price per share subject to the Performance Option Grant is $43.31. The Performance Option Grant was granted in lieu of annual equity awards over subsequent years, and as a result, Mr. Rubin did not receive annual equity grants in 2021 or 2022. The Performance Option Grant consists of four performance-vesting tranches which vest only if our common stock closing price achieves and sustains for 90 days, a 30-day stock price average milestone, as follows: Average Price per Share Milestone Number of Shares Percent of Performance Option Eligible to Vest $55.00 1,330,127 15.38% $70.00 1,995,190 23.08% $90.00 2,660,253 30.77% $110.00 2,660,253 30.77% In the event of a change in control of our Company, if the change-in-control price is at or higher than the performance milestone for any tranche, that tranche will then have satisfied the applicable performance milestone; the portion of the option with a performance milestone above the change-in-control price would be forfeited. However, full vesting and exercisability of the Performance Option Grant will remain subject to satisfaction of the first to occur of the following conditio (i) Mr. Rubin providing up to 12 months of continued service post-closing (the “Consulting Period”) in a role determined by the 102 acquirer (if the services are provided for the full Consulting Period, the Performance Option Grant would vest at the conclusion of the Consulting Period); (ii) Mr. Rubin’s service is terminated by the acquirer without cause during the Consulting Period, in which case, the Performance Option Grant would vest at the time of such termination; or (iii) the acquirer elects not to engage Mr. Rubin’s services post-closing, in which case, the Performance Option Grant would vest upon the closing. As of the date of this filing, none of the performance milestones applicable to the Performance Option Grant have been satisfied. Pursuant to the terms of the Amazon Merger Agreement, and contingent and effective upon the closing of the Amazon Merger, the Performance Option Grant will be canceled. 2022 Retention Equity Grants Following our entry into the Amazon Merger Agreement in July 2022, our Compensation Committee approved a one-time award of Retention RSUs to each of the named executive officers. As the pendency of an acquisition can often result in a period of uncertainty, our Compensation Committee determined that the Retention RSUs were appropriate and necessary to incentivize the executive team to continue with the Company through the consummation of the proposed transaction and for a reasonable period following a potential closing in order to support the successful integration of the two businesses. Our Compensation Committee believes that the granting of Retention RSUs enabled the Company to maintain stability in management and leadership during what otherwise could have been an uncertain time and can help enhance shareholder value in the context of an acquisition and align executives' interests with those of investors. In August 2022, the Compensation Committee recommended, and the Board approved, the following Retention RSUs to our NEOs: Executive RSUs(1) ($) Amir Dan Rubin $9,999,994 Bjorn Thaler $3,999,988 Andrew S. Diamond $1,999,986 Lisa A. Mango $3,999,988 (1) The amounts reported in this column do not reflect dollar amounts actually received by the NEO. Instead, the amounts represent the aggregate grant date fair value of RSUs, computed in accordance with ASC Topic 718 as disclosed in Note 14 to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2022. As required by SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. The amounts reported in this column reflect the accounting cost for these RSUs and do not correspond to the actual economic value that may be received by the NEOs upon vesting or settlement of RSUs or any sale of the underlying shares of common stock, as applicable. The RSUs will vest over a four-year period, with 50% of the shares subject to the Retention RSUs vesting on the first anniversary of the grant date, 20% vesting on the second anniversary of the grant date, and 15% vesting on each of the third and fourth anniversaries of the grant date. Upon and contingent on the closing of the Amazon Merger, the Retention RSUs (other than the Retention RSUs granted to our CEO) will be converted into the right to receive an amount in cash equal to (1) $18.00 multiplied by (2) the number of shares then subject to such Retention RSUs on the same terms and conditions (including vesting conditions). Each such cash award will vest in full upon a “Qualifying Termination,” which includes a termination without “Cause” and a resignation for Good Reason (each as defined in the Executive Severance and Change in Control Plan, except that with respect to this specific grant only, changes in employee roles and reporting chain naturally resulting from the consummation of the proposed Amazon Merger would not automatically give rise to “Good Reason”) at any time on or after the closing date of such transaction. In the case of the Retention RSUs granted to our CEO, any RSUs that remain unvested as of the closing of the Amazon Merger will be forfeited for no consideration in accordance with his letter agreement with Amazon. 103 Other Elements of Compensation Employment Agreements and Severance Benefits We provide our NEOs with certain severance protections in their employment agreements and in our Executive Severance and Change in Control Plan in order to attract and retain an appropriate caliber of talent for such positions. Specifically, our NEOs (other than CEO) are eligible for severance benefits under our Executive Severance and Change in Control Plan, which supersede any similar severance benefits that may be provided under their employment agreements. Our CEO is eligible for severance benefits as set forth in his employment agreement. Our employment agreements with the NEOs and the severance provisions set forth therein are summarized below under “—Employment Arrangements” and “—Potential Payments upon Termination or Change in Control.” Stock Ownership Guidelines In 2021, we established guidelines setting expectations for stock ownership for our CEO as well as the members of our Board. The ownership targets are as follows: Position Required Ownership Chief Executive Officer 5x base salary Directors 5x annual retainer When determining these stock ownership guidelines, our Compensation Committee worked with its independent consultant to review peer and market practices. Our CEO and each director has a period of up to five years from the establishment of these guidelines, or the date of their appointment, to meet the guidelines based on the value of shares of common stock beneficially owned and unvested RSUs. Prohibition on Hedging and Pledging Transactions Our insider trading policy prohibits any director, employee (including our executive officers) or consultant to our Company from, among other things, engaging in short sales, transactions in put or call options, hedging transactions, margin accounts, or other inherently speculative transactions with respect to our common stock at any time. Our directors, employees (including our executive officers), and consultants are also not permitted to pledge our securities as collateral for a loan. Health and Welfare Benefits All of our current NEOs are eligible to participate in our employee benefit plans, including our medical, dental, vision, life, disability and accidental death and dismemberment insurance plans, in each case on the same basis as all of our other employees. We pay the premiums for the life, disability and accidental death and dismemberment insurance for all of our employees, including our NEOs. Perquisites and Personal Benefits With the exception of the car allowance we provide to Mr. Rubin, we generally do not provide perquisites or personal benefits to our NEOs. To the extent that any NEO was granted a perquisite or other personal benefit that is subject to disclosure, such perquisite or other personal benefit has been reported in “—Summary Compensation Table” below. 401(k) Plan We currently maintain a 401(k) retirement savings plan for our employees, including our NEOs, who satisfy certain eligibility requirements. The 401(k) plan is intended to qualify as a tax-qualified plan under the Internal Revenue Code. Our NEOs are eligible to participate in the 401(k) plan on the same basis as our other employees. The Internal Revenue Code allows eligible employees to defer a portion of their compensation, within prescribed limits, on a pre-tax basis (or post-tax basis through a “Roth” 401(k) election) through contributions to the 401(k) plan. For the year ended December 31, 2022, we provided matching contributions under our 401(k) Plan representing 50% of the first 5% of eligible compensation by plan participants, subject to federal tax limits. Pension Benefits Our NEOs did not participate in, or otherwise receive any benefits under, any pension or retirement plan sponsored by us during 2022. 104 Nonqualified Deferred Compensation Our NEOs did not participate in, or earn any benefits under, any nonqualified deferred compensation plan sponsored by us during the year ended December 31, 2022. Our Board may elect to provide our officers and other employees with nonqualified deferred compensation benefits in the future if it determines that doing so is in our best interests. Compensation Risk Assessment Our Compensation Committee has determined, based in part on an assessment of our Company’s executive compensation programs by its independent consultant, that its compensation policies and programs do not give rise to inappropriate risk taking or risks that are reasonably likely to have a material adverse effect on our Company. Tax and Accounting Implications One of the factors our Compensation Committee considers when determining executive compensation is the anticipated tax treatment to our Company and to the executives of the various payments and benefits. Section 162(m) of the Internal Revenue Code (“Section 162(m)”) generally provides that a publicly held company may not deduct compensation paid to certain covered executive officers to the extent that such compensation exceeds $1,000,000 per executive officer in any year. While the Committee generally considers this limit when determining compensation, there are instances in which our Compensation Committee has concluded, and reserves the discretion to conclude in the future, that it is appropriate to exceed the limitation on deductibility under Section 162(m) to ensure that executive officers are compensated in a manner that it believes to be consistent with our Company’s best interests and those of our stockholders. Compensation Committee Report on Executive Compensation The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K and contained within this annual report with management and, based on such review and discussions, the Compensation Committee recommended to our Board that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K for the year ended December 31, 2022. Submitted by the members of the Compensation Committee of the Board of Directo Kalen Holmes, Chairperson David Kennedy Robert Schmidt This report of the compensation committee is required by the SEC and, in accordance with the SEC's rules, will not be deemed to be part of or incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act or under the Exchange Act, except to the extent that we specifically incorporate this information by reference, and will not otherwise be deemed "filed" under either the Securities Act or the Exchange Act. 105 Summary Compensation Table The following table presents all of the compensation awarded to, earned by or paid to our NEOs during the years ended December 31, 2022, 2021 and 2020: Name Year Salary ($)(1) Bonus ($) Stock Awards ($)(2) Option Awards ($)(2) Non-Equity Incentive Plan Compensation ($)(3) All Other Compensation ($) Total ($) Amir Dan Rubin 2022 675,000 — 9,999,994 — 454,025 97,026 (4) 11,226,045 Chair, CEO 2021 697,308 — — — 996,676 94,737 (5) 1,788,721 and President 2020 623,077 — — 197,468,738 (7) 864,915 96,321 (6) 199,053,051 Bjorn Thaler 2022 407,692 — 4,672,643 4,040,513 254,000 22,896 (4) 9,397,744 Chief Financial Officer 2021 415,385 — 812,269 8,788,574 557,581 24,810 (5) 10,598,619 2020 400,000 — — 1,600,723 403,627 24,773 (6) 2,429,123 Andrew S. Diamond, M.D. (8) 2022 400,000 — 2,560,537 1,443,039 196,800 30,528 (4) 4,630,904 Chief Medical Officer 2021 415,385 — 980,172 2,924,991 312,000 29,730 (5) 4,662,278 Lisa A. Mango (9) 2022 382,212 — 4,560,540 1,443,039 163,125 29,655 (4) 6,578,571 General Counsel and Secretary 2021 388,077 — 1,056,014 3,286,278 259,022 28,942 (5) 5,018,333 (1) Salary equals base pay paid to each NEO during the applicable year. The actual salary paid may fluctuate due to the number of pay periods during the calendar year, the timing of increases in base salary, and the timing of payroll processing at each calendar year-end. (2) The amounts reported in this column do not reflect dollar amounts actually received by the NEO. Instead, the amounts represent the aggregate grant date fair value of RSUs and stock options, as applicable, granted to our NEOs during 2022, 2021 and 2020 under our 2017 Equity Incentive Plan, as amended, or our 2020 Equity Incentive Plan, computed in accordance with ASC Topic 718 as disclosed in Note 14 to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2022. As required by SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. In the case of stock options, our NEOs will only realize compensation to the extent the trading price of our common stock is greater than the exercise price of such stock options. The amounts reported in this column reflect the accounting cost for these RSUs and stock options, as applicable, and do not correspond to the actual economic value that may be received by the NEOs upon vesting or settlement of RSUs or the exercise of the stock options or any sale of the underlying shares of common stock, as applicable. (3) Amounts reflect cash performance-based incentives payable by us to the NEOs under our Annual Incentive Plan for 2022, 2021 and 2020, which were based upon the achievement of individual performance goals and/or the achievement of company and financial performance goals as approved by our Compensation Committee. Our 2022, 2021 and 2020 company and financial performance goals consisted of revenue and adjusted EBITDA targets. Individual performance goals were established for certain of our executive officers other than our CEO and Chief Financial Officer. For 2022, 2021 and 2020, we determined certain NEOs’ actual performance-based cash incentives based on attainment of these company and financial performance goals, which cash incentives our Compensation Committee determined were appropriate given each NEO’s individual performance and/or responsibility for the overall direction and success of our business, as applicable. For 2022, our Compensation Committee determined that Mr. Rubin, Mr. Thaler, Dr. Diamond and Ms. Mango were each entitled to 64%, 64%, 82% and 87%, respectively, of their target cash incentives. For 2021, our Compensation Committee determined that Mr. Rubin, Mr. Thaler, Dr. Diamond and Ms. Mango were each entitled to 139%, 139%, 130% and 138%, respectively, of their target cash incentives. For 2020, our Compensation Committee determined that Mr. Rubin and Mr. Thaler were each entitled to 144% and 144%, respectively, of their target cash incentives. (4) For 2022, amounts represent a car allowance for Mr. Rubin ($66,000), medical insurance premiums paid by us on behalf of Mr. Rubin ($21,166), Mr. Thaler ($13,598), Dr. Diamond ($21,230), and Ms. Mango ($20,413), disability and life insurance premiums paid by us on behalf of each NEO, and contributions by us to Mr. Rubin’s, Mr. Thaler’s, Dr. Diamond’s, and Ms. Mango’s respective 401(k) plan accounts. (5) For 2021, amounts represent a car allowance for Mr. Rubin ($66,000), medical insurance premiums paid by us on behalf of Mr. Rubin ($19,182), Mr. Thaler ($15,879), Dr. Diamond ($20,798), and Ms. Mango ($20,068), disability and life insurance premiums paid by us on behalf of each NEO, and contributions by us to Mr. Rubin’s, Mr. Thaler’s, Dr. Diamond’s, and Ms. Mango’s respective 401(k) plan accounts. (6) For 2020, amounts represent a car allowance for Mr. Rubin ($66,000), medical insurance premiums paid by us on behalf of Mr. Rubin ($19,158) and Mr. Thaler ($15,975), disability and life insurance premiums paid by us on behalf of each NEO, and contributions by us to Mr. Rubin’s and Mr. Thaler’s and respective 401(k) plan accounts. (7) Represents the Performance Option granted in December 2020 to Mr. Rubin which vests based upon achievement of certain stock price hurdles. See “Compensation Discussion and Analysis—Elements of Our Compensation Plan—Long-Term Equity Incentives—2020 CEO Long-Term Performance Option Grant” above. Assumptions used in the calculation of the Performance Option in accordance with ASC Topic 718 are included in Note 14 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 23, 2022. The grant date fair value of the Performance Option was determined based on multiple stock price paths developed through the use of a Monte Carlo simulation that incorporates into the valuation the possibility that the market condition may not be satisfied for 2020 and, as a result, his compensation information for that year has been omitted. (8) Dr. Diamond’s compensation information was not required for 2020 and, as a result, his compensation information for that year has been omitted. (9) Ms. Mango’s compensation information was not required for 2020 and, as a result, her compensation information for that year has been omitted. 106 Grants of Plan-Based Awards as of December 31, 2022 The following table sets forth certain information with respect to all plan-based awards granted to our NEOs during the fiscal year ended December 31, 2022. Estimated Possible Payouts Under Non-Equity Incentive Plan Awards(1) All Other Stock Awards: Number of Shares of Stock or Units (#)(2) All Other Option Awards: Number of Securities Underlying Options (#)(2) Exercise or Base Price of Option Awards ($/sh) Grant Date Fair Value of Stock and Option Awards ($)(3) Name Type of Award Grant Date Threshold ($) Target ($) Maximum ($) Amir Dan Rubin Time-based RSU 08/12/22 — — — 583,090 (4) — — 9,999,994 2022 Annual Incentive Plan — 214,500 715,000 1,072,500 — — — — Bjorn Thaler Time-based Stock Option 01/15/22 — — — — 325,091 (5) 12.16 3,953,107 Time-based Stock Option 01/15/22 — — — — 7,188 (5) 12.16 87,406 Time-based RSU 01/15/22 — — — 55,317 (6) — — 672,655 Time-based RSU 08/08/22 — — — 237,529 (4) — — 3,999,988 2022 Annual Incentive Plan — 120,000 400,000 600,000 — — — — Andrew S. Diamond Time-based Stock Option 01/15/22 — — — 118,671 (5) 12.16 1,443,039 Time-based RSU 01/15/22 — — — 46,098 (6) — — 560,552 Time-based RSU 08/08/22 — — — 118,764 (4) — — 1,999,986 2022 Annual Incentive Plan — 72,000 240,000 360,000 — — — — Lisa A. Mango Time-based Stock Option 01/15/22 — — — — 111,072 (5) 12.16 1,350,636 Time-based Stock Option 01/15/22 — — — — 7,599 (5) 12.16 92,404 Time-based RSU 01/15/22 — — — 46,098 (6) — — 560,552 Time-based RSU 08/08/22 — — — 237,529 (4) — — 3,999,988 2022 Annual Incentive Plan — 56,250 187,500 281,250 — — — — (1) Amounts reflect target cash performance-based incentives for the NEOs under our 2022 Annual Incentive Plan, which was based upon the achievement of individual performance goals and/or the achievement of company and financial performance goals as approved by our Compensation Committee. Our 2022 company and financial performance goals consisted of revenue and adjusted EBITDA targets. Individual performance goals were established for certain of our executive officers other than our CEO and Chief Financial Officer. For 2022, our Compensation Committee determined that the target cash incentive for Mr. Rubin, Mr. Thaler, Dr. Diamond and Ms. Mango should be 110%, 100%, 60% and 50%, respectively of each NEO’s base salary. Additional detail regarding the determination of cash incentives is included above under “Compensation Discussion and Analysis — Elements of our Compensation Plan — Annual Cash Incentives.” Actual payments are set forth in the “Summary Compensation Table” above. (2) The RSUs and options were granted pursuant to our 2020 Equity Incentive Plan. (3) The amounts reported in this column do not reflect dollar amounts actually received by the NEO. Instead, the amounts represent the aggregate grant date fair value of RSUs and stock options, as applicable, granted to our NEOs during the fiscal year ended December 31, 2022 under our 2017 Equity Incentive Plan, as amended, or our 2020 Equity Incentive Plan, computed in accordance with ASC Topic 718 as disclosed in Note 14 to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2022. As required by SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. In the case of stock options, our NEOs will only realize compensation to the extent the trading price of our common stock is greater than the exercise price of such stock options. The amounts reported in this column reflect the accounting cost for these RSUs and stock options, as applicable, and do not correspond to the actual economic value that may be received by the NEOs upon vesting or settlement of RSUs or the exercise of the stock options or any sale of the underlying shares of common stock, as applicable. (4) The shares underlying the RSUs vest as follows: The RSU award vests annually over four years, with 50% of the RSUs vesting on the first anniversary of the grant date, 20% of the RSUs vesting on the second anniversary of the grant date, and 15% of the RSUs vesting on each of the third and fourth anniversaries of the grant date, subject to the NEO’s continued service with us. (5) 1/48th of the shares underlying this option vest monthly over four years commencing from the vesting commencement date, subject to the NEO’s continued service with us. (6) The shares underlying the RSUs vest as follows: The RSU awards vest annually over four years, measured from the vesting commencement date, subject to the NEO’s continued service with us. 107 Outstanding Equity Awards as of December 31, 2022 The following table presents the outstanding equity incentive plan awards held by each NEO as of December 31, 2022. Option Awards(1) Stock Awards Name Grant Date Vesting Commencement Date Number of Securities Underlying Unexercised Options Exercisable (#) Number of Securities Underlying Unexercised Options Unexercisable (#) Option Exercise Price ($) Option Expiration Date Number of shares or units of stock that have not vested (#) Market value of shares or units of stock that have not vested ($) Amir Dan Rubin 11/21/19 (2) 09/07/22 242,235 1,822,530 11.56 11/20/29 — — 12/28/20 (3) 12/28/20 — 8,645,823 43.31 12/27/30 — — 08/12/22 (4) 08/12/22 — — — — 583,090 9,743,434 Bjorn Thaler 05/10/19 (5) 04/01/19 10,416 41,667 7.93 05/09/29 — — 09/19/19 (6) 09/19/19 130,000 70,000 11.47 09/18/29 — — 05/12/20 (7) 05/12/20 69,868 38,314 27.25 05/11/30 — — 01/15/21 (7) 01/15/21 52,150 56,684 42.68 01/14/31 — — 11/19/21 (8) 11/19/21 56,649 152,515 19.81 11/18/31 — — 11/19/21 (9) 11/15/21 — — — — 30,752 513,866 01/15/22 (7) 01/15/22 76,147 256,132 12.16 1/14/32 01/15/22 (10) 02/15/22 — — — — 55,317 924,347 08/08/22 (4) 08/08/22 — — — — 237,529 3,969,110 Andrew S. Diamond 11/21/19 (7) 11/21/19 4,005 22,027 11.56 11/20/29 — — 01/15/21 (7) 01/15/21 16,225 17,635 42.68 01/14/31 — — 01/15/21 (10) 02/15/21 — — — — 5,329 89,048 11/19/21 (8) 11/19/21 20,232 54,470 19.81 11/18/31 — — 11/19/21 (9) 11/15/21 — — — — 25,627 428,227 01/15/22 (7) 01/15/22 4,944 91,476 12.16 01/14/32 — — 01/15/22 (10) 02/15/22 — — — — 46,098 770,298 08/08/22 (4) 08/08/22 — — — — 118,764 1,984,546 Lisa A. Mango 09/14/17 (7) 09/14/17 3,750 — 4.01 09/13/27 — — 09/20/18 (7) 09/20/18 12,870 — 7.77 09/19/28 — — 09/19/19 (6) 09/19/19 2,500 52,500 11.47 09/18/29 — — 11/21/19 (7) 11/21/19 1,601 17,621 11.56 11/20/29 — — 01/15/21 (7) 01/15/21 20,281 22,044 42.68 01/14/31 — — 01/15/21 (10) 02/15/21 — — — — 6,662 111,322 11/19/21 (8) 11/19/21 20,232 54,470 19.81 11/18/31 — — 11/19/21 (9) 11/15/21 — — — — 25,627 428,227 01/15/22 (7) 01/15/22 2,472 91,476 12.16 01/14/32 — — 01/15/22 (10) 02/15/22 — — — — 46,098 770,298 08/08/22 (4) 08/08/22 — — — — 237,529 3,969,110 (1) The unvested shares underlying the options set forth below are subject to accelerated vesting as described in “—Employment Arrangements—Amir Dan Rubin,” with respect to certain options held by Mr. Rubin, and “—Employment Arrangements—Executive Severance and Change in Control Plan” with respect to the options and RSUs held by Mr. Thaler, Dr. Diamond and Ms. Mango. (2) 63% of the shares underlying this option will vest ratably on a monthly basis from the vesting commencement date through August 2023; 25% of the shares underlying this option will vest ratably on a monthly basis from September 2023 to August 2024; and the remaining 12% of the shares underlying this option will vest ratably on a monthly basis from September 2024 to August 2025. (3) The shares underlying the option are divided into four performance-based vesting tranches that will vest only if our common stock closing price achieves and sustains for 90 days a 30-day stock price average as follows (each a “Stock Price Milestone”; the number of shares subject to each such tranche in parentheses): $55 per share (1,330,127 shares); $70 per share (1,995,190 shares); $90 per share (2,660,253 shares); and $110 per share (2,660,253 shares). Each share price performance-based vesting tranche of the option is also subject to a time-based vesting requirement and will vest in equal monthly increments of 1/84th of the award commencing on the date of grant and ending on the seventh anniversary of the date of grant, subject to Mr. Rubin’s continued services with us as our CEO through the applicable vesting date. Once a Stock Price Milestone is met, then vesting for the portion of the grant meeting that Stock Price Milestone becomes subject solely to the time-based vesting requirement. No shares will vest with respect to the portion of the option for which the applicable Stock Price Milestone is not met before the end of the seven-year performance period. Any portion of the option that remains unvested on December 27, 2027 will automatically terminate without consideration. The stock price hurdles will be adjusted for stock splits and similar capitalization adjustments. The option expires 10 years after the grant date. (4) The shares underlying the RSUs vest as follows: The RSU award vests annually over four years, with 50% of the RSUs vesting on the first anniversary of the grant date, 20% of the RSUs vesting on the second anniversary of the grant date, and 15% of the RSUs vesting on each of the third and fourth anniversaries of the grant date, subject to the NEO’s continued service with us. (5) 1/4th of the shares underlying this option vested on the first anniversary of the vesting commencement date and 1/48th of the shares vest monthly thereafter over the following three years, subject to the NEO’s continued service with us. (6) 1/5th of the shares underlying this option vested on the first anniversary of the vesting commencement date, and 1/60th of the shares vest monthly thereafter over the following four years, subject to the NEO’s continued service with us. 108 (7) 1/48th of the shares underlying this option vest monthly over four years commencing from the vesting commencement date, subject to the NEO’s continued service with us. (8) The options vest monthly over three years, with 25% of the shares subject to the option vesting in equal monthly installments during each of the first and second anniversaries of the vesting commencement date, and the remaining 50% of the shares subject to the option vesting in equal monthly installments in the third year following the vesting commencement date, subject to the NEO’s continued service with us. (9) The shares underlying the RSUs vest as follows: The RSU awards vest annually over three years, with 25% of the RSUs vesting on each of the first and second anniversaries of the vesting commencement date and 50% of the RSUs vesting on the third anniversary of the vesting commencement date, subject to the NEO’s continued service with us. (10) The shares underlying the RSUs vest as follows: The RSU awards vest annually over four years, measured from the vesting commencement date, subject to the NEO’s continued service with us. Option Exercises and Stock Vested Table The following table presents, for each of our NEOs, the shares of our common stock that were acquired upon the exercise of stock options and vesting of RSUs, if any, and the related value realized during the fiscal year ending December 31, 2022. Option Awards Stock Awards Name Number of Shares Acquired on Exercise (#) Value Realized on Exercise ($)(1) Number of Shares Acquired on Vesting (#) Value Realized on Vesting ($) Amir Dan Rubin 6,933,745 88,919,170 — — Bjorn Thaler 321,597 2,972,380 10,251 171,602 Andrew S. Diamond 184,211 1,566,968 10,319 163,731 Lisa A. Mango 146,986 978,940 10,763 168,912 (1) The aggregate value realized upon the exercise of a stock option represents the difference between the aggregate market price of the shares of our common stock exercised on the date of exercise and the aggregate exercise price of the stock option. Employment Arrangements The employment agreements and offer letters with our NEOs generally provide for at-will employment and set forth the executive officer’s initial base salary, applicable signing bonuses, eligibility for employee benefits and confirmation of the terms of previously issued equity grants, and for our Chair, Chief Executive Officer and President, severance benefits on a qualifying termination of employment or resignation. In addition, each of our NEOs has executed our standard confidential information and invention assignment agreement. The key terms of these agreements are described below. In addition, our NEOs (other than Mr. Rubin) are participants in our Executive Severance and Change in Control Plan, adopted by our Board in January 2020. See “—Potential Payments Upon Termination or Change in Control” for a description of the severance benefits provided under this plan. Amir Dan Rubin In June 2017, we entered into, and in January 2020, we amended, an employment agreement with Amir Dan Rubin, our Chair, Chief Executive Officer and President. The employment agreement was subsequently modified by a letter agreement between Mr. Rubin and Amazon (the “Amazon Letter Agreement”), which was entered into in connection with the Amazon Merger (the details of which are set forth below). Pursuant to his employment agreement, Mr. Rubin is eligible to earn an annual base salary, which was $650,000 in 2022. For 2022, Mr. Rubin was also eligible for a target cash incentive of 110% of his base salary pursuant to our Annual Incentive Plan. Our Compensation Committee or Board will determine his actual cash incentive amount based on its assessment of our Company and individual performance during the year. The agreement also provides for Mr. Rubin to participate in our benefit programs generally made available to our executive officers and other employees. If we terminate Mr. Rubin without cause or he resigns for good reason, at any time other than three months prior to or twelve months following a change in control, then, subject to Mr. Rubin executing and not revoking a general release of all claims, he will be entitled to (i) a lump sum payment equal to 12 months of his annual base salary, (ii) continuation of health 109 insurance coverage under COBRA for up to 12 months following termination or resignation and (iii) acceleration of such number of shares under Mr. Rubin’s stock option to purchase 7,948,990 shares, granted on September 14, 2017, that would have vested and become exercisable if Mr. Rubin had completed an additional 12 months of employment following his termination or resignation date. In addition, if we terminate Mr. Rubin without cause or he resigns for good reason on or within three months prior to or 12 months following a change in control, then, subject to Mr. Rubin executing and not revoking a general release of all claims, he will be entitled to (i) a lump sum payment equal to 24 months of his annual base salary, (ii) a lump sum payment equal to his full performance-based cash incentive at his target achievement level for the applicable year under the Annual Incentive Plan, (iii) continuation of health insurance coverage under COBRA for up to 24 months following termination or resignation and (iv) acceleration of all equity awards outstanding on the resignation or termination date (excluding the Performance Option). Additionally, in connection with, and contingent upon, the closing of the Amazon Merger, Mr. Rubin has entered into the Amazon Letter Agreement pursuant to which Mr. Rubin will serve as CEO, One Medical, following the closing of the Amazon Merger. The Amazon Letter Agreement provides that, effective as of the closing date of the Amazon Merger, Mr. Rubin’s employment agreement with us is amended such that (i) Mr. Rubin waives any right he may have to terminate his employment on or following the closing date of the Amazon Merger for Good Reason (as defined in Mr. Rubin’s employment agreement with the Company) and Mr. Rubin will not be entitled to any severance or other termination benefits (including any acceleration of vesting or continued vesting of any equity-based awards) in the event Mr. Rubin terminates his employment for any reason on or following the closing date of the Amazon Merger, (ii) the Amazon restricted stock unit awards to be granted to Mr. Rubin pursuant to the Amazon Letter Agreement and any other equity-based awards granted to him by Amazon following the closing of the Amazon Merger will not be subject to accelerated vesting or continuing vesting upon termination of his employment for any reason and (iii) any equity-based awards granted to him by us between July 20, 2022 and the closing date of the Amazon Merger that remain unvested as of the closing date of the Amazon Merger will be forfeited for no consideration, effective as of the closing date of the Amazon Merger. In the event Mr. Rubin’s employment is terminated by Amazon without Cause (as defined in Mr. Rubin’s employment agreement with the Company) on or following the closing date of the Amazon Merger, he will be eligible to receive the severance and other termination benefits under his employment agreement. Bjorn Thaler In February 2019, we entered into an offer letter with Bjorn Thaler, our Chief Financial Officer. Mr. Thaler’s offer letter provides that he is eligible for an annual base salary, which in 2022 was $400,000. For 2022, Mr. Thaler was also eligible for a target cash incentive of 100% of his base salary pursuant to our Annual Incentive Plan. Mr. Thaler is also an eligible participant in our Executive Severance and Change in Control Plan. The offer letter also provides for Mr. Thaler to participate in the benefit programs generally made available to our employees and reimbursement of legal expenses incurred by Mr. Thaler in connection with review of his offer letter. Andrew S. Diamond, MD In August 2007, One Medical Group, Inc., a consolidated One Medical affiliated professional entity, entered into a physician employment agreement with Dr. Andrew S. Diamond. Dr. Diamond provides services to us pursuant to contractual arrangements with our Company and One Medical Group, Inc. The physician employment agreement provides that Dr. Diamond is eligible to earn an annualized base salary, which was $400,000 in 2022. The physician employment agreement also provides for Dr. Diamond to participate in the benefit programs generally made available to our employees. For 2022, Dr. Diamond was also eligible for a target cash incentive of 60% of his base salary pursuant to our Annual Incentive Plan and is a participant in our Executive Severance and Change in Control Plan. Lisa A. Mango In October 2015, we entered into an offer letter with Lisa A. Mango, which provides that she is eligible to earn an annualized base salary, which was $375,000 in 2022. The offer letter also provides for Ms. Mango to participate in the benefit programs generally made available to our employees. For 2022, Ms. Mango was also eligible for a target cash incentive of 50% of her base salary pursuant to our Annual Incentive Plan and is a participant in our Executive Severance and Change in Control Plan. 110 Executive Severance and Change in Control Plan In January 2020, our Board adopted an Executive Severance and Change in Control Plan that provides severance benefits to each of our executive officers, including our NEOs, other than our CEO. Under the Executive Severance and Change in Control Plan, upon an involuntary termination without cause or resignation for good reason, participants in the plan will be entitled to receive (i) a cash payment equal to twelve months’ base salary and (ii) continuation of health insurance under COBRA for up to twelve months following the resignation or termination date. In addition, upon an involuntary termination without cause or resignation for good reason in connection with or within twelve months following a change in control, participants will be entitled to (i) receive a cash payment equal to twelve months’ base salary, (ii) receive a cash payment for the participant’s full performance-based incentive at the participant’s target achievement level for the applicable year under the Annual Incentive Plan, (iii) continuation of health insurance under COBRA for up to twelve months following the resignation or termination date, and (iv) acceleration of all time-based vesting equity awards outstanding on the resignation or termination date. With respect to the Retention RSUs for our NEOs (other than our CEO), changes in employee roles and reporting chain naturally resulting from the consummation of the proposed Amazon Merger would not automatically give rise to “Good Reason” at any time on or after the closing date of such transaction. All such severance benefits are subject to the participant signing a general release of all known and unknown claims in substantially the form provided in the Executive Severance and Change in Control Plan. The benefits provided under the Executive Severance and Change in Control Plan supersede any similar severance benefits described in a participant’s offer letter or employment agreement (other than for Mr. Rubin, as noted below). Other Change of Control and Severance Arrangements Under Mr. Rubin’s employment agreement, if we terminate Mr. Rubin without cause or he resigns for good reason, at any time other than three months prior to or twelve months following a change in control, then, subject to Mr. Rubin executing and not revoking a general release of all claims, he will be entitled to (i) a lump sum payment equal to 12 months of his annual base salary, (ii) continuation of health insurance coverage under COBRA for up to 12 months following termination or resignation and (iii) acceleration of such number of shares under Mr. Rubin’s stock option to purchase 7,948,990 shares, granted on September 14, 2017, that would have vested and become exercisable if Mr. Rubin had completed an additional 12 months of employment following his termination or resignation date. In addition, if we terminate Mr. Rubin without cause or he resigns for good reason on or within three months prior to or 12 months following a change in control, then, subject to Mr. Rubin executing and not revoking a general release of all claims, he will be entitled to (i) a lump sum payment equal to 24 months of his annual base salary, (ii) a lump sum payment equal to his full performance-based cash incentive at his target achievement level for the applicable year under the Annual Incentive Plan, (iii) continuation of health insurance coverage under COBRA for up to 24 months following termination or resignation and (iv) acceleration of all equity awards outstanding on the resignation or termination date (excluding the Performance Option). The Amazon Letter Agreement also provides that, effective as of the closing date of the Amazon Merger, Mr. Rubin’s employment agreement with us is amended such that Mr. Rubin waives any right he may have to receive severance benefits upon a termination of his employment on or following the closing date of the Amazon Merger for Good Reason (as defined in Mr. Rubin’s employment agreement). Separately, pursuant to the terms of Mr. Rubin’s Performance Option grant notice and agreement, in connection with a change in control, if the change-in-control price is at or higher than the performance milestone for any tranche of the Performance Option, that tranche will then have satisfied the applicable performance milestone; the portion of the option with a performance milestone above the change-in-control price would be forfeited. However, full vesting and exercisability of the Performance Option will remain subject to satisfaction of the first to occur of the following conditio (i) Mr. Rubin providing up to 12 months of continued service post-closing (the “Consulting Period”) in a role determined by the acquirer (if the services are provided for the full Consulting Period, the Performance Option would vest at the conclusion of the Consulting Period); (ii) Mr. Rubin’s service is terminated by the acquirer without cause during the Consulting Period, in which case, the Performance Option would vest at the time of such termination; or (iii) the acquirer elects not to engage Mr. Rubin’s services post-closing, in which case, the Performance Option would vest upon the closing. Pursuant to the terms of the Amazon Merger Agreement, and contingent and effective upon the closing of the Amazon Merger, the Performance Option will be canceled. Potential Payments Upon Termination or Change in Control The following table presents information concerning estimated payments and benefits that would be provided in the circumstances described below for each of the NEOs serving as of the end of the fiscal year ended December 31, 2022. The payments and benefits set forth below are estimated assuming that the termination or change in control event occurred on the 111 last business day of our fiscal year ended December 31, 2022 using the closing market price of our stock on that date. Actual payments and benefits could be different if such events were to occur on any other date or at any other price or if any other assumptions are used to estimate potential payments and benefits. Separation from Service Absent a Change of Control(1) Separation from Service in Connection with a Change of Control(1)(2) Name Cash Severance ($) Continued Benefits ($) Equity Acceleration ($)(3) Total ($) Cash Severance ($) Continued Benefits ($) Equity Acceleration ($)(3) Total ($) Amir Dan Rubin 650,000 (4) 30,865 (5) — 680,865 2,015,000 (6) 61,730 (8) 9,386,030 11,462,760 Bjorn Thaler 400,000 (4) 8,687 (5) — 408,687 800,000 (7) 8,687 (5) 7,305,359 (9) 8,114,046 Andrew S. Diamond 400,000 (4) 26,216 (5) — 426,216 640,000 (7) 26,216 (5) 3,801,774 (9) 4,467,990 Lisa A. Mango 375,000 (4) 31,729 (5) — 406,729 562,500 (7) 31,729 (5) 6,061,020 (9) 6,655,249 (1) A “separation from service” means employment is terminated by the Company without cause or resignation for good reason and such termination constitutes a “separation from service” (as defined under Treasury Regulation Section 1.409A-1(h)). With respect to the Retention RSUs granted to the executive officers in August 2022 only, changes in employee roles and reporting chain naturally resulting from the consummation of the proposed Amazon Merger would not automatically give rise to “Good Reason.” (2) For all NEOs (other than Mr. Rubin),“in connection with a change of control” means a separation from service within 12 months following a “Change of Control” as defined in the Executive Severance and Change in Control Plan. For Mr. Rubin, “in connection with a change of control” means a separation from service within the three months prior to the effective date of a “Change of Control” or 12 months following the effective date of a “Change of Control” as defined in the Company’s 2017 Equity Incentive Plan. (3) Represents the acceleration of vesting of unvested, in-the-money stock options and RSUs, as applicable. The market value of the shares underlying the stock options and RSUs as of December 31, 2022, is reported based on the closing price of our common stock, as reported on The Nasdaq Global Select Market, of $16.71 per share on December 30, 2022. The equity acceleration value reported excludes any options that were out of the money on December 31, 2022. For all NEOs (other than Mr. Rubin), the equity acceleration value reported includes grants approved by our Board in August 2022 in connection with the Amazon Merger. (4) Represents 12 months of the NEO’s base salary. (5) Represents  12 months of the NEO’s COBRA benefits continuation. (6) Represents 24 months of the NEO’s base salary plus such NEO’s full performance-based cash incentive at the target achievement level for 2022 under our Annual Incentive Plan. (7) Represents 12 months of the NEO’s base salary plus such NEO’s full performance-based cash incentive at the target achievement level for 2022 under our Annual Incentive Plan. (8) Represents 24 months of the NEO’s COBRA benefits continuation. (9) Represents acceleration of 100% of the total number of shares underlying outstanding and unvested stock options and RSUs held by such NEO. CEO Pay Ratio Pursuant to SEC rules, we are required to provide information regarding the relationship between the annual total compensation of our Chief Executive Officer, and the median of the annual total compensation of all of our employees (other than our Chief Executive Officer) for the year ended December 31, 2022. For the year ended December 31, 2022, the annual total compensation of our median employee was $106,622 and the annual total compensation of our Chief Executive Officer was $11,226,045, as reported in the “Total Compensation” column in the “Summary Compensation Table” included in this annual report and includes a one-time special grant of Retention RSUs during fiscal year 2022 in the amount of $9,999,994. See “Elements of our Compensation Plan—Long-Term Equity Incentives—2022 Retention Equity Grants” for more information regarding these Retention RSUs. Based on this information, for 2022, the ratio of the annual total compensation of our CEO to the median of the annual total compensation of all our employees was 105:1. We believe this ratio is a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K under the Exchange Act. Because the SEC’s rules for identifying the median employee and calculating the pay ratio allow companies to use different methodologies, exemptions, estimates and assumptions, our pay ratio may not be directly comparable to the pay ratio reported by other companies. As permitted by SEC rules, to identify our median employee, we reviewed actual base salaries for fiscal year 2022 as our consistently applied compensation measure, which we calculated as actual salary and actual sales commissions paid to our employees in 2022. We collected payroll data for all full-time, part-time, temporary and seasonal employees of 1Life and its consolidated entities (other than our Chief Executive Officer) as of December 30, 2022 to determine our employee population and excluded contractors or workers employed through a third-party provider in our employee population. For those 112 employees employed by us for less than the full fiscal year, we annualized total salary amounts. Using our consistently applied compensation measure, we identified a median employee who is a full-time employee. In identifying the median employee, we excluded employees at the median who had anomalous compensation characteristics. Once we selected the individual who represented the median employee, we then calculated the annual total compensation for this employee using the same methodology we used for our named executive officers in our 2022 Summary Compensation Table to yield the median annual total compensation disclosed above. Employee Benefit and Stock Plans 2020 Equity Incentive Plan Our board of directors adopted the 2020 Equity Incentive Plan (the "2020 Plan"), in September 2019, and our stockholders approved the 2020 Plan in January 2020. The 2020 Plan became effective upon the execution of the underwriting agreement for our initial public offering. The 2020 Plan is the successor to our 2017 Equity Incentive Plan (the "2017 Plan"), which is described below. Types of Awards . Our 2020 Plan provides for the grant of incentive stock options, or ISOs, nonstatutory stock options, or NSOs, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based awards, and other awards, or collectively, awards. ISOs may be granted only to our employees, including our officers, and the employees of our affiliates. All other awards may be granted to our employees, including our officers, our non-employee directors and consultants and the employees and consultants of our affiliates. Authorized Shares . The maximum number of shares of common stock that may be issued under our 2020 Plan will not exceed 45,112,387 shares, which is the sum of (1) 16,000,000 new shares, plus (2) an additional number of shares not to exceed 29,112,387 shares consisting of (A) any shares reserved and available for issuance pursuant to the grant of new awards under our 2017 Plan upon the effectiveness of the 2020 Plan, and (B) any shares subject to stock options or other awards granted under our 2017 Plan or our 2007 Equity Incentive Plan that, on or after the effective date of the 2020 Plan, terminate or expire prior to exercise or settlement; are not issued because the award is settled in cash; are forfeited because of the failure to vest; or are reacquired or withheld (or not issued) to satisfy a tax withholding obligation or the purchase or exercise price, if any, as such shares become available from time to time expire or terminate for any reason, are forfeited or are repurchased by us after the effectiveness of the 2020 Plan. The number of shares of common stock reserved for issuance under our 2020 Plan will automatically increase on January 1 of each year, beginning on January 1, 2021, and continuing through and including January 1, 2030, by 4% of the total number of shares of common stock outstanding on December 31 of the immediately preceding calendar year, or a lesser number of shares determined by our board prior to the applicable January 1st. The maximum number of shares that may be issued upon the exercise of ISOs under our 2020 Plan is three times the share reserve, or 135,337,161 shares. Shares issued under our 2020 Plan are authorized but unissued or reacquired shares of common stock. Shares subject to awards granted under our 2020 Plan that expire or terminate without being exercised in full, or that are paid out in cash rather than in shares, will not reduce the number of shares available for issuance under our 2020 Plan. Additionally, shares issued pursuant to awards under our 2020 Plan that we repurchase or that are forfeited, as well as shares used to pay the exercise price of an award or to satisfy the tax withholding obligations related to an award, will become available for future grant under our 2020 Plan. Plan Administration . Our board, or a duly authorized committee of our board, may administer our 2020 Plan. Our board has delegated concurrent authority to administer our 2020 Plan to the compensation committee under the terms of the compensation committee’s charter. We sometimes refer to the board, or the applicable committee with the power to administer our equity incentive plans, as the administrator. The administrator may also delegate to one or more of our officers the authority to (1) designate employees (other than officers) to receive specified awards, and (2) determine the number of shares subject to such awards. The administrator has the authority to determine the terms of awards, including recipients, the exercise, purchase or strike price of awards, if any, the number of shares subject to each award, the fair market value of a share of common stock, the vesting schedule applicable to the awards, together with any vesting acceleration, and the form of consideration, if any, payable upon exercise or settlement of the award and the terms of the award agreements for use under our 2020 Plan. In addition, subject to the terms of the 2020 Plan, the administrator also has the power to modify outstanding awards under our 2020 Plan, including the authority to reprice any outstanding option or stock appreciation right, cancel and re-grant any outstanding option or stock appreciation right in exchange for new stock awards, cash or other consideration, or take any other action that is treated as a repricing under generally accepted accounting principles, with the consent of any materially adversely affected participant. 113 Stock Options . ISOs and NSOs are granted pursuant to stock option agreements adopted by the administrator. The administrator determines the exercise price for a stock option, within the terms and conditions of the 2020 Plan, provided that the exercise price of a stock option generally cannot be less than 100% of the fair market value of common stock on the date of grant. Options granted under the 2020 Plan vest at the rate specified by the administrator. The administrator determines the term of stock options granted under the 2020 Plan, up to a maximum of ten years. Unless the terms of an optionholder’s stock option agreement provide otherwise, if an optionholder’s service relationship with us, or any of our affiliates, ceases for any reason other than disability, death or cause, the optionholder may generally exercise any vested options for a period of three months following the cessation of service. The option term may be extended in the event that either an exercise of the option or an immediate sale of shares acquired upon exercise of the option following such a termination of service is prohibited by applicable securities laws or our insider trading policy. If an optionholder’s service relationship with us or any of our affiliates ceases due to disability or death, or an optionholder dies within a certain period following cessation of service, the optionholder or a beneficiary may generally exercise any vested options for a period of 12 months in the event of disability and 18 months in the event of death. In the event of a termination for cause, options generally terminate immediately upon the termination of the individual for cause. In no event may an option be exercised beyond the expiration of its term. Acceptable consideration for the purchase of common stock issued upon the exercise of a stock option will be determined by the administrator and may include (1) cash, check, bank draft or money order, (2) a broker-assisted cashless exercise, (3) the tender of shares of common stock previously owned by the optionholder, (4) a net exercise of the option if it is an NSO, and (5) other legal consideration approved by the administrator. Options may not be transferred to third-party financial institutions for value. Unless the administrator provides otherwise, options generally are not transferable except by will, the laws of descent and distribution, or pursuant to a domestic relations order. An optionholder may designate a beneficiary, however, who may exercise the option following the optionholder’s death. Tax Limitations on ISOs. The aggregate fair market value, determined at the time of grant, of common stock with respect to ISOs that are exercisable for the first time by an option holder during any calendar year under all of our stock plans may not exceed $100,000. Options or portions thereof that exceed such limit will be treated as NSOs. No ISOs may be granted to any person who, at the time of the grant, owns or is deemed to own stock possessing more than 10% of our total combined voting power or that of any of our parent or subsidiary corporations, unless (1) the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant and (2) the term of the ISO does not exceed five years from the date of grant. Restricted Stock Awards . Restricted stock awards are granted pursuant to restricted stock award agreements adopted by the administrator. Restricted stock awards may be granted in consideration for cash, check, bank draft or money order, services rendered to us or our affiliates, or any other form of legal consideration. Common stock acquired under a restricted stock award may, but need not, be subject to a share repurchase option in our favor in accordance with a vesting schedule to be determined by the administrator. A restricted stock award may be transferred only upon such terms and conditions as set by the administrator. Except as otherwise provided in the applicable award agreement, restricted stock awards that have not vested may be forfeited or repurchased by us upon the participant’s cessation of continuous service for any reason. Restricted Stock Unit Awards . Restricted stock unit awards are granted pursuant to restricted stock unit award agreements adopted by the administrator. Restricted stock unit awards may be granted in consideration for any form of legal consideration. A restricted stock unit award may be settled by cash, delivery of stock, a combination of cash and stock as deemed appropriate by the administrator, or in any other form of consideration set forth in the restricted stock unit award agreement. Additionally, dividend equivalents may be credited in respect of shares covered by a restricted stock unit award. Except as otherwise provided in the applicable award agreement, restricted stock units that have not vested will be forfeited upon the participant’s cessation of continuous service for any reason. Stock Appreciation Rights . Stock appreciation rights are granted pursuant to stock appreciation right grant agreements adopted by the administrator. The administrator determines the strike price for a stock appreciation right, which generally cannot be less than 100% of the fair market value of common stock on the date of grant. Upon the exercise of a stock appreciation right, we will pay the participant an amount equal to the product of (1) the excess of the per share fair market value of common stock on the date of exercise over the strike price, multiplied by (2) the number of shares of common stock with respect to which the stock appreciation right is exercised. A stock appreciation right granted under the 2020 Plan vests at the rate specified in the stock appreciation right agreement as determined by the administrator. The administrator determines the term of stock appreciation rights granted under the 2020 Plan, up to a maximum of ten years. Unless the terms of a participant’s stock appreciation right agreement provide otherwise, if a participant’s service relationship with us or any of our affiliates ceases for any reason other than cause, disability or death, the participant may generally exercise any vested stock appreciation right for a period of three months following the cessation of service. The 114 stock appreciation right term may be further extended in the event that exercise of the stock appreciation right following such a termination of service is prohibited by applicable securities laws. If a participant’s service relationship with us, or any of our affiliates, ceases due to disability or death, or a participant dies within a certain period following cessation of service, the participant or a beneficiary may generally exercise any vested stock appreciation right for a period of 12 months in the event of disability and 18 months in the event of death. In the event of a termination for cause, stock appreciation rights generally terminate immediately upon the occurrence of the event giving rise to the termination of the individual for cause. In no event may a stock appreciation right be exercised beyond the expiration of its term. Performance Awards . Our 2020 Plan permits the grant of performance-based stock and cash awards. The compensation committee can structure such awards so that the stock or cash will be issued or paid pursuant to such award only following the achievement of certain pre-established performance goals during a designated performance period. Performance awards that are settled in cash or other property are not required to be valued in whole or in part by reference to, or otherwise based on, the common stock. The performance goals may be based on any measure of performance selected by the board of directors. The compensation committee may establish performance goals on a company-wide basis, with respect to one or more business units, divisions, affiliates, or business segments, and in either absolute terms or relative to the performance of one or more comparable companies or the performance of one or more relevant indices. Unless specified otherwise (i) in the award agreement at the time the award is granted or (ii) in such other document setting forth the performance goals at the time the goals are established, the compensation committee will appropriately make adjustments in the method of calculating the attainment of the performance goals as follows: (1) to exclude restructuring and/or other nonrecurring charges; (2) to exclude exchange rate effects; (3) to exclude the effects of changes to generally accepted accounting principles; (4) to exclude the effects of any statutory adjustments to corporate tax rates; (5) to exclude the effects of items that are “unusual” in nature or occur “infrequently” as determined under generally accepted accounting principles; (6) to exclude the dilutive effects of acquisitions or joint ventures; (7) to assume that any business divested by us achieved performance objectives at targeted levels during the balance of a performance period following such divestiture; (8) to exclude the effect of any change in the outstanding shares of common stock by reason of any stock dividend or split, stock repurchase, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any distributions to common stockholders other than regular cash dividends; (9) to exclude the effects of stock-based compensation and the award of bonuses under our bonus plans; (10) to exclude costs incurred in connection with potential acquisitions or divestitures that are required to be expensed under generally accepted accounting principles and (11) to exclude the goodwill and intangible asset impairment charges that are required to be recorded under generally accepted accounting principles. Other Awards . The administrator may grant other awards based in whole or in part by reference to common stock. The administrator will set the number of shares under the award and all other terms and conditions of such awards. Changes to Capital Structure . In the event there is a specified type of change in our capital structure, such as a stock split, reverse stock split, or recapitalization, appropriate adjustments will be made to (1) the class and maximum number of shares reserved for issuance under the 2020 Plan; (2) the class and maximum number of shares by which the share reserve may increase automatically each year; (3) the class and maximum number of shares that may be issued upon the exercise of ISOs and (4) the class and number of shares and exercise price, strike price, or purchase price, if applicable, of all outstanding awards. Corporate Transactions . The following applies to stock awards under the 2020 Plan in the event of a corporate transaction (as defined in the 2020 Plan), unless otherwise provided in a participant’s stock award agreement or other written agreement with us or one of our affiliates or unless otherwise expressly provided by the plan administrator at the time of grant. In the event of a corporate transaction, the plan administrator has the discretion to take any of the following actions with respect to stock awards: • arrange for the assumption, continuation or substitution of a stock award by a surviving or acquiring entity or parent company; • arrange for the assignment of any reacquisition or repurchase rights held by us to the surviving or acquiring entity or parent company; • accelerate the vesting of the stock award and provide for its termination prior to the effective time of the corporate transaction; • arrange for the lapse of any reacquisition or repurchase right held by us; 115 • cancel or arrange for the cancellation of the stock award in exchange for such cash consideration, if any, as our board of directors may deem appropriate; or • make a payment equal to the excess of (A) the value of the property the participant would have received upon exercise of the stock award over (B) the exercise price otherwise payable in connection with the stock award. Our plan administrator is not obligated to treat all stock awards, even those that are of the same type, in the same manner. Under the 2020 Plan, a corporate transaction is generally the consummation of (1) a sale or other disposition of all or substantially all of our consolidated assets, (2) a sale or other disposition of at least 50% of our outstanding securities, (3) a merger, consolidation or similar transaction following which we are not the surviving corporation or (4) a merger, consolidation or similar transaction following which we are the surviving corporation but the shares of common stock outstanding immediately prior to such transaction are converted or exchanged into other property by virtue of the transaction. In the event of a change in control, as defined under our 2020 Plan, awards granted under our 2020 Plan will not receive automatic acceleration of vesting and exercisability, although this treatment may be provided for in an award agreement. Transferability . A participant may not transfer awards under our 2020 Plan other than by will, the laws of descent and distribution or as otherwise provided under our 2020 Plan. Plan Amendment or Termination . Our board has the authority to amend, suspend or terminate our 2020 Plan, provided that such action does not materially impair the existing rights of any participant without such participant’s written consent. Certain material amendments also require the approval of our stockholders. No ISOs may be granted after the tenth anniversary of the date our board adopted our 2020 Plan. No awards may be granted under our 2020 Plan while it is suspended or after it is terminated. 2017 Equity Incentive Plan Our board and stockholders adopted the 2017 Plan in February 2017. The 2017 Plan is the successor to and continuation of our 2007 Equity Incentive Plan. The 2017 Plan provides for the grant of ISOs, NSOs, stock appreciation rights, restricted stock awards, restricted stock unit awards and other awards to our employees, directors and consultants or our affiliates. ISOs may be granted only to our employees or employees of our affiliates. The 2017 Plan was terminated on the date the 2020 Plan became effective. However, any outstanding awards granted under the 2017 Plan remain outstanding, subject to the terms of our 2017 Plan and award agreements, until such outstanding options are exercised or until any awards terminate or expire by their terms. Plan Administration . Our board or a duly authorized committee of our board administers our 2017 Plan and the awards granted under it. Our board has delegated concurrent authority to administer our 2017 Plan to the compensation committee under the terms of the compensation committee’s charter. The administrator has the power to modify outstanding awards under our 2017 Plan. The administrator has the authority to reprice any outstanding option with the consent of any adversely affected participant. Corporate Transactions . Our 2017 Plan provides that in the event of certain specified significant corporate transactions, as defined under our 2017 Plan, our board may (1) arrange for the assumption, continuation or substitution of an award by a successor corporation, or the acquiring corporation’s parent company; (2) arrange for the assignment of any reacquisition or repurchase rights held by us to a successor corporation, or the acquiring corporation’s parent company; (3) accelerate the vesting, in whole or in part, of the award and provide for its termination prior to the transaction if not exercised prior to the effective time of the corporate transaction; (4) arrange for the lapse, in whole or in part, of any reacquisition or repurchase rights held by us; (5) cancel or arrange for the cancellation of the award prior to the transaction in exchange for a cash payment, if any, determined by the board; or (6) make a payment in such form as determined by the board of directors equal to the excess, if any, of the value of the property the participant would have received upon exercise of the awards prior to the transaction over any exercise price payable by the participant in connection with the exercise. The administrator is not obligated to treat all awards or portions of awards, even those that are of the same type, in the same manner. In the event of a change in control, as defined under our 2017 Plan, awards granted under our 2017 Plan will not receive automatic acceleration of vesting and exercisability, although this treatment may be provided for in an award agreement. Transferability . Our board may impose limitations on the transferability of ISOs, NSOs and stock appreciation rights as the board will determine. Absent such limitations, a participant may not transfer awards under our 2017 Plan other than by will, the laws of descent and distribution or as otherwise provided under our 2017 Plan. 116 2020 Employee Stock Purchase Plan Our board of directors adopted our 2020 Employee Stock Purchase Plan (the "ESPP"), in September 2019, and our stockholders adopted the ESPP in January 2020. The ESPP became effective upon the execution of the underwriting agreement for our initial public offering. The purpose of the ESPP is to secure the services of new employees, to retain the services of existing employees and to provide incentives for such individuals to exert maximum efforts toward our success and that of our affiliates. The ESPP includes two components. One component is designed to allow eligible U.S. employees of 1Life to purchase common stock in a manner that may qualify for favorable tax treatment under Section 423 of the Code. In addition, purchase rights may be granted under a component that does not qualify for such favorable tax treatment when necessary or appropriate to permit participation by eligible employees of 1Life who are foreign nationals or employed outside of the United States while complying with applicable foreign laws. Authorized Shares . The maximum aggregate number of shares of common stock that may be issued under our ESPP is 2,800,000 shares. The number of shares of common stock reserved for issuance under our ESPP will automatically increase on January 1 of each calendar year, beginning on January 1, 2021 and continuing through and including January 1, 2030, by the lesser of (1) 1.5% of the total number of shares of our capital stock outstanding on December 31 of the preceding calendar year, (2) 2,800,000 shares, and (3) a number of shares determined by our board. Shares subject to purchase rights granted under our ESPP that terminate without having been exercised in full will not reduce the number of shares available for issuance under our ESPP. Plan Administration . Our board, or a duly authorized committee thereof, will administer our ESPP. Our board has delegated concurrent authority to administer our ESPP to the compensation committee under the terms of the compensation committee’s charter. The ESPP is implemented through a series of offerings under which eligible employees are granted purchase rights to purchase shares of common stock on specified dates during such offerings. Under the ESPP, we may specify offerings with durations of not more than 27 months, and may specify shorter purchase periods within each offering. Each offering will have one or more purchase dates on which shares of common stock will be purchased for eligible employees of 1Life participating in the offering. An offering under the ESPP may be terminated under certain circumstances. Payroll Deductions . Generally, all regular employees, including executive officers, employed by 1Life or by any of its designated affiliates, may participate in the ESPP and may contribute, normally through payroll deductions, up to 15% of their earnings (as defined in the ESPP) for the purchase of common stock under the ESPP. Employees of the One Medical PCs, professional corporations affiliated with 1Life through the ASAs, are not eligible to participate in the ESPP due to regulatory restrictions. Unless otherwise determined by our board, common stock will be purchased for the accounts of employees participating in the ESPP at a price per share equal to the lower of (a) 85% of the fair market value of a share of common stock on the first date of an offering or (b) 85% of the fair market value of a share of common stock on the date of purchase. Limitations . Our employees, including executive officers, or any of our designated affiliates may have to satisfy one or more of the following service requirements before participating in our ESPP, as determined by the administrato (1) customary employment with us or one of our affiliates for more than 20 hours per week and more than five months per calendar year, or (2) continuous employment with us or one of our affiliates for a minimum period of time, not to exceed two years, prior to the first date of an offering. An employee may not be granted rights to purchase stock under our ESPP if such employee (1) immediately after the grant would own stock possessing 5% or more of the total combined voting power or value of common stock, or (2) holds rights to purchase stock under our ESPP that would accrue at a rate that exceeds $25,000 worth of our stock for each calendar year that the rights remain outstanding. Changes to Capital Structure . In the event that there occurs a change in our capital structure through such actions as a stock split, merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, large nonrecurring cash dividend, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or similar transaction, the board of directors will make appropriate adjustments to (1) the number of shares reserved under the ESPP, (2) the maximum number of shares by which the share reserve may increase automatically each year, (3) the number of shares and purchase price of all outstanding purchase rights and (4) the number of shares that are subject to purchase limits under ongoing offerings. Corporate Transactions . In the event of certain corporate transactions, as defined in the ESPP, any then-outstanding rights to purchase our stock under the ESPP may be assumed, continued or substituted for by any surviving or acquiring entity (or its parent company). If the surviving or acquiring entity (or its parent company) elects not to assume, continue or substitute for such purchase rights, then the participants’ accumulated payroll contributions will be used to purchase shares of common stock within 10 business days prior to such corporate transaction, and such purchase rights will terminate immediately. ESPP Amendment or Termination . Our board has the authority to amend or terminate our ESPP, provided that except in certain circumstances such amendment or termination may not materially impair any outstanding purchase rights without the holder’s consent. We will obtain stockholder approval of any amendment to our ESPP as required by applicable law or listing requirements. 117 Limitations of Liability and Indemnification of Directors and Officers Our amended and restated certificate of incorporation contains provisions that limit the liability of our current and former directors for monetary damages to the fullest extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for any breach of fiduciary duties as directors, except liability • any breach of the director’s duty of loyalty to the corporation or its stockholders; • any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law; • unlawful payments of dividends or unlawful stock repurchases or redemptions; or • any transaction from which the director derived an improper personal benefit. Such limitation of liability does not apply to liabilities arising under federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. Our amended and restated certificate of incorporation authorizes us to indemnify our directors, officers, employees and other agents to the fullest extent permitted by Delaware law. Our amended and restated bylaws provide that we are required to indemnify our directors and officers to the fullest extent permitted by Delaware law and may indemnify our other employees and agents. Our amended and restated bylaws also provide that, on satisfaction of certain conditions, we will advance expenses incurred by a director or officer in advance of the final disposition of any action or proceeding, and permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity regardless of whether we would otherwise be permitted to indemnify him or her under the provisions of Delaware law. We have also entered, and expect to continue to enter, into agreements to indemnify our directors and executive officers. With certain exceptions, these agreements provide for indemnification for related expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in connection with any action, proceeding or investigation. We believe that these amended and restated certificate of incorporation and amended and restated bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. We also maintain customary directors’ and officers’ liability insurance. The limitation of liability and indemnification provisions in our amended and restated certificate of incorporation and amended and restated bylaws may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might benefit us and other stockholders. Further, a stockholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions. Insofar as indemnification for liabilities arising under the Securities Act may be permitted for directors, executive officers or persons controlling us, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. Rule 10b5-1 Sales Plans Our directors and executive officers may adopt written plans, known as Rule 10b5-1 plans, in which they will contract with a broker to buy or sell shares of common stock on a periodic basis. Under a Rule 10b5-1 plan, a broker executes trades pursuant to parameters established by the director or executive officer when entering into the plan, without further direction from them. The director or executive officer may amend a Rule 10b5-1 plan in some circumstances and may terminate a plan at any time. Our directors and executive officers also may buy or sell additional shares outside of a Rule 10b5-1 plan when they are not in possession of material nonpublic information, subject to compliance with the terms of our insider trading policy. Non-Employee Director Compensation In September 2019, our board of directors, upon the recommendation of our compensation committee, adopted our Non-Employee Director Compensation Policy for the compensation of our non-employee directors, and in March 2021 the policy was amended and restated. From January 1 to June 2, 2021, each of our non-employee directors were eligible to receive annual retainers for Board and committee service of $40,000 and $20,000, respectively. Commencing on June 3, 2021, each of our non-employee directors received annual retainers for Board and committee service as follows: 118 Annual Retainer for Board Membership Annual service on the board of directors $ 50,000 Additional Annual Retainer for Committee Chair Service Annual service as chair of the audit and compliance committee $ 20,000 Annual service as chair of the compensation committee $ 20,000 Annual service as chair of the nominating and corporate governance committee $ 20,000 In lieu of a cash retainer for annual board service or for annual service as chair of any of the three committees of our board of directors, during 2022, a non-employee director could elect to receive restricted stock units to acquire up to the number of shares of common stock under the 2020 Equity Incentive Plan having a value of such annual retainers for board or committee service based on the fair market value of the underlying common stock on the date of grant, which grant would not be subject to any vesting conditions. All annual cash compensation amounts are payable in equal quarterly installments in arrears, following the end of each quarter in which the service occurred, pro-rated for any partial months of service. Our policy during fiscal year 2022 provided that, each new non-employee director who joins our board of directors following the closing of our initial public offering will receive restricted stock units to acquire up to the number of shares of common stock under our 2020 Equity Incentive Plan having a value of $247,500 (the “Initial Grant”), based on the fair market value of the underlying common stock on the date of grant. The restricted stock units will vest on an annual basis over three years commencing on the grant date, subject to the non-employee director’s continuous service with us on each applicable vesting date. On the date of each annual meeting of our stockholders, each continuing non-employee director will receive restricted stock units to acquire up to the number of shares of common stock under the 2020 Equity Incentive Plan having a value of $165,000 (the “Annual Grant”), based on the fair market value of the underlying common stock on the date of grant, vesting on the earlier of the date of the following annual meeting of stockholders or the one-year anniversary of the grant date, and subject to the non-employee director’s continuous service with us on the applicable vesting date. Each non-employee director can elect to receive the value of any compensation for board and committee service, including annual retainers for board or committee service, the Initial Grant or the Annual Grant for an equivalent value in either cash or equity. In the event of a change of control (as defined in the 2020 Equity Incentive Plan), any unvested restricted stock units or, for grants made before June 3, 2021, unvested options will fully vest and become exercisable immediately prior to the closing of such change of control, subject to the non-employee director’s continuous service with us until immediately prior to the closing of the change of control. Pursuant to our 2020 Equity Incentive Plan the aggregate value of all compensation, including both equity and cash compensation, paid to any non-employee director during any period commencing on the date of our annual meeting of stockholders for a particular year and ending on the day immediately prior to the following year’s annual meeting of stockholders will not exceed $750,000. Employee directors receive no additional compensation for their service as a director. All of our independent directors are entitled to reimbursement of reasonable out-of-pocket expenses incurred for their attendance at meetings of our board of directors or any committee thereof. Non-Employee Director Compensation Table The following table provides information regarding the total compensation that was earned by or paid to each of our non-employee directors during the year ended December 31, 2022. Mr. Rubin, our Chief Executive Officer and President, is also the Chair of our board of directors, but did not receive any additional compensation for his service as a director. Mr. Rubin’s compensation as a named executive officer of the Company is presented in "Executive Compensation—Summary Compensation Table". 119 Name Fees Earned or Paid in Cash Stock Awards($)(1)(2) Option Awards($)(1)(2) Non-Equity Incentive Plan Compensation ($) All Other Compensation ($) Total Paul R. Auvil — 250,201 — — — $ 250,201 Mark S. Blumenkranz, M.D. 50,000 183,443 — — — $ 233,443 Bruce W. Dunlevie — 250,201 — — — $ 250,201 Kalen F. Holmes, Ph.D. 70,000 183,443 — — — $ 253,443 David P. Kennedy — 231,115 — — $ 231,115 Freda Lewis-Hall, M.D. 50,000 183,443 — — — $ 233,443 Robert R. Schmidt 215,000 — — — — $ 215,000 Scott C. Taylor — 231,115 — — — $ 231,115 Mary Ann Tocio — 231,115 — — — $ 231,115 (1) The amounts reported in this column do not reflect dollar amounts actually received by the non-employee director. Instead, the amounts reflect the aggregate grant date fair value of RSUs earned by the non-employee directors for services provided in 2022 (certain of which were granted subsequent to December 31, 2022 due to such director’s election to receive annual retainers in the form of restricted stock units), under our 2020 Equity Incentive Plan, computed in accordance with ASC 718. As required by SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. The amounts reported in this column reflect the accounting cost for these RSUs, as applicable and do not correspond to the actual economic value that may be received by the non-employee directors upon the vesting or settlement of the RSUs or any sale of the underlying shares of common stock, as applicable. The table below shows the aggregate number of option awards (vested and unvested) and RSUs (unvested) held as of December 31, 2022 by each of our non-employee directors (which figures exclude awards granted to each director subsequent to December 31, 2022 as described above): Name Number of Shares Underlying Outstanding Options as of December 31, 2022 Number of RSUs Outstanding as of December 31, 2022 Paul R. Auvil 19,695 20,728 Mark S. Blumenkranz, M.D. 15,675 20,728 Bruce W. Dunlevie 8,249 20,728 Kalen F. Holmes, Ph.D. 29,373 20,728 David P. Kennedy 18,876 20,728 Freda Lewis-Hall, M.D. 15,675 20,728 Robert R. Schmidt — — Scott C. Taylor — 25,262 Mary Ann Tocio 12,214 27,330 (2) In accordance with our Non-Employee Director Compensation Policy, our directors can elect to receive RSUs in lieu of cash for their annual retainer and committee retainers. Our non-employee directors did not receive any equity award grants from us during the year ended December 31, 2022 other than RSUs granted in accordance with our Non-Employee Director Compensation Policy on a quarterly or annual basis or upon joining our board of directors. 120 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Equity Compensation Plan Information The following table provides information as of December 31, 2022 with respect to the shares of our common stock that may be issued under our existing equity compensation plans. The table includes outstanding stock options of Iora originally granted under Iora’s Third Amended and Restated 2011 Equity Incentive Plan (the “Iora Plan”), which we assumed in connection with our acquisition of Iora on September 1, 2021. Plan Category (a) Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (b) Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) Equity compensation plans approved by stockholders(1) 16,650,712 (2) $29.65 (3) 10,973,717 (4) Equity compensation plans not approved by stockholders (5) 816,821 $2.46 — Total 17,467,533 $28.38 10,973,717 (1) Includes the following pla our 2007 Equity Incentive Plan, 2017 Equity Incentive Plan, 2020 Equity Incentive Plan, and 2020 Employee Stock Purchase Plan. (2) Excludes 13,424,299 shares that may be issued under restricted stock unit awards as of December 31, 2022. (3) Excludes 13,424,299 shares that may be issued under restricted stock unit awards as of December 31, 2022. (4) As of December 31, 2022, a total of 4,283,642 shares of our common stock have been reserved for issuance pursuant to the 2020 Plan, which number excludes the 8,241,225 shares that were added to the 2020 Plan as a result of the automatic annual increase on January 1, 2023. The 2020 Plan provides that the number of shares reserved and available for issuance under the 2020 Plan will automatically increase each January 1, beginning on January 1, 2021, by 4% of the outstanding number of shares of our common stock on the immediately preceding December 31 or such lesser number of shares as determined by our Compensation Committee. This number will be subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. The shares of common stock underlying any awards that are forfeited, canceled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by us prior to vesting, satisfied without the issuance of stock, expire or are otherwise terminated, other than by exercise, under the 2020 Plan, the 2007 Plan and the 2017 Plan will be added back to the shares of common stock available for issuance under such plans. Our Company no longer makes grants under the 2007 Plan and the 2017 Plan. As of December 31, 2022, a total of 6,690,075 shares of our common stock have been reserved for issuance pursuant to the ESPP, which number excludes the 2,800,000 shares that were added to the ESPP as a result of the automatic annual increase on January 1, 2023. The ESPP provides that the number of shares reserved and available for issuance under the ESPP will automatically increase each January 1, beginning on January 1, 2021, by the lesser of 2,800,000 shares of our common stock, 1.5% of the outstanding number of shares of our common stock on the immediately preceding December 31 or such lesser number of shares as determined by our Compensation Committee. This number will be subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. (5)    In connection with our acquisition of Iora, we assumed all outstanding Iora stock options under the Iora Plan. As of December 31, 2022, there were 816,821 shares issuable under such outstanding Iora stock options (with a weighted-average exercise price of $2.46). No further grants may be made under the Iora Plan. Security Ownership of Certain Beneficial Owners and Management The following table sets forth information about the beneficial ownership of our common stock as of December 31, 2022 • each person or group known to us who beneficially owns more than 5% of our common stock; • each of our directors and nominees for director; • each of our named executive officers named in “Executive Compensation”; and • all of our directors and executive officers as a group. 121 Each stockholder’s percentage ownership is based on 206,030,641 shares of common stock outstanding as of December 31, 2022. Beneficial ownership for the purposes of the following table is determined in accordance with the rules and regulations of the SEC. These rules generally provide that a person is the beneficial owner of securities if such person has or shares the power to vote or direct the voting thereof, or to dispose or direct the disposition thereof or has the right to acquire such powers within 60 days. Common stock subject to options that are currently exercisable or exercisable within 60 days of December 31, 2022 are deemed to be outstanding and beneficially owned by the person holding the options. These shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as disclosed in the footnotes to this table and subject to applicable community property laws, we believe that each stockholder identified in the table possesses sole voting and investment power over all common stock shown as beneficially owned by the stockholder. Unless otherwise indicated, the address of each beneficial owner listed below is c/o 1Life Healthcare, Inc., One Embarcadero Center, Suite 1900, San Francisco, California 94111. Except as stated in the footnotes below, none of the stockholders or their affiliates, officers, directors and principal equity holders have held any position or office or have had any material relationship with us or our affiliates within the past three years. Shares Beneficially Owned Number Percent 5% Stockholde The Vanguard Group (1) 14,124,081 6.9 Tiger Global Performance LLC (2) 13,793,100 6.7 Carlyle Partners VII Holdings, L.P. (3) 13,612,681 6.6 Temasek Holdings (Private) Limited (4) 10,347,820 5.0 BlackRock, Inc. (5) 10,072,258 4.9 Directors and Named Executive Offi Amir Dan Rubin (6) 584,218 * Bjorn Thaler (7) 492,295 * Andrew S. Diamond (8) 82,498 * Lisa A. Mango (9) 183,861 * Paul R. Auvil (10) 29,704 * Mark S. Blumenkranz, M.D. (11) 18,263 * Bruce W. Dunlevie (12) 685,041 * Kalen F. Holmes, Ph.D.(13) 32,381 * David P. Kennedy (14) 277,663 * Freda Lewis-Hall, M.D. (15) 18,263 * Robert R. Schmidt — — Scott C. Taylor (16) 7,002 * Mary Ann Tocio (17) 58,761 * All directors and executive officers as a group (13 persons)(18) 2,469,950 1.2 * Represents beneficial ownership of less than one percent (1%) of the outstanding shares. (1) Based on information reported by The Vanguard Group on Schedule 13G/A filed with the SEC on February 9, 2022. Of the shares of common stock beneficially owned, The Vanguard Group reported that it has sole dispositive power with respect to 13,791,833 shares, shared dispositive power with respect to 332,248 shares, sole voting power with respect to no shares and shared voting power with respect to 223,385 shares. The Vanguard Group listed its address as 100 Vanguard Blvd., Malvern, Pennsylvania 19355. The Vanguard Group also filed a Schedule 13G/A on February 9, 2023 showing an increase in total shares beneficially owned to 17,071,447. (2) Based on information reported by Tiger Global Performance LLC (“Tiger Global”), on Schedule 13G/A filed with the SEC on February 14, 2022. Of the shares of common stock beneficially owned, Tiger Global reported that is has shared voting power and shared dispositive power with respect to 13,793,100 shares. Tiger Global listed its address as 9 West 57 th Street, 35 th Floor, New York, New York 10019. Tiger Global also filed a Schedule 13G/A on February 14, 2023 showing a decrease in total shares beneficially owned to 0. (3) Reflects shares of common stock held of record by Carlyle Partners VII Holdings, L.P. (the “Carlyle Investor”). Carlyle Group Management L.L.C. holds an irrevocable proxy to vote less than a majority of the shares of The Carlyle Group Inc. (“Carlyle”), a publicly traded company listed on Nasdaq. Carlyle is the sole member of Carlyle Holdings II GP L.L.C., which is the managing member of Carlyle Holdings II L.L.C., which, with respect to the shares of common stock held by the Carlyle Investor, is the managing member of CG Subsidiary Holdings L.L.C., which is the general partner of TC Group Cayman Investment Holdings, L.P., which is the general partner of TC Group Cayman Investment Holdings Sub L.P., which is the sole member of TC Group VII, 122 L.L.C., which is the general partner of TC Group VII, L.P., which is the general partner of the Carlyle Investor. Voting and investment determinations with respect to the shares of common stock held by the Carlyle Investor are made by an investment committee of TC Group VII, L.P. comprised of Allan Holt, William Conway, Jr., Daniel D’Aniello, David Rubenstein, Peter Clare, Kewsong Lee, Norma Kuntz, Sandra Horbach and Marco De Benedetti as a non-voting observer. Accordingly, each of the foregoing entities and individuals may be deemed to share beneficial ownership of the securities held of record by the Carlyle Investor. Each of them disclaims beneficial ownership of such securities. The address for Carlyle Partners VII Holdings, L.P. is c/o The Carlyle Group, 1001 Pennsylvania Avenue, NW, Suite 220 South, Washington, D.C. 20004. Robert R. Schmidt, a member of our board of directors, is a principal of Carlyle. In addition, we have entered into a contractual arrangement with Carlyle as an enterprise client in the ordinary course of business and therefore derive revenue from Carlyle for services provided under such arrangement. (4) Based on information reported by Temasek Holdings (Private) Limited (“Temasek”), on Schedule 13G filed with the SEC on March 4, 2022. Of the shares of common stock beneficially owned, Temasek reported that it has shared voting and dispositive power with respect to 10,347,820 shares. Temasek listed its address as 60B Orchard Road, #06-18 Tower 2, The Atrium@Orchard, Singapore 238891. Temasek also filed a Schedule 13G/A on February 10, 2023 regarding 101,288 escrow shares that are for the benefit of Aquarius Healthcare Investments Pte. Ltd., an indirect wholly-owned subsidiary of Temasek. (5) Based on information reported by BlackRock, Inc. (“BlackRock”), on Schedule 13G filed with the SEC on February 4, 2022. Of the shares of common stock beneficially owned, BlackRock reported that it has sole voting power with respect to 9,676,652 shares and sole dispositive power over 10,072,258 shares. BlackRock listed its address as 55 East 52nd Street, New York, NY 10055. BlackRock also filed a Schedule 13G/A on February 1, 2023 showing an increase in total shares beneficially owned to 13,343,574. (6) Consists of (i) 99,748 shares of common stock held directly by Mr. Rubin and (ii) 484,470 shares of common stock issuable to Mr. Rubin pursuant to options exercisable within 60 days of December 31, 2022. (7) Consists of (i) 13,718 shares of common stock held directly by Mr. Thaler, (ii) 464,748 shares of common stock issuable to Mr. Thaler pursuant to options exercisable within 60 days of December 31, 2022 , and (iii) 13,829 shares of common stock issuable to Mr. Thaler pursuant to restricted stock units vesting within 60 days of December 31, 2022. (8) Consists of (i) 10,319 shares of common stock held directly by Dr. Diamond, (ii) 58,878 shares of common stock issuable to Dr. Diamond pursuant to options exercisable within 60 days of December 31, 2022, and (iii) 13,301 shares of common stock issuable to Dr. Diamond pursuant to restricted stock units vesting within 60 days of December 31, 2022. (9) Consists of (i) 88,385 shares of common stock held directly by Ms. Mango, (ii) 81,730 shares of common stock issuable to Ms. Mango pursuant to options exercisable within 60 days of December 31, 2022, and (iii) 13,746 shares of common stock issuable to Ms. Mango pursuant to restricted stock units vesting within 60 days of December 31, 2022. (10) Consists of (i) 11,535 shares of common stock held directly by Mr. Auvil and (ii) 18,169 shares of common stock issuable to Mr. Auvil pursuant to options exercisable within 60 days of December 31, 2022. (11) Consists of (i) 4,534 shares of common stock held directly by Dr. Blumenkranz and (ii) 13,729 shares of common stock issuable to Dr. Blumenkranz pursuant to options exercisable within 60 days of December 31, 2022. (12) Consists of (i) 11,535 shares of common stock held by Mr. Dunlevie, (ii) 665,257 shares of common stock held by entities controlled by Mr. Dunlevie and (iii) 8,249 shares of common stock issuable to Mr. Dunlevie pursuant to options exercisable within 60 days of December 31, 2022. (13) Consists of (i) 4,534 shares of common stock held directly by Dr. Holmes and (ii) 27,847 shares of common stock issuable to Dr. Holmes pursuant to options exercisable within 60 days of December 31, 2022. (14) Consists of (i) 9,534 shares of common stock held directly by Mr. Kennedy, (ii) 250,779 shares of common stock held by the Cape Lone Star Trust for which Mr. Kennedy and his wife are trustees and share voting and dispositive power and (iii) 17,350 shares of common stock issuable to Mr. Kennedy pursuant to options exercisable within 60 days of December 31, 2022. (15) Consists of (i) 4,534 shares of common stock held directly by Dr. Lewis-Hall and (ii) 13,729 shares of common stock issuable to Dr. Lewis-Hall pursuant to options exercisable within 60 days of December 31, 2022. (16) Consists solely of shares of common stock held directly by Mr. Taylor. (17) Consists of (i) 46,547 shares of common stock held directly by Ms. Tocio and (ii) 12,214 shares of common stock issuable to Ms. Tocio pursuant to options exercisable within 60 days of December 31, 2022. (18) Consists of (i) 1,227,961 shares of common stock directly or indirectly held by all current executive officers and directors as a group, (ii) 1,201,113 shares of common stock issuable pursuant to options exercisable within 60 days of December 31, 2022 and (iii) 40,876 shares of common stock issuable pursuant to restricted stock units vesting within 60 days of December 31, 2022. Item 13. Certain Relationships and Related Transactions, and Director Independence. The following is a summary of transactions since January 1, 2022, to which we have been a participant in which the amount involved exceeded or will exceed $120,000, and in which any of our directors, executive officers or holders of more than five percent of our capital stock, or any member of the immediate family of the foregoing persons, had or will have a direct 123 or indirect material interest, other than compensation arrangements which are described in Part III, Item 11, “Executive Compensation” of this Annual Report on Form 10-K. We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s length transactions. Amended and Restated Investor Rights Agreement In August 2018, we entered into an amended and restated investor rights agreement (“IRA”), with certain holders of our preferred stock and common stock, including certain members of, and affiliates of, our directors and certain of our executive officers. In January 2020, we amended and restated the IRA. The IRA provides the holders with certain registration rights, including the right to demand that we file a registration statement (including registration statements on Form S-3 and accompanying shelf takedowns) or request that their shares be covered by a registration statement that we are otherwise filing. Enterprise Client Arrangements We have entered into contractual arrangements in the ordinary course of business with certain enterprise clients who are affiliated with holders of more than 5% of our outstanding capital stock. The table below sets forth these enterprise clients, their affiliated stockholders and total net revenue derived from these enterprise clients for the year ended December 31, 2022. Net Revenue Year Ended December 31, 2022 Year Ended December 31, 2021 Enterprise Client Affiliated Stockholder (in thousands) The Carlyle Group, Inc. Carlyle Partners VII Holdings, L.P. $ 185 $ 384 Employment Arrangements We have entered into employment agreements and offer letters with certain of our executive officers. For more information regarding these agreements with our executive officers, see Part III, Item 11, “Executive Compensation—Compensation Discussion and Analysis—Employment Arrangements” of this Annual Report on Form 10-K. Annual Cash Incentives We have established a cash incentive plan for certain of our executive officers. For a description of this plan, see Part III. Item 11, “Executive Compensation—Compensation Discussion and Analysis—Elements of our Compensation Plan—Annual Cash Incentives” of this Annual Report on Form 10-K. Other Transactions We have granted options and restricted stock units to certain of our directors and named executive officers. For more information regarding the options and restricted stock units granted to our directors and named executive officers, see Part III, Item 11, “Executive Compensation—Non-Employee Director Compensation—Non-Employee Director Compensation Table” and “Executive Compensation—Outstanding Equity Awards as of December 31, 2022” of this Annual Report on Form 10-K. We have entered into change in control agreements with certain of our executive officers pursuant to offer letters and/or our Executive Severance and Change in Control Plan that, among other things, provide for certain severance and change in control benefits. See the section titled “Executive Compensation—Executive Severance and Change in Control Plan” in Part III, Item 11 of this Annual Report on Form 10-K. Policies and Procedures for Related Party Transactions Our board of directors has adopted a related person transaction policy setting forth the policies and procedures for the identification, review and approval or ratification of related person transactions. This policy covers, with certain exceptions set forth in Item 404 of Regulation S-K under the Securities Act, any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which we and a related person, as defined by the Securities Act, were or will be participants and the amount involved exceeds $120,000, including purchases of goods or services by or from the related 124 person or entities in which the related person has a material interest, indebtedness and guarantees of indebtedness. In reviewing and approving any such transactions, our audit and compliance committee will consider all relevant facts and circumstances as appropriate, such as the purpose of the transaction, the availability of other sources of comparable products or services, whether the transaction is on terms comparable to those that could be obtained in an arm’s length transaction, management’s recommendation with respect to the proposed related person transaction, and the extent of the related person’s interest in the transaction. Director Independence Under the listing requirements and rules of Nasdaq, independent directors must comprise a majority of our board of directors as a listed company within one year of the closing of our initial public offering. Our board of directors has undertaken a review of its composition, the composition of its committees and the independence of each director. Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including family relationships, our board of directors has determined that Drs. Blumenkranz, Holmes and Lewis-Hall, Ms. Tocio and Messrs. Auvil, Dunlevie, Kennedy, Schmidt and Taylor do not have any relationships that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under the applicable rules and regulations of the SEC and the listing requirements and rules of Nasdaq. In making this determination, our board of directors considered the current and prior relationships that each non-employee director has with our Company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director. Item 14. Principal Accounting Fees and Services. The following table presents fees for professional audit services and other services rendered to our Company by PwC for our fiscal years ended December 31, 2022 and 2021. 2022 2021 (in thousands) Audit Fees(1) $ 3,132 $ 3,993 Audit-Related Fees(2) — 280 Tax Fees — — All Other Fees(3) 5 5 Total Fees $ 3,137 $ 4,278 (1) Audit Fees consist of fees billed for professional services by PwC for the audit of our annual consolidated financial statements. (2) Audit-Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit Fees”. These services include accounting consultations in connection with transactions, merger and acquisition due diligence and consultations concerning new financial accounting and reporting standards. (3) All Other Fees for fiscal years 2022 and 2021 include software subscriptions. Pre-Approval Policies and Procedures The audit and compliance committee is required to pre-approve the audit and non-audit services performed by our independent registered public accounting firm in order to assure that the provision of such services does not impair the auditor’s independence. Any proposed services exceeding pre-approved cost levels require specific pre-approval by the audit and compliance committee. The audit and compliance committee at least annually reviews and provides general pre-approval for the services that may be provided by the independent registered public accounting firm; the term of the general pre-approval is 12 months from the date of approval, unless the audit and compliance committee specifically provides for a different period. If the audit and compliance committee has not provided general pre-approval, then the type of service requires specific pre-approval by the audit and compliance committee. The audit and compliance committee may delegate pre-approval authority to one or more audit and compliance committee members so long as any such pre-approval decisions are presented to the full audit and compliance committee at its next scheduled meeting. The annual audit services, engagement terms, and fees are subject to the specific pre-approval of the 125 audit and compliance committee. All services performed and related fees billed by PwC during fiscal year 2022 and fiscal year 2021 were pre-approved by the audit and compliance committee pursuant to regulations of the SEC. 126 PART IV Item 15. Exhibits, Financial Statement Schedules. (a) The following documents are filed as part of this Annual Report on Form 10-K: 1. Financial Statements: The following financial statements and schedules of the Registrant are contained in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K: Page Report of Independent Registered Public Accounting Firm F- 2 Financial Statements: Consolidated Balance Sheets F- 4 Consolidated Statements of Operations F- 5 Consolidated Statements of Comprehensive Loss F- 6 Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) F- 7 Consolidated Statements of Cash Flows F- 8 Notes to the Consolidated Financial Statements F- 9 2. Financial Statement Schedules No financial statement schedules are provided because the information called for is not required or is shown either in the financial statements or notes thereto. (b) Exhibits The exhibits listed in the following "Exhibit Index" are filed, furnished or incorporated by reference as part of this Annual Report on Form 10-K. 127 EXHIBIT INDEX Number Exhibit Description Form File No. Exhibit Filing Date Filed Herewith 2.1* Agreement and Plan of Merger, dated June 6, 2021, by and among 1Life Healthcare, Inc., SB Merger Sub, Inc., Iora Health, Inc. and Fortis Advisors LLC, solely in its capacity as the representative of the stockholders of Iora Health, Inc. 8-K 001-39203 2.1 6/7/20211 2.2* Agreement and Plan of Merger, dated as of July 20, 2022, by and among 1Life Healthcare, Inc., Amazon.com, Inc. and Negroni Merger Sub, Inc. 8-K 001-39203 2.1 7/22/2022 3.1 Amended and Restated Certificate of Incorporation of the Registrant 8-K 001-39203 3.1 2/4/2020 3.2 Amended and Restated Bylaws of the Registrant 8-K 001-39203 3.2 2/4/2020 4.1 Reference is made to Exhibits 3.1 and 3.2 4.2 Form of Common Stock Certificate. S-1 333-235792 4.1 1/21/2020 4.3 Description of Securities X 4.4 Indenture, dated as of May 26, 2020, by and between 1Life Healthcare, Inc. and U.S. Bank National Association, as Trustee. 8-K 001-39203 4.1 5/29/2020 4.5 Form of Global Note, representing 1Life Healthcare, Inc.'s 3.00% Convertible Senior Notes due 2025 (included as Exhibit A to the Indenture filed as Exhibit 4.1) 8-K 001-39203 4.2 5/29/2020 10.1+ Amended and Restated Investor Rights Agreement, dated January 15, 2020, by and among the Registrant and the investors listed on Exhibit A thereto. S-1 333- 235792 10.1 1/21/2020 10.2+ 2007 Equity Incentive Plan, as amended. S-1 333- 235792 10.2 1/3/2020 10.3+ Forms of Option Agreement, Stock Option Grant Notice and Notice of Exercise under the 2007 Equity Incentive Plan. S-1 333- 235792 10.3 1/3/2020 10.4+ 2017 Equity Incentive Plan, as amended. S-1 333- 235792 10.4 1/21/2020 10.5+ Forms of Option Agreement, Stock Option Grant Notice and Notice of Exercise under the 2017 Equity Incentive Plan. S-1 333- 235792 10.5 1/3/2020 10.6+ 2020 Equity Incentive Plan. S-1 333- 235792 10.6 1/21/2020 10.7+ Forms of Option Agreement, Stock Option Grant Notice and Notice of Exercise under the 2020 Equity Incentive Plan. S-1 333- 235792 10.7 1/21/2020 10.8+ Forms of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under the 2020 Equity Incentive Plan. S-1 333- 235792 10.8 1/21/2020 10.9+ 2020 Employee Stock Purchase Plan. S-1 333- 235792 10.9 1/21/2020 10.10+ Executive Annual Incentive Plan. S-1 333- 235792 10.10 1/3/2020 10.11+ Form of Indemnification Agreement, by and between the Registrant and each of its directors and executive officers. S-1 333- 235792 10.11 1/21/2020 10.12+ Employment Agreement, dated June 27, 2017, by and between the Registrant and Amir Dan Rubin, as amended on January 17, 2020. S-1 333- 235792 10.17 1/21/2020 10.13+ Physician Employment Agreement, dated August 1, 2007, by and between One Medical Group, Inc. (previously Apollo Medical Group) and Andrew S. Diamond, M.D., Ph.D. S-1 333- 235792 10.19 1/3/2020 10.14+ Provider Stock Option Program and Advisory Services Agreement, dated October 28, 2014, by and between the Registrant and Andrew S. Diamond, M.D., Ph.D. S-1 333- 235792 10.20 1/3/2020 10.15 Office Lease, dated September 25, 2018, by and between the Registrant and One Embarcadero Center Venture. S-1 333- 235792 10.21 1/3/2020 10.16 First Amendment to Office Lease, dated June 17, 2019, by and between the Registrant and One Embarcadero Center Venture. S-1 333- 235792 10.22 1/3/2020 10.17 Form of Administrative Services Agreement by and between the Registrant and its affiliated professional entities. S-1 333- 235792 10.23 1/3/2020 10.18¥ Interim Loan and Guaranty Agreement, dated November 14, 2022, by and between Registrant and Amazon.com Services, LLC X 10.19+ 1Life Healthcare, Inc. Executive Severance and Change in Control Plan. S-1 333- 235792 10.26 1/21/2020 10.20+ Offer Letter, dated February 14, 2019, by and between the Registrant and Bjorn B. Thaler. S-1 333- 235792 10.27 1/3/2020 10.21+ Offer Letter, dated October 16, 2015, by and between the Registrant and Lisa A. Mango. S-1 333- 235792 10.28 1/3/2020 21.1 List of Subsidiaries of the Registrant X 23.1 Consent of Independent Registered Public Accounting Firm X 128 Number Exhibit Description Form File No. Exhibit Filing Date Filed Herewith 31.1 Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 31.2 Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 32.1† Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X 101.INS Inline XBRL Instance Document X 101.SCH Inline XBRL Taxonomy Schema Linkbase Document X 101.CAL Inline XBRL Taxonomy Definition Linkbase Document X 101.DEF Inline XBRL Taxonomy Calculation Linkbase Document X 101.LAB Inline XBRL Taxonomy Labels Linkbase Document X 101.PRE Inline XBRL Taxonomy Presentation Linkbase Document X 104 Cover Page Interactive Data File (formatted as inline XBRL and contained within Exhibit 101). X * The Schedules and exhibits have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished to the Securities and Exchange Commission upon request. † The certification attached as Exhibit 32.1 that accompanies this Annual Report on Form 10-K, are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of 1Life Healthcare, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing. + Indicates management contract or compensatory plan. ¥ Portions of this exhibit have been omitted as the Registrant has determined that the omitted information (i) is not material and (ii) the type of information the Registrant treats as private or confidential. Item 16. Form 10-K Summary None. 129 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 1LIFE HEALTHCARE, INC. Date:  February 21, 2023 By: /s/ Amir Dan Rubin Amir Dan Rubin Chief Executive Officer and President (Principal Executive Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Amir Dan Rubin and Bjorn Thaler, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution for him or her, and in his or her name in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and either of them, his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. 130 Signature Title Date /s/ Amir Dan Rubin Chair, Chief Executive Officer and President February 21, 2023 Amir Dan Rubin (Principal Executive Officer) /s/ Bjorn Thaler Chief Financial Officer February 21, 2023 Bjorn Thaler (Principal Financial Officer) /s/ Vikas Agarwal Chief Accounting Officer February 21, 2023 Vikas Agarwal (Principal Accounting Officer) /s/ Paul R. Auvil Director February 21, 2023 Paul R. Auvil /s/ Mark S. Blumenkranz Director February 21, 2023 Mark S. Blumenkranz, M.D . /s/ Bruce W. Dunlevie Director February 21, 2023 Bruce W. Dunlevie /s/ Kalen F. Holmes Director February 21, 2023 Kalen F. Holmes, Ph.D. /s/ David P. Kennedy Director February 21, 2023 David P. Kennedy /s/ Freda Lewis-Hall Director February 21, 2023 Freda Lewis-Hall, M.D. /s/ Robert R. Schmidt Director February 21, 2023 Robert R. Schmidt /s/ Scott C. Taylor Director February 21, 2023 Scott C. Taylor /s/ Mary Ann Tocio Director February 21, 2023 Mary Ann Tocio 131 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) F- 2 Consolidated Balance Sheets as of December 31, 2022 and 2021 F- 4 Consolidated Statements of Operations for the Years Ended December 31, 2022, 2021, and 2020 F- 5 Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2022, 2021, and 2020 F- 6 Consolidated Statements of Redeemable Convertible Preferred Stock and Stock h older s' Equity (Deficit) for the Years Ended December 31, 2022, 2021, and 2020 F- 7 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021, and 2020 F- 8 Notes to Consolidated Financial Statements F- 9 F-1 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of 1Life Healthcare, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of 1Life Healthcare, Inc. and its subsidiaries (the "Company") as of December 31, 2022 and 2021, and the related consolidated statements of operations, of comprehensive loss, of redeemable convertible preferred stock and stockholders' equity (deficit) and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for convertible instruments and contracts in an entity's own equity in 2021. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and F-2 expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Valuation of Incurred but not yet Reported (“IBNR”) Claims Liability As described in Note 2 to the consolidated financial statements, the Company’s incurred but not yet reported (“IBNR”) claims liability was $56.2 million as of December 31, 2022. As disclosed by management, the estimated IBNR liability is developed by management using actuarial models which consider significant assumptions such as completion factors and per member per month claim trends. Actual claims expense will differ from the estimated liability due to factors in estimated and actual member utilization of healthcare services, the amount of charges and other factors. Changes in this estimate can materially affect, either favorably or unfavorably, results from operations and overall financial position. The estimated reserve for IBNR claims liability is included in accounts receivable, net. The principal considerations for our determination that performing procedures relating to the valuation of the IBNR claims liability related to Iora Health, Inc. is a critical audit matter are (i) the significant judgment by management when developing the estimate of IBNR claims liability; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate the actuarial models and significant assumptions related to completion factors and per member per month claims trends; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent estimate of the IBNR claims liability. This independent estimate considers a range of reasonable outcomes which are compared to management’s estimate of the IBNR claims liability. Developing the independent estimate involved developing independent completion factors and per member per month claims estimates using management’s data, testing the completeness and accuracy of data provided by management, and evaluating the reasonableness of management’s assumptions related to completion factors and per member per month claims trends assumptions. /s/ PricewaterhouseCoopers LLP San Francisco, California February 21, 2023 We have served as the Company's auditor since 2013. F-3 1LIFE HEALTHCARE, INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except par value amounts) December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 215,447 $ 341,971 Short-term marketable securities 46,980 111,671 Accounts receivable, net 137,359 103,498 Inventories 7,944 6,065 Prepaid expenses 18,724 28,055 Other current assets 24,485 21,767 Total current assets 450,939 613,027 Long-term marketable securities — 48,296 Restricted cash 5,084 3,801 Property and equipment, net 220,314 193,716 Right-of-use assets 276,842 256,293 Intangible assets, net 312,177 352,158 Goodwill 1,157,401 1,147,464 Other assets 9,977 12,277 Total assets $ 2,432,734 $ 2,627,032 Liabilities and Stockholders' Equity Current liabiliti Accounts payable $ 15,148 $ 18,725 Accrued expenses 88,607 72,672 Deferred revenue, current 49,815 47,928 Operating lease liabilities, current 40,267 31,152 Other current liabilities 10,838 31,632 Total current liabilities 204,675 202,109 Operating lease liabilities, non-current 295,748 269,641 Convertible senior notes 311,719 309,844 Deferred income taxes 43,899 73,875 Deferred revenue, non-current 21,233 29,317 Other non-current liabilities 11,474 13,663 Total liabilities 888,748 898,449 Commitments and contingencies (Note 17) Stockholders' Equity: Common stock, $ 0.001 par value, 1,000,000 and 1,000,000 shares authorized as of December 31, 2022 and December 31, 2021, respectively; 206,031 and 191,722 shares issued and outstanding as of December 31, 2022 and December 31, 2021, respectively 206 193 Additional paid-in capital 2,560,604 2,346,781 Accumulated deficit ( 1,016,045 ) ( 618,198 ) Accumulated other comprehensive income (loss) ( 779 ) ( 193 ) Total stockholders' equity 1,543,986 1,728,583 Total liabilities and stockholders' equity $ 2,432,734 $ 2,627,032 The accompanying notes are an integral part of these consolidated financial statements. F-4 1LIFE HEALTHCARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share amounts) Year Ended December 31, 2022 2021 2020 Net Reve Medicare revenue $ 528,909 $ 129,979 $ — Commercial revenue 516,638 493,336 380,223 Total net revenue 1,045,547 623,315 380,223 Operating expens Medical claims expense 419,659 116,543 — Cost of care, exclusive of depreciation and amortization shown separately below 441,499 318,639 234,959 Sales and marketing 97,065 61,994 36,967 General and administrative 415,834 323,127 157,282 Depreciation and amortization 91,185 46,496 22,374 Total operating expenses 1,465,242 866,799 451,582 Loss from operations ( 419,695 ) ( 243,484 ) ( 71,359 ) Other income (expense), n Interest income 2,015 798 1,809 Interest and other income (expense) ( 11,681 ) ( 13,757 ) ( 13,434 ) Change in fair value of redeemable convertible preferred stock warrant liability — — ( 6,560 ) Total other income (expense), net ( 9,666 ) ( 12,959 ) ( 18,185 ) Loss before income taxes ( 429,361 ) ( 256,443 ) ( 89,544 ) Provision for (benefit from) income taxes ( 31,514 ) ( 1,802 ) ( 123 ) Net loss ( 397,847 ) ( 254,641 ) ( 89,421 ) L Net loss attributable to noncontrolling interest — — ( 704 ) Net loss attributable to 1Life Healthcare, Inc. stockholders $ ( 397,847 ) $ ( 254,641 ) $ ( 88,717 ) Net loss per share attributable to 1Life Healthcare, Inc. stockholders - basic and diluted $ ( 2.02 ) $ ( 1.64 ) $ ( 0.75 ) Weighted average common shares outstanding - basic and diluted 197,048 155,343 118,379 The accompanying notes are an integral part of these consolidated financial statements. F-5 1LIFE HEALTHCARE, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Amounts in thousands) Year Ended December 31, 2022 2021 2020 Net loss $ ( 397,847 ) $ ( 254,641 ) $ ( 89,421 ) Other comprehensive l Net unrealized gain (loss) on marketable securities ( 586 ) ( 201 ) ( 30 ) Comprehensive loss ( 398,433 ) ( 254,842 ) ( 89,451 ) L Comprehensive loss attributable to noncontrolling interest — — ( 704 ) Comprehensive loss attributable to 1Life Healthcare, Inc. stockholders $ ( 398,433 ) $ ( 254,842 ) $ ( 88,747 ) The accompanying notes are an integral part of these consolidated financial statements. F-6 1LIFE HEALTHCARE, INC. CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (Amounts in thousands) Redeemable Convertible Preferred Stock Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity (Deficit) Attributable to 1Life Healthcare, Inc. Stockholders Non controlling Interest Total Equity (Deficit) Shares Amount Shares Amount Balance at December 31, 2019 86,252 $ 402,488 18,952 $ 19 $ 93,945 $ ( 281,068 ) $ 38 $ ( 187,066 ) $ 3,035 $ ( 184,031 ) Exercise of redeemable convertible preferred stock warrant 5 76 — — Conversion of redeemable convertible preferred stock into common stock upon closing of initial public offering ( 86,257 ) ( 402,564 ) 86,257 86 402,478 402,564 402,564 Issuance of common stock upon closing of initial public offering, net of issuance costs and underwriting fees of $ 23,631 20,125 20 258,099 258,119 258,119 Fair value adjustment to redeemable convertible preferred stock warrants upon conversion into common stock warrants 13,740 13,740 13,740 Reimbursed secondary offering issuance costs 784 784 784 Exercise of stock options 8,123 9 35,677 35,686 35,686 Exercise of common stock warrants 11 73 73 73 Cashless exercise of common stock warrants 590 — — Issuance of common stock under the employee stock purchase plan 349 4,834 4,834 4,834 Issuance of common stock for settlement of RSUs 40 ( 833 ) ( 833 ) ( 833 ) Shares issued related to net share settlement 25 833 833 833 Stock-based compensation expense 35,095 35,095 35,095 Net unrealized gain (loss) on marketable securities ( 30 ) ( 30 ) ( 30 ) Equity component of convertible senior notes, net of issuance costs of $ 2,242 73,393 73,393 73,393 VIE deconsolidation — ( 2,331 ) ( 2,331 ) Net loss ( 88,717 ) ( 88,717 ) ( 704 ) ( 89,421 ) Balances at December 31, 2020 — — 134,472 134 918,118 ( 369,785 ) 8 548,475 — 548,475 Impact of adoption of ASU 2020-06 ( 73,393 ) 6,656 ( 66,737 ) ( 66,737 ) Impact of adoption of ASC 326 ( 428 ) ( 428 ) ( 428 ) Exercise of stock options 4,284 6 22,778 22,784 22,784 Issuance of common stock under the Employee Stock Purchase Plan 222 5,078 5,078 5,078 Issuance of common stock for settlement of RSUs 338 — Issuance of common stock in acquisition 52,406 53 1,313,259 1,313,312 1,313,312 Equity awards assumed in acquisition 48,643 48,643 48,643 Stock-based compensation expense 112,298 112,298 112,298 Net unrealized gain (loss) on marketable securities ( 201 ) ( 201 ) ( 201 ) Net loss ( 254,641 ) ( 254,641 ) ( 254,641 ) Balances at December 31, 2021 — — 191,722 193 2,346,781 ( 618,198 ) ( 193 ) 1,728,583 — 1,728,583 Exercise of stock options 11,683 12 58,877 58,889 58,889 Issuance of common stock under the employee stock purchase plan 356 2,489 2,489 2,489 Issuance of common stock for settlement of RSUs 996 — — Issuance of common stock in acquisition 1,274 1 5,541 5,542 5,542 Stock-based compensation expense 146,916 146,916 146,916 Net unrealized gain (loss) on marketable securities ( 586 ) ( 586 ) ( 586 ) Net loss ( 397,847 ) ( 397,847 ) ( 397,847 ) Balances at December 31, 2022 — $ — 206,031 $ 206 $ 2,560,604 $ ( 1,016,045 ) $ ( 779 ) $ 1,543,986 $ — $ 1,543,986 The accompanying notes are an integral part of these consolidated financial statements. F-7 1LIFE HEALTHCARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended December 31, 2022 2021 2020 Cash flows from operating activiti Net loss $ ( 397,847 ) $ ( 254,641 ) $ ( 89,421 ) Adjustments to reconcile net loss to net cash used in operating activiti Provision for bad debts ( 928 ) 966 105 Depreciation and amortization 91,185 46,496 22,374 Amortization of debt discount and issuance costs 1,875 1,874 7,767 Accretion of discounts and amortization of premiums on marketable securities, net 1,307 1,178 ( 933 ) Change in fair value of redeemable convertible preferred stock warrant liability — — 6,560 Reduction of operating lease right-of-use assets 33,929 22,062 13,653 Stock-based compensation 146,916 112,298 35,095 Deferred income taxes ( 29,976 ) ( 4,006 ) ( 2,656 ) Other non-cash items 1,082 864 ( 8 ) Changes in operating assets and liabilities, net of acquisitio Accounts receivable, net ( 32,576 ) ( 16,546 ) ( 35,167 ) Inventories ( 1,854 ) 1,118 ( 3,921 ) Prepaid expenses and other current assets 18,575 ( 18,979 ) 6,488 Other assets 1,333 1,687 ( 943 ) Accounts payable ( 2,878 ) 3,111 298 Accrued expenses 15,418 11,175 26,849 Deferred revenue ( 6,578 ) 3,350 16,566 Operating lease liabilities ( 30,248 ) ( 20,919 ) ( 12,169 ) Other liabilities ( 20,538 ) 20,346 5,085 Net cash used in operating activities ( 211,803 ) ( 88,566 ) ( 4,378 ) Cash flows from investing activiti Purchases of property and equipment, net ( 73,719 ) ( 63,616 ) ( 63,707 ) Purchases of marketable securities ( 54,906 ) ( 215,289 ) ( 963,272 ) Proceeds from sales and maturities of marketable securities 166,000 623,966 513,315 Acquisitions of businesses, net of cash and restricted cash acquired ( 10,360 ) ( 23,257 ) — Issuance of note receivable — ( 30,000 ) — VIE deconsolidation — — ( 810 ) Net cash provided by (used in) investing activities 27,015 291,804 ( 514,474 ) Cash flows from financing activiti Proceeds from issuance of convertible senior notes — — 316,250 Payment of convertible senior notes issuance costs — — ( 9,374 ) Proceeds from initial public offering — — 281,750 Payment of underwriting discount and commissions, and offering costs — — ( 20,538 ) Proceeds from the exercise of stock options 58,889 22,784 35,686 Proceeds from employee stock purchase plan 2,489 5,078 4,835 Taxes paid related to net share settlement of equity awards — — ( 833 ) Proceeds from the exercise of redeemable convertible preferred and common stock warrants — — 110 Repayment of notes payable — — ( 3,300 ) Payment of principal portion of finance lease liability ( 52 ) ( 51 ) ( 58 ) Payment received from acquisition related contingent consideration 500 — — Net cash provided by financing activities 61,826 27,811 604,528 Net (decrease) increase in cash, cash equivalents and restricted cash ( 122,962 ) 231,049 85,676 Cash, cash equivalents and restricted cash at beginning of period 346,054 115,005 29,329 Cash, cash equivalent and restricted cash at end of period $ 223,092 $ 346,054 $ 115,005 Supplemental disclosure of cash flow informati Cash (received) paid for income taxes $ ( 4,591 ) $ 13,177 $ — Cash paid for interest $ 9,492 $ 9,495 $ 5,251 Supplemental disclosure of non-cash investing and financing activiti Purchases of property and equipment included in accounts payable and accrued expenses $ 10,059 $ 10,707 $ 4,571 Equity consideration provided for business acquisition $ 5,541 $ 1,361,955 $ — The accompanying notes are an integral part of these consolidated financial statements. F-8 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) 1. Nature of the Business and Basis of Presentation 1Life Healthcare, Inc. (“1Life”) was incorporated in Delaware on July 25, 2002. 1Life’s headquarters are located in San Francisco, California. 1Life has developed a modernized healthcare membership model based on direct consumer enrollment and third-party sponsorship across commercially insured and Medicare populations. Our membership model includes access to 24/7 digital health services paired with in-office care routinely covered by most health care payers, and allows the Company to engage in value-based care across all age groups, including through At-Risk arrangements as defined in Note 2 “Summary of Significant Accounting Policies” with Medicare Advantage payers and the Center for Medicare & Medicaid Services ("CMS"), in which the Company is responsible for managing a range of healthcare services and associated costs of its members. 1Life is also an administrative and managerial services company that provides services pursuant to contracts with physician-owned professional corporations (“One Medical PCs”) that provide medical services virtually and in-office. On September 1, 2021, 1Life completed the acquisition of Iora Health, Inc. ("Iora Health"), a human-centered, value-based primary care group with built-for-purpose technology focused on serving the Medicare population. Iora Health and Iora Senior Health, Inc. (“Iora Senior Health”) are administrative and managerial service companies that provide services pursuant to contracts with physician-owned professional corporations (“Iora PCs”, together with the One Medical PCs, the “PCs”) that provide medical services virtually and in-office. Iora Health is an administrative and managerial services company that provides services pursuant to contracts with Iora Health NE DCE, LLC, a limited liability company that participates in CMS' Direct Contracting Program (now redesigned and renamed the ACO REACH Program . Iora Health, Iora Senior Health, the Iora PCs, and the DCE entity are collectively referred to herein as “Iora”. See Note 8, "Business Combinations" to the consolidated financial statements. 1Life, Iora Health, Iora Senior Health, the PCs, and the DCE entity are collectively referred to herein as the “Company”. 1Life and the One Medical PCs operate under the brand name One Medical. Certain Risks and Uncertainties The Company has incurred losses from operations since inception. Management expects that operating losses and negative cash flows from operations will continue in the foreseeable future; however, it currently believes that the Company's current cash, cash equivalents, marketable securities, and the Loan Agreement from Amazon are sufficient to fund its operating expenses and capital expenditure requirements for the next twelve months. The Company has considered information available to it as of the date of issuance of these financial statements and is not aware of any specific events or circumstances that would require an update to its estimates or judgments, or an adjustment to the carrying value of its assets or liabilities. The accounting estimates and other matters assessed include, but were not limited to, allowance for credit losses, goodwill and other long-lived assets and revenue recognition. These estimates may change as new events occur and additional information becomes available. Actual results could differ materially from these estimates. Proposed Acquisition by Amazon As more fully described in Note 20, on July 20, 2022, the Company entered into a definitive merger agreement (the "Merger Agreement") with Amazon.com, Inc. ("Amazon"), pursuant to which (and subject to the terms and conditions described in the Merger Agreement) the Company will merge with and into a wholly-owned indirect subsidiary of Amazon ("Amazon Merger"). Subject to the terms and conditions of the Merger Agreement, Amazon will acquire the Company for $ 18 per share in an all-cash transaction, valued at approximately $ 3.9 billion, including the Company’s net debt. As a result of the Amazon Merger, the Company will become a wholly-owned indirect subsidiary of Amazon. The consummation of the Amazon Merger is subject to a number of closing conditions, including, among others, the receipt of certain regulatory approvals, as well as other customary closing conditions. In connection with the Merger, on November 14, 2022, Amazon and the Company entered into the Loan Agreement pursuant to which Amazon has agreed to provide senior unsecured financing to the Company in an aggregate principal amount of up to $ 300.0 million to be funded in up to ten tranches of $ 30.0 million per month, beginning on March 20, 2023 until the earliest of (i) the 24-month anniversary of the termination of the Merger in accordance with the terms of the Merger Agreement, (ii) if the Merger has not occurred and the Company does not refinance all of its convertible senior notes, January 1, 2025, (iii) 120 days prior to the maturity date of any indebtedness used to finance the existing convertible senior notes, and (iv) July 22, 2026. The proceeds will be used for working capital funding requirements and other general corporate purposes of the Company. F-9 Basis of Presentation The Company has prepared the accompanying consolidated financial statements in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") and applicable rules and regulations of the Securities and Exchange Commission (“SEC”). The accompanying consolidated financial statements include the accounts of 1Life, Iora Health, and Iora Senior Health, their wholly owned subsidiaries, and variable interest entities (“VIE”) in which 1Life, Iora Health, and Iora Senior Health have an interest and are the primary beneficiaries. See Note 3, “Variable Interest Entities”. All significant intercompany balances and transactions have been eliminated in consolidation. 2. Summary of Significant Accounting Policies Use of Estimates The preparation of consolidated financial statements and related disclosures in conformity with U.S. GAAP and regulations of the SEC requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates include, but are not limited to, revenue recognition, liability for medical claims incurred in the period but not yet reported (“IBNR”), valuation of certain assets and liabilities acquired from business combinations, and stock-based compensation. Actual results could differ from these estimates and may result in material effects on the Company’s operating results and financial position. Cash, Cash Equivalents, and Restricted Cash The Company considers all short-term, highly liquid investments purchased with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash deposits are all in financial institutions in the United States. Cash and cash equivalents consist of cash on deposit, investments in money market funds, and commercial paper. Restricted cash represents cash held under letters of credit for various leases and certain At-Risk arrangements. The expected duration of restrictions on the Company's restricted cash generally ranges from 1 to 7 years. The reconciliation of cash, cash equivalents, and restricted cash reported within the applicable balance sheet line items that sum to the total of the same such amount shown in the consolidated statements of cash flows is as follows: December 31, 2022 2021 2020 Cash and cash equivalents $ 215,447 $ 341,971 $ 112,975 Restricted cash, current (included in other current assets) 2,561 282 119 Restricted cash, non-current 5,084 3,801 1,911 $ 223,092 $ 346,054 $ 115,005 Marketable Securities The Company's investments in marketable securities are classified as available-for-sale and are carried at fair value, with the unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) in total equity (deficit). The Company determines the appropriate classification of these investments at the time of purchase and reevaluates such designation at each balance sheet date. The Company classifies the available-for-sale investments as either short-term or long-term based on each instrument's underlying contractual maturity date. Realized gains and losses and declines in value determined to be other than temporary are based on the specific identification method and are included as a component of other income (expense), net in the consolidated statements of operations. The Company periodically evaluates its available-for-sale debt securities for unrealized losses when carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. No material unrealized losses were recorded during the periods presented. F-10 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three levels of inputs that may be used to measure fair value are defined be • Level 1 - Quoted prices in active markets for identical assets or liabilities. • Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3 - Unobservable inputs that are supported by little or no market activity that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies, and similar techniques. The Company determines the fair value of its marketable securities based on quoted prices in active markets (Level 1 inputs) for identical assets and on quoted prices for similar assets (Level 2 inputs), which are classified as available-for-sale. The carrying amounts of the Company's term notes approximate the fair value based on consideration of current borrowing rates available to the Company (Level 2 inputs). The carrying values of accounts receivable, accounts payable, accrued expenses, and other current liabilities approximate their fair values due to the short-term nature of these assets and liabilities. Variable Interest Entities The Company evaluates its ownership, contractual, and other interests in entities to determine if it has any variable interest in a variable interest entity ("VIE"). These evaluations are complex, involve judgment, and the use of estimates and assumptions based on available historical information, among other factors. If the Company determines that an entity in which it holds a contractual or ownership interest is a VIE and that the Company is the primary beneficiary, the Company consolidates such entity in its consolidated financial statements. The primary beneficiary of a VIE is the party that meets both of the following criteri (i) has the power to make decisions that most significantly affect the economic performance of the VIE; and (ii) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. Management performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company's involvement with a VIE will cause the consolidation conclusion to change. Changes in consolidation status are applied prospectively. Segment Information The Company operates and manages its business as one reportable and operating segment. The Company's chief executive officer, who is the chief operating decision maker ("CODM"), reviews financial information on an aggregate basis for purposes of evaluating financial performance and allocating resources. All of the Company's long-lived assets and customers are located in the United States. Concentration of Credit Risk and Significant Customers Financial instruments that potentially subject the Company to concentration of credit risk consist of cash, cash equivalents, marketable securities, and accounts receivable. The Company's cash balances with individual banking institutions might be in excess of federally insured limits. Cash equivalents are invested in highly rated money market funds and commercial paper. The Company's marketable securities are invested in U.S. Treasury obligations, foreign government bonds, and commercial paper. The Company is not exposed to any significant concentrations of credit risk from these financial instruments. The Company has not experienced any losses on its deposits of cash, cash equivalents, or marketable securities. The Company grants unsecured credit to patients, most of whom reside in the service area of the One Medical or Iora facilities and are largely insured under third-party payer agreements. The Company’s concentration of credit risk is limited by the diversity, geography, and number of patients and payers. F-11 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) The table below presents the customers or payers that individually represented 10% or more of the Company's accounts receivable, net balance as of December 31, 2022 and December 31, 2021. December 31, 2022 2021 Customer F 24 % 38 % Customer I 23 % 23 % Customer J 12 % — % The table below presents the customers or payers that individually exceeded 10% or more of the Company's net revenue for the years ended December 31, 2022, 2021 and 2020. Year Ended December 31, 2022 2021 2020 Customer A * * 13 % Customer E * * 10 % Customer F * * 12 % Customer I 27 % 13 % N/A Customer J 16 % * N/A * Represents percentages below 10% of the Company's net revenue in the period. Accounts Receivable, net Accounts receivable is comprised of amounts due from patients, health systems, and government and private payers for healthcare services, and amounts due from employers, schools, and universities who purchase access to memberships for their employees, students, and faculty, and other medical services. The Company reports accounts receivable net of estimated explicit price concessions and any allowance for credit losses. Collection of accounts receivable is the Company’s primary source of cash and is critical to its operating performance. The Company’s primary collection risks relate to co-payments and other amounts owed by patients and amounts owed by health systems. The Company regularly reviews the adequacy of the allowance for credit losses based on a combination of factors, including historical losses adjusted for current market conditions, the Company’s customers’ financial condition, delinquency trends, aging behaviors of receivables, credit and liquidity indicators for industry groups, and future market and economic conditions. Accounts receivable deemed uncollectable are charged against the allowance for credit losses when identified. Increases and decreases in the allowance for credit losses from patients, health systems, payers, and customers are included in general and administrative expense in the consolidated statements of operations. Changes in the allowance for credit losses were as follows: Balance at Beginning of Period Additions Write-offs and Deductions Balance at End of Period Year ended December 31, 2021 $ 271 $ 1,695 $ ( 332 ) $ 1,634 Year ended December 31, 2022 $ 1,634 $ 1,707 $ ( 2,506 ) $ 835 Capitated accounts receivable and payable related to At-Risk arrangements are recorded net in the consolidated balance sheets when a legal right of offset exists. A right of offset exists when all of the following conditions are (i) each of two parties (the Company and the third-party payer) owes the other determinable amounts; (ii) the reporting party (the Company) has the right to offset the amount owed with the amount owed by the other party (the third-party payer); (iii) the reporting party (the Company) intends to offset; and (iv) the right of offset is enforceable by law. F-12 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) The capitated accounts receivable and payable are recorded at the contract level and consist of the Company’s Capitated Revenue attributed from enrolled At-Risk members less actual paid medical claims expense. If the Capitated Revenue exceeds the actual medical claims expense at the end of the reporting period, such surplus is recorded as capitated accounts receivable within accounts receivable, net in the consolidated balance sheets. If the actual medical claims expense exceeds the Capitated Revenue, such deficit is recorded as capitated accounts payable within other current liabilities in the consolidated balance sheets. As of December 31, 2022 and 2021, the Company has capitated accounts receivable, net, of $ 50,128 and $ 23,903 , and capitated accounts payable, net, of $ 3,363 and $ 7,220 , representing amounts due from and to Medicare Advantage payers and CMS in At-Risk arrangements, respectively. The capitated accounts receivable and payable are presented net of IBNR claims liability and other adjustments. There were no significant prior period adjustments or changes to the assumptions used in estimating the IBNR claims liability as of December 31, 2022. The Company believes the amounts accrued to cover IBNR claims as of December 31, 2022 are adequate. Components of capitated accounts receivable, net is summarized be December 31, 2022 2021 Capitated accounts receivable $ 110,888 $ 56,384 IBNR claims liability ( 56,187 ) ( 32,320 ) Other adjustments ( 4,573 ) ( 161 ) Capitated accounts receivable, net $ 50,128 $ 23,903 Components of capitated accounts payable, net is summarized be December 31, 2022 2021 Capitated accounts payable $ ( 7,051 ) $ 5,483 IBNR claims liability 9,321 1,438 Other adjustments 1,093 299 Capitated accounts payable, net $ 3,363 $ 7,220 Activity in IBNR claims liability from September 1, 2021 through December 31, 2022 is summarized be 2022 2021 Balance as of January 1, 2022 and September 1, 2021 $ 33,758 $ 31,384 Incurred related t Current period 420,522 116,017 Prior periods ( 863 ) 526 419,659 116,543 Paid related t Current period ( 356,345 ) ( 84,770 ) Prior periods ( 31,564 ) ( 29,399 ) ( 387,909 ) ( 114,169 ) Balance as of December 31, $ 65,508 $ 33,758 Inventories Inventories consist of medical supplies, such as vaccines, and are stated at the lower of cost or net realizable value with cost being determined on a weighted average basis. Net realizable value is determined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of disposal and transportation. The cost of inventory includes product cost, shipping costs, and taxes. Management assesses the valuation of inventory and periodically adjusts the value for estimated excess and obsolete inventory based on forecasted future sales volume and pricing and through specific identification of obsolete or damaged products. F-13 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Property and Equipment, net Property and equipment are stated at cost, net of accumulated depreciation. Depreciation and amortization are computed using the straight-line method over the estimated useful lives. The general range of useful lives of other property and equipment is as follows: Estimated Useful Life Furniture and fixtures 5 to 7 years Computer equipment 3 to 5 years Computer software 1.5 to 5 years Laboratory equipment 5 to 10 years Leasehold improvements Lesser of lease term or 10 years When assets are sold or retired, the cost and related accumulated depreciation are removed from the accounts, with any resulting gain or loss recorded in general and administrative expenses in the consolidated statements of operations. Costs of repairs and maintenance are expensed as incurred. Software Developed for Internal Use The Company capitalizes costs related to internal-use software during the application development stage including consulting costs and compensation expenses related to employees who devote time to the development projects. The Company records software development costs in property and equipment, net. Costs incurred in the preliminary stages of development activities and post implementation activities are expensed in the period incurred and included in general and administrative expense in the consolidated statements of operations. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Capitalized costs associated with internal-use software are amortized on a straight-line basis over their estimated useful life, which is 1.5 to 5 years, and are included in depreciation and amortization in the consolidated statements of operations. Business Combinations The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill is measured as the excess of the consideration transferred over the fair value of assets acquired and liabilities assumed on the acquisition date. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed, these estimates are inherently uncertain and subject to refinement. The authoritative guidance allows a measurement period of up to one year from the date of acquisition to make adjustments to the preliminary allocation of the purchase price. As a result, during the measurement period the Company may record adjustments to the fair values of assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation. Upon conclusion of the measurement period or final determination of the values of the assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments will be recorded in the consolidated statement of operations. Goodwill, Intangible Assets, and Other Long-Lived Assets Goodwill The Company recognizes the excess of the purchase price over the fair value of identifiable net assets acquired as goodwill. The Company performs a qualitative assessment on goodwill at least annually on October 1st or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. If it is determined in the qualitative assessment that the fair value of a reporting unit is more likely than not below its carrying amount, then the Company will perform a quantitative impairment test. The quantitative goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. Any excess in the carrying value of a reporting unit's goodwill over its fair value is recognized as an impairment loss, limited to the total amount of goodwill allocated to that reporting unit. For purposes of goodwill impairment testing, the Company has one reporting unit. There were no goodwill impairments recorded during the years ended December 31, 2022, 2021, and 2020. Intangible Assets and Other Long-Lived Assets The Company amortizes the acquired finite-lived intangible assets on a straight-line basis over its estimated useful lives, which ranges from 3 to 9 years. Intangible assets are reviewed for impairment in conjunction with other long-lived assets. The F-14 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Company's long-lived assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset or asset group may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset or asset group to the future undiscounted cash flows expected to be generated by the asset or asset group. If such asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. There were no long-lived asset impairments recorded during the years ended December 31, 2022, 2021, and 2020. Leases The Company determines if a contract meets with definition of a lease at inception of a contract. Lease liabilities represent the obligation to make lease payments and right-of-use ("ROU") assets represent the right to use the underlying asset during the lease term. Leases with a term greater than one year are recognized in the consolidated balance sheet as lease liabilities and ROU assets at the commencement date of the lease based on the present value of lease payments over the lease term. The Company has elected not to recognize on the balance sheet leases with terms of one year or less. When the implicit rate is unknown, an incremental borrowing rate based on the information available at the commencement date is used in determining the present value of the lease payments. Options to extend or terminate the lease are included in the determination of the lease term when it is reasonably certain that the Company will exercise such options. Operating lease ROU assets are adjusted for (i) payments made at or before the commencement date, (ii) initial direct costs incurred, and (iii) tenant incentives under the lease. When a lease contains an escalation clause or a concession, such as a rent holiday or tenant improvement allowance, the Company includes these items in the determination of the ROU asset and the lease liabilities. The effects of these escalation clauses or concessions have been reflected in lease expenses on a straight-line basis over the expected lease term and any variable lease payments subsequent to establishing the lease liability are expensed as incurred. Certain lease agreements include rental payments that are adjusted periodically for inflation or other variables. In addition to rent, the leases may require the Company to pay additional amounts for taxes, insurance, maintenance, and other expenses, which are generally referred to as non-lease components. Such adjustments to rental payments and variable non-lease components are treated as variable lease payments and recognized in the period as incurred. Variable lease components and variable non-lease components are not measured as part of the right-of-use assets and lease liability. Only when lease components and their associated non-lease components are fixed are they recognized as part of the right-of-use assets and lease liability. The Company has made an accounting policy election to not separate lease and non-lease components to all asset classes. Rather, each lease component and the related non-lease components will be accounted for together as a single component. A portfolio approach is applied where appropriate to certain lease contracts with similar characteristics. The Company's lease agreements do not contain any significant residual value guarantees or material restrictive covenants imposed by the leases. Operating leases are included in right of use assets, operating lease liabilities, current and operating lease liabilities, non-current on the Company's consolidated balance sheets. Finance leases are included in property and equipment, net, other current liabilities, and other long-term liabilities in the Company's consolidated balance sheets. Finance leases are not material. Income Taxes Income taxes are computed using the asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements. In estimating future tax consequences, the Company considers all expected future events other than enactment of changes in tax laws or rates. A valuation allowance is recorded, if necessary, to reduce net deferred tax assets to their realizable values if management does not believe it is more likely than not that the net deferred tax assets will be realized. The Company accounts for uncertainty in income taxes pursuant to authoritative guidance to recognize and measure uncertain tax positions taken or expected to be taken in a tax return. The Company can recognize the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit can be recognized. Assessing an uncertain tax position begins with the initial determination of the sustainability of the position and is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed. Additionally, the Company must accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. F-15 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) The Company's policy is to recognize interest and penalties related to uncertain tax positions in the provision for income taxes. As of December 31, 2022 and 2021, the Company had no accrued interest or penalties related to uncertain tax positions. Net Loss per Share Attributable to 1Life Healthcare, Inc. Stockholders The Company applies the two-class method to compute basic and diluted net loss per share attributable to 1Life Healthcare, Inc. stockholders when shares meet the definition of participating securities. The two-class method determines net loss per share for each class of common and redeemable convertible preferred stock according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income (loss) available to common stockholders for the period to be allocated between common and redeemable convertible preferred stock based upon their respective rights to share in the earnings as if all income (loss) for the period had been distributed. During periods of loss, there is no allocation required under the two-class method since the redeemable convertible preferred stock does not have a contractual obligation to share in the Company’s losses. Basic net loss per share attributable to 1Life Healthcare, Inc. stockholders is computed by dividing net loss attributable to 1Life Healthcare, Inc. stockholders by the weighted-average number of common shares outstanding during the period without consideration of potentially dilutive common stock. Diluted net loss per share attributable to 1Life Healthcare, Inc. stockholders reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company unless inclusion of such shares would be anti-dilutive. For periods in which the Company reports net losses, diluted net loss per common share attributable to 1Life Healthcare, Inc. stockholders is the same as basic net loss per common share attributable to 1Life Healthcare, Inc. stockholders, because potentially dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. Revenue Recognition The Company's net revenue consists of Medicare revenue and commercial revenue. Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. The Company determines revenue recognition through the following steps: (i) Identify the contract(s) with a customer; (ii) Identify the performance obligations in the contract; (iii) Determine the transaction price; (iv) Allocate the transaction price to the performance obligations in the contract; and (v) Recognize revenue as the entity satisfies a performance obligation. Medicare Revenue Medicare revenue consists of (i) Capitated Revenue and (ii) fee-for-service and other revenue. Capitated Revenue The Company receives a per member per month (“PMPM”) fee under At-Risk arrangements, which refers to a model in which the Company receives a PMPM fee from the third-party payer, and is responsible for managing a range of healthcare services and associated costs of its members. Under certain contracts, the Company adjusts the PMPM fees for a percentage share of any additional gross capitated revenues and associated medical claims expense generated by the provision of healthcare services not directly provided by the Company. The capitated revenues, medical claims expense, and related adjustments are recorded gross because the Company is acting as a principal in arranging, providing, and controlling the managed healthcare services provided to the eligible enrolled members. The Company’s contracts, which are negotiated by the payer on behalf of its enrolled members, generally have a term of two years or longer. The Company considers its obligation to provide healthcare services to all enrolled members under a given contract as a single performance obligation. This performance obligation is to stand ready to provide managed healthcare services and it is satisfied over time as measured by months of service provided. The Company’s revenues are based on the PMPM amounts it is entitled to receive from the payers, subject to estimates for variable considerations due to changes in the member population and the member's health status (acuity). The adjustment to the PMPM fees must also be estimated due to reporting lag times, and requires significant judgment. These are estimated using the expected value methodology based on historical data and actuarial inputs. Final adjustments related to the contracts may take up to 18 months due to reserves for claims incurred but not reported. The Company recognizes revenue in the month in which eligible members are entitled to receive healthcare benefits during the contract term. The variable consideration is estimated and recorded as earned, which is directly related to the period F-16 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) in which the services are performed. The Company does not have a historical pattern of granting material concessions or waiving fees and, as such, does not include any such estimate in the transaction price of its contracts. Fee-for-service and Other Revenue The Company recognizes fee-for-service Medicare revenue as services are rendered, which are delivered over a period of time, but typically within one day, when the Company provides services to Other Patients not covered under At-Risk arrangements. The Company receives payments for services from third-party payers as well as from Other Patients where they may bear some cost of the service in the form of co-pays, coinsurance, or deductibles. Providing medical services to patients represents the Company’s performance obligation under these contracts, and accordingly, the transaction price is allocated entirely to the one performance obligation. Fee-for-service Medicare revenue is reported net of provisions for contractual allowances from third-party payers and Other Patients. The Company does not have a historical pattern of granting material concessions or waiving fees and, as such, does not include any such estimate in the transaction price of its fee-for-service contracts. The Company may be entitled to one-time payments under certain contracts to compensate the Company for clinical start-up, administration, and on-going coordination of care activities. Such payments are recognized ratably over the length of the term stated in the contracts as they are refundable on a pro-rata basis if the Company ceases to provide services at the specified clinics prior to the contractual end date. These payments are part of the transaction price that is fully allocated to the single performance obligation to provide healthcare services on a stand-ready basis. Commercial Revenue Commercial revenue consists of (i) partnership revenue, (ii) net fee-for-service revenue, and (iii) membership revenue. Partnership Revenue Partnership revenue is generated from (i) contracts with health systems as health network partners, (ii) contracts with employers to provide professional clinical services to employee members, and (iii) contracts with employers, schools, and universities to provide COVID-19 on-site testing service. The Company's main performance obligation under the various partnership arrangements is to stand ready to provide professional clinical services and the associated management and administrative services. As the services are provided concurrently over the contract term and have the same pattern of transfer, the Company has concluded that this represents one performance obligation comprising of a series of distinct services over the contract term. The Company also receives an incentive from certain health network partners to open new clinics, which is considered a distinct performance obligation from the stand-ready obligation to provide clinical and administrative services. Revenue is recognized when the performance obligation is satisfied upon the opening of the new location. While the Company can receive either fixed or variable fees from its enterprise clients (i.e., stated fee per employee per month) for medical services, it generally receives variable fees from health networks primarily on a stated fee PMPM basis, based on the number of members (or participants) serviced. The Company also receives variable fees from enterprise clients, schools, and universities on a stated fee per each COVID-19 on-site testing per month basis, based on the number of tests delivered. The Company recognizes revenue as it satisfies its performance obligation. For fixed-fee agreements the Company uses a time-based measure to recognize revenue ratably over the contract term. For variable-fee agreements with health networks, the Company allocates the PMPM variable consideration to the month that the fee is earned, correlated with the amount of services it is providing, which is consistent with the allocation objective of the series guidance. For variable-fee arrangements with employers, schools, and universities to provide COVID-19 on-site testing services, revenue is recognized as services are rendered. The Company generally invoices for the on-site testing services as the work is incurred and monthly in arrears. From time to time, the Company may provide discounts and rebates to the customer. The Company estimates the variable consideration subject to the constraint and recognizes such variable consideration over the contract term. The estimate of variable consideration is based on the Company’s assessment of historical, current, and forecasted performance. The reserves for variable consideration are recorded as customer refund liabilities within other current liabilities in the consolidated balance sheets. Net Fee-For-Service Revenue Net fee-for-service revenue is generated from providing primary care services pursuant to contracts with the Company's Consumer and Enterprise members. The Company recognizes revenue as services are rendered, which are delivered over a period of time, but typically within one day, when the Company provides services to Consumer and Enterprise members. The Company receives payments for services from third-party payers as well as from Consumer and Enterprise members who have health insurance where they may bear some cost of the service in the form of co-pays, coinsurance, or deductibles. In addition, patients who do not have health insurance are required to pay for their services in full. Providing medical services to patients F-17 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) represents the Company's performance obligation under the contracts, and accordingly, the transaction price is allocated entirely to the one performance obligation. Net fee-for-service revenue is reported net of provisions for contractual allowances from third-party payers and Consumer and Enterprise members. The Company has certain agreements with third-party payers that provide for reimbursement at amounts different from the Company's standard billing rates. The differences between the estimated reimbursement rates and the standard billing rates are accounted for as contractual adjustments, which are deducted from gross revenue to arrive at net fee-for-service revenue. The Company estimates implicit price concessions related to payer and patient receivable balances as part of estimating the original transaction price which is based on historical experience, current market conditions, the amount of any receivables in dispute, current receivables aging, and other collection indicators. Membership Revenue Membership revenue is generated from annual membership fees paid by consumer members and from enterprise clients who purchase access to memberships for their employees and dependents. The terms of service on the Company's website serve as the contract between the Company and consumer members. The Company enters into written contracts with enterprise clients. The transaction price for contracts with enterprise clients is determined on a per employee per month basis, based on the number of employees eligible for membership established at the beginning of the contract term, which is generally one year. The transaction price for the contract is stated in the contract or determinable and is generally collected in advance of the contract term. The Company may provide numerous services under the agreements; however, these services are generally not considered individually distinct as they are not separately identifiable in the context of the agreement. As a result, the Company's single performance obligation in the transaction constitutes a series for the provision of membership and services as and when requested over the membership term. The transaction price relates specifically to the Company's efforts to transfer the services for a distinct increment of the series. Accordingly, the transaction price is allocated entirely to the one performance obligation. Membership revenue is recognized ratably over the contract period with the individual member or enterprise client. Unrecognized but collected amounts are recorded to deferred revenue and amortized over the remainder of the applicable membership period. Contracts with Multiple Performance Obligations Certain contracts with customers contain multiple performance obligations that are distinct and accounted for separately. The transaction price is allocated to the separate performance obligations on a relative standalone selling price ("SSP") basis. The Company determines SSP for all performance obligations using observable inputs, such as standalone sales and historical contract pricing. SSP is consistent with the Company's overall pricing objectives, taking into consideration the type of services. SSP also reflects the amount the Company would charge for that performance obligation if it were sold separately in a standalone sale, and the price the Company would sell to similar customers in similar circumstances. Deferred Revenue The Company records deferred revenue, which is a contract liability, when it has an obligation to provide services to a customer and payment is received in advance of performance. Medical Claims Expense Medical claims expenses consist of certain third-party medical expenses paid by payers contractually on behalf of the Company. Medical claims expense is recognized in the period in which services are provided and includes an estimate of the Company’s obligations for medical services that have been provided to its members and patients but for which claims have not been received or processed, and for liabilities for third-party physician, hospital, and other medical expense disputes. Medical claims expenses include such costs as inpatient and outpatient services, certain pharmacy benefits, and physician services by providers other than the physicians employed by the Company. The cost of healthcare services provided or contracted for is accrued in the period in which the services are rendered. These costs include an estimate, supported by actuarial inputs, of the related IBNR claims liability, which is based on completion factors and per member per month claim trends. Changes in this estimate can materially affect, either favorably or unfavorably, results from operations and overall financial position. The estimated reserve for IBNR claims liability is included in accounts receivable, net and other current liabilities in the consolidated balance sheets. Medical claims expense also includes provider excess insurance costs. The Company purchases provider excess insurance to protect against significant, catastrophic claim expenses incurred on behalf of its patients. The total amount of provider excess insurance premium was $ 2,783 and total reimbursements were $ 1,108 for the year ended December 31, 2022. F-18 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Provider excess insurance costs were not material for the year ended December 31, 2021. The provider excess insurance premium less reimbursement is reported in medical claims expense in the consolidated statements of operations. Cost of Care, Exclusive of Depreciation and Amortization Cost of care, exclusive of depreciation and amortization, includes provider and support employee-related costs for both virtual and in-office care, occupancy costs, medical supplies, insurance, and other operating costs. Providers include doctors of medicine, doctors of osteopathy, nurse practitioners, and physician assistants. Support employees include phlebotomists and administrative assistants assisting our members with all non-medical related services. Virtual care includes video visits and other synchronous and asynchronous communication via our app and website. Cost of care, exclusive of depreciation and amortization, also excludes stock-based compensation. Advertising The Company expenses advertising costs the first time the advertising takes place. Advertising costs are included in sales and marketing in the consolidated statements of operations. For the years ended December 31, 2022, 2021, and 2020, advertising costs were $ 51,931 , $ 32,166 , and $ 15,871 , respectively. Stock-Based Compensation The Company measures all stock-based awards granted to employees and directors based on the fair value on the date of the grant and recognizes compensation expense for those awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. For stock option grants with only service-based vesting conditions, the fair value is estimated on the date of grant using a Black-Scholes option-pricing model, which requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term of the option, the risk-free interest rate for a period that approximates the expected term of the option, and the Company's expected dividend yield. The expense for the stock option grants with only service-based vesting conditions is recorded using the accelerated attribution method. The Company also uses the Black‑Scholes option‑pricing model to estimate the fair value of its stock purchase rights under the 2020 Employee Stock Purchase Plan on the grant date. For stock option awards issued with market-based vesting conditions, the grant date fair value is determined based on multiple stock price paths developed through the use of a Monte Carlo simulation that incorporates into the valuation the possibility that the market condition may not be satisfied. A Monte Carlo simulation requires the use of various assumptions, including the underlying stock price, volatility, and the risk-free interest rate as of the valuation date, corresponding to the length of the time remaining in the performance period, and expected dividend yield. The expected term represents the derived service period for the respective tranches, which is the longer of the explicit service period or the period in which the market conditions are expected to be met. Stock-based compensation expense associated with market-based awards is recognized over the derived requisite service using the accelerated attribution method, regardless of whether the market conditions are achieved. If the related market conditions are achieved earlier than the derived service period, the stock-based compensation expense will be recognized as a cumulative catch-up expense from the grant date to that point in time in achieving the share price goal (see Note 14, "Stock-Based Compensation and Employee Benefit Plans"). Self-Insurance Program The Company self-insures for certain levels of employee medical benefits. The Company maintains a stop-loss insurance policy to protect it from individual losses over $ 275 per claim in 2022, $ 250 per claim in 2021, and $ 250 per claim in 2020. A liability for expected claims incurred but not reported is established on a monthly basis. As claims are paid, the liability is relieved. The Company reviews its self-insurance accruals on a quarterly basis based on actuarial methods to determine the liability for actual claims and claims incurred but not yet reported. As of December 31, 2022 and 2021, the Company's liability for outstanding claims (included in accrued expenses) was $ 3,835 and $ 3,000 , respectively. Recent Accounting Pronouncements Recently Adopted Pronouncements as of December 31, 2022 In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which simplifies the accounting for convertible instruments by removing certain separation models in Subtopic 470-20, Debt—Debt with Conversion and Other Options , for convertible instruments and also F-19 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) increases information transparency by making disclosure amendments. The standard is effective for private companies for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company early adopted this standard on January 1, 2021 on a modified retrospective basis. Under previous GAAP, instruments that may be partially settled in cash were in the scope of the “cash conversion” model, which required conversion features to be separately reported in equity. Upon the adoption of ASU 2020-06, the cash conversion model was eliminated and the Company no longer separates its convertible senior notes (“the 2025 Notes”) into liability and equity components and instead accounts for the 2025 Notes as a single liability instrument. As a result, there is no longer a debt discount or subsequent amortization to be recognized as interest expense. Further, ASU 2020-06 requires the use of the if-converted method for diluted earnings per share calculation, and no longer allows the use of the treasury stock method for instruments with flexible settlement arrangements. Under the previous treasury stock method, only the excess of the average stock price of the Company’s common stock for the reporting period over the conversion price was used in determining the impact to the diluted earnings per share denominator. Under the current if-converted method, all underlying shares shall be included in the denominator regardless of the average stock price for the reporting period, in addition to adding back to the numerator, the related interest expense from the stated coupon and the amortization of issuance costs, if dilutive. The prior period consolidated financial statements have not been retrospectively adjusted and continue to be reported under the accounting standards in effect for those periods. Accordingly, the cumulative-effect adjustment to the opening balance of accumulated deficit as of January 1, 2021 was as follows: December 31, 2020 As Reported Effect of the Adoption of ASU 2020-06 January 1, 2021 As Adjusted Liabilities Convertible senior notes $ 241,233 $ 66,737 $ 307,970 Stockholders' Equity Additional paid-in capital 918,118 ( 73,393 ) 844,725 Accumulated deficit $ ( 369,785 ) $ 6,656 $ ( 363,129 ) The impact of adoption to the consolidated statements of operations for the year ended December 31, 2021 was primarily a reduction of non-cash interest expense of $ 13,104 . The reduction in interest expense decreased the net loss attributable to common stockholders and decreased the basic net loss per share. The required use of the if-converted method for earnings per share does not impact the diluted net loss per share as long as the Company is in a net loss position. The adoption had no impact on the consolidated statement of cash flows. In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance which requires annual disclosures that increase the transparency of transactions involving government grants, including (i) the types of transactions, (ii) the accounting for those transactions, and (iii) the effect of those transactions on an entity’s financial statements. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2021. The Company adopted the standard on January 1, 2022 on a prospective basis. The adoption did not have a material impact to the Company's consolidated financial statements. Recently Issued Accounting Pronouncements Not Yet Adopted as of December 31, 2022 There have been no recent accounting pronouncements or changes in accounting pronouncements that are of significance or potential significance to the Company as of December 31, 2022 . 3. Variable Interest Entities 1Life, Iora Health, and Iora Senior Health's agreements with the PCs generally consist of both Administrative Services Agreements (“ASAs”), which provide for various administrative and management services to be provided by 1Life, Iora Health, or Iora Senior Health, respectively, to the PCs, and succession agreements, which provide for transition of ownership of the PCs under certain conditions ("Succession Agreements"). The ASAs typically provide that the term of the arrangements is ten to twenty years with automatic renewal for successive one-year terms, subject to termination by the contracting parties in certain specified circumstances. The outstanding voting equity instruments of the PCs are owned by nominee shareholders appointed by 1Life, Iora Health, or Iora Senior Health (or the PC in one instance) under the terms of the Succession Agreements or other shareholders who are also subject to the F-20 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) terms of the Succession Agreements. 1Life, Iora Health, and Iora Senior Health have the right to receive income as an ongoing administrative fee in an amount that represents the fair value of services rendered and has provided all financial support through loans to the PCs. 1Life, Iora Health, and Iora Senior Health have exclusive responsibility for the provision of all nonmedical services including facilities, technology, and intellectual property required for the day-to-day operation and management of each of the PCs, and makes recommendations to the PCs in establishing the guidelines for the employment and compensation of the physicians and other employees of the PCs. In addition, the agreements provide that 1Life, Iora Health, and Iora Senior Health have the right to designate a person(s) to purchase the stock of the PCs for a nominal amount in the event of a succession event. Based upon the provisions of these agreements, 1Life determined that the PCs are variable interest entities due to its equity holder having insufficient capital at risk, and 1Life has a variable interest in the PCs. The contractual arrangement to provide management services allows 1Life, Iora Health, or Iora Senior Health to direct the economic activities that most significantly affect the PCs. Accordingly, 1Life, Iora Health, or Iora Senior Health is the primary beneficiary of the PCs and consolidates the PCs under the VIE model. Furthermore, as a direct result of nominal initial equity contributions by the physicians, the financial support 1Life, Iora Health, or Iora Senior Health provides to the PCs (e.g. loans) and the provisions of the nominee shareholder succession arrangements described above, the interests held by noncontrolling interest holders lack economic substance and do not provide them with the ability to participate in the residual profits or losses generated by the PCs. Therefore, all income and expenses recognized by the PCs are allocated to 1Life stockholders. The aggregate carrying value of the assets and liabilities included in the consolidated balance sheets for the PCs after elimination of intercompany transactions and balances were $ 179,359 and $ 87,656 , respectively, as of December 31, 2022 and $ 129,474 and $ 115,744 , respectively, as of December 31, 2021. In September 2014, 1Life entered into a joint venture agreement with a healthcare system to jointly operate physician owned primary care offices in a new market. Pursuant to the formation of this joint venture, the healthcare system contributed $ 10,000 for a 56.9 % interest and 1Life contributed management expertise for a 43.1 % interest. One of the PCs had the responsibility for the provision of medical services and 1Life had responsibility for the day-to-day operation and management of the offices, including the establishment of guidelines for the employment and compensation of the physicians. Based upon this and other provisions of the operating agreement that indicated that 1Life directed the economic activities that most significantly affected the economic performance of the joint venture, 1Life determined that the joint venture was a variable interest entity and that 1Life was the primary beneficiary. The Company recorded the $ 10,000 cash received in noncontrolling interest in the consolidated balance sheet. The income and expenses of the joint venture were recorded in the consolidated statements of operations and statements of comprehensive loss as net loss attributable to noncontrolling interest. Effective April 1, 2020, 1Life terminated the joint venture agreement with the healthcare system and transferred its ownership interest in the joint venture to the healthcare system. As a result, the joint venture became a wholly owned subsidiary of the healthcare system. The joint venture was deconsolidated in the consolidated financial statements as of April 1, 2020 and the Company derecognized all assets and liabilities of the joint venture. The Company did not record a gain or loss in association with the deconsolidation as the Company did not retain any noncontrolling interest in the joint venture and no consideration was transferred as a result of the ownership interest transfer to the healthcare system. At the point of deconsolidation on April 1, 2020, 100 % of the net assets were attributable to the noncontrolling interest. The consolidated statement of operations for the year ended December 31, 2020 included the operations of the joint venture through the date of deconsolidation. The consolidated balance sheet as of December 31, 2021 does not include the operations of the joint venture. F-21 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) 4. Fair Value Measurements and Investments Fair Value Measurements The following tables present information about the Company's financial assets and liabilities measured at fair value on a recurring basis: Fair Value Measurements as of December 31, 2022 Usin Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market fund $ 69,091 $ — $ — $ 69,091 Short-term marketable securiti U.S. Treasury obligations 46,980 — — 46,980 Total financial assets $ 116,071 $ — $ — $ 116,071 Fair Value Measurements as of December 31, 2021 Usin Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market fund $ 315,817 $ — $ — $ 315,817 Short-term marketable securiti U.S. Treasury obligations 58,232 — — 58,232 Foreign government bonds — 5,012 — 5,012 Commercial paper — 48,427 — 48,427 Long-term marketable securiti U.S. Treasury obligations 48,296 — — 48,296 Total financial assets $ 422,345 $ 53,439 $ — $ 475,784 Our financial assets are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily available pricing sources for comparable instruments, identical instruments in less active markets, or models using market observable inputs. During the years ended December 31, 2022 and 2021, there were no transfers between Level 1, Level 2, and Level 3. Valuation of Convertible Senior Notes The Company has $ 316,250 aggregate principal amount outstanding of 3.0 % convertible senior notes due in 2025 (the "2025 Notes"). See Note 12 "Debt" for details. The fair value of the 2025 Notes was $ 306,064 and $ 288,461 as of December 31, 2022 and 2021, respectively. The fair value was determined based on the closing trading price of the 2025 Notes as of the last day of trading for the period. The fair value of the 2025 Notes is primarily affected by the trading price of the Company's common stock and market interest rates. The fair value of the 2025 Notes is considered a Level 2 measurement as they are not actively traded. F-22 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Investments At December 31, 2022 and 2021, the Company's cash equivalents and marketable securities were as follows: December 31, 2022 Amortized cost Gross unrealized gains (losses) Fair value Cash equivalents: Money market fund $ 69,091 $ — $ 69,091 Total cash equivalents 69,091 — 69,091 Short-term marketable securiti U.S. Treasury obligations 47,759 ( 779 ) 46,980 Total short-term marketable securities 47,759 ( 779 ) 46,980 Total cash equivalents and marketable securities $ 116,850 $ ( 779 ) $ 116,071 December 31, 2021 Amortized cost Gross unrealized gains (losses) Fair value Cash equivalents: Money market fund $ 315,817 $ — $ 315,817 Total cash equivalents 315,817 — 315,817 Short-term marketable securiti U.S. Treasury obligations 58,293 ( 61 ) 58,232 Foreign government bonds 5,013 ( 1 ) 5,012 Commercial paper 48,427 — 48,427 Total short-term marketable securities 111,733 ( 62 ) 111,671 Long-term marketable securiti U.S. Treasury obligations 48,427 ( 131 ) 48,296 Total cash equivalents and marketable securities $ 475,977 $ ( 193 ) $ 475,784 5. Revenue Recognition The following table summarizes the Company's net revenue by primary Year Ended December 31, 2022 2021 2020 Net reve Capitated revenue $ 517,395 $ 126,609 $ — Fee-for-service and other revenue 11,514 3,370 — Total Medicare revenue 528,909 129,979 — Partnership revenue 257,309 224,051 159,482 Net fee-for-service revenue 157,239 181,811 149,695 Membership revenue 102,090 85,711 68,466 Grant income — 1,763 2,580 Total commercial revenue 516,638 493,336 380,223 Total net revenue $ 1,045,547 $ 623,315 $ 380,223 F-23 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Net fee-for-service revenue (previously reported as net patient service revenue) is primarily generated from commercial third-party payers with which the One Medical entities have established contractual billing arrangements. The following table summarizes net fee-for-service revenue by Year Ended December 31, 2022 2021 2020 Net fee-for-service reve Commercial and government third-party payers $ 140,239 $ 168,426 $ 136,388 Patients, including self-pay, insurance co-pays and deductibles 17,000 13,385 13,307 Net fee-for-service revenue $ 157,239 $ 181,811 $ 149,695 The CARES Act was enacted on March 27, 2020 to provide economic relief to those impacted by the COVID-19 pandemic. The CARES Act includes various tax and lending provisions, among others. Under the CARES Act, the Company received an income grant of $ 1,763 and $ 2,580 from the Provider Relief Fund administered by the Health and Human Services ("HHS") during the years ended December 31, 2021 and 2020, respectively. The Company did not receive any income grants from the HHS for the year 2022. Management has concluded that the Company met conditions of the grant funds and has recognized it as Grant income for the years ended December 31, 2021 and 2020, respectively. During the year ended December 31, 2022, the Company recognized revenue of $ 47,501 , which was included in the beginning deferred revenue balance as of January 1, 2022. During the year ended December 31, 2021, the Company recognized revenue of $ 35,664 , which was included in the beginning deferred revenue balance as of January 1, 2021. As of December 31, 2022, a total of $ 4,539 is included within deferred revenue related to variable consideration, of which $ 3,026 is classified as non-current as it will not be recognized within the next twelve months. The estimate of variable consideration is based on the Company's assessment of historical, current, and forecasted performance. As summarized in the table below, the Company recorded contract assets and deferred revenue as a result of timing differences between the Company's performance and the customer's payment. December 31, 2022 2021 Balances from contracts with custome Capitated accounts receivable, net $ 50,128 $ 23,903 All other accounts receivable, net 87,231 79,595 Contract asset (included in other current assets) 2,209 458 Deferred revenue $ 71,048 $ 77,245 The Company does not disclose the value of remaining performance obligations for (i) contracts with an original contract term of one year or less, (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice when that amount corresponds directly with the value of services performed, and (iii) variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied distinct service that forms part of a single performance obligation. For those contracts that do not meet the above criteria, the Company's remaining performance obligation as of December 31, 2022, is expected to be recognized as follows: Less than or equal to 12 months Greater than 12 months Total As of December 31, 2022 $ 14,965 $ 21,457 $ 36,422 F-24 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) 6. Property and Equipment, net Property and equipment consisted of the followin December 31, 2022 2021 Leasehold improvements $ 203,347 $ 156,518 Computer software, including internal-use software 66,107 56,620 Computer equipment 31,261 27,237 Furniture and fixtures 21,309 17,075 Laboratory equipment 11,330 9,217 Construction in progress 18,762 19,876 352,116 286,543 L Accumulated depreciation and amortization ( 131,802 ) ( 92,827 ) $ 220,314 $ 193,716 The Company capitalized $ 37,741 , $ 11,617 , and $ 10,069 in internal-use software development costs, and recognized depreciation expense related to these assets of $ 19,599 , $ 7,181 , and $ 4,907 during the years ended December 31, 2022, 2021, and 2020, respectively. As of December 31, 2022 and 2021, the net book value of internal-use software was $ 36,683 and $ 39,441 , respectively. Total depreciation and amortization expense related to property and equipment for the years ended December 31, 2022, 2021, and 2020 was $ 47,004 , $ 31,702 and $ 22,301 , respectively. All long-lived assets are maintained in the United States. 7. Leases At inception of a contract, the Company determines if a contact meets the definition of a lease. A lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. The Company assesses throughout the period of use whether the Company has both of the followin (i) the right to obtain substantially all of the economic benefits from use of the identified asset and (ii) the right to direct the use of the identified asset. This determination is reassessed if the terms of the contract are changed. Leases are classified as operating or finance leases based on the terms of the lease agreement and certain characteristics of the identified asset. Right-of-use assets and operating lease liabilities are recognized at lease commencement date based on the present value of the minimum future lease payments. The carrying value of the Company's right-of-use assets are substantially concentrated in real estate as the Company primarily leases office space. The Company's policy is not to record leases with an original lease term of one year or less in the consolidated balance sheets. The Company recognizes lease expense for these short-term leases on a straight-line basis over the lease term. Certain lease agreements include rental payments that are adjusted periodically for inflation or other variables. In addition to rent, the leases may require the Company to pay additional amounts for taxes, insurance, maintenance, and other expenses, which are generally referred to as non-lease components. Such adjustments to rental payments and variable non-lease components are treated as variable lease payments and recognized in the period as incurred. Variable lease components and variable non-lease components are not measured as part of the right-of-use assets and lease liability. Only when lease components and their associated non-lease components are fixed are they recognized as part of the right-of-use assets and lease liability. Most leases contain clauses for renewal at the Company's option with renewal terms that generally extend the lease term from 1 to 7 years. Certain lease agreements contain options to terminate the lease before maturity. The Company does not have any lease contracts with the option to purchase as of December 31, 2022 and 2021. Payments to be made in option periods are recognized as part of the right-of-use lease assets and lease liabilities when the Company is reasonably certain that the option to extend the lease will be exercised or the option to terminate the lease will not be exercised, or is not at the Company's option. The Company determines whether the reasonably certain threshold is met by considering contract-, asset-, market-, and entity-based factors. A portfolio approach is applied where appropriate to certain lease contracts with similar characteristics. The Company's lease agreements do not contain any significant residual value guarantees or material restrictive covenants imposed by the leases. F-25 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Certain of the Company's furniture and fixtures and lab equipment are held under finance leases. Finance-lease-related assets are included in property and equipment, net in the consolidated balance sheets and are immaterial as of December 31, 2022 and 2021. The components of operating lease costs were as follows: Year Ended December 31, 2022 2021 2020 Operating lease costs $ 55,486 $ 37,214 $ 25,250 Variable lease costs 10,258 6,297 4,166 Total lease costs $ 65,744 $ 43,511 $ 29,416 Other information related to leases was as follows: Supplemental Cash Flow Information Year Ended December 31, 2022 2021 2020 Cash paid for amounts included in the measurement of lease liabiliti Operating cash flows from operating leases $ 52,743 $ 36,935 $ 24,735 Non-cash leases activity: Right-of-use lease assets obtained in exchange for new operating lease liabilities $ 54,478 $ 139,515 $ 45,957 Lease Term and Discount Rate As of December 31, 2022 2021 Weighted-average remaining lease term (in years) 7.72 8.02 Weighted-average discount rate 6.84 % 6.55 % At the lease commencement date, the discount rate implicit in the lease is used to discount the lease liability if readily determinable. If not readily determinable or leases do not contain an implicit rate, the Company's incremental borrowing rate is used as the discount rate. Management determines the appropriate incremental borrowing rates for each of its leases based on the remaining lease term at lease commencement. Future minimum lease payments under non-cancellable operating leases as of December 31, 2022 were as follows (excluding the effect of lease incentives to be received that are recorded in other current assets of $ 17,142 which serve to reduce total lease payments): As of December 31, 2022 2023 $ 61,789 2024 61,076 2025 57,129 2026 53,131 2027 49,389 Thereafter 156,183 Total lease payments 438,697 L interest ( 102,682 ) Total lease liabilities $ 336,015 The amounts in the table above do not reflect total payments for leases that have not yet commenced in the amount of $ 17,899 . F-26 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) 8. Business Combinations Acquisition of Iora On September 1, 2021 ("Acquisition Date"), 1Life acquired all outstanding equity and capital stock of Iora Health, a human-centered, value-based primary care group with built-for-purpose technology focused on serving the Medicare population, for an aggregate purchase consideration of $ 1,424,836 , which was paid through the issuance of 1Life common shares with a fair value of $ 1,313,312 , in part by cash of $ 62,881 , and in part by stock options of Iora assumed by 1Life towards pre-combination services of $ 48,643 . The acquisition was accounted for as a business combination. The final purchase price allocations resulted in $ 1,118,456 of goodwill and $ 363,031 of acquired identifiable intangible assets related to Iora trade name and contracts in existing geographies valued using the income method. Goodwill recorded in the acquisition is not deductible for tax purposes. Goodwill was primarily attributable to the planned growth in new geographies, synergies expected to be achieved in the combined operations of 1Life and Iora, and assembled workforce of Iora. The acquisition expanded the Company's reach to become a premier national human-centered, technology-powered, value-based primary care platform across all age groups. The acquisition allows the Company to participate in At-Risk arrangements with Medicare Advantage payers and CMS, in which the Company is responsible for managing a range of healthcare services and associated costs of its members. Final Purchase Price Allocation The purchase price components are summarized in the following tab Consideration in 1Life common stock (1) $ 1,313,312 Cash consideration (2) 62,881 Stock options of Iora assumed by 1Life towards pre-combination services (3) 48,643 Total Purchase Price $ 1,424,836 (1) Represents the fair value of 53,583 shares of 1Life common stock transferred as consideration consisting of 53,146 shares issued and 437 shares to be issued to former Iora shareholders for outstanding Iora capital stock based on 77,687 Iora shares with the Exchange Ratio of 0.69 for a share of Iora and 1Life's stock price of $ 24.51 as of the closing date. The fair value of the 53,583 shares transferred as consideration was determined on the basis of the closing market price of the Company's common stock one business day prior to the Acquisition Date. (2) Included in the cash consideration • $ 5,993 for the settlement of vested phantom stock awards and cash bonuses contingent on the completion of the merger. Iora's unvested phantom stock awards, to the extent they relate to post-combination services, will be paid out and expensed as they vest subsequent to the acquisition and will be treated as stock-based compensation expense. • $ 30,253 of loans made by the Company to Iora prior to the Acquisition Date • $ 5,391 of repayment of the existing Silicon Valley Bank (“SVB”) loan, which was not legally assumed as part of the merger • The remainder of the cash consideration primarily relates to transaction expenses incurred by Iora and paid by the Company as of the closing date. (3) Represents the fair value of Iora’s equity awards assumed by 1Life for pre-combination services. Pursuant to the terms of the merger agreement, Iora’s outstanding equity awards that are vested and unvested as of the effective time of the merger were replaced by 1Life equity awards with the same terms and conditions. The vested portion of the fair value of 1Life’s replacement equity awards issued represents consideration transferred, while the unvested portion represents post-combination compensation expense based on the vesting terms of the equity awards. The awards that include a provision for accelerated vesting upon a change of control are included in the vested consideration. The fair value of the stock options of Iora assumed by 1Life was determined by using a Black-Scholes option pricing model with the applicable assumptions as of the Acquisition Date. The fair value of the unvested stock awards, for which post-combination service is required, will be recorded as share-based compensation expense over the respective vesting period of each award. See Note 14, "Stock-Based Compensation and Employee Benefit Plans". F-27 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) The following table presents the final purchase price allocation recorded in the Company's consolidated balance sheet as of the Acquisition Date, which reflects measurement period adjustments as further described be Cash and cash equivalents acquired $ 17,808 Accounts receivable, net 20,166 Prepaid expenses and other current assets 3,043 Restricted cash 2,069 Property and equipment, net 29,565 Right-of-use assets 70,249 Intangible assets, net 363,031 Other assets (1) 7,405 Total assets 513,336 Accounts payable 1,974 Accrued expenses 10,077 Deferred revenue, current 5,989 Operating lease liabilities, current 6,617 Operating lease liabilities, non-current 63,558 Deferred revenue, non-current 24,316 Deferred income taxes 80,537 Other non-current liabilities (1) 13,888 Total liabilities 206,956 Net assets acquired 306,380 Merger Consideration 1,424,836 Estimated goodwill attributable to Merger $ 1,118,456 (1) Included in the other assets was an escrow asset of $ 4,336 related to 1Life common stock held by a third-party escrow agent to be released to the former stockholders of Iora, less any amounts that would be necessary to satisfy any then pending and unsatisfied or unresolved claim for indemnification for any 1Life indemnifiable loss pursuant to the indemnity provisions of the Iora Merger Agreement. A corresponding indemnification liability of $ 9,600 was recorded in other non-current liabilities in the Company's consolidated balance sheet. During the year ended December 31, 2022, a reduction in escrow asset and indemnification liability of $ 1,013 and $ 3,383 , respectively was recorded as part of the measurement period adjustment. The indemnification asset is subject to remeasurement at each reporting date due to changes to the underlying value of the escrow shares until the shares are released from escrow, with the remeasurement adjustment reported in the Company's consolidated statement of operations as interest and other income (expense). During the year ended December 31, 2022, the fair value of the escrow asset had declined and the unrealized loss recorded was immaterial for the period. The Company allocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on the estimates of fair values, which were determined primarily using the income method based on estimates and assumptions made by management at the time of the Iora acquisition. Any adjustments to the preliminary purchase price allocation identified during the measurement period have been recognized in the period in which the adjustments were determined. The Company recognized a net deferred tax liability of $ 80,537 in this business combination that is included in long-term liabilities in the accompanying consolidated balance sheet. This primarily related to identified intangible assets recorded in acquisition for which there is no tax basis. The acquired entity's results of operations were included in the Company's consolidated financial statements from the date of acquisition, September 1, 2021. For the period from September 1, 2021 through December 31, 2021, Iora contributed net revenue of $ 130,623 which is reflected in the accompanying consolidated statement of operations for the year ended December 31, 2021. Due to the integrated nature of the Company's operations, it is not practicable to separately identify earnings of Iora on a stand-alone basis. F-28 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) During the year ended December 31, 2021, the Company incurred costs related to this acquisition of $ 39,530 , that were expensed as incurred and recorded in general and administrative expenses in the accompanying consolidated statement of operations. Identifiable intangible assets are comprised of the followin Fair Value Estimated Useful Life (in years) Intangible Ass Medicare Advantage contracts - existing geographies $ 298,000 9 ACO REACH (formerly CMS' Direct Contracting) contract - existing geographies 52,000 9 Trade n Iora 13,031 3 Total $ 363,031 Net tangible assets were valued at their respective carrying amounts as of the Acquisition Date, which approximated their fair values. Medicare Advantage contracts and ACO REACH (formerly CMS Direct Contracting) contract represent the At-Risk arrangements that Iora has with Medicare Advantage plans or directly with CMS. Trade names represent the Company’s right to the Iora trade names and associated design. Loan Agreement Under the Merger Agreement, 1Life and Iora have also entered into a Loan and Security Agreement on June 21, 2021. See Note 19 "Note Receivable" for more details. Iora had an existing credit facility with SVB, which is referred to as the SVB Facility. The SVB facility of $ 5,391 was repaid on September 1, 2021, of which $ 50 is related to the prepayment penalty. Repayment of the existing SVB loan is accounted for as part of the acquisition purchase considerations. Supplemental Unaudited Pro Forma Information The following unaudited pro forma financial information summarizes the combined results of operations for 1Life and Iora as if the companies were combined as of the beginning of fiscal year 2020. The unaudited pro forma information includes transaction and integration costs, adjustments to amortization and depreciation for intangible assets and property and equipment acquired, stock-based compensation costs and tax effects. The table below reflects the impact of material adjustments to the unaudited pro forma results for the year ended December 31, 2021 that are directly attributable to the acquisiti Year Ended December 31, Material Adjustments 2021 2020 (Decrease) / increase to expense as result of transaction and integration costs $ ( 51,433 ) $ 38,918 (Decrease) / increase to expense as result of amortization and depreciation expenses 30,757 46,405 (Decrease) / increase to expense as a result of stock-based compensation costs 1,686 12,136 (Decrease) / increase to expense as result of changes in tax effects $ ( 10,065 ) $ ( 17,880 ) The unaudited pro forma information presented below is for informational purposes only and is not necessarily indicative of our consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of fiscal year 2020 or the results of our future operations of the combined businesses. Year Ended December 31, 2021 2020 Revenue $ 834,622 $ 592,936 Net Loss $ ( 286,993 ) $ ( 247,556 ) F-29 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Other Acquisitions On April 14, 2022, the Company completed an acquisition for an aggregate purchase consideration of $ 17,263 . The aggregate purchase consideration consisted of cash of $ 10,847 , the issuance of 1Life common shares with a fair value of $ 5,541 and contingent consideration with a fair value of $ 875 . The acquisition was accounted for as a business combination. The Company does not consider this acquisition to be material to the Company’s consolidated financial statements. The purchase price allocation resulted in $ 11,709 of goodwill and $ 4,200 of acquired identifiable intangible assets related to customer relationships valued using the income approach. Intangible assets are being amortized over the useful lives of nine years . Acquisition-related costs were immaterial and were expensed as incurred in the consolidated statements of operations. Subsequent to the acquisition, the Company recorded $ 91 to goodwill for an adjustment of consideration transferred and $ 55 during the measurement period for the year ended December 31, 2022. Goodwill recorded in the acquisition is not expected to be deductible for tax purposes. In 2021, the Company completed three other acquisitions for $ 9,908 of total cash consideration. The acquisitions were each accounted for as business combinations. The Company does not consider these acquisitions to be material, individually or in aggregate, to the Company’s consolidated financial statements. The purchase price allocations resulted in $ 5,880 of goodwill and $ 3,921 of acquired identifiable intangible assets related to customer relationships valued using the income method. Intangible assets are being amortized over their respective useful lives of three or seven years . Acquisition-related costs were immaterial and were expensed as incurred in the consolidated statements of operations. During the year ended December 31, 2022, the Company received $ 847 of contingent consideration from one of its acquirees. 9. Goodwill and Intangible Assets Goodwill On September 1, 2021, the Company completed the acquisition of Iora, which was accounted for as a business combination resulting in $ 1,118,456 in goodwill. See Note 8 "Business Combinations". During the second quarter ended June 30, 2022, broadly in line with the stock market declines, the Company’s common stock declined significantly and dropped below its equity book value, which triggered a goodwill impairment analysis under FASB Topic 350 Intangibles – Goodwill and Other . For the purposes of the impairment analysis, goodwill was tested at the entity level as the Company has only one reporting unit. In determining the fair value of the reporting unit, the Company used a combination of the income approach and the market approach, with each method weighted equally. Under the income approach, fair value was determined based on our estimates of future after-tax cash flows, discounted using the appropriate weighted average cost of capital. Under the market approach, the fair value was derived based on the valuation multiples of comparable publicly traded companies. As of June 30, 2022, the fair value of the reporting unit significantly exceeded its net book value, therefore no impairment charge for the three and six months ended June 30, 2022. The Company performed its annual goodwill impairment analysis on October 1, 2022 using the qualitative approach. The fair value of the reporting unit significantly exceeded its book value as of the annual assessment date, hence, no goodwill impairments were recorded during the years ended December 31, 2022 and 2021. Goodwill activity for the year ended December 31, 2022 consisted of the followin Amount Balance as of December 31, 2021 $ 1,147,464 Goodwill recorded in connection with acquisitions 11,709 Measurement period adjustments ( 1,772 ) Balance as of December 31, 2022 $ 1,157,401 Goodwill activity for the year ended December 31, 2021 consisted of the followin Amount Balance as of December 31, 2020 $ 21,301 Goodwill recorded in connection with acquisitions 1,130,124 Measurement period adjustments ( 3,961 ) Balance as of December 31, 2021 $ 1,147,464 F-30 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Intangible Assets The Company recorded amortization expense of $ 44,181 , $ 14,794 , and $ 23 for the years ended December 31, 2022, 2021, and 2020. The Company had no intangible assets as of December 31, 2020. The following summarizes the Company’s intangible assets and accumulated amortization as of December 31, 2022: December 31, 2022 Original Cost Accumulated Amortization Net Book Value Medicare Advantage contracts - existing geographies $ 298,000 $ ( 44,148 ) $ 253,852 ACO REACH (formerly CMS' Direct Contracting) contract - existing geographies 52,000 ( 7,704 ) 44,296 Trade n Iora 13,031 ( 5,792 ) 7,239 Customer relationships 8,121 ( 1,331 ) 6,790 Total intangible assets $ 371,152 $ ( 58,975 ) $ 312,177 The following summarizes the Company’s intangible assets and accumulated amortization as of December 31, 2021: December 31, 2021 Original Cost Accumulated Amortization Net Book Value Medicare Advantage contracts - existing geographies $ 298,000 $ ( 11,037 ) $ 286,963 ACO REACH (formerly CMS' Direct Contracting) contract - existing geographies 52,000 ( 1,926 ) 50,074 Trade n Iora 13,031 ( 1,448 ) 11,583 Customer relationships 3,921 ( 383 ) 3,538 Total intangible assets $ 366,952 $ ( 14,794 ) $ 352,158 Purchased intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The change in purchased intangible assets gross carrying amount resulted primarily from the Iora acquisition. See Note 8 "Business Combinations". As of December 31, 2022, estimated future amortization expense related to intangible assets were as follows: December 31, 2022 2023 $ 44,297 2024 44,297 2025 42,818 2026 39,880 2027 39,880 2028 and thereafter 101,005 Total $ 312,177 F-31 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) 10. Accrued Expenses and Other Current Liabilities Accrued expenses consisted of the followin December 31, 2022 2021 Accrued employee compensation and benefits $ 40,590 $ 37,970 Inventories received not yet invoiced 2,950 4,066 Construction in progress 7,090 5,962 Self-insurance programs 3,835 3,000 Legal and professional fees 13,688 8,744 Medical office and lab supplies 2,558 2,026 Other accrued expenses 17,896 10,904 Total $ 88,607 $ 72,672 Other current liabilities consisted of the followin December 31, 2022 2021 Legal settlement liability $ — $ 11,273 Customer refund liabilities 2,267 10,223 Capitated accounts payable 3,363 7,220 Other current liabilities 5,208 2,916 Total $ 10,838 $ 31,632 11. Self-Insurance Reserves The following table provides a roll-forward of the insurance reserves related to the Company's self-insurance program: Year Ended December 31, 2022 2021 2020 Beginning balance $ 3,000 $ 1,936 $ 1,753 Expenses incurred 33,794 22,909 16,577 Expenses paid ( 32,959 ) ( 21,845 ) ( 16,394 ) Ending balance $ 3,835 $ 3,000 $ 1,936 12. Debt Term Notes In January 2013, the Company entered into a loan and security agreement with an institutional lender and with subsequent amendments for borrowings of $ 11,000 at an interest rate at the greater of prime plus 1.81 % or 5.56 %, ("the "LSA"). In connection with the LSA agreement, the Company issued to the lenders 494,833 warrants. Borrowings under the LSA were secured by substantially all of the Company's properties, rights and assets, excluding intellectual property. On September 1, 2020, the term notes under the LSA matured and the remaining outstanding principal was repaid, plus accrued and unpaid interest. For the year ended December 31, 2020, the Company recorded aggregate interest expense of $ 86 . The non-cash interest expense related to the accretion of debt discounts for common and redeemable convertible preferred stock warrants included in the aggregate interest expense for the year ended December 31, 2020 was immaterial. The Company's annual effective interest rate was approximately 6.0 % for the year ended December 31, 2020. During the year ended December 31, 2020, the Company made aggregate principal payments of $ 3,300 . F-32 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Convertible Senior Notes In May 2020, the Company issued and sold $ 275,000 aggregate principal amount of 3.0 % convertible senior notes due 2025 in a private offering exempt from the registration requirements of the Securities Act of 1933, and in June 2020, the Company issued an additional $ 41,250 aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment option by the initial purchasers of the 2025 Notes. The 2025 Notes are unsecured obligations and bear interest at a fixed rate of 3.0 % per annum, payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2020. The 2025 Notes will mature on June 15, 2025, unless earlier converted, redeemed or repurchased. The total net proceeds from the debt offering, after deducting the initial purchasers' commissions and other issuance costs, were $ 306,868 . Each $ 1 principal amount of the 2025 Notes will initially be convertible into 0.0225052 shares of the Company's common stock, which is equivalent to an initial conversion price of $ 44.43 per share, subject to adjustment upon the occurrence of specified events but not for any accrued and unpaid interest. Holders may convert the 2025 Notes at their option at any time prior to the close of business on the business day immediately preceding March 15, 2025 only under the following circumstanc (i) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day; (ii) during the five business day period after any ten consecutive trading day period (the "measurement period") in which the trading price (as defined below) per $ 1 principal amount of the 2025 Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day; (iii) if the Company calls such 2025 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (iv) upon the occurrence of specified corporate events. It is the Company's current intent to settle conversions through combination settlement comprising of cash and equity. On or after March 15, 2025 until the close of business on the business day immediately preceding the maturity date, holders may convert all or any portion of their 2025 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election and in accordance with the terms of the indenture governing the 2025 Notes. If the Company satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of the Company's common stock, the amount of cash and shares of common stock, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 40 trading day observation period. In addition, following certain corporate events that occur prior to the maturity date or if the Company delivers a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 2025 Notes in connection with such a corporate event or notice of redemption, as the case may be. If the Company undergoes a fundamental change prior to the maturity date, holders of the 2025 Notes may require the Company to repurchase for cash all or any portion of their notes at a repurchase price equal to 100 % of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. If consummated, the Amazon Merger is expected to constitute both a “fundamental change” and a “make-whole fundamental change” (each as defined in the indenture governing the 2025 Notes). Upon the occurrence of a fundamental change, holders of the 2025 Notes may convert their 2025 Notes for a period and, subject to limited exceptions, may require the Company to repurchase for cash all or any portion of their 2025 Notes at a fundamental change repurchase price equal to 100 % of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. With respect to a make-whole fundamental change, the $ 18 per share purchase price in the Amazon Merger is below the lowest stock price on the “make-whole” table included in the indenture governing the 2025 Notes and converting holders of the 2025 Notes will not receive additional conversion consideration in connection with any conversion of their 2025 Notes as a result of the make-whole fundamental change. In addition, if specific corporate events occur prior to the applicable maturity date, the Company will increase the conversion rate for a holder who elects to convert their 2025 Notes in connection with such a corporate event in certain circumstances. The Company may not redeem the 2025 Notes prior to June 20, 2023. The Company may redeem for cash all or any portion of the 2025 Notes, at the Company's option, on or after June 20, 2023 and prior to March 15, 2025, if the last reported sale price of the Company's common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100 % of the principal amount of the 2025 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the notes. During the year ended F-33 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) December 31, 2022, the conditions allowing holders of the 2025 Notes to convert have not been met. The 2025 Notes are therefore not convertible as of December 31, 2022 and are classified in long term liabilities in the consolidated balance sheet. The Company adopted ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), ("ASU 2020-06"), as of January 1, 2021. Under ASU 2020-06, the Company is no longer required to bifurcate the equity component from the liability component for the 2025 Notes and instead accounts for it as a single liability instrument. Comparative prior period consolidated financial statements have not been restated for ASU 2020-06 and are not directly comparable to the current period consolidated financial statements. See Note 2, "Summary of Significant Accounting Policies" for details on adoption impact. The Company incurred issuance costs of $ 9,374 and amortizes the issuance costs to interest expense over the contractual term of the 2025 Notes at an effective interest rate of 0.65 %. The net carrying amount of the 2025 Notes was as follows: Year Ended December 31, Liabiliti 2022 2021 Principal $ 316,250 $ 316,250 Unamortized issuance costs ( 4,531 ) ( 6,406 ) Net carrying amount $ 311,719 $ 309,844 The following table sets forth the interest expense recognized related to the 2025 Not Year Ended December 31, 2022 2021 2020 Contractual interest expense $ 9,488 $ 9,488 $ 5,587 Amortization of debt discount — — 7,194 Amortization of issuance costs 1,875 1,875 556 Total interest expense related to the 2025 Notes $ 11,363 $ 11,363 $ 13,337 13. Common Stock As of December 31, 2022 and 2021, the Company's Certificate of Incorporation, as amended and restated, authorized the Company to issue 1,000,000 and 1,000,000 shares of common stock, respectively, par value of $ 0.001 per share. Each share of common stock is entitled to one vote. Initial Public Offering On February 4, 2020, the Company closed its initial public offering ("IPO") and sold 20,125 shares of common stock, including the underwriters' option to purchase additional shares at the IPO price. The public offering price of the shares sold in the IPO was $ 14.00 per share. In aggregate, the shares issued in the offering generated $ 258,119 in net proceeds, which amount is net of $ 18,314 in underwriters' discount and commissions, and $ 5,317 in offering costs. Upon the closing of the IPO, all shares of redeemable convertible preferred stock then outstanding were automatically converted into 86,257 shares of common stock and all redeemable preferred stock warrants were converted into warrants to purchase 668 shares of common stock. In addition, 1,590 options held by a named executive officer that were subject to immediate vesting upon the execution of the IPO underwriting agreement vested and accordingly, $ 3,506 of stock-based compensation expense was recognized. In June 2020, the Company completed a secondary offering in which certain stockholders sold 8,300 shares of common stock at an offering price of $ 31.00 per share. The selling stockholders received all of the net proceeds from the sale of shares in this offering. The Company did not sell any shares or receive any proceeds in this secondary offering. F-34 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) The Company had reserved shares of common stock for issuance in connection with the followin December 31, 2022 2021 2020 Options outstanding under the Equity Incentive Plans 13,187 28,312 28,273 Unvested restricted stock 13,396 3,249 1,291 Common stock reserved for issuance in connection with acquisitions — 1,177 — Options available for future issuance 11,074 12,972 9,855 37,657 45,710 39,419 14. Stock-Based Compensation and Employee Benefit Plans Stock Incentive Plan The Company has the following stock-based compensation pla the 2007 Equity Incentive Plan (the "2007 Plan"), the 2017 Equity Incentive Plan (the "2017 Plan"), and the 2020 Equity Incentive Plan (the "2020 Plan", and, together with the 2007 Plan and the 2017 Plan, the "Plans"). In January 2020, the Company's stockholders approved the 2020 Equity Incentive Plan, which took effect upon the execution of the underwriting agreement for the Company's IPO in January 2020. The 2020 Plan is intended as the successor to and continuation of the 2007 Plan and the 2017 Plan. The number of shares of common stock reserved for issuance under the Company's 2020 Plan will automatically increase on January 1 of each year, beginning on January 1, 2021, and continuing through and including January 1, 2030, by 4 % of the total number of shares of common stock outstanding on December 31 of the immediately preceding calendar year, or a lesser number of shares determined by the Company's board prior to the applicable January 1st. The number of shares issuable under the Plans is adjusted for capitalization changes, forfeitures, expirations and certain share reacquisitions. The Plan provides for the grants of incentive stock options ("ISOs"), nonstatutory stock options ("NSOs"), restricted stock awards, and restricted stock unit awards ("RSUs"). ISOs may be granted only to employees, including officers. All other awards may be granted to employees, including officers, non-employee directors and consultants. The 2020 Plan provides that grants of ISOs will be made at no less than the estimated fair value of common stock, as determined by the Board of Directors, at the date of grant. Stock options granted to employees and nonemployees under the Plans generally vest over four years . Options granted under the Plans generally expire ten years after the date of grant. At December 31, 2022, 4,384 shares were available for future grants. 2020 Employee Stock Purchase Plan In January 2020, the Company's stockholders approved the 2020 Employee Stock Purchase Plan ("ESPP") Plan. The 2020 ESPP became effective upon the execution of the underwriting agreement for the Company's IPO in January 2020. The Company has initially reserved 2,800 shares of common stock for issuance under the 2020 ESPP. The reserve will automatically increase on January 1st of each calendar year for a period of up to ten years , commencing on January 1, 2021 and ending on (and including) January 1, 2030, in an amount equal to the lesser of (i) 1.5 % of the total number of shares of Common Stock outstanding on December 31st of the preceding fiscal year, (ii) 2,800 shares, and (iii) a number of shares determined by the Company's board. At December 31, 2022, 6,690 shares were available for future issuance. The ESPP allows eligible employees to contribute, through payroll deductions, up to 15 % of their earnings for the purchase of the Company's common stock at a discounted price per share, subject to limitations imposed by federal income tax regulations. The price at which common stock is purchased under the ESPP is equal to 85 % of the fair market value of the Company's common stock on the first or last day of the offering period, whichever is lower. The initial offering period ran from January 31, 2020 to August 15, 2020 and the second offering period ran from August 16, 2020 to November 15, 2020. The ESPP will provide for separate six-month offering periods beginning on May 16 and November 16 of each year. During the years ended December 31, 2022, 2021, and 2020, the Company's employees purchased approximately 356 , 222 , and 350 shares, respectively under the ESPP at a weighted-average price of $ 7.00 , $ 22.89 , and $ 13.83 , respectively per share. The stock-based compensation expense recognized for the ESPP was $ 969 , $ 2,139 , and $ 2,058 , respectively during the years ended December 31, 2022, 2021, and 2020. The fair value of the stock purchase right granted under the ESPP was estimated on the first day of each offering period using the Black-Scholes option pricing model. The following assumptions were used to calculate the stock-based compensation for each stock purchase right granted under the ESPP: F-35 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Year Ended December 31, 2022 2021 2020 Expected term in years 0.5 - 0.5 0.5 - 0.5 0.3 - 0.5 Expected stock price volatility 44.5 % - 73.6 % 44.5 % - 59.4 % 53.7 % - 63.5 % Risk-free interest rate 0.1 % - 1.5 % — % - 0.1 % 0.1 % - 1.5 % Expected dividend yield — % — % — % The Company discontinued its ESPP plan after the last offering in November 2022. Therefore, there was no unrecognized stock-based compensation expense related to the ESPP plan at December 31, 2022. Stock Options The following table summarizes stock option activity under the Pla Number of Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Outstanding as of December 31, 2019 27,806 $ 5.97 7.76 $ 207,956 Granted 381 22.32 Exercised ( 8,123 ) 4.39 Canceled ( 436 ) 8.06 Market-based stock options granted 8,645 43.31 Outstanding as of December 31, 2020 28,273 $ 18.03 8.20 $ 724,339 Granted 5,013 13.91 Exercised ( 4,284 ) 5.32 Canceled ( 690 ) 14.01 Outstanding as of December 31, 2021 28,312 $ 19.32 7.57 $ 192,955 Granted 1,819 12.11 Exercised ( 11,683 ) 5.04 Canceled ( 981 ) 14.75 Outstanding as of December 31, 2022 17,467 $ 28.38 7.68 $ 45,467 Options exercisable as of December 31, 2022 3,739 $ 12.26 6.71 $ 25,747 Options vested and expected to vest as of December 31, 2022 8,048 $ 7.93 3.97 $ 16,813 The aggregate intrinsic value of service-based options exercised for the years ended December 31, 2022, 2021, and 2020 was $ 129,572 , $ 133,807 , and $ 206,143 , respectively. At December 31, 2022, there was $ 10,956 in unrecognized compensation expense related to service-based options, net of forfeitures, that is expected to be recognized over a weighted-average period of 1.4 years. Fair Value of Stock Options Granted The fair value of stock option grants with service-based vesting conditions is estimated using the Black-Scholes option-pricing model. The Company lacks company-specific historical and implied volatility information. Therefore, it estimated its expected stock volatility based on the historical volatility of a publicly traded set of peer companies. For options with service-based vesting conditions, the expected term of the Company's stock options has been determined utilizing the "simplified" method for awards that qualify as "plain-vanilla" options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future. F-36 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) We estimated the fair value of stock option grants with service-based vesting conditions using a Black-Scholes option pricing model with the following assumptions presented on a weighted-average basis: Year Ended December 31, 2022 2021 2020 Expected term in years 6.0 5.1 6.0 Expected stock price volatility 55.2 % 53.7 % 57.4 % Risk-free interest rate 1.7 % 0.9 % 0.9 % Expected dividend yield — % — % — % Estimated fair value per option granted $ 6.38 $ 18.56 $ 11.88 The fair value of stock option grants with service-based vesting conditions for the years ended December 31, 2022, 2021, and 2020 was $ 11,598 , $ 93,062 , and $ 4,519 , respectively. Assumed Equity Awards As of the Acquisition Date, the Company assumed Iora’s outstanding equity awards related to stock options and phantom stock. The awards under the assumed equity plan were generally settled as follows: • Optio All Iora options outstanding on the close date were assumed by 1Life and converted into options to acquire shares of 1Life common stock. The vested and unvested options, to the extent related to pre-combination services were included in the consideration transferred. Iora’s unvested options, to the extent they relate to post-combination services, will be expensed as they vest post acquisition and will be treated as stock-based compensation expense. See Note 8 "Business Combinations". • Phantom stoc Each Iora vested phantom stock award has been settled in cash. Each Iora unvested phantom stock award has been assumed by the Company and converted into the right to receive the unvested phantom cash award. Each unvested phantom cash award will remain subject to the same terms and conditions as were applicable to the underlying unvested phantom stock award immediately prior to the close date. The unvested phantom stock award is considered a liability-classified award as the settlement involves a cash payment upon the dates when these awards vest. The entire vested award and unvested phantom stock, to the extent they relate to pre-combination services, were included in the consideration transferred. Iora’s unvested phantom stock awards, to the extent they relate to post-combination services, will be expensed as they vest post acquisition and will be treated as stock-based compensation expense. See Note 8 "Business Combinations". As of the Acquisition Date, the estimated fair value of the assumed equity awards was $ 60,856 , of which $ 52,662 was allocated to the purchase price and the balance of $ 8,194 will be recognized as stock-based compensation expense over the remainder term of the assumed equity awards. The fair value of the assumed equity awards for service rendered through the Acquisition Date was recognized as a component of the acquisition consideration, with the remaining fair value related to post combination services to be recorded as stock-based compensation over the remaining vesting period. Market-based Stock Options During the year ended December 31, 2020, the Board of Directors ("Board") approved the grant of a long-term market-based stock option (the "Performance Stock Option") to the Company's Chief Executive Officer and President. The Performance Stock Option was granted to acquire up to 8,645 shares of the Company's common stock upon exercise. The Performance Stock Option consists of four separate tranches and each tranche will vest over a seven-year time period and only if the Company’s stock price sustains achievement of pre-determined increases for a period of 90 consecutive calendar days and the Chief Executive Officer remains employed with the Company. The exercise price per share of the Stock Option is the closing price of a share of the Company's common stock on the date of grant. The vesting of the Performance Stock Option can also be triggered upon a change in control. The following table presents additional information relating to each tranche of the Performance Stock Opti Tranche Stock Price Milestone Number of Options Tranche 1 $ 55 per share 1,330 Tranche 2 $ 70 per share 1,995 Tranche 3 $ 90 per share 2,660 Tranche 4 $ 110 per share 2,660 F-37 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) The grant date fair value of the Performance Stock Option is determined using a Monte Carlo simulation that incorporates estimates of the potential outcomes of the market condition on the grant with the following assumptio Year Ended December 31, 2020 Derived service period in years 1.16 - 3.09 Expected stock price volatility 55.0 % Risk-free interest rate 0.7 % Expected dividend yield — % Weighted-average fair value per option granted $ 22.84 The Company will recognize aggregate stock-based compensation expense of $ 197,469 over the derived service period of each tranche using the accelerated attribution method as long as the service-based vesting conditions are satisfied. If the market conditions are achieved sooner than the derived service period, the Company will adjust its stock-based compensation to reflect the cumulative expense associated with the vested awards. The Company recorded stock-based compensation expense of $ 53,916 , $ 60,027 and $ 490 related to the award for the years ended December 31, 2022, 2021 and 2020, respectively, which is included in general and administrative in the consolidated statements of operations. Unamortized stock-based compensation expense related to the award was $ 83,036 as of December 31, 2022. Restricted Stock Units In March 2016, the Company issued 150 shares of restricted stock pursuant to a purchase agreement that was subject to a twenty-four-month pro-rata vesting period with any unvested shares forfeited upon termination of the employees. The fair value of these shares was recorded as stock-based compensation expense in the Company's consolidated financial statements. The following table summarizes restricted stock unit activity under the Pla Number of Shares Grant Date Fair Value Unvested and outstanding as of December 31, 2019 — $ — Granted 1,490 21.52 Vested ( 65 ) 15.00 Canceled and forfeited ( 134 ) 18.74 Unvested and outstanding as of December 31, 2020 1,291 $ 22.14 Granted 2,697 30.44 Vested ( 338 ) 22.98 Canceled and forfeited ( 401 ) 30.62 Unvested and outstanding as of December 31, 2021 3,249 $ 27.90 Granted 12,648 11.66 Vested ( 996 ) 26.72 Canceled and forfeited ( 1,476 ) 16.00 Unvested and outstanding as of December 31, 2022 13,425 $ 14.00 The fair value of restricted stock units granted for the years ended December 31, 2022, 2021, and 2020 was $ 147,421 and $ 82,131 , and $ 32,071 respectively. As of December 31, 2022, there was $ 75,282 in unrecognized compensation expense related to restricted stock units, net of forfeitures, that is expected to be recognized over a weighted-average period of 1.7 years. Stock-Based Compensation Expense Total stock-based compensation expense for employees and nonemployees recognized by the Company for the years ended December 31, 2022, 2021, and 2020, was $ 146,916 , $ 112,298 , and $ 35,095 , respectively. A tax benefit of $ 35,773 , $ 33,547 , and $ 53,749 for the years ended December 31, 2022, 2021, and 2020, respectively, was included in the Company's net operating loss carry-forward that could potentially reduce future tax liabilities. F-38 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Stock-based compensation expense was classified in the consolidated statements of operations as follows: Year Ended December 31, 2022 2021 2020 Sales and marketing $ 3,618 $ 4,136 $ 2,385 General and administrative 143,298 108,162 32,710 Total $ 146,916 $ 112,298 $ 35,095 Employee Benefit Plan Effective January 1, 2007, the Company adopted a 401(k) plan that is available to all full-time employees over the age of 18, who have been employed at least three months with the Company. Eligible employees may contribute up to 90 % of their annual compensation to the 401(k) plan, subject to limitations imposed by federal income tax regulations. The Company matches 50 % of the first 5 % of amounts contributed by employees, subject to limitations by federal income tax regulations. The Company's contribution was $ 8,687 , $ 6,103 , and $ 5,051 for the years ended December 31, 2022, 2021, and 2020, respectively. 15. Income Taxes The provision for (benefit from) income taxes consists of the followin Year Ended December 31, 2022 2021 2020 Curren Federal $ ( 1,040 ) $ 1,166 $ 869 State ( 498 ) 607 1,664 Total current ( 1,538 ) 1,773 2,533 Deferr Federal ( 13,084 ) ( 3,022 ) ( 1,895 ) State ( 16,892 ) ( 553 ) ( 761 ) Total deferred ( 29,976 ) ( 3,575 ) ( 2,656 ) Total provision for (benefit from) income taxes $ ( 31,514 ) $ ( 1,802 ) $ ( 123 ) The following table reconciles the Federal statutory income tax provision to the Company's effective income tax provision. Amounts may not sum due to rounding. Year Ended December 31, 2022 2021 2020 Federal statutory income tax rate 21.0 % 21.0 % 21.0 % Valuation allowance ( 16.2 ) % ( 24.7 ) % ( 49.8 ) % State income tax expense 2.2 % ( 2.0 ) % ( 6.3 ) % Stock-based compensation 0.9 % 3.1 % 38.6 % Adoption of ASU 2020-06 — % 5.5 % — % Section 162(m) ( 0.3 ) % ( 1.1 ) % ( 0.6 ) % Transaction Costs — % ( 1.1 ) % — % Warrant fair value adjustment — % — % ( 1.5 ) % Other, net ( 0.3 ) % — % ( 1.3 ) % Effective income tax rate 7.3 % 0.7 % 0.1 % F-39 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Deferred income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company's deferred income tax assets and liabilities at December 31, 2022 and 2021 were comprised of the followin December 31, 2022 2021 Deferred tax assets: Net operating loss and credit carryforwards $ 341,102 $ 249,685 Reserves and allowances 6,066 11,675 Basis difference in fixed and intangible assets 774 290 Stock-based compensation 25,254 19,550 Lease liability 91,298 86,328 Section 163(j) interest 17,063 4,460 Total gross deferred tax assets 481,557 371,988 Valuation allowance ( 358,029 ) ( 265,898 ) Total deferred tax assets 123,528 106,090 Deferred tax liabiliti Basis difference in fixed and intangible assets ( 91,970 ) ( 106,276 ) Right-of-use assets ( 75,296 ) ( 73,372 ) Capitalized commissions ( 161 ) ( 317 ) Total deferred tax liabilities ( 167,427 ) ( 179,965 ) Net deferred tax assets (liabilities) $ ( 43,899 ) $ ( 73,875 ) Of the total deferred tax assets, none are related to the noncontrolling interest as of December 31, 2022 and 2021, respectively. A valuation allowance is required to be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. A full review of all positive and negative evidence needs to be considered, including the Company’s current and past performance, the market environments in which the Company operates, the utilization of past tax credits, length of carry back and carry forward periods, as well as tax planning strategies that might be implemented. Management believes that, based on a number of factors, it is more likely than not, that most of the deferred tax assets may not be realized; and accordingly, as of December 31, 2022 and December 31, 2021, the Company has provided a full valuation allowance against its net deferred tax assets. A partial valuation allowance was established against deferred tax assets in entities with recent cumulative losses as of December 31, 2020. The change in total valuation allowance was an increase of $ 92,131 and $ 152,128 for the years ended December 31, 2022 and 2021, respectively. At December 31, 2022, the Company had net operating loss carryforwards for federal and state and local income tax purposes of $ 1,204,940 and $ 1,225,456 , respectively, which are available to reduce future income subject to income taxes. Federal net operating losses generated after 2017, of $ 997,790 , do not expire. The remaining federal and state net operating loss carry forwards will begin to expire, if not used, at various dates beginning in tax year 2025 and 2024, respectively. As of December 31, 2022, the Company had federal credits of $ 618 and state credit carryforwards of $ 783 which are available to reduce future income tax. The federal credits will begin to expire, if not used, in tax year 2030. Some of the state credit carryforwards will begin to expire, if not used, in tax year 2023. Utilization of some of the federal, state and local net operating loss and credit carryforwards may be subject to annual limitations due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state and local provisions. The annual limitations may result in the expiration of net operating losses and credits before utilization. The Company performed a Section 382 analysis through December 31, 2021, on 1Life ownership history, including the pre-acquisition Iora group history. The Company has identified $ 25,215 and $ 30,983 of federal and state net operating losses, respectively, in the historical One Medical PCs that will expire unused due to ownership changes in the non-controlling interests. State credits of $ 71 will not be able to be utilized due to ownership change limitations in the historical One Medical PCs. The Company has identified $ 2,838 of historical Iora federal net operating losses and $ 165 of historical Iora federal credits that will expire unused. F-40 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Intended to provide economic relief to those impacted by the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted on March 27, 2020 and includes provisions, among others, addressing the carryback of net operating losses for specific periods, refunds of alternative minimum tax credits, temporary modifications to the limitations placed on the tax deductibility of net interest expenses, and technical amendments for qualified improvement property ("QIP"). Additionally, the CARES Act, in efforts to enhance business' liquidity, provides for refundable employee retention tax credits and the deferral of the employer paid portion of social security taxes. The CARES Act did not have a material impact on the Company's income taxes. On June 29, 2020, California Governor Newsom signed into law the state's budget package which included Assembly Bill 85 ("AB 85"). AB 85 contained two major tax chan (1) the suspension of net operating loss ("NOLs") utilization for certain taxpayers; and (2) the limitation of certain business tax credits for tax years 2020, 2021, and 2022. AB 85 resulted in an additional $ 105 of current expense to the Company's 2020 state income tax provision. Senate Bill 113 (SB 113), which Governor Newsom signed into law February 9, 2022, contains important California tax law changes, including reinstatement of 2022 business tax credits and NOL deductions limited by AB 85. The Company has analyzed its filing positions in all significant Federal and State jurisdictions where it is required to file income tax returns, as well as open tax years in these jurisdictions. The Company had immaterial unrecognized tax benefits as of December 31, 2022 and December 31, 2021. During the years ended December 31, 2022 and 2021, no interest or penalties were required to be recognized relating to unrecognized tax benefits. Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next twelve months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities, we do not anticipate any significant changes to unrecognized tax benefits over the next 12 months. The Company’s tax returns continue to remain subject to examination by U.S. federal and state taxing authorities for effectively all years since inception due to net operating loss carryforwards. The Company is not currently under examination in any jurisdictions. 16. Net Loss Per Share Net Loss Per Share Attributable to 1Life Healthcare, Inc. Stockholders Basic and diluted net loss per share attributable to 1Life Healthcare, Inc. stockholders were calculated as follows: Year Ended December 31, 2022 2021 2020 Numerato Net loss $ ( 397,847 ) $ ( 254,641 ) $ ( 89,421 ) L Net loss attributable to noncontrolling interest — — ( 704 ) Net loss attributable to 1Life Healthcare, Inc. stockholders $ ( 397,847 ) $ ( 254,641 ) $ ( 88,717 ) Denominato Weighted average common shares outstanding-basic and diluted 197,048 155,343 118,379 Net loss per share attributable to1Life Healthcare, Inc. stockholders- basic and diluted $ ( 2.02 ) $ ( 1.64 ) $ ( 0.75 ) The Company's potentially dilutive securities have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to 1Life Healthcare, Inc. stockholders is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from F-41 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) the computation of diluted net loss per share attributable to 1Life Healthcare, Inc. stockholders for the periods indicated because including them would have had an anti-dilutive effec Year Ended December 31, 2022 2021 2020 Options to purchase common stock 17,468 28,312 28,273 Unvested restricted stock 13,429 3,249 1,291 2025 Notes (1) 7,117 7,117 — Shares held in special indemnity escrow account in connection with Iora acquisition (2) 405 405 — 38,419 39,083 29,564 (1) Under the modified retrospective method of adoption of ASU 2020-06, the dilutive impact of convertible senior notes was calculated using the if-converted method for the year ended December 31, 2022. During the year ended December 31, 2022, the conditions allowing holders of the 2025 Notes to convert have not been met. The 2025 Notes are therefore not convertible as of December 31, 2022. See Note 2 "Summary of Significant Accounting Policies". (2) The escrow shares will terminate on the 36 -month anniversary of the closing date of the Iora acquisition. 17. Commitments and Contingencies Indemnification Agreements In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners, and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its Board of Directors and officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. As of December 31, 2022 and December 31, 2021, the Company has not incurred any material costs as a result of such indemnifications. Legal Matters In May 2018, a class action complaint was filed by two former members against the Company in the Superior Court of California for the County of San Francisco (the "Court"), alleging that the Company made certain misrepresentations resulting in them paying the Annual Membership Fee, or AMF, in violation of California’s Consumers Legal Remedies Act, California’s False Advertising Law and California’s Unfair Competition Law, and seeking damages and injunctive relief. Following certain trial court proceedings and certain appeals, arbitration proceedings, and court-ordered mediation proceedings, in June 2021, the parties filed a joint notice of settlement and request for stay before the appellate court in light of reaching a settlement in principle. The parties later executed a class action settlement agreement and release effective June 30, 2021, which requires trial court approval. A preliminary class settlement approval hearing was scheduled to take place in August 2021, but the trial court requested supplemental briefing and vacated the previously scheduled hearing. Plaintiffs filed their supplemental brief and supporting documents on October 12, 2021. The trial court granted the motion for preliminary approval on November 12, 2021. Pursuant to the terms of the settlement and the trial court’s order, the class notice phase took place in late February 2022. The final approval hearing for the settlement was held on July 25, 2022. On July 26, 2022, the court granted the motion for final approval of the class action settlement. No appeals were filed. A settlement compliance hearing is currently scheduled for March 2, 2023. The settlement amount of $ 11,500 was recorded as other current liabilities in the consolidated balance sheets as of December 31, 2021. The Company's insurers committed to pay $ 5,950 towards the settlement amount. The settlement amount, net of expected insurance recovery, of which $ 5,550 was recorded as general and administrative expenses in the consolidated statements of operations for the twelve months ended December 31, 2021. The settlement fund was funded on October 3, 2022 and initial distribution of the settlement fund to recipients occurred in 2022, with redistribution continuing into 2023. F-42 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) Between August 10, 2022, and August 31, 2022, seven complaints were filed in federal court by purported stockholders of 1Life regarding the Amazon Merger. The aforementioned seven complaints are collectively referred to as the “Complaints.” The Complaints name as defendants 1Life and each member of the Board, collectively referred to as the “1Life Defendants.” The Complaints alleged violations of Section 14(a) of the Exchange Act against all 1Life Defendants and alleged violations of Section 20(a) of the Exchange Act against the members of the Board in connection with disclosures made by the 1Life Defendants related to the Merger. The Complaints sought, among other relief, (i) injunctive relief preventing the consummation of the Merger unless the 1Life Defendants disclosed certain information requested by the plaintiffs, (ii) rescission and/or rescissory damages in the event the Merger was consummated, and (iii) an award of plaintiffs’ expenses and attorneys’ fees. As of December 31, 2022, all seven of the Complaints had been voluntarily dismissed. Government Inquiries and Investigations In March 2021, the Company received (i) requests for information and documents from the United States House Select Subcommittee on the Coronavirus Crisis, (ii) a request for information from the California Attorney General and the Alameda County District Attorney’s Office, and (iii) a request for information and documents from the Federal Trade Commission relating to the Company’s provision of COVID-19 vaccinations. The Company has also received inquiries from state and local public health departments regarding its vaccine administration practices and has and may continue to receive additional requests for information from other governmental agencies relating to its provision of COVID-19 vaccinations. The Company is cooperating with these requests as well as requests received from other governmental agencies, including with respect to the Company's compensation practices and membership generation during the relevant periods. The majority staff of the Subcommittee released a memorandum of findings in December 2021. No further disclosures, testimony, or other responses have been requested by the Subcommittee. In addition, in February 2022, the Federal Trade Commission advised us that they were closing their inquiry on our provision of COVID-19 vaccinations. The Company is unable to predict the outcomes or timeline of the residual government inquiries or if any additional requests, inquiries, investigations, or other government actions may arise relating to such circumstances. Legal fees have been recorded as general and administrative expenses in the consolidated statements of operations. Sales and Use Tax During 2017 and 2018, a state jurisdiction engaged in an audit of 1Life’s sales and use tax records applicable to that jurisdiction from March 2011 through February 2017. The Company disputed the finding representing the majority of the state's proposed audit change and successfully overturned the sales tax assessment resulting from the audit in December 2021. The audit was closed and the payment, which was not material, was remitted during the first quarter ended March 31, 2022. In addition, from time to time, the Company has been and may be involved in various legal proceedings arising in the ordinary course of business. The Company currently believes that the outcome of these legal proceedings, either individually or in the aggregate, will not have a material effect on its consolidated financial position, results of operations or cash flows. 18. Related Party Transactions Certain of the Company's investors are also customers of the Company. Revenue recognized under contractual obligations from such customers was immaterial for the years ended December 31, 2022 and 2021, respectively. Revenue recognized under contractual obligations from such customers was $ 2,093 for the year ended December 31, 2020. The outstanding receivable balance from such customers was immaterial as of December 31, 2022 and December 31, 2021. 19. Note Receivable In connection with the Iora acquisition, on June 21, 2021, 1Life and Iora entered into a loan agreement under which the Company might advance secured loans to Iora to fund working capital, at Iora's request from time to time, in outstanding amounts not to exceed $ 75,000 in the aggregate. Amounts drawn under the loan agreement are secured by all assets of Iora and were subordinated to Iora's obligations under its then-existing credit facility with SVB. The loan agreement is effective through the maturity date of borrowed amounts under the loan agreement. Such maturity date is the later of 90 days following the earliest of certain maturity dates set forth in the SVB Facility. Amounts drawn bear interest at a rate equal to 10 % per year, payable monthly. As of the Acquisition Date, there was $ 30,000 drawn and outstanding under the loan agreement. Pursuant to the consummation of Iora's acquisition by 1Life, this note receivable was eliminated as part of intercompany eliminations. $ 30,253 of note receivable including accrued interests prior to the Acquisition Date was treated as purchase consideration. See Note 8 "Business Combinations" for details. F-43 1LIFE HEALTHCARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) 20. Proposed Acquisition by Amazon On July 20, 2022, the Company entered into the Merger Agreement with Amazon. Subject to the terms and conditions of the Merger Agreement, Amazon will acquire the Company for $ 18 per share in an all-cash transaction valued at approximately $ 3.9 billion, including the Company’s net debt. As a result of the Amazon Merger, the Company will become a wholly-owned indirect subsidiary of Amazon. The consummation of the Amazon Merger is subject to a number of closing conditions, including, among others, the receipt of certain regulatory approvals, as well as other customary closing conditions. In connection with the Merger, on November 14, 2022, Amazon and the Company entered into the Loan Agreement pursuant to which Amazon has agreed to provide senior unsecured financing to the Company in an aggregate principal amount of up to $ 300.0 million to be funded in up to ten tranches of $ 30.0 million per month, beginning on March 20, 2023 until the earliest of (i) the 24-month anniversary of the termination of the Merger in accordance with the terms of the Merger Agreement, (ii) if the Merger has not occurred and the Company does not refinance all of its convertible senior notes, January 1, 2025, (iii) 120 days prior to the maturity date of any indebtedness used to finance the existing convertible senior notes, and (iv) July 22, 2026. The proceeds will be used for working capital funding requirements and other general corporate purposes of the Company. Amounts drawn bear interest at a rate equal to the secured overnight financing rate for such business day announced by the Federal Reserve Bank of New York (“SOFR”) plus 3.5 % per annum, which shall increase to SOFR plus 6.0 % per annum following the merger termination date. The principal amount outstanding and all accrued and unpaid interest under the Loan Agreement is payable on the maturity date. Following the merger termination date, certain customary covenants apply under the Loan Agreement, such as limitations on indebtedness, liens, mergers or acquisitions, restricted payments, asset transfers, investments, transactions with affiliates, changes in business, dissolution, and compliance with law. Upon the occurrence of an event of default, a default interest rate of an additional 2.0 % may be applied to the outstanding loan balances, and Amazon may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan Agreement. Events of default under the Loan Agreement include customary events of default, including, but not limited t (i) failure to make any payment of principal, interest or any other obligation under the Loan Agreement when due and payable; (ii) failure to perform any obligation under any negative covenants, (iii) failure to perform any other obligations not otherwise specified in clauses (i) and (ii) subject to a 30 day cure period; (iv) change of control of the Company, other than pursuant to the Merger, (v) the Company being or becoming insolvent, beginning an insolvency proceeding, or becoming subject to an insolvency proceeding that is not dismissed or stayed within 45 days; (vi) a default under any agreement with a third party resulting in a right by such third party to accelerate the maturity of any indebtedness in an amount in excess of $ 5.0 million; or (vii) the making of a material misrepresentation. F-44

Page PART I. FINANCIAL INFORMATION 3 Item 1. Financial Statements 3 Consolidated Balance Sheets 3 Consolidated Statements Of Income 4 Consolidated Statements Of Comprehensive Income (Loss) 5 Consolidated Statements Of Changes In Shareholders’ Equity 6 Consolidated Statements Of Cash Flows 7 Notes To Interim Consolidated Financial Statements 8 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31 Item 4. Controls and Procedures 38 PART II. OTHER INFORMATION 41 Item 1. Legal Proceedings 41 Item 1A. Risk Factors 41 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 41 Item 5. Other Information 41 Item 6. Exhibits 42 Signatures 43 PART I. FINAN CIAL INFORMATION Item 1. Fina ncial Statements . ChoiceOne Financial Services, Inc. CONSOLIDAT ED BALANCE SHEETS March 31, December 31, (Dollars in thousands, except per share data) 2023 2022 (Unaudited) (Audited) Assets Cash and due from banks $ 54,839 $ 43,593 Time deposits in other financial institutions 350 350 Cash and cash equivalents 55,189 43,943 Equity securities, at fair value (Note 2) 8,699 8,566 Securities available for sale, at fair value (Note 2) 535,348 529,749 Securities held to maturity, at amortized cost (Note 2) 422,876 425,906 Federal Home Loan Bank stock 5,195 3,517 Federal Reserve Bank stock 5,064 5,064 Loans held for sale 3,603 4,834 Loans (Note 3) 1,210,583 1,189,782 Allowance for credit losses (Note 3) ( 15,065 ) ( 7,619 ) Loans, net 1,195,518 1,182,163 Premises and equipment, net 28,633 28,232 Other real estate owned, net 130 - Cash value of life insurance policies 44,241 43,978 Goodwill 59,946 59,946 Core deposit intangible 2,557 2,809 Other assets 42,887 47,208 Total assets $ 2,409,886 $ 2,385,915 Liabilities Deposits – noninterest-bearing $ 554,699 $ 599,579 Deposits – interest-bearing 1,513,429 1,518,424 Brokered deposits 37,773 - Total deposits 2,105,901 2,118,003 Borrowings 85,000 50,000 Subordinated debentures 35,323 35,262 Other liabilities 14,950 13,776 Total liabilities 2,241,174 2,217,041 Shareholders' Equity Preferred stock; shares authoriz 100,000 ; shares outstandin none — — Common stock and paid-in capital, no par value; shares authoriz 15,000,000 ; shares outstandin 7,521,749 at March 31, 2023 and 7,516,098 at December 31, 2022 172,564 172,277 Retained earnings 64,026 68,394 Accumulated other comprehensive loss, net ( 67,878 ) ( 71,797 ) Total shareholders’ equity 168,712 168,874 Total liabilities and shareholders’ equity $ 2,409,886 $ 2,385,915 See accompanying notes to interim consolidated financial statements. 3 ChoiceOne Financial Services, Inc. CONSOLIDATED STA TEMENTS OF INCOME (Unaudited) Three Months Ended (Dollars in thousands, except per share data) March 31, 2023 2022 Interest income Loans, including fees $ 14,873 $ 12,298 Securiti Taxable 4,913 3,507 Tax exempt 1,435 1,655 Other 177 14 Total interest income 21,398 17,474 Interest expense Deposits 3,276 783 Advances from Federal Home Loan Bank 605 1 Other 505 369 Total interest expense 4,386 1,153 Net interest income 17,012 16,321 Provision for credit losses on loans 309 — Provision for credit losses on unfunded commitments ( 284 ) — Net Provision for credit losses expense 25 — Net interest income after provision 16,987 16,321 Noninterest income Customer service charges 2,267 2,189 Insurance and investment commissions 196 205 Gains on sales of loans 403 804 Net gains on sales and write downs of other assets 3 171 Earnings on life insurance policies 263 280 Trust income 184 178 Change in market value of equity securities 63 ( 356 ) Other 292 374 Total noninterest income 3,671 3,845 Noninterest expense Salaries and benefits 8,083 7,606 Occupancy and equipment 1,643 1,625 Data processing 1,682 1,744 Professional fees 621 510 Supplies and postage 191 191 Advertising and promotional 149 132 Intangible amortization 252 282 FDIC insurance 300 225 Other 1,074 1,375 Total noninterest expense 13,995 13,690 Income before income tax 6,663 6,476 Income tax expense 1,030 948 Net income $ 5,633 $ 5,528 Basic earnings per share (Note 4) $ 0.75 $ 0.74 Diluted earnings per share (Note 4) $ 0.75 $ 0.74 Dividends declared per share $ 0.26 $ 0.25 See accompanying notes to interim consolidated financial statements. 4 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEME NTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) Three Months Ended (Dollars in thousands) March 31, 2023 2022 Net income $ 5,633 $ 5,528 Other comprehensive income: Change in net unrealized gain (loss) on available-for-sale securities 13,694 ( 42,767 ) Income tax benefit (expense) ( 2,876 ) 8,981 L reclassification adjustment for net (gain) loss for fair value hedge ( 6,021 ) - Income tax benefit (expense) 1,264 - Unrealized gain (loss) on available-for-sale securities, net of tax 6,061 ( 33,786 ) Amortization of net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity 29 - Income tax benefit (expense) ( 6 ) - Unrealized loss on held to maturity securities, net of tax 23 - Change in net unrealized gain (loss) on cash flow hedge ( 2,896 ) - Income tax benefit (expense) 608 - L reclassification adjustment for net (gain) loss on cash flow hedge - - Income tax benefit (expense) - - L amortization of net unrealized (gains) losses included in net income 156 - Income tax benefit (expense) ( 33 ) - Unrealized gain (loss) on cash flow hedge instruments, net of tax ( 2,165 ) - Other comprehensive income (loss), net of tax 3,919 ( 33,786 ) Comprehensive income (loss) $ 9,552 $ ( 28,258 ) See accompanying notes to interim consolidated financial statements. 5 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited) For the three months ended March 31, Accumulated Common Other Stock and Comprehensive Number of Paid in Retained Income/(Loss), (Dollars in thousands, except per share data) Shares Capital Earnings Net Total Balance, January 1, 2022 7,510,379 $ 171,913 $ 52,332 $ ( 2,576 ) $ 221,669 Net income 5,528 5,528 Other comprehensive income ( 33,786 ) ( 33,786 ) Shares issued 5,332 133 133 Effect of employee stock purchases 7 7 Stock-based compensation expense 121 121 Shares repurchased ( 25,899 ) ( 682 ) ( 682 ) Cash dividends declared ($ 0.25 per share) ( 1,872 ) ( 1,872 ) Balance, March 31, 2022 7,489,812 $ 171,492 $ 55,988 $ ( 36,362 ) $ 191,118 Balance, December 31, 2022 7,516,098 $ 172,277 $ 68,394 $ ( 71,797 ) $ 168,874 Adoption of ASU 2016-13 (CECL ) on January 1, 2023 ( 8,046 ) ( 8,046 ) Balance, January 1, 2023 7,516,098 $ 172,277 $ 60,348 $ ( 71,797 ) $ 160,828 Net income 5,633 5,633 Other comprehensive income (loss) 3,919 3,919 Shares issued 5,651 147 147 Effect of employee stock purchases 7 7 Stock-based compensation expense 133 133 Cash dividends declared ($ 0.26 per share) ( 1,955 ) ( 1,955 ) Balance, March 31, 2023 7,521,749 $ 172,564 $ 64,026 $ ( 67,878 ) $ 168,712 6 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEME NTS OF CASH FLOWS (Unaudited) Three Months Ended (Dollars in thousands) March 31, 2023 2022 Cash flows from operating activiti Net income $ 5,633 $ 5,528 Adjustments to reconcile net income to net cash from operating activiti Provision for credit losses 25 - Depreciation 609 672 Amortization 2,500 2,673 Compensation expense on employee and director stock purchases, stock options, and restricted stock units 235 226 Net change in market value of equity securities ( 63 ) 356 Gains on sales of loans ( 403 ) ( 804 ) Loans originated for sale ( 10,283 ) ( 29,531 ) Proceeds from loan sales 11,753 25,896 Earnings on bank-owned life insurance ( 263 ) ( 280 ) Proceeds from BOLI policy - 130 Earnings on death benefit from bank-owned life insurance - ( 14 ) (Gains)/losses on sales of other real estate owned - ( 41 ) Proceeds from sales of other real estate owned - 235 Deferred federal income tax (benefit)/expense 252 248 Net change in: Other assets 995 173 Other liabilities ( 1,821 ) ( 2,665 ) Net cash provided by operating activities 9,169 2,802 Cash flows from investing activiti Maturities, prepayments and calls of securities available for sale 7,052 13,157 Maturities, prepayments and calls of securities held to maturity 2,990 1,078 Purchases of securities available for sale ( 393 ) ( 28,197 ) Purchases of securities held to maturity ( 421 ) ( 3,160 ) Purchase of Federal Home Loan Bank stock ( 1,678 ) - Proceeds from redemption of Federal Home Loan Bank stock - 331 Loan originations and payments, net ( 20,701 ) 31,816 Additions to premises and equipment ( 1,025 ) ( 526 ) Proceeds from (payments for) derivative contracts, net ( 551 ) - Payments for derivative contracts settlements ( 4,191 ) - Net cash provided by (used in) investing activities ( 18,918 ) 14,499 Cash flows from financing activiti Net change in deposits ( 12,102 ) 93,307 Net change in short term borrowings 35,000 ( 50,000 ) Issuance of common stock 52 35 Repurchase of common stock - ( 682 ) Cash dividends ( 1,955 ) ( 1,872 ) Net cash provided by financing activities 20,995 40,788 Net change in cash and cash equivalents 11,246 58,089 Beginning cash and cash equivalents 43,943 31,887 Ending cash and cash equivalents $ 55,189 $ 89,976 Supplemental disclosures of cash flow informati Cash paid for interest $ 4,557 $ 1,413 Cash paid for income taxes - - Loans transferred to other real estate owned 130 172 See accompanying notes to interim consolidated financial statements. 7 ChoiceOne Financial Services, Inc. NOTES TO INTERIM CONSOLID ATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include ChoiceOne Financial Services, Inc. ("ChoiceOne"), its wholly-owned subsidiary, ChoiceOne Bank, and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. Intercompany transactions and balances have been eliminated in consolidation. ChoiceOne owns all of the common securities of Community Shores Capital Trust I (the “Capital Trust”). Under U.S. generally accepted accounting principles ("GAAP"), the Capital Trust is not consolidated because it is a variable interest entity and ChoiceOne is not the primary beneficiary. The accompanying unaudited consolidated financial statements and notes thereto reflect all adjustments ordinary in nature which are, in the opinion of management, necessary for a fair presentation of such financial statements. Operating results for the three months ended March 31, 2023 , are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 . The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2022 . Use of Estimates To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, ChoiceOne’s management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. These estimates and assumptions are subject to many risks and uncertainties, and actual results may differ from these estimates. Estimates associated with the allowance for credit losses and the unrealized gains and losses on securities available for sale and held to maturity are particularly susceptible to change. Investment Securities Investment securities for which ChoiceOne has the intent and ability to hold to maturity are classified as held to maturity and are carried at amortized cost. Investment securities not classified as held to maturity are classified as available for sale and are reported at fair value with unrealized gains and losses, net of income taxes, as a separate component of other comprehensive income. ChoiceOne determines the appropriate classification of investment securities at the time of purchase and reassesses the classification at each reporting date. Additions to securities held to maturity consist mostly of local issue municipals. Goodwill Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of the acquired tangible assets and liabilities and identifiable intangible assets. Goodwill and intangible assets acquired in a purchase or business combination and determined to have an indefinite useful life are not amortized but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. Core Deposit Intangible Core deposit intangible represents the value of the acquired customer core deposit bases and is included as an asset on the consolidated balance sheets. The core deposit intangible has an estimated finite life, is amortized on an accelerated basis over a 120 month period and is subject to periodic impairment evaluation. Stock Transactions A total of 3,220 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of $ 94,000 under the terms of the Directors’ Stock Purchase Plan in the first quarter of 2023 . A total of 2,431 shares for a cash price of $ 53,000 were issued under the Employee Stock Purchase Plan in the first quarter of 2023 . ChoiceOne's common stock repurchase program announced in April 2021 and amended in 2022, authorizes repurchases of up to 375,388 shares, representing 5 % of the total outstanding shares of common stock as of the date the program was adopted. No shares were repurchased under this program in the first quarter of 2023 . Reclassifications Certain amounts presented in prior periods have been reclassified to conform to the current presentation. 8 Recently Issued Accounting Pronouncements Allowance for Credit Losses ("ACL") In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU (as subsequently amended by ASU 2018-19) significantly changed how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard replaced the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the CECL model, applies to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures. The standard also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the ACL. In addition, entities need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. A reasonable and supportable economic forecast is a key component of the CECL methodology. ChoiceOne adopted CECL effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the incurred loss accounting standards. The transition adjustment of the CECL adoption included an increase in the ACL of $ 7.2 million, which included a $ 5.5 million decrease to the retained earnings account to reflect the cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the $ 1.5 million tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet. The transition adjustment of the CECL adoption included an additional ACL on unfunded commitments of $ 3.3 million, which included a $ 2.6 million decrease to the retained earnings account to reflect the cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the $ 688,000 tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet. The ACL is a valuation allowance for probable incurred credit losses. The ACL is increased by the provision for credit losses and decreased by loans charged off less any recoveries of charged off loans. As ChoiceOne has had very limited loss experience since 2011, management elected to utilize benchmark peer loss history data to estimate historical loss rates. ChoiceOne worked with a third party advisory firm to identify an appropriate peer group for each loan group which shared similar characteristics. Management estimates the ACL required based on a selected peer group loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, a reasonable and supportable economic forecast, and other factors. Allocations of the ACL may be made for specific loans, but the entire ACL is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the ACL when management believes that collection of a loan balance is not possible. The ACL consists of general and specific components. The general component covers loans collectively evaluated for credit losses and is based on peer historical loss experience adjusted for current and forecasted factors. Management's adjustment for current and forecasted factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, the experience and ability of lending staff, and a reasonable and supportable economic forecast described further below. The discounted cash flow methodology is utilized for all loan pools. This methodology is supported by our CECL software provider and allows management to automatically calculate contractual life by factoring in all cash flows and adjusting them for behavioral and credit-related aspects. Reasonable and supportable economic forecasts have to be incorporated in determining expected credit losses. The forecast period represents the time frame from the current period end through the point in time that we can reasonably forecast and support entity and environmental factors that are expected to impact the performance of our loan portfolio. Ideally, the economic forecast period would encompass the contractual terms of all loans; however, the ability to produce a forecast that is considered reasonable and supportable becomes more difficult or may not be possible in later periods. Subsequent to the end of the forecast period, we revert to historical loan data based on an ongoing evaluation of each economic forecast in relation to then current economic conditions as well as any developing loan loss activity and resulting historical data. As of March 31, 2023, we used a one-year reasonable and supportable economic forecast period, with a two year straight-line reversion period. We are not required to develop and use our own economic forecast model, and elected to utilize economic forecasts from third-party providers that analyze and develop forecasts of the economy for the entire United States at least quarterly. We are also required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheet and is increased or decreased via the provision for credit losses account on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded. . 9 Securities Available for Sale - For securities AFS in an unrealized loss position, management determines whether they intend to sell or if it is more likely than not that ChoiceOne will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income with an allowance being established under CECL. For securities AFS with unrealized losses not meeting these criteria, management evaluates whether any decline in fair value is due to credit loss factors. In making this assessment, management considers any changes to the rating of the security by rating agencies and adverse conditions specifically related to the issuer of the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses (“ACL”) is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Changes in the ACL under ASC 326-30 are recorded as provisions for (or reversal of) credit loss expense. Losses are charged against the allowance when the collectability of a debt security AFS is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, net of income taxes. At March 31, 2023 and at adoption of CECL on January 1, 2023, there was no ACL related to debt securities AFS. Accrued interest receivable on debt securities was excluded from the estimate of credit losses. Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. ChoiceOne has determined that any loans which have been placed on non-performing status, loans with a risk rating of 6 or higher, and loans past due more than 60 days will be assessed for individually evaluation. Management's judgment will be used to determine if the loan should be migrated back to pool on an individual basis. Individual analysis will establish a specific reserve for loans in scope. Specific reserves on non-performing loans are typically based on management’s best estimate of the fair value of collateral securing these loans, adjusted for selling costs as appropriate. Securities Held to Maturity - Since the adoption of CECL, ChoiceOne measures credit losses on HTM securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The ACL on securities HTM is a contra asset valuation account that is deducted from the carrying amount of HTM securities to present the net amount expected to be collected. HTM securities are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in ChoiceOne’s Consolidated Statements of Income in the provision for credit losses. Accrued interest receivable on HTM securities is excluded from the estimate of credit losses. With regard to US Treasury securities, these have an explicit government guarantee; therefore, no ACL is recorded for these securities. With regard to obligations of states and political subdivisions and other HTM securities, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. At March 31, 2023 and at adoption of CECL on January 1, 2023, there was no ACL related to securities HTM. Troubled Loan Modifications FASB also issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This standard eliminated the previous accounting guidance for troubled debt restructurings and added additional disclosure requirements for gross chargeoffs by year of origination. It also prescribes guidance for reporting modifications of loans to borrowers experiencing financial difficulty. Investment in Equity Method and Joint Ventures In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Venture (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. The amendments in this ASU permit reporting entities to account for the tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2023. Early adoption is permitted. ChoiceOne is currently evaluating the impact of this standard on the consolidated financial statements. 10 NOTE 2 – SECURITIES On January 1, 2022, ChoiceOne reassessed and transferred, at fair value $ 428.4 million of securities classified as available for sale to the held to maturity classification. The net unrealized after-tax loss of $ 2.7 million as of the transfer date remained in accumulated other comprehensive income to be amortized over the remaining life of the securities, offsetting the related amortization of discount or premium on the transferred securities. No gains or losses were recognized at the time of the transfer. The remaining net unamortized unrealized loss on transferred securities included in accumulated other comprehensive income was $ 2.4 million after tax as of March 31, 2023. The fair value of equity securities and the related gross unrealized gains and (losses) recognized in noninterest income were as follows: March 31, 2023 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity securities $ 9,052 $ 310 $ ( 663 ) $ 8,699 December 31, 2022 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity securities $ 8,982 $ 305 $ ( 721 ) $ 8,566 11 The following tables present the amortized cost and fair value of securities available for sale and the gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and the fair value of securities held to maturity and the related gross unrealized gains and loss March 31, 2023 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Available for S Cost Gains Losses Value U.S. Treasury notes and bonds $ 90,695 $ - $ ( 10,720 ) $ 79,975 State and municipal 281,139 - ( 44,641 ) 236,498 Mortgage-backed 231,577 8 ( 25,448 ) 206,137 Corporate 758 - ( 42 ) 716 Asset-backed securities 12,546 - ( 524 ) 12,022 Total $ 616,715 $ 8 $ ( 81,375 ) $ 535,348 Held to Maturity: U.S. Government and federal agency $ 2,968 $ - $ ( 365 ) $ 2,603 State and municipal 199,267 1 ( 32,688 ) 166,580 Mortgage-backed 199,795 - ( 29,139 ) 170,656 Corporate 19,990 46 ( 2,292 ) 17,744 Asset-backed securities 856 - ( 66 ) 790 Total $ 422,876 $ 47 $ ( 64,550 ) $ 358,373 December 31, 2022 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Available for S Cost Gains Losses Value U.S. Treasury notes and bonds $ 90,810 $ - $ ( 12,606 ) $ 78,204 State and municipal 277,489 - ( 47,551 ) 229,938 Mortgage-backed 236,703 - ( 28,140 ) 208,563 Corporate 757 - ( 46 ) 711 Asset-backed securities 13,031 - ( 698 ) 12,333 Total $ 618,790 $ - $ ( 89,041 ) $ 529,749 Held to Maturity: U.S. Government and federal agency $ 2,966 $ - $ ( 421 ) $ 2,545 State and municipal 201,890 1 ( 39,355 ) 162,536 Mortgage-backed 200,473 - ( 29,868 ) 170,605 Corporate 19,603 - ( 2,285 ) 17,318 Asset-backed securities 974 - ( 77 ) 897 Total $ 425,906 $ 1 $ ( 72,006 ) $ 353,901 Available for sale securities with unrealized losses as of March 31, 2023 and December 31, 2022, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows: March 31, 2023 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Available for S Value Losses Value Losses Value Losses U.S. Treasury notes and bonds $ - $ - $ 79,975 $ 10,720 $ 79,975 $ 10,720 State and municipal 2,481 25 233,517 44,616 235,998 44,641 Mortgage-backed 26,955 1,626 178,182 23,822 205,137 25,448 Corporate 501 7 215 35 716 42 Asset-backed securities - - 12,022 524 12,022 524 Total temporarily impaired $ 29,937 $ 1,658 $ 503,911 $ 79,717 $ 533,848 $ 81,375 12 December 31, 2022 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Available for S Value Losses Value Losses Value Losses U.S. Treasury notes and bonds $ - $ - $ 78,204 $ 12,606 $ 78,204 $ 12,606 State and municipal 89,158 12,612 140,390 34,939 229,548 47,551 Mortgage-backed 63,249 3,093 144,318 25,047 207,567 28,140 Corporate 711 46 - - 711 46 Asset-backed securities - - 12,333 698 12,333 698 Total temporarily impaired $ 153,118 $ 15,751 $ 375,245 $ 73,290 $ 528,363 $ 89,041 Held to maturity securities with unrealized losses as of March 31, 2023 and December 31, 2022, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows: March 31, 2023 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Held to Maturity: Value Losses Value Losses Value Losses U.S. Government and federal agency $ - $ - $ 2,603 $ 365 $ 2,603 $ 365 State and municipal 1,411 10 164,769 32,678 166,180 32,688 Mortgage-backed 414 24 170,242 29,115 170,656 29,139 Corporate 2,263 171 13,803 2,121 16,066 2,292 Asset-backed securities - - 790 66 790 66 Total temporarily impaired $ 4,088 $ 205 $ 352,207 $ 64,345 $ 356,295 $ 64,550 December 31, 2022 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Held to Maturity: Value Losses Value Losses Value Losses U.S. Government and federal agency $ - $ - $ 2,545 $ 421 $ 2,545 $ 421 State and municipal 13,457 1,899 149,016 37,456 162,473 39,355 Mortgage-backed 25,582 822 145,024 29,046 170,606 29,868 Corporate 5,296 603 10,771 1,682 16,067 2,285 Asset-backed securities - - 897 77 897 77 Total temporarily impaired $ 44,335 $ 3,324 $ 308,253 $ 68,682 $ 352,588 $ 72,006 ChoiceOne evaluates all securities on a quarterly basis to determine if an ACL and corresponding impairment charge should be recorded. Consideration is given to the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of ChoiceOne to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value of amortized cost basis. ChoiceOne believes that unrealized losses on securities were temporary in nature and were caused primarily by changes in interest rates, increased credit spreads, and reduced market liquidity and were not caused by the credit status of the issuer. No ACL was recorded in the three months ended March 31, 2023 , and no other-than-temporary impairment charges were recorded in the same periods in 2022 . At March 31, 2023 and December 31, 2022, there were 604 and 611 securities with an unrealized loss, respectively. Unrealized losses on corporate and municipal bonds have not been recognized into income because the issuers’ bonds are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity. The majority of unrealized losses at March 31, 2023 , are related to U.S. Treasury notes and bonds, state and municipal bonds and mortgage backed securities. The U.S. Treasury notes are guaranteed by the U.S. government and 100 % of the notes are rated AA or better. State and municipal bonds are backed by the taxing authority of the bond issuer or the revenues from the bond. On March 31, 2023 , 86 % of state and municipal bonds held are rated AA or better, 11 % are A rated and 3 % are not rated. Of the mortgage-backed securities held on March 31, 2023 , 38 % were issued by US government sponsored entities and agencies, and rated AA, 46 % are AAA rated private issue and collateralized mortgage obligation, and 16 % are unrated privately issued mortgage-backed securities with structured credit enhancement and collateralized mortgage obligation. 13 Presented below is a schedule of maturities of securities as of March 31, 2023. Available for sale securities are reported at fair value and held to maturity securities are reported at amortized cost. Callable securities in the money are presumed called and matured at the callable date. Available for Sale Securities maturing within: Fair Value Less than 1 Year - 5 Years - More than at March 31, (Dollars in thousands) 1 Year 5 Years 10 Years 10 Years 2023 U.S. Government and federal agency $ - $ - $ - $ - $ - U.S. Treasury notes and bonds - 19,451 60,524 - 79,975 State and municipal 4,261 7,282 99,415 125,540 236,498 Corporate 501 - 215 — 716 Asset-backed securities — 8,767 3,255 — 12,022 Total debt securities 4,762 35,500 163,409 125,540 329,211 Mortgage-backed securities 7,412 76,343 106,925 15,457 206,137 Total Available for Sale $ 12,174 $ 111,843 $ 270,334 $ 140,997 $ 535,348 Held to Maturity Securities maturing within: Amortized Cost Less than 1 Year - 5 Years - More than at March 31, (Dollars in thousands) 1 Year 5 Years 10 Years 10 Years 2023 U.S. Government and federal agency $ — $ — $ 2,968 $ — $ 2,968 State and municipal 2,415 4,998 89,542 102,312 199,267 Corporate — - 18,990 1,000 19,990 Asset-backed securities — 856 — — 856 Total debt securities 2,415 5,854 111,500 103,312 223,081 Mortgage-backed securities 21,951 32,133 145,711 — 199,795 Total Held to Maturity $ 24,366 $ 37,987 $ 257,211 $ 103,312 $ 422,876 Following is information regarding unrealized gains and losses on equity securities for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, 2023 2022 Net gains and (losses) recognized during the period $ 63 $ ( 356 ) L Net gains and (losses) recognized during the period on securities sold — — Unrealized gains and (losses) recognized during the reporting period on securities still held at the reporting date $ 63 $ ( 356 ) 14 NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES Loans by type as a percentage of the portfolio were as follows: March 31, 2023 December 31, 2022 (Dollars in thousands) Balance % Balance % Percent Increase (Decrease) Agricultural $ 55,995 4.63 % 64,159 5.39 % ( 12.72 ) % Commercial and Industrial 217,063 17.93 % 210,210 17.67 % 3.26 % Commercial Real Estate 648,202 53.54 % 630,953 53.03 % 2.73 % Consumer 38,891 3.21 % 39,808 3.35 % ( 2.30 ) % Construction Real Estate 13,939 1.15 % 14,736 1.24 % ( 5.41 ) % Residential Real Estate 236,493 19.54 % 229,916 19.32 % 2.86 % Gross Loans $ 1,210,583 $ 1,189,782 Allowance for credit losses 15,065 1.24 % 7,619 0.64 % Net loans $ 1,195,518 $ 1,182,163 Activity in the allowance for credit losses and balances in the loan portfolio were as follows: Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Credit Losses Three Months Ended March 31, 2023 Beginning balance $ 144 $ 1,361 $ 310 $ 4,822 $ 63 $ 906 $ 13 $ 7,619 Cumulative effect of change in accounting principle 14 1,587 541 3,006 20 2,010 ( 13 ) 7,165 Charge-offs — — ( 140 ) — — — — ( 140 ) Recoveries — 27 69 13 — 3 — 112 Provision ( 23 ) 45 133 ( 4 ) ( 10 ) 168 — 309 Ending balance $ 135 $ 3,020 $ 913 $ 7,837 $ 73 $ 3,087 $ — $ 15,065 Individually evaluated for credit loss $ 1 $ 7 $ 1 $ 1 $ — $ 42 $ — $ 52 Collectively evaluated for credit loss $ 134 $ 3,013 $ 912 $ 7,836 $ 73 $ 3,045 $ — $ 15,013 Loans March 31, 2023 Individually evaluated for credit loss $ 18 $ 180 $ 27 $ 32 $ — $ 1,894 $ 2,151 Collectively evaluated for credit loss 55,977 216,883 38,864 648,170 13,939 234,599 1,208,432 Ending balance $ 55,995 $ 217,063 $ 38,891 $ 648,202 $ 13,939 $ 236,493 $ 1,210,583 15 Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses Three Months Ended March 31, 2022 Beginning balance $ 448 $ 1,454 $ 290 $ 3,705 $ 110 $ 671 $ 1,010 $ 7,688 Charge-offs — ( 31 ) ( 112 ) - — — — ( 143 ) Recoveries — 2 52 1 — 1 — 56 Provision ( 61 ) 327 74 ( 16 ) ( 73 ) ( 83 ) ( 168 ) — Ending balance $ 387 $ 1,752 $ 304 $ 3,690 $ 37 $ 589 $ 842 $ 7,601 Individually evaluated for impairment $ 253 $ 116 $ 3 $ 9 $ — $ 167 $ — $ 548 Collectively evaluated for impairment $ 134 $ 1,636 $ 301 $ 3,681 $ 37 $ 422 $ 842 $ 7,053 Loans March 31, 2022 Individually evaluated for impairment $ 2,542 $ 356 $ 32 $ 157 $ — $ 1,853 $ 4,940 Collectively evaluated for impairment 59,076 194,024 36,108 527,743 15,669 174,206 1,006,826 Acquired with deteriorated credit quality — 4,534 11 9,352 — 1,743 15,640 Ending balance $ 61,618 $ 198,914 $ 36,151 $ 537,252 $ 15,669 $ 177,802 $ 1,027,406 Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses December 31, 2022 Individually evaluated for impairment $ 2 $ 14 $ 1 $ 5 $ — $ 131 $ — $ 153 Collectively evaluated for impairment $ 142 $ 1,347 $ 309 $ 4,817 $ 63 $ 775 $ 13 $ 7,466 Loans December 31, 2022 Individually evaluated for impairment $ 23 $ 177 $ 7 $ 165 $ — $ 2,474 $ 2,846 Collectively evaluated for impairment 64,136 206,074 39,793 622,131 14,736 225,792 1,172,662 Acquired with deteriorated credit quality — 3,959 8 8,657 — 1,650 14,274 Ending balance $ 64,159 $ 210,210 $ 39,808 $ 630,953 $ 14,736 $ 229,916 $ 1,189,782 The provision for credit losses on loans was $ 309,000 in the first quarter of 2023 , compared to $ 0 in the same period in the prior year. Provision expense was deemed necessary to reserve for core loan growth of $ 20.8 million in the first quarter of 2023. There was very little change to forecasted economic conditions and no changes to qualitative factors from the CECL implementation date of January 1, 2023 to March 31, 2023. 16 The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking (1) the risk ratings of business loans, (2) the level of classified business loans, and (3) delinquent and nonperforming consumer loans. Business loans are risk rated on a scale of 1 to 9. A description of the characteristics of the ratings follows: Risk Rating 1 through 5 or pass: These loans are considered pass credits. They exhibit acceptable credit risk and demonstrate the ability to repay the loan from normal business operations. Risk rating 6 or special menti Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions that have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that ChoiceOne Bank will sustain some future loss if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual asset classified as substandard. Loans falling into this category should have clear action plans and timelines with benchmarks to determine which direction the relationship will move. Risk rating 7 or substandar Loans and other credit extensions graded “7” have all the weaknesses inherent in those graded “6”, with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. Loans in this classification should be evaluated for non-accrual status. All nonaccrual commercial and Retail loans must be at a minimum graded a risk code “7”. Risk rating 8 or doubtfu Loans and other credit extensions bearing this grade have been determined to have the extreme probability of some loss, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral. Risk rating 9 or l Loans in this classification are considered uncollectible and cannot be justified as a viable asset of ChoiceOne Bank. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future. 17 The following table reflects the amortized cost basis of loans as of March 31, 2023 based on year of origination (dollars in thousands): Commerci 2023 2022 2021 2020 2019 Prior Term Loans Total Revolving Loans Grand Total Agricultural Pass $ 19 $ 19,463 $ 3,285 $ 1,905 $ 7,853 $ 18,052 $ 50,577 $ 5,149 $ 55,726 Special mention - - - - 184 85 269 - 269 Substandard - - - - - - - - - Doubtful - - - - - - - - - Loss - - - - - - - - - Total $ 19 $ 19,463 $ 3,285 $ 1,905 $ 8,037 $ 18,137 $ 50,846 $ 5,149 $ 55,995 Current year-to-date gross write-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Commercial and Industrial Pass $ 9,644 $ 49,508 $ 31,241 $ 14,120 $ 16,186 $ 16,174 $ 136,873 $ 79,836 $ 216,709 Special mention - - 38 161 110 38 347 - 347 Substandard - - - - - 7 7 - 7 Doubtful - - - - - - - - - Loss - - - - - - - - - Total $ 9,644 $ 49,508 $ 31,279 $ 14,281 $ 16,296 $ 16,219 $ 137,227 $ 79,836 $ 217,063 Current year-to-date gross write-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Commercial Real Estate Pass $ 20,489 $ 136,340 $ 129,054 $ 85,247 $ 49,365 $ 158,159 $ 578,654 $ 64,573 $ 643,227 Special mention - - - - - 761 761 - 761 Substandard - - - - - 4,214 4,214 - 4,214 Doubtful - - - - - - - - - Loss - - - - - - - - - Total $ 20,489 $ 136,340 $ 129,054 $ 85,247 $ 49,365 $ 163,134 $ 583,629 $ 64,573 $ 648,202 Retai 2023 2022 2021 2020 2019 Prior Term Loans Total Revolving Loans Grand Total Consumer Performing $ 2,786 $ 17,480 $ 9,478 $ 4,431 $ 2,094 $ 2,034 $ 38,303 $ 588 $ 38,891 Nonperforming - - - - - - - - - Nonaccrual - - - - - - - - - Total $ 2,786 $ 17,480 $ 9,478 $ 4,431 $ 2,094 $ 2,034 $ 38,303 $ 588 $ 38,891 Current year-to-date gross write-offs $ - $ 12 $ 7 $ 1 $ - $ - $ 20 $ - $ 20 Construction real estate Performing $ - $ 1,599 $ 1,001 $ - $ - $ - $ 2,600 $ 11,339 $ 13,939 Nonperforming - - - - - - - - - Nonaccrual - - - - - - - - - Total $ - $ 1,599 $ 1,001 $ - $ - $ - $ 2,600 $ 11,339 $ 13,939 Current year-to-date gross write-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Residential real estate Performing $ 9,793 $ 70,595 $ 30,957 $ 18,271 $ 14,386 $ 46,875 $ 190,877 $ 44,020 $ 234,897 Nonperforming - - - - - - - - - Nonaccrual - 420 214 - - 885 1,519 77 1,596 Total $ 9,793 $ 71,015 $ 31,171 $ 18,271 $ 14,386 $ 47,760 $ 192,396 $ 44,097 $ 236,493 18 Corporate Credit Exposure - Credit risk profile by credit worthiness category (Dollars in thousands) Agricultural Commercial and Industrial Commercial Real Estate December 31, December 31, December 31, 2022 2022 2022 Pass $ 63,867 $ 209,700 $ 624,555 Special Mention 289 400 2,048 Substandard 3 110 4,350 Doubtful — - — Loss - - - $ 64,159 $ 210,210 $ 630,953 Consumer Credit Exposure - Credit risk profile based on payment activity (Dollars in thousands) Consumer Construction Real Estate Residential Real Estate December 31, December 31, December 31, 2022 2022 2022 Performing $ 39,808 $ 14,736 $ 228,653 Nonperforming — — — Nonaccrual — — 1,263 $ 39,808 $ 14,736 $ 229,916 The following table provides information on loans that were considered troubled loan modification ("TLMs") that were modified during the three months ended March 31, 2023 Three Months Ended March 31, 2023 Term extension % of total class of (Dollars in thousands) Amortized financing Cost basis receivable Residential real estate $ 129 0 % Total 129 Three Months Ended March 31, 2023 Term extension Residential real estate Provided twelve month payment plan to catch up past due amount through our standard program. Three Months Ended March 31, 2023 (Dollars in thousands) Term extension Residential real estate $ 129 Total $ 129 19 Three Months Ended March 31, 2023 (Dollars in thousands) Current 30-89 days Greater than 90 days Total Residential real estate $ 129 — — — Total $ 129 $ - $ - $ - The following table provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the three months ended March 31, 2022 . Three Months Ended March 31, 2022 Pre- Post- Modification Modification Outstanding Outstanding (Dollars in thousands) Number of Recorded Recorded Loans Investment Investment Agricultural 1 $ 258 $ 258 Total 1 $ 258 $ 258 There were no TDRs where the borrower was past due with respect to principal and/or interest for 30 days or more during the three months ended March 31, 2022, which loans had been modified and classified as TDRs during the year prior to the default. 20 Nonaccrual loans by loan category as of March 31, 2023 were as follows: (Dollars in thousands) Nonaccrual loans with no ACL Total nonaccrual loans Interest income recognized during the period on nonaccrual loans Residential real estate $ 1,432 $ 1,596 $ — Total nonaccrual loans $ 1,432 $ 1,596 $ — Nonaccrual loans by loan category as of December 31, 2022 were as follows: (Dollars in thousands) Total nonaccrual loans Residential real estate $ 1,263 $ 1,263 The following schedule provides information regarding average balances of loans evaluated for impairment and interest recognized on impaired loans for the three months ended three months ended December 31, 2022 and March 31, 2022: Interest (Dollars in thousands) Recorded Related Income Investment Allowance Recognized December 31, 2022 With no related allowance recorded Agricultural $ — $ — $ — Commercial and industrial — — — Consumer — — — Construction real estate — — — Commercial real estate — — — Residential real estate 550 — 1 Subtotal 550 — 1 With an allowance recorded Agricultural 23 2 2 Commercial and industrial 177 14 13 Consumer 7 1 1 Construction real estate — — — Commercial real estate 165 5 13 Residential real estate 1,924 131 93 Subtotal 2,296 153 122 Total Agricultural 23 2 2 Commercial and industrial 177 14 13 Consumer 7 1 1 Construction real estate — — — Commercial real estate 165 5 13 Residential real estate 2,474 131 94 Total $ 2,846 $ 153 $ 123 21 Interest (Dollars in thousands) Recorded Related Income Investment Allowance Recognized March 31, 2022 With no related allowance recorded Agricultural $ 314 $ — $ — Commercial and industrial 92 — 1 Consumer — — — Construction real estate — — — Commercial real estate — — — Residential real estate - — — Subtotal 406 — 1 With an allowance recorded Agricultural 2,228 253 42 Commercial and industrial 264 116 2 Consumer 32 3 — Construction real estate — — — Commercial real estate 157 8 3 Residential real estate 1,853 167 17 Subtotal 4,534 547 64 Total Agricultural 2,542 253 42 Commercial and industrial 356 116 3 Consumer 32 3 — Construction real estate — — — Commercial real estate 157 8 3 Residential real estate 1,853 167 17 Total $ 4,940 $ 547 $ 65 An aging analysis of loans by loan category follows: Loans Loans Loans Loans Past Due 90 Days Past Due Past Due Greater Past (Dollars in thousands) 30 to 59 60 to 89 Than 90 Loans Not Total Due and Days (1) Days (1) Days (1) Total (1) Past Due Loans Accruing March 31, 2023 Agricultural $ — $ — $ — $ — $ 55,995 $ 55,995 $ — Commercial and industrial 174 — — 174 216,889 217,063 — Consumer 3 27 — 30 38,861 38,891 — Commercial real estate — — — — 648,202 648,202 — Construction real estate 267 — — 267 13,672 13,939 — Residential real estate 2,416 290 153 2,859 233,634 236,493 $ 2,860 $ 317 $ 153 $ 3,330 $ 1,207,253 $ 1,210,583 $ — December 31, 2022 Agricultural $ — $ — $ — $ — $ 64,159 $ 64,159 $ — Commercial and industrial — 171 — 171 210,039 210,210 — Consumer 39 7 — 46 39,762 39,808 — Commercial real estate — — — — 630,953 630,953 — Construction real estate — — — — 14,736 14,736 — Residential real estate 682 — 842 1,524 228,392 229,916 — $ 721 $ 178 $ 842 $ 1,741 $ 1,188,041 $ 1,189,782 $ — (1) Includes nonaccrual loans. 22 The table below presents a roll forward of the accretable yield on the County Bank Corp. acquired loan portfolio for the years ended December 31, 2022 and the three months ended March 31, 2023 (dollars in thousands): (Dollars in thousands) Purchased with credit deterioration Purchased without credit deterioration Acquired Total Balance January 1, 2022 288 1,176 1,464 Transfer from non-accretable to accretable yield 2,192 — 2,192 Accretion January 1, 2022 through December 31, 2022 ( 553 ) ( 98 ) ( 651 ) Balance January 1, 2023 1,927 1,078 3,005 Transfer from non-accretable to accretable yield - Accretion January 1, 2023 through March 31, 2023 ( 133 ) ( 135 ) ( 268 ) Balance, March 31, 2023 $ 1,794 $ 943 $ 2,737 The table below presents a roll forward of the accretable yield on Community Shores Bank Corporation acquired loan portfolio for the years ended December 31, 2022 and the three months ended March 31, 2023 (dollars in thousands): Purchased with credit deterioration Purchased without credit deterioration Acquired Total Balance January 1, 2022 522 197 719 Transfer from non-accretable to accretable yield 1,086 — 1,086 Accretion January 1, 2022 through December 31, 2022 ( 993 ) ( 197 ) ( 1,190 ) Balance January 1, 2023 615 - 615 Transfer from non-accretable to accretable yield 622 622 Accretion January 1, 2023 through March 31, 2023 ( 203 ) ( 203 ) Balance, March 31, 2023 $ 1,034 $ - $ 1,034 NOTE 4 – EARNINGS PER SHARE Earnings per share are based on the weighted average number of shares outstanding during the period. A computation of basic earnings per share and diluted earnings per share follows: Three Months Ended (Dollars in thousands, except share data) March 31, 2023 2022 Basic Net income $ 5,633 $ 5,528 Weighted average common shares outstanding 7,519,282 7,495,464 Basic earnings per common shares $ 0.75 $ 0.74 Diluted Net income $ 5,633 $ 5,528 Weighted average common shares outstanding 7,519,282 7,495,464 Plus dilutive stock options and restricted stock units 33,047 21,461 Weighted average common shares outstanding and potentially dilutive shares 7,552,329 7,516,925 Diluted earnings per common share $ 0.75 $ 0.74 There were no performance awards, restricted stock, or stock options that were considered anti-dilutive to earnings per share for the three months ended March 31, 2023 . There were no performance awards or restricted stock units that were considered anti-dilutive and there were 12,000 stock options that were considered anti-dilutive for the three months ended March 31, 2022. 23 Note 5 – Financial Instruments Financial instruments as of the dates indicated were as follows: Quoted Prices In Active Significant Markets for Other Significant Identical Observable Unobservable (Dollars in thousands) Carrying Estimated Assets Inputs Inputs Amount Fair Value (Level 1) (Level 2) (Level 3) March 31, 2023 Assets Cash and cash equivalents $ 55,189 $ 55,189 $ 55,189 $ - $ - Equity securities at fair value 8,699 8,699 6,062 - 2,637 Securities available for sale 535,348 535,348 79,975 455,373 - Securities held to maturity 422,876 358,373 - 342,946 15,427 Federal Home Loan Bank and Federal Reserve Bank stock 10,259 10,259 - 10,259 - Loans held for sale 3,603 3,711 - 3,711 - Loans to other financial institutions - - - - - Loans, net 1,195,518 1,151,264 - - 1,151,264 Accrued interest receivable 9,652 9,652 - 9,652 - Interest rate lock commitments 87 87 - 87 - Mortgage loan servicing rights 4,165 5,623 - 5,623 - Interest rate derivative contracts 2,244 2,244 - 2,244 - Liabilities Noninterest-bearing deposits 554,699 554,699 554,699 - - Interest-bearing deposits 1,513,429 1,510,549 - 1,510,549 - Brokered deposits 37,773 37,698 - 37,698 - Borrowings 85,000 85,000 - 85,000 - Subordinated debentures 35,323 30,883 - 30,883 - Accrued interest payable 438 438 - 438 - Interest rate derivative contracts 3,790 3,790 - 3,790 - December 31, 2022 Assets Cash and cash equivalents $ 43,943 $ 43,943 $ 43,943 $ - $ - Equity securities at fair value 8,566 8,566 6,024 - 2,542 Securities available for sale 529,749 529,749 78,204 451,545 - Securities held to maturity 425,906 353,901 - 338,583 15,318 Federal Home Loan Bank and Federal Reserve Bank stock 8,581 8,581 - 8,581 - Loans held for sale 4,834 4,979 - 4,979 - Loans to other financial institutions - - - - - Loans, net 1,182,163 1,123,198 - - 1,123,198 Accrued interest receivable 8,949 8,949 - 8,949 - Interest rate lock commitments 28 28 - 28 - Mortgage loan servicing rights 4,322 5,855 - 5,855 - Interest rate derivative contracts 9,204 9,204 - 9,204 - Liabilities Noninterest-bearing deposits 599,579 599,579 599,579 - - Interest-bearing deposits 1,518,424 1,514,294 - 1,514,294 - Borrowings 50,000 50,000 - 50,000 - Subordinated debentures 35,262 30,304 - 30,304 - Accrued interest payable 610 610 - 610 - Interest rate derivative contracts 5,823 5,823 - 5,823 - 24 NOTE 6 – FAIR VALUE MEASUREMENTS The following tables present information about assets and liabilities measured at fair value on a recurring basis and the valuation techniques used to determine those fair values. In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that ChoiceOne Bank has the ability to access. Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability. In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. ChoiceOne Bank’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability. 25 Disclosures concerning assets and liabilities measured at fair value are as follows: Assets and Liabilities Measured at Fair Value on a Recurring Basis Quoted Prices In Active Significant Markets for Other Significant Identical Observable Unobservable Balance (Dollars in thousands) Assets Inputs Inputs at Date (Level 1) (Level 2) (Level 3) Indicated Equity Securities Held at Fair Value - March 31, 2023 Equity securities $ 6,062 $ - $ 2,637 $ 8,699 Investment Securities, Available for Sale - March 31, 2023 U.S. Treasury notes and bonds $ 79,975 $ - $ - $ 79,975 State and municipal - 236,498 - 236,498 Mortgage-backed - 206,137 - 206,137 Corporate - 716 - 716 Asset-backed securities - 12,022 - 12,022 Total $ 79,975 $ 455,373 $ - $ 535,348 Derivative Instruments - March 31, 2023 Interest rate derivative contracts - assets $ - $ 2,244 $ - $ 2,244 Interest rate derivative contracts - liabilities $ - $ 3,790 $ - $ 3,790 Equity Securities Held at Fair Value - December 31, 2022 Equity securities $ 6,024 $ - $ 2,542 $ 8,566 Investment Securities, Available for Sale - December 31, 2022 U. S. Government and federal agency $ - $ - $ - $ - U. S. Treasury notes and bonds 78,204 - - 78,204 State and municipal - 229,938 - 229,938 Mortgage-backed - 208,563 - 208,563 Corporate - 711 - 711 Asset-backed securities - 12,333 - 12,333 Total $ 78,204 $ 451,545 $ - $ 529,749 Derivative Instruments - December 31, 2022 Interest rate derivative contracts - assets $ - $ 9,204 $ - $ 9,204 Interest rate derivative contracts - liabilities $ - $ 5,823 $ - $ 5,823 26 Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis Three Months Ended (Dollars in thousands) March 31, 2023 2022 Equity Securities Held at Fair Value Balance, January 1 $ 2,542 $ 1,768 Total realized and unrealized gains included in noninterest income 25 ( 1 ) Net purchases, sales, calls, and maturities 70 - Net transfers into Level 3 - - Balance, March 31, $ 2,637 $ 1,767 Amount of total losses for the period included in earning attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at March 31, $ 25 $ ( 1 ) Investment Securities, Available for Sale Balance, January 1 $ - $ 21,050 Total unrealized gains included in other comprehensive income - - Net purchases, sales, calls, and maturities - - Net transfers into Level 3 - - Transfer to held to maturity - ( 21,050 ) Balance, March 31, $ - $ - Amount of total losses for the period included in earning attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at March 31, $ - $ - Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 investment securities and liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs. Securities categorized as Level 3 assets as of March 31, 2023 and December 31, 2022 primarily consist of common and preferred equity securities of community banks. ChoiceOne estimates the fair value of these bonds and equity securities based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved. ChoiceOne also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment. Disclosures concerning assets measured at fair value on a non-recurring basis are as follows: Assets Measured at Fair Value on a Non-recurring Basis Quoted Prices In Active Significant Markets for Other Significant Balances at Identical Observable Unobservable (Dollars in thousands) Dates Assets Inputs Inputs Indicated (Level 1) (Level 2) (Level 3) Collateral Dependent Loans March 31, 2023 $ 2,151 $ - $ - $ 2,151 December 31, 2022 $ 2,846 $ - $ - $ 2,846 Other Real Estate March 31, 2023 $ 130 $ - $ - $ 130 December 31, 2022 $ - $ - $ - $ - 27 Collateral dependent loans categorized as Level 3 assets consist of non-homogeneous loans that are considered non-accrual or higher risk. ChoiceOne estimates the fair value of the loans based on the present value of expected future cash flows using management’s estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). The changes in fair value consisted of charge-downs of collateral dependent loans that were posted to the allowance for credit losses and write-downs of other real estate that were posted to a valuation account. NOTE 7 – REVENUE FROM CONTRACTS WITH CUSTOMERS ChoiceOne has a variety of sources of revenue, which include interest and fees from customers as well as revenue from non-customers. ASC Topic 606, Revenue from Contracts With Customers, covers certain sources of revenue that are classified within noninterest income in the Consolidated Statements of Income. Sources of revenue that are included in the scope of ASC Topic 606 include service charges and fees on deposit accounts, interchange income, investment asset management income and transaction-based revenue, and other charges and fees for customer services. Service Charges and Fees on Deposit Accounts Revenue includes charges and fees to provide account maintenance, overdraft services, wire transfers, funds transfer, and other deposit-related services. Account maintenance fees such as monthly service charges are recognized over the period of time that the service is provided. Transaction fees such as wire transfer charges are recognized when the service is provided to the customer. Interchange Income Revenue includes debit card interchange and network revenues. This revenue is earned on debit card transactions that are conducted through payment networks such as MasterCard. The revenue is recorded as services are delivered and is presented net of interchange expenses. Investment Commission Income Revenue includes fees from the investment management advisory services and revenue is recognized when services are rendered. Revenue also includes commissions received from the placement of brokerage transactions for purchase or sale of stocks or other investments. Commission income is recognized when the transaction has been completed. Trust Fee Income Revenue includes fees from the management of trust assets and from other related advisory services. Revenue is recognized when services are rendered. Following is noninterest income separated by revenue within the scope of ASC 606 and revenue within the scope of other GAAP topics: Three Months Ended March 31, (Dollars in thousands) 2023 2022 Service charges and fees on deposit accounts $ 1,027 $ 1,031 Interchange income 1,240 1,158 Investment commission income 196 205 Trust fee income 184 178 Other charges and fees for customer services 137 148 Noninterest income from contracts with customers within the scope of ASC 606 2,784 2,720 Noninterest income within the scope of other GAAP topics 887 1,125 Total noninterest income $ 3,671 $ 3,845 28 NOTE 8 – DERIVATIVE AND HEDGING ACTIVITIES ChoiceOne is exposed to certain risks relating to its ongoing business operations. ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. Derivatives are also implicit in certain contracts and commitments. ChoiceOne recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. ChoiceOne records derivative assets and derivative liabilities on the balance sheet within other assets and other liabilities, respectively. Changes in the fair value of derivative financial instruments are either recognized in income or in shareholders’ equity as a component of accumulated other comprehensive income or loss depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge. ChoiceOne currently uses interest rate swaps to manage its exposure to certain fixed and variable rate assets and variable rate liabilities. Interest rate swaps ChoiceOne uses interest rate swaps as part of its interest rate risk management strategy to add stability to net interest income and to manage its exposure to interest rate movements. Interest rate swaps designated as hedges involve the receipt of variable-rate amounts from a counterparty in exchange for ChoiceOne making fixed-rate payments or the receipt of fixed-rate amounts from a counterparty in exchange for ChoiceOne making variable rate payments, over the life of the agreements without the exchange of the underlying notional amount. In the second quarter of 2022, ChoiceOne entered i nto two pay-floating/receive-fixed interest rate swaps (the “Pay Floating Swap Agreements”) for a total notional amount of $ 200.0 million that were designated as cash flow hedges. These derivatives hedge the variable cash flows of specifically identified available-for-sale securities, cash and loans. The Pay Floating Swap Agreements were determined to be highly effective during the periods presented and therefore no amount of ineffectiveness has been included in net income. The Pay Floating Swap Agreements pay a coupon rate equal to SOFR while receiving a fixed coupon rate of 2.41 %. In March 2023, ChoiceOne terminated all Pay Floating Swap Agreements for a cash payment of $ 4.2 million. The loss will be amortized into interest income over 13 months, which was the remaining period of the swap agreements. Net cash settlements paid on pay-floating/received-fixed swaps were $ 837,000 as of March 31, 2023, which were included in interest income. In the second quarter of 2022, ChoiceOne entered into one forward starting pay-fixed/receive-floating interest rate swap (the “Pay Fixed Swap Agreement”) for a notional amount of $ 200.0 million that was designated as a cash flow hedge. This derivative hedges the risk of variability in cash flows attributable to forecasted payments on future deposits or floating rate borrowings indexed to the SOFR Rate. The Pay Fixed Swap Agreement is two years forward starting with an eight-year term set to expire in 2032. The Pay Fixed Swap Agreements will pay a fixed coupon rate of 2.75 % while receiving the SOFR Rate. In the fourth quarter of 2022, ChoiceOne entered into four pay-fixed/receive-floating interest rate swaps for a total notional amount of $ 201.0 million that were designated as fair value hedges. These derivatives hedge the risk of changes in fair value of certain available for sale securities for changes in the SOFR benchmark interest rate component of the fixed rate bonds. All four of these hedges were effective immediately on December 22, 2022. Of the total notional value, $ 101.9 million has a ten-year term set to expire in 2032, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.390 %. Of the total notional value, $ 50.0 million has a nine-year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.4015 %. The remaining notional value of $ 49.1 million has a nine-year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bond equal to 3.4030 %. ChoiceOne adopted ASC2022-01, as of December 20, 2022, to use the portfolio layer method. The fair value basis adjustment associated with available-for-sale fixed rate bonds initially results in an adjustment to AOCI. For available-for-sale securities subject to fair value hedge accounting, the changes in the fair value of the fixed rate bonds related to the hedged risk (the benchmark interest rate component and the partial term) are then reclassed from AOCI to current earnings offsetting the fair value measurement change of the interest rate swap, which is also recorded in current earnings. Net cash settlements are received/paid semi-annually, with the first starting in March 2023, and will be included in interest income. Net cash settlements received on these four pay-fixed/receive-floating swaps we re $ 565,000 a s of March 31, 2023, which were included in interest income. 29 The table below presents the fair value of derivative financial instruments as well as the classification within the consolidated statements of financial conditi March 31, 2023 December 31, 2022 (Dollars in thousands) Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments Interest rate contracts Other Assets $ 2,244 Other Assets $ 9,204 Interest rate contracts Other Liabilities $ 3,790 Other Liabilities $ 5,823 The table below presents the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost of those items as of the periods present Location and Amount of Gain or (Loss) Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships Recognized in Income on Fair Value and Cash Flow Hedging Relationships Three months ended March 31, 2023 Three months ended March 31, 2022 Interest Income Interest Expense Interest Income Interest Expense Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded $ ( 366 ) $ - $ - $ - Gain or (loss) on fair value hedging relationships: Interest rate contra Hedged items $ 6,022 $ - $ - $ - Derivatives designated as hedging instruments $ ( 5,960 ) $ - $ - $ - Amount excluded from effectiveness testing recognized in earnings based on amortization approach $ - $ - $ - $ - Gain or (loss) on cash flow hedging relationships: Interest rate contra Amount of gain or (loss) reclassified from accumulated other comprehensive income into income $ ( 156 ) $ - $ - $ - Amount excluded from effectiveness testing recognized in earnings based on amortization approach $ - $ - $ - $ - The table below presents the effect of fair value and cash flow hedge accounting on the consolidated statements of operations for the periods present March 31, 2023 Cumulative amount of Fair Value Hedging Adjustment Line Item in the Statement of included in the carrying Financial Position in which the Amortized cost of the amount of the Hedged Hedged Item is included Hedged Assets/(Liabilities) Assets/(Liabilities) Securities available for sale $ 225,127 $ ( 4,091 ) 30 Item 2. Management’s Discussion and Ana lysis of Financial Condition and Results of Operations . The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (“ChoiceOne”), its wholly-owned subsidiary ChoiceOne Bank, and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. This discussion should be read in conjunction with the interim consolidated financial statements and related notes. FORWARD-LOOKING STATEMENTS This discussion and other sections of this quarterly report contain forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and ChoiceOne. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “look forward,” “continue,” “future,” “will” and variations of such words and similar expressions are intended to identify such forward-looking statements. Management’s determination of the provision for credit losses and ACL, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management’s assumptions concerning pension and other post-retirement benefit plans involve judgments that are inherently forward-looking. All of the information concerning interest rate sensitivity is forward-looking. All statements with references to future time periods are forward-looking. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, ChoiceOne undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. Additional risk factors include, but are not limited to, the risk factors discussed in Item 1A of ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2022 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. RESULTS OF OPERATIONS Net income for the first quarter of 2023 was $ 5,633,000 , which represented an increase of $105,000 or 1.9% compared to the first quarter of 2022. Basic and diluted earnings per common share were $0.75 for the first quarter of 2023 compared to $0.74 for the first quarter of the prior year. The increase in the first quarter of 2023 is largely related to the increase in interest income due to strong organic loan growth over the past year which was offset by the increase in deposit and borrowing costs due to rate increases. Core loans, which exclude held for sale loans and Paycheck Protection Program loans ("PPP"), grew organically by $20.8 million or 7.0% on an annualized basis during the first quarter of 2023 and $191.7 million or 18.8% since March 31, 2022. Loan interest income increased $2.6 million in the first quarter of 2023 compared to the same period in 2022, despite the first quarter of 2022 being aided by $869,000 in PPP fees and an additional $347,000 in accretion income. Deposits, excluding brokered deposits, decreased by $77.5 million or 3.6% as of March 31, 2023, compared to March 31, 2022 ,while the total cost of funds increased to 0.79% in the first quarter of 2023 compared to 0.21% in the first quarter of 2022. Deposit interest expense increased $2.5 million in the first quarter of 2023 compared to the same period in 2022. The return on average assets and return on average shareholders’ equity were 0.94% and 13.42%, respectively, for the first quarter of 2023, compared to 0.93% and 10.72%, respectively, for the same period in 2022. The increase in the return on average shareholders' equity is related to the decline in equity caused by the increase in unrealized losses on available-for-sale securities. Dividends Cash dividends of $2.0 million or $0.26 per share were declared in the first quarter of 2023 , compared to $1.9 million or $0.25 per share in the first quarter of 2022 . The cash dividend payout percentage was 34.7% for the first quarter of 2023, compared to 33.9% in the same period in the prior year. Interest Income and Expense Tables 1 and 2 on the following pages provide information regarding interest income and expense for the first quarter of 2023. Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities. Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates. These tables are referred to in the discussion of interest income, interest expense and net interest income. 31 Table 1 – Average Balances and Tax-Equivalent Interest Rates Three Months Ended March 31, 2023 2022 (Dollars in thousands) Average Average Balance Interest Rate Balance Interest Rate Assets: Loans (1)(3)(4)(5)(6) $ 1,202,268 $ 14,889 5.02 % $ 1,037,646 $ 12,304 4.74 % Taxable securities (2)(6) 761,318 4,913 2.62 795,888 3,507 1.76 Nontaxable securities (1) 298,429 1,817 2.47 334,793 2,097 2.50 Other 19,452 177 3.68 36,460 14 0.15 Interest-earning assets 2,281,467 21,796 3.87 2,204,787 17,922 3.25 Noninterest-earning assets 109,877 171,077 Total assets $ 2,391,344 $ 2,375,864 Liabilities and Shareholders' Equity: Interest-bearing demand deposits $ 875,435 $ 1,572 0.73 % $ 928,437 $ 435 0.19 % Savings deposits 407,022 273 0.27 440,873 146 0.13 Certificates of deposit 247,856 1,279 2.09 179,375 202 0.45 Brokered deposit 12,762 152 4.84 - - 0.00 Borrowings 63,122 708 4.55 10,239 6 0.22 Subordinated debentures 35,290 402 4.62 35,342 364 4.12 Interest-bearing liabilities 1,641,487 4,386 1.08 1,594,266 1,153 0.29 Demand deposits 566,628 553,267 Other noninterest-bearing liabilities 15,277 22,051 Total liabilities 2,223,392 2,169,584 Shareholders' equity 167,952 206,280 Total liabilities and shareholders' equity $ 2,391,344 $ 2,375,864 Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 17,410 $ 16,769 Net interest margin (tax-equivalent basis) (Non-GAAP) (1) 3.09 % 3.04 % Reconciliation to Reported Net Interest Income Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 17,410 $ 16,769 Adjustment for taxable equivalent interest (398 ) (447 ) Net interest income (GAAP) $ 17,012 $ 16,322 Net interest margin (GAAP) 3.02 % 2.96 % (1) Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%. The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry. These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities. (2) Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock. (3) Loans include both loans to other financial institutions and loans held for sale. (4) Non-accruing loan and PPP loan balances are included in the balances of average loans. Non-accruing loan average balances were $1.4 million and $1.4 million in the first quarter of 2023 and 2022, respectively. PPP loan average balances were $0 and $20.8 million in the first quarter of 2023 and 2022, respectively. (5) Interest on loans included net origination fees, accretion income, and PPP fees. Accretion income was $471,000 and $818,000 in the first quarter of 2023 and 2022, respectively. PPP fees were approximately $0 and $869,000 in the first quarter of 2023 and 2022, respectively. (6) Interest on loans and securities included derivative income and expense. Security income was $373,000 and $0 in the first quarter of 2023 and 2022, respectively. Loan expense was $745,000 and $0 in the first quarter of 2023 and 2022, respectively. 32 Table 2 – Changes in Tax-Equivalent Net Interest Income Three Months Ended March 31, (Dollars in thousands) 2023 Over 2022 Total Volume Rate Increase (decrease) in interest income (1) Loans (2) $ 2,585 $ 1,879 $ 706 Taxable securities 1,406 (1,002 ) $ 2,408 Nontaxable securities (2) (280 ) (252 ) $ (28 ) Other 163 (47 ) $ 210 Net change in interest income 3,874 578 3,296 Increase (decrease) in interest expense (1) Interest-bearing demand deposits 1,137 (175 ) 1,312 Savings deposits 127 (74 ) 201 Certificates of deposit 1,077 102 975 Brokered deposit 152 152 0 Borrowings 702 146 556 Subordinated debentures 38 (4 ) 42 Net change in interest expense 3,233 147 3,086 Net change in tax-equivalent net interest income $ 641 $ 431 $ 210 (1) The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s interest rate. The rate variance is computed as the change in interest rate multiplied by the previous year’s volume (average balance). The change in interest due to both volume and rate has been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. (2) Interest on nontaxable investment securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21%. Net Interest Income Tax-equivalent net interest income increased $641,000 in the first quarter of 2023, compared to the same period in 2022. The Federal Reserve increased the federal funds rate by 4.50% from March 31, 2022 to March 31, 2023 in response to published inflation rates. This both increased rates on newly originated loans and increased the rates paid on deposits. Tax equivalent net interest margin increased 5 basis points in the first quarter of 2023 compared to the same period in 2022. GAAP based net interest margin increased 6 basis points in the first quarter of 2023 compared to the same period in 2022. The following table presents the cost of deposits and the cost of funds for the three months ended March 31, 2023 and the three months ended March 31, 2022. Three months ended March 31, 2023 2022 Cost of deposits 0.62 % 0.15 % Cost of funds 0.79 % 0.21 % ChoiceOne has experienced substantial core loan growth from March 31, 2022 to March 31, 2023, leading to an increase in interest income from loans of $2.6 million in the three months ended March 31, 2023, compared to the same period in the prior year. Average core loans, which exclude PPP loans, loans held for sale, and loans to other financial institutions, grew $164.6 million from March 31, 2022 to March 31, 2023. In addition, the average rate earned on loans increased 28 basis points during that time period. The increase in interest income from loans and the average rate increase on loans is muted by a decline in PPP fee income of $869,000, an increase in derivative expense of $745,000, and a reduction in accretion income of $347,000 in the first quarter of 2023 compared to same time period in 2022. The average balance of total securities decreased $70.9 million from Q1 2022 through the end of Q1 2023. The decrease is due to the liquidation of $47.2 million in securities during 2022, with the remainder attributed to paydowns and a decline in the fair value of available for sale securities. The average rate earned on securities increased 83 basis points in the first quarter of 2023 compared to the same period in 2022 which was aided by $373,000 of income related to derivative instruments which were put in place during the second quarter of 2022. 33 Interest expense increased $3.2 million in the first quarter of 2023, compared to the same period in 2022. The average rate paid on deposits, excluding brokered deposits, increased 41 basis points in the first quarter of 2023 compared to the same period in 2022, offset by the decline in the average balance of deposits, excluding brokered deposits, of $86.9 million from Q1 2022 to Q1 2023. The increase in the average balance of certificates of deposit of $68.5 million, combined with a 164 basis point increase in the rate paid on certificates of deposits in Q1 of 2023 compared to Q1 2022, led to an increase in interest expense of $1.1 million. Due to the decline in the average balance of deposits, ChoiceOne borrowed additional funds from the Federal Home Loan Bank ("FHLB") and the Federal Reserve Bank ("FRB"), and obtained $37.8 million in brokered deposits during the first quarter of 2023. The net effect of these additional borrowed funds and brokered CDs was an increase in interest expense of $855,000 in the first quarter of 2023 compared to the first quarter of 2022. In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. In addition, ChoiceOne holds certain subordinated debentures issued in connection with a trust preferred securities offering that were obtained as part of the merger with Community Shores. The average balance of subordinated debentures was relatively flat compared in the first quarter of 2023 compared to the same period in the prior year. Provision and Allowance for Credit Losses On January 1, 2023, ChoiceOne adopted ASU 2016-13 CECL which caused an increase in the ACL of $7.2 million. The large increase is partially due to the current economic environment and the nature of the CECL calculation. Approximately 20% of this increase is related to the migration of purchased loans into the portfolio assessed by the CECL calculation. ChoiceOne also booked a liability for expected credit losses on unfunded loans and other commitments of $3.3 million related to the adoption of CECL guidance. These unfunded loans are open credit lines with current customers and loans approved by ChoiceOne but not funded. The increase in the allowance and the cost of the liability resulted in a decrease in the retained earnings account on our Consolidated Balance Sheet equal to the after-tax impact, with the tax impact portion being recorded in deferred taxes in our Consolidated balance Sheet in accordance with FASB guidance. The ACL consists of general and specific components. The general component covers loans collectively evaluated for credit loss and is based on peer historical loss experience adjusted for current and forecasted factors. Management's adjustment for current and forecasted factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, the experience and ability of lending staff, and a reasonable and supportable economic forecast described further below. Loans individually evaluated for credit losses increased by $300,000 during the three months ended March 31, 2023; however, the ACL related to these individually evaluated loans decreased by $100,000 during the three months ended March 31, 2023 largely due to the loan balances being fully collateralized compared to December 31, 2022. The determination of our loss factors is based, in part, upon benchmark peer loss history adjusted for qualitative factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date. ChoiceOne's lookback period of benchmark peer net charge-off history was from January 1, 2004 through December 31, 2019 for this analysis. Nonperforming loans, which excludes performing TLM and TDR loans, were $1.7 million as of March 31, 2023, compared to $1.3 million as of December 31, 2022 . The ACL was 1.24 % of total loans at March 31, 2023, compared to 1.24% as of January 1, 2023 (the CECL adoption date) and 0.64% at December 31, 2022. The liability for expected credit losses on unfunded loans and other commitments was $3.0 million on March 31, 2023, compared to $3.3 million as of January 1, 2023 and did not exist on December 31, 2022. Net charge-offs were $27,000 in the first quarter of 2023, compared to net charge-offs of $87,000 during the same period in 2022. Checking account charge-off and recovery activity is included in the consumer charge-off activity above. Net charge-offs for checking accounts for the first quarter of 2023 were $56,000 compared to $53,000 for the same period in the prior year. Net charge-offs on an annualized basis as a percentage of average loans were 0.01% in the first quarter of 2023 compared to annualized net charge-offs of 0.03% of average loans in the same period in the prior year. Management is aware that the economic climate in Michigan will continue to affect businesses and individual borrowers. Management has worked and intends to continue to work with delinquent borrowers in an attempt to lessen the negative impact to ChoiceOne. 34 Charge-offs and recoveries for respective loan categories for the three months ended March 31, 2023 and 2022 were as follows: (Dollars in thousands) 2023 2022 Charge-offs Recoveries Charge-offs Recoveries Agricultural $ — $ — $ — $ — Commercial and industrial — 27 31 2 Consumer 140 69 112 52 Commercial real estate — 13 — 1 Construction real estate — — — — Residential real estate — 3 — 1 $ 140 $ 112 $ 143 $ 56 The provision for credit losses on loans was $309,000 in the first quarter of 2023, compared to $0 in the same period in the prior year. Provision expense was deemed necessary to reserve for core loan growth of $20.8 million in the first quarter of 2023. There was very little change to forecasted economic conditions from the CECL implementation date of January 1, 2023 to March 31, 2023. The loan provision was offset by the decline in unfunded commitments provision of $284,000 as ChoiceOne saw declines in the pipeline for new loans approved but not funded as well as an increase in the funding on open lines of credit. The total unfunded commitments declined $15.9 million in the first quarter of 2023 compared to January 1, 2023. The net provision expense for the first quarter of 2023 was $25,000. Noninterest Income Total noninterest income declined $174,000 in the first three months of 2023 compared to the same period in the prior year. With the rapid rise in interest rates, refinancing activity has slowed, and demand has shifted towards adjustable-rate mortgage products. This led to a decline in mortgage sales of $401,000 in the first quarter of 2023 compared to the same time period in the prior year. This decline was offset by the change in market value of equity securities, which saw an increase in the first quarter of 2023 compared to a large decline during the same period of the prior year. Equity investments include local community bank stocks and Community Reinvestment Act bond mutual funds. Customer service charges also increased by $78,000 in the first quarter of 2023 compared to the same period of 2022, as consumer and business activity improved. Noninterest Expense Total noninterest expense increased $305,000, or 2.2%, in the first quarter of 2023 compared to the same period in the prior year. The increase in total noninterest expense was related to an increase in FDIC insurance costs and inflationary pressures on employee wages and benefits. This increase was offset by decreases in other categories including data processing and fraud losses. ChoiceOne continues to monitor expenses and looks to improve our efficiency through automation and use of digital tools. ChoiceOne launched an enhanced treasury services online platform for business clients during the first quarter of 2023. This new platform targets mid-sized businesses and municipalities who require enhanced reporting, security, and payment capabilities. Management believes that continuing to invest in our technology and people is the right way to maintain sustainable growth. Income Tax Expense Income tax expense was $1.0 million in the first quarter of 2023 compared to $948,000 for the same period in 2022. The effective tax rate was 15.5% for the first quarter of 2023 compared to 14.6% for the first quarter of 2022. In the first quarter of 2022, non taxable municipal interest decreased and disallowed interest expense increased compared to the first quarter of 2022. FINANCIAL CONDITION Securities Total available for sale securities on March 31, 2023, was $535.3 million compared to $529.7 on December 31, 2022, with the increase caused by an increase in the fair value of the underlying securities. The unrealized loss on securities available for sale declined by $7.6 million in the first quarter of 2023. ChoiceOne's held to maturity securities declined slightly during the first quarter of 2023, as $3.8 million of securities were called or matured and principal repayments on securities totaled $6.2 million. The securities portfolio is projected to produce over $217 million of cashflows over the next two years as lower yielding assets roll off. 35 At March 31, 2023, ChoiceOne had $145.9 million in unrealized losses on its investment securities, including $81.4 million in unrealized losses on available for sale securities and $64.5 in unrealized losses on held to maturity securities. Unrealized losses on corporate and municipal bonds have not been recognized into income because the issuers’ bonds are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity. ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. In order to hedge the risk of rising rates and unrealized losses on securities resulting from the rising rates, ChoiceOne currently holds four interest rate swaps with a total notional value of $401.0 million. These derivative instruments increase in value as long-term interest rates rise, which offsets the reduction in equity due to unrealized losses on securities available for sale. Refer to footnote 8 for more discussion on ChoiceOne’s derivative position. Equity securities included a money market preferred security ("MMP") of $1.0 million and common stock of $7.7 million as of March 31, 2023. As of March 31, 2022, equity securities included an MMP of $1.0 million and common stock of $7.6 million. Per U.S. generally accepted accounting principles, unrealized gains or losses on securities available for sale are reflected on the balance sheet in accumulated other comprehensive income (loss), while unrealized gains or losses on securities held to maturity are not reflected on the balance sheet in accumulated other comprehensive income (loss). Loans Core loans, which exclude held for sale loans and PPP, grew organically by $20.8 million or 7.0% on an annualized basis during the first quarter of 2023 and $191.7 million or 18.8% since March 31, 2022. Loan interest income increased $2.6 million in the first quarter of 2023 compared to the same period in 2022. The increase in interest income from loans is muted by a decline in PPP fee income of $869,000, an increase in derivative expense of $745,000, and a reduction in accretion income of $347,000 in the first quarter of 2023 compared to same time period in 2022. Loan growth was largely concentrated in commercial real estate loans which grew $111.0 million or 21% in the trailing twelve months from March 31, 2023. Much of this growth in commercial real estate loans is directly the result of the new loan production offices in both the city of Wyoming and Macomb County as well as the newly hired experienced lenders in these locations. Approximately 12% of this commercial real estate loan growth is a single land development loan which consists of high end single family homes currently under construction which are 85% pre-sold. Another 21% of this growth is owner-occupied and mainly consists of current customers who are expanding businesses that are performing well in the current environment. Residential real estate loans also grew $58.7 million or 33% in the trailing twelve months from March 31, 2023 as the 5/1 ARM product became popular as a mortgage option and it is less salable than more traditional mortgage options. These large increases were offset by declines in agricultural loans of $5.6 million and construction real estate loans of $1.7 million during the period beginning on April 1, 2022 through March 31, 2023. ChoiceOne recorded accretion income related to acquired loans in the amount of $471,000 during the first quarter of 2023. Remaining credit and yield mark on acquired loans from the mergers with County Bank Corp. and Community Shores will accrete into income as the acquired loans mature. The remaining yield mark on acquired loans from the mergers with County Bank Corp. and Community Shores totaled $3.8 million as of March 31, 2023. Asset Quality Information regarding individually evaluated loans can be found in Note 3 to the consolidated financial statements included in this report. The total balance of individually evaluated loans was $2.2 million on March 31, 2023, compared to $2.8 million of impaired loans as of December 31, 2022. The change in the first quarter of 2023 was primarily due to the decline in non-accrual residential mortgage loans. As part of its review of the loan portfolio, management also monitors the various nonperforming loans. Nonperforming loans are comprised of loans accounted for on a nonaccrual basis and loans, not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments. 36 The balances of these nonperforming loans were as follows: (Dollars in thousands) March 31, December 31, 2023 2022 Loans accounted for on a nonaccrual basis $ 1,596 $ 1,263 Accruing loans which are contractually past due 90 days or more as to principal or interest payments — — Loans past due defined as "troubled loan modifications" or "troubled debt restructurings " which are not included above — — Total $ 1,596 $ 1,263 The small increase in the balance of nonaccrual loans in the first quarter of 2023 was primarily due to the increase in residential mortgage loans. It is also noted that 100% of loans considered TLMs and TDRs were performing according to their restructured terms as of March 31, 2023. Management believes the ACL allocated to its nonperforming loans is sufficient at March 31, 2023. Goodwill Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value. Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required. ChoiceOne acquired Valley Ridge Financial Corp. in 2006, County Bank Corp. in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $13.7 million, $38.9 million and $7.3 million, respectively. ChoiceOne conducted an annual assessment of goodwill as of June 30, 2022 and no impairment was identified. ChoiceOne used a qualitative assessment to determine goodwill was not impaired as of June 30, 2022. Additionally, ChoiceOne engaged a third party valuation firm to assist in performing a quantitative analysis of goodwill as of November 30, 2022 ("the valuation date"). In deriving the fair value of the reporting unit (the Bank), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events to financial performance; the market price of ChoiceOne’s common stock and other relevant events. In addition, the valuation relied on financial projections through 2027 and growth rates prepared by management. Based on the valuation prepared, it was determined that ChoiceOne's estimated fair value of the reporting unit at the valuation date was greater than its book value and impairment of goodwill was not required. Management concurred with the conclusion derived from the quantitative goodwill analysis as of the valuation date and determined that there were no material changes and that no triggering events had occurred that indicated impairment from the valuation date through March 31, 2023, and as a result that it is more likely than not that there was no goodwill impairment. Deposits and Borrowings ChoiceOne saw deposits, excluding brokered deposits, decline $49.9 million in the first quarter of 2023 and $77.5 million or 3.6% compared to March 31, 2022. This decrease was attributed to a combination of customers using cash on hand for debt payoffs, seasonal tax and municipal bond payments, and customers seeking higher rates via money market securities with transfers to the ChoiceOne Wealth department or outside firms. In the last twelve months, over $33.6 million or 43.4% of the trailing twelve-month deposit runoff has been transferred from bank deposits to the ChoiceOne Wealth department, which is off balance sheet. The cost of deposits has increased to 0.62% during the three months ended March 31, 2023 compared to 0.47% and 0.15% for the three months ended December 31, 2022 and March 31, 2022, respectively, due to rising short term interest rates and is expected to continue to increase as deposits reprice. ChoiceOne is actively managing these costs and expects rates paid on deposits to continue to lag the federal fund rate. Uninsured deposits total $751.4 million or 36% of deposits at March 31, 2023 compared to $823.2 million, or 39% of total deposits and $889.2 million, or 43% of total deposits at December 31, 2022 and 2021, respectively. At March 31, 2023, total available borrowing capacity from all sources was $405.7 million. Management notes that if additional collateral is pledged to the FHLB, the Federal Reserve Discount Window, or the new Bank Term Funding Program, borrowing capacity from all sources would increase to over $800 million, which exceeds uninsured deposits. 37 In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. ChoiceOne also holds $3.2 million in subordinated debentures issued in connection with a $4.5 million trust preferred securities offering, which were obtained in the merger with Community Shores, offset by the merger mark-to-market adjustment. ChoiceOne increased its Federal Home Loan Bank advances by $35.0 million in the first quarter of 2023 to $85.0 million in total at March 31, 2023 compared to $50.0 million at December 31, 2022. During the first quarter of 2023 ChoiceOne also obtained $37.8 million in short term brokered deposits, which were locked in at below market rates prior to the latest increase by the Federal Reserve. Brokered deposits allow us to preserve borrowing capacity at more accessible funding options. ChoiceOne will continue to use brokered deposits, Federal Home Loan Bank advances, advances from the Federal Reserve Bank Discount Window, and potentially the Bank Term Funding Program to meet short-term funding needs in the remainder of 2023. Shareholders' Equity Shareholders’ equity totaled $168.7 million as of March 31, 2023, flat compared to December 31, 2022 and down from $191.1 million compared to March 31, 2022. The decline from March 31, 2022 is primarily due to an increase in the after-tax net unrealized loss on securities available for sale resulting from higher market interest rates. ChoiceOne uses interest rate swaps to manage interest rate exposure to certain fixed assets and variable rate liabilities. On March 31, 2022 ChoiceOne has pay-fixed interest rate swaps with a total notional value of $401.0 million. These derivative instruments increase in value as long-term interest rates rise, which offsets the reduction in equity due to unrealized losses on securities available for sale. On January 1, 2023, ChoiceOne adopted ASU 2016-13 CECL which caused an increase in the ACL of $7.2 million and booked a liability for expected credit losses on unfunded loans and other commitments of $3.3 million related to the adoption of CECL guidance. The increase in the allowance and the cost of the liability resulted in a decrease in the retained earnings account on our Consolidated Balance Sheet equal to the after-tax impact, with the tax impact portion being recorded in deferred taxes in our Consolidated balance Sheet in accordance with FASB guidance. This reduction in retained earnings was offset by first quarter 2023 earnings and recovery of accumulated other comprehensive loss. 38 Regulatory Capital Requirements Following is information regarding compliance of ChoiceOne and ChoiceOne Bank with regulatory capital requirements: Minimum Required to be Well Minimum Required Capitalized Under for Capital Prompt Corrective (Dollars in thousands) Actual Adequacy Purposes Action Regulations Amount Ratio Amount Ratio Amount Ratio March 31, 2023 ChoiceOne Financial Services Inc. Total capital (to risk weighted assets) $ 219,626 13.5 % $ 129,905 8.0 % N/A N/A Common equity Tier 1 capital (to risk weighted assets) 174,088 10.7 73,072 4.5 N/A N/A Tier 1 capital (to risk weighted assets) 178,588 11.0 97,429 6.0 N/A N/A Tier 1 capital (to average assets) 178,588 7.7 93,290 4.0 N/A N/A ChoiceOne Bank Total capital (to risk weighted assets) $ 211,447 13.0 % $ 129,640 8.0 % $ 162,049 10.0 % Common equity Tier 1 capital (to risk weighted assets) 202,416 12.5 72,922 4.5 105,332 6.5 Tier 1 capital (to risk weighted assets) 202,416 12.5 97,230 6.0 129,640 8.0 Tier 1 capital (to average assets) 202,416 8.7 93,161 4.0 116,451 5.0 December 31, 2022 ChoiceOne Financial Services Inc. Total capital (to risk weighted assets) $ 222,006 13.8 % $ 128,545 8.0 % N/A N/A Common equity Tier 1 capital (to risk weighted assets) 177,916 11.1 72,307 4.5 N/A N/A Tier 1 capital (to risk weighted assets) 182,416 11.4 96,409 6.0 N/A N/A Tier 1 capital (to average assets) 182,416 7.9 92,558 4.0 N/A N/A ChoiceOne Bank Total capital (to risk weighted assets) $ 208,696 13.0 % $ 128,294 8.0 % $ 160,367 10.0 % Common equity Tier 1 capital (to risk weighted assets) 201,077 12.5 72,165 4.5 104,239 6.5 Tier 1 capital (to risk weighted assets) 201,077 12.5 96,220 6.0 128,294 8.0 Tier 1 capital (to average assets) 201,077 8.7 92,449 4.0 115,562 5.0 Management reviews the capital levels of ChoiceOne and ChoiceOne Bank on a regular basis. The Board of Directors and management believe that the capital levels as of March 31, 2023 are adequate for the foreseeable future. The Board of Directors’ determination of appropriate cash dividends for future periods will be based on, among other things, market conditions and ChoiceOne’s requirements for cash and capital. 39 Liquidity Net cash provided by operating activities was $9.2 million for the three months ended March 31, 2023 compared to $2.8 million in the same period a year ago. The change was due to higher net proceeds from loan sales in 2023 compared to 2022. Net cash used in investing activities was $18.9 million for the three months ended March 31, 2023 compared to $14.5 million of cash provided by investing activities in the same period in 2022. ChoiceOne purchased $2.5 million of securities and had maturities or sales of securities of $10.0 million in the first quarter of 2023 compared to $31.4 million and $14.2 million in the same periods in 2022, respectively. An increase in net loan originations led to cash used of $20.7 million in the first quarter of 2023 compared to cash provided of $31.8 million in the same period during the prior year. Net cash provided by financing activities was $21.0 million for the first quarter of 2023, compared to $40.1 million in the same period in the prior year. ChoiceOne experienced a decline of $12.1 million in deposits in the first quarter of 2023 compared to $93.3 million of growth in 2022. ChoiceOne increased borrowing by $35.0 million in the first quarter of 2023 compared to a decrease of $50.0 million in the same period during the prior year. ChoiceOne's market risk exposure occurs in the form of interest rate risk and liquidity risk. ChoiceOne's business is transacted in U.S. dollars with no foreign exchange risk exposure. Agricultural loans comprise a relatively small portion of ChoiceOne's total assets. Management believes that ChoiceOne's exposure to changes in commodity prices is insignificant. Management believes that the current level of liquidity and sources of additional liquidity are sufficient to meet the Bank's future liquidity needs. This belief is based upon the availability of deposits from both the local and national markets, our core deposit base, maturities of and cash flows from securities, normal loan repayments, income retention, federal funds purchased and advances available from the FHLB. Liquidity risk deals with ChoiceOne's ability to meet its cash flow requirements. These requirements include depositors desiring to withdraw funds and borrowers seeking credit. Longer-term liquidity needs may be met through core deposit growth, maturities of and cash flows from securities, normal loan repayments, advances from the FHLB, brokered certificates of deposit, and income retention. ChoiceOne had $85.0 million in outstanding borrowings at the FHLB as of March 31, 2023, and $316.1 million of additional borrowing capacity was available based on residential real estate loans pledged and if securities were pledged as collateral. The acceptance of brokered certificates of deposit is not limited as long as the Bank is categorized as “well capitalized” under regulatory guidelines. At March 31, 2023, total available borrowing capacity from all sources was $405.7 million. ChoiceOne estimates that if additional collateral is pledged to the FHLB, the Federal Reserve Discount Window, or the new Bank Term Funding Program, we would increase available borrowing capacity from all sources to over $800 million. ChoiceOne continues to review its liquidity management and has taken steps in an effort to ensure adequacy. These steps include limiting bond purchases in the first quarter of 2023, moving safekeeping of securities to FHLB in order to increase borrowing capacity, if pledged and using alternative funding sources such as brokered deposits. Item 4. Controls and Procedures. An evaluation was performed under the supervision and with the participation of ChoiceOne’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of ChoiceOne’s disclosure controls and procedures as of March 31, 2023. Based on and as of the time of that evaluation, ChoiceOne’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that ChoiceOne’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that material information required to be disclosed in the reports that ChoiceOne files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that ChoiceOne files or submits under the Exchange Act is accumulated and communicated to management, including ChoiceOne’s principal executive and principal financial officers, as appropriate to allow for timely decisions regarding required disclosure. There was no change in ChoiceOne’s internal control over financial reporting that occurred during the three months ended March 31, 2023 that has materially affected, or that is reasonably likely to materially affect, ChoiceOne’s internal control over financial reporting. 40 PART II. OT HER INFORMATION Item 1. Le gal Proceedings . There are no material pending legal proceedings to which ChoiceOne or ChoiceOne Bank is a party or to which any of their properties are subject, except for proceedings that arose in the ordinary course of business. Item 1A. Risk Factors . Information concerning risk factors is contained in the discussion in Item 1A, “Risk Factors,” in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2022. Ite m 2. Unregistered Sales of Equity Securities and Use of Proceeds . There were no unregistered sales of equity securities in the first quarter of 2023. There were no issuer purchases of equity securities during the first quarter of 2023. Ite m 5. Other Information None. 41 It em 6. Exhibits The following exhibits are filed or incorporated by reference as part of this repor Exhibit Number Document 3.1 Restated Articles of Incorporation of ChoiceOne Financial Services, Inc. Previously filed as an exhibit to ChoiceOne’s Form 10-K Annual Report for the year ended December 31, 2022. Here incorporated by reference. 3.2 Bylaws of ChoiceOne as currently in effect and any amendments thereto. Previously filed as an exhibit to ChoiceOne’s Form 8-K filed April 21, 2021. Here incorporated by reference. 4.1 Advances, Pledge and Security Agreement between ChoiceOne Bank and the Federal Home Loan Bank of Indianapolis. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference. 4.2 Form of 3.25% Fixed-to-Floating Rate Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference. 4.3 Form of 3.25% Fixed-to-Floating Rate Global Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference. 31.1 Certification of Chief Executive Officer 31.2 Certification of Chief Financial Officer 32.1 Certification pursuant to 18 U.S.C. § 1350. 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) 42 SIGNA TURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHOICEONE FINANCIAL SERVICES, INC. Date: May 9, 2023 /s/ Kelly J. Potes Kelly J. Potes Chief Executive Officer (Principal Executive Officer) Date: May 9, 2023 /s/ Adom J. Greenland Adom J. Greenland Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 43

Page PART I. FINANCIAL INFORMATION 3 Item 1. Financial Statements 3 Consolidated Balance Sheets 3 Consolidated Statements Of Income 4 Consolidated Statements Of Comprehensive Income (Loss) 5 Consolidated Statements Of Changes In Shareholders’ Equity 6 Consolidated Statements Of Cash Flows 8 Notes To Interim Consolidated Financial Statements 9 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 38 Item 4. Controls and Procedures 50 PART II. OTHER INFORMATION 51 Item 1. Legal Proceedings 51 Item 1A. Risk Factors 51 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 51 Item 5. Other Information 51 Item 6. Exhibits 52 Signatures 53 PART I. FINAN CIAL INFORMATION Item 1. Fina ncial Statements . ChoiceOne Financial Services, Inc. CONSOLIDAT ED BALANCE SHEETS June 30, December 31, (Dollars in thousands, except share data) 2023 2022 (Unaudited) (Audited) Assets Cash and due from banks $ 76,460 $ 43,593 Time deposits in other financial institutions 350 350 Cash and cash equivalents 76,810 43,943 Equity securities, at fair value (Note 2) 8,299 8,566 Securities available for sale, at fair value (Note 2) 521,202 529,749 Securities held to maturity, at amortized cost net of credit losses (Note 2) 420,549 425,906 Federal Home Loan Bank stock 8,366 3,517 Federal Reserve Bank stock 5,065 5,064 Loans held for sale 8,924 4,834 Loans to other financial institutions (Note 3) 38,838 — Core loans (Note 3) 1,225,390 1,189,782 Total loans (Note 3) 1,264,228 1,189,782 Allowance for credit losses (Note 3) ( 14,582 ) ( 7,619 ) Loans, net 1,249,646 1,182,163 Premises and equipment, net 29,085 28,232 Other real estate owned, net 266 — Cash value of life insurance policies 44,510 43,978 Goodwill 59,946 59,946 Core deposit intangible 2,304 2,809 Other assets 48,754 47,208 Total assets $ 2,483,726 $ 2,385,915 Liabilities Deposits – noninterest-bearing $ 544,925 $ 599,579 Deposits – interest-bearing 1,490,093 1,518,424 Brokered deposits 51,370 - Total deposits 2,086,388 2,118,003 Borrowings 160,000 50,000 Subordinated debentures 35,385 35,262 Other liabilities 22,713 13,776 Total liabilities 2,304,486 2,217,041 Shareholders' Equity Preferred stock; shares authoriz 100,000 ; shares outstandin none — — Common stock and paid-in capital, no par value; shares authoriz 15,000,000 ; shares outstandin 7,534,658 at June 30, 2023 and 7,516,098 at December 31, 2022 172,880 172,277 Retained earnings 67,281 68,394 Accumulated other comprehensive loss, net ( 60,921 ) ( 71,797 ) Total shareholders’ equity 179,240 168,874 Total liabilities and shareholders’ equity $ 2,483,726 $ 2,385,915 See accompanying notes to interim consolidated financial statements. 3 ChoiceOne Financial Services, Inc. CONSOLIDATED STA TEMENTS OF INCOME (Unaudited) Three Months Ended Six Months Ended (Dollars in thousands, except share data) June 30, June 30, 2023 2022 2023 2022 Interest income Loans, including fees $ 15,978 $ 12,523 $ 30,851 $ 24,821 Securiti Taxable 5,378 3,522 10,291 7,029 Tax exempt 1,389 1,559 2,824 3,214 Other 571 62 748 76 Total interest income 23,316 17,666 44,714 35,140 Interest expense Deposits 5,056 996 8,332 1,779 Advances from Federal Home Loan Bank 621 2 1,226 3 Other 1,548 379 2,053 748 Total interest expense 7,225 1,377 11,611 2,530 Net interest income 16,091 16,289 33,103 32,610 Provision for (reversal of) credit losses on loans ( 415 ) — ( 106 ) — Provision for (reversal of) credit losses on unfunded commitments 165 — ( 119 ) — Net Provision for (reversal of) credit losses expense ( 250 ) — ( 225 ) — Net interest income after provision 16,341 16,289 33,328 32,610 Noninterest income Customer service charges 2,271 2,353 4,538 4,542 Insurance and investment commissions 172 233 368 438 Gains on sales of loans 540 887 943 1,691 Net gains (losses) on sales of securities — ( 427 ) — ( 427 ) Net gains on sales and write downs of other assets 133 1 136 172 Earnings on life insurance policies 269 254 532 534 Trust income 196 176 380 354 Change in market value of equity securities ( 385 ) ( 327 ) ( 322 ) ( 683 ) Other 289 280 581 655 Total noninterest income 3,485 3,430 7,156 7,276 Noninterest expense Salaries and benefits 7,837 7,537 15,920 15,143 Occupancy and equipment 1,507 1,518 3,150 3,143 Data processing 1,681 1,578 3,363 3,322 Professional fees 619 559 1,240 1,069 Supplies and postage 197 166 388 357 Advertising and promotional 155 147 304 279 Intangible amortization 253 322 505 604 FDIC insurance 220 225 520 450 Other 1,104 1,105 2,178 2,480 Total noninterest expense 13,573 13,157 27,568 26,847 Income before income tax 6,253 6,562 12,916 13,039 Income tax expense 1,040 947 2,070 1,896 Net income $ 5,213 $ 5,615 $ 10,846 $ 11,143 Basic earnings per share (Note 4) $ 0.69 $ 0.75 $ 1.44 $ 1.49 Diluted earnings per share (Note 4) $ 0.69 $ 0.75 $ 1.44 $ 1.49 Dividends declared per share $ 0.26 $ 0.25 $ 0.52 $ 0.50 See accompanying notes to interim consolidated financial statements. 4 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEME NTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) Three Months Ended Six Months Ended (Dollars in thousands) June 30, June 30, 2023 2022 2023 2022 Net income $ 5,213 $ 5,615 $ 10,846 $ 11,143 Other comprehensive income: Change in net unrealized gain (loss) on available-for-sale securities ( 5,018 ) ( 31,574 ) 8,676 ( 74,512 ) Income tax benefit (expense) 1,054 6,631 ( 1,822 ) 15,648 L reclassification adjustment for net (gain) loss included in net income - 427 - 427 Income tax benefit (expense) - ( 90 ) - ( 90 ) L reclassification adjustment for net (gain) loss for fair value hedge 6,752 - 731 - Income tax benefit (expense) ( 1,417 ) - ( 153 ) - L net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity - - - 3,404 Income tax benefit (expense) - - - ( 715 ) Unrealized gain (loss) on available-for-sale securities, net of tax 1,371 ( 24,606 ) 7,432 ( 55,838 ) Reclassification of unrealized gain (loss) upon transfer of securities from available-for-sale to held-to-maturity - - - ( 3,404 ) Income tax benefit (expense) - - - 715 Amortization of net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity 165 74 194 244 Income tax benefit (expense) ( 35 ) ( 16 ) ( 41 ) ( 51 ) Unrealized loss on held to maturity securities, net of tax 130 58 153 ( 2,496 ) Change in net unrealized gain (loss) on cash flow hedge 6,019 ( 5,576 ) 3,123 ( 5,576 ) Income tax benefit (expense) ( 1,264 ) 1,171 ( 656 ) 1,171 L reclassification adjustment for net (gain) loss on cash flow hedge - - - - Income tax benefit (expense) - - - - L amortization of net unrealized (gains) losses included in net income 887 307 1,043 307 Income tax benefit (expense) ( 186 ) ( 64 ) ( 219 ) ( 64 ) Unrealized gain (loss) on cash flow hedge instruments, net of tax 5,456 ( 4,162 ) 3,291 ( 4,162 ) Other comprehensive income (loss), net of tax 6,957 ( 28,710 ) 10,876 ( 62,496 ) Comprehensive income (loss) $ 12,170 $ ( 23,095 ) $ 21,722 $ ( 51,353 ) See accompanying notes to interim consolidated financial statements. 5 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited) For the three months ended June 30, Accumulated Common Other Stock and Comprehensive Number of Paid in Retained Income/(Loss), (Dollars in thousands, except per share data) Shares Capital Earnings Net Total Balance, April 1, 2022 7,489,812 $ 171,492 $ 55,988 $ ( 36,362 ) $ 191,118 Net income 5,615 5,615 Other comprehensive income ( 28,710 ) ( 28,710 ) Shares issued 13,260 139 139 Effect of employee stock purchases 6 6 Stock-based compensation expense 167 167 Cash dividends declared ($ 0.25 per share) ( 1,875 ) ( 1,875 ) Balance, June 30, 2022 7,503,072 $ 171,804 $ 59,728 $ ( 65,072 ) $ 166,460 Balance, April 1, 2023 7,521,749 $ 172,564 $ 64,026 $ ( 67,878 ) $ 168,712 Net income 5,213 5,213 Other comprehensive income (loss) 6,957 6,957 Shares issued 12,909 150 150 Effect of employee stock purchases 7 7 Stock-based compensation expense 159 159 Cash dividends declared ($ 0.26 per share) ( 1,958 ) ( 1,958 ) Balance, June 30, 2023 7,534,658 $ 172,880 $ 67,281 $ ( 60,921 ) $ 179,240 6 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited) For the six months ended June 30, Accumulated Common Other Stock and Comprehensive Number of Paid in Retained Income/(Loss), (Dollars in thousands, except per share data) Shares Capital Earnings Net Total Balance, January 1, 2022 7,510,379 $ 171,913 $ 52,332 $ ( 2,576 ) $ 221,669 Net income 11,143 11,143 Other comprehensive loss ( 62,496 ) ( 62,496 ) Shares issued 18,592 272 272 Effect of employee stock purchases 13 13 Stock options exercised and issued 288 288 Shares repurchased ( 25,899 ) ( 682 ) ( 682 ) Cash dividends declared ($ 0.50 per share) ( 3,747 ) ( 3,747 ) Balance, June 30, 2022 7,503,072 $ 171,804 $ 59,728 $ ( 65,072 ) $ 166,460 Balance, January 1, 2023 7,516,098 $ 172,277 $ 68,394 $ ( 71,797 ) $ 168,874 Adoption of ASU 2016-13 (CECL ) on January 1, 2023 ( 8,046 ) ( 8,046 ) Balance, January 1, 2023 7,516,098 $ 172,277 $ 60,348 $ ( 71,797 ) $ 160,828 Net income 10,846 10,846 Other comprehensive income (loss) 10,876 10,876 Shares issued 18,560 297 297 Effect of employee stock purchases 14 14 Stock-based compensation expense 292 292 Cash dividends declared ($ 0.52 per share) ( 3,913 ) ( 3,913 ) Balance, June 30, 2023 7,534,658 $ 172,880 $ 67,281 $ ( 60,921 ) $ 179,240 7 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEME NTS OF CASH FLOWS (Unaudited) Six Months Ended (Dollars in thousands) June 30, 2023 2022 Cash flows from operating activiti Net income $ 10,846 $ 11,143 Adjustments to reconcile net income to net cash from operating activiti Provision for credit losses ( 225 ) - Depreciation 1,230 1,356 Amortization 4,970 5,506 Compensation expense on employee and director stock purchases, stock options, and restricted stock units 487 493 Net losses (gains) on sales of available for sale securities - 427 Net change in market value of equity securities 322 683 Gains on sales of loans ( 943 ) ( 1,691 ) Loans originated for sale ( 29,192 ) ( 53,750 ) Proceeds from loan sales 25,684 53,480 Earnings on bank-owned life insurance ( 532 ) ( 534 ) Proceeds from BOLI policy - 130 Earnings on death benefit from bank-owned life insurance - ( 14 ) (Gains)/losses on sales of other real estate owned - ( 41 ) Proceeds from sales of other real estate owned - 235 Deferred federal income tax (benefit)/expense 59 169 Net change in: Other assets 6,649 ( 768 ) Other liabilities 5,856 5,480 Net cash provided by operating activities 25,211 22,304 Cash flows from investing activiti Sales of securities available for sale - 31,828 Sales of equity securities 42 - Maturities, prepayments and calls of securities available for sale 15,159 27,404 Maturities, prepayments and calls of securities held to maturity 5,091 3,485 Purchases of securities available for sale ( 774 ) ( 32,676 ) Purchases of securities held to maturity ( 597 ) ( 5,748 ) Purchase of Federal Home Loan Bank stock ( 4,849 ) - Loan originations and payments, net ( 74,553 ) ( 59,602 ) Additions to premises and equipment ( 2,212 ) ( 701 ) Proceeds from (payments for) derivative contracts, net ( 48 ) ( 16,745 ) Payments for derivative contracts settlements ( 4,191 ) - Net cash provided by (used in) investing activities ( 66,932 ) ( 52,755 ) Cash flows from financing activiti Net change in deposits ( 31,615 ) 86,210 Net change in short term borrowings 110,000 ( 43,000 ) Issuance of common stock 116 80 Repurchase of common stock - ( 682 ) Cash dividends ( 3,913 ) ( 3,747 ) Net cash provided by financing activities 74,588 38,861 Net change in cash and cash equivalents 32,867 8,409 Beginning cash and cash equivalents 43,943 31,887 Ending cash and cash equivalents $ 76,810 $ 40,296 Supplemental disclosures of cash flow informati Cash paid for interest $ 10,269 $ 2,182 Cash paid for income taxes 2,900 - Loans transferred to other real estate owned 266 - See accompanying notes to interim consolidated financial statements. 8 ChoiceOne Financial Services, Inc. NOTES TO INTERIM CONSOLID ATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include ChoiceOne Financial Services, Inc. ("ChoiceOne"), its wholly-owned subsidiary, ChoiceOne Bank, and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. Intercompany transactions and balances have been eliminated in consolidation. ChoiceOne owns all of the common securities of Community Shores Capital Trust I (the “Capital Trust”). Under U.S. generally accepted accounting principles ("GAAP"), the Capital Trust is not consolidated because it is a variable interest entity and ChoiceOne is not the primary beneficiary. The accompanying unaudited consolidated financial statements and notes thereto reflect all adjustments ordinary in nature which are, in the opinion of management, necessary for a fair presentation of such financial statements. Operating results for the six months ended June 30, 2023 , are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 . The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2022 . Use of Estimates To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, ChoiceOne’s management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. These estimates and assumptions are subject to many risks and uncertainties, and actual results may differ from these estimates. Estimates associated with the allowance for credit losses and the unrealized gains and losses on securities available for sale and held to maturity are particularly susceptible to change. Investment Securities Investment securities for which ChoiceOne has the intent and ability to hold to maturity are classified as held to maturity and are carried at amortized cost. Investment securities classified as available for sale are reported at fair value with unrealized gains and losses, net of income taxes, as a separate component of other comprehensive income. ChoiceOne determines the appropriate classification of investment securities at the time of purchase and reassesses the classification at each reporting date. Additions to securities held to maturity consist mostly of local issue municipals. Goodwill Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of the acquired tangible assets and liabilities and identifiable intangible assets. Goodwill and intangible assets acquired in a purchase or business combination and determined to have an indefinite useful life are not amortized but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. Core Deposit Intangible Core deposit intangible represents the value of the acquired customer core deposit bases and is included as an asset on the consolidated balance sheets. The core deposit intangible has an estimated finite life, is amortized on an accelerated basis over a 120 month period and is subject to periodic impairment evaluation. Stock Transactions A total of 3,477 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of $ 88,000 under the terms of the Directors’ Stock Purchase Plan in the second quarter of 2023 . A total of 3,266 shares for a cash price of $ 64,000 were issued under the Employee Stock Purchase Plan in the second quarter of 2023 . ChoiceOne's common stock repurchase program announced in April 2021 and amended in 2022, authorizes repurchases of up to 375,388 shares, representing 5 % of the total outstanding shares of common stock as of the date the program was adopted. No shares were repurchased under this program in the second quarter of 2023 . Reclassifications Certain amounts presented in prior periods have been reclassified to conform to the current presentation. 9 Recently Issued Accounting Pronouncements Allowance for Credit Losses ("ACL") In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU (as subsequently amended by ASU 2018-19) significantly changed how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard replaced the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the CECL model, applies to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures. The standard also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the ACL. In addition, entities need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. A reasonable and supportable economic forecast is a key component of the CECL methodology. ChoiceOne adopted CECL effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the incurred loss accounting standards. The transition adjustment of the CECL adoption included an increase in the ACL of $ 7.2 million, which included a $ 5.5 million decrease to the retained earnings account to reflect the cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the $ 1.5 million tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet. The transition adjustment of the CECL adoption included an additional ACL on unfunded commitments of $ 3.3 million, which included a $ 2.6 million decrease to the retained earnings account to reflect the cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the $ 688,000 tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet. The ACL is a valuation allowance for expected credit losses. The ACL is increased by the provision for credit losses and decreased by loans charged off less any recoveries of charged off loans. As ChoiceOne has had very limited loss experience since 2011, management elected to utilize benchmark peer loss history data to estimate historical loss rates. ChoiceOne worked with a third party advisory firm to identify an appropriate peer group for each loan cohort which shared similar characteristics. Management estimates the ACL required based on the selected peer group loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, a reasonable and supportable economic forecast, and other factors. Allocations of the ACL may be made for specific loans, but the entire ACL is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the ACL when management believes that collection of a loan balance is not possible. The ACL consists of general and specific components. The general component covers loans collectively evaluated for credit losses and is based on peer historical loss experience adjusted for current and forecasted factors. Management's adjustment for current and forecasted factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, the experience and ability of lending staff, and a reasonable and supportable economic forecast described further below. The discounted cash flow methodology is utilized for all loan pools. This methodology is supported by our CECL software provider and allows management to automatically calculate contractual life by factoring in all cash flows and adjusting them for behavioral and credit-related aspects. Reasonable and supportable economic forecasts have to be incorporated in determining expected credit losses. The forecast period represents the time frame from the current period end through the point in time that we can reasonably forecast and support entity and environmental factors that are expected to impact the performance of our loan portfolio. Ideally, the economic forecast period would encompass the contractual terms of all loans; however, the ability to produce a forecast that is considered reasonable and supportable becomes more difficult or may not be possible in later periods. Subsequent to the end of the forecast period, we revert to historical loan data based on an ongoing evaluation of each economic forecast in relation to then current economic conditions as well as any developing loan loss activity and resulting historical data. As of June 30, 2023, we used a one-year reasonable and supportable economic forecast period, with a two year straight-line reversion period. We are not required to develop and use our own economic forecast model, and elected to utilize economic forecasts from third-party providers that analyze and develop forecasts of the economy for the entire United States at least quarterly. Other inputs to the calculation are also updated or reviewed quarterly. Prepayment speeds are updated on a one quarter lag based on the asset liability model from the previous quarter. This model is performed at the loan level by a third party. Curtailment is updated quarterly within the ACL model based on our peer group average. The reversion period is reviewed by management quarterly with consideration of the current economic climate. Prepayment speeds and curtailment were updated during the second quarter of 2023; however, the effect was insignificant. 10 We are also required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheet and is increased or decreased via the provision for credit losses account on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded. Securities Available for Sale - For securities AFS in an unrealized loss position, management determines whether they intend to sell or if it is more likely than not that ChoiceOne will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income with an allowance being established under CECL. For securities AFS with unrealized losses not meeting these criteria, management evaluates whether any decline in fair value is due to credit loss factors. In making this assessment, management considers any changes to the rating of the security by rating agencies and adverse conditions specifically related to the issuer of the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses (“ACL”) is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Changes in the ACL under ASC 326-30 are recorded as provisions for (or reversal of) credit loss expense. Losses are charged against the allowance when the collectability of a debt security AFS is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, net of income taxes. At June 30, 2023 and at adoption of CECL on January 1, 2023, there was no ACL related to debt securities AFS. Accrued interest receivable on debt securities was excluded from the estimate of credit losses. Securities Held to Maturity - Since the adoption of CECL, ChoiceOne measures credit losses on HTM securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The ACL on securities HTM is a contra asset valuation account that is deducted from the carrying amount of HTM securities to present the net amount expected to be collected. HTM securities are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in ChoiceOne’s Consolidated Statements of Income in the provision for credit losses. Accrued interest receivable on HTM securities is excluded from the estimate of credit losses. With regard to US Treasury securities, these have an explicit government guarantee; therefore, no ACL is recorded for these securities. With regard to obligations of states and political subdivisions and other HTM securities, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. At June 30, 2023, the ACL related to securities HTM is insignificant. Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. ChoiceOne has determined that any loans which have been placed on non-performing status, loans with a risk rating of 6 or higher, and loans past due more than 60 days will be assessed individually for evaluation. Management's judgment will be used to determine if the loan should be migrated back to pool on an individual basis. Individual analysis will establish a specific reserve for loans in scope. Specific reserves on non-performing loans are typically based on management’s best estimate of the fair value of collateral securing these loans, adjusted for selling costs as appropriate or based on the present value of the expected cash flows from that loan. Troubled Loan Modifications FASB also issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This standard eliminated the previous accounting guidance for troubled debt restructurings and added additional disclosure requirements for gross chargeoffs by year of origination. It also prescribes guidance for reporting modifications of loans to borrowers experiencing financial difficulty. Investment in Equity Method and Joint Ventures In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Venture (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. The amendments in this ASU permit reporting entities to account for the tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2023. Early adoption is permitted. ChoiceOne is currently evaluating the impact of this standard on the consolidated financial statements. 11 NOTE 2 – SECURITIES The fair value of equity securities and the related gross unrealized gains and (losses) recognized in noninterest income were as follows: June 30, 2023 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity securities $ 9,037 $ 201 $ ( 939 ) $ 8,299 December 31, 2022 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity securities $ 8,982 $ 305 $ ( 721 ) $ 8,566 The following tables present the amortized cost and fair value of securities available for sale and the gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and the amortized cost and fair value of securities held to maturity and the related gross unrealized gains and loss June 30, 2023 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Available for S Cost Gains Losses Value U.S. Treasury notes and bonds $ 90,579 $ - $ ( 12,184 ) $ 78,395 State and municipal 271,940 - ( 39,143 ) 232,797 Mortgage-backed 225,413 - ( 27,764 ) 197,649 Corporate 759 - ( 54 ) 705 Asset-backed securities 12,144 - ( 488 ) 11,656 Total $ 600,835 $ - $ ( 79,633 ) $ 521,202 Held to Maturity: U.S. Government and federal agency $ 2,969 $ - $ ( 384 ) $ 2,585 State and municipal 197,746 9 ( 34,551 ) 163,204 Mortgage-backed 199,093 - ( 30,552 ) 168,541 Corporate 19,998 17 ( 3,204 ) 16,811 Asset-backed securities 743 - ( 59 ) 684 Total $ 420,549 $ 26 $ ( 68,750 ) $ 351,825 December 31, 2022 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Available for S Cost Gains Losses Value U.S. Treasury notes and bonds $ 90,810 $ - $ ( 12,606 ) $ 78,204 State and municipal 277,489 - ( 47,551 ) 229,938 Mortgage-backed 236,703 - ( 28,140 ) 208,563 Corporate 757 - ( 46 ) 711 Asset-backed securities 13,031 - ( 698 ) 12,333 Total $ 618,790 $ - $ ( 89,041 ) $ 529,749 Held to Maturity: U.S. Government and federal agency $ 2,966 $ - $ ( 421 ) $ 2,545 State and municipal 201,890 1 ( 39,355 ) 162,536 Mortgage-backed 200,473 - ( 29,868 ) 170,605 Corporate 19,603 - ( 2,285 ) 17,318 Asset-backed securities 974 - ( 77 ) 897 Total $ 425,906 $ 1 $ ( 72,006 ) $ 353,901 12 Available for sale securities with unrealized losses as of June 30, 2023 and December 31, 2022, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows: June 30, 2023 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Available for S Value Losses Value Losses Value Losses U.S. Treasury notes and bonds $ - $ - $ 78,395 $ 12,184 $ 78,395 $ 12,184 State and municipal 1,311 31 231,235 39,112 232,546 39,143 Mortgage-backed 21,083 1,502 176,566 26,262 197,649 27,764 Corporate - - 705 54 705 54 Asset-backed securities - - 11,656 488 11,656 488 Total temporarily impaired $ 22,394 $ 1,533 $ 498,557 $ 78,100 $ 520,951 $ 79,633 December 31, 2022 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Available for S Value Losses Value Losses Value Losses U.S. Treasury notes and bonds $ - $ - $ 78,204 $ 12,606 $ 78,204 $ 12,606 State and municipal 89,158 12,612 140,390 34,939 229,548 47,551 Mortgage-backed 63,249 3,093 144,318 25,047 207,567 28,140 Corporate 711 46 - - 711 46 Asset-backed securities - - 12,333 698 12,333 698 Total temporarily impaired $ 153,118 $ 15,751 $ 375,245 $ 73,290 $ 528,363 $ 89,041 13 Held to maturity securities with unrealized losses as of June 30, 2023 and December 31, 2022, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows: June 30, 2023 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Held to Maturity: Value Losses Value Losses Value Losses U.S. Government and federal agency $ - $ - $ 2,585 $ 384 $ 2,585 $ 384 State and municipal 768 4 162,252 34,547 163,020 34,551 Mortgage-backed 404 34 168,137 30,518 168,541 30,552 Corporate - - 15,159 3,204 15,159 3,204 Asset-backed securities - - 684 59 684 59 Total temporarily impaired $ 1,172 $ 38 $ 348,817 $ 68,712 $ 349,989 $ 68,750 December 31, 2022 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Held to Maturity: Value Losses Value Losses Value Losses U.S. Government and federal agency $ - $ - $ 2,545 $ 421 $ 2,545 $ 421 State and municipal 13,457 1,899 149,016 37,456 162,473 39,355 Mortgage-backed 25,582 822 145,024 29,046 170,606 29,868 Corporate 5,296 603 10,771 1,682 16,067 2,285 Asset-backed securities - - 897 77 897 77 Total temporarily impaired $ 44,335 $ 3,324 $ 308,253 $ 68,682 $ 352,588 $ 72,006 14 ChoiceOne evaluates all securities on a quarterly basis to determine if an ACL and corresponding impairment charge should be recorded. Consideration is given to the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of ChoiceOne to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value of amortized cost basis. ChoiceOne believes that unrealized losses on securities were temporary in nature and were caused primarily by changes in interest rates, increased credit spreads, and reduced market liquidity and were not caused by the credit status of the issuer. No ACL was recorded in the three and six months ended June 30, 2023 , and no other-than-temporary impairment charges were recorded in the same periods in 2022 . At June 30, 2023 and December 31, 2022, there were 601 and 611 securities with an unrealized loss, respectively. Unrealized losses on corporate and municipal bonds have not been recognized into income because the issuers’ bonds are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity. The majority of unrealized losses at June 30, 2023 , are related to U.S. Treasury notes and bonds, state and municipal bonds and mortgage backed securities. The U.S. Treasury notes are guaranteed by the U.S. government and 100 % of the notes are rated AA or better. State and municipal bonds are backed by the taxing authority of the bond issuer or the revenues from the bond. On June 30, 2023 , 86 % of state and municipal bonds held are rated AA or better, 11 % are A rated and 3 % are not rated. Of the mortgage-backed securities held on June 30, 2023 , 38 % were issued by US government sponsored entities and agencies, and rated AA, 37 % are AAA rated private issue and collateralized mortgage obligation, and 25 % are unrated privately issued mortgage-backed securities with structured credit enhancement and collateralized mortgage obligation. 15 Presented below is a schedule of maturities of securities as of June 30, 2023. Available for sale securities are reported at fair value and held to maturity securities are reported at amortized cost. Callable securities in the money are presumed called and matured at the callable date. Available for Sale Securities maturing within: Fair Value Less than 1 Year - 5 Years - More than at June 30, (Dollars in thousands) 1 Year 5 Years 10 Years 10 Years 2023 U.S. Government and federal agency $ - $ - $ - $ - $ - U.S. Treasury notes and bonds - 40,530 37,865 - 78,395 State and municipal 2,717 7,031 86,525 136,524 232,797 Corporate 504 - 201 — 705 Asset-backed securities — 8,473 3,183 — 11,656 Total debt securities 3,221 56,034 127,774 136,524 323,553 Mortgage-backed securities 9,856 71,075 95,439 21,279 197,649 Total Available for Sale $ 13,077 $ 127,109 $ 223,213 $ 157,803 $ 521,202 Held to Maturity Securities maturing within: Amortized Cost Less than 1 Year - 5 Years - More than at June 30, (Dollars in thousands) 1 Year 5 Years 10 Years 10 Years 2023 U.S. Government and federal agency $ — $ — $ 2,969 $ — $ 2,969 State and municipal 1,633 9,469 93,041 93,603 197,746 Corporate — - 19,998 - 19,998 Asset-backed securities — 743 — — 743 Total debt securities 1,633 10,212 116,008 93,603 221,456 Mortgage-backed securities 18,743 34,838 145,512 — 199,093 Total Held to Maturity $ 20,376 $ 45,050 $ 261,520 $ 93,603 $ 420,549 Following is information regarding unrealized gains and losses on equity securities for the three and six months ended June 30, 2023 and 2022: Three Months Ended Six Months Ended June 30, June 30, 2023 2022 2023 2022 Net gains and (losses) recognized during the period $ ( 385 ) $ ( 327 ) $ ( 322 ) $ ( 683 ) L Net gains and (losses) recognized during the period on securities sold — — — — Unrealized gains and (losses) recognized during the reporting period on securities still held at the reporting date $ ( 385 ) $ ( 327 ) $ ( 322 ) $ ( 683 ) 16 NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES Loans by type as a percentage of the portfolio were as follows: June 30, 2023 December 31, 2022 (Dollars in thousands) Balance % Balance % Percent Increase (Decrease) Agricultural $ 40,684 3.22 % 64,159 5.39 % ( 36.59 ) % Commercial and Industrial 224,191 17.73 % 210,210 17.67 % 6.65 % Commercial Real Estate 657,549 52.01 % 630,953 53.03 % 4.22 % Consumer 38,614 3.05 % 39,808 3.35 % ( 3.00 ) % Construction Real Estate 16,734 1.32 % 14,736 1.24 % 13.56 % Residential Real Estate 247,618 19.59 % 229,916 19.32 % 7.70 % Loans to Other Financial Institutions 38,838 3.07 % - 0.00 % 100.00 % Gross Loans $ 1,264,228 $ 1,189,782 Allowance for credit losses 14,582 1.15 % 7,619 0.64 % Net loans $ 1,249,646 $ 1,182,163 17 Activity in the allowance for credit losses and balances in the loan portfolio were as follows: Commercial Loans to Other (Dollars in thousands) and Commercial Construction Residential Financial Agricultural Industrial Consumer Real Estate Real Estate Real Estate Institutions Unallocated Total Allowance for Credit Losses Three Months Ended June 30, 2023 Beginning balance $ 136 $ 3,020 $ 913 $ 7,837 $ 72 $ 3,087 $ — $ — $ 15,065 Charge-offs — — ( 131 ) — — — — — ( 131 ) Recoveries — 2 59 — — 2 — — 63 Provision ( 58 ) ( 126 ) 44 ( 600 ) ( 2 ) 287 40 — ( 415 ) Ending balance $ 78 $ 2,896 $ 885 $ 7,237 $ 70 $ 3,376 $ — $ — $ 14,582 Allowance for Credit Losses Six Months Ended June 30, 2023 Beginning balance $ 144 $ 1,361 $ 310 $ 4,822 $ 63 $ 906 $ — $ 13 $ 7,619 Cumulative effect of change in accounting principle 14 1,587 541 3,006 20 2,010 — ( 13 ) 7,165 Charge-offs — — ( 271 ) — — — — — ( 271 ) Recoveries — 29 129 13 — 5 — — 176 Provision ( 80 ) ( 81 ) 176 ( 604 ) ( 13 ) 455 40 — ( 106 ) Ending balance $ 78 $ 2,896 $ 885 $ 7,237 $ 70 $ 3,376 $ 40 $ — $ 14,582 Individually evaluated for credit loss $ 1 $ 34 $ — $ 1 $ — $ 36 $ — $ — $ 72 Collectively evaluated for credit loss $ 77 $ 2,862 $ 885 $ 7,236 $ 70 $ 3,340 $ 40 $ — $ 14,510 Loans June 30, 2023 Individually evaluated for credit loss $ 17 $ 318 $ — $ 32 $ — $ 1,756 $ — $ 2,123 Collectively evaluated for credit loss 40,667 223,873 38,614 657,517 16,734 245,862 38,838 1,262,105 Ending balance $ 40,684 $ 224,191 $ 38,614 $ 657,549 $ 16,734 $ 247,618 $ 38,838 $ 1,264,228 18 Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses Three Months Ended June 30, 2022 Beginning balance $ 387 $ 1,752 $ 304 $ 3,690 $ 37 $ 589 $ 842 $ 7,601 Charge-offs - ( 100 ) ( 144 ) — - — - ( 244 ) Recoveries - 2 55 1 - 1 - 59 Provision ( 255 ) ( 41 ) 94 533 8 101 ( 440 ) — Ending balance $ 132 $ 1,613 $ 309 $ 4,224 $ 45 $ 691 $ 402 $ 7,416 Allowance for Loan Losses Six Months Ended June 30, 2022 Beginning balance $ 448 $ 1,454 $ 290 $ 3,705 $ 110 $ 671 $ 1,010 $ 7,688 Charge-offs ( 131 ) ( 255 ) - - — - ( 386 ) Recoveries 4 106 2 - 2 - 114 Provision ( 316 ) 286 168 517 ( 65 ) 18 ( 608 ) - Ending balance $ 132 $ 1,613 $ 309 $ 4,224 $ 45 $ 691 $ 402 $ 7,416 Individually evaluated for impairment $ 1 $ 52 $ 1 $ 7 $ — $ 154 $ — $ 215 Collectively evaluated for impairment $ 131 $ 1,561 $ 308 $ 4,217 $ 45 $ 537 $ 402 $ 7,201 Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses December 31, 2022 Individually evaluated for impairment $ 2 $ 14 $ 1 $ 5 $ — $ 131 $ — $ 153 Collectively evaluated for impairment $ 142 $ 1,347 $ 309 $ 4,817 $ 63 $ 775 $ 13 $ 7,466 Loans December 31, 2022 Individually evaluated for impairment $ 23 $ 177 $ 7 $ 165 $ — $ 2,474 $ 2,846 Collectively evaluated for impairment 64,136 206,074 39,793 622,131 14,736 225,792 1,172,662 Acquired with deteriorated credit quality — 3,959 8 8,657 — 1,650 14,274 Ending balance $ 64,159 $ 210,210 $ 39,808 $ 630,953 $ 14,736 $ 229,916 $ 1,189,782 19 The provision for credit losses on loans was a benefit of $ 415,000 and a benefit of $ 106,000 in the second quarter and first half of 2023 respectively, compared to $ 0 in the same periods in the prior year. The provision benefit was deemed necessary due to the impact of improvements in the Federal Open Market Committee ("FOMC") forecast for unemployment and Gross Domestic Product ("GDP") growth exceeding the provision required for loan growth in the second quarter and first half of 2023 . The FOMC forecast for change in real GDP improved from 0.4 % in March to 1.0 % in June while the unemployment rate forecast improved from 4.5 % in March to 4.1 % in June. The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking (1) the risk ratings of business loans, (2) the level of classified business loans, and (3) delinquent and nonperforming consumer loans. Business loans are risk rated on a scale of 1 to 9. A description of the characteristics of the ratings follows: Risk Rating 1 through 5 or pass: These loans are considered pass credits. They exhibit acceptable credit risk and demonstrate the ability to repay the loan from normal business operations. Risk rating 6 or special menti Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions that have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that ChoiceOne Bank will sustain some future loss if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual asset classified as substandard. Loans falling into this category should have clear action plans and timelines with benchmarks to determine which direction the relationship will move. Risk rating 7 or substandar Loans and other credit extensions graded “7” have all the weaknesses inherent in those graded “6”, with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. Loans in this classification should be evaluated for non-accrual status. All nonaccrual commercial and Retail loans must be at a minimum graded a risk code “7”. Risk rating 8 or doubtfu Loans and other credit extensions bearing this grade have been determined to have the extreme probability of some loss, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral. Risk rating 9 or l Loans in this classification are considered uncollectible and cannot be justified as a viable asset of ChoiceOne Bank. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future. 20 The following table reflects the amortized cost basis of loans as of June 30, 2023 based on year of origination (dollars in thousands): Commerci 2023 2022 2021 2020 2019 Prior Term Loans Total Revolving Loans Grand Total Agricultural Pass $ 1,168 $ 4,940 $ 3,197 $ 1,827 $ 7,427 $ 17,414 $ 35,973 $ 4,455 $ 40,428 Special mention - - - - 182 74 256 - 256 Substandard - - - - - - - - - Doubtful - - - - - - - - - Loss - - - - - - - - - Total $ 1,168 $ 4,940 $ 3,197 $ 1,827 $ 7,609 $ 17,488 $ 36,229 $ 4,455 $ 40,684 Current year-to-date gross write-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Commercial and Industrial Pass $ 19,124 $ 45,260 $ 26,555 $ 12,437 $ 14,795 $ 14,162 $ 132,333 $ 91,514 $ 223,847 Special mention - - 34 113 87 97 331 9 340 Substandard - - - - - 4 4 - 4 Doubtful - - - - - - - - - Loss - - - - - - - - - Total $ 19,124 $ 45,260 $ 26,589 $ 12,550 $ 14,882 $ 14,263 $ 132,668 $ 91,523 $ 224,191 Current year-to-date gross write-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Commercial Real Estate Pass $ 29,461 $ 137,786 $ 110,926 $ 74,413 $ 46,365 $ 150,104 $ 549,055 $ 107,383 $ 656,438 Special mention - - - - - 586 586 - 586 Substandard - - - - - 525 525 - 525 Doubtful - - - - - - - - - Loss - - - - - - - - - Total $ 29,461 $ 137,786 $ 110,926 $ 74,413 $ 46,365 $ 151,215 $ 550,166 $ 107,383 $ 657,549 Retai 2023 2022 2021 2020 2019 Prior Term Loans Total Revolving Loans Grand Total Consumer Performing $ 5,938 $ 16,228 $ 8,648 $ 3,820 $ 1,764 $ 1,682 $ 38,080 $ 534 $ 38,614 Nonperforming - - - - - - - - - Nonaccrual - - - - - - - - - Total $ 5,938 $ 16,228 $ 8,648 $ 3,820 $ 1,764 $ 1,682 $ 38,080 $ 534 $ 38,614 Current year-to-date gross write-offs $ - $ 12 $ 9 $ 28 $ - $ 1 $ 50 $ - $ 50 Construction real estate Performing $ 1,313 $ 1,770 $ 565 $ - $ - $ - $ 3,648 $ 13,086 $ 16,734 Nonperforming - - - - - - - - - Nonaccrual - - - - - - - - - Total $ 1,313 $ 1,770 $ 565 $ - $ - $ - $ 3,648 $ 13,086 $ 16,734 Current year-to-date gross write-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Residential real estate Performing $ 25,538 $ 67,935 $ 30,068 $ 17,783 $ 13,699 $ 43,496 $ 198,519 $ 47,517 $ 246,036 Nonperforming - - - - - - - - - Nonaccrual - 436 347 - - 799 1,582 - 1,582 Total $ 25,538 $ 68,371 $ 30,415 $ 17,783 $ 13,699 $ 44,295 $ 200,101 $ 47,517 $ 247,618 21 Corporate Credit Exposure - Credit risk profile by credit worthiness category (Dollars in thousands) Agricultural Commercial and Industrial Commercial Real Estate December 31, December 31, December 31, 2022 2022 2022 Pass $ 63,867 $ 209,700 $ 624,555 Special Mention 289 400 2,048 Substandard 3 110 4,350 Doubtful — - — Loss - - - $ 64,159 $ 210,210 $ 630,953 Consumer Credit Exposure - Credit risk profile based on payment activity (Dollars in thousands) Consumer Construction Real Estate Residential Real Estate December 31, December 31, December 31, 2022 2022 2022 Performing $ 39,808 $ 14,736 $ 228,653 Nonperforming — — — Nonaccrual — — 1,263 $ 39,808 $ 14,736 $ 229,916 The following table provides information on loans that were considered troubled loan modification ("TLMs") that were modified during the three and six months ended June 30, 2023 Three Months Ended June 30, 2023 Term Extension % of Total Class of (Dollars in thousands) Amortized Financing Cost Basis Receivable Commercial and industrial $ 67 0 % Total 67 Six Months Ended June 30, 2023 Term Extension % of Total Class of (Dollars in thousands) Amortized Financing Cost Basis Receivable Commercial and industrial 67 0 % Residential real estate $ 129 0 % Total 196 22 The following table presents the financial effect by type of modification made to borrowers experiencing financial difficulty and class of financing receivable. Three Months Ended June 30, 2023 Term Extension Commercial and industrial Termed out line of Credit Six Months Ended June 30, 2023 Term Extension Commercial and industrial Termed Out Line of Credit Residential real estate Provided twelve month payment plan to catch up past due amount through our standard program. The following table presents the period-end amortized cost basis of financing receivables that had a payment default during the period and were modified in the 12 months before default to borrowers experiencing financial difficulty. Three Months Ended June 30, 2023 (Dollars in thousands) Term extension Commercial and industrial 67 Total $ 67 Six Months Ended June 30, 2023 (Dollars in thousands) Term extension Commercial and industrial 67 Residential real estate $ 129 Total $ 196 The following table presents the period-end amortized cost basis of loans that have been modified in the past 12 months to borrowers experiencing financial difficulty by payment status and class of financing receivable. Three Months Ended June 30, 2023 (Dollars in thousands) Current 30-89 days Greater than 90 days Total Commercial and industrial 67 — — 67 Total $ 67 $ - $ - $ 67 Six Months Ended June 30, 2023 (Dollars in thousands) Current 30-89 days Greater than 90 days Total Commercial and industrial 67 — — 67 Residential real estate — — 129 129 Total $ 67 $ - $ 129 $ 196 23 The following table provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the three and six months ended June 30, 2022 . Three Months Ended June 30, 2022 Six Months Ended June 30, 2022 Pre- Post- Pre- Post- Modification Modification Modification Modification Outstanding Outstanding Outstanding Outstanding (Dollars in thousands) Number of Recorded Recorded Number of Recorded Recorded Loans Investment Investment Loans Investment Investment Agricultural — $ — $ — 1 $ 258 $ 258 Commercial and industrial 1 19 19 1 19 19 Total 1 $ 19 $ 19 2 $ 277 $ 277 There were no TDRs where the borrower was past due with respect to principal and/or interest for 30 days or more during the three months ended June 30, 2022, which loans had been modified and classified as TDRs during the year prior to the default. Nonaccrual loans by loan category as of June 30, 2023 were as follows: (Dollars in thousands) Nonaccrual loans with no ACL Total nonaccrual loans Interest income recognized during the period on nonaccrual loans Interest income recognized during the period on nonaccrual loans Residential real estate $ 676 $ 1,581 $ — $ — Total nonaccrual loans $ 676 $ 1,581 $ — $ — Nonaccrual loans by loan category as of December 31, 2022 were as follows: (Dollars in thousands) Total nonaccrual loans Residential real estate $ 1,263 $ 1,263 24 The following schedule provides information regarding average balances of loans evaluated for impairment and interest recognized on impaired loans for the three months and six months ended December 31, 2022 and June 30, 2022: Unpaid (Dollars in thousands) Recorded Principal Related Investment Balance Allowance December 31, 2022 With no related allowance recorded Agricultural $ — $ — $ — Commercial and industrial — — — Consumer — — — Construction real estate — — — Commercial real estate — — — Residential real estate 550 595 — Subtotal 550 595 — With an allowance recorded Agricultural 23 27 2 Commercial and industrial 177 177 14 Consumer 7 7 1 Construction real estate — — — Commercial real estate 165 165 5 Residential real estate 1,924 1,954 131 Subtotal 2,296 2,330 153 Total Agricultural 23 27 2 Commercial and industrial 177 177 14 Consumer 7 7 1 Construction real estate — — — Commercial real estate 165 165 5 Residential real estate 2,474 2,549 131 Total $ 2,846 $ 2,925 $ 153 Unpaid (Dollars in thousands) Recorded Principal Related Investment Balance Allowance June 30, 2022 With no related allowance recorded Agricultural $ 314 $ 428 $ — Commercial and industrial — — — Consumer — — — Construction real estate — — — Commercial real estate — — — Residential real estate 439 469 — Subtotal 753 897 — With an allowance recorded Agricultural 6 7 1 Commercial and industrial 159 190 52 Consumer 7 8 1 Construction real estate 149 149 — Commercial real estate — — 7 Residential real estate 1,613 1,644 154 Subtotal 1,934 1,998 215 Total Agricultural 320 435 1 Commercial and industrial 159 190 52 Consumer 7 8 1 Construction real estate 149 149 — Commercial real estate — — 7 Residential real estate 2,052 2,113 154 Total $ 2,687 $ 2,895 $ 215 25 Average Interest (Dollars in thousands) Recorded Income Investment Recognized Three Months Ended June 30, 2022 With no related allowance recorded Agricultural $ 314 $ — Commercial and industrial 46 — Consumer — — Construction real estate — — Commercial real estate — — Residential real estate 220 — Subtotal 580 — With an allowance recorded Agricultural 1,117 - Commercial and industrial 211 1 Consumer 20 — Construction real estate — — Commercial real estate 153 2 Residential real estate 1,733 12 Subtotal 3,234 15 Total Agricultural 1,431 — Commercial and industrial 257 1 Consumer 20 — Construction real estate — — Commercial real estate 153 2 Residential real estate 1,953 12 Total $ 3,814 $ 15 Average Interest (Dollars in thousands) Recorded Income Investment Recognized Six Months Ended June 30, 2022 With no related allowance recorded Agricultural $ 314 $ — Commercial and industrial 31 — Consumer — — Construction real estate — — Commercial real estate 31 — Residential real estate 201 — Subtotal 577 — With an allowance recorded Agricultural 1,512 — Commercial and industrial 254 2 Consumer 18 — Construction real estate — — Commercial real estate 162 5 Residential real estate 1,831 29 Subtotal 3,777 36 Total Agricultural 1,826 — Commercial and industrial 285 2 Consumer 18 — Construction real estate — — Commercial real estate 193 5 Residential real estate 2,032 29 Total $ 4,354 $ 36 26 An aging analysis of loans by loan category follows: Loans Loans Loans Loans Past Due 90 Days Past Due Past Due Greater Past (Dollars in thousands) 30 to 59 60 to 89 Than 90 Loans Not Total Due and Days (1) Days (1) Days (1) Total (1) Past Due Loans Accruing June 30, 2023 Agricultural $ — $ — $ — $ — $ 40,684 $ 40,684 $ — Commercial and industrial 61 132 — 193 223,998 224,191 — Consumer 5 — — 5 38,609 38,614 — Commercial real estate 1,059 — — 1,059 656,490 657,549 — Construction real estate — 128 — 128 16,606 16,734 — Residential real estate 224 653 560 1,437 246,181 247,618 Loans to Other Financial Institutions — — — — 38,838 38,838 $ 1,349 $ 913 $ 560 $ 2,822 $ 1,261,406 $ 1,264,228 $ — December 31, 2022 Agricultural $ — $ — $ — $ — $ 64,159 $ 64,159 $ — Commercial and industrial — 171 — 171 210,039 210,210 — Consumer 39 7 — 46 39,762 39,808 — Commercial real estate — — — — 630,953 630,953 — Construction real estate — — — — 14,736 14,736 — Residential real estate 682 — 842 1,524 228,392 229,916 — $ 721 $ 178 $ 842 $ 1,741 $ 1,188,041 $ 1,189,782 $ — (1) Includes nonaccrual loans. The table below presents a roll forward of the accretable yield on the County Bank Corp. acquired loan portfolio for the years ended December 31, 2022 and the six months ended June 30, 2023 (dollars in thousands): (Dollars in thousands) Purchased with credit deterioration Purchased without credit deterioration Acquired Total Balance January 1, 2022 $ 288 $ 1,176 $ 1,464 Transfer from non-accretable to accretable yield 2,192 — 2,192 Accretion January 1, 2022 through December 31, 2022 ( 553 ) ( 98 ) ( 651 ) Balance January 1, 2023 1,927 1,078 3,005 Transfer from non-accretable to accretable yield - Accretion January 1, 2023 through June 30, 2023 ( 269 ) ( 270 ) ( 539 ) Balance, June 30, 2023 $ 1,658 $ 808 $ 2,466 The table below presents a roll forward of the accretable yield on Community Shores Bank Corporation acquired loan portfolio for the years ended December 31, 2022 and the six months ended June 30, 2023 (dollars in thousands): Purchased with credit deterioration Purchased without credit deterioration Acquired Total Balance January 1, 2022 $ 522 $ 197 $ 719 Transfer from non-accretable to accretable yield 1,086 — 1,086 Accretion January 1, 2022 through December 31, 2022 ( 993 ) ( 197 ) ( 1,190 ) Balance January 1, 2023 615 - 615 Transfer from non-accretable to accretable yield 622 622 Accretion January 1, 2023 through June 30, 2023 ( 376 ) ( 376 ) Balance, June 30, 2023 $ 861 $ - $ 861 27 NOTE 4 – EARNINGS PER SHARE Earnings per share are based on the weighted average number of shares outstanding during the period. A computation of basic earnings per share and diluted earnings per share follows: Three Months Ended Six Months Ended (Dollars in thousands, except share data) June 30, June 30, 2023 2022 2023 2022 Basic Net income $ 5,213 $ 5,615 $ 10,846 $ 11,143 Weighted average common shares outstanding 7,529,177 7,499,497 7,524,257 7,497,492 Basic earnings per common shares $ 0.69 $ 0.75 $ 1.44 $ 1.49 Diluted Net income $ 5,213 $ 5,615 $ 10,846 $ 11,143 Weighted average common shares outstanding 7,529,177 7,499,497 7,524,257 7,497,492 Plus dilutive stock options and restricted stock units 22,720 11,027 28,335 13,766 Weighted average common shares outstanding and potentially dilutive shares 7,551,897 7,510,524 7,552,592 7,511,258 Diluted earnings per common share $ 0.69 $ 0.75 $ 1.44 $ 1.49 There were 15,000 stock options and 5,125 performance awards that were considered anti-dilutive to earnings per share for the three months ended June 30, 2023. There were 15,000 stock options and 5,125 performance awards that were considered anti-dilutive to earnings per share for the six months ended June 30, 2023. There were 15,000 stock options, 28,660 restricted stock units, and 6,396 performance awards that were considered anti-dilutive to earnings per share for the three months ended June 30,2022. There were 15,000 stock options, 28,660 restricted stock units, and 6,396 performance awards that were considered anti-dilutive for the six months ended June 30, 2022. 28 Note 5 – Financial Instruments Financial instruments as of the dates indicated were as follows: Quoted Prices In Active Significant Markets for Other Significant Identical Observable Unobservable (Dollars in thousands) Carrying Estimated Assets Inputs Inputs Amount Fair Value (Level 1) (Level 2) (Level 3) June 30, 2023 Assets Cash and cash equivalents $ 76,810 $ 76,810 $ 76,810 $ - $ - Equity securities at fair value 8,299 8,299 5,599 - 2,700 Securities available for sale 521,202 521,202 78,395 442,807 - Securities held to maturity 420,549 351,825 - 337,944 13,881 Federal Home Loan Bank and Federal Reserve Bank stock 13,431 13,431 - 13,431 - Loans held for sale 8,924 9,192 - 9,192 - Loans to other financial institutions 38,838 38,838 - 38,838 - Loans, net 1,249,646 1,195,843 - - 1,195,843 Accrued interest receivable 8,650 8,650 - 8,650 - Interest rate lock commitments 126 126 - 126 - Mortgage loan servicing rights 4,030 5,769 - 5,769 - Interest rate derivative contracts 11,177 11,177 - 11,177 - Liabilities Noninterest-bearing deposits 544,925 544,925 544,925 - - Interest-bearing deposits 1,490,093 1,486,941 - 1,486,941 - Brokered deposits 51,370 51,292 - 51,292 - Borrowings 160,000 159,122 - 159,122 - Subordinated debentures 35,385 30,613 - 30,613 - Accrued interest payable 1,952 1,952 - 1,952 - Interest rate derivative contracts - - - - - December 31, 2022 Assets Cash and cash equivalents $ 43,943 $ 43,943 $ 43,943 $ - $ - Equity securities at fair value 8,566 8,566 6,024 - 2,542 Securities available for sale 529,749 529,749 78,204 451,545 - Securities held to maturity 425,906 353,901 - 338,583 15,318 Federal Home Loan Bank and Federal Reserve Bank stock 8,581 8,581 - 8,581 - Loans held for sale 4,834 4,979 - 4,979 - Loans to other financial institutions - - - - - Loans, net 1,182,163 1,123,198 - - 1,123,198 Accrued interest receivable 8,949 8,949 - 8,949 - Interest rate lock commitments 28 28 - 28 - Mortgage loan servicing rights 4,322 5,855 - 5,855 - Interest rate derivative contracts 9,204 9,204 - 9,204 - Liabilities Noninterest-bearing deposits 599,579 599,579 599,579 - - Interest-bearing deposits 1,518,424 1,514,294 - 1,514,294 - Borrowings 50,000 50,000 - 50,000 - Subordinated debentures 35,262 30,304 - 30,304 - Accrued interest payable 610 610 - 610 - Interest rate derivative contracts 5,823 5,823 - 5,823 - 29 NOTE 6 – FAIR VALUE MEASUREMENTS The following tables present information about assets and liabilities measured at fair value on a recurring basis and the valuation techniques used to determine those fair values. In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that ChoiceOne Bank has the ability to access. Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability. In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. ChoiceOne Bank’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability. 30 Disclosures concerning assets and liabilities measured at fair value are as follows: Assets and Liabilities Measured at Fair Value on a Recurring Basis Quoted Prices In Active Significant Markets for Other Significant Identical Observable Unobservable Balance (Dollars in thousands) Assets Inputs Inputs at Date (Level 1) (Level 2) (Level 3) Indicated Equity Securities Held at Fair Value - June 30, 2023 Equity securities $ 5,599 $ - $ 2,700 $ 8,299 Investment Securities, Available for Sale - June 30, 2023 U.S. Treasury notes and bonds $ 78,395 $ - $ - $ 78,395 State and municipal - 232,797 - 232,797 Mortgage-backed - 197,649 - 197,649 Corporate - 705 - 705 Asset-backed securities - 11,656 - 11,656 Total $ 78,395 $ 442,807 $ - $ 521,202 Derivative Instruments - June 30, 2023 Interest rate derivative contracts - assets $ - $ 11,177 $ - $ 11,177 Interest rate derivative contracts - liabilities $ - $ - $ - $ - Equity Securities Held at Fair Value - December 31, 2022 Equity securities $ 6,024 $ - $ 2,542 $ 8,566 Investment Securities, Available for Sale - December 31, 2022 U. S. Government and federal agency $ - $ - $ - $ - U. S. Treasury notes and bonds 78,204 - - 78,204 State and municipal - 229,938 - 229,938 Mortgage-backed - 208,563 - 208,563 Corporate - 711 - 711 Asset-backed securities - 12,333 - 12,333 Total $ 78,204 $ 451,545 $ - $ 529,749 Derivative Instruments - December 31, 2022 Interest rate derivative contracts - assets $ - $ 9,204 $ - $ 9,204 Interest rate derivative contracts - liabilities $ - $ 5,823 $ - $ 5,823 31 Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis Six Months Ended (Dollars in thousands) June 30, 2023 2022 Equity Securities Held at Fair Value Balance, January 1 $ 2,542 $ 1,768 Total realized and unrealized gains included in noninterest income 60 ( 5 ) Net purchases, sales, calls, and maturities 98 63 Net transfers into Level 3 - - Balance, June 30, $ 2,700 $ 1,826 Amount of total losses for the period included in earning attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at June 30, $ 60 $ ( 5 ) Investment Securities, Available for Sale Balance, January 1 $ - $ 21,050 Total unrealized gains included in other comprehensive income - - Net purchases, sales, calls, and maturities - - Net transfers into Level 3 - - Transfer to held to maturity - ( 21,050 ) Balance, June 30, $ - $ - Amount of total losses for the period included in earning attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at June 30, $ - $ - Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 investment securities and liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs. Securities categorized as Level 3 assets as of June 30, 2023 and December 31, 2022 primarily consist of common and preferred equity securities of community banks. ChoiceOne estimates the fair value of these equity securities based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved. ChoiceOne also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment. Disclosures concerning assets measured at fair value on a non-recurring basis are as follows: 32 Assets Measured at Fair Value on a Non-recurring Basis Quoted Prices In Active Significant Markets for Other Significant Balances at Identical Observable Unobservable (Dollars in thousands) Dates Assets Inputs Inputs Indicated (Level 1) (Level 2) (Level 3) Collateral Dependent Loans June 30, 2023 $ 676 $ - $ - $ 676 December 31, 2022 $ 2,846 $ - $ - $ 2,846 Other Real Estate June 30, 2023 $ 266 $ - $ - $ 266 December 31, 2022 $ - $ - $ - $ - Collateral dependent loans categorized as Level 3 assets consist of non-homogeneous loans that are considered non-accrual or higher risk. ChoiceOne estimates the fair value of the loans based on the present value of expected future cash flows using management’s estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). The changes in fair value consisted of charge-downs of collateral dependent loans that were posted to the allowance for credit losses and write-downs of other real estate that were posted to a valuation account. 33 NOTE 7 – REVENUE FROM CONTRACTS WITH CUSTOMERS ChoiceOne has a variety of sources of revenue, which include interest and fees from customers as well as revenue from non-customers. ASC Topic 606, Revenue from Contracts With Customers, covers certain sources of revenue that are classified within noninterest income in the Consolidated Statements of Income. Sources of revenue that are included in the scope of ASC Topic 606 include service charges and fees on deposit accounts, interchange income, investment asset management income and transaction-based revenue, and other charges and fees for customer services. Service Charges and Fees on Deposit Accounts Revenue includes charges and fees to provide account maintenance, overdraft services, wire transfers, funds transfer, and other deposit-related services. Account maintenance fees such as monthly service charges are recognized over the period of time that the service is provided. Transaction fees such as wire transfer charges are recognized when the service is provided to the customer. Interchange Income Revenue includes debit card interchange and network revenues. This revenue is earned on debit card transactions that are conducted through payment networks such as MasterCard. The revenue is recorded as services are delivered and is presented net of interchange expenses. Investment Commission Income Revenue includes fees from the investment management advisory services and revenue is recognized when services are rendered. Revenue also includes commissions received from the placement of brokerage transactions for purchase or sale of stocks or other investments. Commission income is recognized when the transaction has been completed. Trust Fee Income Revenue includes fees from the management of trust assets and from other related advisory services. Revenue is recognized when services are rendered. 34 Following is noninterest income separated by revenue within the scope of ASC 606 and revenue within the scope of other GAAP topics: Three Months Ended Six Months Ended June 30, June 30, (Dollars in thousands) 2023 2022 2023 2022 Service charges and fees on deposit accounts $ 1,105 $ 1,036 $ 2,132 $ 2,067 Interchange income 1,166 1,317 2,406 2,475 Investment commission income 172 233 368 438 Trust fee income 196 176 380 354 Other charges and fees for customer services 155 125 292 274 Noninterest income from contracts with customers within the scope of ASC 606 2,794 2,887 5,578 5,608 Noninterest income within the scope of other GAAP topics 691 543 1,578 1,668 Total noninterest income $ 3,485 $ 3,430 $ 7,156 $ 7,276 35 NOTE 8 – DERIVATIVE AND HEDGING ACTIVITIES ChoiceOne is exposed to certain risks relating to its ongoing business operations. ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. Derivatives are also implicit in certain contracts and commitments. ChoiceOne recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. ChoiceOne records derivative assets and derivative liabilities on the balance sheet within other assets and other liabilities, respectively. Changes in the fair value of derivative financial instruments are either recognized in income or in shareholders’ equity as a component of accumulated other comprehensive income or loss depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge. ChoiceOne currently uses interest rate swaps to manage its exposure to certain fixed and variable rate assets and variable rate liabilities. Interest rate swaps ChoiceOne uses interest rate swaps as part of its interest rate risk management strategy to add stability to net interest income and to manage its exposure to interest rate movements. Interest rate swaps designated as hedges involve the receipt of variable-rate amounts from a counterparty in exchange for ChoiceOne making fixed-rate payments or the receipt of fixed-rate amounts from a counterparty in exchange for ChoiceOne making variable rate payments, over the life of the agreements without the exchange of the underlying notional amount. In the second quarter of 2022, ChoiceOne entered into two pay-floating/receive-fixed interest rate swaps (the “Pay Floating Swap Agreements”) for a total notional amount of $ 200.0 million that were designated as cash flow hedges. These derivatives hedge the variable cash flows of specifically identified available-for-sale securities, cash and loans. The Pay Floating Swap Agreements were determined to be highly effective during the periods presented and therefore no amount of ineffectiveness has been included in net income. The Pay Floating Swap Agreements pay a coupon rate equal to SOFR while receiving a fixed coupon rate of 2.41 %. In March 2023, ChoiceOne terminated all Pay Floating Swap Agreements for a cash payment of $ 4.2 million. The loss will be amortized into interest income over 13 months, which was the remaining period of the swap agreements. In the second quarter of 2022, ChoiceOne entered into one forward starting pay-fixed/receive-floating interest rate swap (the “Pay Fixed Swap Agreement”) for a notional amount of $ 200.0 million that was designated as a cash flow hedge. This derivative hedges the risk of variability in cash flows attributable to forecasted payments on future deposits or floating rate borrowings indexed to the SOFR Rate. The Pay Fixed Swap Agreement is two years forward starting with an eight-year term set to expire in 2032. The Pay Fixed Swap Agreements will pay a fixed coupon rate of 2.75 % while receiving the SOFR Rate. In the fourth quarter of 2022, ChoiceOne entered into four pay-fixed/receive-floating interest rate swaps, with payments starting in April 2024, for a total notional amount of $ 201.0 million that were designated as fair value hedges. These derivatives hedge the risk of changes in fair value of certain available for sale securities for changes in the SOFR benchmark interest rate component of the fixed rate bonds. All four of these hedges were effective immediately on December 22, 2022. Of the total notional value, $ 101.9 million has a ten-year term set to expire in 2032, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.390 %. Of the total notional value, $ 50.0 million has a nine-year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.4015 %. The remaining notional value of $ 49.1 million has a nine-year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bond equal to 3.4030 %. ChoiceOne adopted ASC2022-01, as of December 20, 2022, to use the portfolio layer method. The fair value basis adjustment associated with available-for-sale fixed rate bonds initially results in an adjustment to AOCI. For available-for-sale securities subject to fair value hedge accounting, the changes in the fair value of the fixed rate bonds related to the hedged risk (the benchmark interest rate component and the partial term) are then reclassed from AOCI to current earnings offsetting the fair value measurement change of the interest rate swap, which is also recorded in current earnings. Net cash settlements are received/paid semi-annually, with the first starting in March 2023, and will be included in interest income. Net cash settlements received on these four pay-fixed/receive-floating swaps were $ 798,000 and $ 1.4 million for the three and six months ended June 30, 2023, which were included in interest income. 36 The table below presents the fair value of derivative financial instruments as well as the classification within the consolidated statements of financial conditi June 30, 2023 December 31, 2022 (Dollars in thousands) Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments Interest rate contracts Other Assets $ 11,177 Other Assets $ 9,204 Interest rate contracts Other Liabilities $ — Other Liabilities $ 5,823 The table below presents the effect of fair value and cash flow hedge accounting on the consolidated statements of operations for the periods present Location and Amount of Gain or (Loss) Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships Recognized in Income on Fair Value and Cash Flow Hedging Relationships Three months ended June 30, 2023 Three months ended June 30, 2022 Six months ended June 30, 2023 Six months ended June 30, 2022 Interest Income Interest Expense Interest Income Interest Expense Interest Income Interest Expense Interest Income Interest Expense Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded $ ( 137 ) $ - $ 422 $ ( 155 ) $ ( 504 ) $ - $ 422 $ ( 155 ) Gain or (loss) on fair value hedging relationships: Interest rate contra Hedged items $ ( 6,753 ) $ - $ ( 71 ) $ - $ ( 731 ) $ - $ - $ - Derivatives designated as hedging instruments $ 6,705 $ - $ 71 $ - $ 745 $ - $ - $ - Amount excluded from effectiveness testing recognized in earnings based on amortization approach $ - $ - $ ( 153 ) $ - $ - $ - $ ( 153 ) $ - Gain or (loss) on cash flow hedging relationships: Interest rate contra Amount of gain or (loss) reclassified from accumulated other comprehensive income into income $ ( 887 ) $ - $ - $ - $ ( 1,043 ) $ - $ - $ - Amount excluded from effectiveness testing recognized in earnings based on amortization approach $ - $ - $ - $ ( 155 ) $ - $ - $ - $ ( 155 ) The table below presents the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost of those items as of the periods present June 30, 2023 Cumulative amount of Fair Value Hedging Adjustment Line Item in the Statement of included in the carrying Financial Position in which the Amortized cost of the amount of the Hedged Hedged Item is included Hedged Assets/(Liabilities) Assets/(Liabilities) Securities available for sale $ 224,399 $ 2,662 37 Item 2. Management’s Discussion and Ana lysis of Financial Condition and Results of Operations . The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (“ChoiceOne”), its wholly-owned subsidiary ChoiceOne Bank, and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. This discussion should be read in conjunction with the interim consolidated financial statements and related notes. FORWARD-LOOKING STATEMENTS This discussion and other sections of this quarterly report contain forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and ChoiceOne. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “look forward,” “continue,” “future,” “will” and variations of such words and similar expressions are intended to identify such forward-looking statements. Management’s determination of the provision for credit losses and ACL, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management’s assumptions concerning pension and other post-retirement benefit plans involve judgments that are inherently forward-looking. All of the information concerning interest rate sensitivity is forward-looking. All statements with references to future time periods are forward-looking. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, ChoiceOne undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. Additional risk factors include, but are not limited to, the risk factors discussed in Item 1A of ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2022 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. RESULTS OF OPERATIONS ChoiceOne reported net income of $5,213,000 and $10,846,000 for the three and six months ended June 30, 2023, compared to $5,615,000 and $11,143,000 for the same periods in 2022. Diluted earnings per share were $0.69 and $1.44 in the three and six months ended June 30, 2023, compared to $0.75 and $1.49 per share in the same periods in the prior year. The increase in deposit costs during the first half of 2023 has negatively impacted earnings, offset by higher interest income from higher interest rates on loans and organic loan growth. Total assets as of June 30, 2023, increased $73.8 million as compared to March 31, 2023. The asset growth during the second quarter of 2023 is due to an increase in cash of $21.6 million, an increase in core loans (which excludes held for sale loans, loans to other financial institutions, and PPP loans (“core loans”)) of $14.8 million or 4.9% annualized, and an increase in loans to other financial institutions of $38.8 million. Loans to other financial institutions is comprised of a warehouse line of credit to facilitate mortgage loan originations, and interest rates fluctuate with the national mortgage market. This balance is short term in nature with an average life of under 30 days. Management believes the short-term structure and low credit risk of this asset is advantageous in the current rate environment. Asset growth from June 30, 2022 to June 30, 2023 of $123.5 million is due to an increase in cash of $36.5 million and an increase in core loans of $145.8 million or 13.5%. Deposits, excluding brokered deposits, decreased by $103.5 million or 4.8% as of June 30, 2023 compared to June 30, 2022 and decreased $33.1 million or 1.6% compared to March 31, 2023. The decrease in deposits since June 30, 2022 was largely concentrated in the first quarter of 2023 as a result of a combination of customers using cash on hand for debt payoffs, seasonal tax and municipal bond payments, and customers seeking higher rates via money market securities or other investments. Deposit outflows have stabilized in the second quarter of 2023 with monthly growth of deposits, excluding brokered deposits, in May and June of 2023. In the last 12 months ended June 30, 2023, approximately $39 million or 38% of the trailing 12-month deposit runoff has been transferred from bank deposits to the ChoiceOne Wealth department. During the second quarter of 2023, ChoiceOne borrowed $160 million from the Federal Reserve’s Bank Term Funding Program (BTFP). This program provides a 1-year term at a fixed rate with the ability to prepay at any time without penalty. Collateral pledged is U.S. Treasuries, agency debt and mortgage-backed securities valued at par. The interest rate on the BTFP borrowings as of June 30, 2023 is 4.71% and fixed through May of 2024. Management elected to use the BTFP over other funding options due to the favorable interest rate and terms offered. 38 The return on average assets and return on average shareholders’ equity were 0.86% and 12.13%, respectively, for the second quarter of 2023, compared to 0.95% and 12.68%, respectively, for the same period in 2022. The return on average assets and return on average shareholders’ equity were 0.90% and 12.75%, respectively, for the first six months of 2023, compared to 0.94% and 11.62%, respectively, for the same period in 2022. The decrease in the return on average shareholders' equity in the three months ended June 30, 2023, was caused by an increase in shareholders’ equity related to a decrease in unrealized losses on available for sale securities and an increase in the fair value of derivatives. The increase in return on average shareholders' equity in the six months ended June 30, 2023 was caused by a decline in shareholders equity related to the increase in unrealized losses on available-for-sale securities. Dividends Cash dividends of $2.0 million or $0.26 per share were declared in the second quarter of 2023 , compared to $1.9 million or $0.25 per share in the second quarter of 2022 . Cash dividends declared in the first six months of 2023 were $3.9 million or $0.52 per share, compared to $3.7 million or $0.50 per share in the same period during the prior year. The cash dividend payout percentage was 36.1% for the first half of 2023, compared to 33.6% in the same period in the prior year. Interest Income and Expense Tables 1 and 2 on the following pages provide information regarding interest income and expense for the three and six months ended June 30, 2023 and 2022. Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities. Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates. These tables are referred to in the discussion of interest income, interest expense and net interest income. 39 Table 1 – Average Balances and Tax-Equivalent Interest Rates Three Months Ended June 30, 2023 2022 (Dollars in thousands) Average Average Balance Interest Rate Balance Interest Rate Assets: Loans (1)(3)(4)(5)(6) $ 1,218,860 $ 15,986 5.26 % $ 1,076,934 $ 12,529 4.65 % Taxable securities (2)(6) 756,239 5,378 2.85 780,689 3,522 1.80 Nontaxable securities (1) 296,952 1,758 2.38 317,730 1,973 2.48 Other 41,075 571 5.57 40,728 63 0.61 Interest-earning assets 2,313,126 23,693 4.11 2,216,081 18,087 3.26 Noninterest-earning assets 109,441 145,398 Total assets $ 2,422,567 $ 2,361,479 Liabilities and Shareholders' Equity: Interest-bearing demand deposits $ 815,179 $ 1,905 0.94 % $ 911,936 $ 627 0.27 % Savings deposits 372,651 345 0.37 461,934 157 0.14 Certificates of deposit 285,160 2,225 3.13 181,851 211 0.47 Brokered deposit 49,679 581 4.69 - - 0.00 Borrowings 144,231 1,717 4.78 5,765 21 1.44 Subordinated debentures 35,352 407 4.62 35,095 361 4.11 Other 3,763 45 4.81 - - 0.00 Interest-bearing liabilities 1,706,015 7,225 1.70 1,596,581 1,377 0.34 Demand deposits 534,106 578,943 Other noninterest-bearing liabilities 10,534 8,870 Total liabilities 2,250,655 2,184,394 Shareholders' equity 171,912 177,085 Total liabilities and shareholders' equity $ 2,422,567 $ 2,361,479 Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 16,468 $ 16,710 Net interest margin (tax-equivalent basis) (Non-GAAP) (1) 2.86 % 3.02 % Reconciliation to Reported Net Interest Income Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 16,468 $ 16,710 Adjustment for taxable equivalent interest (377 ) (422 ) Net interest income (GAAP) $ 16,091 $ 16,288 Net interest margin (GAAP) 2.79 % 2.94 % (1) Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%. The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry. These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities. (2) Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock. (3) Loans include both loans to other financial institutions and loans held for sale. (4) Non-accruing loan and PPP loan balances are included in the balances of average loans. Non-accruing loan average balances were $1.6 million and $1.3 million in the second quarter of 2023 and 2022, respectively. PPP loan average balances were $0 and $5.1 million in the second quarter of 2023 and 2022, respectively. (5) Interest on loans included net origination fees, accretion income, and PPP fees. Accretion income was $444,000 and $408,000 in the second quarter of 2023 and 2022, respectively. PPP fees were approximately $0 and $283,000 in the second quarter of 2023 and 2022, respectively. (6) Interest on loans and securities included derivative income and expense. Derivative income in securities was $523,000 and derivative expense in securities was $9,000 in the second quarter of 2023 and 2022, respectively. Derivative expense in loan interest income was $665,000 and derivative income in loan interest was $430,000 in the second quarter of 2023 and 2022, respectively. 40 Six Months Ended June 30, 2023 2022 (Dollars in thousands) Average Average Balance Interest Rate Balance Interest Rate Assets: Loans (1)(3)(4)(5)(6) $ 1,210,611 $ 30,876 5.10 % $ 1,056,155 $ 24,832 4.70 % Taxable securities (2)(6) 756,967 10,291 2.72 786,620 7,029 1.79 Nontaxable securities (1) 296,969 3,575 2.41 326,687 4,068 2.49 Other 30,325 748 4.93 38,521 76 0.39 Interest-earning assets 2,294,872 45,490 3.96 2,207,983 36,005 3.26 Noninterest-earning assets 112,160 155,796 Total assets $ 2,407,032 $ 2,363,779 Liabilities and Shareholders' Equity: Interest-bearing demand deposits $ 845,140 $ 3,477 0.82 % $ 920,141 $ 1,062 0.23 % Savings deposits 389,742 618 0.32 451,462 303 0.13 Certificates of deposit 266,611 3,504 2.63 180,620 413 0.46 Brokered deposit 31,322 733 4.68 - - 0.00 Borrowings 103,900 2,425 4.67 1,872 27 2.85 Subordinated debentures 35,321 809 4.58 36,509 725 3.97 Other 1,888 45 4.78 - - 0.00 Interest-bearing liabilities 1,673,924 11,611 1.39 1,590,604 2,530 0.32 Demand deposits 550,281 566,177 Other noninterest-bearing liabilities 12,721 15,235 Total liabilities 2,236,926 2,172,016 Shareholders' equity 170,106 191,763 Total liabilities and shareholders' equity $ 2,407,032 $ 2,363,779 Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 33,879 $ 33,475 Net interest margin (tax-equivalent basis) (Non-GAAP) (1) 2.95 % 3.03 % Reconciliation to Reported Net Interest Income Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 33,879 $ 33,475 Adjustment for taxable equivalent interest (776 ) (866 ) Net interest income (GAAP) $ 33,103 $ 32,609 Net interest margin (GAAP) 2.88 % 2.95 % (1) Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%. The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry. These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities. (2) Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock. (3) Loans include both loans to other financial institutions and loans held for sale. (4) Non-accruing loan and PPP loan balances are included in the balances of average loans. Non-accruing loan average balances were $1.5 million and $1.4 million in the six months ended June 30, 2023 and 2022, respectively. PPP loan average balances were $0 and $14.5 million in the six months ended June 30, 2023 and 2022, respectively. (5) Interest on loans included net origination fees, accretion income, and PPP fees. Accretion income was $916,000 and $1.2 million in the six months ended June 30, 2023 and 2022, respectively. PPP fees were approximately $0 and $1.2 million in the six months ended June 30, 2023 and 2022, respectively. (6) Interest on loans and securities included derivative income and expense. Derivative income in securities was $896,000 and derivative expense in securities was $9,000 in the six months ended June 30, 2023 and 2022, respectively. Derivative expense in loan interest income was $1.4 million and derivative income in loan interest was $430,000 in the six months ended June 30, 2023and 2022, respectively. 41 Table 2 – Changes in Tax-Equivalent Net Interest Income Three Months Ended June 30, (Dollars in thousands) 2023 Over 2022 Total Volume Rate Increase (decrease) in interest income (1) Loans (2) $ 3,457 $ 1,732 $ 1,725 Taxable securities 1,856 (741 ) 2,597 Nontaxable securities (2) (215 ) (130 ) (85 ) Other 508 1 507 Net change in interest income 5,606 862 4,744 Increase (decrease) in interest expense (1) Interest-bearing demand deposits 1,278 (448 ) 1,726 Savings deposits 188 (204 ) 392 Certificates of deposit 2,014 184 1,830 Brokered deposit 581 581 - Borrowings 1,696 1,547 149 Subordinated debentures 46 3 43 Other 45 45 - Net change in interest expense 5,848 1,708 4,140 Net change in tax-equivalent net interest income $ (242 ) $ (846 ) $ 604 Six Months Ended June 30, (Dollars in thousands) 2023 Over 2022 Total Volume Rate Increase (decrease) in interest income (1) Loans (2) $ 6,044 $ 4,679 $ 1,365 Taxable securities 3,262 (513 ) 3,775 Nontaxable securities (2) (493 ) (417 ) (76 ) Other 672 (38 ) 710 Net change in interest income 9,485 3,711 5,774 Increase (decrease) in interest expense (1) Interest-bearing demand deposits 2,415 (181 ) 2,596 Savings deposits 315 (85 ) 400 Certificates of deposit 3,091 519 2,572 Brokered deposit 733 733 0 Borrowings 2,398 2,384 14 Subordinated debentures 84 (41 ) 125 Other 45 45 0 Net change in interest expense 9,081 3,374 5,707 Net change in tax-equivalent net interest income $ 404 $ 337 $ 67 (1) The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s interest rate. The rate variance is computed as the change in interest rate multiplied by the previous year’s volume (average balance). The change in interest due to both volume and rate has been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. (2) Interest on nontaxable investment securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21%. 42 Net Interest Income Tax-equivalent net interest income decreased $242,000 and increased $404,000 in the second quarter and first six months of 2023, respectively, compared to the same periods in 2022. The Federal Reserve increased the federal funds rate by 5.00% from March 31, 2022 to June 30, 2023 in response to published inflation rates. This increased rates on newly originated loans and increased rates paid on deposits. Tax equivalent net interest margin decreased 16 basis points and 8 basis points in the second quarter and first six months of 2023 to 2.86% and 2.95%, respectively, compared to the same periods in 2022. GAAP based net interest margin decreased 15 basis points and 7 basis points in the second quarter and first six months of 2023 to 2.79% and 2.88%, respectively, compared to the same periods in 2022. GAAP Net interest margin during the month of June 2023 was 2.75%. The following table presents the cost of deposits and the cost of funds for the three and six months ended June 30, 2023 and 2022. Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Cost of deposits 0.98 % 0.19 % 0.80 % 0.17 % Cost of funds 1.29 % 0.25 % 2.09 % 0.47 % ChoiceOne has experienced substantial core loan growth from June 30, 2022 to June 30, 2023, leading to an increase in interest income from loans of $3.5 million and $6.0 million in the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year. Average core loans grew $168.7 million and $181.2 million for the three and six months ended June 30, 2022, respectively, compared to the same periods in the prior year. In addition, the average rate earned on loans increased 61 basis points and 40 basis points for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year. The increase in interest income from loans and the average rate increase on loans was muted by a decline in PPP fees and an increase in derivative expense in the three and six months ended June 30, 2023 compared to the same periods in 2022. PPP fee income in the first six months of 2023 was $0 compared to $283,000 and $1.2 million in the three and six months ended June 30, 2022. Derivative expense was $665,000 and $1.4 million during the three and six months ended June 30, 2023, respectively, compared to derivative income in the prior year of $431,000 during the three and six months ended June 30, 2022. The average balance of total securities decreased $45.2 million and $59.4 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year. The decrease is due to the liquidation of $31.8 million in securities during the first six months of 2022, with the remainder attributed to paydowns and a decline in the fair value of available for sale securities. The average rate earned on securities increased 71 basis points and 64 basis points for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year, which was aided by $523,000 and $896,000 of income related to derivative instruments for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year. Interest expense increased $5.8 million and $9.1 million in the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year. The average rate paid on interest bearing-demand deposits and savings deposits increased 53 basis points and 46 basis points in the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year. This was offset by the decline in the average balance of interest bearing-demand deposits and savings deposits, of $186.0 million and $136.7 million during the respective time periods. The increase in the average balance of certificates of deposit of $103.3 million and $86.0 million, combined with a 266 basis point and 217 basis point increase in the rate paid on certificates of deposits in the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year, led to an increase in interest expense of $2.0 million and $3.1 million during the respective time periods. In order to bolster liquidity, ChoiceOne borrowed $160.0 million from the Bank Term Funding Program ("BTFP") and obtained $51.4 million in brokered deposits at the end of the second quarter of 2023. The net effect of these additional borrowed funds and brokered CDs was an increase in interest expense of $2.3 million and $3.1 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022. In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. In addition, ChoiceOne holds certain subordinated debentures issued in connection with a trust preferred securities offering that were obtained as part of the merger with Community Shores. The average balance of subordinated debentures was relatively flat in the second quarter of 2023 compared to the same period in the prior year. 43 Provision and Allowance for Credit Losses On January 1, 2023, ChoiceOne adopted ASU 2016-13 CECL which caused an increase in the ACL of $7.2 million. The large increase is partially due to the current economic environment and the nature of the CECL calculation. Approximately 20% of this increase is related to the migration of purchased loans into the portfolio assessed by the CECL calculation. ChoiceOne also booked a liability for expected credit losses on unfunded loans and other commitments of $3.3 million related to the adoption of CECL guidance. These unfunded loans are open credit lines with current customers and loans approved by ChoiceOne but not funded. The increase in the allowance and the cost of the liability resulted in a decrease in the retained earnings account on our Consolidated Balance Sheet equal to the after-tax impact, with the tax impact portion being recorded in deferred taxes in our Consolidated balance Sheet in accordance with FASB guidance. The ACL consists of general and specific components. The general component covers loans collectively evaluated for credit loss and is based on peer historical loss experience adjusted for current and forecasted factors. Management's adjustment for current and forecasted factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, the experience and ability of lending staff, and a reasonable and supportable economic forecast described further below. The determination of our loss factors is based, in part, upon benchmark peer loss history adjusted for qualitative factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date. ChoiceOne's lookback period of benchmark peer net charge-off history was from January 1, 2004 through December 31, 2019 for this analysis. Loans individually evaluated for credit losses decreased by $723,000 to $2.1 million during the six months ended June 30, 2023, and the ACL related to these individually evaluated loans decreased by $81,000 during the six months ended June 30, 2023 largely due to the loan balances being fully collateralized compared to December 31, 2022. Nonperforming loans, which includes Other Real Estate Owned (OREO) but excludes performing TLM and TDR loans, were $1.8 million as of June 30, 2023, compared to $2.7 million as of December 31, 2022. The ACL was 1.15% of total loans at June 30, 2023, compared to 1.24% as of January 1, 2023 (the CECL adoption date) and 0.64% at December 31, 2022. The liability for expected credit losses on unfunded loans and other commitments was $3.2 million on June 30, 2023, compared to $3.3 million as of January 1, 2023 (the CECL adoption date) and did not exist on December 31, 2022. Net charge-offs were $95,000 in the first six months of 2023, compared to net charge-offs of $272,000 during the same period in 2022. Checking account charge-off and recovery activity is included in the consumer charge-off activity below. Net charge-offs for checking accounts for the second quarter of 2023 were $100,000 compared to $113,000 for the same period in the prior year. Net charge-offs on an annualized basis as a percentage of average loans were 0.03% in the first six months of 2023 compared to annualized net charge-offs of 0.05% of average loans in the same period in the prior year. 44 Charge-offs and recoveries for respective loan categories for the six months ended June 30, 2023 and 2022 were as follows: (Dollars in thousands) 2023 2022 Charge-offs Recoveries Charge-offs Recoveries Agricultural $ — $ — $ — $ — Commercial and industrial - 29 131 4 Consumer 271 129 255 106 Commercial real estate — 13 — 2 Construction real estate — — — — Residential real estate — 5 — 2 $ 271 $ 176 $ 386 $ 114 The provision for credit losses benefit was $415,000 and $106,000 in the second quarter of 2023 and first six months of 2023, respectively, compared to $0 in the same periods in the prior year. The provision benefit was deemed necessary due to the impact of improvements in the FOMC forecast for unemployment and GDP growth exceeding the provision required for loan growth in the second quarter and first half of 2023. The FOMC forecast for change in real GDP improved from 0.4% in March to 1.0% in June while the unemployment rate forecast improved from 4.5% in March to 4.1% in June. The loan provision benefit was offset by the increase in unfunded commitments provision of $165,000 in the second quarter of 2023 as ChoiceOne saw increases in the pipeline for new loans approved but not funded. The total unfunded commitments increased $50.1 million in the second quarter of 2023 compared to March 31, 2023 and $40.0 million compared to January 1, 2023. The net provision benefit of $250,000 and $225,000 was recorded in the second quarter and first six months of 2023, respectively, compared to zero for the same periods in 2022. Noninterest Income Total noninterest income increased $55,000 or 1.59% and decreased $120,000 or 1.7% in the second quarter and first half of 2023, respectively, compared to the same periods in 2022. This was largely due to a decline of $748,000 in gains on sales of loans for the six months ended June 30, 2023 compared to the same period in the prior year. With the rapid rise in interest rates, refinancing activity has slowed and the rate environment for mortgage loans has become increasingly competitive. This decline was offset by reduced losses on the sale of securities and a smaller decline in the change in market value of equity securities. Equity investments include local community bank stocks and Community Reinvestment Act bond mutual funds. Noninterest Expense Total noninterest expense increased $416,000 or 3.2% and $721,000 or 2.7% in the second quarter and first half of 2023, respectively, compared to the same periods in 2022. The increase in total noninterest expense was related to inflationary pressures on employee wages and benefits. This increase was offset by decreases in other categories including intangible amortization and fraud losses. ChoiceOne continues to monitor expenses and looks to improve our efficiency through automation and use of digital tools. ChoiceOne launched an enhanced treasury services online platform for business clients during the first quarter of 2023. This new platform targets mid-sized businesses and municipalities who require enhanced reporting, security, and payment capabilities. Management believes that continuing to invest in our technology and people is the right way to maintain sustainable growth. Income Tax Expense Income tax expense was $2.1 million in the first six months of 2023 compared to $1.9 million for the same period in 2022. The effective tax rate was 16.0% for the first six months of 2023 compared to 14.5% for the same period in 2022. In the six months ended June 30, 2023, non taxable municipal interest decreased and disallowed interest expense increased compared to the first six months of 2022. 45 FINANCIAL CONDITION Securities Total available for sale securities on June 30, 2023, were $521.2 million compared to $529.7 on December 31, 2022, with the small decrease caused by $15.2 million of principal repayments, calls or maturities, which was offset by an increase in the fair value of the underlying securities. The unrealized loss on securities available for sale declined by $9.4 million in the first six months of 2023. ChoiceOne's held to maturity securities declined slightly during the first half of 2023, as $3.2 million of securities were called or matured and principal repayments on securities totaled $1.9 million. The securities portfolio is projected to produce approximately $179 million of cashflows over the next two years as lower yielding assets mature. At June 30, 2023, ChoiceOne had $148.4 million in unrealized losses on its investment securities, including $79.6 million in unrealized losses on available for sale securities and $68.8 in unrealized losses on held to maturity securities. Unrealized losses on corporate and municipal bonds have not been recognized into income because management believes the issuers’ are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity. ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. In order to hedge the risk of rising rates and unrealized losses on securities resulting from the rising rates, ChoiceOne currently holds four interest rate swaps with a total notional value of $401.0 million. These derivative instruments increase in value as long-term interest rates rise, which offsets the reduction in shareholders' equity due to unrealized losses on securities available for sale. Refer to footnote 8 for more discussion on ChoiceOne’s derivative position. Equity securities included a money market preferred security ("MMP") of $1.0 million and common stock of $7.3 million as of June 30, 2023. As of December 31, 2022, equity securities included an MMP of $1.0 million and common stock of $7.6 million. Per U.S. generally accepted accounting principles, unrealized gains or losses on securities available for sale are reflected on the balance sheet in accumulated other comprehensive income (loss), while unrealized gains or losses on securities held to maturity are not reflected on the balance sheet in accumulated other comprehensive income (loss). Loans Core loans grew organically by $14.8 million or 4.9% on an annualized basis during the second quarter of 2023 and $145.8 million or 13.5% since June 30, 2022. Loans to other financial institutions increased to $38.8 million as of June 30, 2023, compared to $37.4 million as of June 30, 2022. Loans to other financial institutions is comprised of a warehouse line of credit to facilitate mortgage loan originations and the interest rate fluctuates with the national mortgage market. This balance is short term in nature with an average life of under 30 days. Management believes the short-term structure and low credit risk of this asset is advantageous in the current rate environment. Loan interest income increased $3.5 million in the second quarter of 2023 compared to the same period in 2022, despite being offset by a decline in PPP fees and an increase in derivative expense in the three and six months ended June 30, 2023 compared to the same periods in 2022. PPP fee income in 2023 was $0 compared to $283,000 and $1.2 million in the three and six months ended June 30, 2022. Derivative expense was $665,000 and $1.4 million during the three and six months ended June 30, 2023, respectively, compared to derivative income in the prior year of $431,000 during the three and six months ended June 30, 2022. Loan growth was concentrated in commercial real estate loans which grew $91.1 million in the trailing twelve months from June 30, 2023. Much of this growth in commercial real estate loans is directly the result of the new loan production offices in both the city of Wyoming and Macomb County as well as the newly hired experienced lenders in these locations. Approximately 12% of this commercial real estate loan growth is a single land development loan which consists of high end single family homes currently under construction, 85% of which are pre-sold. Another 19% of this growth is owner-occupied and mainly consists of current customers who are expanding businesses that are performing well in the current environment. Residential real estate loans also grew $52.7 million in the trailing twelve months from June 30, 2023 as the 5/1 ARM product became popular as a mortgage option and it is less salable than more traditional fixed-rate mortgage products. These large increases were offset by declines in agricultural loans of $18.6 million and construction real estate loans of $1.2 million during the period beginning on July 1, 2022 through June 30, 2023. During the second quarter and first half of 2023, ChoiceOne recorded accretion income related to acquired loans in the amount of $444,000 and $916,000, respectively. Remaining credit and yield mark on acquired loans from the mergers with County Bank Corp. and Community Shores will accrete into income as the acquired loans mature. The remaining yield mark on acquired loans from the mergers with County Bank Corp. and Community Shores totaled $3.3 million as of June 30, 2023. 46 Asset Quality Information regarding individually evaluated loans can be found in Note 3 to the consolidated financial statements included in this report. The total balance of individually evaluated loans was $2.1 million on June 30, 2023, compared to $2.8 million of impaired loans as of December 31, 2022. The change in the first six months of 2023 was primarily due to the decline in non-accrual residential mortgage loans. As part of its review of the loan portfolio, management also monitors the various nonperforming loans. Nonperforming loans are comprised of loans accounted for on a nonaccrual basis and loans, not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments. The balances of these nonperforming loans were as follows: (Dollars in thousands) June 30, December 31, 2023 2022 Loans accounted for on a nonaccrual basis $ 1,581 $ 1,263 Accruing loans which are contractually past due 90 days or more as to principal or interest payments — — Loans past due defined as "troubled loan modifications" or "troubled debt restructurings " which are not included above 129 — Total $ 1,710 $ 1,263 The small increase in the balance of nonaccrual loans in the second quarter of 2023 was primarily due to the increase in residential mortgage loans. Management believes the ACL allocated to its nonperforming loans was sufficient at June 30, 2023. Goodwill Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value. Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required. ChoiceOne acquired Valley Ridge Financial Corp. in 2006, County Bank Corp. in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $13.7 million, $38.9 million and $7.3 million, respectively. ChoiceOne conducted an annual assessment of goodwill as of June 30, 2023 and no impairment was identified. ChoiceOne used a qualitative assessment to determine goodwill was not impaired. During the prior year, ChoiceOne engaged a third party valuation firm to assist in performing a quantitative analysis of goodwill as of November 30, 2022 ("the valuation date"). In deriving the fair value of the reporting unit (the Bank), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events to financial performance; the market price of ChoiceOne’s common stock and other relevant events. In addition, the valuation relied on financial projections through 2027 and growth rates prepared by management. Based on the valuation prepared, it was determined that ChoiceOne's estimated fair value of the reporting unit at the valuation date was greater than its book value and impairment of goodwill was not required. Management concurred with the conclusion derived from the quantitative goodwill analysis as of the valuation date and determined that there were no material changes and that no triggering events had occurred that indicated impairment from the valuation date through June 30, 2023, and as a result that it is more likely than not that there was no goodwill impairment. 47 Deposits and Borrowings ChoiceOne saw deposits, excluding brokered deposits, decline $83.0 million or 3.9% in the first six months of 2023 compared to December 31, 2022. The decrease in deposits was largely concentrated in the first quarter of 2023 as a result of a combination of customers using cash on hand for debt payoffs, seasonal tax and municipal bond payments, and customers seeking higher rates via money market securities or other investments. Deposit outflows have stabilized in the second quarter of 2023 with monthly growth of deposits in May and June of 2023. In the last 12 months ended June 30, 2023, approximately $39 million or 38% of the trailing 12-month deposit runoff has been transferred from bank deposits to the ChoiceOne Wealth department, which is off balance sheet. The cost of deposits has increased to 0.98% during the three months ended June 30, 2023 compared to 0.62% and 0.19% for the three months ended March 31, 2023 and June 30, 2022, respectively, due to rising short term interest rates and is expected to continue to increase as deposits reprice. ChoiceOne is actively managing these costs and expects rates paid on deposits to continue to lag the federal fund rate. Uninsured deposits total $700.3 million or 34.4% of deposits at June 30, 2023 compared to $751.4.million, or 36% of total deposits and $823.2 million, or 39% of total deposits at March 31, 2023 and December 31, 2022, respectively. At June 30, 2023, total available borrowing capacity from all sources was $791.7 million, which exceeds uninsured deposits. In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. ChoiceOne also holds $3.2 million in subordinated debentures issued in connection with a $4.5 million trust preferred securities offering, which were obtained in the merger with Community Shores, offset by the merger mark-to-market adjustment. During the second quarter of 2023, ChoiceOne borrowed $160 million from the Federal Reserve’s Bank Term Funding Program (BTFP). This program provides a 1-year term at a fixed rate with the ability to prepay at any time without penalty. The interest rate on the BTFP borrowings as of June 30, 2023 is 4.71% and fixed through May of 2024. Collateral pledged is U.S. Treasuries, agency debt and mortgage-backed securities valued at par. The interest rate on the BTFP borrowings as of June 30, 2023 is 4.71% and fixed through May of 2024. During the first six months of 2023 ChoiceOne also obtained $51.4 million in short term brokered deposits, which were fixed at below market rates prior to the latest increase to the federal funds rate by the Federal Reserve. Brokered deposits allow us to preserve borrowing capacity at more accessible funding options. ChoiceOne will continue to use brokered deposits, Federal Home Loan Bank advances, advances from the Federal Reserve Bank Discount Window, and the Bank Term Funding Program to meet short-term funding needs in the remainder of 2023. Shareholders' Equity Shareholders’ equity totaled $179.2 million as of June 30, 2023, a $10.4 million increase compared to December 31, 2022. The increase is primarily due to a decrease in the after-tax net unrealized loss on securities available for sale resulting from higher market interest rates. ChoiceOne uses interest rate swaps to manage interest rate exposure to certain fixed assets and variable rate liabilities. On June 30, 2023 ChoiceOne has pay-fixed interest rate swaps with a total notional value of $401.0 million. These derivative instruments increase in value as long-term interest rates rise, which offsets the reduction in equity due to unrealized losses on securities available for sale. On January 1, 2023, ChoiceOne adopted ASU 2016-13 CECL which caused an increase in the ACL of $7.2 million and booked a liability for expected credit losses on unfunded loans and other commitments of $3.3 million related to the adoption of CECL guidance. The increase in the allowance and the cost of the liability resulted in a decrease in the retained earnings account on our Consolidated Balance Sheet equal to the after-tax impact, with the tax impact portion being recorded in deferred taxes in our Consolidated balance Sheet in accordance with FASB guidance. This reduction in retained earnings was offset by first quarter 2023 earnings and recovery of accumulated other comprehensive loss. 48 Regulatory Capital Requirements Following is information regarding compliance of ChoiceOne and ChoiceOne Bank with regulatory capital requirements: Minimum Required to be Well Minimum Required Capitalized Under for Capital Prompt Corrective (Dollars in thousands) Actual Adequacy Purposes Action Regulations Amount Ratio Amount Ratio Amount Ratio June 30, 2023 ChoiceOne Financial Services Inc. Total capital (to risk weighted assets) $ 223,004 13.2 % $ 135,279 8.0 % N/A N/A Common equity Tier 1 capital (to risk weighted assets) 177,911 10.5 76,094 4.5 N/A N/A Tier 1 capital (to risk weighted assets) 182,411 10.8 101,459 6.0 N/A N/A Tier 1 capital (to average assets) 182,411 7.7 94,633 4.0 N/A N/A ChoiceOne Bank Total capital (to risk weighted assets) $ 214,046 12.7 % $ 135,044 8.0 % $ 168,805 10.0 % Common equity Tier 1 capital (to risk weighted assets) 205,497 12.2 75,962 4.5 109,723 6.5 Tier 1 capital (to risk weighted assets) 205,497 12.2 101,283 6.0 135,044 8.0 Tier 1 capital (to average assets) 205,497 8.7 94,500 4.0 118,125 5.0 December 31, 2022 ChoiceOne Financial Services Inc. Total capital (to risk weighted assets) $ 222,006 13.8 % $ 128,545 8.0 % N/A N/A Common equity Tier 1 capital (to risk weighted assets) 177,916 11.1 72,307 4.5 N/A N/A Tier 1 capital (to risk weighted assets) 182,416 11.4 96,409 6.0 N/A N/A Tier 1 capital (to average assets) 182,416 7.9 92,558 4.0 N/A N/A ChoiceOne Bank Total capital (to risk weighted assets) $ 208,696 13.0 % $ 128,294 8.0 % $ 160,367 10.0 % Common equity Tier 1 capital (to risk weighted assets) 201,077 12.5 72,165 4.5 104,239 6.5 Tier 1 capital (to risk weighted assets) 201,077 12.5 96,220 6.0 128,294 8.0 Tier 1 capital (to average assets) 201,077 8.7 92,449 4.0 115,562 5.0 Management reviews the capital levels of ChoiceOne and ChoiceOne Bank on a regular basis. The Board of Directors and management believe that the capital levels as of June 30, 2023 are adequate for the foreseeable future. The Board of Directors’ determination of appropriate cash dividends for future periods will be based on, among other things, market conditions and ChoiceOne’s requirements for cash and capital. 49 Liquidity Net cash provided by operating activities was $25.2 million for the six months ended June 30, 2023 compared to $22.3 million in the same period in 2022. The change was due to lower net proceeds from loan sales in 2023 compared to 2022, which was offset by change in other assets. Net cash used in investing activities was $66.9 million for the six months ended June 30, 2023 compared to $52.8 million used in the same period in 2022. ChoiceOne purchased $6.2 million of securities and had maturities, principal paydowns or sales of securities of $20.3 million in the first six months of 2023 compared to $38.4 million of purchases and $62.7 million of maturities, principal paydowns or sales in the same period in 2022. An increase in net loan originations led to cash used of $74.6 million in the first six months of 2023 compared to $59.6 million used in the same period during the prior year. Net cash provided by financing activities was $74.6 million for the six months ended June 30, 2023, compared to $38.9 million in the same period in the prior year. ChoiceOne experienced a decline of $31.6 million in deposits in the first six months of 2023 compared to $86.2 million of growth in the same period in 2022. ChoiceOne increased borrowing by $110.0 million in the first six months of 2023 compared to a decrease of $43.0 million in the same period during the prior year. ChoiceOne's market risk exposure occurs in the form of interest rate risk and liquidity risk. ChoiceOne's business is transacted in U.S. dollars with no foreign exchange risk exposure. Agricultural loans comprise a relatively small portion of ChoiceOne's total assets. Management believes that ChoiceOne's exposure to changes in commodity prices is insignificant. Liquidity risk deals with ChoiceOne's ability to meet its cash flow requirements. These requirements include depositors desiring to withdraw funds and borrowers seeking credit. Longer-term liquidity needs may be met through core deposit growth, maturities of and cash flows from investment securities, normal loan repayments, advances from the FHLB and the Federal Reserve Bank, brokered certificates of deposit, and income retention. ChoiceOne had $160.0 million in outstanding borrowings from the Federal Reserve’s Bank Term Funding Program (BTFP) as of June 30, 2023. ChoiceOne had no outstanding borrowings at the FHLB as of June 30, 2023. The acceptance of brokered certificates of deposit is not limited as long as the Bank is categorized as “well capitalized” under regulatory guidelines. At June 30, 2023, total available borrowing capacity from the FHLB and the Federal Reserve Bank was $791.7 million. ChoiceOne continues to review its liquidity management and has taken steps in an effort to ensure adequacy. These steps include limiting bond purchases in the first six months of 2023, pledging securities to FHLB and the Federal Reserve Bank in order to increase borrowing capacity and using alternative funding sources such as brokered deposits. Item 4. Controls and Procedures. An evaluation was performed under the supervision and with the participation of ChoiceOne’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of ChoiceOne’s disclosure controls and procedures as of June 30, 2023. Based on and as of the time of that evaluation, ChoiceOne’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that ChoiceOne’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that material information required to be disclosed in the reports that ChoiceOne files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that ChoiceOne files or submits under the Exchange Act is accumulated and communicated to management, including ChoiceOne’s principal executive and principal financial officers, as appropriate to allow for timely decisions regarding required disclosure. There was no change in ChoiceOne’s internal control over financial reporting that occurred during the three months ended June 30, 2023 that has materially affected, or that is reasonably likely to materially affect, ChoiceOne’s internal control over financial reporting. 50 PART II. OT HER INFORMATION Item 1. Le gal Proceedings . There are no material pending legal proceedings to which ChoiceOne or ChoiceOne Bank is a party or to which any of their properties are subject, except for proceedings that arose in the ordinary course of business. Item 1A. Risk Factors . Information concerning risk factors is contained in the discussion in Item 1A, “Risk Factors,” in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2022. Ite m 2. Unregistered Sales of Equity Securities and Use of Proceeds . There were no unregistered sales of equity securities in the second quarter of 2023. There were no issuer purchases of equity securities during the second quarter of 2023. Ite m 5. Other Information None. 51 It em 6. Exhibits The following exhibits are filed or incorporated by reference as part of this repor Exhibit Number Document 3.1 Restated Articles of Incorporation of ChoiceOne Financial Services, Inc. Previously filed as an exhibit to ChoiceOne’s Form 10-K Annual Report for the year ended December 31, 2022. Here incorporated by reference. 3.2 Bylaws of ChoiceOne as currently in effect and any amendments thereto. Previously filed as an exhibit to ChoiceOne’s Form 8-K filed April 21, 2021. Here incorporated by reference. 4.1 Advances, Pledge and Security Agreement between ChoiceOne Bank and the Federal Home Loan Bank of Indianapolis. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference. 4.2 Form of 3.25% Fixed-to-Floating Rate Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference. 4.3 Form of 3.25% Fixed-to-Floating Rate Global Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference. 31.1 Certification of Chief Executive Officer 31.2 Certification of Chief Financial Officer 32.1 Certification pursuant to 18 U.S.C. § 1350. 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) 52 SIGNA TURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHOICEONE FINANCIAL SERVICES, INC. Date: August 14, 2023 /s/ Kelly J. Potes Kelly J. Potes Chief Executive Officer (Principal Executive Officer) Date: August 14, 2023 /s/ Adom J. Greenland Adom J. Greenland Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 53

Page PART I. FINANCIAL INFORMATION 3 Item 1. Financial Statements 3 Consolidated Balance Sheets 3 Consolidated Statements Of Income 4 Consolidated Statements Of Comprehensive Income (Loss) 6 Consolidated Statements Of Changes In Shareholders’ Equity 7 Consolidated Statements Of Cash Flows 9 Notes To Interim Consolidated Financial Statements 11 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 43 Item 4. Controls and Procedures 55 PART II. OTHER INFORMATION 56 Item 1. Legal Proceedings 56 Item 1A. Risk Factors 56 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 56 Item 5. Other Information 56 Item 6. Exhibits 57 Signatures 58 PART I. FINAN CIAL INFORMATION Item 1. Fina ncial Statements . ChoiceOne Financial Services, Inc. CONSOLIDAT ED BALANCE SHEETS September 30, December 31, (Dollars in thousands, except share data) 2023 2022 (Unaudited) (Audited) Assets Cash and due from banks $ 144,323 $ 43,593 Time deposits in other financial institutions 350 350 Cash and cash equivalents 144,673 43,943 Equity securities, at fair value (Note 2) 7,262 8,566 Securities available for sale, at fair value (Note 2) 490,804 529,749 Securities held to maturity, at amortized cost net of credit losses (Note 2) 414,743 425,906 Federal Home Loan Bank stock 4,449 3,517 Federal Reserve Bank stock 5,065 5,064 Loans held for sale 5,222 4,834 Loans to other financial institutions (Note 3) 23,763 — Core loans (Note 3) 1,286,037 1,189,782 Total loans (Note 3) 1,309,800 1,189,782 Allowance for credit losses (Note 3) ( 14,872 ) ( 7,619 ) Loans, net 1,294,928 1,182,163 Premises and equipment, net 29,628 28,232 Other real estate owned, net 122 — Cash value of life insurance policies 44,788 43,978 Goodwill 59,946 59,946 Core deposit intangible 2,057 2,809 Other assets 70,509 47,208 Total assets $ 2,574,196 $ 2,385,915 Liabilities Deposits – noninterest-bearing $ 531,962 $ 599,579 Deposits – interest-bearing 1,551,995 1,518,424 Brokered deposits 49,238 - Total deposits 2,133,195 2,118,003 Borrowings 180,000 50,000 Subordinated debentures 35,446 35,262 Other liabilities 44,394 13,776 Total liabilities 2,393,035 2,217,041 Shareholders' Equity Preferred stock; shares authoriz 100,000 ; shares outstandin none — — Common stock and paid-in capital, no par value; shares authoriz 15,000,000 ; shares outstandin 7,541,187 at September 30, 2023 and 7,516,098 at December 31, 2022 173,187 172,277 Retained earnings 70,444 68,394 Accumulated other comprehensive loss, net ( 62,470 ) ( 71,797 ) Total shareholders’ equity 181,161 168,874 Total liabilities and shareholders’ equity $ 2,574,196 $ 2,385,915 See accompanying notes to interim consolidated financial statements. 3 ChoiceOne Financial Services, Inc. CONSOLIDATED STA TEMENTS OF INCOME (Unaudited) 4 Three Months Ended Nine Months Ended (Dollars in thousands, except share data) September 30, September 30, 2023 2022 2023 2022 Interest income Loans, including fees $ 17,774 $ 13,611 $ 48,625 $ 38,432 Securiti Taxable 5,346 3,972 15,637 11,001 Tax exempt 1,420 1,464 4,244 4,678 Other 1,764 238 2,512 314 Total interest income 26,304 19,285 71,018 54,425 Interest expense Deposits 7,237 1,563 15,569 3,342 Advances from Federal Home Loan Bank 272 5 1,498 8 Other 2,569 379 4,622 1,127 Total interest expense 10,078 1,947 21,689 4,477 Net interest income 16,226 17,338 49,329 49,948 Provision for (reversal of) credit losses on loans 438 100 332 100 Provision for (reversal of) credit losses on unfunded commitments ( 438 ) — ( 557 ) — Net Provision for (reversal of) credit losses expense - 100 ( 225 ) 100 Net interest income after provision 16,226 17,238 49,554 49,848 Noninterest income Customer service charges 2,382 2,458 6,920 7,000 Insurance and investment commissions 173 158 541 596 Gains on sales of loans 536 432 1,479 2,123 Net gains (losses) on sales of securities ( 71 ) ( 378 ) ( 71 ) ( 805 ) Net gains on sales and write downs of other assets 13 — 149 172 Earnings on life insurance policies 278 259 810 793 Trust income 197 174 577 528 Change in market value of equity securities ( 134 ) ( 323 ) ( 456 ) ( 1,006 ) Other 330 267 911 922 Total noninterest income 3,704 3,047 10,860 10,323 Noninterest expense Salaries and benefits 8,038 7,668 23,958 22,811 Occupancy and equipment 1,427 1,545 4,577 4,688 Data processing 1,724 1,734 5,087 5,056 Professional fees 435 559 1,675 1,628 Supplies and postage 192 184 580 541 Advertising and promotional 269 199 573 478 Intangible amortization 247 297 752 901 FDIC insurance 270 195 790 645 Other 1,126 1,035 3,304 3,515 Total noninterest expense 13,728 13,416 41,296 40,263 Income before income tax 6,202 6,869 19,118 19,908 Income tax expense 1,080 1,056 3,150 2,952 Net income $ 5,122 $ 5,813 $ 15,968 $ 16,956 Basic earnings per share (Note 4) $ 0.68 $ 0.77 $ 2.12 $ 2.26 Diluted earnings per share (Note 4) $ 0.68 $ 0.77 $ 2.12 $ 2.26 Dividends declared per share $ 0.26 $ 0.25 $ 0.78 $ 0.75 See accompanying notes to interim consolidated financial statements. 5 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEME NTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) Three Months Ended Nine Months Ended (Dollars in thousands) September 30, September 30, 2023 2022 2023 2022 Net income $ 5,122 $ 5,813 $ 15,968 $ 16,956 Other comprehensive income: Change in net unrealized gain (loss) on available-for-sale securities ( 21,739 ) ( 25,073 ) ( 13,063 ) ( 99,584 ) Income tax benefit (expense) 4,565 5,265 2,743 20,913 L reclassification adjustment for net (gain) loss included in net income - 378 - 805 Income tax benefit (expense) - ( 79 ) - ( 169 ) L reclassification adjustment for net (gain) loss for fair value hedge 9,189 - 9,920 - Income tax benefit (expense) ( 1,930 ) - ( 2,083 ) - L net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity - - - 3,404 Income tax benefit (expense) - - - ( 715 ) Unrealized gain (loss) on available-for-sale securities, net of tax ( 9,915 ) ( 19,509 ) ( 2,483 ) ( 75,346 ) Reclassification of unrealized gain (loss) upon transfer of securities from available-for-sale to held-to-maturity - - - ( 3,404 ) Income tax benefit (expense) - - - 715 Amortization of net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity 67 53 261 297 Income tax benefit (expense) ( 14 ) ( 11 ) ( 55 ) ( 62 ) Unrealized loss on held to maturity securities, net of tax 53 42 206 ( 2,454 ) Change in net unrealized gain (loss) on cash flow hedge 9,625 6,618 12,748 1,042 Income tax benefit (expense) ( 2,021 ) ( 1,390 ) ( 2,677 ) ( 219 ) L reclassification adjustment for net (gain) loss on cash flow hedge - - - - Income tax benefit (expense) - - - - L amortization of net unrealized (gains) losses included in net income 897 416 1,940 723 Income tax benefit (expense) ( 188 ) ( 87 ) ( 407 ) ( 152 ) Unrealized gain (loss) on cash flow hedge instruments, net of tax 8,313 5,557 11,604 1,394 Other comprehensive income (loss), net of tax ( 1,549 ) ( 13,910 ) 9,327 ( 76,406 ) Comprehensive income (loss) $ 3,573 $ ( 8,097 ) $ 25,295 $ ( 59,450 ) See accompanying notes to interim consolidated financial statements. 6 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited) For the three months ended September 30, Accumulated Common Other Stock and Comprehensive Number of Paid in Retained Income/(Loss), (Dollars in thousands, except per share data) Shares Capital Earnings Net Total Balance, July 1, 2022 7,503,072 $ 171,804 $ 59,728 $ ( 65,072 ) $ 166,460 Net income 5,813 5,813 Other comprehensive income (loss) ( 13,910 ) ( 13,910 ) Shares issued 6,964 32 32 Effect of employee stock purchases 6 6 Stock-based compensation expense 133 133 Cash dividends declared ($ 0.25 per share) ( 1,877 ) ( 1,877 ) Balance, September 30, 2022 7,510,036 $ 171,975 $ 63,664 $ ( 78,982 ) $ 156,657 Balance, July 1, 2023 7,534,658 $ 172,880 $ 67,281 $ ( 60,921 ) $ 179,240 Net income 5,122 5,122 Other comprehensive income (loss) ( 1,549 ) ( 1,549 ) Shares issued 6,529 131 131 Effect of employee stock purchases 9 9 Stock-based compensation expense 167 167 Cash dividends declared ($ 0.26 per share) ( 1,959 ) ( 1,959 ) Balance, September 30, 2023 7,541,187 $ 173,187 $ 70,444 $ ( 62,470 ) $ 181,161 7 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited) For the nine months ended September 30, Accumulated Common Other Stock and Comprehensive Number of Paid in Retained Income/(Loss), (Dollars in thousands, except per share data) Shares Capital Earnings Net Total Balance, January 1, 2022 7,510,379 $ 171,913 $ 52,332 $ ( 2,576 ) $ 221,669 Net income 16,956 16,956 Other comprehensive income (loss) ( 76,406 ) ( 76,406 ) Shares issued 25,556 304 304 Effect of employee stock purchases 19 19 Stock options exercised and issued 421 421 Shares repurchased ( 25,899 ) ( 682 ) ( 682 ) Cash dividends declared ($ 0.75 per share) ( 5,624 ) ( 5,624 ) Balance, September 30, 2022 7,510,036 $ 171,975 $ 63,664 $ ( 78,982 ) $ 156,657 Balance, January 1, 2023 7,516,098 $ 172,277 $ 68,394 $ ( 71,797 ) $ 168,874 Adoption of ASU 2016-13 (CECL ) on January 1, 2023 ( 8,046 ) ( 8,046 ) Balance, January 1, 2023 7,516,098 $ 172,277 $ 60,348 $ ( 71,797 ) $ 160,828 Net income 15,968 15,968 Other comprehensive income (loss) 9,327 9,327 Shares issued 25,089 428 428 Effect of employee stock purchases 23 23 Stock-based compensation expense 459 459 Cash dividends declared ($ 0.78 per share) ( 5,872 ) ( 5,872 ) Balance, September 30, 2023 7,541,187 $ 173,187 $ 70,444 $ ( 62,470 ) $ 181,161 8 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEME NTS OF CASH FLOWS (Unaudited) Nine Months Ended (Dollars in thousands) September 30, 2023 2022 Cash flows from operating activiti Net income $ 15,968 $ 16,956 Adjustments to reconcile net income to net cash from operating activiti (Reversal of) provision for credit losses ( 225 ) 100 Depreciation 1,854 2,041 Amortization 7,495 8,145 Compensation expense on employee and director stock purchases, stock options, and restricted stock units 741 726 Net losses (gains) on sales of available for sale securities 71 805 Net change in market value of equity securities 456 1,006 Gains on sales of loans ( 1,479 ) ( 2,123 ) Loans originated for sale ( 37,845 ) ( 68,434 ) Proceeds from loan sales 38,330 70,155 Earnings on bank-owned life insurance ( 810 ) ( 793 ) Proceeds from BOLI policy - 130 Earnings on death benefit from bank-owned life insurance - ( 14 ) (Gains)/losses on sales of other real estate owned - ( 41 ) Proceeds from sales of other real estate owned 144 235 Deferred federal income tax (benefit)/expense 138 169 Net change in: Other assets 4,443 ( 4,461 ) Other liabilities 28,049 7,423 Net cash provided by operating activities 57,330 32,025 Cash flows from investing activiti Sales of securities available for sale - 47,167 Sales of equity securities 887 - Maturities, prepayments and calls of securities available for sale 21,981 39,024 Maturities, prepayments and calls of securities held to maturity 10,218 6,277 Purchases of securities available for sale ( 110 ) ( 54,347 ) Purchases of securities held to maturity ( 597 ) ( 7,505 ) Purchase of Federal Home Loan Bank stock ( 4,849 ) - Proceeds from redemption of Federal Home Loan Bank stock 3,916 - Loan originations and payments, net ( 120,271 ) ( 73,321 ) Additions to premises and equipment ( 3,454 ) ( 1,238 ) Proceeds from (payments for) derivative contracts, net 382 ( 16,547 ) Payments for derivative contracts settlements ( 4,191 ) - Net cash flows from investing activities ( 96,088 ) ( 60,490 ) Cash flows from financing activiti Net change in deposits 15,192 104,360 Net change in short term borrowings 130,000 ( 50,000 ) Issuance of common stock 168 80 Repurchase of common stock - ( 682 ) Share based compensation withholding obligation - ( 62 ) Cash dividends ( 5,872 ) ( 5,624 ) Cash related to equity issuance for merger - - Net cash provided by financing activities 139,488 48,072 Net change in cash and cash equivalents 100,730 19,607 Beginning cash and cash equivalents 43,943 31,887 Ending cash and cash equivalents $ 144,673 $ 51,494 Supplemental disclosures of cash flow informati Cash paid for interest $ 18,393 $ 4,738 Cash paid for income taxes 3,900 200 Loans transferred to other real estate owned 266 - 9 See accompanying notes to interim consolidated financial statements. 10 ChoiceOne Financial Services, Inc. NOTES TO INTERIM CONSOLID ATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include ChoiceOne Financial Services, Inc. ("ChoiceOne"), its wholly-owned subsidiary, ChoiceOne Bank, and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. Intercompany transactions and balances have been eliminated in consolidation. ChoiceOne owns all of the common securities of Community Shores Capital Trust I (the “Capital Trust”). Under U.S. generally accepted accounting principles ("GAAP"), the Capital Trust is not consolidated because it is a variable interest entity and ChoiceOne is not the primary beneficiary. The accompanying unaudited consolidated financial statements and notes thereto reflect all adjustments ordinary in nature which are, in the opinion of management, necessary for a fair presentation of such financial statements. Operating results for the nine months ended September 30, 2023 , are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 . The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2022 . Use of Estimates To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, ChoiceOne’s management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. These estimates and assumptions are subject to many risks and uncertainties, and actual results may differ from these estimates. Estimates associated with the allowance for credit losses and the unrealized gains and losses on securities available for sale and held to maturity are particularly susceptible to change. Investment Securities Investment securities for which ChoiceOne has the intent and ability to hold to maturity are classified as held to maturity and are carried at amortized cost. Investment securities classified as available for sale are reported at fair value with unrealized gains and losses, net of income taxes, as a separate component of other comprehensive income. ChoiceOne determines the appropriate classification of investment securities at the time of purchase and reassesses the classification at each reporting date. Additions to securities held to maturity consist mostly of local issue municipals. Goodwill Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of the acquired tangible assets and liabilities and identifiable intangible assets. Goodwill and intangible assets acquired in a purchase or business combination and determined to have an indefinite useful life are not amortized but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. Core Deposit Intangible Core deposit intangible represents the value of the acquired customer core deposit bases and is included as an asset on the consolidated balance sheets. The core deposit intangible has an estimated finite life, is amortized on an accelerated basis over a 120 month period and is subject to periodic impairment evaluation. Stock Transactions A total of 3,340 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of $ 76,000 under the terms of the Directors’ Stock Purchase Plan in the third quarter of 2023 . A total of 3,189 shares for a cash price of $ 53,000 were issued under the Employee Stock Purchase Plan in the third quarter of 2023 . ChoiceOne's common stock repurchase program announced in April 2021 and amended in 2022, authorizes repurchases of up to 375,388 shares, representing 5 % of the total outstanding shares of common stock as of the date the program was adopted. No shares were repurchased under this program in the third quarter of 2023 . Reclassifications 11 Certain amounts presented in prior periods have been reclassified to conform to the current presentation. Recently Issued Accounting Pronouncements Allowance for Credit Losses ("ACL") In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU (as subsequently amended by ASU 2018-19) significantly changed how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard replaced the former “incurred loss” approach with an “expected loss” model. The new model, referred to as the CECL model, applies to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures. The standard also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the ACL. In addition, entities need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. A reasonable and supportable economic forecast is a key component of the CECL methodology. ChoiceOne adopted CECL effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the incurred loss accounting standards. The transition adjustment of the CECL adoption included an increase in the ACL of $ 7.2 million, which included a $ 5.5 million decrease to the retained earnings account to reflect the cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the $ 1.5 million tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet. The transition adjustment of the CECL adoption included an additional ACL on unfunded commitments of $ 3.3 million, which included a $ 2.6 million decrease to the retained earnings account to reflect the cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the $ 688,000 tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet. The ACL is a valuation allowance for expected credit losses. The ACL is increased by the provision for credit losses and decreased by loans charged off less any recoveries of charged off loans. As ChoiceOne has had very limited loss experience since 2011, management elected to utilize benchmark peer loss history data to estimate historical loss rates. ChoiceOne worked with a third party advisory firm to identify an appropriate peer group for each loan cohort which shared similar characteristics. Management estimates the ACL required based on the selected peer group loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, a reasonable and supportable economic forecast, and other factors. Allocations of the ACL may be made for specific loans, but the entire ACL is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the ACL when management believes that collection of a loan balance is not possible. The ACL consists of general and specific components. The general component covers loans collectively evaluated for credit losses and is based on peer historical loss experience adjusted for current and forecasted factors. Management's adjustment for current and forecasted factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, the experience and ability of lending staff, and a reasonable and supportable economic forecast described further below. The discounted cash flow methodology is utilized for all loan pools. This methodology is supported by our CECL software provider and allows management to automatically calculate contractual life by factoring in all cash flows and adjusting them for behavioral and credit-related aspects. Reasonable and supportable economic forecasts have to be incorporated in determining expected credit losses. The forecast period represents the time frame from the current period end through the point in time that we can reasonably forecast and support entity and environmental factors that are expected to impact the performance of our loan portfolio. Ideally, the economic forecast period would encompass the contractual terms of all loans; however, the ability to produce a forecast that is considered reasonable and supportable becomes more difficult or may not be possible in later periods. Subsequent to the end of the forecast period, we revert to historical loan data based on an ongoing evaluation of each economic forecast in relation to then current economic conditions as well as any developing loan loss activity and resulting historical data. As of September 30, 2023, we used a one-year reasonable and supportable economic forecast period, with a two year straight-line reversion period. We are not required to develop and use our own economic forecast model, and we elected to utilize economic forecasts from third-party providers that analyze and develop forecasts of the economy for the entire United States at least quarterly. Other inputs to the calculation are also updated or reviewed quarterly. Prepayment speeds are updated on a one quarter lag based on the asset liability model from the previous quarter. This model is performed at the loan level by a third party. Curtailment is updated quarterly within the ACL model based on our peer group average. The reversion period is reviewed by management quarterly with 12 consideration of the current economic climate. Prepayment speeds and curtailment were updated during the third quarter of 2023; however, the effect was insignificant. We are also required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheet and is increased or decreased via the provision for credit losses account on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded. Securities Available for Sale - For securities AFS in an unrealized loss position, management determines whether they intend to sell or if it is more likely than not that ChoiceOne will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income with an allowance being established under CECL. For securities AFS with unrealized losses not meeting these criteria, management evaluates whether any decline in fair value is due to credit loss factors. In making this assessment, management considers any changes to the rating of the security by rating agencies and adverse conditions specifically related to the issuer of the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses (“ACL”) is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Changes in the ACL under ASC 326-30 are recorded as provisions for (or reversal of) credit loss expense. Losses are charged against the allowance when the collectability of a debt security AFS is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, net of income taxes. At September 30, 2023 and at adoption of CECL on January 1, 2023, there was no ACL related to debt securities AFS. Accrued interest receivable on debt securities was excluded from the estimate of credit losses. Securities Held to Maturity - Since the adoption of CECL, ChoiceOne measures credit losses on HTM securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The ACL on securities HTM is a contra asset valuation account that is deducted from the carrying amount of HTM securities to present the net amount expected to be collected. HTM securities are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in ChoiceOne’s Consolidated Statements of Income in the provision for credit losses. Accrued interest receivable on HTM securities is excluded from the estimate of credit losses. With regard to US Treasury securities, these have an explicit government guarantee; therefore, no ACL is recorded for these securities. With regard to obligations of states and political subdivisions and other HTM securities, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. At September 30, 2023, the ACL related to securities HTM is insignificant. Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. ChoiceOne has determined that any loans which have been placed on non-performing status, loans with a risk rating of 6 or higher, and loans past due more than 60 days will be assessed individually for evaluation. Management's judgment will be used to determine if the loan should be migrated back to pool on an individual basis. Individual analysis will establish a specific reserve for loans in scope. Specific reserves on non-performing loans are typically based on management’s best estimate of the fair value of collateral securing these loans, adjusted for selling costs as appropriate or based on the present value of the expected cash flows from that loan. Troubled Loan Modifications FASB also issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This standard eliminated the previous accounting guidance for troubled debt restructurings and added additional disclosure requirements for gross chargeoffs by year of origination. It also prescribes guidance for reporting modifications of loans to borrowers experiencing financial difficulty. Investment in Equity Method and Joint Ventures In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Venture (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. The amendments in this ASU permit reporting entities to account for the tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2023. Early adoption is permitted. ChoiceOne is currently evaluating the impact of this standard on the consolidated financial statements. 13 14 NOTE 2 – SECURITIES The fair value of equity securities and the related gross unrealized gains and (losses) recognized in noninterest income were as follows: September 30, 2023 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity securities $ 7,928 $ 208 $ ( 874 ) $ 7,262 December 31, 2022 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity securities $ 8,982 $ 305 $ ( 721 ) $ 8,566 The following tables present the amortized cost and fair value of securities available for sale and the gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and the amortized cost and fair value of securities held to maturity and the related gross unrealized gains and losses. Mortgage backed security and collateralized mortgage obligation maturities are based on the average life at the prepayment speed and all other security types are based on the pre-refund date, call date, or maturity date: September 30, 2023 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Available for S Cost Gains Losses Value U.S. Treasury notes and bonds $ 90,463 $ - $ ( 13,431 ) $ 77,032 State and municipal 260,976 - ( 48,262 ) 212,714 Mortgage-backed 219,113 9 ( 30,058 ) 189,064 Corporate 760 - ( 51 ) 709 Asset-backed securities 11,675 - ( 390 ) 11,285 Total $ 582,987 $ 9 $ ( 92,192 ) $ 490,804 Held to Maturity: U.S. Government and federal agency $ 2,971 $ - $ ( 396 ) $ 2,575 State and municipal 196,580 3 ( 42,986 ) 153,597 Mortgage-backed 194,545 - ( 33,599 ) 160,946 Corporate 20,005 16 ( 3,117 ) 16,904 Asset-backed securities 642 - ( 39 ) 603 Total $ 414,743 $ 19 $ ( 80,137 ) $ 334,625 15 December 31, 2022 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Available for S Cost Gains Losses Value U.S. Treasury notes and bonds $ 90,810 $ - $ ( 12,606 ) $ 78,204 State and municipal 277,489 - ( 47,551 ) 229,938 Mortgage-backed 236,703 - ( 28,140 ) 208,563 Corporate 757 - ( 46 ) 711 Asset-backed securities 13,031 - ( 698 ) 12,333 Total $ 618,790 $ - $ ( 89,041 ) $ 529,749 Held to Maturity: U.S. Government and federal agency $ 2,966 $ - $ ( 421 ) $ 2,545 State and municipal 201,890 1 ( 39,355 ) 162,536 Mortgage-backed 200,473 - ( 29,868 ) 170,605 Corporate 19,603 - ( 2,285 ) 17,318 Asset-backed securities 974 - ( 77 ) 897 Total $ 425,906 $ 1 $ ( 72,006 ) $ 353,901 Available for sale securities with unrealized losses as of September 30, 2023 and December 31, 2022, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows: September 30, 2023 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Available for S Value Losses Value Losses Value Losses U.S. Treasury notes and bonds $ - $ - $ 77,032 $ 13,431 $ 77,032 $ 13,431 State and municipal 529 35 212,185 48,227 212,714 48,262 Mortgage-backed 4,099 160 174,956 29,898 179,055 30,058 Corporate - - 709 51 709 51 Asset-backed securities - - 11,285 390 11,285 390 Total temporarily impaired $ 4,628 $ 195 $ 476,167 $ 91,997 $ 480,795 $ 92,192 December 31, 2022 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Available for S Value Losses Value Losses Value Losses U.S. Treasury notes and bonds $ - $ - $ 78,204 $ 12,606 $ 78,204 $ 12,606 State and municipal 89,158 12,612 140,390 34,939 229,548 47,551 Mortgage-backed 63,249 3,093 144,318 25,047 207,567 28,140 Corporate 711 46 - - 711 46 Asset-backed securities - - 12,333 698 12,333 698 Total temporarily impaired $ 153,118 $ 15,751 $ 375,245 $ 73,290 $ 528,363 $ 89,041 16 Held to maturity securities with unrealized losses as of September 30, 2023 and December 31, 2022, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows: September 30, 2023 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Held to Maturity: Value Losses Value Losses Value Losses U.S. Government and federal agency $ - $ - $ 2,575 $ 396 $ 2,575 $ 396 State and municipal 125 6 153,293 42,980 153,418 42,986 Mortgage-backed - - 160,946 33,599 160,946 33,599 Corporate - - 15,251 3,117 15,251 3,117 Asset-backed securities - - 603 39 603 39 Total temporarily impaired $ 125 $ 6 $ 332,668 $ 80,131 $ 332,793 $ 80,137 December 31, 2022 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Held to Maturity: Value Losses Value Losses Value Losses U.S. Government and federal agency $ - $ - $ 2,545 $ 421 $ 2,545 $ 421 State and municipal 13,457 1,899 149,016 37,456 162,473 39,355 Mortgage-backed 25,582 822 145,024 29,046 170,606 29,868 Corporate 5,296 603 10,771 1,682 16,067 2,285 Asset-backed securities - - 897 77 897 77 Total temporarily impaired $ 44,335 $ 3,324 $ 308,253 $ 68,682 $ 352,588 $ 72,006 17 ChoiceOne evaluates all securities on a quarterly basis to determine if an ACL and corresponding impairment charge should be recorded. Consideration is given to the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of ChoiceOne to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value of amortized cost basis. ChoiceOne believes that unrealized losses on securities were temporary in nature and were caused primarily by changes in interest rates, increased credit spreads, and reduced market liquidity and were not caused by the credit status of the issuer. No ACL was recorded in the three and nine months ended September 30, 2023 , and no other-than-temporary impairment charges were recorded in the same periods in 2022 . At September 30, 2023 and December 31, 2022, there were 591 and 611 securities with an unrealized loss, respectively. Unrealized losses have not been recognized into income because the issuers’ bonds are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity. The majority of unrealized losses at September 30, 2023 , are related to U.S. Treasury notes and bonds, state and municipal bonds and mortgage backed securities. The U.S. Treasury notes are guaranteed by the U.S. government and 100 % of the notes are rated AA or better. State and municipal bonds are backed by the taxing authority of the bond issuer or the revenues from the bond. On September 30, 2023 , 86 % of state and municipal bonds held are rated AA or better, 11 % are A rated and 3 % are not rated. Of the mortgage-backed securities held on September 30, 2023 , 38 % were issued by US government sponsored entities and agencies, and rated AA, 39 % are AAA rated private issue and collateralized mortgage obligation, and 23 % are unrated privately issued mortgage-backed securities with structured credit enhancement and collateralized mortgage obligation. 18 Presented below is a schedule of maturities of securities as of September 30, 2023. Available for sale securities are reported at fair value and held to maturity securities are reported at amortized cost. Callable securities in the money are presumed called and matured at the callable date. Available for Sale Securities maturing within: Fair Value Less than 1 Year - 5 Years - More than at September 30, (Dollars in thousands) 1 Year 5 Years 10 Years 10 Years 2023 U.S. Government and federal agency $ - $ - $ - $ - $ - U.S. Treasury notes and bonds - 55,662 21,370 - 77,032 State and municipal 1,854 9,677 36,082 165,101 212,714 Corporate 509 - 200 — 709 Asset-backed securities — 8,195 3,090 — 11,285 Total debt securities 2,363 73,534 60,742 165,101 301,740 Mortgage-backed securities 14,001 59,091 109,991 5,981 189,064 Total Available for Sale $ 16,364 $ 132,625 $ 170,733 $ 171,082 $ 490,804 Held to Maturity Securities maturing within: Amortized Cost Less than 1 Year - 5 Years - More than at September 30, (Dollars in thousands) 1 Year 5 Years 10 Years 10 Years 2023 U.S. Government and federal agency $ — $ 2,971 $ - $ — $ 2,971 State and municipal 1,056 9,425 80,002 106,097 196,580 Corporate — - 20,005 - 20,005 Asset-backed securities — 642 — — 642 Total debt securities 1,056 13,038 100,007 106,097 220,198 Mortgage-backed securities 14,753 30,664 149,128 — 194,545 Total Held to Maturity $ 15,809 $ 43,702 $ 249,135 $ 106,097 $ 414,743 Following is information regarding unrealized gains and losses on equity securities for the three and nine months ended September 30, 2023 and 2022: Three Months Ended Nine Months Ended September 30, September 30, 2023 2022 2023 2022 Net gains and (losses) recognized during the period $ ( 205 ) $ ( 323 ) $ ( 527 ) $ ( 1,006 ) L Net gains and (losses) recognized during the period on securities sold ( 71 ) — ( 71 ) — Unrealized gains and (losses) recognized during the reporting period on securities still held at the reporting date $ ( 134 ) $ ( 323 ) $ ( 456 ) $ ( 1,006 ) 19 NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES Loans by type as a percentage of the portfolio were as follows: September 30, 2023 December 31, 2022 (Dollars in thousands) Balance % Balance % Percent Increase (Decrease) Agricultural $ 43,290 3.31 % $ 64,159 5.39 % ( 32.53 ) % Commercial and Industrial 222,357 16.98 % 210,210 17.67 % 5.78 % Commercial Real Estate 709,960 54.20 % 630,953 53.03 % 12.52 % Consumer 37,605 2.87 % 39,808 3.35 % ( 5.53 ) % Construction Real Estate 16,477 1.26 % 14,736 1.24 % 11.81 % Residential Real Estate 256,348 19.57 % 229,916 19.32 % 11.50 % Loans to Other Financial Institutions 23,763 1.81 % - 0.00 % 100.00 % Gross Loans $ 1,309,800 $ 1,189,782 Allowance for credit losses 14,872 1.14 % 7,619 0.64 % Net loans $ 1,294,928 $ 1,182,163 20 Activity in the allowance for credit losses and balances in the loan portfolio were as follows: Commercial Loans to Other (Dollars in thousands) and Commercial Construction Residential Financial Agricultural Industrial Consumer Real Estate Real Estate Real Estate Institutions Unallocated Total Allowance for Credit Losses Three Months Ended September 30, 2023 Beginning balance $ 78 $ 2,896 $ 885 $ 7,237 $ 70 $ 3,376 $ 40 $ — $ 14,582 Charge-offs — ( 73 ) ( 161 ) — — ( 27 ) — — ( 261 ) Recoveries — 28 80 — — 5 — — 113 Provision 5 ( 328 ) 22 908 ( 19 ) ( 150 ) — — 438 Ending balance $ 83 $ 2,523 $ 826 $ 8,145 $ 51 $ 3,204 $ 40 $ — $ 14,872 Allowance for Credit Losses Nine Months Ended September 30, 2023 Beginning balance $ 144 $ 1,361 $ 310 $ 4,822 $ 63 $ 906 $ — $ 13 $ 7,619 Cumulative effect of change in accounting principle 14 1,587 541 3,006 20 2,010 — ( 13 ) 7,165 Charge-offs — ( 73 ) ( 432 ) — — ( 27 ) — — ( 532 ) Recoveries — 57 208 13 — 10 — — 288 Provision ( 75 ) ( 409 ) 199 304 ( 32 ) 305 40 — 332 Ending balance $ 83 $ 2,523 $ 826 $ 8,145 $ 51 $ 3,204 $ 40 $ — $ 14,872 Individually evaluated for credit loss $ 3 $ 89 $ — $ 347 $ — $ 45 $ — $ — $ 484 Collectively evaluated for credit loss $ 80 $ 2,434 $ 826 $ 7,798 $ 51 $ 3,159 $ 40 $ — $ 14,388 Loans September 30, 2023 Individually evaluated for credit loss $ 65 $ 269 $ 6 $ 1,070 $ — $ 1,738 $ — $ 3,148 Collectively evaluated for credit loss 43,225 222,088 37,599 708,890 16,477 254,610 23,763 1,306,652 Ending balance $ 43,290 $ 222,357 $ 37,605 $ 709,960 $ 16,477 $ 256,348 $ 23,763 $ 1,309,800 21 Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses Three Months Ended September 30, 2022 Beginning balance $ 132 $ 1,613 $ 309 $ 4,224 $ 45 $ 691 $ 402 $ 7,416 Charge-offs — ( 47 ) ( 128 ) — — — — ( 175 ) Recoveries — 59 56 1 — — — 116 Provision 8 ( 252 ) 66 384 14 178 ( 298 ) 100 Ending balance $ 140 $ 1,373 $ 303 $ 4,609 $ 59 $ 869 $ 104 $ 7,457 Allowance for Loan Losses Nine Months Ended September 30, 2022 Beginning balance $ 448 $ 1,454 $ 290 $ 3,705 $ 110 $ 671 $ 1,010 $ 7,688 Charge-offs — ( 177 ) ( 383 ) — — — — ( 560 ) Recoveries — 62 162 3 - 2 — 229 Provision ( 308 ) 34 234 901 ( 51 ) 196 ( 906 ) 100 Ending balance $ 140 $ 1,373 $ 303 $ 4,609 $ 59 $ 869 $ 104 $ 7,457 Individually evaluated for impairment $ 1 $ 6 $ 1 $ 6 $ — $ 143 $ — $ 157 Collectively evaluated for impairment $ 139 $ 1,367 $ 302 $ 4,603 $ 59 $ 726 $ 104 $ 7,300 Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses December 31, 2022 Individually evaluated for impairment $ 2 $ 14 $ 1 $ 5 $ — $ 131 $ — $ 153 Collectively evaluated for impairment $ 142 $ 1,347 $ 309 $ 4,817 $ 63 $ 775 $ 13 $ 7,466 Loans December 31, 2022 Individually evaluated for impairment $ 23 $ 177 $ 7 $ 165 $ — $ 2,474 $ 2,846 Collectively evaluated for impairment 64,136 206,074 39,793 622,131 14,736 225,792 1,172,662 Acquired with deteriorated credit quality — 3,959 8 8,657 — 1,650 14,274 Ending balance $ 64,159 $ 210,210 $ 39,808 $ 630,953 $ 14,736 $ 229,916 $ 1,189,782 22 The provision for credit losses on loans was an expense of $ 438,000 and an expense of $ 332,000 in the third quarter and first nine months of 2023 respectively, compared to an expense of $ 100,000 in the same periods in the prior year. The provision expense was deemed necessary due to third quarter 2023 core loan growth of $ 60.6 million offset by the impact of improvements in the Federal Open Market Committee ("FOMC") forecast for unemployment and Gross Domestic Product ("GDP"). The FOMC forecast for change in real GDP improved from 1.0 % in June 2023 to 2.1 % in September 2023, while the unemployment rate forecast improved from 4.1 % in June 2023 to 3.8 % in September 2023. The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking (1) the risk ratings of business loans, (2) the level of classified business loans, and (3) delinquent and nonperforming consumer loans. Business loans are risk rated on a scale of 1 to 9. A description of the characteristics of the ratings follows: Risk Rating 1 through 5 or pass: These loans are considered pass credits. They exhibit acceptable credit risk and demonstrate the ability to repay the loan from normal business operations. Risk rating 6 or special menti Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current net worth and debt service capacity of the borrower or of any pledged collateral. These loans, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions that have jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that ChoiceOne will sustain some future loss if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual credit classified as substandard. Loans falling into this category should have clear action plans and timelines with benchmarks to return to a pass grade. Risk rating 7 or substandar Loans and other credit extensions graded “7” have all the weaknesses inherent in those graded “6”, with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. Loans in this classification should be evaluated for non-accrual status. All nonaccrual commercial and retail loans must be graded a risk rating “7” or worse. Risk rating 8 or doubtfu Loans and other credit extensions bearing this grade have been determined to have the extreme probability of some loss, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral. Risk rating 9 or l Loans in this classification are considered uncollectible and cannot be justified as a viable asset of ChoiceOne. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future. 23 The following table reflects the amortized cost basis of loans as of September 30, 2023 based on year of origination (dollars in thousands): Commerci 2023 2022 2021 2020 2019 Prior Term Loans Total Revolving Loans Grand Total Agricultural Pass $ 1,963 $ 4,129 $ 3,134 $ 1,813 $ 7,184 $ 18,311 $ 36,534 $ 6,512 $ 43,046 Special mention - - - - 176 68 244 - 244 Substandard - - - - - - - - - Doubtful - - - - - - - - - Loss - - - - - - - - - Total $ 1,963 $ 4,129 $ 3,134 $ 1,813 $ 7,360 $ 18,379 $ 36,778 $ 6,512 $ 43,290 Current year-to-date gross write-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Commercial and Industrial Pass $ 17,445 $ 47,330 $ 25,078 $ 11,584 $ 11,077 $ 12,891 $ 125,405 $ 96,604 $ 222,009 Special mention - - 31 39 83 82 235 7 242 Substandard - 60 30 - - 16 106 - 106 Doubtful - - - - - - - - - Loss - - - - - - - - - Total $ 17,445 $ 47,390 $ 25,139 $ 11,623 $ 11,160 $ 12,989 $ 125,746 $ 96,611 $ 222,357 Current year-to-date gross write-offs $ - $ - $ - $ 71 $ - $ - $ 71 $ - $ 71 Commercial Real Estate Pass $ 72,271 $ 137,771 $ 109,265 $ 73,112 $ 45,074 $ 141,265 $ 578,758 $ 129,070 $ 707,828 Special mention - - - - - 572 572 - 572 Substandard - - - - - 1,560 1,560 - 1,560 Doubtful - - - - - - - - - Loss - - - - - - - - - Total $ 72,271 $ 137,771 $ 109,265 $ 73,112 $ 45,074 $ 143,397 $ 580,890 $ 129,070 $ 709,960 24 Retai 2023 2022 2021 2020 2019 Prior Term Loans Total Revolving Loans Grand Total Consumer Performing $ 8,246 $ 14,922 $ 7,421 $ 3,332 $ 1,472 $ 1,404 $ 36,797 $ 808 $ 37,605 Nonperforming - - - - - - - - - Nonaccrual - - - - - - - - - Total $ 8,246 $ 14,922 $ 7,421 $ 3,332 $ 1,472 $ 1,404 $ 36,797 $ 808 $ 37,605 Current year-to-date gross write-offs $ 1 $ 13 $ 11 $ 28 $ - $ 1 $ 54 $ - $ 54 Construction real estate Performing $ 777 $ 1,089 $ 557 $ - $ - $ - $ 2,423 $ 14,054 $ 16,477 Nonperforming - - - - - - - - - Nonaccrual - - - - - - - - - Total $ 777 $ 1,089 $ 557 $ - $ - $ - $ 2,423 $ 14,054 $ 16,477 Current year-to-date gross write-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Residential real estate Performing $ 38,656 $ 66,921 $ 29,360 $ 17,023 $ 13,292 $ 41,778 $ 207,030 $ 47,751 $ 254,781 Nonperforming - - - - - - - - - Nonaccrual - 464 70 - - 541 1,075 492 1,567 Total $ 38,656 $ 67,385 $ 29,430 $ 17,023 $ 13,292 $ 42,319 $ 208,105 $ 48,243 $ 256,348 Current year-to-date gross write-offs $ - $ 27 $ - $ - $ - $ 1 $ 28 $ - $ 28 Loans to Other Financial Institutions Performing $ 23,763 $ - $ - $ - $ - $ - $ 23,763 $ - $ 23,763 Nonperforming - - - - - - - - - Nonaccrual - - - - - - - - - Total $ 23,763 $ - $ - $ - $ - $ - $ 23,763 $ - $ 23,763 Current year-to-date gross write-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Grand Total $ 71,442 $ 83,396 $ 37,408 $ 20,355 $ 14,764 $ 43,723 $ 271,088 $ 63,105 $ 334,193 Corporate Credit Exposure - Credit risk profile by credit worthiness category (Dollars in thousands) Agricultural Commercial and Industrial Commercial Real Estate December 31, December 31, December 31, 2022 2022 2022 Pass $ 63,867 $ 209,700 $ 624,555 Special Mention 289 400 2,048 Substandard 3 110 4,350 Doubtful — - — Loss - - - $ 64,159 $ 210,210 $ 630,953 Consumer Credit Exposure - Credit risk profile based on payment activity 25 (Dollars in thousands) Consumer Construction Real Estate Residential Real Estate December 31, December 31, December 31, 2022 2022 2022 Performing $ 39,808 $ 14,736 $ 228,653 Nonperforming — — — Nonaccrual — — 1,263 $ 39,808 $ 14,736 $ 229,916 The following table presents the amortized cost basis as of September 30, 2023 of the loans modified to borrowers experiencing financial difficulty disaggregated by class of financing receivable and type of concession granted during the reporting period. For the period end September 30, 2023 Term Extension % of Total Class of (Dollars in thousands) Amortized Financing Cost Basis Receivable Commercial and industrial $ 70 0 % Residential real estate 129 0 % Total $ 199 26 The following table presents the financial effect by type of modification made to borrowers experiencing financial difficulty and class of financing receivable. For the period end September 30, 2023 Term Extension Commercial and industrial Termed out line of credit & termed out draw note Residential real estate Provided with new twelve month payment plan to catch up on past due balance. The following table presents the period-end amortized cost basis of financing receivables that had a payment default during the period and were modified in the 12 months before default to borrowers experiencing financial difficulty. For the period end September 30, 2023 (Dollars in thousands) Term extension Commercial and industrial 70 Residential real estate 129 Total $ 199 The following table presents the period-end amortized cost basis of loans that have been modified in the past 12 months to borrowers experiencing financial difficulty by payment status and class of financing receivable. For the period end September 30, 2023 (Dollars in thousands) Current 30-89 days Greater than 90 days Total Commercial and industrial 62 8 — 70 Residential real estate — — 129 129 Total $ 62 $ 8 $ 129 $ 199 The following table provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the three and nine months ended September 30, 2022 . Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022 Pre- Post- Pre- Post- Modification Modification Modification Modification Outstanding Outstanding Outstanding Outstanding (Dollars in thousands) Number of Recorded Recorded Number of Recorded Recorded Loans Investment Investment Loans Investment Investment Agricultural — $ — $ — 1 $ 253 $ 253 Commercial and industrial — — — 1 18 18 Total — $ — $ — 2 $ 271 $ 271 27 There were no TDRs where the borrower was past due with respect to principal and/or interest for 30 days or more during the three months ended September 30, 2022, which loans had been modified and classified as TDRs during the year prior to the default. Nonaccrual loans by loan category as of September 30, 2023 were as follows: (Dollars in thousands) Nonaccrual loans with no ACL Total nonaccrual loans Interest income recognized during the period on nonaccrual loans Interest income recognized during the period on nonaccrual loans Commercial and industrial $ — $ 103 $ — $ 5 Residential real estate 457 1,567 - 10 Total nonaccrual loans $ 457 $ 1,670 $ — $ 15 Nonaccrual loans by loan category as of December 31, 2022 were as follows: (Dollars in thousands) Total nonaccrual loans Residential real estate $ 1,263 $ 1,263 28 The following schedule provides information regarding average balances of loans evaluated for impairment at December 31, 2022 and September 30, 2022 and interest recognized on impaired loans for the three months and nine months ended September 30, 2022: Unpaid (Dollars in thousands) Recorded Principal Related Investment Balance Allowance December 31, 2022 With no related allowance recorded Agricultural $ — $ — $ — Commercial and industrial — — — Consumer — — — Construction real estate — — — Commercial real estate — — — Residential real estate 550 595 — Subtotal 550 595 — With an allowance recorded Agricultural 23 27 2 Commercial and industrial 177 177 14 Consumer 7 7 1 Construction real estate — — — Commercial real estate 165 165 5 Residential real estate 1,924 1,954 131 Subtotal 2,296 2,330 153 Total Agricultural 23 27 2 Commercial and industrial 177 177 14 Consumer 7 7 1 Construction real estate — — — Commercial real estate 165 165 5 Residential real estate 2,474 2,549 131 Total $ 2,846 $ 2,925 $ 153 Unpaid (Dollars in thousands) Recorded Principal Related Investment Balance Allowance September 30, 2022 With no related allowance recorded Agricultural $ 307 $ 428 $ — Commercial and industrial — — — Consumer — — — Construction real estate — — — Commercial real estate — — — Residential real estate — — — Subtotal 307 428 — With an allowance recorded Agricultural 5 5 1 Commercial and industrial 108 185 6 Consumer 7 7 1 Construction real estate — — — Commercial real estate 140 140 6 Residential real estate 2,070 2,149 143 Subtotal 2,330 2,486 157 Total Agricultural 312 433 1 Commercial and industrial 108 185 6 Consumer 7 7 1 Construction real estate — — — Commercial real estate 140 140 6 29 Residential real estate 2,070 2,149 143 Total $ 2,637 $ 2,914 $ 157 30 Average Interest (Dollars in thousands) Recorded Income Investment Recognized Three Months Ended September 30, 2022 With no related allowance recorded Agricultural $ 310 $ — Commercial and industrial — — Consumer — — Construction real estate — — Commercial real estate — — Residential real estate 220 — Subtotal 530 — With an allowance recorded Agricultural 6 - Commercial and industrial 134 1 Consumer 7 — Construction real estate — — Commercial real estate 145 2 Residential real estate 1,842 16 Subtotal 2,134 19 Total Agricultural 316 — Commercial and industrial 134 1 Consumer 7 — Construction real estate — — Commercial real estate 145 2 Residential real estate 2,062 16 Total $ 2,664 $ 19 Average Interest (Dollars in thousands) Recorded Income Investment Recognized Nine Months Ended September 30, 2022 With no related allowance recorded Agricultural $ 312 $ — Commercial and industrial 23 — Consumer — — Construction real estate — — Commercial real estate 23 — Residential real estate 151 — Subtotal 509 - With an allowance recorded Agricultural 1,136 — Commercial and industrial 217 3 Consumer 15 — Construction real estate — — Commercial real estate 159 7 Residential real estate 1,891 49 Subtotal 3,418 59 Total Agricultural 1,448 - Commercial and industrial 240 3 Consumer 15 - Construction real estate - - Commercial real estate 182 7 Residential real estate 2,042 49 Total $ 3,927 $ 59 31 An aging analysis of loans by loan category follows: Loans Loans Loans Loans Past Due 90 Days Past Due Past Due Greater Past (Dollars in thousands) 30 to 59 60 to 89 Than 90 Loans Not Total Due and Days (1) Days (1) Days (1) Total (1) Past Due Loans Accruing September 30, 2023 Agricultural $ — $ — $ — $ — $ 43,290 $ 43,290 $ — Commercial and industrial 101 — 90 191 222,166 222,357 — Consumer 30 6 — 36 37,569 37,605 — Commercial real estate — — — — 709,960 709,960 — Construction real estate — — — — 16,477 16,477 — Residential real estate 1,320 30 702 2,052 254,296 256,348 Loans to Other Financial Institutions — — — — 23,763 23,763 $ 1,451 $ 36 $ 792 $ 2,279 $ 1,307,521 $ 1,309,800 $ — December 31, 2022 Agricultural $ — $ — $ — $ — $ 64,159 $ 64,159 $ — Commercial and industrial — 171 — 171 210,039 210,210 — Consumer 39 7 — 46 39,762 39,808 — Commercial real estate — — — — 630,953 630,953 — Construction real estate — — — — 14,736 14,736 — Residential real estate 682 — 842 1,524 228,392 229,916 — $ 721 $ 178 $ 842 $ 1,741 $ 1,188,041 $ 1,189,782 $ — (1) Includes nonaccrual loans. The table below presents a roll forward of the accretable yield on the County Bank Corp. acquired loan portfolio for the year ended December 31, 2022 and the nine months ended September 30, 2023 (dollars in thousands): (Dollars in thousands) Purchased with credit deterioration Purchased without credit deterioration Acquired Total Balance January 1, 2022 $ 288 $ 1,176 $ 1,464 Transfer from non-accretable to accretable yield 2,192 — 2,192 Accretion January 1, 2022 through December 31, 2022 ( 553 ) ( 98 ) ( 651 ) Balance January 1, 2023 1,927 1,078 3,005 Transfer from non-accretable to accretable yield — — — Accretion January 1, 2023 through September 30, 2023 ( 402 ) ( 405 ) ( 807 ) Balance, September 30, 2023 $ 1,525 $ 673 $ 2,198 The table below presents a roll forward of the accretable yield on the Community Shores Bank Corporation acquired loan portfolio for the year ended December 31, 2022 and the nine months ended September 30, 2023 (dollars in thousands): Purchased with credit deterioration Purchased without credit deterioration Acquired Total Balance January 1, 2022 $ 522 $ 197 $ 719 Transfer from non-accretable to accretable yield 1,086 — 1,086 Accretion January 1, 2022 through December 31, 2022 ( 993 ) ( 197 ) ( 1,190 ) Balance January 1, 2023 615 — 615 Transfer from non-accretable to accretable yield 622 — 622 Accretion January 1, 2023 through September 30, 2023 ( 470 ) — ( 470 ) Balance, September 30, 2023 $ 767 — $ 767 32 NOTE 4 – EARNINGS PER SHARE Earnings per share are based on the weighted average number of shares outstanding during the period. A computation of basic earnings per share and diluted earnings per share follows: Three Months Ended Nine Months Ended (Dollars in thousands, except share data) September 30, September 30, 2023 2022 2023 2022 Basic Net income $ 5,122 $ 5,813 $ 15,968 $ 16,956 Weighted average common shares outstanding 7,537,996 7,507,538 7,528,887 7,500,877 Basic earnings per common shares $ 0.68 $ 0.77 $ 2.12 $ 2.26 Diluted Net income $ 5,122 $ 5,813 $ 15,968 $ 16,956 Weighted average common shares outstanding 7,537,996 7,507,538 7,528,887 7,500,877 Plus dilutive stock options and restricted stock units 30,038 12,820 33,273 17,279 Weighted average common shares outstanding and potentially dilutive shares 7,568,034 7,520,358 7,562,160 7,518,156 Diluted earnings per common share $ 0.68 $ 0.77 $ 2.12 $ 2.26 There were 15,000 stock options that were considered anti-dilutive to earnings per share for the three and nine months ended September 30, 2023. There were 15,000 stock options that were considered anti-dilutive to earnings per share for the three and nine months ended September 30, 2022. There were no restricted stock units that were considered anti-dilutive for the three and nine months ended September 30, 2023 and September 30, 2022. 33 Note 5 – Financial Instruments Financial instruments as of the dates indicated were as follows: Quoted Prices In Active Significant Markets for Other Significant Identical Observable Unobservable (Dollars in thousands) Carrying Estimated Assets Inputs Inputs Amount Fair Value (Level 1) (Level 2) (Level 3) September 30, 2023 Assets Cash and cash equivalents $ 144,673 $ 144,673 $ 144,673 $ - $ - Equity securities at fair value 7,262 7,262 4,543 - 2,719 Securities available for sale 490,804 490,804 77,032 413,772 - Securities held to maturity 414,743 334,625 - 322,107 12,518 Federal Home Loan Bank and Federal Reserve Bank stock 9,514 9,514 - 9,514 - Loans held for sale 5,222 5,378 - 5,378 - Loans, net 1,294,928 1,258,262 - - 1,258,262 Accrued interest receivable 10,491 10,491 - 10,491 - Interest rate lock commitments 60 60 - 60 - Mortgage loan servicing rights 3,944 6,050 - 6,050 - Interest rate derivative contracts 29,900 29,900 - 29,900 - Liabilities Noninterest-bearing deposits 531,962 531,962 531,962 - - Interest-bearing deposits 1,551,995 1,549,272 - 1,549,272 - Brokered deposits 49,238 49,137 - 49,137 - Borrowings 180,000 179,041 - 179,041 - Subordinated debentures 35,446 30,751 - 30,751 - Accrued interest payable 3,906 3,906 - 3,906 - Interest rate derivative contracts - - - - - December 31, 2022 Assets Cash and cash equivalents $ 43,943 $ 43,943 $ 43,943 $ - $ - Equity securities at fair value 8,566 8,566 6,024 - 2,542 Securities available for sale 529,749 529,749 78,204 451,545 - Securities held to maturity 425,906 353,901 - 338,583 15,318 Federal Home Loan Bank and Federal Reserve Bank stock 8,581 8,581 - 8,581 - Loans held for sale 4,834 4,979 - 4,979 - Core loans, net 1,182,163 1,123,198 - - 1,123,198 Accrued interest receivable 8,949 8,949 - 8,949 - Interest rate lock commitments 28 28 - 28 - Mortgage loan servicing rights 4,322 5,855 - 5,855 - Interest rate derivative contracts 9,204 9,204 - 9,204 - Liabilities Noninterest-bearing deposits 599,579 599,579 599,579 - - Interest-bearing deposits 1,518,424 1,514,294 - 1,514,294 - Borrowings 50,000 50,000 - 50,000 - Subordinated debentures 35,262 30,304 - 30,304 - Accrued interest payable 610 610 - 610 - Interest rate derivative contracts 5,823 5,823 - 5,823 - 34 NOTE 6 – FAIR VALUE MEASUREMENTS The following tables present information about assets and liabilities measured at fair value on a recurring basis and the valuation techniques used to determine those fair values. In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that ChoiceOne Bank has the ability to access. Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability. In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. ChoiceOne Bank’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability. 35 Disclosures concerning assets and liabilities measured at fair value are as follows: Assets and Liabilities Measured at Fair Value on a Recurring Basis Quoted Prices In Active Significant Markets for Other Significant Identical Observable Unobservable Balance (Dollars in thousands) Assets Inputs Inputs at Date (Level 1) (Level 2) (Level 3) Indicated Equity Securities Held at Fair Value - September 30, 2023 Equity securities $ 4,543 $ - $ 2,719 $ 7,262 Investment Securities, Available for Sale - September 30, 2023 U.S. Treasury notes and bonds $ 77,032 $ - $ - $ 77,032 State and municipal - 212,714 - 212,714 Mortgage-backed - 189,064 - 189,064 Corporate - 709 - 709 Asset-backed securities - 11,285 - 11,285 Total $ 77,032 $ 413,772 $ - $ 490,804 Derivative Instruments - September 30, 2023 Interest rate derivative contracts - assets $ - $ 29,900 $ - $ 29,900 Interest rate derivative contracts - liabilities $ - $ - $ - $ - Equity Securities Held at Fair Value - December 31, 2022 Equity securities $ 6,024 $ - $ 2,542 $ 8,566 Investment Securities, Available for Sale - December 31, 2022 U. S. Government and federal agency $ - $ - $ - $ - U. S. Treasury notes and bonds 78,204 - - 78,204 State and municipal - 229,938 - 229,938 Mortgage-backed - 208,563 - 208,563 Corporate - 711 - 711 Asset-backed securities - 12,333 - 12,333 Total $ 78,204 $ 451,545 $ - $ 529,749 Derivative Instruments - December 31, 2022 Interest rate derivative contracts - assets $ - $ 9,204 $ - $ 9,204 Interest rate derivative contracts - liabilities $ - $ 5,823 $ - $ 5,823 36 Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis Nine Months Ended (Dollars in thousands) September 30, 2023 2022 Equity Securities Held at Fair Value Balance, January 1 $ 2,542 $ 1,768 Total realized and unrealized gains included in noninterest income 67 18 Net purchases, sales, calls, and maturities 110 75 Net transfers into Level 3 - - Balance, September 30, $ 2,719 $ 1,861 Amount of total losses for the period included in earning attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at September 30, $ 67 $ 18 Investment Securities, Available for Sale Balance, January 1 $ - $ 21,050 Total unrealized gains included in other comprehensive income - - Net purchases, sales, calls, and maturities - - Net transfers into Level 3 - - Transfer to held to maturity - ( 21,050 ) Balance, September 30, $ - $ - Amount of total losses for the period included in earning attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at September 30, $ - $ - Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 investment securities and liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs. Securities categorized as Level 3 assets as of September 30, 2023 and December 31, 2022 primarily consist of common and preferred equity securities of community banks. ChoiceOne estimates the fair value of these equity securities based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved. ChoiceOne also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment. Disclosures concerning assets measured at fair value on a non-recurring basis are as follows: 37 Assets Measured at Fair Value on a Non-recurring Basis Quoted Prices In Active Significant Markets for Other Significant Balances at Identical Observable Unobservable (Dollars in thousands) Dates Assets Inputs Inputs Indicated (Level 1) (Level 2) (Level 3) Collateral Dependent Loans September 30, 2023 $ 1,896 $ - $ - $ 1,896 December 31, 2022 $ 2,846 $ - $ - $ 2,846 Other Real Estate September 30, 2023 $ 122 $ - $ - $ 122 December 31, 2022 $ - $ - $ - $ - Collateral dependent loans categorized as Level 3 assets consist of non-homogeneous loans that are considered non-accrual or higher risk. ChoiceOne estimates the fair value of the loans based on the present value of expected future cash flows using management’s estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). The changes in fair value consisted of charge-downs of collateral dependent loans that were posted to the allowance for credit losses and write-downs of other real estate that were posted to a valuation account. 38 NOTE 7 – REVENUE FROM CONTRACTS WITH CUSTOMERS ChoiceOne has a variety of sources of revenue, which include interest and fees from customers as well as revenue from non-customers. ASC Topic 606, Revenue from Contracts with Customers, covers certain sources of revenue that are classified within noninterest income in the Consolidated Statements of Income. Sources of revenue that are included in the scope of ASC Topic 606 include service charges and fees on deposit accounts, interchange income, investment asset management income and transaction-based revenue, and other charges and fees for customer services. Service Charges and Fees on Deposit Accounts Revenue includes charges and fees to provide account maintenance, overdraft services, wire transfers, funds transfer, and other deposit-related services. Account maintenance fees such as monthly service charges are recognized over the period of time that the service is provided. Transaction fees such as wire transfer charges are recognized when the service is provided to the customer. Interchange Income Revenue includes debit card interchange and network revenues. This revenue is earned on debit card transactions that are conducted through payment networks such as MasterCard. The revenue is recorded as services are delivered and is presented net of interchange expenses. Investment Commission Income Revenue includes fees from the investment management advisory services and revenue is recognized when services are rendered. Revenue also includes commissions received from the placement of brokerage transactions for purchase or sale of stocks or other investments. Commission income is recognized when the transaction has been completed. Trust Fee Income Revenue includes fees from the management of trust assets and from other related advisory services. Revenue is recognized when services are rendered. 39 Following is noninterest income separated by revenue within the scope of ASC 606 and revenue within the scope of other GAAP topics: Three Months Ended Nine Months Ended September 30, September 30, (Dollars in thousands) 2023 2022 2023 2022 Service charges and fees on deposit accounts $ 1,176 $ 1,152 $ 3,307 $ 3,218 Interchange income 1,206 1,306 3,613 3,782 Investment commission income 173 158 541 596 Trust fee income 197 174 577 528 Other charges and fees for customer services 184 113 476 387 Noninterest income from contracts with customers within the scope of ASC 606 2,936 2,903 8,514 8,511 Noninterest income within the scope of other GAAP topics 768 144 2,346 1,812 Total noninterest income $ 3,704 $ 3,047 $ 10,860 $ 10,323 40 NOTE 8 – DERIVATIVE AND HEDGING ACTIVITIES ChoiceOne is exposed to certain risks relating to its ongoing business operations. ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. Derivatives are also implicit in certain contracts and commitments. ChoiceOne recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. ChoiceOne records derivative assets and derivative liabilities on the balance sheet within other assets and other liabilities, respectively. Changes in the fair value of derivative financial instruments are either recognized in income or in shareholders’ equity as a component of accumulated other comprehensive income or loss depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge. Interest rate swaps ChoiceOne uses interest rate swaps as part of its interest rate risk management strategy to add stability to net interest income and to manage its exposure to interest rate movements. Interest rate swaps designated as hedges involve the receipt of variable-rate amounts from a counterparty in exchange for ChoiceOne making fixed-rate payments or the receipt of fixed-rate amounts from a counterparty in exchange for ChoiceOne making variable rate payments, over the life of the agreements without the exchange of the underlying notional amount. In the second quarter of 2022, ChoiceOne entered into two pay-floating/receive-fixed interest rate swaps (the “Pay Floating Swap Agreements”) for a total notional amount of $ 200.0 million that were designated as cash flow hedges. These derivatives hedge the variable cash flows of specifically identified available-for-sale securities, cash and loans. The Pay Floating Swap Agreements were determined to be highly effective during the periods presented and therefore no amount of ineffectiveness has been included in net income. The Pay Floating Swap Agreements pay a coupon rate equal to SOFR while receiving a fixed coupon rate of 2.41 %. In March 2023, ChoiceOne terminated all Pay Floating Swap Agreements for a cash payment of $ 4.2 million. The loss will be amortized into interest income over 13 months, which was the remaining period of the swap agreements. In the second quarter of 2022, ChoiceOne entered into one forward starting pay-fixed/receive-floating interest rate swap (the “Pay Fixed Swap Agreement”) for a notional amount of $ 200.0 million that was designated as a cash flow hedge. This derivative hedges the risk of variability in cash flows attributable to forecasted payments on future deposits or floating rate borrowings indexed to the SOFR Rate. The Pay Fixed Swap Agreement is two years forward starting with an eight-year term set to expire in 2032. The Pay Fixed Swap Agreements will pay a fixed coupon rate of 2.75 % while receiving the SOFR Rate. In the fourth quarter of 2022, ChoiceOne entered into four pay-fixed/receive-floating interest rate swaps for a total notional amount of $ 201.0 million that were designated as fair value hedges. These derivatives hedge the risk of changes in fair value of certain available for sale securities for changes in the SOFR benchmark interest rate component of the fixed rate bonds. All four of these hedges were effective immediately on December 22, 2022. Of the total notional value, $ 101.9 million has a ten-year term set to expire in 2032, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.390 %. Of the total notional value, $ 50.0 million has a nine-year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.4015 %. The remaining notional value of $ 49.1 million has a nine-year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bond equal to 3.4030 %. ChoiceOne adopted ASC2022-01, as of December 20, 2022, to use the portfolio layer method. The fair value basis adjustment associated with available-for-sale fixed rate bonds initially results in an adjustment to AOCI. For available-for-sale securities subject to fair value hedge accounting, the changes in the fair value of the fixed rate bonds related to the hedged risk (the benchmark interest rate component and the partial term) are then reclassed from AOCI to current earnings offsetting the fair value measurement change of the interest rate swap, which is also recorded in current earnings. Net cash settlements are received/paid semi-annually, with the first starting in March 2023, and will be included in interest income. Net cash settlements received on these four pay-fixed/receive-floating swaps were $ 959,000 and $ 2.3 million for the three and nine months ended September 30, 2023, which were included in interest income. 41 The table below presents the fair value of derivative financial instruments as well as the classification within the consolidated statements of financial conditi September 30, 2023 December 31, 2022 (Dollars in thousands) Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments Interest rate contracts Other Assets $ 29,900 Other Assets $ 9,204 Interest rate contracts Other Liabilities $ — Other Liabilities $ 5,823 The table below presents the effect of fair value and cash flow hedge accounting on the consolidated statements of operations for the periods present Location and Amount of Gain or (Loss) Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships Recognized in Income on Fair Value and Cash Flow Hedging Relationships Three months ended September 30, 2023 Three months ended September 30, 2022 Nine months ended September 30, 2023 Nine months ended September 30, 2022 Interest Income Interest Expense Interest Income Interest Expense Interest Income Interest Expense Interest Income Interest Expense Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded $ ( 30 ) $ - $ ( 8 ) $ ( 209 ) $ ( 534 ) $ - $ 414 $ ( 364 ) Gain or (loss) on fair value hedging relationships: Interest rate contra Hedged items $ ( 9,189 ) $ - $ ( 4,229 ) $ - $ ( 9,920 ) $ - $ ( 4,300 ) $ - Derivatives designated as hedging instruments $ 9,097 $ - $ 4,229 $ - $ 9,842 $ - $ 4,300 $ - Amount excluded from effectiveness testing recognized in earnings based on amortization approach $ - $ - $ ( 206 ) $ - $ - $ - $ ( 359 ) $ - Gain or (loss) on cash flow hedging relationships: Interest rate contra Amount of gain or (loss) reclassified from accumulated other comprehensive income into income $ ( 897 ) $ - $ - $ - $ ( 1,940 ) $ - $ - $ - Amount excluded from effectiveness testing recognized in earnings based on amortization approach $ - $ - $ - $ ( 209 ) $ - $ - $ - $ ( 364 ) The table below presents the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost of those items as of the periods present September 30, 2023 Cumulative amount of Fair Value Hedging Adjustment Line Item in the Statement of included in the carrying Financial Position in which the Amortized cost of the amount of the Hedged Hedged Item is included Hedged Assets/(Liabilities) Assets/(Liabilities) Securities available for sale $ 223,667 $ ( 11,851 ) 42 Item 2. Management’s Discussion and Ana lysis of Financial Condition and Results of Operations . The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (“ChoiceOne”), its wholly-owned subsidiary ChoiceOne Bank, and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. This discussion should be read in conjunction with the interim consolidated financial statements and related notes. FORWARD-LOOKING STATEMENTS This discussion and other sections of this quarterly report contain forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and ChoiceOne. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “look forward,” “continue,” “future,” “will” and variations of such words and similar expressions are intended to identify such forward-looking statements. Management’s determination of the provision and allowance for credit losses, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management’s assumptions concerning pension and other post-retirement benefit plans involve judgments that are inherently forward-looking. All of the information concerning interest rate sensitivity is forward-looking. All statements with references to future time periods are forward-looking. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, ChoiceOne undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. Additional risk factors include, but are not limited to, the risk factors discussed in Item 1A of ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2022 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. RESULTS OF OPERATIONS ChoiceOne reported net income of $5,122,000 and $15,968,000 for the three and nine months ended September 30, 2023, compared to $5,813,000 and $16,956,000 for the same periods in 2022. Diluted earnings per share were $0.68 and $2.12 in the three and nine months ended September 30, 2023, compared to $0.77 and $2.26 per share in the same periods in the prior year. The increase in deposit costs during the first nine months of 2023 has negatively impacted earnings, offset by higher interest income from higher interest rates on loans and organic loan growth. Total assets as of September 30, 2023, increased $90.5 million as compared to June 30, 2023. The asset growth during the third quarter is due to an increase in cash of $67.9 million and an increase in core loans of $60.6 million offset by a decrease in securities of $41.2 million. Asset growth from September 30, 2022 to September 30, 2023 of $210.7 million is due to an increase in cash of $93.2 million and an increase in core loans of $153.6 million or 13.6% offset by a decrease in securities of $52.5 million. ChoiceOne management has intentionally increased liquidity to fund organic loan growth while shifting earning assets into loans as demonstrated by the growth during the three and nine months ended September 30, 2023. Deposits, excluding brokered deposits, increased by $48.9 million or an annualized 9.6% in the third quarter of 2023 and decreased $72.7 million or 3.4% as of September 30, 2023 compared to September 30, 2022. The decrease in deposits since September 30, 2022 was largely concentrated in the first quarter of 2023 as a result of a combination of customers using cash on hand for debt payoffs, seasonal tax and municipal bond payments, and customers seeking higher rates in money market securities or other investments. Deposits grew in the third quarter of 2023 due to new business, recapture of deposit losses, and some seasonality in municipal balances. ChoiceOne continues to be proactive in managing its liquidity position by using brokered deposits, the Bank Term Funding Program ("BTFP") and FHLB advances to ensure ample liquidity. At September 30, 2023, total available borrowing capacity from all sources was $796.1 million. Uninsured deposits totaled $724.1 million or 34.7% of deposits at September 30, 2023. The cost of deposits increased to 1.36% during the three months ended September 30, 2023, compared to 0.98% and 0.29% for the three months ended June 30, 2023 and September 30, 2022, respectively, due to rising short term interest rates and is expected to continue to increase as deposits reprice and customers migrate to CD products. ChoiceOne is actively managing these costs and expects rates paid on deposits to continue to lag the federal funds rate. Interest expense on borrowings for the three and nine months ended September 30, 2023, increased $2.5 million and $5.0 million, respectively, compared to the same periods in the prior year, due to increases in borrowing amounts and interest rates. Borrowings include $160 million from the BTFP with a fixed rate of 4.71% through May 2024 and $20 million of FHLB borrowings with a fixed rate of 4.88% through July of 2025. This funding structure has helped moderate interest 43 expense increases in the third quarter as rates have risen. Total cost of funds (annualized interest paid on all interest bearing liabilities over average interest bearing liabilities plus demand deposits) increased to 1.70% in the third quarter of 2023 compared to 1.29% in the second quarter of 2023 and 0.35% in the second quarter of 2022. The return on average assets and return on average shareholders’ equity were 0.80% and 11.31%, respectively, for the third quarter of 2023, compared to 0.97% and 14.11%, respectively, for the same period in 2022. The return on average assets and return on average shareholders’ equity were 0.87% and 12.26%, respectively, for the first nine months of 2023, compared to 0.95% and 12.32%, respectively, for the same period in 2022. The decrease in the return on average shareholders' equity in the three months ended September 30, 2023, was caused by an increase in shareholders’ equity. The increase in shareholders' equity was related to a decrease in unrealized losses on available for sale securities and an increase in the fair value of derivatives. Dividends Cash dividends of $2.0 million or $0.26 per share were declared in the third quarter of 2023 , compared to $1.9 million or $0.25 per share in the third quarter of 2022 . Cash dividends declared in the first nine months of 2023 were $5.9 million or $0.78 per share, compared to $5.6 million or $0.75 per share in the same period during the prior year. The cash dividend payout percentage was 36.8% for the first nine months of 2023, compared to 33.2% in the same period in the prior year. Interest Income and Expense Tables 1 and 2 on the following pages provide information regarding interest income and expense for the three and nine months ended September 30, 2023 and 2022. Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities. Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates. These tables are referred to in the discussion of interest income, interest expense and net interest income. 44 Table 1 – Average Balances and Tax-Equivalent Interest Rates Three Months Ended September 30, 2023 2022 (Dollars in thousands) Average Average Balance Interest Rate Balance Interest Rate Assets: Loans (1)(3)(4)(5)(6) $ 1,278,421 $ 17,779 5.52 % $ 1,128,679 $ 13,622 4.83 % Taxable securities (2)(6) 741,287 5,345 2.86 774,040 3,943 2.04 Nontaxable securities (1) 294,498 1,797 2.42 305,661 1,853 2.43 Other 128,704 1,766 5.44 43,418 238 2.19 Interest-earning assets 2,442,910 26,687 4.33 2,251,798 19,656 3.49 Noninterest-earning assets 125,330 137,752 Total assets $ 2,568,240 $ 2,389,550 Liabilities and Shareholders' Equity: Interest-bearing demand deposits $ 856,485 $ 2,885 1.34 % $ 915,698 $ 972 0.42 % Savings deposits 357,687 462 0.51 464,382 182 0.16 Certificates of deposit 336,419 3,308 3.90 196,160 410 0.84 Brokered deposit 44,868 582 5.15 - - 0.00 Borrowings 181,739 2,171 4.74 2,414 8 1.40 Subordinated debentures 35,413 413 4.62 35,168 375 4.27 Other 20,480 257 4.97 - - 0.00 Interest-bearing liabilities 1,833,091 10,078 2.18 1,613,822 1,947 0.48 Demand deposits 540,497 593,793 Other noninterest-bearing liabilities 13,433 17,177 Total liabilities 2,387,021 2,224,792 Shareholders' equity 181,219 164,758 Total liabilities and shareholders' equity $ 2,568,240 $ 2,389,550 Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 16,609 $ 17,709 Net interest margin (tax-equivalent basis) (Non-GAAP) (1) 2.70 % 3.15 % Reconciliation to Reported Net Interest Income Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 16,609 $ 17,709 Adjustment for taxable equivalent interest (383 ) (371 ) Net interest income (GAAP) $ 16,226 $ 17,338 Net interest margin (GAAP) 2.64 % 3.08 % (1) Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%. The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry. These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities. (2) Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock. (3) Loans include both loans to other financial institutions and loans held for sale. (4) Non-accruing loan and PPP loan balances are included in the balances of average loans. Non-accruing loan average balances were $1.6 million and $1.2 million in the third quarter of 2023 and 2022, respectively. PPP loan average balances were $0 and $879,000 in the third quarter of 2023 and 2022, respectively. (5) Interest on loans included net origination fees, accretion income, and PPP fees. Accretion income was $444,000 and $440,000 in the third quarter of 2023 and 2022, respectively. PPP fees were approximately $0 and $68,000 in the third quarter of 2023 and 2022, respectively. (6) Interest on loans and securities included derivative income and expense. Derivative income in securities was $637,000 and derivative expense in securities was $157,000 in the third quarter of 2023 and 2022, respectively. Derivative expense 45 in loan interest income was $673,000 and derivative income in loan interest was $149,000 in the third quarter of 2023 and 2022, respectively. Nine Months Ended September 30, 2023 2022 (Dollars in thousands) Average Average Balance Interest Rate Balance Interest Rate Assets: Loans (1)(3)(4)(5)(6) $ 1,233,463 $ 48,655 5.26 % $ 1,081,943 $ 38,454 4.74 % Taxable securities (2)(6) 753,490 15,637 2.77 782,378 11,001 1.87 Nontaxable securities (1) 296,453 5,372 2.42 319,381 5,921 2.47 Other 63,478 2,514 5.28 40,217 314 1.04 Interest-earning assets 2,346,884 72,178 4.10 2,223,919 55,691 3.34 Noninterest-earning assets 114,474 149,813 Total assets $ 2,461,358 $ 2,373,732 Liabilities and Shareholders' Equity: Interest-bearing demand deposits $ 848,964 $ 6,362 1.00 % $ 918,644 $ 2,034 0.30 % Savings deposits 378,939 1,080 0.38 455,816 485 0.14 Certificates of deposit 290,136 6,813 3.13 185,857 823 0.59 Brokered deposit 35,887 1,315 4.89 - - 0.00 Borrowings 130,133 4,597 4.71 5,708 35 0.83 Subordinated debentures 35,352 1,222 4.61 35,205 1,099 4.16 Other 7,934 302 5.07 - - 0.00 Interest-bearing liabilities 1,727,345 21,691 1.67 1,601,230 4,477 0.37 Demand deposits 546,983 575,483 Other noninterest-bearing liabilities 13,392 13,528 Total liabilities 2,287,720 2,190,241 Shareholders' equity 173,638 183,491 Total liabilities and shareholders' equity $ 2,461,358 $ 2,373,732 Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 50,487 $ 51,214 Net interest margin (tax-equivalent basis) (Non-GAAP) (1) 2.87 % 3.07 % Reconciliation to Reported Net Interest Income Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 50,487 $ 51,214 Adjustment for taxable equivalent interest (1,158 ) (1,265 ) Net interest income (GAAP) $ 49,329 $ 49,948 Net interest margin (GAAP) 2.80 % 2.99 % (1) Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%. The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry. These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities. (2) Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock. (3) Loans include both loans to other financial institutions and loans held for sale. (4) Non-accruing loan and PPP loan balances are included in the balances of average loans. Non-accruing loan average balances were $1.5 million and $1.3 million in the nine months ended September 30, 2023 and 2022, respectively. PPP loan average balances were $0 and $10.8 million in the nine months ended September 30, 2023 and 2022, respectively. (5) Interest on loans included net origination fees, accretion income, and PPP fees. Accretion income was $1.4 million and $1.7 million in the nine months ended September 30, 2023 and 2022, respectively. PPP fees were approximately $0 and $1.2 million in the nine months ended September 30, 2023 and 2022, respectively. 46 (6) Interest on loans and securities included derivative income and expense. Derivative income in securities was $1.5 million and derivative expense in securities was $166,000 in the nine months ended September 30, 2023 and 2022, respectively. Derivative expense in loan interest income was $2.1 million and derivative income in loan interest was $580,000 in the nine months ended September 30, 2023and 2022, respectively. Table 2 – Changes in Tax-Equivalent Net Interest Income Three Months Ended September 30, (Dollars in thousands) 2023 Over 2022 Total Volume Rate Increase (decrease) in interest income (1) Loans (2) $ 4,157 $ 2,001 $ 2,156 Taxable securities 1,402 (1,075 ) 2,477 Nontaxable securities (2) (56 ) (54 ) (2 ) Other 1,528 870 658 Net change in interest income 7,031 1,742 5,289 Increase (decrease) in interest expense (1) Interest-bearing demand deposits 1,913 (428 ) 2,341 Savings deposits 280 (283 ) 563 Certificates of deposit 2,898 475 2,423 Brokered deposit 582 582 - Borrowings 2,163 2,096 67 Subordinated debentures 38 3 35 Other 257 257 - Net change in interest expense 8,131 2,702 5,429 Net change in tax-equivalent net interest income $ (1,100 ) $ (960 ) $ (140 ) Nine Months Ended September 30, (Dollars in thousands) 2023 Over 2022 Total Volume Rate Increase (decrease) in interest income (1) Loans (2) $ 10,201 $ 6,423 $ 3,778 Taxable securities 4,635 (547 ) 5,182 Nontaxable securities (2) (549 ) (444 ) (105 ) Other 2,200 350 1,850 Net change in interest income 16,487 5,782 10,705 Increase (decrease) in interest expense (1) Interest-bearing demand deposits 4,328 (221 ) 4,549 Savings deposits 595 (121 ) 716 Certificates of deposit 5,990 886 5,104 Brokered deposit 1,315 1,315 0 Borrowings 4,562 3,930 632 Subordinated debentures 123 6 117 Other 302 302 0 Net change in interest expense 17,215 6,097 11,118 Net change in tax-equivalent net interest income $ (728 ) $ (315 ) $ (413 ) (1) The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s interest rate. The rate variance is computed as the change in interest rate multiplied by the previous year’s volume (average balance). The change in interest due to both volume and rate has been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. (2) Interest on nontaxable investment securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21%. 47 Net Interest Income Tax-equivalent net interest income decreased $1.1 million and $728,000 in the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022. The Federal Reserve increased the federal funds rate by 5.25% from March 31, 2022 to September 30, 2023 in response to published inflation rates. This increased rates on newly originated loans and increased rates paid on deposits. Tax equivalent net interest margin decreased 45 basis points and 20 basis points in the third quarter and first nine months of 2023 to 2.70% and 2.87%, respectively, compared to the same periods in 2022. GAAP based net interest margin decreased 44 basis points and 19 basis points in the third quarter and first nine months of 2023 to 2.64% and 2.80%, respectively, compared to the same periods in 2022. Tax-equivalent net interest margin during the month of September 2023 was 2.70%. The following table presents the cost of deposits and the cost of funds for the three and nine months ended September 30, 2023 and 2022. Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Cost of deposits 1.36 % 0.29 % 0.99 % 0.21 % Cost of funds 1.70 % 0.35 % 1.27 % 0.37 % ChoiceOne has experienced substantial core loan growth from September 30, 2022 to September 30, 2023, leading to an increase in interest income from loans of $4.2 million and $10.2 million in the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. Average core loans grew $149.7 million and $174.3 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. In addition, the average rate earned on loans increased 69 basis points and 52 basis points for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The increase in interest income from loans and the average rate increase on loans was muted by a decline in PPP fees and an increase in derivative expense in the three and nine months ended September 30, 2023, compared to the same periods in 2022. PPP fee income in the first nine months of 2023 was $0 compared to $68,000 and $1.2 million in the three and nine months ended September 30, 2022. Derivative loan expense was $673,000 and $2.1 million during the three and nine months ended September 30, 2023, respectively, compared to derivative loan income in the prior year of $149,000 and $580,000 during the three and nine months ended September 30, 2022. The average balance of total securities decreased $43.9 million and $51.8 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The decrease is due to the liquidation of $31.8 million in securities during the first nine months of 2022, with the remainder attributed to paydowns and a decline in the fair value of available for sale securities. The average rate earned on securities increased 61 basis points and 62 basis points for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year, which was aided by $637,000 and $1.5 million of income related to derivative instruments for the three and nine months ended September 30, 2023, respectively, compared to a loss of $157,000 and $166,000 in the same periods in the prior year. Interest expense increased $8.1 million and $17.2 million in the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The average rate paid on interest bearing-demand deposits and savings deposits increased 77 basis points and 56 basis points in the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. This was offset by the decline in the average balance of interest bearing-demand deposits and savings deposits, of $165.9 million and $146.6 million during the respective time periods. The increase in the average balance of certificates of deposit of $140.3 million and $104.3 million in the three and nine months ended September 30, 2023, respectively, combined with a 306 basis point and 254 basis point increase in the rate paid on certificates of deposits in the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year, led to an increase in interest expense of $2.9 million and $6.0 million during the respective time periods. In order to bolster liquidity, ChoiceOne borrowed $160.0 million from the Bank Term Funding Program ("BTFP") and currently holds $49.2 million in brokered deposits and $20.0 million in FHLB advances at the end of the third quarter of 2023. The net effect of these additional borrowed funds and brokered CDs was an increase in interest expense of $2.7 million and $5.9 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. In addition, ChoiceOne holds certain subordinated debentures issued in connection with a trust preferred securities offering that were obtained as part of the merger with Community Shores. The average balance of subordinated debentures was relatively flat in the third quarter of 2023 compared to the same period in the prior year. 48 Provision and Allowance for Credit Losses On January 1, 2023, ChoiceOne adopted ASU 2016-13 CECL which caused an increase in the allowance for credit losses ("ACL") of $7.2 million. The large increase was partially due to the economic environment and the nature of the CECL calculation. Approximately 20% of this increase is related to the migration of purchased loans into the portfolio assessed by the CECL calculation. ChoiceOne also booked a liability for expected credit losses on unfunded loans and other commitments of $3.3 million related to the adoption of CECL. These unfunded loans are open credit lines with current customers and loans approved by ChoiceOne but not funded. The increase in the ACL and the cost of the liability resulted in a decrease in the retained earnings account on our Consolidated Balance Sheet equal to the after-tax impact, with the tax impact portion being recorded in deferred taxes in our Consolidated balance Sheet in accordance with FASB guidance. The ACL consists of general and specific components. The general component covers loans collectively evaluated for credit loss and is based on peer historical loss experience adjusted for current and forecasted factors. Management's adjustment for current and forecasted factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, the experience and ability of lending staff, and a reasonable and supportable economic forecast described further below. The determination of our loss factors is based, in part, upon benchmark peer loss history adjusted for qualitative factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date. ChoiceOne's lookback period of benchmark peer net charge-off history was from January 1, 2004 through December 31, 2019 for this analysis. Loans individually evaluated for credit losses increased by $302,000 to $3.1 million during the nine months ended September 30, 2023, and the ACL related to these individually evaluated loans increased by $331,000 during the nine months ended September 30, 2023 largely due the decline in collateral value of the impaired loans at September 30, 2023, compared to December 31, 2022. Nonperforming loans, which includes Other Real Estate Owned (OREO) but excludes performing TLM and TDR loans, were $1.8 million as of September 30, 2023, compared to $1.2 million as of December 31, 2022. The ACL was 1.14% of total loans, excluding loans held for sale, at September 30, 2023, compared to 1.24% as of January 1, 2023 (the CECL adoption date) and 0.64% at December 31, 2022. The liability for expected credit losses on unfunded loans and other commitments was $2.7 million on September 30, 2023, compared to $3.3 million as of January 1, 2023 (the CECL adoption date) and did not exist on December 31, 2022. Net charge-offs were $244,000 in the first nine months of 2023, compared to net charge-offs of $331,000 during the same period in 2022. Checking account charge-off and recovery activity is included in the consumer charge-off activity below. Net charge-offs for checking accounts for the first nine months of 2023 were $178,000 compared to $186,000 for the same period in the prior year. Net charge-offs on an annualized basis as a percentage of average loans were 0.03% in the first nine months of 2023 compared to annualized net charge-offs of 0.04% of average loans in the same period in the prior year. 49 Charge-offs and recoveries for respective loan categories for the nine months ended September 30, 2023 and 2022 were as follows: (Dollars in thousands) 2023 2022 Charge-offs Recoveries Charge-offs Recoveries Agricultural $ — $ — $ — $ — Commercial and industrial 73 57 177 62 Consumer 432 208 383 162 Commercial real estate — 13 — 3 Construction real estate — — — — Residential real estate 27 10 — 2 $ 532 $ 288 $ 560 $ 229 The provision for credit losses was $438,000 and $333,000 in the third quarter of 2023 and first nine months of 2023, respectively, compared to $100,000 in the same periods in the prior year. The provision expense was deemed necessary due to the impact of core loan growth and the increase in the calculated reserve for individually analyzed loans offset by improvements in the Federal Open Market Committee ("FOMC") forecast for unemployment and GDP growth. The FOMC forecast for change in real GDP improved from 1.0% in June to 2.1% in September while the unemployment rate forecast improved from 4.1% in June to 3.8% in September. The loan provision expense was offset by the decrease in unfunded commitments provision of $438,000 in the third quarter of 2023 as ChoiceOne saw a decrease in the pipeline for new loans approved but not funded. The total unfunded commitments decreased $32.5 million in the third quarter of 2023 compared to June 30, 2023 and increased $7.5 million compared to January 1, 2023. Net provision for credit losses was zero in the third quarter of 2023. Noninterest Income Total noninterest income increased by $657,000 and $537,000 in the three and nine months ended September 30, 2023, compared to the same periods in the prior year. The increase was largely due to losses in the securities markets which occurred during the prior year. Gains on sales of loans was slightly better in the third quarter of 2023 compared to the third quarter of 2022; however, overall volume remains somewhat depressed due to a competitive housing market and higher mortgage rates. ChoiceOne has also seen steady increases in wealth management income after recent investments in the operation, including the opening of a dedicated wealth management office in Sparta, Michigan during the third quarter of 2023. Noninterest Expense Total noninterest expense increased $1.0 million or 2.6%, in the nine months ended September 30, 2023 compared to the same period in 2022. The modest increase in total noninterest expense was largely related to inflationary pressures on employee wages and benefits. ChoiceOne continues to monitor expenses and looks to improve our efficiency through automation and use of digital tools. Management continues to seek out ways to manage costs; however, staying ahead of technological advances and retaining top talent continue to be important in maintaining our competitive advantage. Income Tax Expense Income tax expense was $3.2 million in the first nine months of 2023 compared to $3.0 million for the same period in 2022. The effective tax rate was 16.5% for the first nine months of 2023 compared to 14.8% for the same period in 2022. In the nine months ended September 30, 2023, non taxable municipal interest decreased and disallowed interest expense increased compared to the first nine months of 2022. 50 FINANCIAL CONDITION Securities Total available for sale securities on September 30, 2023, were $490.8 million compared to $529.7 on December 31, 2022, with the decrease caused by $22.0 million of principal repayments, calls or maturities, and a decrease in the fair value of the underlying securities. The unrealized loss on securities available for sale increased by $3.2 million in the first nine months of 2023. ChoiceOne's held to maturity securities declined during the first nine months of 2023, as $3.5 million of securities were called or matured and principal repayments on securities totaled $6.7 million. The securities portfolio is projected to produce approximately $173 million of cashflows over the next two years as securities mature. At September 30, 2023, ChoiceOne had $172.3 million in unrealized losses on its investment securities, including $92.2 million in unrealized losses on available for sale securities and $80.1 in unrealized losses on held to maturity securities. Unrealized losses on corporate and municipal bonds have not been recognized into income because management believes the issuers are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity. ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. In order to hedge the risk of rising rates and unrealized losses on securities resulting from the rising rates, ChoiceOne currently holds four interest rate swaps with a total notional value of $401.0 million. These derivative instruments increase in value as long-term interest rates rise, which offsets the reduction in shareholders' equity due to unrealized losses on securities available for sale. Refer to footnote 8 for more discussion on ChoiceOne’s derivative position. Equity securities included a money market preferred security ("MMP") of $1.0 million and common stock of $6.3 million as of September 30, 2023. As of December 31, 2022, equity securities included an MMP of $1.0 million and common stock of $7.6 million. The decline compared to December 31, 2022 was due to the sale of a local bank stock during the quarter. Per U.S. generally accepted accounting principles, unrealized gains or losses on securities available for sale are reflected on the balance sheet in accumulated other comprehensive income (loss), while unrealized gains or losses on securities held to maturity are not reflected on the balance sheet in accumulated other comprehensive income (loss). Loans Core loans grew organically by $60.6 million or 19.8% on an annualized basis during the third quarter of 2023 and $153.6 million or 13.6% since September 30, 2022. Loans to other financial institutions increased to $23.8 million as of September 30, 2023, compared to $70,000 as of September 30, 2022. Loans to other financial institutions is comprised of a warehouse line of credit to facilitate mortgage loan originations and the interest rate fluctuates with the national mortgage market. This balance is short term in nature with an average life of under 30 days. Management believes the short-term structure and low credit risk of this asset is advantageous in the current rate environment. Loan interest income increased $4.2 million and $10.2 million in the third quarter and first nine months of 2023 compared to the same period in 2022, despite being offset by a decline in PPP fees and an increase in derivative expense. PPP fee income for the three and nine months ended September 30, 2023 was $0 compared to $68,000 and $1.2 million in the three and nine months ended September 30, 2022. Derivative expense was $673,000 and $2.1 million during the three and nine months ended September 30, 2023, respectively, compared to derivative income in the prior year of $149,000 and $580,000 during the three and nine months ended September 30, 2022. Loan growth was concentrated in residential real estate 1-4 family loans which grew $76.5 million and non-owner occupied commercial real estate loans which grew $51.5 million in the trailing twelve months from September 30, 2023. Much of this growth in commercial real estate loans is directly the result of the new loan production offices in both the city of Wyoming, Michigan and Macomb County, Michigan, as well as the newly hired experienced lenders in these locations. Part of the growth in residential real estate loans can be attributed to the 5/1 ARM product, which became popular as a mortgage option and is less salable than more traditional fixed-rate mortgage products. During the third quarter and first nine months of 2023, ChoiceOne recorded accretion income related to acquired loans in the amount of $444,000 and $1.4 million, respectively. Remaining credit and yield mark on acquired loans from the mergers with County Bank Corp. and Community Shores will accrete into income as the acquired loans mature. The remaining yield mark on acquired loans from the mergers with County Bank Corp. and Community Shores totaled $3.0 million as of September 30, 2023. Asset Quality 51 Information regarding individually evaluated loans can be found in Note 3 to the consolidated financial statements included in this report. The total balance of individually evaluated loans was $3.1 million on September 30, 2023, compared to $2.8 million of impaired loans as of December 31, 2022. The change in the first nine months of 2023 was primarily due to an increase in non-accrual residential mortgage loans. As part of its review of the loan portfolio, management also monitors the various nonperforming loans. Nonperforming loans are comprised of loans accounted for on a nonaccrual basis and loans, not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments. The balances of these nonperforming loans were as follows: (Dollars in thousands) September 30, December 31, 2023 2022 Loans accounted for on a nonaccrual basis $ 1,670 $ 1,263 Accruing loans which are contractually past due 90 days or more as to principal or interest payments — — Loans past due defined as "troubled loan modifications" or "troubled debt restructurings " which are not included above 137 — Total $ 1,807 $ 1,263 The increase in the balance of nonaccrual loans in the first nine months of 2023 was primarily due to the increase in residential mortgage loans. Management believes the ACL allocated to its nonperforming loans was sufficient at September 30, 2023. Goodwill Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value. Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required. ChoiceOne acquired Valley Ridge Financial Corp. in 2006, County Bank Corp. in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $13.7 million, $38.9 million and $7.3 million, respectively. ChoiceOne conducted an annual assessment of goodwill as of June 30, 2023 and no impairment was identified. ChoiceOne used a qualitative assessment to determine goodwill was not impaired. During the prior year, ChoiceOne engaged a third party valuation firm to assist in performing a quantitative analysis of goodwill as of November 30, 2022 ("the valuation date"). In deriving the fair value of the reporting unit (the Bank), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events to financial performance; the market price of ChoiceOne’s common stock and other relevant events. In addition, the valuation relied on financial projections through 2027 and growth rates prepared by management. Based on the valuation prepared, it was determined that ChoiceOne's estimated fair value of the reporting unit at the valuation date was greater than its book value and impairment of goodwill was not required. Management concurred with the conclusion derived from the quantitative goodwill analysis as of the valuation date and determined that there were no material changes and that no triggering events had occurred that indicated impairment from the valuation date through September 30, 2023, and as a result that it is more likely than not that there was no goodwill impairment. 52 Deposits and Borrowings ChoiceOne saw deposits, excluding brokered deposits, grow $48.9 million or an annualized 9.6% in the third quarter of 2023 and decline $34.0 million or an annualized 2.1% in the first nine months of 2023. The decrease in deposits was largely concentrated in the first quarter of 2023 as a result of a combination of customers using cash on hand for debt payoffs, seasonal tax and municipal bond payments, and customers seeking higher rates via money market securities or other investments. ChoiceOne is actively managing deposit costs and expects rates paid on deposits to continue to lag the federal funds rate. The cost of deposits has increased to 1.36% during the three months ended September 30, 2023 compared to 0.29% for the same period in the prior year, due to rising short term interest rates and is expected to continue to increase as deposits reprice. Uninsured deposits totaled $724.1 million or 34.7% of deposits on September 30, 2023 compared to $823.2 million, or 39% of total deposits at December 31, 2022. At September 30, 2023, total available borrowing capacity from all sources was $796.1 million, which exceeds uninsured deposits. In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. ChoiceOne also holds $3.4 million in subordinated debentures issued in connection with a $4.5 million trust preferred securities offering, which were obtained in the merger with Community Shores, offset by the merger mark-to-market adjustment. During the second quarter of 2023, ChoiceOne borrowed $160 million from the Federal Reserve’s Bank Term Funding Program (BTFP). This program provides a 1-year term at a fixed rate with the ability to prepay at any time without penalty. The interest rate on the BTFP borrowings as of September 30, 2023 was 4.71% and fixed through May of 2024. Collateral pledged is U.S. Treasuries, agency debt and mortgage-backed securities valued at par. During the third quarter of 2023 ChoiceOne borrowed $20 million from the FHLB with a fixed rate of 4.88% through July of 2025. This funding structure has helped moderate interest expense increases in the third quarter as rates have risen. Total cost of funds increased to 1.70% in the third quarter of 2023 compared to 0.35% in the third quarter of 2022. Shareholders' Equity Shareholders’ equity totaled $181.2 million as of September 30, 2023, up from $168.9 million as of December 31, 2022. This increase is due to retained earnings increasing $2.1 million due to earnings and a reduction in accumulated other compressive loss (AOCI) of $9.3 million. AOCI has improved compared to December 31, 2022, despite the rise in interest rates, due to the passage of time, the maturity of our securities portfolio, and an offsetting increase in unrealized gain of our pay-fixed swap derivatives. ChoiceOne Bank remains “well-capitalized” with a total risk-based capital ratio of 12.7% as of September 30, 2023. ChoiceOne uses interest rate swaps to manage interest rate exposure to certain fixed assets and variable rate liabilities. On September 30, 2023, ChoiceOne had pay-fixed interest rate swaps with a total notional value of $401.0 million, a weighted average coupon of 3.07%, and a fair value of $29.9 million and an average contract length of 8 to 9 years. These derivative instruments increase in value as long-term interest rates rise, which offsets the reduction in equity due to unrealized losses on securities available for sale. Included in the total is $200.0 million of forward starting pay-fixed, receive floating interest rate swaps used to hedge interest bearing liabilities. These forward starting swaps will pay a fixed coupon of 2.75% while receiving SOFR starting in late April 2024. At the current SOFR rate of 5.31%, these forward starting swaps would contribute approximately $427,000 monthly starting in May 2024 which will offset interest expense. In addition, in March 2023, ChoiceOne eliminated all receive-fixed, pay floating swap agreements for a cash payment of $4.2 million. The loss is being amortized in interest income with an expense of approximately $285,000 monthly through April 2024, which was the remaining period of the agreements. On January 1, 2023, ChoiceOne adopted ASU 2016-13 CECL which caused an increase in the ACL of $7.2 million and booked a liability for expected credit losses on unfunded loans and other commitments of $3.3 million. The increase in the ACL and the cost of the liability resulted in a decrease in the retained earnings account on our Consolidated Balance Sheet equal to the after-tax impact, with the tax impact portion being recorded in deferred taxes in our Consolidated balance Sheet in accordance with FASB guidance. This reduction in retained earnings was offset by first quarter 2023 earnings and recovery of accumulated other comprehensive loss. 53 Regulatory Capital Requirements Following is information regarding compliance of ChoiceOne and ChoiceOne Bank with regulatory capital requirements: Minimum Required to be Well Minimum Required Capitalized Under for Capital Prompt Corrective (Dollars in thousands) Actual Adequacy Purposes Action Regulations Amount Ratio Amount Ratio Amount Ratio September 30, 2023 ChoiceOne Financial Services Inc. Total capital (to risk weighted assets) $ 229,763 13.2 % $ 139,121 8.0 % N/A N/A Common equity Tier 1 capital (to risk weighted assets) 181,628 10.4 78,256 4.5 N/A N/A Tier 1 capital (to risk weighted assets) 186,128 10.7 104,341 6.0 N/A N/A Tier 1 capital (to average assets) 186,128 7.4 100,482 4.0 N/A N/A ChoiceOne Bank Total capital (to risk weighted assets) $ 220,200 12.7 % $ 138,902 8.0 % $ 173,628 10.0 % Common equity Tier 1 capital (to risk weighted assets) 208,644 12.0 78,133 4.5 112,858 6.5 Tier 1 capital (to risk weighted assets) 208,644 12.0 104,177 6.0 138,902 8.0 Tier 1 capital (to average assets) 208,644 8.3 100,350 4.0 125,438 5.0 December 31, 2022 ChoiceOne Financial Services Inc. Total capital (to risk weighted assets) $ 222,006 13.8 % $ 128,545 8.0 % N/A N/A Common equity Tier 1 capital (to risk weighted assets) 177,916 11.1 72,307 4.5 N/A N/A Tier 1 capital (to risk weighted assets) 182,416 11.4 96,409 6.0 N/A N/A Tier 1 capital (to average assets) 182,416 7.9 92,558 4.0 N/A N/A ChoiceOne Bank Total capital (to risk weighted assets) $ 208,696 13.0 % $ 128,294 8.0 % $ 160,367 10.0 % Common equity Tier 1 capital (to risk weighted assets) 201,077 12.5 72,165 4.5 104,239 6.5 Tier 1 capital (to risk weighted assets) 201,077 12.5 96,220 6.0 128,294 8.0 Tier 1 capital (to average assets) 201,077 8.7 92,449 4.0 115,562 5.0 Management reviews the capital levels of ChoiceOne and ChoiceOne Bank on a regular basis. The Board of Directors and management believe that the capital levels as of September 30, 2023 are adequate for the foreseeable future. The Board of Directors’ determination of appropriate cash dividends for future periods will be based on, among other things, market conditions and ChoiceOne’s requirements for cash and capital. 54 Liquidity Net cash provided by operating activities was $57.3 million for the nine months ended September 30, 2023 compared to $32.0 million in the same period in 2022. The change was due to lower net proceeds from loan sales in 2023 compared to 2022, which was offset by change in other liabilities. Net cash used in investing activities was $96.1 million for the nine months ended September 30, 2023 compared to $60.5 million used in the same period in 2022. The change was due in part to an increase in net loan originations led to cash used of $120.3 million in the first nine months of 2023 compared to $73.3 million used in the same period during the prior year. Net cash provided by financing activities was $139.5 million for the nine months ended September 30, 2023, compared to $48.1 million in the same period in the prior year. ChoiceOne had $89.2 million less deposit growth in the first nine months of 2023 compared to the same period in 2022. ChoiceOne also increased borrowing by $130.0 million in the first nine months of 2023 compared to a decrease of $50.0 million in the same period during the prior year. ChoiceOne's market risk exposure occurs in the form of interest rate risk and liquidity risk. ChoiceOne's business is transacted in U.S. dollars with no foreign exchange risk exposure. Agricultural loans comprise a relatively small portion of ChoiceOne's total assets. Management believes that ChoiceOne's exposure to changes in commodity prices is insignificant. Liquidity risk deals with ChoiceOne's ability to meet its cash flow requirements. These requirements include depositors desiring to withdraw funds and borrowers seeking credit. Longer-term liquidity needs may be met through core deposit growth, maturities of and cash flows from investment securities, normal loan repayments, advances from the FHLB and the Federal Reserve Bank, brokered certificates of deposit, and income retention. ChoiceOne had $160.0 million in outstanding borrowings from the Federal Reserve’s Bank Term Funding Program (BTFP) as of September 30, 2023. ChoiceOne had $20.0 million in outstanding borrowings at the FHLB as of September 30, 2023. The acceptance of brokered certificates of deposit is not limited as long as the Bank is categorized as “well capitalized” under regulatory guidelines. At September 30, 2023, total available borrowing capacity from the FHLB and the Federal Reserve Bank was $796.1 million. ChoiceOne continues to review its liquidity management and has taken steps in an effort to ensure adequacy. These steps include limiting bond purchases in the first nine months of 2023, pledging securities to FHLB and the Federal Reserve Bank in order to increase borrowing capacity and using alternative funding sources such as brokered deposits. Item 4. Controls and Procedures. An evaluation was performed under the supervision and with the participation of ChoiceOne’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of ChoiceOne’s disclosure controls and procedures as of September 30, 2023. Based on and as of the time of that evaluation, ChoiceOne’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that ChoiceOne’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that material information required to be disclosed in the reports that ChoiceOne files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that ChoiceOne files or submits under the Exchange Act is accumulated and communicated to management, including ChoiceOne’s principal executive and principal financial officers, as appropriate to allow for timely decisions regarding required disclosure. There was no change in ChoiceOne’s internal control over financial reporting that occurred during the three months ended September 30, 2023 that has materially affected, or that is reasonably likely to materially affect, ChoiceOne’s internal control over financial reporting. 55 PART II. OT HER INFORMATION Item 1. Le gal Proceedings . There are no material pending legal proceedings to which ChoiceOne or ChoiceOne Bank is a party or to which any of their properties are subject, except for proceedings that arose in the ordinary course of business. Item 1A. Risk Factors . Information concerning risk factors is contained in the discussion in Item 1A, “Risk Factors,” in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2022. Ite m 2. Unregistered Sales of Equity Securities and Use of Proceeds . There were no unregistered sales of equity securities in the third quarter of 2023. There were no issuer purchases of equity securities during the third quarter of 2023. Ite m 5. Other Information None. 56 It em 6. Exhibits The following exhibits are filed or incorporated by reference as part of this repor Exhibit Number Document 3.1 Restated Articles of Incorporation of ChoiceOne Financial Services, Inc. Previously filed as an exhibit to ChoiceOne’s Form 10-K Annual Report for the year ended December 31, 2022. Here incorporated by reference. 3.2 Bylaws of ChoiceOne as currently in effect and any amendments thereto. Previously filed as an exhibit to ChoiceOne’s Form 8-K filed April 21, 2021. Here incorporated by reference. 4.1 Advances, Pledge and Security Agreement between ChoiceOne Bank and the Federal Home Loan Bank of Indianapolis. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference. 4.2 Form of 3.25% Fixed-to-Floating Rate Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference. 4.3 Form of 3.25% Fixed-to-Floating Rate Global Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference. 31.1 Certification of Chief Executive Officer 31.2 Certification of Chief Financial Officer 32.1 Certification pursuant to 18 U.S.C. § 1350. 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) 57 SIGNA TURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHOICEONE FINANCIAL SERVICES, INC. Date: November 13, 2023 /s/ Kelly J. Potes Kelly J. Potes Chief Executive Officer (Principal Executive Officer) Date: November 13, 2023 /s/ Adom J. Greenland Adom J. Greenland Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 58

WASHINGTON, DC 20549 FORM 10-K ☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2021 ☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from__________________ to __________________ Commission File Numbe 000-19202 ChoiceOne Financial Services, Inc. (Exact Name of Registrant as Specified in its Charter) Michigan (State or Other Jurisdiction of Incorporation or Organization) 38-2659066 (I.R.S. Employer Identification No.) 109 East Division Street , Sparta , Michigan (Address of Principal Executive Offices) 49345 (Zip Code) ( 616 ) 887-7366 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Ac Title of each class Trading symbol(s) Name of each exchange on which registered Common stock COFS NASDAQ Capital Market Securities registered pursuant to Section 12(g) of the Ac None. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Emerging growth company ☐ Smaller reporting company ☒ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public acco unting firm that prepared or issued its audit report. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒ As of June 30, 2021, the aggregate market value of common stock held by non-affiliates of the Registrant was $ 166.6 million. This amount is based on an average bid price of $24.22 per share for the Registrant's stock as of such date. As of February 28, 2022, the Registrant had 7,516,017 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement of ChoiceOne Financial Services, Inc. for the Annual Meeting of Shareholders to be held on May 25, 2022 are inc orporated by reference into Part III of this Form 10-K. 1 ChoiceOne Financial Services, Inc. Form 10-K ANNUAL REPORT Contents Page PART 1 Item 1: Business 4 Item 1A: Risk Factors 12 Item 1B: Unresolved Staff Comments 17 Item 2: Properties 17 Item 3: Legal Proceedings 17 Item 4: Mine Safety Disclosures 17 PART II Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 18 Item 6: Reserved 18 Item 7: Management’s Discussion and Analysis of Results of Operations and Financial Condition 19 Item 7A: Quantitative and Qualitative Disclosures About Market Risk 32 Item 8: Financial Statements and Supplementary Data 34 Item 9: Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 71 Item 9A: Controls and Procedures 71 Item 9B: Other Information 71 Item 9C: Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 71 PART III Item 10: Directors, Executive Officers and Corporate Governance 72 Item 11: Executive Compensation 72 Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 72 Item 13: Certain Relationships and Related Transactions, and Director Independence 73 Item 14: Principal Accountant Fees and Services 73 PART IV Item 15: Exhibits and Financial Statement Schedules 73 SIGNATURES 75 2 FORWARD-LOOKING STATEMENTS This report and the documents incorporated into this report contain forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and ChoiceOne Financial Services, Inc. Words such as “anticipates,” “believes,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “estimates,” “look forward,” “continue,” “future,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Management’s determination of the provision and allowance for loan losses, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management’s assumptions concerning pension and other postretirement benefit plans involve judgments that are inherently forward-looking. Examples of forward-looking statements also include, but are not limited to, statements related to the impact of the global coronavirus (COVID-19) pandemic on the businesses, financial condition and results of operations of ChoiceOne and its customers and statements regarding the outlook and expectations of ChoiceOne and its customers.   All of the information concerning interest rate sensitivity is forward-looking. All statements with references to future time periods are forward-looking. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, ChoiceOne Financial Services, Inc. undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. Risk factors include, but are not limited to, the risk factors disclosed in Item 1A of this report. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. PART I Explanatory Note On July 1, 2020, ChoiceOne Financial Services, Inc. (“ChoiceOne” or the “Company”) completed the merger of Community Shores Bank Corporation ("Community Shores") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2020 and December 31, 2021 include the impact of the merger, which was effective as of July 1, 2020. On October 1, 2019, ChoiceOne completed the merger of County Bank Corp. ("County") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2019, December 31, 2020, and December 31, 2021 include the impact of the merger, which was effective as of October 1, 2019. For additional details regarding the mergers with Community Shores and County, see Note 21 (Business Combinations) of the Notes to the Consolidated Financial Statements included in Item 8 of this report. 3 Item 1. Business General ChoiceOne is a financial holding company registered under the Bank Holding Company Act of 1956, as amended (“BHC Act”). The Company was incorporated on February 24, 1986, as a Michigan corporation. The Company was formed to create a bank holding company for the purpose of acquiring all of the capital stock of ChoiceOne Bank, which became a wholly owned subsidiary of the Company on April 6, 1987. Effective November 1, 2006, the Company merged with Valley Ridge Financial Corp., a one-bank holding company for Valley Ridge Bank (“VRB”). In December 2006, VRB was consolidated into ChoiceOne Bank. Effective October 1, 2019, County, a one-bank holding company for Lakestone Bank & Trust (“Lakestone”), merged with and into the Company.  Lakestone was consolidated into ChoiceOne Bank in May 2020.  On July 1, 2020, Community Shores Bank Corporation ("Community Shores"), a one bank holding company for Community Shores Bank, merged with and into the Company.   Community Shores Bank was consolidated into ChoiceOne Bank in October 2020. ChoiceOne Bank owns all of the outstanding common stock of ChoiceOne Insurance Agencies, Inc., an independent insurance agency headquartered in Sparta, Michigan (the "Insurance Agency"). The Company's business is primarily concentrated in a single industry segment, banking. ChoiceOne Bank (referred to as the “Bank”) is a full-service banking institution that offers a variety of deposit, payment, credit and other financial services to all types of customers. These services include time, savings, and demand deposits, safe deposit services, and automated transaction machine services. Loans, both commercial and consumer, are extended primarily on a secured basis to corporations, partnerships and individuals. Commercial lending covers such categories as business, industry, agricultural, construction, inventory and real estate. The Bank’s consumer loan departments make direct and indirect loans to consumers and purchasers of residential and real property. In addition, the Bank offers trust and wealth management services. No material part of the business of the Company or the Bank is dependent upon a single customer or very few customers, the loss of which would have a materially adverse effect on the Company. The Bank’s primary market areas lie within Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan, and Lapeer, Macomb, and St. Clair counties in southeastern Michigan in the communities where the Bank's respective offices are located. The Bank serves these markets through 32 full-service offices and three loan production offices. The Company and the Bank have no foreign assets or income. At December 31, 2021 , the Company had consolidated total assets of $2.4 billion, net loans of $1.0 billion, total deposits of $2.1 billion and total shareholders' equity of $221.7 million. For the year ended December 31, 2021 , the Company recognized consolidated net income of $22.0 million. The principal source of revenue for the Company and the Bank is interest and fees on loans. On a consolidated basis, interest and fees on loans accounted for 58%, 60%, and 64% of total revenues in 2021, 2020, and 2019 , respectively. Interest on securities accounted for 19%, 11%, and 13% of total revenues in 2021, 2020, and 2019 , respectively. For more information about the Company's financial condition and results of operations, see the consolidated financial statements and related notes included in Item 8 of this report. The information under the heading “The Coronavirus (COVID-19) Outbreak” in Item 7 below is incorporated herein by reference. Competition The Bank’s competition primarily comes from other financial institutions located within Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan and Lapeer, Macomb, and St. Clair counties in southeastern Michigan. There are a number of larger commercial banks within the Bank’s primary market areas. The Bank also competes with a large number of other financial institutions, such as savings and loan associations, insurance companies, consumer finance companies, credit unions, internet banks and other financial technology companies, and commercial finance and leasing companies for deposits, loans and service business. Money market mutual funds, brokerage houses and nonfinancial institutions provide many of the financial services offered by the Bank. Many of these competitors have substantially greater resources than the Bank. The principal methods of competition for financial services are price (the rates of interest charged for loans, the rates of interest paid for deposits and the fees charged for services) and the convenience and quality of services rendered to customers. 4 Supervision and Regulation Banks and bank holding companies are extensively regulated. The Company is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Company's activities are generally limited to owning or controlling banks and engaging in such other activities as the Federal Reserve Board may determine to be closely related to banking. Prior approval of the Federal Reserve Board, and in some cases various other government agencies, is required for the Company to acquire control of any additional bank holding companies, banks or other operating subsidiaries. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support it. The Bank is chartered under state law and is subject to regulation by the Michigan Department of Insurance and Financial Services (“DIFS”). State banking laws place restrictions on various aspects of banking, including permitted activities, loan interest rates, branching, payment of dividends and capital and surplus requirements. The Bank is a member of the Federal Reserve System and is also subject to regulation by the Federal Reserve Board. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) to the maximum extent provided by law. The Bank is a member of the Federal Home Loan Bank system, which provides certain advantages to the Bank, including favorable borrowing rates for certain funds. The Company is a legal entity separate and distinct from the Bank. The Company's primary source of funds available to pay dividends to shareholders is dividends paid to it by the Bank. There are legal limitations on the extent to which the Bank can lend or otherwise supply funds to the Company. In addition, payment of dividends to the Company by the Bank is subject to various state and federal regulatory limitations. The Deposit Insurance Funds Act of 1996 authorized the Financing Corporation (“FICO”) to impose periodic assessments on all depository institutions. The purpose of these periodic assessments is to spread the cost of the interest payments on the outstanding FICO bonds issued to recapitalize the Savings Association Insurance Fund (“SAIF”) over a larger number of institutions. The federal banking agencies have adopted guidelines to promote the safety and soundness of federally-insured depository institutions. These guidelines establish standards for, among other things, internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. The Company and the Bank are subject to regulatory “risk-based” capital guidelines. Failure to meet these capital guidelines could subject the Company or the Bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and other restrictions on its business. In addition, the Bank would generally not receive regulatory approval of any application that requires the consideration of capital adequacy, such as a branch or merger application, unless it could demonstrate a reasonable plan to meet the capital requirement within a reasonable period of time. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank. In addition, if DIFS deems the Bank's capital to be impaired, DIFS may require the Bank to restore its capital by a special assessment on the Company as the Bank's sole shareholder. If the Company fails to pay any assessment, the Company’s directors will be required, under Michigan law, to sell the shares of the Bank's stock owned by the Company to the highest bidder at either a public or private auction and use the proceeds of the sale to restore the Bank's capital. 5 The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) requires, among other things, federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. FDICIA sets forth the following five capital categori “well-capitalized,” “adequately-capitalized,” “undercapitalized,” “significantly-undercapitalized” and “critically-undercapitalized.” A depository institution's capital category will depend upon how its capital levels compare with various relevant capital measures as established by regulation, which include Tier 1 and total risk-based capital ratio measures and a leverage capital ratio measure. Under certain circumstances, the appropriate banking agency may treat a well-capitalized, adequately-capitalized, or undercapitalized institution as if the institution were in the next lower capital category. Federal banking regulators are required to take specified mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Subject to a narrow exception, the banking regulator must generally appoint a receiver or conservator for an institution that is critically undercapitalized. An institution in any of the undercapitalized categories is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. An undercapitalized institution is also generally prohibited from paying any dividends, increasing its average total assets, making acquisitions, establishing any branches, accepting or renewing any brokered deposits or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. On July 3, 2013, the FDIC Board of Directors approved the Regulatory Capital Interim Final Rule, implementing Basel III. This rule redefines Tier 1 capital as two components (Common Equity Tier 1 and Additional Tier 1), creates a new capital ratio (Common Equity Tier 1 Risk-based Capital Ratio) and implements a capital conservation buffer. It also revises the prompt corrective action thresholds and makes changes to risk weights for certain assets and off-balance-sheet exposures. The Bank was required to transition into the new rule beginning on January 1, 2015. Banks are subject to a number of federal and state laws and regulations, which have a material impact on their business. These include, among others, minimum capital requirements, state usury laws, state laws relating to fiduciaries, the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, the Expedited Funds Availability Act, the Community Reinvestment Act, the Real Estate Settlement Procedures Act, the Service Members Civil Relief Act, the USA PATRIOT Act, the Bank Secrecy Act, regulations of the Office of Foreign Assets Controls, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, electronic funds transfer laws, redlining laws, predatory lending laws, antitrust laws, environmental laws, money laundering laws and privacy laws. The monetary policy of the Federal Reserve Board may influence the growth and distribution of bank loans, investments and deposits, and may also affect interest rates on loans and deposits. These policies may have a significant effect on the operating results of banks. In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the Federal Reserve Board has determined to be closely related to the business of banking. In addition, bank holding companies that qualify and elect to be financial holding companies may engage in any activities that are financial in nature or complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system without prior approval of the Federal Reserve Board. Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments.  The Company has elected to be a financial holding company. In order for the Company to maintain financial holding company status, both the Company and the Bank must be categorized as "well-capitalized" and "well-managed" under applicable regulatory guidelines. If the Company or the Bank ceases to meet these requirements, the Federal Reserve Board may impose corrective capital and/or managerial requirements and place limitations on the Company’s ability to conduct the broader financial activities permissible for financial holding companies. In addition, if the deficiencies persist, the Federal Reserve Board may require the Company to divest of the Bank. The Company and the Bank were each categorized as "well-capitalized" and "well-managed" as of December 31, 2021. Bank holding companies may acquire banks and other bank holding companies located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state banking law. Banks may also establish interstate branch networks through acquisitions of and mergers with other banks. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed only if specifically authorized by state law. 6 Michigan banking laws do not significantly restrict interstate banking. The Michigan Banking Code permits, in appropriate circumstances and with the approval of DIFS, (1) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, (4) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of branches located in Michigan. Banks are subject to the provisions of the Community Reinvestment Act ("CRA"). Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with its examination of a bank, to assess the bank's record in meeting the credit needs of the community served by that bank, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the institution. Under the CRA, institutions are assigned a rating of "outstanding," "satisfactory," "needs to improve," or "substantial non-compliance." The regulatory agency's assessment of the bank's record is made available to the public. Further, a bank's federal regulatory agency is required to assess the CRA compliance record of any bank that has applied to establish a new branch office that will accept deposits, relocate an office, or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or another bank holding company, the Federal Reserve Board will assess the CRA compliance record of each subsidiary bank of the applicant bank holding company, and such compliance records may be the basis for denying the application. Upon receiving notice that a subsidiary bank is rated less than "satisfactory," a financial holding company will be prohibited from additional activities that are permitted to be conducted by a financial holding company and from acquiring any company engaged in such activities. The CRA rating of the Bank was "Satisfactory" as of its most recent examination. Effects of Compliance With Environmental Regulations The nature of the business of the Bank is such that it holds title, on a temporary or permanent basis, to a number of parcels of real property. These include properties owned for branch offices and other business purposes as well as properties taken in or in lieu of foreclosure to satisfy loans in default. Under current state and federal laws, present and past owners of real property may be exposed to liability for the cost of cleanup of environmental contamination on or originating from those properties, even if they are wholly innocent of the actions that caused the contamination. These liabilities can be material and can exceed the value of the contaminated property. Management is not presently aware of any instances where compliance with these provisions will have a material effect on the capital expenditures, earnings or competitive position of the Company or the Bank, or where compliance with these provisions will adversely affect a borrower's ability to comply with the terms of loan contracts. Employees As of February 28, 2022, the Company, on a consolidated basis, e mployed 386 employees, of which 320 were full -time employees.  Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good. Statistical Information Additional statistical information describing the business of the Company appears on the following pages and in Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this report and in the Consolidated Financial Statements and the notes thereto in Item 8 of this report. The following statistical information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and notes in this report.  Average balances used in statistical information are calculated using daily averages, unless otherwise specified. 7 The Company did not hold investment securities from any one issuer at December 31, 2021 , that were greater than 10% of the Company's shareholders' equity, exclusive of U.S. Government and U.S. Government agency securities. Presented below is the fair value of securities as of December 31, 2021 and 2020 , a schedule of maturities of securities as of December 31, 2021 , and the weighted average yields of securities as of December 31, 2021 .  Callable securities in the money are presumed called and matured at the callable date. Securities maturing within: Fair Value Fair Value Less than 1 Year - 5 Years - More than at Dec. 31, at Dec. 31, (Dollars in thousands) 1 Year 5 Years 10 Years 10 Years 2021 2020 U.S. Government and federal agency $ 2,008 $ - $ - $ - $ 2,008 $ 2,051 U.S. Treasury notes and bonds 2,021 - 89,958 - 91,979 2,056 State and municipal (1) 20,776 42,569 366,634 104,868 534,847 320,368 Corporate 505 1,769 14,369 3,999 20,642 3,589 Asset-backed securities - 6,641 9,653 - 16,294 - Total debt securities 25,310 50,979 480,614 108,867 665,770 328,064 Mortgage-backed securities 18,315 113,991 291,088 9,721 433,115 246,723 Equity securities (2) - 1,000 - 7,492 8,492 2,896 Total $ 43,625 $ 165,970 $ 771,702 $ 126,080 $ 1,107,377 $ 577,683 Weighted average yields: Less than 1 Year - 5 Years - More than 1 Year 5 Years 10 Years 10 Years Total U.S. Government and federal agency 1.98 % - % - % - % 1.98 % U.S. Treasury notes and bonds 1.85 - 1.16 - 1.18 State and municipal (1) 2.71 2.95 2.50 2.31 2.51 Corporate 2.50 3.70 2.93 3.25 3.04 Asset-backed securities - 0.60 0.84 - 0.74 Mortgage-backed securities 1.56 1.88 1.44 1.79 1.57 Equity securities (2) - 4.61 - - 0.54 (1) The yield is computed for tax-exempt securities on a fully tax-equivalent basis at an incremental tax rate of 21% for 2021. (2) Equity securities are preferred and common stock that may or may not have a stated maturity. Weighted average yields are based on the fair value of securities which are denoted in the table above.  Callable securities in the money are presumed called and matured at the callable date. 8 Maturities and Sensitivities of Loans to Changes in Interest Rates The following schedule presents the maturities of loans as of December 31, 2021. Loans are also classified according to the sensitivity to changes in interest rates as of December 31, 2021. (Dollars in thousands) In one year After one year After five years After fifteen or less through five years through fifteen years years Total Agricultural $ 12,350 $ 29,426 $ 18,493 $ 4,550 $ 64,819 Commercial and industrial 47,704 98,651 56,183 486 203,024 Commercial real estate 39,844 256,366 220,123 9,551 525,884 Construction real estate 18,245 212 - 609 19,066 Consumer 1,244 18,099 15,542 289 35,174 Residential real estate 2,535 10,138 82,552 73,656 168,881 Totals $ 121,922 $ 412,892 $ 392,893 $ 89,141 $ 1,016,848 (Dollars in thousands) Fixed or Floating or predetermined rates variable rates Total Loans maturing after one y Agricultural $ 35,713 $ 16,756 $ 52,469 Commercial and industrial 133,803 21,516 155,319 Commercial real estate 396,942 89,098 486,040 Construction real estate 821 - 821 Consumer 33,511 420 33,931 Residential real estate 91,501 74,845 166,346 Totals $ 692,291 $ 202,635 $ 894,926 Loan maturities are classified according to the contractual maturity date or the anticipated amortization period, whichever is appropriate. The anticipated amortization period is used in the case of loans where a balloon payment is due before the end of the loan’s normal amortization period. At the time the balloon payment is due, the loan can either be rewritten or payment in full can be requested. The decision regarding whether the loan will be rewritten or a payment in full will be requested will be based upon the loan’s payment history, the borrower’s current financial condition, and other relevant factors. 9 The following table reflects the composition of our allowance for loan loss, non-accrual loans, and nonperforming loans as a percentage of total loans represented by each class of loans as of the dates indicat (Dollars in thousands) Agricultural Commercial and industrial Consumer Commercial real estate Construction real estate Residential real estate Loans December 31, 2021 $ 64,819 $ 203,024 $ 35,174 $ 525,884 $ 19,066 $ 168,881 Allowance for loan losses year ended December 31, 2021 $ 448 $ 1,454 $ 290 $ 3,705 $ 110 $ 671 Allowance as a percentage of loan category 0.69 % 0.72 % 0.82 % 0.70 % 0.58 % 0.40 % Nonaccrual loans year ended December 31, 2021 $ 313 $ 285 $ - $ 279 $ - $ 850 Nonaccrual as a percentage of loan category 0.48 % 0.14 % 0.00 % 0.05 % 0.00 % 0.50 % Nonperforming loans year ended December 31, 2021 $ 2,117 $ 358 $ - $ 880 $ - $ 2,189 Nonperforming loans as a percentage of loan category 3.27 % 0.18 % 0.00 % 0.17 % 0.00 % 1.30 % (Dollars in thousands) Agricultural Commercial and industrial Consumer Commercial real estate Construction real estate Residential real estate Loans December 31, 2020 $ 53,735 $ 303,527 $ 34,014 $ 469,247 $ 16,639 $ 192,506 Allowance for loan losses year ended December 31, 2020 $ 257 $ 1,327 $ 317 $ 4,178 $ 97 $ 1,300 Allowance as a percentage of loan category 0.48 % 0.44 % 0.93 % 0.89 % 0.58 % 0.68 % Nonaccrual loans year ended December 31, 2020 $ 348 $ 1,802 $ 8 $ 3,088 $ 80 $ 1,381 Nonaccrual as a percentage of loan category 0.65 % 0.59 % 0.02 % 0.66 % 0.48 % 0.72 % Nonperforming loans year ended December 31, 2020 $ 348 $ 1,802 $ 8 $ 3,284 $ 80 $ 2,722 Nonperforming loans as a percentage of loan category 0.65 % 0.59 % 0.02 % 0.70 % 0.48 % 1.41 % Additions to the allowance for loan losses charged to operations during the periods shown were based on management’s judgment after considering factors such as loan loss experience, evaluation of the loan portfolio, and prevailing and anticipated economic conditions. The evaluation of the loan portfolio is based upon various risk factors such as the financial condition of the borrower, the value of collateral and other considerations, which, in the opinion of management, deserve current recognition in estimating loan losses. 10 The following schedule presents an allocation of the allowance for loan losses to the various loan categories as of the years ended December 31: (Dollars in thousands) 2021 2020 2019 Agricultural $ 448 $ 257 $ 471 Commercial and industrial 1,454 1,327 655 Consumer 290 317 270 Real estate - commercial 3,705 4,178 1,663 Real estate - construction 110 97 76 Real estate - residential 671 1,300 640 Unallocated 1,010 117 282 Total Allowance $ 7,688 $ 7,593 $ 4,057 Management periodically reviews the assumptions, loss ratios and delinquency trends in estimating the appropriate level of its allowance for loan losses and believes the unallocated portion of the total allowance was sufficient at December 31, 2021. Deposits The following schedule presents the average deposit balances by category and the average rates paid thereon for the respective yea (Dollars in thousands) 2021 2020 2019 Average Balance Average Rate Average Balance Average Rate Average Balance Average Rate Noninterest-bearing demand $ 527,876 - % $ 398,422 - % $ 186,411 - % Interest-bearing demand and money market deposits 791,886 0.23 571,693 0.32 278,444 0.56 Savings 398,969 0.14 267,217 0.11 109,028 0.07 Certificates of deposit 186,898 0.51 183,836 1.11 136,537 1.87 Total $ 1,905,629 0.17 % $ 1,421,168 0.29 % $ 710,420 0.63 % At December 31, 2021, the aggregate balance of time deposits exceeding the FDIC insured limit of $250,000 totaled $87.3 million.  At December 31, 2021, 93% of uninsured time deposit accounts were scheduled to mature within one year.  The maturity profile of uninsured time deposits at December 31, 2021 is as follows: Amount of time deposits in uninsured accounts (Dollars in thousands) Maturing in less than 3 months $ 29,498 Maturing in 3 to 6 months 34,891 Maturing in 6 to 12 months 13,607 Maturing in more than 12 months 9,347 Total uninsured time deposits $ 87,343 At December 31, 2021, the aggregate balance of all deposits exceeding the FDIC insured limit of $250,000 totaled $889.2 million, compared to $583.7 million and $323.8 million in 2020 and 2019, respectively. At December 31, 2021, the Bank had no material foreign deposits. 11 Return on Equity and Assets The following schedule presents certain financial ratios of the Company for the years ended December 31: 2021 2020 2019 Return on assets (net income divided by average total assets) 1.02 % 0.94 % 0.85 % Return on equity (net income divided by average equity) 9.79 % 7.28 % 6.48 % Dividend payout ratio (dividends declared per share divided by net income per share) 32.67 % 39.54 % 80.97 % Equity to assets ratio (average equity divided by average total assets) 10.44 % 12.97 % 13.08 % Item 1A. Risk Factors The Company is subject to many risks and uncertainties. Although the Company seeks ways to manage these risks and develop programs to control risks to the extent that management can control them, the Company cannot predict the future. Actual results may differ materially from management’s expectations. Some of these significant risks and uncertainties are discussed below. The risks and uncertainties described below are not the only ones that the Company faces. Additional risks and uncertainties of which the Company is unaware, or that it currently does not consider to be material, also may become important factors that affect the Company and its business. If any of these risks were to occur, the Company’s business, financial condition or results of operations could be materially and adversely affected. Risks Related to the Company ’ s Business The continuing COVID-19 pandemic could adversely impact the Company ’ s and its customers ’ business, financial condition, and results of operations. The continuing COVID-19 pandemic is significantly disrupting the economy, financial markets, and societal norms in Michigan, the United States and across the world.  Due to the nature of the pandemic, uncertainty and fluidity of the spread of the virus and its multiple variants, volatility of financial markets, and varied responses and actions from local, state and federal governments, including mandated shutdowns and other restrictive orders, it is impossible to predict the ultimate adverse impact COVID-19 could have on the Company and its customers.  The effects of COVID-19 could, among other risks, result in a material increase in requests from the Company’s customers for loan deferrals, modifications to the terms of loans, or other borrower accommodations; have a material adverse impact on the financial condition of the Company’s customers, potentially impacting their ability to make payments to the Company as scheduled and driving an increase in delinquencies and loan losses; result in additional material provision for loan losses; result in a decreased demand for the Company’s loans; or negatively impact the Company’s ability to access capital on attractive terms or at all.  Those effects could have a material adverse impact on the Company’s and its customers’ business, financial condition, and results of operations. Asset quality could be less favorable than expected. A significant source of risk for the Company arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loan agreements. Most loans originated by the Company are secured, but some loans are unsecured depending on the nature of the loan. With respect to secured loans, the collateral securing the repayment of these loans includes a wide variety of real and personal property that may be insufficient to cover the obligations owed under such loans. Collateral values may be adversely affected by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, terrorist activity, environmental contamination and other external events. The Company’s allowance for loan losses may not be adequate to cover actual loan losses. The risk of nonpayment of loans is inherent in all lending activities and nonpayment of loans may have a material adverse effect on the Company’s earnings and overall financial condition, and the value of its common stock. The Company makes various assumptions and judgments about the collectability of its loan portfolio and provides an allowance for potential losses based on a number of factors. If its assumptions are wrong, the allowance for loan losses may not be sufficient to cover losses, which could have an adverse effect on the Company’s operating results and may cause it to increase the allowance in the future. The actual amount of future provisions for loan losses cannot now be determined and may exceed the amounts of past provisions for loan losses. Federal and state banking regulators, as an integral part of their supervisory function, periodically review the allowance for loan losses. These regulatory agencies may require the Company to increase its provision for loan losses or to recognize further loan charge-offs based upon their judgments, which may be different from the Company’s judgments. Any increase in the allowance for loan losses could have a negative effect on the Company’s regulatory capital ratios, net income, financial condition and results of operations. In addition, a large portion of the loan portfolio was marked to fair value as part of the mergers with County and Community Shores and does not carry an allowance as management determined no credit deterioration had occurred since the effective date of the merger. 12 General economic conditions in the state of Michigan could be less favorable than expected. The Company is affected by general economic conditions in the United States, although most directly within Michigan. An economic downturn within Michigan could negatively impact household and corporate incomes. This impact may lead to decreased demand for both loan and deposit products and increase the number of customers who fail to pay interest or principal on their loans. The Company could be adversely affected by the soundness of other financial institutions, including defaults by larger financial institutions. The Company's ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of credit, trading, clearing, counterparty or other relationships between financial institutions. The Company has exposure to multiple counterparties, and it routinely executes transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by the Company or by other institutions. This is sometimes referred to as "systemic risk" and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which the Company interacts on a daily basis, and therefore could adversely affect the Company. If the Company does not adjust to changes in the financial services industry, its financial performance may suffer. The Company’s ability to maintain its financial performance and return on investment to shareholders will depend in part on its ability to maintain and grow its core deposit customer base and expand its financial services to its existing customers. In addition to other banks, competitors include credit unions, securities dealers, brokers, mortgage bankers, investment advisors, internet banks and other financial technology companies, and finance and insurance companies. The increasingly competitive environment is, in part, a result of changes in the economic environment within the state of Michigan, regulation, changes in technology and product delivery systems and consolidation among financial service providers. New competitors may emerge to increase the degree of competition for the Company’s customers and services. Financial services and products are also constantly changing. The Company’s financial performance will also depend in part upon customer demand for the Company’s products and services and the Company’s ability to develop and offer competitive financial products and services. Changes in interest rates could reduce the Company's income and cash flow. The Company’s income and cash flow depends, to a great extent, on the difference between the interest earned on loans and securities, and the interest paid on deposits and other borrowings. Market interest rates are beyond the Company’s control, and they fluctuate in response to general economic conditions and the policies of various governmental and regulatory agencies including, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates and interest rate relationships, will influence the origination of loans, the purchase of investments, the generation of deposits and the rate received on loans and securities and paid on deposits and other borrowings. Interest rates on our outstanding financial instruments might be subject to change based on regulatory developments, which could adversely affect our revenue, expenses, and the value of those financial instruments . LIBOR and certain other “benchmarks” are the subject of recent national, international, and other regulatory guidance and proposals for reform. These reforms may cause such benchmarks to perform differently than in the past or have other consequences which cannot be predicted. On July 27, 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. In November 2020, the FCA announced that it would continue to publish LIBOR rates through June 30, 2023. It is unclear whether, or in what form, LIBOR will continue to exist after that date. Any uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could adversely affect the value of our floating rate obligations, loans, deposits, and other financial instruments tied to LIBOR rates, as well as the revenue and expenses associated with those financial instruments. While, at this time, it appears that consensus is growing around using the Secured Overnight Financing Rate (“SOFR”) as an alternative to LIBOR, it remains to be determined whether this will ultimately be the case and what the impact of a possible transition to SOFR or other alternative reference rates may have on our business, financial results and results of operations.  We could become subject to litigation and other types of disputes as a consequence of the transition from LIBOR to SOFR or another alternative reference rate, which could subject us to increased legal expenses, monetary damages and reputational harm. The Company is subject to liquidity risk in its operations, which could adversely affect its ability to fund various obligations. Liquidity risk is the possibility of being unable to meet obligations as they come due or capitalize on growth opportunities as they arise because of an inability to liquidate assets or obtain adequate funding on a timely basis, at a reasonable cost and within acceptable risk tolerances. Liquidity is required to fund various obligations, including credit obligations to borrowers, loan originations, withdrawals by depositors, repayment of debt, dividends to shareholders, operating expenses and capital expenditures. Liquidity is derived primarily from retail deposit growth and earnings retention, principal and interest payments on loans and investment securities, net cash provided from operations and access to other funding. If the Company is unable to maintain adequate liquidity, then its business, financial condition and results of operations would be negatively affected. 13 The Company has significant exposure to risks associated with commercial and residential real estate. A substantial portion of the Company’s loan portfolio consists of commercial and residential real estate-related loans, including real estate development, construction and residential and commercial mortgage loans.  As of December 31, 2021, the Company had approximately $545.0 million of commercial and construction real estate loans outstanding, which represented approximately 54% of its loan portfolio.  As of that same date, the Company had approximately $168.9 million in residential real estate loans outstanding, or approximately 17% of its loan portfolio. Consequently, real estate-related credit risks are a significant concern for the Company. The adverse consequences from real estate-related credit risks tend to be cyclical and are often driven by national economic developments that are not controllable or entirely foreseeable by the Company or its borrowers. Commercial loans may expose the Company to greater financial and credit risk than other loans. The Company’s commercial and industrial loan portfolio, including commercial mortgages, was approximately $203.0 million at December 31, 2021, comprising approximately 20% of its total loan portfolio. Commercial loans generally carry larger loan balances and can involve a greater degree of financial and credit risk than other loans. Any significant failure to pay on time by the Company’s customers would hurt the Company’s earnings. The increased financial and credit risk associated with these types of loans are a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. Legislative or regulatory changes or actions could adversely impact the Company or the businesses in which it is engaged. The Company and the Bank are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of their operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance fund, and not to benefit the Company's shareholders. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact the Company or its ability to increase the value of its business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution's allowance for loan losses. Future regulatory changes or accounting pronouncements may increase the Company's regulatory capital requirements or adversely affect its regulatory capital levels. Additionally, actions by regulatory agencies against the Company or the Bank could require the Company to devote significant time and resources to defending its business and may lead to penalties that materially affect the Company. The Company relies heavily on its management and other key personnel, and the loss of any of them may adversely affect its operations. The Company is and will continue to be dependent upon the services of its management team and other key personnel. Losing the services of one or more key members of the Company’s management team could adversely affect its operations. The Company ’ s controls and procedures may fail or be circumvented. Management regularly reviews and updates the Company’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met.  If the Company fails to identify and remediate control deficiencies, it is possible that a material misstatement of interim or annual financial statements will not be prevented or detected on a timely basis.  In addition, any failure or circumvention of the Company’s other controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s business, results of operations and financial condition. The Company may be a defendant in a variety of litigation and other actions, which may have a material adverse effect on the Company's financial condition and results of operations. The Company and the Bank are regularly involved in a variety of litigation arising out of the normal course of business. The Company's insurance may not cover all claims that may be asserted against it, and any claims asserted against it, regardless of merit or eventual outcome, may harm its reputation or cause the Company to incur unexpected expenses, which could be material in amount. Should the ultimate expenses, judgments or settlements in any litigation exceed the Company's insurance coverage, they could have a material adverse effect on the Company's financial condition and results of operations. In addition, the Company may not be able to obtain appropriate types or levels of insurance in the future, nor may it be able to obtain adequate replacement policies with acceptable terms, if at all. If the Company cannot raise additional capital when needed, its ability to further expand its operations through organic growth or acquisitions could be materially impaired. The Company is required by federal and state regulatory authorities to maintain specified levels of capital to support its operations. The Company may need to raise additional capital to support its current level of assets or its growth. The Company’s ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside its control, and on its financial performance. The Company cannot assure that it will be able to raise additional capital in the future on terms acceptable to it or at all. If the Company cannot raise additional capital when needed, its ability to maintain its current level of assets or to expand its operations through organic growth or acquisitions could be materially limited. 14 Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of computer systems or otherwise, could severely harm the Company's business. As part of its business, the Company collects, processes and retains sensitive and confidential client and customer information on behalf of itself and other third parties. Despite the security measures the Company has in place for its facilities and systems, and the security measures of its third party service providers, the Company may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by the Company or by its vendors, could severely damage the Company's reputation, expose it to the risks of litigation and liability, disrupt the Company's operations and have a material adverse effect on the Company's business. The Company's information systems may experience an interruption or breach in security. The Company relies heavily on communications and information systems to conduct its business and deliver its products. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company's customer relationship management, general ledger, deposit, loan and other systems. While the Company has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches of the Company's information systems or its customers' information or computer systems would not damage the Company's reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and financial liability, any of which could have a material adverse effect on the Company's financial condition and results of operations. Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations. Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to information technology (IT) systems to sophisticated and targeted measures known as advanced persistent threats, directed at the Company and/or its third party service providers. Although we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, employee training, data encryption, vulnerability assessments, continuous monitoring of our IT networks and systems and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. The potential consequences of a material cybersecurity incident include reputational damage, litigation with third parties and increased cybersecurity protection and remediation costs, which in turn could materially adversely affect our results of operations. Environmental liability associated with commercial lending could result in losses. In the course of its business, the Company may acquire, through foreclosure, properties securing loans it has originated or purchased that are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, the Company might be required to remove these substances from the affected properties at the Company's sole cost and expense. The cost of this removal could substantially exceed the value of affected properties. The Company may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have an adverse effect on the Company's business, results of operations and financial condition. The Company depends upon the accuracy and completeness of information about customers. In deciding whether to extend credit to customers, the Company relies on information provided to it by its customers, including financial statements and other financial information. The Company may also rely on representations of customers as to the accuracy and completeness of that information and on reports of independent auditors on financial statements. The Company's financial condition and results of operations could be negatively impacted to the extent that the Company extends credit in reliance on financial statements that do not comply with generally accepted accounting principles or that are misleading or other information provided by customers that is false or misleading. The Company operates in a highly competitive industry and market area. The Company faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national and regional banks within the various markets where the Company operates, as well as internet banks and other financial technology companies. The Company also faces competition from many other types of financial institutions, including savings and loan associations, credit unions, finance companies, brokerage firms, insurance companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. The Company competes with these institutions both in attracting deposits and in making new loans. Technology has lowered barriers to entry into the market and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Company's competitors have fewer regulatory constraints and may have lower cost structures, such as credit unions that are not subject to federal income tax. Due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Company can. Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact the Company's business. Severe weather, natural disasters, acts of war or terrorism, risks posed by an outbreak of a widespread epidemic or pandemic of disease (or widespread fear thereof), including the impact of the COVID-19 pandemic, and other adverse external events could have a significant impact on the Company's ability to conduct business. Such events could affect the stability of the Company's deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. 15 The Company relies on dividends from the Bank for most of its revenue. The Company is a separate and distinct legal entity from the Bank. It receives substantially all of its revenue from dividends from the Bank. These dividends are the principal source of funds to pay cash dividends on the Company's common stock. Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay to the Company. If the Bank is unable to pay dividends to the Company, the Company may not be able to pay cash dividends on its common stock. The earnings of the Bank have been the principal source of funds to pay cash dividends to shareholders. Over the long-term, cash dividends to shareholders are dependent upon earnings, as well as capital requirements, regulatory restraints and other factors affecting the Company and the Bank. Additional risks and uncertainties could have a negative effect on financial performance. Additional factors could have a negative effect on the financial performance of the Company and the Company’s common stock. Some of these factors are financial market conditions, changes in financial accounting and reporting standards, new litigation or changes in existing litigation, regulatory actions and losses. Risks Related to the Company ’ s Common Stock Investments in the Company ’ s common stock involve risk. The market price of the Company’s common stock may fluctuate significantly in response to a number of factors, includin ● The impact associated with the COVID-19 pandemic ● Variations in quarterly or annual operating results ● Changes in dividends per share ● Changes in interest rates ● New developments, laws or regulations in the banking industry ● Acquisitions or business combinations involving the Company or its competition ● Regulatory actions, including changes to regulatory capital levels, the components of regulatory capital and how regulatory capital is calculated ● Volatility of stock market prices and volumes ● Changes in market valuations of similar companies ● New litigation or contingencies or changes in existing litigation or contingencies ● Changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies ● Rumors or erroneous information ● Credit and capital availability ● Issuance of additional shares of common stock or other debt or equity securities of the Company The Company's common stock, while publicly traded, has less liquidity than the average liquidity of stocks listed on the Nasdaq Stock Market. The Company's common stock is listed for trading on the Nasdaq Capital Market.  However, the Company's common stock has less liquidity than the average liquidity for companies listed in the Nasdaq Stock Market.  The public trading market for the Company's common stock depends on a marketplace of willing buyers and sellers at any given time, which in turn depends on factors outside of the Company's control, including general economic and market conditions and the decisions of individual investors.  The limited market for the Company's common stock may affect a shareholder's ability to sell their shares at any given time, and the sale of a large number of shares at one time could temporarily adversely affect the market price of our common stock. The Company's common stock is not insured by any government entity. The Company's common stock is not insured by the FDIC or any other government entity.  Investment in the Company's common stock is subject to risk and potential loss. A shareholder's ownership of common stock may be diluted if the Company issues additional shares of common stock in the future. The Company's articles of incorporation authorize the Company's Board of Directors to issue additional shares of common stock or preferred stock without shareholder approval.  To the extent the Company issues additional shares of common stock or preferred stock, or issues options or warrants permitting the holder to purchase or acquire common stock in the future and such warrants or options are exercised, the Company's shareholders may experience dilution in their ownership of the Company's common stock.  Holders of the Company's common stock do not have any preemptive or similar rights to purchase a pro rata share of any additional shares offered or issued by the Company. 16 The value of the Company's common stock may be adversely affected if the Company issues debt and equity securities that are senior to the Company's common stock in liquidation or as to distributions. The Company may increase its capital by issuing debt or equity securities or by entering into debt or debt-like financing.  This may include the issuance of common stock, preferred stock, senior notes, or subordinated notes.  Upon any liquidation of the Company, the Company's lenders and holders of its debt securities would be entitled to distribution of the Company's available assets before distributions to the holders of the Company's common stock, and holders of preferred stock may be granted rights to similarly receive a distribution upon liquidation prior to distribution to holders of the Company's common stock.  The Company cannot predict the amount, timing or nature of any future debt financings or stock offerings, and the decision of whether to incur debt or issue securities will depend on market conditions and other factors beyond the Company's control.  Future offerings could dilute a shareholder's interests in the Company or reduce the per-share value of the Company's common stock. The Company's articles of incorporation and bylaws, and certain provisions of Michigan law, contain provisions that could make a takeover effort more difficult. The Michigan Business Corporation Act, and the Company's articles of incorporation and bylaws, include provisions intended to protect shareholders and prohibit, discourage, or delay certain types of hostile takeover activities.  In addition, federal law requires the Federal Reserve Board's prior approval for acquisition of "control" of a bank holding company such as the Company, including acquisition of 10% or more of the Company's outstanding securities by any person not defined as a company under the Bank Holding Company Act of 1956, as amended (the "BHC Act").  These provisions and requirements could discourage potential acquisition proposals, delay or prevent a change in control, diminish the opportunities for a shareholder to participate in tender offers, prevent transactions in which our shareholders might otherwise receive a premium for their shares, or limit the ability for our shareholders to approve transactions that they may believe to be in their best interests. An entity or group holding a certain percentage of the Company's outstanding securities could become subject to regulation as a "bank holding company" or may be required to obtain prior approval of the Federal Reserve Board. Any bank holding company or foreign bank with a presence in the United States may be required to obtain approval of the Federal Reserve Board under the BHC Act to acquire or retain 5% or more of the Company's outstanding securities.  Further, if any entity (including a "group" comprised of individual persons) owns or controls the power to vote 25% or more of the Company's outstanding securities, or 5% or more of the outstanding securities if the entity otherwise exercises a "controlling influence" over the Company, the entity may become subject to regulation as a "bank holding company" under the BHC Act.  An entity that is subject to regulation as a bank holding company would be subject to regulatory and statutory obligations and restrictions, and could be required to divest all or a portion of the entity's investment in the Company's securities or in other investments that are not permitted for a bank holding company. Item 1B. Unresolved Staff Comments None. Item 2. Properties The Company’s headquarters are located at 109 East Division, Sparta, Michigan 49345. The headquarters location is owned by the Company and is not subject to any mortgage. 32 of the Company’s 36 locations are designed for use and operation as a bank, are well maintained, and are suitable for current operations. The remaining Four locations are comprised of three loan offices and a wealth management center. Banking offices generally range in size from 1,200 to 3,200 square feet, based on the location and number of employees located at the facility. All of our banking offices are owned by the Bank except for 4 that are leased under various operating lease agreements.  The Company’s management believes all offices are adequately covered by property insurance. Item 3. Legal Proceedings As of December 31, 2021, there were no significant pending legal proceedings to which the Company or the Bank is a party or to which any of their properties were subject, except for legal proceedings arising in the ordinary course of business. In the opinion of management, pending legal proceedings will not have a material adverse effect on the consolidated financial condition of the Company. Item 4. Mine Safety Disclosures Not applicable. 17 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Stock Information The Company’s common stock is traded on the NASDAQ Capital Market under the symbol COFS. As of February 28, 2022, there were approximately 1,167 owners of record and approximately 1,050 beneficial owners of our common stock. The following table summarizes the quarterly cash dividends declared per share of common stock during 2021 and 2020: 2021 2020 First Quarter $ 0.22 $ 0.20 Second Quarter 0.22 0.20 Third Quarter 0.25 0.20 Fourth Quarter 0.25 0.22 Total $ 0.94 $ 0.82 ChoiceOne’s principal source of funds to pay cash dividends is the earnings and dividends paid by the Bank. The Bank is restricted in its ability to pay cash dividends under current banking regulations. See Note 20 to the consolidated financial statements for a description of these restrictions. Based on information presently available, management expects ChoiceOne to declare and pay regular quarterly cash dividends in 2021, although the amount of the quarterly dividends will be dependent on market conditions and ChoiceOne’s requirements for cash and capital, among other things. Information regarding the Company’s equity compensation plans may be found in Item 12 of this report and is here incorporated by reference. ISSUER PURCHASES OF EQUITY SECURITIES ChoiceOne repurchased approximately 85,000 shares for $2.2 million, or a weighted average cost per share of $25.78, during the fourth quarter of 2021. ChoiceOne repurchased approximately 309,000 shares for $7.8 million, or a weighted average cost per share of $25.17 during the year ended December 31, 2021. Total Number Maximum of Shares Number of Total Purchased as Shares that Number Average Part of a May Yet be of Shares Price Paid Publicly Purchased Period Purchased per Share Announced Plan Under the Plan October 1 - October 31, 2021 Employee Transactions - $ - - Repurchase Plan 20,840 $ 24.94 20,840 146,333 November 1 - November 30, 2021 Employee Transactions - $ - - Repurchase Plan 37,715 $ 26.22 37,715 108,618 December 1 - December 31, 2021 Employee Transactions - $ - - Repurchase Plan 27,778 $ 25.79 27,778 80,840 As of December 31, 2021, there are approximately 81,000 shares remaining that may yet be purchased under approved plans. The repurchase plan was adopted and announced in April 2021. There was no stated expiration date. The plan authorized the repurchase of up to 390,114 shares, representing 5% of the total outstanding shares of common stock as of the date the plan was adopted. Item 6. Reserved 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (“ChoiceOne” or the “Company”), and its wholly-owned subsidiaries. This discussion should be read in conjunction with the consolidated financial statements and related footnotes. We have omitted discussion of 2020 results where it would be redundant to the discussion previously included in Part II, Item 7 of our 2020 Annual Report on Form 10-K. Selected Financial Data (Dollars in thousands, except per share data) 2021 2020 2019 For the year Net interest income $ 60,641 $ 51,071 $ 27,773 Provision for loan losses 416 4,000 - Noninterest income 19,194 22,698 9,168 Noninterest expense 52,921 50,884 28,476 Income before income taxes 26,498 18,885 8,465 Income tax expense 4,456 3,272 1,294 Net income 22,042 15,613 7,171 Cash dividends declared 7,200 6,174 5,806 Per share * Basic earnings $ 2.87 $ 2.08 $ 1.58 Diluted earnings 2.86 2.07 1.58 Cash dividends declared 0.94 0.82 1.40 Shareholders' equity (at year end) 29.52 29.15 26.52 Average for the year Securities $ 869,788 $ 388,797 $ 210,492 Gross loans 1,040,430 1,014,959 534,646 Deposits 1,905,629 1,421,168 710,419 Borrowings 5,465 16,712 21,270 Subordinated debt 12,841 1,532 - Shareholders' equity 225,120 214,591 110,610 Assets 2,156,774 1,654,873 845,851 At year end Securities $ 1,116,265 $ 585,687 $ 348,888 Gross loans 1,068,831 1,117,798 856,191 Deposits 2,052,294 1,674,578 1,154,602 Borrowings 50,000 9,327 33,198 Subordinated debt 35,017 3,089 - Shareholders' equity 221,669 227,268 192,139 Assets 2,366,682 1,919,342 1,386,128 Selected financial ratios Return on average assets 1.02 % 0.94 % 0.85 % Return on average shareholders' equity 9.79 7.28 6.48 Cash dividend payout as a percentage of net income 32.67 39.54 80.97 Shareholders' equity to assets (at year end) 9.37 11.84 13.86 Note - 2019 financial data includes the impact of the merger with County, which was effective as of October 1, 2019, and 2020 financial data includes the impact of the merger with Community Shores, which was effective July 1, 2020. 19 Explanatory Note On July 1, 2020, ChoiceOne completed the merger of Community Shores Bank Corporation ("Community Shores") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2020 and December 31, 2021 include the impact of the merger, which was effective as of July 1, 2020. On October 1, 2019, ChoiceOne completed the merger of County Bank Corp. ("County") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2019, December 31, 2020, and December 31, 2021 include the impact of the merger, which was effective as of October 1, 2019. For additional details regarding the mergers with Community Shores and County, see Note 21 (Business Combinations) of the Notes to the Consolidated Financial Statements included in Item 8 of this report. RESULTS OF OPERATIONS Summary ChoiceOne's net income for 2021 was $22.0 million, compared to $15.6 million in 2020 .  Diluted earnings per share was $2.86 during in the twelve months ended December 31, 2021, compared to $2.07 per share in the twelve months ended December 31, 2020.  Net income for the year ended December 31, 2020, excluding $2.7 million of tax-effected merger expenses, was $18.3 million or $2.43 per diluted share. Total assets grew to $2.4 billion as of December 31, 2021 compared to $1.9 billion as of December 31, 2020 .  The increase was related to organic deposit growth of $ 377.7 million in the twelve months ended December 31, 2021.  This growth was partly due to how individuals and businesses have managed funds received under the Coronavirus Aid, Relief and Economic Security ("CARES") Act.  In an effort to deploy deposit growth, ChoiceOne grew its securities portfolio $530.6 million in the year ended December 31, 2021.  During the twelve months ended December 31, 2021, $192.5 million of loans under the Paycheck Protection Program ("PPP") were forgiven resulting in $5.2 million of fee income.  This growth in the securities portfolio coupled with PPP fees helped total interest income for 2021 to grow $8.9 million compared to 2020. 2021 interest income on loans included accretion income related to loans acquired from the mergers with County Bank Corp. and Community Shores Bank Corporation in the amount of $1.1 million.  The remaining credit mark on these acquired loans totaled $6.8 million as of December 31, 2021.  Despite the large increase in deposit balances, interest cost of deposits decreased by $873,000 in 2021 compared to 2020. In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031.  ChoiceOne used a portion of net proceeds from the private placement to redeem senior debt, fund common stock repurchases, and support bank-level capital ratios. Total noninterest income declined $3.5 million in the twelve months ended December 31, 2021, compared to the twelve months ended December 31, 2020.  Total noninterest income in 2020 was bolstered by heightened levels of refinancing activity within ChoiceOne's mortgage portfolio, with gains on sales of loans $3.7 million higher than in 2021.  Customer service charges increased $1.4 million in the twelve months ended December 31, 2021, compared to the twelve months ended December 31, 2020.  2020 service charges were depressed by stay-at-home orders during the COVID 19 pandemic.  2021 service charges also included the effect from the merger with Community Shores, which closed on July 1, 2020. Total noninterest expense increased $2.0 million in the year ended December 31, 2021, compared to the year ended December 31, 2020.  Much of the increase in 2021 was caused by the increase in scale related to the merger with Community Shores. 20 The Coronavirus (COVID-19) Outbreak Consistent with federal banking agencies' “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus,” ChoiceOne is working with its borrowers affected by the COVID-19 pandemic. ChoiceOne granted deferrals on numerous loans to borrowers affected by the pandemic; however, as of June 30, 2021, all deferments had resumed payments in accordance with loan terms. In addition, ChoiceOne processed over $126 million in PPP loans in 2020 and acquired an additional $37 million in PPP loans in the merger with Community Shores. ChoiceOne originated an additional $89.1 million in PPP loans in 2021. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. PPP loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven in whole or in part. Payments are deferred until either the date on which the Small Business Administration ("SBA") remits the amount of forgiveness proceeds to the lender or the date that is ten months after the last day of the covered period if the borrower does not apply for forgiveness within that ten-month period. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. Upon SBA forgiveness, unrecognized fees are recognized into interest income.  During the year ended December 31, 2021, $192.5 million of PPP loans were forgiven resulting in $5.2 million of fee income compared to $23.4 million of PPP loans forgiven resulting in $3.0 million of fee income in 2020. $33.1 million in PPP loans and $1.2 million in deferred PPP fee income remains outstanding as of December 31, 2021.  Management expects the remaining PPP loans to be forgiven in the first half of 2022. Dividends Cash dividends of $7.2 million or $0.94 per common share were declared in 2021 compared to $6.2 million or $0.82 per common share were declared in 2020.  The dividend yield for ChoiceOne’s common stock was 3.55% as of the end of 2021, compared to 2.66% as of the end of 2020. The cash dividend payout as a percentage of net income was 33% as of December 31, 2021, compared to 40% as of December 31, 2020. 21 Table 1 – Average Balances and Tax-Equivalent Interest Rates Year Ended December 31, 2021 2020 2019 (Dollars in thousands) Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate Assets: Loans (1) (3)(4)(5) $ 1,040,430 $ 48,672 4.68 % $ 1,014,959 $ 46,893 4.62 % $ 534,646 $ 26,791 5.01 % Taxable securities (2) 599,902 10,260 1.71 276,085 5,891 2.13 152,094 3,955 2.60 Nontaxable securities (1) 269,886 7,098 2.63 112,712 3,402 3.02 58,398 1,867 3.20 Other 68,879 84 0.12 71,417 266 0.37 14,992 268 1.79 Interest-earning assets 1,979,097 66,114 3.34 1,475,173 56,452 3.83 760,130 32,881 4.33 Noninterest-earning assets 177,677 179,699 85,721 Total assets $ 2,156,774 $ 1,654,873 $ 845,851 Liabilities and Shareholders' Equity: Interest-bearing demand deposits $ 791,886 $ 1,797 0.23 % $ 571,693 $ 1,832 0.32 % $ 278,444 $ 1,559 0.56 % Savings deposits 398,969 551 0.14 267,217 300 0.11 109,028 79 0.07 Certificates of deposit 186,898 957 0.51 183,836 2,046 1.11 136,537 2,550 1.87 Borrowings 5,465 101 1.86 16,712 327 1.96 21,269 512 2.41 Subordinated debentures 12,841 571 4.45 1,532 139 9.07 - - 0.00 Interest-bearing liabilities 1,396,059 3,977 0.28 1,040,990 4,644 0.45 545,278 4,700 0.86 Demand deposits 527,876 398,422 186,411 Other noninterest-bearing liabilities 7,719 870 3,552 Total liabilities 1,931,654 1,440,282 735,241 Shareholders' equity 225,120 214,591 110,610 Total liabilities and shareholders' equity $ 2,156,774 $ 1,654,873 $ 845,851 Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 62,137 $ 51,808 $ 28,181 Net interest margin (tax-equivalent basis) (Non-GAAP) (1) 3.14 % 3.51 % 3.71 % Reconciliation to Reported Net Interest Income Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 62,137 $ 51,808 $ 28,181 Adjustment for taxable equivalent interest (1,513 ) (737 ) (408 ) Net interest income (GAAP) $ 60,624 $ 51,071 $ 27,773 Net interest margin (GAAP) 3.08 % 3.38 % 3.47 % (1) Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%.  The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry. These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities. (2) Interest on taxable securities includes dividends on Federal Home Loan Bank and Federal Reserve Bank stock. (3) Loans include both loans to other financial institutions and loans held for sale. (4) Non-accruing loan balances are included in the balance of average loans. (5) Interest on loans included net origination fees and PPP fees of approximately $7,232,000, $5,236,000, and $866,000 in 2021, 2020, and 2019, respectively. 22 Table 2 – Changes in Tax-Equivalent Net Interest Income Year Ended December 31, (Dollars in thousands) 2021 Over 2020 2020 Over 2019 Total Volume Rate Total Volume Rate Increase (decrease) in interest income (1) Loans (2) $ 1,779 $ 1,187 $ 592 $ 20,102 $ 22,336 $ (2,234 ) Taxable securities 4,369 5,737 (1,368 ) 1,936 2,749 (813 ) Nontaxable securities (2) 3,696 4,185 (489 ) 1,535 1,647 (112 ) Other (182 ) (9 ) (173 ) (2 ) 349 (351 ) Net change in interest income 9,662 11,099 (1,437 ) 23,571 27,081 (3,510 ) Increase (decrease) in interest expense (1) Interest-bearing demand deposits (35 ) 588 (623 ) 273 1,143 (870 ) Savings deposits 251 171 80 221 156 65 Certificates of deposit (1,089 ) 34 (1,123 ) (504 ) 721 (1,225 ) Borrowings (226 ) (210 ) (16 ) (235 ) (230 ) (5 ) Subordinated debentures 432 1,516 (37 ) 189 183 6 Net change in interest expense (667 ) 2,099 (1,719 ) (56 ) 1,973 (2,029 ) Net change in tax-equivalent net interest income $ 10,329 $ 9,001 $ 282 $ 23,627 $ 25,108 $ (1,481 ) (1) The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s interest rate. The rate variance is computed as the change in interest rate multiplied by the previous year’s volume (average balance). The change in interest due to both volume and rate has been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. (2) Interest on tax-exempt securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21% for 2021, 2020, and 2019. Net I nterest Income The presentation of net interest income on a tax-equivalent basis is not in accordance with generally accepted accounting principles (“GAAP”), but is customary in the banking industry. This non-GAAP measure ensures comparability of net interest income arising from both taxable and tax-exempt loans and investment securities. The adjustments to determine net interest income on a tax-equivalent basis were $1.5 million and $737,000 for the years ended 2021 and 2020, respectively. These adjustments were computed using a 21% federal income tax rate. On March 3, 2020 the Federal Reserve Open Market Committee lowered the federal funds rate by 50 basis points which was followed by a reduction of 100 basis points on March 15, 2020. Operating in an environment with lower interest rates has had a negative effect on both ChoiceOne’s interest income and interest spread. ChoiceOne management continues to monitor rates and their effect on income as part of the Asset/Liability Risk Committee to determine what strategic decisions will need to be made in both higher and lower rate environments.  No changes were made to the federal funds rate during 2021. Tax-equivalent net interest income increased $10.3 million in 2021 compared to 2020 . The increase was attributed to an increase of $503.9 million in average interest-earning assets.  The average balance of loans increased $25.5 million in 2021 compared to 2020 .  This is due to loan growth excluding loans held for sale, loans to other financial institutions, and PPP loans during that period of $52.1 million offset by a decline in the average balance of PPP loans held during 2021 compared to 2020.  The average rate earned on loans also increased by 6 basis points in 2021 compared to 2020 as a result of the recognition of $5.2 million in PPP fees earned. Tax-equivalent interest income on loans increased $1.8 million in 2021 compared to the prior year. The average balance of total securities grew $481.0 million in 2021 compared to the prior year as ChoiceOne made efforts to deploy deposit growth into earning assets.  The average balance growth offset by a 39 basis point decline in the average rate earned on securities caused interest income from securities to grow $8.1 million in 2021 compared to the prior year. A decline of $2.5 million in average balance in other interest-earning assets in 2021 compared to 2020, coupled with a 25 basis point decline in the rate earned, caused interest income to decline by $182,000. Despite large increases in deposit balances, a significant decline in overall market interest rates in 2021 compared to 2020 caused the interest paid on interest-bearing liabilities to decline by $667,000. The average balance of interest-bearing demand deposits and savings deposits increased $351.9 million in 2021 compared to 2020 . The effect of this increase, offset by a 6 basis point decline in the average rate paid, caused interest expense to be $216,000 higher in 2021 than in the prior year. The average balance of certificates of deposit was $3.1 million higher in 2021 than in 2020 . Growth in the average balance was more than offset by a decline in average rate paid of 60 basis points which caused interest expense to decline by $1.1 million. ChoiceOne’s tax-equivalent net interest income margin was 3.14% in 2021 and 3.51% in 2020 . The decrease in the net interest income margin resulted from a lower rate environment and an asset mix with a higher percentage of securities to total assets. 23 Provision and Allowance For Loan Losses Table 3 – Provision and Allowance For Loan Losses (Dollars in thousands) 2021 2020 2019 Allowance for loan losses at beginning of year $ 7,593 $ 4,057 $ 4,673 Charge-offs: Agricultural - 15 - Commercial and industrial 195 148 83 Real estate - commercial 111 254 - Real estate - construction - - 25 Real estate - residential - 8 292 Consumer 370 329 589 Total 676 754 989 Recoveri Agricultural - - 65 Commercial and industrial 86 57 22 Real estate - commercial 48 10 - Real estate - construction - - 124 Real estate - residential 7 19 136 Consumer 214 204 26 Total 355 290 373 Net charge-offs (recoveries) 321 464 616 Provision for loan losses 416 4,000 - Allowance for loan losses at end of year $ 7,688 $ 7,593 $ 4,057 Allowance for loan losses as a percentage o Total loans as of year end 0.76 % 0.71 % 0.51 % Nonaccrual loans, accrual loans past due 90 days or more and troubled debt restructurings 139 % 92 % 63 % Ratio of net charge-offs during the period to average loans outstanding during the period 0.03 % 0.05 % 0.12 % Loan recoveries as a percentage of prior year's charge-offs 47 % 29 % 102 % 24 The provision for loan losses was $416,000 in 2021, compared to $4.0 million in the prior year. The provision in 2020 was impacted by the economic impact of the COVID-19 pandemic on ChoiceOne's local market areas and the national economy.  The provision in 2021 was deemed prudent based on our assessment of the probable estimated losses inherent in the loan portfolio. Our methodology for measuring the appropriate level of allowance for loan losses and related provision for loan losses involves specific allocations for loans considered impaired, and general allocations for homogeneous loans based on historical loss experience. Loans classified as impaired loans declined by $2.4 million during 2021. The specific allowance for loan losses for impaired loans increased $72,000 during 2021 as the loans being evaluated had a higher risk of loss based on management's judgement than impaired loans at December 31, 2020. Loans that were collectively analyzed for impairment decreased by $45.5 million in 2021 as a result of forgiveness of PPP loans of $192.5 million offset by loans excluding PPP, loans to other financial institutions, and loans held for sale, increasing by $52.1 million and PPP originations of $89.1 million.  As PPP loans are 100% government guaranteed and carry no allowance,  the net decrease in PPP loans had no impact on the allowance for loan losses.  The general allocation for loan losses not considered impaired increased by $23,000 during 2021. The determination of our loss factors is based, in part, upon our actual loss history adjusted for significant qualitative factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date. ChoiceOne uses a rolling 20 quarter actual net charge-off history as the base for the computation. Nonperforming loans were $5.5 million as of December 31, 2021 compared to $8.2 million as of December 31, 2020. The allowance for loan losses was 0.76% of total loans at December 31, 2021, compared to 0.71% at December 31, 2020. Loans acquired in the mergers with County and Community Shores were recorded at fair value and as a result do not have an allowance for loan losses allocated to them unless credit deteriorates subsequent to acquisition. ChoiceOne has $6.8 million in credit mark remaining on loans acquired in the mergers. If the credit mark associated with the loans acquired in the mergers were added to the allowance for loan losses, the total allowance for loan losses would have represented 1.37% of total loans excluding loans held for sale at December 31, 2021 and 1.55% at December 31, 2020. Net charge-offs were $321,000 in 2021 compared to net charge-offs of $464,000 during the same period in 2020.  Net charge-offs on an annualized basis as a percentage of average loans were 0.03% in 2021 compared to 0.05% and 0.12% in 2020. Management is aware that the economic climate in Michigan will continue to affect business and individual borrowers.  Management believes that the COVID-19 pandemic continue to have an impact in 2022 and, accordingly, has maintained a qualitative allocation related to the COVID-19 pandemic in evaluating its allowance for loan losses.  Management has worked and intends to continue to work with delinquent borrowers in an attempt to lessen the impact of the COVID-19 pandemic on ChoiceOne. ChoiceOne has allocated approximately $1.1 million of its allowance for loan losses at December 31, 2021 compared to $2.2 million at December 31, 2020, to borrowers falling into industry classification codes that management believes to be highly or moderately affected by the pandemic, as follows: Highly Affected Moderately Affected Accommodation Ambulatory Health Care Services Amusement, Gambling, and Recreation Industries Educational Services Food Services and Drinking Places Merchant Wholesalers, Durable Goods Performing Arts, Spectator Sports, and Related Industries Merchant Wholesalers, Nondurable Goods Rental and Leasing Services Miscellaneous Store Retailers Scenic and Sightseeing Transportation Motion Picture and Sound Recording Industries Transit and Ground Passenger Transportation Real Estate Loans highly affected and moderately affected based on their commercial industry category have been allocated an additional 20 basis points and 10 basis points, respectively. ChoiceOne has also allocated 10 basis points to all retail loan categories. It is noted that this allowance amount is in addition to the regularly calculated allowance based on risk rating and qualitative factors. These allocations have declined from their highest levels at December 31, 2020, as ChoiceOne has seen improvements in customer, industry, and economic conditions related to the effects of the pandemic. ChoiceOne will continue to monitor concentrations as part of its analysis on an ongoing basis. Management will continue to monitor charge-offs, changes in the level of nonperforming loans, changes within the composition of the loan portfolio and the impact of the COVID-19 pandemic, and it will adjust the provision and allowance for loan losses as determined to be necessary. 25 Noninterest Income Total noninterest income declined $3.5 million in 2021 compared to 2020.  Total noninterest income in 2020 was bolstered by heightened levels of refinancing activity within ChoiceOne's mortgage portfolio, with gains on sales of loans $3.7 million higher than in 2021.  Customer service charges increased $1.4 million in 2021 compared to the prior year.  Prior year service charges were depressed by stay-at-home orders during the COVID-19 pandemic.  Current year service charges also included the effect from the merger with Community Shores, which closed on July 1, 2020.  The stock market dipped sharply in March 2020 related to the COVID-19 pandemic, which affected securities held by ChoiceOne. Since that time ChoiceOne has seen the value of equity investments held climb to pre-pandemic levels. The change in the market value of equity securities was $634,000 higher in 2021, when compared to the prior year. It is also noted that ChoiceOne performed a restructuring of its security portfolio in the second quarter of 2020, which provided $1.3 million of additional noninterest income in 2020 compared to 2021. Noninterest Expense Total noninterest expense increased $2.0 million in the year ended December 31, 2021, compared to the year ended December 31, 2020.  Much of the increase in 2021 was caused by the increase in scale related to the merger with Community Shores.  During 2021, ChoiceOne hired six experienced commercial lenders, opened a loan production office in Wyoming, Michigan, and added four experienced members to the wealth management team.  These increases were offset by declines in professional fees of $707,000, data processing of $576,000, and supplies and postage of $230,000.  These reductions in expenses in 2021 are related to synergies from the merger with Community Shores and fees incurred in 2020 related to the merger with Community Shores. Inco me Taxes Income tax expense was $1.2 million higher in 2021 than in 2020 . The increase is related to additional pre-tax income offset by the effect of merger-related expenses in 2020.  The effective tax rate was 17% in 2021 and 2020 . Financial Condition Summary Total assets grew $447.3 million in the twelve months ended December 31, 2021, while deposit growth during the twelve months ended December 31, 2021 was $377.7 million.  Despite the large increase in deposits, ChoiceOne has been able to maintain low deposit costs; interest expense from deposits decreased $873,000 during the year ended December 31, 2021 compared to the year ended December 31, 2020.  Excluding PPP loans, loans held for sale, and loans held at other financial institutions, ChoiceOne grew loans by $52.1 million during 2021.  Management expects the remaining PPP loans to be forgiven in the first half of 2022. Securities The Company’s securities balances as of December 31 were as follows: (Dollars in thousands) 2021 2020 Equity securities $ 8,492 $ 2,896 Available for Sale Securities U.S. Government and federal agency $ 2,008 $ 2,051 U.S. Treasury notes and bonds 91,979 2,056 State and municipal 534,847 320,368 Mortgage-backed 433,115 246,723 Corporate 20,642 3,589 Asset-backed securities 16,294 - Total $ 1,098,885 $ 574,787 Total investment securities increased $530.6 million from December 31, 2020 to December 31, 2021 .  Approximately $637.9 million of securities were purchased in 2021 . Securities totaling $14.6 million were called or matured in 2021 . Principal payments for municipal and mortgage-backed securities totaling $39.6 million were received during 2021 . Approximately $29.7 million of securities were sold during 2021 for a net loss of $40,000.  The Bank’s Investment Committee continues to monitor the portfolio and purchases securities as it considers prudent. Equity securities included a money market preferred security ("MMP") of $1.0 million and common stock of $7.5 million as of December 31, 2021 . As of December 31, 2020 , equity securities included an MMP of $1.0 million and common stock of $1.9 million. 26 Loans The Company’s loan portfolio as of December 31 was as follows: (Dollars in thousands) 2021 2020 Agricultural $ 64,819 $ 53,735 Commercial and industrial 203,024 303,527 Consumer 35,174 34,014 Real estate - commercial 525,884 469,247 Real estate - construction 19,066 16,639 Real estate - residential 168,881 192,506 Loans, gross $ 1,016,848 $ 1,069,668 The loan portfolio (excluding loans held for sale and loans to other financial institutions) decreased $52.8 million from December 31, 2020 to December 31, 2021.  If PPP loans are also excluded the portfolio grew by $52.1 million during the same time period. The Bank entered into an agreement during 2018 to provide a line of credit to facilitate funding of residential mortgage loan originations at other financial institutions. The loans are short-term in nature and are designed to provide funding for the time period between the loan origination and its subsequent sale in the secondary market. The balance of the lines of credit held by the Bank was $42.6 million as of December 31, 2021 compared to $35.2 million as of December 31, 2020. Information regarding impaired loans can be found in Note 3 to the consolidated financial statements included in this report. In addition to its review of the loan portfolio for impaired loans, management also monitors various nonperforming loans. Nonperforming loans are comprised of (1) loans accounted for on a nonaccrual basis; (2) loans, not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments; and (3) loans, not included in nonaccrual or past due 90 days or more, which are considered troubled debt restructurings. Troubled debt restructurings consist of loans where the terms have been modified to assist the borrowers in making their payments. The modifications can include capitalization of interest onto the principal balance, reduction in interest rate, and extension of the loan term. The balances of these nonperforming loans as of December 31 were as follows: (Dollars in thousands) 2021 2020 Loans accounted for on a nonaccrual basis $ 1,727 $ 6,707 Loans contractually past due 90 days or more as to principal or interest payments - - Loans considered troubled debt restructurings which are not included above 3,816 1,537 Total $ 5,543 $ 8,244 Nonaccrual loans included $313,000 in agricultural loans, $285,000 in commercial and industrial loans, $279,000 in commercial real estate loans, and $850,000 in residential real estate loans as of December 31, 2021.  Nonaccrual loans included $348,000 in agricultural loans, $1.8 million in commercial and industrial loans, $8,000 in consumer loans, $3.1 million in commercial real estate loans, $80,000 in construction real estate loans, and $1.4 million in residential real estate loans as of December 31, 2020.  Loans considered troubled debt restructurings which were not on a nonaccrual basis and were not 90 days or more past due as to principal or interest payments consisted of $1.8 million in agricultural loans, $73,000 in commercial and industrial loans, 601,000 in commercial real estate loans and $1.3 million in residential real estate loans at December 31, 2021, compared to $196,000 in commercial real estate loans and $1.3 million in residential real estate loans at December 31, 2020. The federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” on March 22, 2020 and subsequently issued a revised statement on April 7, 2020. These statements encourage financial institutions to work constructively with borrowers affected by COVID-19, and provide that short-term modifications to loans made on a good faith basis to borrowers who were current as of the implementation date of the statements are not considered TDRs. Further, Section 4013 of the CARES Act states that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs.  As of December 31, 2020, ChoiceOne had granted deferments on approximately 750 loans with loan balances totaling $148 million which, in reliance on the statements of federal banking agencies and the CARES Act, are not reflected as TDRs in this report.  All deferments had resumed payments in accordance with loan terms as of June 30, 2021. Management also maintains a list of loans that are not classified as nonperforming loans but where some concern exists as to the borrowers’ abilities to comply with the original loan terms. There were no loans fitting this description as of December 31, 2021 , compared to $26.1 million as of December 31, 2020 . 27 Deposits and Other Funding Sources The Company’s deposit balances as of December 31 were as follows: (Dollars in thousands) 2021 2020 Noninterest-bearing demand deposits $ 560,931 $ 477,654 Interest-bearing demand deposits 665,482 471,346 Money market deposits 218,211 191,681 Savings deposits 425,626 337,332 Local certificates of deposit 182,044 196,565 Brokered certificates of deposit - - Total deposits $ 2,052,294 $ 1,674,578 Total deposits increased $377.7 million from December 31, 2020 to December 31, 2021 .  Much of the growth was due to the various stimulus programs offered as a result of the COVID-19 pandemic. As of December 31, 2021, borrowings consisted of Federal Home Loan Bank ("FHLB") advances of $50.0 million.  Total borrowings increased in 2021 as management invested in earning assets.  FHLB advances were secured by agricultural loans and residential real estate loans with a carrying value of approximately $127.5 million at December 31, 2021. Approximately $69.3 million of additional FHLB advances were available as of December 31, 2021 based on the collateral pledged by the Bank. In 2022, management will continue to focus its marketing efforts toward growth in local deposits. If local deposit growth is insufficient to support asset growth, management believes that advances from the FHLB and brokered certificates of deposit can address corresponding funding needs. In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. ChoiceOne used a portion of net proceeds from the private placement to redeem senior debt, fund common stock repurchases, and support bank-level capital ratios. ChoiceOne also holds $3.1 million in subordinated debentures issued in connection with a $4.5 million trust preferred securities offering, which were obtained in the merger with Community Shores, offset by the merger mark-to-market adjustment. Shareholders’ Equity Total shareholders' equity declined $5.6 million in 2021. Accumulated other comprehensive income declined $13.6 million in 2021 as a result of market value declines in ChoiceOne’s available for sale securities. The change was caused by increases in certain general market interest rates since the beginning of 2021. The reduction in common stock and paid in capital resulted from ChoiceOne's repurchase of approximately 309,000 shares for $7.8 million, or a weighted average all-in cost per share of $25.17, during 2021. This was part of the common stock repurchase program announced in April 2021 which authorized repurchases of up to 390,114 shares, representing 5% of the total outstanding shares of common stock as of the date the plan was adopted. This program replaced and superseded all prior repurchase programs for ChoiceOne. Note 20 to the consolidated financial statements presents regulatory cap ital information for ChoiceOne and the Bank at the end of 2021 and 2020. Management will monitor these capital ratios during 2022 as they relate to asset growth and earnings retention. ChoiceOne’s Board of Directors and management do not plan to allow capital to decrease below those levels necessary to be considered "well capitalized" by regulatory guidelines. At December 31, 2021, the Bank was categorized as "well-capitalized" under the Basel III framework. 28 Table 4 – Contractual Obligations The following table discloses information regarding the maturity of ChoiceOne’s contractual obligations at December 31, 2021: Payment Due by Period Less More than 1 - 3 3 - 5 than (Dollars in thousands) Total 1 year Years Years 5 Years Time deposits $ 182,044 $ 149,991 $ 25,170 $ 6,491 $ 392 Borrowings 50,000 50,000 - - - Cumulative Preferred Securities 3,190 (101 ) (202 ) (202 ) 3,695 ChoiceOne Subordinated Debenture 31,827 (144 ) (288 ) (241 ) 32,500 Operating leases 657 221 284 152 - Other obligations 227 68 118 19 22 Total $ 267,945 $ 200,035 $ 25,082 $ 6,219 $ 36,609 Liquidity and Interest Rate Risk Net cash from operating activities was $37.7 million in 2021 compared to $8.5 million in 2020 . Net cash used in investing activities was $521.4 million in 2021 compared to cash used of $250.8 million in 2020 . The change was caused by higher net purchases of securities in 2021 compared to 2020 offset by higher loan payments due to PPP loan forgiveness than loan originations in 2021 .  Net cash flows from financing activities were a positive $436.0 million in 2021 compared to a positive $262.2 million in 2020 . The change was caused by more growth in deposits in 2021 and higher proceeds from borrowings and subordinated debt in 2021 compared to 2020 . ChoiceOne's primary market risk exposure occurs in the form of interest rate risk. Liquidity risk also can have an impact but to a lesser extent. ChoiceOne's business is transacted in U.S. dollars with no foreign exchange risk exposure. Agricultural loans comprise a relatively small portion of ChoiceOne's total assets. Management believes that ChoiceOne's exposure to changes in commodity prices is insignificant. Management believes that the current level of liquidity is sufficient to meet the Bank's normal operating needs. This belief is based upon the availability of deposits from both the local and national markets, maturities of securities, normal loan repayments, income retention, federal funds purchased, lines of credit from correspondent banks, and advances available from the FHLB. Liquidity risk deals with ChoiceOne's ability to meet its cash flow requirements. These requirements include depositors desiring to withdraw funds and borrowers seeking credit. Relatively short-term liquid funds exist in the form of lines of credit to purchase federal funds at correspondent banks. As of December 31, 2021 , the amount of federal funds available for purchase from the Bank's correspondent banks totaled approximately $134.5 million. ChoiceOne’s federal funds purchased balance was $0 as of December 31, 2021 and December 31, 2020 . The Bank also has a line of credit secured by ChoiceOne’s commercial loans with the Federal Reserve Bank of Chicago for $196.5 million, which is designated for nonrecurring short-term liquidity needs. Longer-term liquidity needs may be met through local deposit growth, maturities of securities, normal loan repayments, advances from the FHLB, brokered certificates of deposit, and income retention. Approximately $69.4 million of additional borrowing capacity was available from the FHLB based on agricultural real estate loans and residential real estate loans pledged as collateral at the end of 2021 . The acceptance of brokered certificates of deposit is not limited as long as the Bank is categorized as “well capitalized” under regulatory guidelines. 29 NON-GAAP FINANCIAL MEASURES This report contains references to net income excluding tax-effected merger-related expenses, which is a financial measure that is not defined in U.S. generally accepted accounting principles ("GAAP"). Management believes this non-GAAP financial measure provides additional information that is useful to investors in helping to understand the underlying financial performance of ChoiceOne. Non-GAAP financial measures have inherent limitations. Readers should be aware of these limitations and should be cautious with respect to the use of such measures. To compensate for these limitations, we use non-GAAP measures as comparative tools, together with GAAP measures, to assist in the evaluation of our operating performance or financial condition. Also, we ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and that they are computed in a manner intended to facilitate consistent period-to-period comparisons. ChoiceOne’s method of calculating these non-GAAP financial measures may differ from methods used by other companies. These non-GAAP financial measures should not be considered in isolation or as a substitute for those financial measures prepared in accordance with GAAP or in-effect regulatory requirements. NON-GAAP Reconciliation (Unaudited) The non-GAAP measures presented in the table below reflect the adjustments of the reported U.S. GAAP results for significant items that management does not believe are reflective of the Company's current and ongoing operations. Year Ended December 31, (In Thousands, Except Per Share Data) 2021 2020 Income before income tax $ 26,498 $ 18,885 Adjustment for pre-tax merger expenses - 3,219 Adjusted income before income tax 26,498 22,104 Income tax expense 4,456 3,272 Tax impact of adjustment for pre-tax merger expenses - 505 Adjusted income tax expense 4,456 3,777 Net income 22,042 15,613 Adjustment for pre-tax merger expenses, net of tax impact - 2,714 Adjusted net income $ 22,042 $ 18,327 Basic earnings per share $ 2.87 $ 2.08 Effect of merger expenses, net of tax impact - 0.36 Adjusted basic earnings per share $ 2.87 $ 2.44 Diluted earnings per share $ 2.86 $ 2.07 Effect of merger expenses, net of tax impact - 0.36 Adjusted diluted earnings per share $ 2.86 $ 2.43 30 Critical Accounting Policies And Estimates Management’s discussion and analysis of financial condition and results of operations as well as disclosures found elsewhere in this report are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the market value of securities, the amount of the allowance for loan losses, loan servicing rights, carrying value of goodwill, and income taxes. Actual results could differ from those estimates. Securities Debt securities available for sale may be sold prior to maturity due to changes in interest rates, prepayment risks, yield, availability of alternative investments, liquidity needs, credit rating changes, or other factors. Debt securities classified as available for sale are reported at their fair value with changes flowing through other comprehensive income. Declines in the fair value of securities below their cost that are considered to be “other than temporary” are recorded as losses in the income statement. In estimating whether a fair value decline is considered to be “other than temporary,” management considers the length of time and extent that the security’s fair value has been less than its carrying value, the financial condition and near-term prospects of the issuer, and the Bank’s ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. Market values for securities available for sale are obtained from outside sources and applied to individual securities within the portfolio. The difference between the amortized cost and the fair value of securities is recorded as a valuation adjustment and reported net of tax effect in other comprehensive income. Equity securities are reported at their fair value with changes in market value flowing through net income. Prior to 2018, equity securities were accounted for in a manner similar to available for sale debt securities. Allowance for Loan Losses The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses inherent in the consolidated loan portfolio. Management’s evaluation of the adequacy of the allowance for loan losses is an estimate based on reviews of individual loans, assessments of the impact of current economic conditions on the portfolio and historical loss experience of seasoned loan portfolios. Management believes the accounting estimate related to the allowance for loan losses is a “critical accounting estimate” because (1) the estimate is highly susceptible to change from period to period because of assumptions concerning the changes in the types and volumes of the portfolios and current economic conditions and (2) the impact of recognizing an impairment or loan loss could have a material effect on the Company’s assets reported on the balance sheet as well as its net income. Loan Servicing Rights Loan servicing rights represent the estimated value of servicing loans that are sold with servicing retained by ChoiceOne and are initially recorded at estimated fair value. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Management’s accounting treatment of loan servicing rights is estimated based on current prepayment speeds that are typically market driven. Management believes the accounting estimate related to loan servicing rights is a “critical accounting estimate” because (1) the estimate is highly susceptible to change from period to period because of significant changes within long-term interest rates affecting the prepayment speeds for current loans being serviced and (2) the impact of recognizing an impairment loss could have a material effect on ChoiceOne’s net income. Management has obtained a third-party valuation of its loan servicing rights to corroborate its current carrying value at the end of each reporting period. Goodwill Generally accepted accounting principles require that the fair values of the assets and liabilities of an acquired entity be recorded at their fair value on the date of acquisition. The fair values are determined using both internal computations and information obtained from outside parties when deemed necessary. The net difference between the price paid for the acquired company and the net value of its balance sheet is recorded as goodwill. Accounting principles also require that goodwill be evaluated for impairment on an annual basis or more frequently whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Under recently issued accounting pronouncements, ChoiceOne is permitted to first perform a qualitative assessment to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of equity is less than its carrying value. If the conclusion is that it is more likely than not that the fair value of equity is more than its carrying value, no further testing in the form of a quantitative assessment is necessary. If the conclusion is that it is more likely than not that the fair value of equity is less than its carrying value, then a two-step quantitative assessment test is performed to identify any potential goodwill impairment. Management hired a third party to perform a quantitative assessment of goodwill as of November 30, 2020.  The third party used an income approach to calculate cash flow based on excess capital above a required tangible equity to tangible assets ratio selected with consideration given to regulatory guidelines and the risk profile of ChoiceOne.  As a result of the income approach, no indication of goodwill impairment was noted.  The third party analysis also assessed the share price, book value, and financial results of ChoiceOne as compared to the previous year. Additionally, industry and market conditions were evaluated and compared, including the potential impact of COVID-19 on the ability of ChoiceOne’s borrowers to comply with loan terms. The third party also compared average values for recently closed bank merger and acquisition transactions to ChoiceOne's recently completed merger and acquisition transactions. In assessing the totality of the events and circumstances, management determined that it is more likely than not that the fair value of the Bank’s operations, from a qualitative perspective, exceeded the carrying value as of November 30, 2020 and there was no further quantitative assessment necessary. Management performed its annual qualitative assessment of goodwill as of June 30, 2021. In evaluating whether it is more likely than not that the fair value of ChoiceOne's operations was less than the carrying amount, management assessed the relevant events and circumstances such as the ones noted in ASC 350-20-35-3c. The analysis consisted of a review of ChoiceOne’s current and expected future financial performance, the potential impact of the COVID-19 pandemic on the ability of ChoiceOne’s borrowers to comply with loan terms, and the impact that reductions in both short-term and long-term interest rates have had and may continue to have on net interest margin and mortgage sales activity.  ChoiceOne’s stock price per share was less than its book value as of December 31, 2021. This indicated that goodwill may be impaired and resulted in management performing another qualitative goodwill impairment assessment as of the year ended December 31, 2021.  As a result of the analysis, management concluded that it was more-likely-than-not that the fair value of the reporting unit was greater than the carrying value.  This was evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In addition, revenue for the year ended December 31, 2021 reflected significant and continuing growth in ChoiceOne's interest income, as well as net Small Business Administration fees related to Paycheck Protection Program loans.  Based on the results of the qualitative analysis, management believed that a quantitative analysis was not necessary as of December 31, 2021. 31 Taxes Income taxes include both a current and deferred portion. Deferred tax assets and liabilities are recorded to account for differences in the timing of the recognition of revenues and expenses for financial reporting and tax purposes. Generally accepted accounting principles require that deferred tax assets be reviewed to determine whether a valuation allowance should be established using a “more likely than not” standard. Based on its review of ChoiceOne’s deferred tax assets as of December 31, 2021, management determined that no valuation allowance was necessary. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest rate risk is related to liquidity because each is affected by maturing assets and sources of funds. ChoiceOne’s Asset/Liability Management Committee (the "ALCO") attempts to stabilize the interest rate spread and avoid possible adverse effects when unusual or rapid changes in interest rates occur. The ALCO uses a simulation model to measure the Bank's interest rate risk. The model incorporates changes in interest rates on rate-sensitive assets and liabilities. The degree of rate sensitivity is affected by prepayment assumptions that exist in the assets and liabilities. One method the ALCO uses of measuring interest rate sensitivity is the ratio of rate-sensitive assets to rate-sensitive liabilities. An asset or liability is considered to be rate-sensitive if it matures or otherwise reprices within a given time frame. Table 5 documents the maturity or repricing schedule for ChoiceOne’s rate-sensitive assets and liabilities for selected time periods: Table 5 – Maturities and Repricing Schedule As of December 31, 2021 (Dollars in thousands) 0 - 3 3 - 12 1 - 5 Over Months Months Years 5 Years Total Assets Equity securities at fair value $ 8,492 $ - $ - $ - $ 8,492 Securities available for sale 88,300 53,738 218,381 738,466 1,098,885 Federal Home Loan Bank stock 3,824 - - - 3,824 Federal Reserve Bank stock - - - 5,064 5,064 Loans held for sale 9,351 - - - 9,351 Loans to other financial institutions 42,632 - - - 42,632 Loans 247,874 196,556 497,906 74,512 1,016,848 Cash surrender value of life insurance policies - - - 43,356 43,356 Rate-sensitive assets $ 400,473 $ 250,294 $ 716,287 $ 861,398 $ 2,228,452 Liabilities Interest-bearing demand deposits $ 665,482 $ - $ - $ - $ 665,482 Money market deposits 218,211 - - - 218,211 Savings deposits 425,626 - - - 425,626 Certificates of deposit 51,577 98,414 31,661 392 182,044 Borrowings 50,000 - - - 50,000 Subordinated debentures (61 ) (184 ) 31,568 3,694 35,017 Rate-sensitive liabilities $ 1,410,835 $ 98,230 $ 63,229 $ 4,086 $ 1,576,380 Rate-sensitive assets less rate-sensitive liabiliti Asset (liability) gap for the period $ (1,010,362 ) $ 152,064 $ 653,058 $ 857,312 $ 652,072 Cumulative asset (liability) gap $ (1,010,362 ) $ (858,298 ) $ (205,240 ) $ 652,072 Under this method, the ALCO measures interest rate sensitivity by focusing on the one-year repricing gap. ChoiceOne’s ratio of rate-sensitive assets to rate-sensitive liabilities that matured or repriced within a one-year time frame was 43% at December 31, 2021 , compared to 63% at December 31, 2020 . Table 5 above shows the entire balance of interest-bearing demand deposits, savings deposits, and money market deposits in the shortest repricing term. Although these categories have the ability to reprice immediately, management has some control over the actual timing or extent of the changes in interest rates on these liabilities. The ALCO plans to continue to monitor the ratio of rate-sensitive assets to rate-sensitive liabilities on a quarterly basis in 2022. As interest rates change, the ALCO will attempt to match its maturing assets with corresponding liabilities to maximize ChoiceOne’s net interest income. Another method the ALCO uses to monitor its interest rate sensitivity is to subject rate-sensitive assets and liabilities to interest rate shocks. At December 31, 2021 , management used a simulation model to subject its assets and liabilities up to an immediate 400 basis point increase. The maturities of loans and mortgage-backed securities were affected by certain prepayment assumptions. Maturities for interest-bearing core deposits were based on an estimate of the period over which they would be outstanding. The maturities of advances from the FHLB were based on their contractual maturity dates. In the case of variable rate assets and liabilities, repricing dates were used to determine their values. The simulation model measures the effect of immediate interest rate changes on both net interest income and shareholders' equity. 32 Table 6 provides an illustration of hypothetical interest rate changes as of December 31, 2021 and 2020: Table 6 – Sensitivity to Changes in Interest Rates 2021 Net Market (Dollars in thousands) Interest Percent Value of Percent Income Change Equity Change Change in Interest Rate 400 basis point rise $ 60,978 - % $ 345,361 -21 % 300 basis point rise 60,627 -1 % 383,202 -13 % 200 basis point rise 60,058 -1 % 416,435 -5 % 100 basis point rise 60,482 -1 % 437,975 - % Base rate scenario 60,970 - % 439,144 - % 100 basis point decline 59,132 -3 % 390,180 -11 % 200 basis point decline 57,503 -6 % 326,201 -26 % 300 basis point decline 56,502 -7 % 325,906 -26 % 400 basis point decline 56,264 -8 % 325,839 -26 % 2020 Net Market (Dollars in thousands) Interest Percent Value of Percent Income Change Equity Change Change in Interest Rate 400 basis point rise $ 57,184 8 % $ 394,977 5 % 300 basis point rise 55,380 5 % 404,998 8 % 200 basis point rise 54,106 3 % 405,238 8 % 100 basis point rise 43,420 1 % 398,862 6 % Base rate scenario 52,722 - % 376,571 - % 100 basis point decline 51,341 -3 % 304,778 -19 % 200 basis point decline 50,125 -5 % 277,058 -26 % 300 basis point decline 49,177 -7 % 276,744 -27 % 400 basis point decline 48,968 -7 % 276,317 -27 % As of December 31, 2021, the Bank was within its guidelines for immediate rate shocks up and down for all net interest income scenarios and for the up rate scenarios and the down 300 and 400 basis points scenarios for the market value of shareholders’ equity. The Bank’s percent change in the 100 and 200 basis points down scenarios for the market value of shareholders’ equity was slightly higher than the policy guidelines. As of December 31, 2020, the Bank was within its guidelines for immediate rate shocks up and down for all net interest income scenarios and for the up rate scenarios and the down 100 and down 200 basis points scenarios for the market value of shareholders’ equity. The Bank’s percent change in the 300 and 400 basis points down scenarios for the market value of shareholders’ equity was slightly higher than the policy guidelines. The ALCO plans to continue to monitor the effect of changes in interest rates on both net interest income and shareholders’ equity and will make changes in the duration of its rate-sensitive assets and rate-sensitive liabilities where necessary. 33 Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of ChoiceOne Financial Services, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of ChoiceOne Financial Services, Inc. (the “Company”) as of December 31, 2021 and 2020, the related statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 34 Allowance for Loan Losses – Current Factor Adjustments – Refer to Notes 1 and 3 to the consolidated financial statements Critical Audit Matter Description The general component of management’s estimate of the allowance for loan losses covers non-impaired loans and is based on historical loss experience adjusted for current factors.  Management’s adjustment for current factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, experience and ability of lending staff, national and economic trends and conditions, industry conditions, trends in real estate values, and other conditions.  Identification of factors to consider and adjustments to those factors involve management’s judgement. Given the significant estimates and assumptions management makes to estimate the current factor adjustments of the allowance for loan losses, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the current factor adjustments used in the estimate of the allowance for loan losses included the following, among othe ● We obtained an understanding of management’s process for determining the current factor adjustments, which included identification of internal and external data used in the analysis and understanding how management selects inputs from a range of potential assumptions. ● We evaluated the design of controls over management’s allowance for loan losses estimate, including those over current factor adjustments. ● We evaluated management’s selection of factors to consider when making current factor adjustments. ● We evaluated management's determination of adjustments for each factor, including evaluation of each adjustment for consistency with the direction and magnitude of changes in internal and external data. /s/ Plante & Moran, PLLC We have served as the Company’s auditor since 2006. Auburn Hills, Michigan March 17, 2022 35 ChoiceOne Financial Services, Inc. Consolidated Balance Sheets December 31, (Dollars in thousands) 2021 2020 Assets Cash and due from banks $ 31,537 $ 79,169 Time deposits in other financial institutions 350 350 Cash and cash equivalents 31,887 79,519 Equity securities at fair value (Note 2) 8,492 2,896 Securities available for sale (Note 2) 1,098,885 574,787 Federal Home Loan Bank stock 3,824 3,824 Federal Reserve Bank stock 5,064 4,180 Loans held for sale 9,351 12,921 Loans to other financial institutions 42,632 35,209 Loans (Note 3) 1,016,848 1,069,668 Allowance for loan losses (Note 3) ( 7,688 ) ( 7,593 ) Loans, net 1,009,160 1,062,075 Premises and equipment, net (Note 5) 29,880 29,489 Other real estate owned, net (Note 7) 194 266 Cash value of life insurance policies 43,356 32,751 Goodwill (Note 6) 59,946 60,506 Core deposit intangible (Note 6) 3,962 5,269 Other assets 20,049 15,650 Total assets $ 2,366,682 $ 1,919,342 Liabilities Deposits – noninterest-bearing (Note 8) $ 560,931 $ 477,654 Deposits – interest-bearing (Note 8) 1,491,363 1,196,924 Total deposits 2,052,294 1,674,578 Borrowings (Note 9) 50,000 9,327 Subordinated debentures (Note 10) 35,017 3,089 Other liabilities (Notes 11) 7,702 5,080 Total liabilities 2,145,013 1,692,074 Shareholders' Equity Preferred stock; shares authoriz 100,000 ; shares outstandin none - - Common stock and paid-in capital, no par value; shares authoriz 12,000,000 ; shares outstandin 7,510,379 at December 31, 2021 and 7,796,352 at December 31, 2020 (Note 14) 171,913 178,750 Retained earnings 52,332 37,490 Accumulated other comprehensive income, net ( 2,576 ) 11,028 Total shareholders’ equity 221,669 227,268 Total liabilities and shareholders’ equity $ 2,366,682 $ 1,919,342 See accompanying notes to consolidated financial statements. 36 ChoiceOne Financial Services, Inc. Consolidated Statements of Income Years Ended (Dollars in thousands, except per share data) December 31, 2021 2020 2019 Interest income Loans, including fees $ 48,657 $ 46,874 $ 26,777 Securiti Taxable 10,260 5,891 3,956 Tax exempt 5,617 2,684 1,472 Other 84 266 268 Total interest income 64,618 55,715 32,473 Interest expense Deposits 3,305 4,178 4,188 Advances from Federal Home Loan Bank 22 220 455 Other 650 246 57 Total interest expense 3,977 4,644 4,700 Net interest income 60,641 51,071 27,773 Provision for loan losses 416 4,000 - Net interest income after provision for loan losses 60,225 47,071 27,773 Noninterest income Customer service charges 8,628 7,252 5,277 Insurance and investment commissions 765 541 310 Mortgage servicing rights (Note 4) 2,335 3,180 822 Gains on sales of loans (Note 4) 4,441 8,133 1,129 Net (losses) gains on sales of securities (Note 2) ( 40 ) 1,308 22 Net (losses) gains on sales and write-downs of other assets (Note 7) 6 ( 13 ) 55 Earnings on life insurance policies 809 772 773 Trust income 790 739 162 Change in market value of equity securities 479 ( 155 ) - Other 981 941 618 Total noninterest income 19,194 22,698 9,168 Noninterest expense Salaries and benefits (Note 13 and 14) 29,300 26,539 14,401 Occupancy and equipment (Note 5) 6,168 5,783 3,557 Data processing 6,189 6,765 3,210 Professional fees 3,009 3,716 3,112 Supplies and postage 614 844 407 Advertising and promotional 848 588 528 Intangible amortization (Note 6) 1,307 1,498 353 FDIC insurance 804 450 45 Other 4,682 4,701 2,863 Total noninterest expense 52,921 50,884 28,476 Income before income tax 26,498 18,885 8,465 Income tax expense 4,456 3,272 1,294 Net income $ 22,042 $ 15,613 $ 7,171 Basic earnings per share (Note 15) $ 2.87 $ 2.08 $ 1.58 Diluted earnings per share (Note 15) $ 2.86 $ 2.07 $ 1.58 Dividends declared per share $ 0.94 $ 0.82 $ 1.40 See accompanying notes to consolidated financial statements. 37 ChoiceOne Financial Services, Inc. Consolidated Statements of Comprehensive Income Years Ended (Dollars in thousands) December 31, 2021 2020 2019 Net income $ 22,042 $ 15,613 $ 7,171 Other comprehensive income: Changes in net unrealized gains (losses) on investment securities available for sale, net of tax expense (benefit) of $( 3,625 ), $ 2,846 , and $ 583 for the years ended December 31, 2021, 2020, and 2019, respectively. ( 13,636 ) 10,708 2,246 Reclassification adjustment for realized (loss) gain on sale of investment securities available for sale included in net income, net of tax (benefit) expense of $ 7 , $ 275 , and $ 5 for the years ended December 31, 2021, 2020, and 2019, respectively. 32 ( 1,033 ) ( 18 ) Change in adjustment for postretirement benefits, net of tax expense (benefit) of $ 0 , $( 33 ), and $( 5 ) for the years ended December 31, 2021, 2020, and 2019, respectively. - ( 125 ) ( 18 ) Other comprehensive income (loss), net of tax ( 13,604 ) 9,550 2,210 Comprehensive income $ 8,437 $ 25,163 $ 9,381 See accompanying notes to consolidated financial statements. 38 ChoiceOne Financial Services, Inc. Consolidated Statements of Changes in Shareholders’ Equity Accumulated Common Other Stock and Comprehensive Number of Paid in Retained Income/(Loss), (Dollars in thousands, except per share data) Shares Capital Earnings Net Total Balance, January 1, 2019 3,616,483 $ 54,523 $ 26,686 $ ( 732 ) $ 80,477 Net income 7,171 7,171 Other comprehensive income 2,210 2,210 Shares issued 8,118 25 25 Shares repurchased ( 2,228 ) ( 67 ) ( 67 ) Effect of employee stock purchases 14 14 Stock options exercised and issued (1) 3,913 78 78 Stock-based compensation expense 398 398 Restricted stock units issued 14,930 - Merger with County Bank Corp, net of issuance costs 3,603,872 107,639 107,639 Cash dividends declared ($ 1.40 per share) ( 5,806 ) ( 5,806 ) Balance, December 31, 2019 7,245,088 $ 162,610 $ 28,051 $ 1,478 $ 192,139 Net income 15,613 15,613 Other comprehensive income 9,550 9,550 Shares issued 19,583 451 451 Effect of employee stock purchases 24 24 Stock options exercised and issued (1) 7,261 - Stock-based compensation expense 171 171 Restricted stock units issued 365 - Merger with Community Shores Bank Corporation 524,055 15,494 15,494 Cash dividends declared ($ 0.82 per share) ( 6,174 ) ( 6,174 ) Balance, December 31, 2020 7,796,352 $ 178,750 $ 37,490 $ 11,028 $ 227,268 Net income 22,042 22,042 Other comprehensive income (loss) ( 13,604 ) ( 13,604 ) Shares issued 23,301 509 509 Effect of employee stock purchases 25 25 Stock-based compensation expense 415 415 Shares repurchased ( 309,274 ) ( 7,786 ) ( 7,786 ) Cash dividends declared ($ 0.94 per share) ( 7,200 ) ( 7,200 ) Balance, December 31, 2021 7,510,379 $ 171,913 $ 52,332 $ ( 2,576 ) $ 221,669 (1) The amount shown represents the number of shares issued in cashless transactions where some taxes are netted on a portion of the exercises. See accompanying notes to consolidated financial statements. 39 ChoiceOne Financial Services, Inc. Consolidated Statements of Cash Flows Years Ended (Dollars in thousands) December 31, 2021 2020 2019 Cash flows from operating activiti Net income $ 22,042 $ 15,613 $ 7,171 Adjustments to reconcile net income to net cash from operating activiti Provision for loan losses 416 4,000 - Depreciation 2,624 2,721 1,610 Amortization 9,801 4,985 1,517 Compensation expense on employee and director stock purchases, stock options, and restricted stock units 812 512 373 Net (gains) losses on sales of securities 40 ( 1,308 ) ( 22 ) Net change in market value of equity securities ( 479 ) 155 - Gains on sales of loans ( 6,776 ) ( 11,313 ) ( 1,951 ) Loans originated for sale ( 197,387 ) ( 326,286 ) ( 63,920 ) Proceeds from loan sales 205,398 325,306 62,763 Earnings on bank-owned life insurance ( 778 ) ( 772 ) ( 485 ) Proceeds from BOLI policy 204 - 605 Earnings on death benefit from bank-owned life insurance ( 31 ) - ( 288 ) (Gains) on sales of other real estate owned ( 19 ) ( 64 ) ( 54 ) Write downs of ORE - 80 - Proceeds from sales of other real estate owned 611 1,384 938 Costs capitalized to other real estate - ( 19 ) - Deferred federal income tax expense 924 202 310 Net change in: Other assets ( 5,418 ) ( 3,186 ) 2,128 Other liabilities 5,715 ( 3,532 ) ( 1,493 ) Net cash provided by operating activities 37,699 8,478 9,202 Cash flows from investing activiti Sales of securities available for sale 29,742 121,942 178,450 Sales of equity securities - - 463 Maturities, prepayments and calls of securities available for sale 54,202 48,787 47,816 Purchases of securities available for sale ( 637,943 ) ( 375,670 ) ( 209,763 ) Purchase of bank-owned life insurance policies ( 10,000 ) - - Purchase of Federal Reserve Bank stock - - ( 1 ) Loan originations and payments, net 45,384 ( 79,594 ) ( 485 ) Additions to premises and equipment ( 2,759 ) ( 1,852 ) ( 766 ) Cash received from merger with Community Shores Bank Corporation - 35,636 - Cash received from merger with County Bank Corp - - 20,638 Net cash (used in)/provided by investing activities ( 521,374 ) ( 250,751 ) 36,352 Cash flows from financing activiti Net change in deposits 377,716 292,145 3,986 Net change in fed funds purchased - - ( 8,600 ) Proceeds from borrowings 87,500 10,050 115,000 Payments on borrowings ( 14,326 ) ( 33,921 ) ( 110,035 ) Issuance of common stock 139 134 142 Repurchase of common stock ( 7,786 ) - ( 67 ) Cash dividends and fractional shares from merger ( 7,200 ) ( 6,174 ) ( 5,815 ) Cash related to equity issuance for merger - - ( 297 ) Net cash provided by/(used in) financing activities 436,043 262,234 ( 5,686 ) Net change in cash and cash equivalents ( 47,632 ) 19,961 39,868 Beginning cash and cash equivalents 79,519 59,558 19,690 Ending cash and cash equivalents $ 31,887 $ 79,519 $ 59,558 Supplemental disclosures of cash flow informati Cash paid for interest $ 3,718 $ 4,872 $ 4,500 Cash paid for income taxes 3,251 5,001 1,035 Loans transferred to other real estate owned 520 372 347 See accompanying notes to consolidated financial statements. 40 Note 1 – Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include ChoiceOne Financial Services, Inc. ("ChoiceOne"), its wholly-owned subsidiary, ChoiceOne Bank (the "Bank"), and ChoiceOne Bank’s wholly-owned subsidiary. ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"). Intercompany transactions and balances have been eliminated in consolidation. ChoiceOne owns all of the common securities of Community Shores Capital Trust I (the “Capital Trust”).  Under U.S. generally accepted accounting principles ("GAAP"), the Capital Trust is not consolidated because it is a variable interest entity and ChoiceOne is not the primary beneficiary. Recent Mergers On July 1, 2020, ChoiceOne completed the merger of Community Shores Bank Corporation ("Community Shores") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2020 and December 31, 2021 include the impact of the merger. On October 1, 2019, ChoiceOne completed the merger of County Bank Corp. ("County") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2019, December 31, 2020, and December 31, 2021 include the impact of the merger. The Coronavirus (COVID- 19 ) Outbreak Consistent with federal banking agencies' “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus,” ChoiceOne is working with its borrowers affected by the COVID- 19 pandemic. ChoiceOne granted deferrals on numerous loans to borrowers affected by the pandemic; however, as of June 30, 2021, all deferments had resumed payments in accordance with loan terms. In addition, ChoiceOne processed over $ 126 million in Paycheck Protection Program ("PPP") loans in 2020 and acquired an additional $ 37 million in PPP loans in the merger with Community Shores. ChoiceOne originated an additional $ 89.1 million in PPP loans in 2021. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. PPP loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven in whole or in part. Payments are deferred until either the date on which the Small Business Administration ("SBA") remits the amount of forgiveness proceeds to the lender or the date that is ten months after the last day of the covered period if the borrower does not apply for forgiveness within that ten -month period. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. Upon SBA forgiveness, unrecognized fees are recognized into interest income. During the year ended December 31, 2021, $ 192.5 million of PPP loans were forgiven resulting in $ 5.2 million of fee income compared to $ 23.4 million of PPP loans forgiven resulting in $ 3.0 million of fee income in 2020. $ 33.1 million in PPP loans and $ 1.2 million in deferred PPP fee income remains outstanding as of December 31, 2021. Management expects the remaining PPP loans to be forgiven in the first half of 2022. Nature of Operations The Bank is a full-service community bank that offers commercial, consumer, and real estate loans as well as traditional demand, savings and time deposits to both commercial and consumer clients within the Bank’s primary market areas in Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan and Lapeer, Macomb, and St. Clair counties in southeastern Michigan. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and real estate. Commercial loans are expected to be repaid from the cash flows from operations of businesses. Real estate loans are collateralized by either residential or commercial real estate. The Insurance Agency is a wholly-owned subsidiary of the Bank. The Insurance Agency sells insurance policies such as life and health for both commercial and consumer clients. The Insurance Agency also offers alternative investment products such as annuities and mutual funds through a registered broker. Together, the Bank and ChoiceOne's other direct and indirect subsidiaries account for substantially all of ChoiceOne’s assets, revenues and operating income. 41 Use of Estimates To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, ChoiceOne’s management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. These estimates and assumptions are subject to many risks and uncertainties, including changes in interest rates and other general economic, business and political conditions, including the effects of the COVID- 19 pandemic, and its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic. Actual results may differ from these estimates. Estimates associated with the allowance for loan losses are particularly susceptible to change. Cash and Cash Equivalents Cash and cash equivalents are defined to include cash on hand, demand deposits with other banks, and federal funds sold. Cash flows are reported on a net basis for customer loan and deposit transactions, deposits with other financial institutions, and short-term borrowings with original terms of 90 days or less. Securities Debt securities are classified as available for sale because they might be sold before maturity. Debt securities classified as available for sale are carried at fair value, with unrealized holding gains and losses reported separately in the accumulated other comprehensive income or loss section of shareholders’ equity, net of tax effect. Restricted investments in Federal Reserve Bank stock and Federal Home Loan Bank stock are carried at cost. Equity securities consist of investments in preferred stock and investments in common stock of other financial institutions. Equity securities are reported at their fair value with changes in market value reported through current earnings. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized using the level-yield method without anticipating prepayments. Gains or losses on sales are recorded on the trade date based on the amortized cost of the security sold. Management evaluates debt securities for other-than-temporary impairment ("OTTI") on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The evaluation of securities includes consideration given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether ChoiceOne has the intent to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. In analyzing an issuer's financial condition, management may consider whether the securities are issued by the federal government or its agencies, or U.S. Government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether ChoiceOne intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If ChoiceOne intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. If a security is determined to be other-than-temporarily impaired, but ChoiceOne does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, remaining purchase accounting adjustments, and an allowance for loan losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis. Interest income on loans is reported on the interest method and includes amortization of net deferred loan fees and costs over the estimated loan term. Interest on loans is accrued based upon the principal balance outstanding. The accrual of interest is discontinued at the time at which loans are 90 days past due unless the loan is secured by sufficient collateral and is in the process of collection. Past due status is based on the contractual terms of the loan. Loans are placed into nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. Interest accrued but not received is reversed against interest income when the loans are placed into nonaccrual status. Interest received on such loans is applied to principal until qualifying for return to accrual. Loans are returned to accrual basis when all the principal and interest amounts contractually due are brought current and future payment is reasonably assured. No allowance for loan loss is recorded for loans acquired in a business combination unless losses are incurred subsequent to the acquisition date. Acquired loans are considered purchased credit impaired (“PCI”) if as of the acquisition date, management determines the loan has evidence of deterioration in credit quality since origination and it is probable at acquisition the Company will be unable to collect all contractually required payments. The discount related to credit quality for PCI loans is recorded as an adjustment to the loan balance as of the acquisition date and is not accreted into income. Management subsequently estimates expected cash flows on an individual loan basis. If the present value of expected cash flows is less than a loan's carrying amount, an allowance for loan loss is recorded through the provision for loan losses. If the present value of expected cash flows is greater than the carrying amount, the excess may be reclassified to an accretable difference and recognized into income over the loan's remaining life. For non-PCI loans, the difference between acquisition date fair value and expected cash flows is accreted into income over a pool's expected life using the level yield method. 42 Loans to Other Financial Institutions Loans to other financial institutions are made for the purpose of providing a warehouse line of credit to facilitate funding of residential mortgage loan originations at other financial institutions. The loans are short-term in nature and are designed to provide funding for the time period between the loan origination and its subsequent sale in the secondary market. Loans to other financial institutions earn a share of interest income, determined by the contract, from when the loan is funded to when the loan is sold on the secondary market.  Loans to other financial institutions are excluded from Note 3. As of December 31, 2021 and 2020 none of the loans to other financial institutions were classified as impaired or nonaccrual. No loans to other financial institutions were impaired, nonaccrual, or past due greater than 30 days as of December 31, 2021 or December 31, 2020. Allowance for Loan Losses The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan losses is increased by the provision for loan losses and decreased by loans charged off less any recoveries of charged off loans. Management estimates the allowance for loan losses balance required based on past loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance for loan losses when management believes that collection of a loan balance is not possible. The allowance for loan losses consists of general and specific components. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful.  The general component of management's estimate of the allowance for loan losses covers non-impaired loans and is based on historical loss experience adjusted for current factors. Management's adjustment for current factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, experience and ability of lending staff, national and economic trends and conditions, industry conditions, trends in real estate values, and other conditions. A loan is impaired when full payment under the loan terms is not expected. Troubled debt restructuring of loans is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule. All modified loans are evaluated to determine whether the loans should be reported as Troubled Debt Restructurings ("TDR"). A loan is a TDR when the Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower by modifying a loan. To make this determination, the Bank must determine whether (a) the borrower is experiencing financial difficulties and (b) the Bank granted the borrower a concession. This determination requires consideration of all facts and circumstances surrounding the modification. An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically mean the borrower is experiencing financial difficulties. Commercial loans are evaluated for impairment on an individual loan basis. If a loan is considered impaired or if a loan has been classified as a TDR, a portion of the allowance for loan losses is allocated to the loan so that it is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller-balance homogeneous loans such as consumer and residential real estate mortgage loans are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Land is carried at cost. Land improvements are depreciated using the straight-line method with useful lives ranging from 7 to 15 years. Building and related components are depreciated using the straight-line method with useful lives ranging from 5 to 39 years. Leasehold improvements are depreciated over the shorter of the estimated life or the lease term. Furniture and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7 years. Fixed assets are periodically reviewed for impairment. If impaired, the assets are recorded at fair value. Other Real Estate Owned Real estate properties acquired in the collection of a loan are initially recorded at the lower of the Bank’s basis in the loans or fair value at acquisition establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan is accounted for as a loan loss. After acquisition, a valuation allowance reduces the reported amount to the lower of the initial amount or fair value less costs to sell. Expenses to repair or maintain properties are included within other noninterest expenses. Gains and losses upon disposition and changes in the valuation allowance are reported net within noninterest income. Bank Owned Life Insurance Bank owned life insurance policies are stated at the current cash surrender value of the policy, or the policy death proceeds less any obligation to provide a death benefit to an insured’s beneficiaries if that value is less than the cash surrender value. Increases in the asset value are recorded as earnings in other income. Loan Servicing Rights Loan servicing rights represent the allocated value of servicing rights on loans sold with servicing retained. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Servicing rights are initially recorded at estimated fair value and fair value is determined using prices for similar assets with similar characteristics when available or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance. Goodwill and Intangible Assets Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of the acquired tangible assets and liabilities and identifiable intangible assets. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. 43 Core Deposit Intangible Core deposit intangible represents the value of the acquired customer core deposit bases and is included as an asset on the consolidated balance sheets. The core deposit intangible has an estimated finite life, is amortized on an accelerated basis over a 120 month period and is subject to periodic impairment evaluation. Loan Commitments and Related Financial Instruments Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet financing needs of customers. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Employee Benefit Plans ChoiceOne’s 401 (k) plan allows participants to make contributions to their individual accounts under the plan in amounts up to the IRS maximum. Employer matching contributions from ChoiceOne to its 401 (k) plan are discretionary. Income Taxes Income tax expense is the sum of the current year income tax due and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. Earnings Per Share Basic earnings per common share ("EPS") is based on weighted-average common shares outstanding. Diluted EPS assumes issuance of any dilutive potential common shares issuable under stock options or restricted stock units granted. Comprehensive Income Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss includes unrealized gains and losses on securities available for sale and changes in the funded status of post-retirement plans, net of tax, which are also recognized as a separate component of shareholders’ equity. Accumulated other comprehensive income was as follows: (Dollars in thousands) As of December 31, 2021 2020 Unrealized gain (loss) on available for sale securities $ ( 3,261 ) $ 13,959 Unrecognized gains on post-retirement benefits — — Tax effect 685 ( 2,931 ) Accumulated other comprehensive income (loss) $ ( 2,576 ) $ 11,028 L oss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe that there are any such matters that may have a material effect on the financial statements as of December 31, 2021 . Cash Restrictions Cash on hand or on deposit with the Federal Reserve Bank was 

$ 0 at both December 31, 2021 and 2020, as the Federal Reserve revoked the reserve requirement due to COVID- 19. Leases Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. 44 Stock-Based Compensation The Company values share-based stock option awards granted using the Black-Scholes option-pricing model. The Company recognizes compensation expense for its awards on a straight-line basis over the requisite service period for the entire award (straight-line attribution method), ensuring that the amount of compensation cost recognized at any date at least equals the portion of the grant-date fair value of the award that is vested at that time. Compensation costs related to stock options granted are disclosed in Note 14. ChoiceOne has granted restricted stock units to a select group of employees under the Stock Incentive Plan of 2012. Each unit, once vested, is settled by delivery of one share of ChoiceOne common stock. Dividend Restrictions Banking regulations require the maintenance of certain capital levels and may limit the amount of dividends that may be paid by the Bank to ChoiceOne (see Note 20 ). Fair Value of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions, which are more fully documented in Note 18 to the consolidated financial statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Operating Segments While ChoiceOne’s management monitors the revenue streams of various products and services for the Bank and the Insurance Agency, operations and financial performance are evaluated on a company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated into one reportable operating segment. Recent Accounting Pronouncements The FASB issued ASU No. 2016 - 13 , Financial Instruments—Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments . This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current generally accepted accounting principles ("GAAP") with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance attempts to reflect an entity’s current estimate of all expected credit losses and broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity may apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. Additionally, credit losses on available-for-sale debt securities will have to be presented as an allowance rather than as a write-down. This ASU is effective for fiscal years beginning after December 15, 2022, and for interim periods within those years for companies considered smaller reporting filers with the Securities and Exchange Commission. ChoiceOne was classified as a smaller reporting filer as of the measurement date. Management is currently evaluating the impact of this new ASU on its consolidated financial statements which may be significant. Reclassifications Certain amounts presented in prior year consolidated financial statements have been reclassified to conform to the 2021 presentation. 45 Note 2 – Securities The fair value of equity securities and the related gross unrealized gains recognized in noninterest income at December 31 were as follows: December 31, 2021 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity securities $ 7,953 $ 665 $ ( 126 ) $ 8,492 December 31, 2020 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity securities $ 2,836 $ 60 $ - $ 2,896 The fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows: December 31, 2021 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Government and federal agency $ 2,001 $ 7 $ - $ 2,008 U.S. Treasury notes and bonds 93,267 23 ( 1,311 ) 91,979 State and municipal 528,252 10,704 ( 4,109 ) 534,847 Mortgage-backed 441,383 781 ( 9,049 ) 433,115 Corporate 20,856 19 ( 233 ) 20,642 Asset-backed securities 16,387 - ( 93 ) 16,294 Total $ 1,102,146 $ 11,534 $ ( 14,795 ) $ 1,098,885 December 31, 2020 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Government and federal agency $ 2,007 $ 44 $ - $ 2,051 U.S. Treasury notes and bonds 1,996 60 - 2,056 State and municipal 307,201 13,191 ( 24 ) 320,368 Mortgage-backed 246,085 1,510 ( 872 ) 246,723 Corporate 3,539 51 ( 1 ) 3,589 Total $ 560,828 $ 14,856 $ ( 897 ) $ 574,787 Information regarding sales of securities available for sale for the year ended December 31 follows: (Dollars in thousands) 2021 2020 2019 Proceeds from sales of securities $ 29,742 $ 121,942 $ 178,913 Gross realized gains 0 1,308 22 Gross realized losses ( 40 ) - - 46 Contractual maturities of equity securities and securities available for sale at December 31, 2021 were as follows: (Dollars in thousands) Amortized Fair Cost Value Due within one year $ 25,111 $ 25,310 Due after one year through five years 49,146 50,979 Due after five years through ten years 474,166 480,614 Due after ten years 112,340 108,867 Total debt securities 660,763 665,770 Mortgage-backed securities 441,383 433,115 Equity securities 7,953 8,492 Total $ 1,110,099 $ 1,107,377 Certain securities were pledged as collateral for participation in a program that provided Community Reinvestment Act credits. The carrying amount of the securities pledged as collateral at December 31 was as follows: (Dollars in thousands) 2021 2020 Securities pledged for Community Reinvestment Act credits $ 273 $ 278 Securities with unrealized losses at year-end 2021 and 2020 , aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows: 2021 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses U.S. Government and federal agency $ - $ - $ - $ - $ - $ - U.S. Treasury notes and bonds 89,958 1,311 - - 89,958 1,311 State and municipal 130,001 3,253 15,237 856 145,238 4,109 Mortgage-backed 261,560 5,709 86,974 3,340 348,534 9,049 Corporate 17,369 233 - - 17,369 233 Asset-backed securities 16,294 93 - - 16,294 93 Total temporarily impaired $ 515,182 $ 10,599 $ 102,211 $ 4,196 $ 617,393 $ 14,795 2020 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses U.S. Government and federal agency $ - $ - $ - $ - $ - $ - U.S. Treasury notes and bonds - - - - - - State and municipal 8,950 24 - - 8,950 24 Mortgage-backed 75,126 866 9,994 6 85,120 872 Corporate 453 1 - - 453 1 Asset-backed securities - - - - - - Total temporarily impaired $ 84,529 $ 891 $ 9,994 $ 6 $ 94,523 $ 897 ChoiceOne evaluates all securities on a quarterly basis to determine whether unrealized losses are temporary or other than temporary. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of ChoiceOne to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value of amortized cost basis. Management believed that unrealized losses as of December 31, 2021 were temporary in nature and were caused primarily by changes in interest rates, increased credit spreads, and reduced market liquidity and were not caused by the credit status of the issuer. No other than temporary impairments were recorded in 2021 or 2020. Following is information regarding unrealized gains and losses on equity securities for the years ending December 31: 2021 2020 2019 Net gains and losses recognized during the period $ 479 $ ( 155 ) $ - L Net gains and losses recognized during the period on securities sold - - ( 5 ) Unrealized gains and losses recognized during the reporting period on securities still held at the reporting date $ 479 $ ( 155 ) $ 5 At December 31, 2021 , there were 247 securities with an unrealized loss, compared to 22 securities with an unrealized loss as of December 31, 2020 . 47 Note 3 – Loans and Allowance for Loan Losses The Bank’s loan portfolio as of December 31 was as follows: (Dollars in thousands) 2021 2020 Agricultural $ 64,819 $ 53,735 Commercial and industrial 203,024 303,527 Consumer 35,174 34,014 Real estate - commercial 525,884 469,247 Real estate - construction 19,066 16,639 Real estate - residential 168,881 192,506 Loans, gross $ 1,016,848 $ 1,069,668 Allowance for Loan Losses ( 7,688 ) ( 7,593 ) Loans, net $ 1,009,160 $ 1,062,075 ChoiceOne manages its credit risk through the use of its loan policy and its loan approval process and by monitoring of loan credit performance. The loan approval process for commercial loans involves individual and group approval authorities. Individual authority levels are based on the experience of the lender. Group authority approval levels can consist of an internal loan committee that includes the Bank’s President or Senior Lender and other loan officers for loans that exceed individual approval levels, or a loan committee of the Board of Directors for larger commercial loans. Most consumer loans are approved by individual loan officers based on standardized underwriting criteria, with larger consumer loans subject to approval by the internal loan committee. Ongoing credit review of commercial loans is the responsibility of the loan officers. ChoiceOne’s internal credit committee meets at least monthly and reviews loans with payment issues and loans with a risk rating of 6, 7, or 8. Risk ratings of commercial loans are reviewed periodically and adjusted if needed. ChoiceOne’s consumer loan portfolio is primarily monitored on an exception basis. Loans where payments are past due are turned over to the applicable Bank’s collection department, which works with the borrower to bring payments current or take other actions when necessary. In addition to internal reviews of credit performance, ChoiceOne contracts with a third party for independent loan review that monitors the loan approval process and the credit quality of the loan portfolio. The table below details the outstanding balances of the County Bank Corp. acquired portfolio and the acquisition fair value adjustments at acquisition date: (Dollars in thousands) Acquired Acquired Impaired Non-impaired Total Loans acquired - contractual payments $ 7,729 $ 387,394 $ 395,123 Nonaccretable difference ( 2,928 ) - ( 2,928 ) Expected cash flows 4,801 387,394 392,195 Accretable yield ( 185 ) ( 1,894 ) ( 2,079 ) Carrying balance at acquisition date $ 4,616 $ 385,500 $ 390,116 The table below presents a roll-forward of the accretable yield on County Bank Corp. acquired loans for the year ended December 31, 2021: (Dollars in thousands) Acquired Acquired Impaired Non-impaired Total Balance, January 1, 2019 $ - $ - $ - Merger with County Bank Corp on October 1, 2019 185 1,894 2,079 Accretion October 1, 2019 through December 31, 2019 - ( 75 ) ( 75 ) Balance, January 1, 2020 185 1,819 2,004 Accretion January 1, 2020 through December 31, 2020 ( 50 ) ( 295 ) ( 345 ) Balance, January 1, 2021 135 1,524 1,659 Transfer from non-accretable to accretable yield 400 - 400 Accretion January 1, 2021 through December 31, 2021 ( 247 ) ( 95 ) ( 342 ) Balance, December 31, 2021 $ 288 $ 1,429 $ 1,717 The table below details the outstanding balances of the Community Shores Bank Corporation acquired loan portfolio and the acquisition fair value adjustments at acquisition date: (Dollars in thousands) Acquired Acquired Impaired Non-impaired Total Loans acquired - contractual payments $ 20,491 $ 158,495 $ 178,986 Nonaccretable difference ( 2,719 ) - ( 2,719 ) Expected cash flows 17,772 158,495 176,267 Accretable yield ( 869 ) ( 596 ) ( 1,465 ) Carrying balance at acquisition date $ 16,903 $ 157,899 $ 174,802 The table below presents a roll-forward of the accretable yield on Community Shores Bank Corporation acquired loans for the year ended December 31, 2021: (Dollars in thousands) Acquired Acquired Impaired Non-impaired Total Balance, January 1, 2020 $ - $ - $ - Merger with Community Shores Bank Corporation on July 1, 2020 869 596 1,465 Accretion July 1, 2020 through December 31, 2020 ( 26 ) ( 141 ) ( 167 ) Balance, January 1, 2020 843 455 1,298 Accretion January 1, 2021 through December 31, 2021 ( 321 ) ( 258 ) ( 579 ) Balance, December 31, 2021 $ 522 $ 197 $ 719 48 Activity in the allowance for loan losses and balances in the loan portfolio was as follows: Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses Year Ended December 31, 2021 Beginning balance $ 257 $ 1,327 $ 317 $ 4,178 $ 97 $ 1,300 $ 117 $ 7,593 Charge-offs — ( 195 ) ( 370 ) ( 111 ) — — — ( 676 ) Recoveries — 86 214 48 — 7 — 355 Provision 191 236 129 ( 410 ) 13 ( 636 ) 893 416 Ending balance $ 448 $ 1,454 $ 290 $ 3,705 $ 110 $ 671 $ 1,010 $ 7,688 Individually evaluated for impairment $ 251 $ 95 $ 2 $ 9 $ — $ 146 $ — $ 503 Collectively evaluated for impairment $ 197 $ 1,359 $ 288 $ 3,696 $ 110 $ 525 $ 1,010 $ 7,185 Loans December 31, 2021 Individually evaluated for impairment $ 2,616 $ 339 $ 14 $ 273 $ — $ 2,191 $ 5,433 Collectively evaluated for impairment 62,203 197,656 35,148 515,528 19,066 164,647 994,248 Acquired with deteriorated credit quality — 5,029 12 10,083 — 2,043 17,167 Ending balance $ 64,819 $ 203,024 $ 35,174 $ 525,884 $ 19,066 $ 168,881 $ 1,016,848 Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses Year Ended December 31, 2020 Beginning balance $ 471 $ 655 $ 270 $ 1,663 $ 76 $ 640 $ 282 $ 4,057 Charge-offs ( 15 ) ( 148 ) ( 329 ) ( 254 ) - ( 8 ) - ( 754 ) Recoveries - 57 204 10 - 19 - 290 Provision ( 199 ) 763 172 2,759 21 649 ( 165 ) 4,000 Ending balance $ 257 $ 1,327 $ 317 $ 4,178 $ 97 $ 1,300 $ 117 $ 7,593 Individually evaluated for impairment $ - $ 19 $ 1 $ 157 $ - $ 254 $ - $ 431 Collectively evaluated for impairment $ 257 $ 1,308 $ 316 $ 4,021 $ 97 $ 1,046 $ 117 $ 7,162 Loans December 31, 2020 Individually evaluated for impairment $ 348 $ 1,663 $ 8 $ 3,032 $ 80 $ 2,720 $ 7,851 Collectively evaluated for impairment 53,387 295,154 33,982 453,681 16,559 186,982 1,039,745 Acquired with deteriorated credit quality - 6,710 24 12,534 - 2,804 22,072 Ending balance $ 53,735 $ 303,527 $ 34,014 $ 469,247 $ 16,639 $ 192,506 $ 1,069,668 Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses Year Ended December 31, 2019 Beginning balance $ 481 $ 892 $ 254 $ 1,926 $ 38 $ 537 $ 545 $ 4,673 Charge-offs - ( 83 ) ( 292 ) ( 589 ) - ( 25 ) - ( 989 ) Recoveries 65 22 136 26 - 124 - 373 Provision ( 75 ) ( 176 ) 172 300 38 4 ( 263 ) - Ending balance $ 471 $ 655 $ 270 $ 1,663 $ 76 $ 640 $ 282 $ 4,057 Individually evaluated for impairment $ 103 $ - $ 4 $ 13 $ - $ 235 $ - $ 355 Collectively evaluated for impairment $ 368 $ 655 $ 266 $ 1,650 $ 76 $ 405 $ 282 $ 3,702 Loans December 31, 2019 Individually evaluated for impairment $ 924 $ 259 $ 17 $ 2,288 $ - $ 2,434 $ 5,922 Collectively evaluated for impairment 56,415 141,583 38,524 323,358 13,411 215,106 788,397 Acquired with deteriorated credit quality - 6,241 313 733 - 442 7,729 Ending balance $ 57,339 $ 148,083 $ 38,854 $ 326,379 $ 13,411 $ 217,982 $ 802,048 49 The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking ( 1 ) the risk ratings of business loans, ( 2 ) the level of classified business loans, and ( 3 ) delinquent and nonperforming consumer loans. Business loans are risk rated on a scale of 1 to 9. A description of the characteristics of the ratings follows: Risk Rating 1 through 5 or pass: These loans are considered pass credits. They exhibit acceptable credit risk and demonstrate the ability to repay the loan from normal business operations. Risk rating 6 or special menti Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions that have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that ChoiceOne Bank will sustain some future loss if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual assets classified as substandard. Loans falling into this category should have clear action plans and timelines with benchmarks to determine which direction the relationship will move. Risk rating 7 or substandar Loans and other credit extensions graded “7” have all the weaknesses inherent in those graded “6”, with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. Loans in this classification should be evaluated for non-accrual status. All nonaccrual commercial and Retail loans must be at a minimum graded a risk code “7”. Risk rating 8 or doubtfu Loans and other credit extensions bearing this grade have been determined to have the extreme probability of some loss, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral. Risk rating 9 or l Loans in this classification are considered uncollectible and cannot be justified as a viable asset of ChoiceOne Bank. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future. Information regarding the Bank’s credit exposure as of December 31 was as follows: Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category (Dollars in thousands) Agricultural Commercial and Industrial Commercial Real Estate December 31, December 31, December 31, December 31, December 31, December 31, 2021 2020 2021 2020 2021 2020 Pass $ 61,864 $ 50,185 $ 201,202 $ 294,614 $ 519,537 $ 453,080 Special Mention 339 3,202 300 4,101 778 6,006 Substandard 2,616 348 1,266 4,812 5,569 8,925 Doubtful - - 256 - - 1,236 $ 64,819 $ 53,735 $ 203,024 $ 303,527 $ 525,884 $ 469,247 Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity (Dollars in thousands) Consumer Construction Real Estate Residential Real Estate December 31, December 31, December 31, December 31, December 31, December 31, 2021 2020 2021 2020 2021 2020 Performing $ 35,174 $ 34,006 $ 19,066 $ 16,559 $ 168,031 $ 191,125 Nonperforming - - - - - - Nonaccrual - 8 - 80 850 1,381 $ 35,174 $ 34,014 $ 19,066 $ 16,639 $ 168,881 $ 192,506 Included within the loan categories above were loans in the process of foreclosure. As of December 31, 2021 and 2020 , loans in the process of foreclosure totaled $81 3,000 and $337,000, respectively. Loans are classified as performing when they are current as to principal and interest payments or are past due on payments less than 90 days. Loans are classified as nonperforming when they are past due 90 days or more as to principal and interest payments or are considered a troubled debt restructuring. 50 The following table provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the year ended December 31, 2021. There were no new TDRs in 2020. Year Ended December 31, 2021 Pre- Post- Modification Modification Outstanding Outstanding (Dollars in thousands) Number of Recorded Recorded Loans Investment Investment Agricultural 5 $ 1,803 $ 1,803 Commercial and Industrial 4 270 270 Commercial Real Estate 2 619 619 Total 11 $ 2,692 $ 2,692 The following schedule provides information on TDRs as of December 31, 2021 where the borrower was past due with respect to principal and/or interest for 30 days during the year ended December 31, 2021, which loans had been modified and classified as TDRs during the year prior to the default.  There were no TDRs as of December 31, 2020 where the borrower was past due with respect to principal and/or interest for 30 days or more during year ended December 31, 2020, which loans had been modified and classified as TDRs during the year prior to the default. Year Ended December 31, 2021 (Dollars in thousands) Number Recorded of Loans Investment Commercial Real Estate 1 185 Total 1 $ 185 The federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” on March 22, 2020 and subsequently issued a revised statement on April 7, 2020. These statements encourage financial institutions to work constructively with borrowers affected by COVID- 19, and provide that short-term modifications to loans made on a good faith basis to borrowers who were current as of the implementation date of the statements are not considered TDRs. Further, Section 4013 of the CARES Act states that COVID- 19 related modifications made during 2020 and 2021 on loans that were current as of December 31, 2019 are not TDRs. As of December 31, 2020, ChoiceOne had granted deferments on approximately 750 loans with loan balances totaling $ 148 million which, in reliance on the statements of federal banking agencies and the CARES Act, are not reflected as TDRs in this report.  All deferments had resumed payments in accordance with loan terms as of June 30, 2021. Impaired loans by loan category as of December 31 were as follows: Unpaid Average Interest (Dollars in thousands) Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized December 31, 2021 With no related allowance recorded Agricultural $ 314 $ 428 $ - $ 598 $ - Commercial and industrial - - - 596 - Consumer - - - - - Construction real estate - - - 16 - Commercial real estate 94 94 - 1,117 5 Residential real estate 164 172 - 228 - Subtotal 572 694 - 2,555 5 With an allowance recorded Agricultural 2,302 2,302 251 1,873 139 Commercial and industrial 339 363 95 226 5 Consumer 14 15 2 4 - Construction real estate - - - - - Commercial real estate 179 179 9 456 10 Residential real estate 2,027 2,084 146 2,177 64 Subtotal 4,861 4,943 503 4,736 218 Total Agricultural 2,616 2,730 251 2,471 139 Commercial and industrial 339 363 95 822 5 Consumer 14 15 2 4 - Construction real estate - - - 16 - Commercial real estate 273 273 9 1,573 15 Residential real estate 2,191 2,256 146 2,405 64 Total $ 5,433 $ 5,637 $ 503 $ 7,291 $ 223 51 Unpaid Average Interest (Dollars in thousands) Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized December 31, 2020 With no related allowance recorded Agricultural $ 348 $ 434 $ - $ 329 $ - Commercial and industrial 1,516 1,629 - 464 2 Consumer - - - 1 - Construction real estate 80 80 - 16 - Commercial real estate 1,852 2,664 - 1,495 14 Residential real estate 162 162 - 99 3 Subtotal 3,958 4,969 - 2,404 19 With an allowance recorded Agricultural - - - 152 - Commercial and industrial 147 147 19 111 12 Consumer 8 8 1 16 - Construction real estate - - - - - Commercial real estate 1,180 1,180 157 897 35 Residential real estate 2,558 2,651 254 2,330 87 Subtotal 3,893 3,986 431 3,506 134 Total Agricultural 348 434 - 481 - Commercial and industrial 1,663 1,776 19 575 14 Consumer 8 8 1 17 - Construction real estate 80 80 - 16 - Commercial real estate 3,032 3,844 157 2,392 49 Residential real estate 2,720 2,813 254 2,429 90 Total $ 7,851 $ 8,955 $ 431 $ 5,910 $ 153 Unpaid Average Interest (Dollars in thousands) Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized December 31, 2019 With no related allowance recorded Agricultural $ 545 $ 545 $ - $ 146 $ 10 Commercial and industrial 259 340 - 104 9 Consumer - - - - - Construction real estate - - - - - Commercial real estate 1,882 2,471 - 782 30 Residential real estate 42 42 - 133 4 Subtotal 2,728 3,398 - 1,165 53 With an allowance recorded Agricultural 379 439 103 388 - Commercial and industrial - - - 86 1 Consumer 17 18 4 48 - Construction real estate - - - - - Commercial real estate 406 406 13 975 32 Residential real estate 2,392 2,460 235 2,486 83 Subtotal 3,194 3,323 355 3,983 116 Total Agricultural 924 984 103 534 10 Commercial and industrial 259 340 - 190 10 Consumer 17 18 4 48 - Construction real estate - - - - - Commercial real estate 2,288 2,877 13 1,757 62 Residential real estate 2,434 2,502 235 2,619 87 Total $ 5,922 $ 6,721 $ 355 $ 5,148 $ 169 52 An aging analysis of loans by loan category as of December 31 follows: Loans Loans Loans Past Due Loans Past Due Past Due Greater 90 Days Past (Dollars in thousands) 30 to 59 60 to 89 Than 90 Loans Not Total Due and Days (1) Days (1) Days (1) Total (1) Past Due Loans Accruing December 31, 2021 Agricultural $ - $ - $ - $ - $ 64,819 $ 64,819 $ - Commercial and industrial 21 - 88 109 202,915 203,024 - Consumer 70 15 - 85 35,089 35,174 - Commercial real estate 422 13 279 714 525,170 525,884 - Construction real estate 1,149 1,235 - 2,384 16,682 19,066 - Residential real estate 1,489 306 454 2,249 166,632 168,881 - $ 3,151 $ 1,569 $ 821 $ 5,541 $ 1,011,307 $ 1,016,848 $ - December 31, 2020 Agricultural $ - $ - $ - $ - $ 53,735 $ 53,735 $ - Commercial and industrial - 109 515 624 302,903 303,527 - Consumer 39 - - 39 33,975 34,014 - Commercial real estate 532 44 1,744 2,320 466,927 469,247 - Construction real estate 1,076 180 80 1,336 15,303 16,639 - Residential real estate 1,563 256 352 2,171 190,335 192,506 - $ 3,210 $ 589 $ 2,691 $ 6,490 $ 1,063,178 $ 1,069,668 $ - ( 1 ) Includes nonaccrual loans Nonaccrual loans by loan category as of December 31 as follows: (Dollars in thousands) 2021 2020 Agricultural $ 313 $ 348 Commercial and industrial 285 1,802 Consumer - 8 Commercial real estate 279 3,088 Construction real estate - 80 Residential real estate 850 1,381 $ 1,727 $ 6,707 Note 4 – Mortgage Banking Activity in secondary market loans during the year was as follows: (Dollars in thousands) 2021 2020 2019 Loans originated for resale, net of principal payments $ 197,387 $ 326,286 $ 63,920 Proceeds from loan sales 205,398 325,306 62,763 Net gains on sales of loans held for sale 6,776 11,313 1,951 Loan servicing fees, net of amortization ( 163 ) ( 129 ) 82 Net gains on sales of loans held for sale include capitalization of loan servicing rights. Loans serviced for others are not reported as assets in the accompanying consolidated balance sheets. The unpaid principal balances of these loans were $ 481.9 million and $ 404.2 million at December 31, 2021 and 2020 , respectively. The Bank maintains custodial escrow balances in connection with these serviced loans; however, such escrows were immaterial at December 31, 2021 and 2020 . 53 Activity for loan servicing rights (included in other assets) was as follows: (Dollars in thousands) 2021 2020 2019 Balance, beginning of year $ 3,967 $ 2,131 $ 1,049 Capitalized 1,961 3,554 822 Amortization ( 1,635 ) ( 1,344 ) ( 453 ) Market valuation allowance change 374 ( 374 ) - Acquired from merger with County Bank Corp. - - 713 Balance, end of year $ 4,667 $ 3,967 $ 2,131 The fair value of loan servicing rights was $ 5,521,000 and $ 3,967,000 as of December 31, 2021 and 2020, respectively. Valuation allowances of $ 0 and $ 373,000 were recorded at December 31, 2021 and December 31, 2020, respectively. The fair value of the Bank’s servicing rights at December 31, 2021 was determined using a discount rate of 8.00 % and prepayment speeds ranging from 5 % to 27 %.  The fair value of the Bank’s servicing rights at December 31, 2020 was determined using a discount rate of 7.75 % and prepayment speeds ranging from 7 % to 26 %. Note 5 – Premises and Equipment As of December 31, premises and equipment consisted of the followin (Dollars in thousands) 2021 2020 Land and land improvements $ 8,888 $ 8,753 Leasehold improvements 69 69 Buildings 26,091 25,985 Furniture and equipment 11,145 10,687 Total cost 46,193 45,494 Accumulated depreciation ( 16,313 ) ( 16,005 ) Premises and equipment, net $ 29,880 $ 29,489 Depreciation expense was $ 2.6 million, $ 2.7 million and $ 1.6 million for 2021 , 2020 and 2019 , respectively. The Bank leases certain branch properties and automated-teller machine locations in its normal course of business. Rent expense totaled $ 153,000 , $ 83,000 , and $ 72,000 for 2021 , 2020 and 2019 , respectively. The associated right of use assets are included in the applicable categories of fixed assets in the above table and the net book value of such assets approximates the operating lease liability. Rent commitments under non-cancelable operating leases were as follows, before considering renewal options that generally are present (dollars in thousands): 2022 $ 221 2023 169 2024 115 2025 106 2026 46 Total undiscounted cash flows 657 Less discount 27 Total operating lease liabilities $ 630 54 Note 6 - Goodwill and Acquired Intangible Assets Goodwill The change in the balance for goodwill was as follows: (Dollars in thousands) 2021 2020 Balance, beginning of year $ 60,506 $ 52,870 Goodwill adjustment from merger with County Bank Corp. - ( 277 ) Acquired goodwill from merger with Community Shores Bank Corporation - 7,913 Goodwill adjustment from merger with Community Shores Bank Corporation ( 560 ) - Balance, end of year $ 59,946 $ 60,506 Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value.  Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required. The Company acquired Valley Ridge Financial Corp. in 2006, County in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $ 13.7 million, $ 38.9 million and $ 7.3 million, respectively. Management performed its annual qualitative assessment of goodwill as of June 30, 2021. In evaluating whether it is more likely than not that the fair value of ChoiceOne's operations was less than the carrying amount, management assessed the relevant events and circumstances such as the ones noted in ASC 350 - 20 - 35 - 3c. The analysis consisted of a review of ChoiceOne’s current and expected future financial performance, the potential impact of the COVID- 19 pandemic on the ability of ChoiceOne’s borrowers to comply with loan terms, and the impact that reductions in both short-term and long-term interest rates have had and may continue to have on net interest margin and mortgage sales activity. The share price and book value of ChoiceOne’s stock were also compared to the most recent quantitative assessment, which was performed as of November 30, 2020. Management also compared average deal values for recent closed bank transactions to ChoiceOne transactions. Despite ChoiceOne's market capitalization declining slightly from November 30, 2020 to June 30, 2021, ChoiceOne's financial performance remained positive. In assessing the totality of the events and circumstances, management determined that it was more likely than not that the fair value of ChoiceOne’s operations, from a qualitative perspective, exceeded the carrying value as of June 30, 2021 and impairment of goodwill was not necessary. ChoiceOne’s stock price per share was less than its book value as of December 31, 2021. This indicated that goodwill may be impaired and resulted in management performing another qualitative goodwill impairment assessment as of the year ended December 31, 2021. As a result of the analysis, management concluded that it was more-likely-than- not that the fair value of the reporting unit was greater than the carrying value.  This was evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In addition, revenue for the year ended December 31, 2021 reflected significant and continuing growth in ChoiceOne's interest income, as well as net Small Business Administration fees related to Paycheck Protection Program loans.  Based on the results of the qualitative analysis, management believed that a quantitative analysis was not necessary as of December 31, 2021. Acquired Intangible Assets Information for acquired intangible assets at December 31 is as follows: 2021 2020 Gross Gross Carrying Accumulated Carrying Accumulated (Dollars in thousands) Amount Amortization Amount Amortization Core deposit intangible $ 7,120 $ 3,158 $ 7,120 $ 1,851 The core deposit intangible from the County and Community Shores mergers is being amortized on a sum-of-the-years digits basis over ten years and eight years, respectively.  Amortization expense was $ 1,307,000 in 2021 and $ 1,498,000 in 2020. The estimated amortization expense for the next five years ending December 31 is as follows (dollars in thousands): 2022 $ 1,153 2023 955 2024 757 2025 560 2026 362 Thereafter 175 Total $ 3,962 55 Note 7 – Other Real Estate Owned Other real estate owned represents residential and commercial properties primarily owned as a result of loan collection activities and is reported net of a valuation allowance. Activity within other real estate owned was as follows: (Dollars in thousands) 2021 2020 2019 Balance, beginning of year $ 266 $ 929 $ 102 Transfers from loans 520 391 347 Additions from merger - 346 1,364 Proceeds from sales ( 611 ) ( 1,384 ) ( 938 ) Write-downs - ( 80 ) - Gains on sales 19 64 54 Balance, end of year $ 194 $ 266 $ 929 Included in the balances above were residential real estate mortgage loans of $ 80,000 , $ 61,000 , and $ 175,000 as of December 31, 2021, 2020, and 2019, respectively, and $ 114,000 , $ 205,000 , and $ 754,000 of commercial real estate loans as of December 31, 2021, 2020, and 2019 respectively. Note 8 – Deposits Deposit balances as of December 31 consisted of the followin (Dollars in thousands) 2021 2020 Noninterest-bearing demand deposits $ 560,931 $ 477,654 Interest-bearing demand deposits 665,482 471,346 Money market deposits 218,211 191,681 Savings deposits 425,626 337,332 Local certificates of deposit 182,044 196,565 Total deposits $ 2,052,294 $ 1,674,578 Scheduled maturities of certificates of deposit as of December 31, 2021 were as follows: (Dollars in thousands) 2022 $ 149,991 2023 19,641 2024 5,529 2025 3,759 2026 2,732 Thereafter 392 Total $ 182,044 The Bank had certificates of deposit issued in denominations of $250,000 or greater totaling $ 87.3 million and $ 88.2 million at December 31, 2021 and 2020, respectively. The Bank held $ 0 in brokered certificates of deposit at December 31, 2021 and 2020. In addition, the Bank had $ 13.7 million and $ 12.7 million of certificates of deposit as of December 31, 2021, and December 31, 2020, respectively, that had been issued through the Certificate of Deposit Account Registry Service ("CDARS"). 56 Note 9 – Borrowings Federal Home Loan Bank Advances At December 31, advances from the FHLB were as follows: (Dollars in thousands) 2021 2020 Maturity of January 2022 with fixed interest rate of .21 % $ 50,000 $ - Maturity of November 2024 with fixed interest rate of 3.98 % - 161 Total advances outstanding at year-end $ 50,000 $ 161 Fees of $ 16,000 were charged on a fixed rate advance that was paid prior to maturity during 2021. No fixed rate advances were paid prior to maturity in 2020. Advances were secured by agricultural loans and residential real estate loans with a carrying value of approximately $ 127.5 million and $ 158.2 million at December 31, 2021 and December 31, 2020, respectively. Based on this collateral, the Bank was eligible to borrow an additional $ 69.3 million at year-end 2021. FHLB Advances mature in January 2022. Holding Company Term Loan ChoiceOne obtained a $ 10,000,000 term note in June 2020. Part of the proceeds from the note were used to fund the cash portion of the consideration paid in the Community Shores merger.  The note would have matured in June 2023; however, the note was paid off with a line of credit in June 2021. At December 31, information regarding the holding company term loan was as follows: (Dollars in thousands) 2021 2020 Maturity of June 2023 with floating interest rate of 3.00 % $ - $ 9,167 In June 2021, ChoiceOne obtained a $ 20,000,000 line of credit with an annual renewal.  The line carries a floating rate of prime rate with a floor of 3.25 %.  The credit agreement includes certain financial covenants, including minimum capital ratios, asset quality ratios, and the requirements of achieving certain profitability thresholds.  ChoiceOne was in compliance with all covenants as of December 31, 2021. The line of credit balance was $ 0 at December 31, 2021. Note 10 – Subo rdinated Debentures The Capital Trust sold 4,500 Cumulative Preferred Securities (“trust preferred securities”) at $ 1,000 per security in a December 2004 offering. The proceeds from the sale of the trust preferred securities were used by the Capital Trust to purchase an equivalent amount of subordinated debentures from Community Shores. The trust preferred securities and subordinated debentures carry a floating rate of 2.05 % over the 3 -month LIBOR and the rate was 2.27 % at December 31, 2021 and 2.29 % at December 31, 2020. The stated maturity is December 30, 2034. The trust preferred securities are redeemable at par value on any interest payment date and are, in effect, guaranteed by ChoiceOne. Interest on the subordinated debentures is payable quarterly on March 30, June 30, September 30 and December 30. ChoiceOne is not considered the primary beneficiary of the Capital Trust (under the variable interest entity rules), therefore the Capital Trust is not consolidated in the consolidated financial statements, rather the subordinated debentures are shown as a liability, and the interest expense is recorded in the consolidated statement of income. The terms of the subordinated debentures, the trust preferred securities and the agreements under which they were issued give ChoiceOne the right, from time to time, to defer payment of interest for up to 20 consecutive quarters, unless certain specified events of default have occurred and are continuing. The deferral of interest payments on the subordinated debentures results in the deferral of distributions on the trust preferred securities. In September 2021, ChoiceOne completed a private placement of $ 32.5 million in aggregate principal amount of 3.25 % fixed-to-floating rate subordinated notes due 2031. The notes will initially bear interest at a fixed interest rate of 3.25% per annum until September 3, 2026, after which time the interest rate will reset quarterly to a floating rate equal to a benchmark rate, which is expected to be the then current three -month term Secured Overnight Financing Rate ("SOFR") plus 255 basis points until the notes’ maturity on September 3, 2031. The notes are redeemable by ChoiceOne, in whole or in part, on or after September 3, 2026, and at any time upon the occurrence of certain events. The notes have been structured to qualify as Tier 2 capital for ChoiceOne for regulatory capital purposes.  ChoiceOne used a portion of net proceeds from the private placement to redeem senior debt, fund common stock repurchases, and support bank-level capital ratios. During the third quarter of 2021, ChoiceOne used a portion of the proceeds from this private placement to pay off $ 2.6 million of other outstanding debt and an additional $ 5.0 million of proceeds was downstreamed to the Bank. 57 Note 11 – Income Taxes Information as of December 31 and for the year follows: (Dollars in thousands) 2021 2020 2019 Provision for Income Taxes Current federal income tax expense $ 3,532 $ 3,070 $ 984 Deferred federal income tax expense/(benefit) 924 202 310 Income tax expense $ 4,456 $ 3,272 $ 1,294 Reconciliation of Income Tax Provision to Statutory Rate Income tax computed at statutory federal rate of 21 % $ 5,565 $ 3,966 $ 1,778 Tax exempt interest income ( 1,190 ) ( 574 ) ( 320 ) Tax exempt earnings on bank-owned life insurance ( 170 ) ( 162 ) ( 162 ) Tax credits ( 284 ) ( 240 ) ( 218 ) Nondeductible merger expenses - 182 164 Disallowed interest expense 74 64 13 Other items 461 36 39 Income tax expense $ 4,456 $ 3,272 $ 1,294 Effective income tax rate 17 % 17 % 15 % (Dollars in thousands) Components of Deferred Tax Assets and Liabilities 2021 2020 Deferred tax assets: Purchase accounting adjustments from mergers with County and Community Shores $ 1,374 $ 1,953 Allowance for loan losses 1,614 1,595 Unrealized losses on securities available for sale 685 - Net operating loss carryforward 544 851 Deferred loan fees 319 466 Write-downs of other real estate owned - 326 Other 354 380 Total deferred tax assets 4,890 5,571 Deferred tax liabiliti Unrealized gains on securities available for sale - 2,931 Purchase accounting adjustments from mergers with County and Community Shores 1,107 1,403 Loan servicing rights 980 833 Depreciation 540 653 Interest rate lock commitments - 177 Other 323 230 Total deferred tax liabilities 2,950 6,227 Net deferred tax asset (liability) $ 1,940 $ ( 656 ) As of December 31, 2021, deferred tax assets included federal net operating loss carryforwards of approximately $ 2.6 million which was acquired through the merger with Community Shores.  The loss carryforwards expire at various dates from 2031 to 2035. Deferred tax assets are recognized for net operating losses because the benefit is more likely than not to be realized.  Under Code Section 382, ChoiceOne is limited to applying approximately $ 185,000 of net operating losses per year. 58 Note 12 – Related Party Transactions Loans to executive officers, directors and their affiliates were as follows at December 31: (Dollars in thousands) 2021 2020 Balance, beginning of year $ 20,724 $ 10,563 New loans 13,188 12,211 Repayments ( 9,912 ) ( 5,125 ) Loans acquired from merger - 3,075 Balance, end of year $ 24,000 $ 20,724 Deposits from executive officers, directors and their affiliates were $ 16.8 million and $ 14.7 million at December 31, 2021 and 2020 , respectively. Note 13 – Employee Benefit Plans 401 (k) Plan : The 401 (k) plan allows employees to contribute to their individual accounts under the plan amounts up to the IRS maximum. Matching company contributions to the plan are discretionary. Expense for matching company contributions under the plan was $ 627,000 , $ 465,000 , and $ 233,000 in 2021, 2020, and 2019, respectively. Post-retirement Benefits Plan : ChoiceOne maintains an unfunded post-retirement health care plan, which permits employees (and their dependents) the ability to participate upon retirement from ChoiceOne. ChoiceOne does not pay any portion of the health care premiums charged to its retired participants. A liability would be accrued for the obligation under this plan. Effective in December 2020, ChoiceOne curtailed the plan to the extent that it would be no longer offered to future retirees.  Current retirees receiving the benefit were not affected.  As a result of the curtailment, ChoiceOne realized a recovery of post-retirement benefit expense of $ 10,000 in 2021, compared to recoveries of $ 222,000 and $ 14,000 in 2020 and 2019, respectively. The post-retirement obligation liability was $ 0 as of December 31, 2021 and $ 10,000 as of December 31, 2020. 59 Note 14 - Stock Based Compensation Options to buy stock have been granted to key employees to provide them with additional equity interests in ChoiceOne. Compensation expense in connection with stock options granted was $ 15,000 in 2021, $ 15,000 in 2020, and $ 53,000 in 2019. The Stock Incentive Plan of 2012 was approved by the Company’s shareholders at the Annual Meeting held on April 25, 2012. The Stock Incentive Plan of 2012, as amended effective May 23, 2018, provides for the issuance of up to 200,000 shares of common stock. At December 31, 2021, there were 76,467 shares available for future grants. A summary of stock options activity during the year ended December 31, 2021 was as follows: Weighted Weighted average average exercise Grant Date Shares price Fair Value Options outstanding at January 1, 2021 20,631 $ 25.30 $ 3.46 Options granted - - - Options exercised - - - Options forfeited or expired - - - Options outstanding, end of year 20,631 $ 25.30 $ 3.36 Options exercisable at December 31, 2021 8,631 $ 22.60 $ 3.22 The exercise prices for options outstanding and exercisable at the end of 2021 ranged from $ 20.86 to $ 25.65 per share. The weighted average remaining contractual life of options outstanding and exercisable at the end of 2021 was approximately 4.81 years. The intrinsic value of all outstanding stock options and exercisable stock options was $ 34,000 and $ 82,000 respectively, at December 31, 2021 and December 31, 2020. The aggregate intrinsic values of outstanding and exercisable options at December 31, 2021 were calculated based on the closing market price of the Company’s common stock on December 31, 2021 of $ 26.49 per share less the exercise price. Information pertaining to options outstanding at December 31, 2021 was as follows: Exercise price of stock optio Number of options outstanding at year-end Number of options exercisable at year-end Average remaining contractual life (in years) $ 27.25 12,000 - 7.44 $ 25.65 3,000 3,000 6.51 $ 20.86 3,306 3,306 5.36 $ 21.13 2,325 2,325 4.02 The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. ChoiceOne uses historical data to estimate the volatility of the market price of ChoiceOne stock and employee terminations within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. As of December 31, 2021, there was $ 4,000 in unrecognized compensation expense related to stock options. ChoiceOne has granted restricted stock units to a select group of employees under the Stock Incentive Plan of 2012. Restricted stock units outstanding as of December 31, 2021 vest on the three year anniversary of the grant date. Certain additional vesting provisions apply. Each restricted stock unit, once vested, is settled by delivery of one share of ChoiceOne common stock. ChoiceOne recognized compensation expense of $ 320,000 , $ 157,000 , and $ 349,000 in 2021, 2020, and 2019, respectively, in connection with restricted stock units for current participants during these years. A summary of the activity for restricted stock units outstanding during the year ended December 31, 2021 is presented be Outstanding Stock Awards Shares Per Share Outstanding at January 1, 2021 18,989 $ 28.20 Granted 19,575 28.50 Vested - Forfeited ( 2,880 ) 28.20 Outstanding at December 31, 2021 35,684 $ 28.36 At December 31, 2021, there were 35,684 restricted stock units outstanding with an approximate stock value of $ 945,000 based on ChoiceOne’s December 31, 2021 stock price. At December 31, 2020, there were 18,989 restricted stock units outstanding with an approximate stock value of $ 585,000 based on ChoiceOne’s December 31, 2020 stock price. As a result of the merger with County, all unvested stock awards granted prior to October 1, 2019 vested upon completion of the merger.  The grant date fair value of restricted stock units granted was $ 558,000 and $ 306,000 in 2021 and 2020, respectively.  The cost is expected to be recognized over a weighted average period of 1.63 years.  As of December 31, 2021, there was $ 503,000 of unrecognized compensation cost related to unvested shares granted. 60 Note 15 - Earnings Per Share (Dollars in thousands, except share data) 2021 2020 2019 Basic Net income $ 22,042 $ 15,613 $ 7,171 Weighted average common shares outstanding 7,685,459 7,521,771 4,528,786 Basic earnings per common shares $ 2.87 $ 2.08 $ 1.58 Diluted Net income $ 22,042 $ 15,613 $ 7,171 Weighted average common shares outstanding 7,685,459 7,521,771 4,528,786 Plus dilutive stock options and restricted stock units 17,255 9,846 10,489 Weighted average common shares outstanding and potentially dilutive shares 7,702,714 7,531,617 4,539,275 Diluted earnings per common share $ 2.86 $ 2.07 $ 1.58 Stock options considered anti-dilutive to earnings per share were 15,000 , 0 , and 0 as of December 31, 2021 , December 31, 2020 , and December 31, 2019 , respectively. This calculation is based on the average stock price during the year. 61 Note 16 – Condensed Financial Statements of Parent Company Condensed Balance Sheets (Dollars in thousands) December 31, 2021 2020 Assets Cash $ 17,622 $ 11,939 Equity securities at fair value 2,555 1,884 Securities available for sale - - Other assets 553 292 Investment in subsidiaries 236,462 228,895 Total assets $ 257,192 $ 243,010 Liabilities Term loan $ - $ 9,167 Subordinated debentures 31,827 - Trust preferred securities 3,190 3,089 Other liabilities 506 3,486 Total liabilities 35,523 15,742 Shareholders' equity 221,669 227,268 Total liabilities and shareholders’ equity $ 257,192 $ 243,010 Condensed Statements of Income (Dollars in thousands) Years Ended December 31, 2021 2020 2019 Interest income Interest and dividends from ChoiceOne Bank $ 6,125 $ 12,942 $ 4,011 Interest and dividends from other securities 10 13 50 Total interest income 6,135 12,955 4,061 Interest expense Borrowings 645 239 - Net interest income 5,490 12,716 4,061 Noninterest income Gains on sales of securities - 26 8 Change in market value of equity securities 554 ( 155 ) ( 114 ) Other 4 - - Total noninterest income 558 ( 129 ) ( 106 ) Noninterest expense Salaries and benefits - 1,201 339 Professional fees 15 1,093 1,517 Other 203 217 492 Total noninterest expense 218 2,511 2,348 Income before income tax and equity in undistributed net income of subsidiary 5,830 10,076 1,607 Income tax (expense)/benefit 64 431 261 Income before equity in undistributed net income of subsidiary 5,894 10,507 1,868 Equity in undistributed net income of subsidiary 16,148 5,106 5,303 Net income $ 22,042 $ 15,613 $ 7,171 62 Condensed Statements of Cash Flows (Dollars in thousands) Years Ended December 31, 2021 2020 2019 Cash flows from operating activiti Net income $ 22,042 $ 15,613 $ 7,171 Adjustments to reconcile net income to net cash from operating activiti Equity in undistributed net income of subsidiary ( 16,148 ) ( 5,106 ) ( 5,303 ) Amortization 101 51 14 Compensation expense on employee and director stock purchases, stock options, and restricted stock units 787 488 359 Net gain on sale of securities - ( 26 ) ( 8 ) Change in market value of equity securities ( 554 ) 155 114 Changes in other assets ( 260 ) 582 ( 344 ) Changes in other liabilities ( 2,982 ) 551 1,485 Net cash from operating activities 2,986 12,308 3,488 Cash flows from investing activiti Sales of securities - 958 1,102 Purchases of securities ( 117 ) ( 200 ) - Investment in Subsidiary ( 5,000 ) - - Cash acquired from mergers with Community Shores Bank Corporation and County Bank Corp. - 142 1,038 Net cash from investing activities ( 5,117 ) 900 2,140 Cash flows from financing activiti Issuance of common stock 139 134 142 Repurchase of common stock ( 7,786 ) - ( 67 ) Proceeds from borrowings 36,827 10,000 - Payments on borrowings ( 14,166 ) ( 833 ) - Cash used as part of equity issuance for merger - ( 5,387 ) ( 297 ) Cash dividends paid ( 7,200 ) ( 6,174 ) ( 5,815 ) Net cash from financing activities 7,814 ( 2,260 ) ( 6,037 ) Net change in cash 5,683 10,948 ( 409 ) Beginning cash 11,939 991 1,400 Ending cash $ 17,622 $ 11,939 $ 991 63 Note 17 – Financial Instruments Financial instruments as of the dates indicated were as follows: Quoted Prices In Active Significant Markets for Other Significant Identical Observable Unobservable (Dollars in thousands) Carrying Estimated Assets Inputs Inputs Amount Fair Value (Level 1) (Level 2) (Level 3) December 31, 2021 Assets Cash and cash equivalents $ 31,887 $ 31,887 $ 31,887 $ - $ - Equity securities at fair value 8,492 8,492 6,724 - 1,768 Securities available for sale 1,098,885 1,098,885 - 1,077,835 21,050 Federal Home Loan Bank and Federal Reserve Bank stock 8,888 8,888 - 8,888 - Loans held for sale 9,351 9,632 - 9,632 - Loans to other financial institutions 42,632 42,632 - 42,632 - Loans, net 1,009,160 999,393 - - 999,393 Accrued interest receivable 8,211 8,211 - 8,211 - Interest rate lock commitments 172 172 - 172 - Liabilities Noninterest-bearing deposits 560,931 560,931 - 560,931 - Interest-bearing deposits 1,491,363 1,491,135 - 1,491,135 - Borrowings 50,000 50,000 - 50,000 - Subordinated debentures 35,017 33,414 - 33,414 - Accrued interest payable 441 441 - 441 - December 31, 2020 Assets Cash and due from banks $ 79,519 $ 79,519 $ 79,519 $ - $ - Equity securities at fair value 2,896 2,896 1,411 - 1,485 Securities available for sale 574,787 574,787 - 563,364 11,423 Federal Home Loan Bank and Federal Reserve Bank stock 8,004 8,004 - 8,004 - Loans held for sale 12,921 13,350 - 13,350 - Loans to other financial institutions 35,209 35,209 - 35,209 - Loans, net 1,062,075 1,057,786 - - 1,057,786 Accrued interest receivable 6,521 6,521 - 6,521 - Interest rate lock commitments 842 842 - 842 - Liabilities Noninterest-bearing deposits 477,654 477,654 - 477,654 - Interest-bearing deposits 1,196,924 1,197,964 - 1,197,964 - Borrowings 9,327 9,143 - 9,143 - Subordinated debentures 3,089 3,089 - 3,089 - Accrued interest payable 183 183 - 183 - The estimated fair values approximate the carrying amounts for all financial instruments except those described later in this paragraph. The methodology for determining the estimated fair value for securities available for sale is described in Note 18. The estimated fair value for loans follows the guidance in ASU 2016 - 01 which prescribes an “exit price” approach, which incorporates discounts for credit, liquidity, and marketability. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. The estimated fair value of loans also included the mark to market adjustments related to the Company’s mergers. The estimated fair value of deposits is based on comparing the average rate paid on deposits compared to the three month LIBOR rate which is assumed to be the replacement value of these deposits. The estimated fair values for time deposits and FHLB advances are based on the rates paid at December 31 for new deposits or FHLB advances, applied until maturity. The estimated fair values for other financial instruments and off-balance sheet loan commitments are considered nominal. 64 Note 18 – Fair Value Measurements The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2021 and December 31, 2020 , and the valuation techniques used by the Company to determine those fair values. In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability. In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability. There were no liabilities measured at fair value as of December 31, 2020 or December 31, 2021 . Disclosures concerning assets measured at fair value are as follows: Assets Measured at Fair Value on a Recurring Basis Quoted Prices In Active Significant Markets for Other Significant Identical Observable Unobservable (Dollars in thousands) Assets Inputs Inputs Balance at (Level 1) (Level 2) (Level 3) Date Indicated Equity Securities Held at Fair Value - December 31, 2021 Equity securities $ 6,724 $ - $ 1,768 $ 8,492 Investment Securities, Available for Sale - December 31, 2021 U. S. Government and federal agency $ - $ 2,008 $ - $ 2,008 U. S. Treasury notes and bonds - 91,979 - 91,979 State and municipal - 514,797 20,050 534,847 Mortgage-backed - 433,115 - 433,115 Corporate - 19,642 1,000 20,642 Asset-backed Securities - 16,294 - 16,294 Total $ - $ 1,077,835 $ 21,050 $ 1,098,885 Equity Securities Held at Fair Value - December 31, 2020 Equity securities $ 1,411 $ - $ 1,485 $ 2,896 Investment Securities, Available for Sale - December 31, 2020 U. S. Government and federal agency $ - $ 2,051 $ - $ 2,051 U. S. Treasury notes and bonds - 2,056 - 2,056 State and municipal - 309,945 10,423 320,368 Mortgage-backed - 246,723 - 246,723 Corporate - 2,589 1,000 3,589 Total $ - $ 563,364 $ 11,423 $ 574,787 Securities classified as available for sale are generally reported at fair value utilizing Level 2 inputs. ChoiceOne’s external investment advisor obtained fair value measurements from an independent pricing service that uses matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). The fair value measurements considered observable data that may include dealer quotes, market spreads, cash flows and the bonds' terms and conditions, among other things. Securities classified in Level 2 included U.S. Government and federal agency securities, U.S. Treasury notes and bonds, state and municipal securities, mortgage-backed securities, corporate bonds, and asset backed securities. The Company classified certain state and municipal securities and corporate bonds, and equity securities as Level 3. Based on the lack of observable market data, estimated fair values were based on the observable data available and reasonable unobservable market data. 65 Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis (Dollars in thousands) 2021 2020 Equity Securities Held at Fair Value Balance, January 1 $ 1,485 $ 1,472 Total realized and unrealized gains included in noninterest income 166 13 Net purchases, sales, calls, and maturities 117 - Balance, December 31 $ 1,768 $ 1,485 Investment Securities, Available for Sale Balance, January 1 $ 11,423 $ 12,367 Total realized and unrealized gains included in income - - Total unrealized gains/(losses) included in other comprehensive income 1,720 512 Net purchases, sales, calls, and maturities 7,907 ( 1,456 ) Balance, December 31 $ 21,050 $ 11,423 Of the Level 3 assets that were held by the Company at December 31, 2021, the net unrealized gain as of December 31, 2021 was $ 591,000 , compared to $ 889,000 as of December 31, 2020. The change in the net unrealized gain or loss is recognized in noninterest income or other comprehensive income in the consolidated balance sheets and income statements. Amounts recognized in noninterest income relate to changes in equity securities. A total of $ 8,839,000 and $ 1,642,000 of Level 3 securities were purchased in 2021 and 2020, respectively. Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets and liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs. Available for sale investment securities categorized as Level 3 assets consist of bonds issued by local municipalities and a trust-preferred security. The Company estimates the fair value of these assets based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved. The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment. Disclosures concerning assets measured at fair value on a non-recurring basis are as follows: Assets Measured at Fair Value on a Non-recurring Basis Quoted Prices In Active Significant Markets for Other Significant Balances at Identical Observable Unobservable (Dollars in thousands) Dates Assets Inputs Inputs Indicated (Level 1) (Level 2) (Level 3) Impaired Loans December 31, 2021 $ 5,433 $ - $ - $ 5,433 December 31, 2020 $ 7,851 $ - $ - $ 7,851 Other Real Estate December 31, 2021 $ 194 $ - $ - $ 194 December 31, 2020 $ 266 $ - $ - $ 266 Mortgage Loan Servicing Rights December 31, 2020 $ 3,967 $ - $ 3,967 $ - Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Company estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). The changes in fair value consisted of charge-downs of impaired loans that were posted to the allowance for loan losses and write-downs of other real estate owned that were posted to a valuation account. The fair value of other real estate owned was based on appraisals or other reviews of property values, adjusted for estimated costs to sell. 66 Note 19 – Off-Balance Sheet Activities Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customers’ financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment. The contractual amount of financial instruments with off-balance sheet risk was as follows at December 31: 2021 2020 Fixed Variable Fixed Variable (Dollars in thousands) Rate Rate Rate Rate Unused lines of credit and letters of credit $ 63,001 $ 275,170 $ 48,622 $ 231,667 Commitments to fund loans (at market rates) 72,257 25,545 10,691 3,954 Commitments to fund loans are generally made for periods of 180 days or less. The fixed rate loan commitments have interest rates ranging from 2.375 % to 6.00 % and maturities ranging from 1 year to 30 years. 67 Note 20 – Regulatory Capital ChoiceOne and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. Depending upon the capital category to which an institution is assigned, the regulators' corrective powers inclu prohibiting the acceptance of brokered deposits; requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution. At year-end 2021 and 2020 , the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. Actual capital levels and minimum required levels for ChoiceOne and the Bank were as follows: Minimum Required to be Well Minimum Required Capitalized Under for Capital Prompt Corrective (Dollars in thousands) Actual Adequacy Purposes Action Regulations Amount Ratio Amount Ratio Amount Ratio December 31, 2021 ChoiceOne Financial Services Inc. Total capital (to risk weighted assets) $ 204,353 14.4 % $ 113,604 8.0 % N/A N/A Common equity Tier 1 capital (to risk weighted assets) 160,338 11.3 63,902 4.5 N/A N/A Tier 1 capital (to risk weighted assets) 164,838 11.6 85,203 6.0 N/A N/A Tier 1 capital (to average assets) 164,838 7.4 89,415 4.0 N/A N/A ChoiceOne Bank Total capital (to risk weighted assets) $ 182,275 12.9 % $ 113,444 8.0 % $ 141,806 10.0 % Common equity Tier 1 capital (to risk weighted assets) 174,587 12.3 63,813 4.5 92,174 6.5 Tier 1 capital (to risk weighted assets) 174,587 12.3 85,083 6.0 113,444 8.0 Tier 1 capital (to average assets) 174,587 7.8 89,289 4.0 111,611 5.0 December 31, 2020 ChoiceOne Financial Services Inc. Total capital (to risk weighted assets) $ 162,558 13.2 % $ 98,835 8.0 % N/A N/A Common equity Tier 1 capital (to risk weighted assets) 150,465 12.2 55,595 4.5 N/A N/A Tier 1 capital (to risk weighted assets) 150,465 12.2 74,126 6.0 N/A N/A Tier 1 capital (to average assets) 150,465 8.3 72,281 4.0 N/A N/A ChoiceOne Bank Total capital (to risk weighted assets) $ 159,684 12.9 % $ 98,683 8.0 % $ 123,353 10.0 % Common equity Tier 1 capital (to risk weighted assets) 152,091 12.3 55,509 4.5 80,180 6.5 Tier 1 capital (to risk weighted assets) 152,091 12.3 74,012 6.0 98,683 8.0 Tier 1 capital (to average assets) 152,091 8.4 72,208 4.0 90,259 5.0 Banking regulations limit capital distributions by state-chartered banks. Generally, capital distributions are limited to undistributed net income for the current and prior two years. At December 31, 2021, approximately $ 26.6 million was available for the Bank to pay dividends to ChoiceOne. ChoiceOne’s ability to pay dividends to shareholders is dependent on the payment of dividends from the Bank, which is restricted by state law and regulations. 68 Note 21 – Business Combinations Community Shores Bank Corporation ChoiceOne completed the acquisition of Community Shores Bank Corporation (“Community Shores”) with and into ChoiceOne, with ChoiceOne as the surviving entity, effective on July 1, 2020. Community Shores had 4 branch offices as of the date of the merger. Total assets of Community Shores as of July 1, 2020 were $ 244.5 million, including total loans of $ 174.8 million. Deposits acquired in the merger, the majority of which were core deposits, totaled $ 227.8 million. The impact of the merger has been included in ChoiceOne’s results of operations since the effective date of the merger. As con sideration in the merger, ChoiceOne issued 524,139 shares of ChoiceOne common stock and cash in the amount of $ 5,390,000 with an approximate total value of $ 20.9 million. During 2021 management finalized accounting for certain loans and deferred tax accounts, resulting in measurement period adjustments increasing the acquisition date fair value of loans by $ 828,000 and decreasing the acquisition date fair value of other assets by $ 268,000 . As a result, goodwill recognized as a result of the acquisition was reduced by $ 560,000 . The table below presents the allocation of purchase price for the merger with Community Shores (dollars in thousands): Purchase Price Consideration $ 20,881 Net assets acquir Cash and cash equivalents 41,023 Securities available for sale 20,023 Federal Home Loan Bank and Federal Reserve Bank stock 300 Originated loans 174,802 Premises and equipment 6,204 Other real estate owned 346 Deposit based intangible 760 Other assets 1,077 Total assets 244,535 Non-interest bearing deposits 65,499 Interest bearing deposits 162,333 Total deposits 227,832 Trust preferred securities 3,039 Other liabilities 136 Total liabilities 231,007 Net assets acquired 13,528 Goodwill $ 7,353 69 County Bank Corp. ChoiceOne completed the merger of County Bank Corp. (“County”) with and into ChoiceOne effective on October 1, 2019. County had 14 branch offices and one loan production office as of the date of the merger. Total assets of County as of October 1, 2019 were $ 673 million, including total loans of $ 424 million. Deposits acquired in the merger, the majority of which were core deposits, totaled $ 574 million. The impact of the merger has been included in ChoiceOne’s results of operations since the effective date of the merger. As consideration in the merger, ChoiceOne issued 3,603,872 shares of ChoiceOne common stock with an approximate value of $ 108 million. During 2020, management finalized accounting for acquired loans and deferred taxes. As a result, the acquisition date fair value of loans was decreased by $ 238,000 , other liabilities were decreased by $ 502,000 , and goo dwill recognized as a result of the acquisition was reduced by $ 276,000 . The table below highlights the allocation of purchase price for the merger with County (dollars in thousands): Purchase Price Consideration $ 107,945 Net assets acquir Cash and cash equivalents 20,638 Equity securities at fair value 474 Securities available for sale 187,230 Federal Home Loan Bank and Federal Reserve Bank stock 2,915 Loans to other financial institutions 33,481 Originated loans 390,116 Premises and equipment 9,271 Other real estate owned 1,364 Deposit based intangible 6,359 Bank owned life insurance 16,912 Other assets 4,002 Total assets 672,762 Non-interest bearing deposits 124,113 Interest bearing deposits 449,488 Total deposits 573,601 Federal funds purchased 3,800 Advances from Federal Home Loan Bank 23,000 Other liabilities 3,282 Total liabilities 603,683 Net assets acquired 69,079 Goodwill $ 38,866 70 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on and as of the time of that evaluation, the Company’s management, including the Chief Executive Officer and principal financial officer, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods. Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation. Management assessed the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2021, as required by Section 404 of the Sarbanes-Oxley Act of 2002. Management’s assessment is based on the criteria for effective internal control over financial reporting as described in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that, as of December 31, 2021, its system of internal control over financial reporting was effective and meets the criteria of the “Internal Control – Integrated Framework. There was no change in the Company’s internal control over financial reporting that occurred during the three months ended December 31, 2021 that has materially affected, or that is reasonably likely to materially affect, the Company’s internal control over financial reporting. Item 9B. Other Information None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections None. 71 PART III Item 10. Directors, Executive Officers and Corporate Governance The information under the captions “ChoiceOne's Board of Directors and Executive Officers and “Corporate Governance” in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 25, 2022, is incorporated herein by reference. The Company has adopted a Code of Ethics for Executive Officers and Senior Financial Officers, which applies to the Chief Executive Officer and the Chief Financial Officer, as well as all other senior financial and accounting officers. The Code of Ethics is posted on the Company’s website at “ www.choiceone.com. ” The Company intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, a provision of the Code of Ethics by posting such information on its website at “ www.choiceone.com. ” Item 11. Executive Compensation The information under the captions “Executive Compensation” in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 25, 2022, is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information under the caption "Ownership of ChoiceOne Common Stock" in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 25, 2022, is incorporated herein by reference. The following table presents information regarding the equity compensation plans both approved and not approved by shareholders at December 31, 2021: Number of securities remaining available for Number of securities to Weighted-average future issuance under be issued upon exercise exercise price of equity compensation plans of outstanding options, outstanding options, (excluding securities warrants and rights warrants and rights reflected in column (a)) (a) (b) (c) Equity compensation plans approved by security holders 56,315 $ 9.27 84,832 Equity compensation plans not approved by security holders - - 183,055 Total 56,315 $ 9.27 267,887 Equity compensation plans approved by security holders include the Stock Incentive Plan of 2012, the Amended and Restated Executive Stock Incentive Plan and the Employee Stock Purchase Plan. As of December 31, 2021, 76,467 shares remained available for future issuance under the Stock Incentive Plan of 2012 and 8,365 shares remained available for future issuance under the Employee Stock Purchase Plan, in each case other than upon the exercise of outstanding stock options. No further future issuances of shares are permitted under the Amended and Restated Executive Stock Incentive Plan other than upon the exercise of outstanding stock options. The Directors’ Stock Purchase Plan and the Directors’ Equity Compensation Plan are the only equity compensation plans not approved by security holders. The Directors’ Stock Purchase Plan is designed to provide directors of the Company the option of receiving their fees in the Company’s common stock. Directors who elect to participate in the plan may elect to contribute to the plan twenty-five, fifty, seventy-five or one hundred percent of their board of director fees and one hundred percent of their director committee fees earned as directors of the Company. Contributions to the plan are made by the Company on behalf of each electing participant. Plan participants may terminate their participation in the plan at any time by written notice of withdrawal to the Company. The Directors’ Equity Compensation Plan provides for the grant and award of stock options, restricted stock, restricted stock units, stock awards, and other stock-based and stock-related awards as part of director compensation. Participants will cease to be eligible to participate in both plans when they cease to serve as directors of the Company. Shares are distributed to participants on a quarterly basis. The Directors' Equity Compensation Plan provides for the issuance of a maximum of 100,000 shares of the Company's common stock thereunder and the Directors' Stock Purchase Plan provides for issuance of a maximum of 100,000 shares thereunder, in each case subject to adjustments for certain changes in the capital structure of the Company. As of December 31, 2021, 91,633 shares remained available for issuance under the Directors' Equity Compensation Plan and 91,422 shares remained available for issuance under the Directors' Stock Purchase Plan. 72 Item 13. Certain Relationships and Related Transactions, and Director Independence The information under the captions “Related Matters - Transactions with Related Persons” and “Corporate Governance” in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 25, 2022, is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information under the caption "Related Matters - Independent Certified Public Accountants" in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 25, 2022, is incorporated herein by reference. Independent Registered Public Accounting F N Plante & Moran, PLLC Locati Auburn Hills, Michigan PCAOB ID: 166 PART IV Item 15. Exhibits and Financial Statement Schedules (a) (1) Financial Statements . The following financial statements and independent auditors' reports are filed as part of this repor Consolidated Balance Sheets at December 31, 2021 and 2020. Consolidated Statements of Income for the years ended December 31, 2021, 2020, and 2019. Consolidated Statement of Comprehensive Income for the years ended December 31, 2021, 2020, and 2019. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2021, 2020, and 2019. Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020, and 2019. Notes to Consolidated Financial Statements. Report of Independent Registered Public Accounting Firm dated March 17, 2021. (2) Financial Statement Schedules . None. Exhibit Document 3.1 Restated Articles of Incorporation of ChoiceOne Financial Services, Inc. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-A filed February 4, 2020. Here incorporated by reference. 3.2 Bylaws of ChoiceOne Financial Services, Inc., as currently in effect and any amendments thereto. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed April 21, 2021. Here incorporated by reference. 4.1 Advances, Pledge and Security Agreement between ChoiceOne Bank and the Federal Home Loan Bank of Indianapolis. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013.  Here incorporated by reference. 4.2 Form of 3.25% Fixed-to-Floating Rate Subordinated Note due September 3, 2031.  Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference. 4.3 Form of 3.25% Fixed-to-Floating Rate Global Subordinated Note due September 3, 2031.  Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference. 4.4 Description of Rights of Shareholders. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 10-K Annual Report for the year ended December 31, 2019. Here incorporated by reference. 73 10.1 Employment Agreement between ChoiceOne Financial Services, Inc. and Kelly J. Potes, dated as of September 30, 2019. (1) Previously filed as an exhibit to ChoiceOne’s Form 8-K filed October 1, 2019. Here incorporated by reference. 10.2 Employment Agreement between ChoiceOne Financial Services, Inc. and Michael J. Burke, Jr., dated as of March 22, 2019. (1) Previously filed as exhibit to ChoiceOne’s Pre-Effective Amendment No. 2 to Form S-4 filed August 5, 2019. Here incorporated by reference. 10.3 Stock Incentive Plan of 2012. (1) Previously filed as Appendix A to ChoiceOne’s definitive proxy statement for ChoiceOne’s 2018 Annual Meeting of Shareholders, filed on April 19, 2018. Here incorporated by reference. 10.4 Directors' Stock Purchase Plan, as amended. (1) Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 10-K Annual Report for the year ended December 31, 2019. Here incorporated by reference. 10.5 Director Equity Compensation Plan of 2019. (1) Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 10-K Annual Report for the year ended December 31, 2019. Here incorporated by reference. 10.6 Former Valley Ridge Executive Employee Salary Continuation Agreements, as amended. (1) Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference. 10.7 Former Valley Ridge Directors’ Deferred Compensation Plan and Agreement. (1) Previously filed as an exhibit to the ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference. 10.8 Amended and Restated Employee Stock Purchase Plan. (1) Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 10-K Annual Report for the year ended December 31, 2016. Here incorporated by reference. 21 Subsidiaries of ChoiceOne Financial Services, Inc. 23 Consent of Independent Registered Public Accounting Firm. 24 Powers of Attorney. 31.1 Certification of Chief Executive Officer. 31.2 Certification of Treasurer. 32 Certification pursuant to 18 U.S.C. § 1350. 101.INS Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) (1) This agreement is a management contract or compensation plan or arrangement to be filed as an exhibit to this Form 10-K. Copies of any exhibits will be furnished to shareholders upon written request. Requests should be directed t Adom J. Greenland, Secretary, Chief Financial Officer and Treasurer, ChoiceOne Financial Services, Inc., 109 East Division, Sparta, Michigan, 49345. 74 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ChoiceOne Financial Services, Inc. By: /s/ Kelly J. Potes March 18, 2022 Kelly J. Potes Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Kelly J. Potes Chief Executive Officer and March 18, 2022 Kelly J. Potes Director (Principal Executive Officer) /s/ Adom J. Greenland Chief Financial Officer and Treasurer (Principal Financial and March 18, 2022 Adom J. Greenland Accounting Officer) */s/ Jack G. Hendon Chairman of the Board and Director March 18, 2022 Jack G. Hendon */s/ Greg L. Armock Director March 18, 2022 Greg L. Armock */s/ Keith Brophy Director March 18, 2022 Keith Brophy */s/ Michael J. Burke, Jr. President and Director March 18, 2022 Michael J. Burke, Jr. */s/ Harold J. Burns Director March 18, 2022 Harold J. Burns */s/ Eric E. Burrough Director March 18, 2022 Eric E. Burrough */s/ David H. Bush Director March 18, 2022 David H. Bush */s/ Bruce J. Cady Director March 18, 2022 Bruce J. Cady */s/ Patrick A. Cronin Director March 18, 2022 Patrick A. Cronin */s/ Gregory A. McConnell Director March 18, 2022 Gregory A. McConnell */s/ Bradley F. McGinnis Director March 18, 2022 Bradley F. McGinnis */s/ Nels W. Nyblad Director March 18, 2022 Nels W. Nyblad */s/ Roxanne M. Page Director March 18, 2022 Roxanne M. Page *By /s/ Adom J. Greenland Attorney-in-Fact 75

WASHINGTON, D.C. 20549 FORM 10-Q ☒ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2022 ☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Numbe 000-19202 ChoiceOne Financial Services, Inc. (Exact Name of Registrant as Specified in its Charter) Michigan (State or Other Jurisdiction of Incorporation or Organization) 38-2659066 (I.R.S. Employer Identification No.) 109 East Division Sparta , Michigan (Address of Principal Executive Offices) 49345 (Zip Code) ( 616 ) 887-7366 (Registrant’s Telephone Number, including Area Code) Indicate by check mark whether the Registran (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒        No ☐ Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒        No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☒ Securities registered pursuant to Section 12(b) of the Ac Title of each class Trading symbol(s) Name of each exchange on which registered Common stock COFS NASDAQ Capital Market As of April 30, 2022, the Registra nt had outstanding 7,493,521 shares of common stock. PART I.  FINANCIAL INFORMATION Item 1. Financial Statements . ChoiceOne Financial Services, Inc. CONSOLIDATED BALANCE SHEETS March 31, December 31, (Dollars in thousands) 2022 2021 (Unaudited) (Audited) Assets Cash and due from banks $ 89,626 $ 31,537 Time deposits in other financial institutions 350 350 Cash and cash equivalents 89,976 31,887 Equity securities, at fair value (Note 2) 8,282 8,492 Securities available for sale, at fair value (Note 2) 641,048 1,098,885 Securities held to maturity (Note 2) 429,918 - Federal Home Loan Bank stock 3,493 3,824 Federal Reserve Bank stock 5,064 5,064 Loans held for sale 13,450 9,351 Loans to other financial institutions - 42,632 Loans (Note 3) 1,027,406 1,016,848 Allowance for loan losses (Note 3) ( 7,601 ) ( 7,688 ) Loans, net 1,019,805 1,009,160 Premises and equipment, net 29,678 29,880 Other real estate owned, net 172 194 Cash value of life insurance policies 43,520 43,356 Goodwill 59,946 59,946 Core deposit intangible 3,660 3,962 Other assets 28,766 20,049 Total assets $ 2,376,778 $ 2,366,682 Liabilities Deposits – noninterest-bearing $ 565,657 $ 560,931 Deposits – interest-bearing 1,579,944 1,491,363 Total deposits 2,145,601 2,052,294 Borrowings - 50,000 Subordinated debentures 35,078 35,017 Other liabilities 4,981 7,702 Total liabilities 2,185,660 2,145,013 Shareholders' Equity Preferred stock; shares authoriz 100,000 ; shares outstandin none - - Common stock and paid-in capital, no par value; shares authoriz 12,000,000 ; shares outstandin 7,489,812 at March 31, 2022 and 7,510,379 at December 31, 2021 171,492 171,913 Retained earnings 55,988 52,332 Accumulated other comprehensive loss, net ( 36,362 ) ( 2,576 ) Total shareholders’ equity 191,118 221,669 Total liabilities and shareholders’ equity $ 2,376,778 $ 2,366,682 See accompanying notes to interim consolidated financial statements. 2 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended (Dollars in thousands, except per share data) March 31, 2022 2021 Interest income Loans, including fees $ 12,298 $ 12,682 Securiti Taxable 3,507 1,856 Tax exempt 1,655 1,097 Other 14 20 Total interest income 17,474 15,655 Interest expense Deposits 783 880 Advances from Federal Home Loan Bank 1 1 Other 369 86 Total interest expense 1,153 967 Net interest income 16,321 14,688 Provision for loan losses - 250 Net interest income after provision for loan losses 16,321 14,438 Noninterest income Customer service charges 2,189 1,920 Insurance and investment commissions 205 273 Gains on sales of loans 804 2,146 Net gains on sales of securities - 1 Net gains on sales and write downs of other assets 171 5 Earnings on life insurance policies 280 186 Trust income 178 172 Change in market value of equity securities ( 356 ) 608 Other 374 289 Total noninterest income 3,845 5,600 Noninterest expense Salaries and benefits 7,606 7,168 Occupancy and equipment 1,625 1,555 Data processing 1,744 1,429 Professional fees 510 729 Supplies and postage 191 100 Advertising and promotional 132 145 Intangible amortization 282 307 FDIC insurance 225 152 Other 1,375 943 Total noninterest expense 13,690 12,528 Income before income tax 6,476 7,510 Income tax expense 948 1,272 Net income $ 5,528 $ 6,238 Basic earnings per share (Note 4) $ 0.74 $ 0.80 Diluted earnings per share (Note 4) $ 0.74 $ 0.80 Dividends declared per share $ 0.25 $ 0.22 See accompanying notes to interim consolidated financial statements. 3 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) Three Months Ended (Dollars in thousands) March 31, 2022 2021 Net income $ 5,528 $ 6,238 Other comprehensive income: Changes in net unrealized gains on investment securities available for sale, net of tax (benefit)/expense of ($ 8,981 ) and ($ 3,560 ) for the three months ended March 31, 2022 and March 31, 2021, respectively. ( 33,786 ) ( 13,393 ) Reclassification adjustment for realized (gain) loss on sale of investment securities available for sale included in net income, net of tax expense (benefit) of $ 0 and $ 0 for the three months ended March 31, 2022 and March 31, 2021, respectively. 0 ( 1 ) Other comprehensive income (loss), net of tax ( 33,786 ) ( 13,394 ) Comprehensive income (loss) $ ( 28,258 ) $ ( 7,156 ) See accompanying notes to interim consolidated financial statements. 4 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited) For the three months ended March 31, Accumulated Common Other Stock and Comprehensive Number of Paid in Retained Income/(Loss), (Dollars in thousands, except per share data) Shares Capital Earnings Net Total Balance, January 1, 2021 7,796,352 $ 178,750 $ 37,490 $ 11,028 $ 227,268 Net income 6,238 6,238 Other comprehensive loss ( 13,394 ) ( 13,394 ) Shares issued 4,732 175 175 Effect of employee stock purchases 1,201 4 4 Stock-based compensation expense - 64 64 Cash dividends declared ($ 0.22 per share) ( 1,716 ) ( 1,716 ) Balance, March 31, 2021 7,802,285 $ 178,993 $ 42,012 $ ( 2,366 ) $ 218,639 Balance, January 1, 2022 7,510,379 $ 171,913 $ 52,332 $ ( 2,576 ) $ 221,669 Net income 5,528 5,528 Other comprehensive loss ( 33,786 ) ( 33,786 ) Shares issued 5,332 133 133 Effect of employee stock purchases 7 7 Stock-based compensation expense 121 121 Shares repurchased ( 25,899 ) ( 682 ) ( 682 ) Cash dividends declared ($ 0.25 per share) ( 1,872 ) ( 1,872 ) Balance, March 31, 2022 7,489,812 $ 171,492 $ 55,988 $ ( 36,362 ) $ 191,118 See accompanying notes to interim consolidated financial statements. 5 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended (Dollars in thousands) March 31, 2022 2021 Cash flows from operating activiti Net income $ 5,528 $ 6,238 Adjustments to reconcile net income to net cash from operating activiti Provision for loan losses - 250 Depreciation 672 646 Amortization 2,673 1,949 Compensation expense on employee and director stock purchases, stock options, and restricted stock units 226 214 Net gains on sales of securities - ( 1 ) Net change in market value of equity securities 356 ( 608 ) Gains on sales of loans ( 804 ) ( 2,146 ) Loans originated for sale ( 29,531 ) ( 72,727 ) Proceeds from loan sales 25,896 68,637 Earnings on bank-owned life insurance ( 280 ) ( 186 ) Proceeds from BOLI policy 130 - Earnings on death benefit from bank-owned life insurance ( 14 ) - (Gains)/losses on sales of other real estate owned ( 41 ) ( 4 ) Proceeds from sales of other real estate owned 235 270 Deferred federal income tax (benefit)/expense 248 506 Net change in: Other assets 173 ( 3,952 ) Other liabilities ( 2,665 ) 3,124 Net cash provided by operating activities 2,802 2,210 Cash flows from investing activiti Maturities, prepayments and calls of securities available for sale 13,157 12,918 Maturities, prepayments and calls of securities held to maturity 1,078 - Purchases of securities available for sale ( 28,197 ) ( 179,221 ) Purchases of securities held to maturity ( 3,160 ) - Proceeds from redemption of Federal Home Loan Bank stock 331 - Loan originations and payments, net 31,816 63,084 Additions to premises and equipment ( 526 ) ( 1,038 ) Net cash provided by (used in) investing activities 14,499 ( 104,257 ) Cash flows from financing activiti Net change in deposits 93,307 165,386 Net change in short term borrowings ( 50,000 ) ( 5,843 ) Issuance of common stock 35 29 Repurchase of common stock ( 682 ) - Cash dividends ( 1,872 ) ( 1,716 ) Net cash provided by financing activities 40,788 157,856 Net change in cash and cash equivalents 58,089 55,809 Beginning cash and cash equivalents 31,887 79,519 Ending cash and cash equivalents $ 89,976 $ 135,328 Supplemental disclosures of cash flow informati Cash paid for interest $ 1,413 $ 1,021 Cash paid for income taxes - - Loans transferred to other real estate owned 172 123 See accompanying notes to interim consolidated financial statements. 6 ChoiceOne Financial Services, Inc. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include ChoiceOne Financial Services, Inc. ("ChoiceOne"), its wholly-owned subsidiary, ChoiceOne Bank, and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"). Intercompany transactions and balances have been eliminated in consolidation. ChoiceOne owns all of the common securities of Community Shores Capital Trust I (the “Capital Trust”). Under U.S. generally accepted accounting principles ("GAAP"), the Capital Trust is not consolidated because it is a variable interest entity and ChoiceOne is not the primary beneficiary. The accompanying unaudited consolidated financial statements and notes thereto reflect all adjustments ordinary in nature which are, in the opinion of management, necessary for a fair presentation of the Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021 , the Consolidated Statements of Income for the three -month periods ended March 31, 2022 and March 31, 2021 , the Consolidated Statements of Comprehensive Income for the three -month periods ended March 31, 2022 and March 31, 2021 , the Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2022 and March 31, 2021 , and the Consolidated Statements of Cash Flows for the three -month periods ended March 31, 2022 and March 31, 2021 . Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 . The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in ChoiceOne’s Annual Report on Form 10 -K for the year ended December 31, 2021 . Use of Estimates To prepare financial statements in conformity with GAAP, ChoiceOne’s management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. These estimates and assumptions are subject to many risks and uncertainties, including changes in interest rates and other general economic, business and political conditions, including the effects of the COVID- 19 pandemic, and its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic. Actual results may differ from these estimates. Estimates associated with the allowance for loan losses are particularly susceptible to change. Investment Securities Investment securities for which ChoiceOne has the intent and ability to hold to maturity are classified as held to maturity and are carried at amortized cost.  Investment securities not classified as held to maturity are classified as available for sale and are reported at fair value with unrealized gains and losses, net of income taxes, as a separate component of other comprehensive income. ChoiceOne determines the appropriate classification of investment securities at the time of purchase and reassesses the classification at each reporting date. Loans to Other Financial Institutions ChoiceOne Bank entered into an agreement with another financial institution to fund mortgage loans. Loans to other financial institutions are purchased participating interests in individual advances made to mortgage bankers nation-wide from an unaffiliated originating bank. The originating bank services these loans and cash flows on the individual advances (principal, interest, and fees) which are allocated pro-rata based on ownership in the participating interest, less fees paid for the servicing activity. The underlying collateral is generally made up of 1 - 4 family first residential mortgages owned by the mortgage banker and held for sale in the secondary market and have been underwritten using secondary market underwriting standards prior to purchasing the participating interest. Once the mortgage banker delivers the loan to the secondary market, the advance is required to be paid off, including ChoiceOne Bank’s participating interest. If the advance (in which ChoiceOne Bank has a participating interest) is outstanding over 90 days, the originating bank has the right to request the participating interest be paid off by the mortgage banker. There was no participating interest as of March 31, 2022. Credit risk associated with the participating interest is measured as an allowance for loan losses when necessary. Losses are charged off against the allowance when incurred and recoveries of loan charge-offs are recorded when received. At least quarterly, ChoiceOne Bank reviews the portfolios of participating interests for potential losses including any participating interest that is outstanding over 90 days (even if the advance and participating interest is current). Loans to other financial institutions are excluded from the loans described in Note 3 to the interim consolidated financial statements. Goodwill Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of the acquired tangible assets and liabilities and identifiable intangible assets. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. Core Deposit Intangible Core deposit intangible represents the value of the acquired customer core deposit bases and is included as an asset on the consolidated balance sheets. The core deposit intangible has an estimated finite life, is amortized on an accelerated basis over a 120 month period and is subject to periodic impairment evaluation. 7 Stock Transactions A total of 3,698 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of $ 98,000 under the terms of the Directors’ Stock Purchase Plan in the first quarter of 2022 . A total of 1,634 shares for a cash price of $ 35,000 were issued under the Employee Stock Purchase Plan in the first quarter of 2022 .  ChoiceOne repurchased 25,899 shares for $ 682,000 , or a weighted average all-in cost per share of $ 26.35 , during the first quarter of 2022. This was part of the common stock repurchase program announced in April 2021 which authorized repurchases of up to 390,114 shares, representing 5 % of the total outstanding shares of common stock as of the date the program was adopted. Allowance for Loan Losses The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan losses is increased by the provision for loan losses and decreased by loans charged off less any recoveries of charged off loans. Management estimates the allowance for loan losses balance required based on past loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance for loan losses when management believes that collection of a loan balance is not possible. The allowance for loan losses consists of general and specific components. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful.  The general component of management's estimate of the allowance for loan losses covers non-impaired loans and is based on historical loss experience adjusted for current factors. Management's adjustment for current factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, experience and ability of lending staff, national and economic trends and conditions, industry conditions, trends in real estate values, and other conditions. A loan is impaired when full payment under the loan terms is not expected. Troubled debt restructuring of loans is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule. All modified loans are evaluated to determine whether the loans should be reported as Troubled Debt Restructurings ("TDR"). A loan is a TDR when the Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower by modifying a loan. To make this determination, the Bank must determine whether (a) the borrower is experiencing financial difficulties and (b) the Bank granted the borrower a concession. This determination requires consideration of all facts and circumstances surrounding the modification. An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically mean the borrower is experiencing financial difficulties. Commercial loans are evaluated for impairment on an individual loan basis. If a loan is considered impaired or if a loan has been classified as a TDR, a portion of the allowance for loan losses is allocated to the loan so that it is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller-balance homogeneous loans such as consumer and residential real estate mortgage loans are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures. Reclassifications Certain amounts presented in prior periods have been reclassified to conform to the current presentation. Recent Accounting Pronouncements The Financial Accounting Standards Board (FASB) issued ASU No. 2016 - 13 , Financial Instruments — Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments . This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance attempts to reflect an entity’s current estimate of all expected credit losses and broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity may apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. Additionally, credit losses on available-for-sale debt securities will have to be presented as an allowance rather than as a write-down. This ASU is effective for fiscal years beginning after December 15, 2022, and for interim periods within those years for companies considered smaller reporting companies with the Securities and Exchange Commission. ChoiceOne was classified as a smaller reporting company as of the measurement date. Management is currently evaluating the impact of this new ASU on its consolidated financial statements which may be significant. 8 NOTE 2 – SECURITIES During the three months ended March 31, 2022, ChoiceOne reassessed and transferred, at fair value $ 428.4 million of securities classified as available for sale to the held to maturity classification.  The net unrealized pre-tax loss of $ 3.4 million as of the transfer date remained in accumulated other comprehensive income to be amortized over the remaining life of the securities, offsetting the related amortization of discount or premium on the transferred securities. No gains or losses were recognized at the time of the transfer.  The remaining net unamortized unrealized loss on transferred securities included in accumulated other comprehensive income was $ 2.6 million after tax as of March 31, 2022. The fair value of equity securities and the related gross unrealized gains and (losses) recognized in noninterest income were as follows: March 31, 2022 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity securities $ 8,100 $ 545 $ ( 363 ) $ 8,282 December 31, 2021 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity securities $ 7,953 $ 665 $ ( 126 ) $ 8,492 The following tables present the amortized cost and fair value of investment securities at the dates indicated and the corresponding amounts of gross unrealized gains and losses, including the corresponding amounts of gross unrealized gains and losses on investment securities available for sale recognized in accumulated other comprehensive income: March 31, 2022 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Available for S Cost Gains Losses Value U.S. Government and federal agency $ - $ - $ - $ - U.S. Treasury notes and bonds 93,154 8 ( 6,671 ) 86,491 State and municipal 334,907 443 ( 22,962 ) 312,388 Mortgage-backed 240,062 19 ( 13,412 ) 226,669 Corporate 1,255 4 ( 4 ) 1,255 Asset-backed securities 14,465 - ( 220 ) 14,245 Total $ 683,843 $ 474 $ ( 43,269 ) $ 641,048 Held to Maturity: U.S. Government and federal agency $ 2,962 $ - $ ( 195 ) $ 2,767 U.S. Treasury notes and bonds - - - - State and municipal 204,201 2 ( 17,668 ) 186,535 Mortgage-backed 204,165 30 ( 13,533 ) 190,662 Corporate 17,161 - ( 606 ) 16,555 Asset-backed securities 1,429 - ( 37 ) 1,392 Total $ 429,918 $ 32 $ ( 32,039 ) $ 397,911 December 31, 2021 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Available for S Cost Gains Losses Value U.S. Government and federal agency $ 2,001 $ 7 $ - $ 2,008 U.S. Treasury notes and bonds 93,267 23 ( 1,311 ) 91,979 State and municipal 528,252 10,704 ( 4,109 ) 534,847 Mortgage-backed 441,383 781 ( 9,049 ) 433,115 Corporate 20,856 19 ( 233 ) 20,642 Asset-backed securities 16,387 - ( 93 ) 16,294 Total $ 1,102,146 $ 11,534 $ ( 14,795 ) $ 1,098,885 ChoiceOne reviews its securities portfolio on a quarterly basis to determine whether unrealized losses are considered to be temporary or other-than-temporary. No other-than-temporary impairment charges were recorded in the three months ended March 31, 2022 or in the same period in 2021 . ChoiceOne believes that unrealized losses on securities were temporary in nature and were due to changes in interest rates and reduced market liquidity and not as a result of credit quality issues. 9 Presented below is a schedule of maturities of securities as of March 31, 2022 , the fair value of securities available for sale and the amortized cost of securities held to maturity as of March 31, 2022 .  Callable securities in the money are presumed called and matured at the callable date. Available for Sale Securities maturing within: Fair Value Less than 1 Year - 5 Years - More than at March 31, (Dollars in thousands) 1 Year 5 Years 10 Years 10 Years 2022 U.S. Government and federal agency $ - $ - $ - $ - $ - U.S. Treasury notes and bonds 2,007 - 84,484 - 86,491 State and municipal 17,913 34,667 185,902 73,906 312,388 Corporate 501 508 246 - 1,255 Asset-backed securities - 10,305 3,940 - 14,245 Total debt securities 20,421 45,480 274,572 73,906 414,379 Mortgage-backed securities 13,689 84,660 119,303 9,017 226,669 Equity securities - 1,000 - 7,282 8,282 Total Available for Sale $ 34,110 $ 131,140 $ 393,875 $ 90,205 $ 649,330 Held to Maturity Securities maturing within: Amortized Cost Less than 1 Year - 5 Years - More than at March 31, (Dollars in thousands) 1 Year 5 Years 10 Years 10 Years 2022 U.S. Government and federal agency $ - $ - $ 2,962 $ - $ 2,962 U.S. Treasury notes and bonds - - - - - State and municipal 2,755 4,608 97,764 99,074 204,201 Corporate - 250 15,911 1,000 17,161 Asset-backed securities - 1,429 - - 1,429 Total debt securities 2,755 6,287 116,637 100,074 225,753 Mortgage-backed securities 3,511 44,972 155,682 - 204,165 Equity securities - - - - - Total Held to Maturity $ 6,266 $ 51,259 $ 272,319 $ 100,074 $ 429,918 Following is information regarding unrealized gains and losses on equity securities for the three months ended March 31, 2022 and 2021: Three Months Ended March 31, 2022 2021 Net gains and (losses) recognized during the period $ ( 356 ) $ 608 L Net gains and (losses) recognized during the period on securities sold — — Unrealized gains and (losses) recognized during the reporting period on securities still held at the reporting date $ ( 356 ) $ 608 10 NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses and balances in the loan portfolio were as follows: Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses Three Months Ended March 31, 2022 Beginning balance $ 448 $ 1,454 $ 290 $ 3,705 $ 110 $ 671 $ 1,010 $ 7,688 Charge-offs — ( 31 ) ( 112 ) - — - — ( 143 ) Recoveries — 2 52 1 — 1 — 56 Provision ( 61 ) 327 74 ( 16 ) ( 73 ) ( 83 ) ( 168 ) - Ending balance $ 387 $ 1,752 $ 304 $ 3,690 $ 37 $ 589 $ 842 $ 7,601 Individually evaluated for impairment $ 253 $ 116 $ 3 $ 9 $ — $ 167 $ — $ 548 Collectively evaluated for impairment $ 134 $ 1,636 $ 301 $ 3,681 $ 37 $ 422 $ 842 $ 7,053 Loans March 31, 2022 Individually evaluated for impairment $ 2,542 $ 356 $ 32 $ 157 $ — $ 1,853 $ 4,940 Collectively evaluated for impairment 59,076 194,024 36,108 527,743 15,669 174,206 1,006,826 Acquired with deteriorated credit quality — 4,534 11 9,352 — 1,743 15,640 Ending balance $ 61,618 $ 198,914 $ 36,151 $ 537,252 $ 15,669 $ 177,802 $ 1,027,406 Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses Three Months Ended March 31, 2021 Beginning balance $ 257 $ 1,327 $ 317 $ 4,178 $ 97 $ 1,300 $ 117 $ 7,593 Charge-offs - ( 74 ) ( 71 ) ( 48 ) - - - ( 193 ) Recoveries - 9 79 - - 2 - 90 Provision 85 337 ( 78 ) 215 ( 23 ) ( 278 ) ( 8 ) 250 Ending balance $ 342 $ 1,599 $ 247 $ 4,345 $ 74 $ 1,024 $ 109 $ 7,740 Individually evaluated for impairment $ 114 $ 2 $ - $ 10 $ — $ 213 $ — $ 339 Collectively evaluated for impairment $ 227 $ 1,596 $ 246 $ 4,337 $ 75 $ 811 $ 109 $ 7,401 Loans March 31, 2021 Individually evaluated for impairment $ 3,173 $ 1,626 $ - $ 3,001 $ — $ 2,589 $ 10,389 Collectively evaluated for impairment 43,513 290,140 32,311 448,261 15,670 174,562 1,004,457 Acquired with deteriorated credit quality — 6,284 19 11,159 — 2,775 20,237 Ending balance $ 46,686 $ 298,050 $ 32,330 $ 462,421 $ 15,670 $ 179,926 $ 1,035,083 11 Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses December 31, 2021 Individually evaluated for impairment $ 251 $ 95 $ 2 $ 9 $ - $ 146 $ - $ 503 Collectively evaluated for impairment $ 197 $ 1,359 $ 288 $ 3,696 $ 110 $ 525 $ 1,010 $ 7,185 Loans December 31, 2021 Individually evaluated for impairment $ 2,616 $ 339 $ 14 $ 273 $ - $ 2,191 $ 5,433 Collectively evaluated for impairment 62,203 197,656 35,148 515,528 19,066 164,647 994,248 Acquired with deteriorated credit quality - 5,029 12 10,083 - 2,043 17,167 Ending balance $ 64,819 $ 203,024 $ 35,174 $ 525,884 $ 19,066 $ 168,881 $ 1,016,848 The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking ( 1 ) the risk ratings of business loans, ( 2 ) the level of classified business loans, and ( 3 ) delinquent and nonperforming consumer loans. Business loans are risk rated on a scale of 1 to 9. A description of the characteristics of the ratings follows: Risk Rating 1 through 5 or pass: These loans are considered pass credits. They exhibit acceptable credit risk and demonstrate the ability to repay the loan from normal business operations. Risk rating 6 or special menti  Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions that have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that ChoiceOne Ban k will sustain some future loss if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual assets classified as substandard. Loans falling into this category should have clear action plans and timelines with benchmarks to determine which direction the relationship will move. Risk rating 7 or substandar Loans and other credit extensions graded “7” have all the weaknesses inherent in those graded “6”, with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. Loans in this classification should be evaluated for non-accrual status. All nonaccrual commercial and Retail loans must be at a minimum graded a risk code “7”. Risk rating 8 or doubtfu Loans and other credit extensions bearing this grade have been determined to have the extreme probability of some loss, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral. Risk rating 9 or l Loans in this classification are considered uncollectible and cannot be justified as a viable asset of ChoiceOne Bank. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future. 12 Information regarding ChoiceOne Bank's credit exposure was as follows: Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category (Dollars in thousands) Agricultural Commercial and Industrial Commercial Real Estate March 31, December 31, March 31, December 31, March 31, December 31, 2022 2021 2022 2021 2022 2021 Pass $ 58,749 $ 61,864 $ 196,394 $ 201,202 $ 531,683 $ 519,537 Special Mention 327 339 1,190 300 749 778 Substandard 2,542 2,616 1,245 1,266 4,820 5,569 Doubtful - - 85 256 - - $ 61,618 $ 64,819 $ 198,914 $ 203,024 $ 537,252 $ 525,884 Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity (Dollars in thousands) Consumer Construction Real Estate Residential Real Estate March 31, December 31, March 31, December 31, March 31, December 31, 2022 2021 2022 2021 2022 2021 Performing $ 36,119 $ 35,174 $ 15,669 $ 19,066 $ 177,186 $ 168,031 Nonperforming - - - - - - Nonaccrual 32 - - - 616 850 $ 36,151 $ 35,174 $ 15,669 $ 19,066 $ 177,802 $ 168,881 The following table provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the three months ended March 31, 2022 and March 31, 2021 . Three Months Ended March 31, 2022 Pre- Post- Modification Modification Outstanding Outstanding (Dollars in thousands) Number of Recorded Recorded Loans Investment Investment Agricultural 1 $ 258 $ 258 Total 1 $ 258 $ 258 Three Months Ended March 31, 2021 Pre- Post- Modification Modification Outstanding Outstanding (Dollars in thousands) Number of Recorded Recorded Loans Investment Investment Agricultural 6 $ 2,326 $ 2,326 Commercial Real Estate 1 958 958 Total 7 $ 3,284 $ 3,284 There were no TDRs as of March 31, 2022 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three months ended March 31, 2022, which loans had been modified and classified as TDRs during the year prior to the default.  The following schedule provides information on TDRs as of March 31, 2021 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three months ended March 31, 2021, which loans had been modified and classified as TDRs during the year prior to the default. Three Months Ended March 31, 2021 (Dollars in thousands) Number Recorded of Loans Investment Commercial and industrial 1 $ 52 Commercial Real Estate 3 1,850 Total 4 $ 1,902 13 Impaired loans by loan category fol Unpaid (Dollars in thousands) Recorded Principal Related Investment Balance Allowance March 31, 2022 With no related allowance recorded Agricultural $ 314 $ 428 $ - Commercial and industrial 92 123 - Consumer - - - Construction real estate - - - Commercial real estate - - - Residential real estate - - - Subtotal 406 551 - With an allowance recorded Agricultural 2,228 2,228 253 Commercial and industrial 264 279 116 Consumer 32 32 3 Construction real estate - - - Commercial real estate 157 157 8 Residential real estate 1,853 1,907 167 Subtotal 4,534 4,603 547 Total Agricultural 2,542 2,656 253 Commercial and industrial 356 402 116 Consumer 32 32 3 Construction real estate - - - Commercial real estate 157 157 8 Residential real estate 1,853 1,907 167 Total $ 4,940 $ 5,154 $ 547 Unpaid (Dollars in thousands) Recorded Principal Related Investment Balance Allowance December 31, 2021 With no related allowance recorded Agricultural $ 314 $ 428 $ - Commercial and industrial - - - Consumer - - - Construction real estate - - - Commercial real estate 94 94 - Residential real estate 164 172 - Subtotal 572 694 - With an allowance recorded Agricultural 2,302 2,302 251 Commercial and industrial 339 363 95 Consumer 14 15 2 Construction real estate - - - Commercial real estate 179 179 9 Residential real estate 2,027 2,084 146 Subtotal 4,861 4,943 503 Total Agricultural 2,616 2,730 251 Commercial and industrial 339 363 95 Consumer 14 15 2 Construction real estate - - - Commercial real estate 273 273 9 Residential real estate 2,191 2,256 146 Total $ 5,433 $ 5,637 $ 503 14 The following schedule provides information regarding average balances of impaired loans and interest recognized on impaired loans for the three months ended March 31, 2022 and March 31, 2021: Average Interest (Dollars in thousands) Recorded Income Investment Recognized Three Months Ended March 31, 2022 With no related allowance recorded Agricultural $ 314 $ - Commercial and industrial 46 1 Consumer - - Construction real estate - - Commercial real estate 47 - Residential real estate 82 - Subtotal 489 1 With an allowance recorded Agricultural 2,265 42 Commercial and industrial 301 2 Consumer 23 - Construction real estate - - Commercial real estate 168 3 Residential real estate 1,940 17 Subtotal 4,697 64 Total Agricultural 2,579 42 Commercial and industrial 347 3 Consumer 23 - Construction real estate - - Commercial real estate 215 3 Residential real estate 2,022 17 Total $ 5,186 $ 65 Average Interest (Dollars in thousands) Recorded Income Investment Recognized Three Months Ended March 31, 2021 With no related allowance recorded Agricultural $ 348 $ - Commercial and industrial 1,490 - Consumer - - Construction real estate 40 - Commercial real estate 2,238 3 Residential real estate 166 1 Subtotal 4,282 4 With an allowance recorded Agricultural 1,413 - Commercial and industrial 155 - Consumer 4 - Construction real estate - - Commercial real estate 778 4 Residential real estate 2,488 17 Subtotal 4,838 21 Total Agricultural 1,761 - Commercial and industrial 1,645 - Consumer 4 - Construction real estate 40 - Commercial real estate 3,016 7 Residential real estate 2,654 18 Total $ 9,120 $ 25 15 An aging analysis of loans by loan category follows: Loans Loans Loans Past Due Loans Past Due Past Due Greater 90 Days Past (Dollars in thousands) 30 to 59 60 to 89 Than 90 Loans Not Total Due and Days (1) Days (1) Days (1) Total (1) Past Due Loans Accruing March 31, 2022 Agricultural $ - $ - $ - $ - $ 61,618 $ 61,618 $ - Commercial and industrial - 93 85 178 198,736 198,914 - Consumer 66 - 32 98 36,053 36,151 - Commercial real estate - - - - 537,252 537,252 - Construction real estate - - - - 15,669 15,669 - Residential real estate 2,032 28 - 2,060 175,742 177,802 - $ 2,098 $ 121 $ 117 $ 2,336 $ 1,025,070 $ 1,027,406 $ - December 31, 2021 Agricultural $ - $ - $ - $ - $ 64,819 $ 64,819 $ - Commercial and industrial 21 - 88 109 202,915 203,024 - Consumer 70 15 - 85 35,089 35,174 - Commercial real estate 422 13 279 714 525,170 525,884 - Construction real estate 1,149 1,235 - 2,384 16,682 19,066 - Residential real estate 1,489 306 454 2,249 166,632 168,881 - $ 3,151 $ 1,569 $ 821 $ 5,541 $ 1,011,307 $ 1,016,848 $ - ( 1 ) Includes nonaccrual loans. Nonaccrual loans by loan category fol (Dollars in thousands) March 31, December 31, 2022 2021 Agricultural $ 314 $ 313 Commercial and industrial 205 285 Consumer 32 - Commercial real estate - 279 Residential real estate 616 850 $ 1,167 $ 1,727 16 The table below details the outstanding balances of the County Bank Corp. acquired loan portfolio and the acquisition fair value adjustments at acquisition date of October 1, 2019 ( dollars in thousands): Acquired Acquired Acquired Impaired Non-impaired Total Loans acquired - contractual payments $ 7,729 $ 387,394 $ 395,123 Nonaccretable difference ( 2,928 ) - ( 2,928 ) Expected cash flows 4,801 387,394 392,195 Accretable yield ( 185 ) ( 1,894 ) ( 2,079 ) Carrying balance at acquisition date $ 4,616 $ 385,500 $ 390,116 The table below presents a roll forward of the accretable yield on the County Bank Corp. acquired loan portfolio for the years ended December 31, 2019, December 31, 2020, and December 31, 2021 and the three months ended March 31, 2022 (dollars in thousands): (Dollars in thousands) Acquired Acquired Acquired Impaired Non-impaired Total Balance, January 1, 2019 $ - $ - $ - Merger with County Bank Corp on October 1, 2019 185 1,894 2,079 Accretion October 1, 2019 through December 31, 2019 - ( 75 ) ( 75 ) Balance January 1, 2020 185 1,819 2,004 Accretion January 1, 2020 through December 31, 2020 ( 50 ) ( 295 ) ( 345 ) Balance January 1, 2021 135 1,524 1,659 Accretion January 1, 2021 through December 31, 2021 ( 247 ) ( 95 ) ( 342 ) Transfer from non-accretable to accretable yield 400 - 400 Balance January 1, 2022 288 1,429 1,717 Transfer from non-accretable to accretable yield 400 - 400 Accretion January 1, 2022 through March 31, 2022 ( 102 ) ( 151 ) ( 253 ) Balance, March 31, 2022 $ 586 $ 1,278 $ 1,864 The table below details the outstanding balances of the Community Shores Bank Corporation acquired loan portfolio and the acquisition fair value adjustments at acquisition date of July 1, 2020 ( dollars in thousands): Acquired Acquired Acquired Impaired Non-impaired Total Loans acquired - contractual payments $ 20,491 $ 158,495 $ 178,986 Nonaccretable difference ( 2,719 ) - ( 2,719 ) Expected cash flows 17,772 158,495 176,267 Accretable yield ( 869 ) ( 596 ) ( 1,465 ) Carrying balance at acquisition date $ 16,903 $ 157,899 $ 174,802 The table below presents a roll forward of the accretable yield on Community Shores Bank Corporation acquired loan portfolio for the years ended December 31, 2020 and December 31, 2021 and the three months ended March 31, 2022 (dollars in thousands): Acquired Acquired Acquired Impaired Non-impaired Total Balance January 1, 2020 $ - $ - $ - Merger with Community Shores Bank Corporation on July 1, 2020 869 596 1,465 Accretion July 1, 2020 through December 31, 2020 ( 26 ) ( 141 ) ( 167 ) Balance, January 1, 2021 843 455 1,298 Accretion January 1, 2021 through December 31, 2021 ( 321 ) ( 258 ) ( 579 ) Balance January 1, 2022 522 197 719 Transfer from non-accretable to accretable yield 874 - 874 Accretion January 1, 2022 through March 31, 2022 ( 302 ) - ( 302 ) Balance, March 31, 2022 $ 1,094 $ 197 $ 1,291 17 NOTE 4 – EARNINGS PER SHARE Earnings per share are based on the weighted average number of shares outstanding during the period. A computation of basic earnings per share and diluted earnings per share follows: Three Months Ended (Dollars in thousands, except share data) March 31, 2022 2021 Basic Net income $ 5,528 $ 6,238 Weighted average common shares outstanding 7,495,464 7,801,058 Basic earnings per common shares $ 0.74 $ 0.80 Diluted Net income $ 5,528 $ 6,238 Weighted average common shares outstanding 7,495,464 7,801,058 Plus dilutive stock options and restricted stock units 21,461 9,732 Weighted average common shares outstanding and potentially dilutive shares 7,516,925 7,810,790 Diluted earnings per common share $ 0.74 $ 0.80 There were 12,000 stock options that were considered anti-dilutive to earnings per share for the three months ended March 31, 2022. There were no stock options that were considered to be anti-dilutive to earnings per share for the three months ended March 31, 2021. There were no restricted stock units that were considered anti-dilutive to earnings per share during either the three months ended March 31, 2022 or March 31, 2021. 18 Note 5 – Financial Instruments Financial instruments as of the dates indicated were as follows: Quoted Prices In Active Significant Markets for Other Significant Identical Observable Unobservable (Dollars in thousands) Carrying Estimated Assets Inputs Inputs Amount Fair Value (Level 1) (Level 2) (Level 3) March 31, 2022 Assets Cash and cash equivalents $ 89,976 $ 89,976 $ 89,976 $ - $ - Equity securities at fair value 8,282 8,282 6,515 - 1,767 Securities available for sale 641,048 641,048 - 641,048 - Securities held to maturity 429,918 397,911 - 380,447 17,464 Federal Home Loan Bank and Federal Reserve Bank stock 8,557 8,557 - 8,557 - Loans held for sale 13,450 13,853 - 13,853 - Loans to other financial institutions - - - - - Loans, net 1,019,805 1,001,696 - - 1,001,696 Accrued interest receivable 9,382 9,382 - 9,382 - Interest rate lock commitments 167 167 - 167 - Mortgage loan servicing rights 4,680 5,537 - 5,537 - Liabilities Noninterest-bearing deposits 565,657 565,657 - 565,657 - Interest-bearing deposits 1,579,944 1,577,909 - 1,577,909 - Borrowings - - - - - Subordinated debentures 35,078 31,350 - 31,350 - Accrued interest payable 181 181 - 181 - December 31, 2021 Assets Cash and cash equivalents $ 31,887 $ 31,887 $ 31,887 $ - $ - Equity securities at fair value 8,492 8,492 6,724 - 1,768 Securities available for sale 1,098,885 1,098,885 - 1,077,835 21,050 Federal Home Loan Bank and Federal Reserve Bank stock 8,888 8,888 - 8,888 - Loans held for sale 9,351 9,632 - 9,632 - Loans to other financial institutions 42,632 42,632 - 42,632 - Loans, net 1,009,160 999,393 - - 999,393 Accrued interest receivable 8,211 8,211 - 8,211 - Interest rate lock commitments 172 172 - 172 - Mortgage loan servicing rights 4,666 5,522 - 5,522 - Liabilities Noninterest-bearing deposits 560,931 560,931 - 560,931 - Interest-bearing deposits 1,491,363 1,491,135 - 1,491,135 - Borrowings 50,000 50,000 - 50,000 - Subordinated debentures 35,017 33,414 - 33,414 - Accrued interest payable 441 441 - 441 - 19 NOTE 6 – FAIR VALUE MEASUREMENTS The following tables present information about assets and liabilities measured at fair value on a recurring basis and the valuation techniques used to determine those fair values. In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that ChoiceOne Bank has the ability to access. Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability. In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. ChoiceOne Bank’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability. There were no liabilities measured at fair value as of March 31, 2022 or December 31, 2021 . Disclosures concerning assets measured at fair value are as follows: Assets Measured at Fair Value on a Recurring Basis Quoted Prices In Active Significant Markets for Other Significant Identical Observable Unobservable Balance (Dollars in thousands) Assets Inputs Inputs at Date (Level 1) (Level 2) (Level 3) Indicated Equity Securities Held at Fair Value - March 31, 2022 Equity securities $ 6,515 $ - $ 1,767 $ 8,282 Investment Securities, Available for Sale - March 31, 2022 U. S. Government and federal agency $ - $ - $ - $ - U. S. Treasury notes and bonds - 86,491 - 86,491 State and municipal - 312,388 - 312,388 Mortgage-backed - 226,669 - 226,669 Corporate - 1,255 - 1,255 Asset-backed securities - 14,245 - 14,245 Total $ - $ 641,048 $ - $ 641,048 Equity Securities Held at Fair Value - December 31, 2021 Equity securities $ 6,724 $ - $ 1,768 $ 8,492 Investment Securities, Available for Sale - December 31, 2021 U. S. Government and federal agency $ - $ 2,008 $ - $ 2,008 U. S. Treasury notes and bonds - 91,979 - 91,979 State and municipal - 514,797 20,050 534,847 Mortgage-backed - 433,115 - 433,115 Corporate - 19,642 1,000 20,642 Asset-backed securities - 16,294 - 16,294 Total $ - $ 1,077,835 $ 21,050 $ 1,098,885 20 Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis Three Months Ended (Dollars in thousands) March 31, 2022 2021 Equity Securities Held at Fair Value Balance, January 1 $ 1,768 $ 1,485 Total realized and unrealized gains included in noninterest income ( 1 ) ( 40 ) Net purchases, sales, calls, and maturities - 500 Net transfers into Level 3 - - Balance, March 31 $ 1,767 $ 1,945 Amount of total losses for the period included in earning attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at March 31 $ ( 1 ) $ ( 40 ) Investment Securities, Available for Sale Balance, January 1 $ 21,050 $ 11,423 Total unrealized gains included in other comprehensive income - ( 270 ) Net purchases, sales, calls, and maturities - 2,453 Net transfers into Level 3 - - Transfer to held to maturity ( 21,050 ) - Balance, March 31 $ - $ 13,606 Amount of total losses for the period included in earning attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at March 31 $ - $ ( 270 ) Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 investment securities and liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs. Securities categorized as Level 3 assets as of March 31, 2022 primarily consist of common and preferred equity securities of community banks. As of December 31, 2021, bonds issued by local municipalities were classified as available for sale and were included as Level 3 securities. ChoiceOne estimates the fair value of these bonds and equity securities based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved. ChoiceOne also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment.  Disclosures concerning assets measured at fair value on a non-recurring basis are as follows: Assets Measured at Fair Value on a Non-recurring Basis Quoted Prices In Active Significant Markets for Other Significant Balances at Identical Observable Unobservable (Dollars in thousands) Dates Assets Inputs Inputs Indicated (Level 1) (Level 2) (Level 3) Impaired Loans March 31, 2022 $ 4,940 $ - $ - $ 4,940 December 31, 2021 $ 5,433 $ - $ - $ 5,433 Other Real Estate March 31, 2022 $ 172 $ - $ - $ 172 December 31, 2021 $ 194 $ - $ - $ 194 Mortgage Loan Servicing Rights March 31, 2022 $ 4,680 $ - $ 4,680 $ - December 31, 2021 $ 4,666 $ - $ 4,666 $ - Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired.  ChoiceOne estimates the fair value of the loans based on the present value of expected future cash flows using management’s estimate of key assumptions.  These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). The changes in fair value consisted of charge-downs of impaired loans that were posted to the allowance for loan losses and write-downs of other real estate that were posted to a valuation account. 21 NOTE 7 – REVENUE FROM CONTRACTS WITH CUSTOMERS ChoiceOne has a variety of sources of revenue, which include interest and fees from customers as well as revenue from non-customers.  ASC Topic 606, Revenue from Contracts With Customers, covers certain sources of revenue that are classified within noninterest income in the Consolidated Statements of Income.  Sources of revenue that are included in the scope of ASC Topic 606 include service charges and fees on deposit accounts, interchange income, investment asset management income and transaction-based revenue, and other charges and fees for customer services. Service Charges and Fees on Deposit Accounts Revenue includes charges and fees to provide account maintenance, overdraft services, wire transfers, funds transfer, and other deposit-related services.  Account maintenance fees such as monthly service charges are recognized over the period of time that the service is provided.  Transaction fees such as wire transfer charges are recognized when the service is provided to the customer. Interchange Income Revenue includes debit card interchange and network revenues.  This revenue is earned on debit card transactions that are conducted through payment networks such as MasterCard. The revenue is recorded as services are delivered and is presented net of interchange expenses. Investment Commission Income Revenue includes fees from the investment management advisory services and revenue is recognized when services are rendered.  Revenue also includes commissions received from the placement of brokerage transactions for purchase or sale of stocks or other investments. Commission income is recognized when the transaction has been completed. Trust Fee Income Revenue includes fees from the management of trust assets and from other related advisory services. Revenue is recognized when services are rendered. Following is noninterest income separated by revenue within the scope of ASC 606 and revenue within the scope of other GAAP topics: Three Months Ended March 31, (Dollars in thousands) 2022 2021 Service charges and fees on deposit accounts $ 1,031 $ 785 Interchange income 1,157 1,135 Investment commission income 205 236 Trust fee income 178 173 Other charges and fees for customer services 148 166 Noninterest income from contracts with customers within the scope of ASC 606 2,719 2,495 Noninterest income within the scope of other GAAP topics 1,126 3,105 Total noninterest income $ 3,845 $ 5,600 NOTE 8 – SUBSEQUENT EVENTS During the first quarter of 2022, the Federal Reserve increased the federal funds rate by 25 basis points in response to published inflation rates, causing interest rates generally to sharply increase.  This change in interest rates increased ChoiceOne's unrealized pre-tax loss on its available for sale securities portfolio from $ 3.3 million at December 31, 2021 to $ 42.8 million at March 31, 2022. Additionally, meeting minutes from the Federal Open Market Committee indicated that additional increases in the federal funds rate are expected in order to combat inflation in the coming quarters.  As such, ChoiceOne has elected to utilize interest rate derivatives in order to better manage its interest rate risk position.  On April 21, 2022, ChoiceOne purchased five forward-starting interest rate caps with a total notional amount of $ 200 million and entered into a $ 200 million forward-starting pay-fixed interest rate swap.  ChoiceOne also entered into a $ 200 million receive-fixed interest rate swap, which, in the current environment, offsets the cost of the rising rate protection.  The five forward-starting interest rate caps are tied to the Secured Overnight Financing Rate ("SOFR") with a strike price of 2.68 %, and are structured as a two -year forward eight year term.  The forward-starting pay-fixed interest rate swap is also structured with a two -year forward eight year term, and ChoiceOne will pay a coupon rate of 2.75 % while receiving SOFR.  The receive-fixed interest rate swap has a two year term with an immediate start date and ChoiceOne is receiving a fixed coupon of 2.41 % while paying SOFR.  These strategies create accounting symmetry between available-for-sale securities and other comprehensive income (equity), thus protecting tangible capital from further increases in interest rates.  These three strategies, in the aggregate, are expected to be modestly accretive to net income in 2022 and better position ChoiceOne Bank should rates continue to rise. 22 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations . The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (“ChoiceOne”), its wholly-owned subsidiary ChoiceOne Bank, and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc.  This discussion should be read in conjunction with the interim consolidated financial statements and related notes. FORWARD-LOOKING STATEMENTS This discussion and other sections of this quarterly report contain forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and ChoiceOne.  Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “look forward,” “continue”, “future”, and variations of such words and similar expressions are intended to identify such forward-looking statements.  Management’s determination of the provision and allowance for loan losses, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management’s assumptions that are inherently forward-looking.  Examples of forward-looking statements also include, but are not limited to, statements related to risks and uncertainties related to, and the impact of, the COVID-19 pandemic on the businesses, financial condition and results of operations of ChoiceOne and its customers and statements regarding the outlook and expectations of ChoiceOne and its customers.  All of the information concerning interest rate sensitivity is forward-looking.  All statements with references to future time periods are forward-looking.  These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence.  Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements.  Furthermore, ChoiceOne undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. Additional risk factors include, but are not limited to, the risk factors discussed in Item 1A of ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2021 and in Part II, Item 1A of this Quarterly Report on Form 10-Q.  These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. 23 RESULTS OF OPERATIONS Net income for the first quarter of 2022 was $ 5,528,000 , which represented a decline of $ 710,000 or 11% compared to the first quarter of 2021 .  Basic and diluted earnings per common share were $0.74 for the first quarter of 2022 compared to $0.80 for the first quarter of the prior year.  The decline in net income in the first quarter of 2022 compared to the same period in the prior year resulted in part from a decline of refinancing activity within ChoiceOne's mortgage portfolio due to a rise in mortgage rates since the first quarter of the prior year.  Net income also declined as noninterest expense increased related to salaries and wages of new commercial loan production staff and wealth management staff.  These factors were offset by an increase of $1.8 million in interest income as the balance of both core loans and securities continued to grow.  Core loans (defined as loans excluding loans held for sale, loans to other financial institutions, and Paycheck Protection Program (“PPP”) loans) increased $121.3 million from March 31, 2021 to March 31, 2022. The return on average assets and return on average shareholders’ equity were 0.93% and 10.72%, respectively, for the first quarter of 2022 , compared to 1.25% and 11.13%, respectively, for the same period in 2021 . Paycheck Protection Program ("PPP") ChoiceOne processed over $126 million in PPP loans in 2020, acquired an additional $37 million in PPP loans in the merger with Community Shores, and originated $89.1 million in PPP loans in 2021.  PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. PPP loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven in whole or in part.  Payments are deferred until either the date on which the Small Business Administration ("SBA") remits the amount of forgiveness proceeds to the lender or the date that is ten months after the last day of the covered period if the borrower does not apply for forgiveness within that ten-month period.  The loans are 100% guaranteed by the SBA.  The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. Upon SBA forgiveness, unrecognized fees are recognized into interest income. During the three months ended March 31, 2022, $24.7 million of PPP loans were forgiven resulting in $869,000 of fee income.  $8.5 million in PPP loans and $351,000 in deferred PPP fee income remains outstanding as of March 31, 2022.  Management expects the remaining PPP loans to be forgiven in the second quarter of 2022. Dividends Cash dividends of $1,872,000 or $0.25 per share were declared in the first quarter of 2022 , compared to $1,716,000 or $0.22 per share declared in the first quarter of 2021 .  The cash dividend payout percentage was 33.9% for the first quarter of 2022 , compared to 27.5% in the same period in the prior year. Interest Income and Expense Tables 1 and 2 on the following pages provide information regarding interest income and expense for the three months ended March 31, 2022 and 2021.  Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities.  Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates.  These tables are referred to in the discussion of interest income, interest expense and net interest income. 24 Table 1 – Average Balances and Tax-Equivalent Interest Rates Three Months Ended March 31, 2022 2021 (Dollars in thousands) Average Average Balance Interest Rate Balance Interest Rate Assets: Loans (1)(3)(4)(5) $ 1,037,646 $ 12,304 4.74 % $ 1,080,181 $ 12,687 4.70 % Taxable securities (2) 795,888 3,507 1.76 438,575 1,856 1.69 Nontaxable securities (1) 334,793 2,097 2.50 201,228 1,390 2.76 Other 36,460 14 0.15 84,822 20 0.09 Interest-earning assets 2,204,787 17,921 3.25 1,804,806 15,953 3.54 Noninterest-earning assets 171,077 184,954 Total assets $ 2,375,864 $ 1,989,760 Liabilities and Shareholders' Equity: Interest-bearing demand deposits $ 928,437 $ 435 0.19 % $ 715,868 $ 429 0.24 % Savings deposits 440,873 146 0.13 355,395 114 0.13 Certificates of deposit 179,375 202 0.45 195,093 337 0.69 Borrowings 10,239 6 0.22 8,462 35 1.70 Subordinated debentures 35,342 364 4.12 3,099 52 6.65 Interest-bearing liabilities 1,594,266 1,153 0.29 1,277,917 967 0.30 Demand deposits 553,267 479,649 Other noninterest-bearing liabilities 22,051 7,937 Total liabilities 2,169,584 1,765,503 Shareholders' equity 206,280 224,257 Total liabilities and shareholders' equity $ 2,375,864 $ 1,989,760 Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 16,768 $ 14,986 Net interest margin (tax-equivalent basis) (Non-GAAP) (1) 3.04 % 3.32 % Reconciliation to Reported Net Interest Income Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 16,768 $ 14,986 Adjustment for taxable equivalent interest (447 ) (297 ) Net interest income (GAAP) $ 16,321 $ 14,689 Net interest margin (GAAP) 2.96 % 3.26 % (1) Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%.  The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry.  These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities. (2) Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock. (3) Loans include both loans to other financial institutions and loans held for sale. (4) Non-accruing loan and PPP loan balances are included in the balances of average loans.  Non-accruing loan average balances were $1.4 million and $5.9 million in the first quarter of 2022 and 2021, respectively.  PPP loan average balances were $22.8 million and $137.7 million in the first quarter of 2022 and 2021, respectively. (5) Interest on loans included net origination fees, accretion income, and PPP fees.  Accretion income was $818,000 and $351,000 in the first quarter of 2022 and 2021, respectively. PPP fees were approximately $869,000 and $1.4 million in the first quarter of 2022 and 2021, respectively. 25 Table 2 – Changes in Tax-Equivalent Net Interest Income Three Months Ended March 31, (Dollars in thousands) 2022 Over 2021 Total Volume Rate Increase (decrease) in interest income (1) Loans (2) $ (383 ) $ (1,063 ) $ 680 Taxable securities 1,651 1,568 83 Nontaxable securities (2) 707 1,521 (814 ) Other (6 ) (50 ) 43 Net change in interest income 1,969 1,976 (8 ) Increase (decrease) in interest expense (1) Interest-bearing demand deposits 6 436 (430 ) Savings deposits 32 30 2 Certificates of deposit (135 ) (25 ) (110 ) Borrowings (30 ) 43 (73 ) Subordinated debentures 312 452 (139 ) Net change in interest expense 185 936 (750 ) Net change in tax-equivalent net interest income $ 1,784 $ 1,040 $ 742 (1) The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s interest rate.  The rate variance is computed as the change in interest rate multiplied by the previous year’s volume (average balance).  The change in interest due to both volume and rate has been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. (2) Interest on nontaxable investment securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21%. Net Interest Income Tax-equivalent net interest income increased $1.8 million in the first three months of 2022 compared to the same period in 2021 . This was partially due to a $490.9 million increase in the securities portfolio balance compared to 2021. Net interest margin on a tax-equivalent basis declined by 28 basis points to 3.04% in the first quarter of 2022 from 3.32% in the same period of 2021. The decline was due to lower PPP fees and a higher percentage of securities to total assets. The average balance of loans decreased $42.5 million in the first quarter of 2022 compared to the same period in 2021.  The decline in average loan balance is due to average PPP loans declining $116.9 million from March 31, 2021 to March 31, 2022.  This decline in balance was offset by an increase in average core loans (defined as loans excluding PPP loans, loans to other financial institutions, and loans held for sale) of $86.7 million from March 31, 2021 to March 31, 2022. The decrease in PPP loan balance and fees caused tax-equivalent interest income from loans to decrease $383,000 in the first quarter of 2022 compared to the same period in the prior year. The average balance of total securities increased $490.9 million in the first quarter of 2022 compared to the same period in 2021. The securities portfolio has grown as ChoiceOne has deployed excess deposit dollars into securities with the intent to transition to loans as good credits become available.  The effect of the average balance growth, partially offset by a combined 5 basis point reduction in the average rate earned on securities, caused tax-equivalent securities income to increase $2.4 million in the first quarter of 2022 compared to the same period in 2021. 26 Growth of $298.0 million in the average balance of interest-bearing demand deposits and savings deposits, partially offset by a combined 3 basis point decrease in the average rate paid, caused interest expense to be $38,000 higher in the first three months of 2022 compared to the first three months of the prior year. The average balance of certificates of deposit decreased $15.7 million in the first three months of 2022 compared to the same period in 2021. The decreased balance and a reduction of 24 basis points in the average rate paid on certificates caused interest expense to decrease $135,000 in the first three months of 2022 compared to the same period in 2021.  In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031.  In addition, ChoiceOne holds certain subordinated debentures issued in connection with a trust preferred securities offering that were obtained as part of the merger with Community Shores.  These increased the average balance of subordinated debentures by $32.2 million in the first three months of 2022 compared to the same period in the prior year and caused interest expense to increase by $312,000. Provision and Allowance for Loan Losses The provision for loan losses was $0 in the first quarter of 2022, compared to $250,000 in the same period in the prior year. No provision in the first quarter of 2022 was deemed prudent based on our assessment of the probable estimated losses inherent in the loan portfolio. Our methodology for measuring the appropriate level of allowance for loan losses and related provision for loan losses involves specific allocations for loans considered impaired, and general allocations for homogeneous loans based on historical loss experience. Loans classified as impaired loans declined by $494,000 during the three months ended March 31, 2022.  The specific allowance for loan losses for impaired loans increased by $44,000 during the three months ended March 31, 2022 as the loans being evaluated had a higher risk of loss based on management's judgement than impaired loans at  December 31, 2021. The determination of our loss factors is based, in part, upon our actual loss history adjusted for significant qualitative factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date.  ChoiceOne uses a rolling 20 quarter actual net charge-off history as the base for the computation. Nonperforming loans were $4.7 million as of March 31, 2022, compared to $5.5 million as of December 31, 2021.  The allowance for loan losses was 0.74% of total loans at March 31, 2022, compared to 0.76% at December 31, 2021.  Loans acquired in the mergers with County and Community Shores were recorded at fair value and as a result do not have an allowance for loan losses allocated to them unless credit deteriorates subsequent to acquisition.  ChoiceOne has $4.5 million in credit mark remaining on loans acquired in the mergers.  If the credit mark associated with the loans acquired in the mergers were added to the allowance for loan losses, the total allowance for loan losses would have represented 1.18% of total loans at March 31, 2022. Charge-offs and recoveries for respective loan categories for the three months ended March 31, 2022 and 2021 were as follows: (Dollars in thousands) 2022 2021 Charge-offs Recoveries Charge-offs Recoveries Agricultural $ - $ - $ - $ - Commercial and industrial 31 2 74 9 Consumer 112 52 71 79 Commercial real estate - 1 48 - Residential real estate - 1 - 2 $ 143 $ 56 $ 193 $ 90 Net charge-offs were $87,000 in the first quarter of 2022, compared to net charge-offs of $103,000 during the same period in 2021. Net charge-offs on an annualized basis as a percentage of average loans were 0.03% in the first three months of 2022 compared to annualized net charge-offs of 0.04% of average loans in the same period in the prior year. Management is aware that the economic climate in Michigan will continue to affect business and individual borrowers. Management believes that the COVID-19 pandemic will continue to have an impact in 2022 and, accordingly, has maintained a qualitative allocation related to the COVID-19 pandemic in evaluating its allowance for loan losses. Management has worked and intends to continue to work with delinquent borrowers in an attempt to lessen the impact of the COVID-19 pandemic on ChoiceOne. ChoiceOne has allocated approximately $545,000 of its allowance for loan losses to borrowers falling into industry classification codes that management believes to be highly or moderately affected by the pandemic, as follows: Highly Affected Moderately Affected Accommodation Ambulatory Health Care Services Amusement, Gambling, and Recreation Industries Educational Services Food Services and Drinking Places Merchant Wholesalers, Durable Goods Performing Arts, Spectator Sports, and Related Industries Merchant Wholesalers, Nondurable Goods Rental and Leasing Services Miscellaneous Store Retailers Scenic and Sightseeing Transportation Motion Picture and Sound Recording Industries Transit and Ground Passenger Transportation Real Estate Loans highly affected and moderately affected based on their commercial industry category have been allocated an additional 10 basis points and 5 basis points, respectively.  ChoiceOne has also allocated 5 basis points to all retail loan categories.  It is noted that this allowance amount is in addition to the regularly calculated allowance based on risk rating and qualitative factors.  These allocations have continued to decline, as ChoiceOne has seen improvements in customer, industry, and economic conditions related to the effects of the pandemic.  ChoiceOne will continue to monitor concentrations as part of its analysis on an ongoing basis. Management will continue to monitor charge-offs, changes in the level of nonperforming loans, changes within the composition of the loan portfolio and the impact of the COVID-19 pandemic, and it will adjust the provision and allowance for loan losses as determined to be necessary. Noninterest Income Total noninterest income declined $1.8 million in the first quarter of 2022 compared to the same period in 2021.  Total noninterest income in the first quarter of 2021 was bolstered by heightened levels of refinancing activity within ChoiceOne's mortgage portfolio, with gains on sales of loans $1.3 million larger than in the first quarter of 2022.  Customer service charges increased $269,000 compared to the same period in the prior year.  Prior year service charges were depressed by stay at home orders during the COVID-19 pandemic.  The market value of equity securities declined during the current quarter compared to the first quarter of 2021 consistent with general market conditions.  Equity securities include local community bank stocks and Community Reinvestment Act bond mutual funds. Noninterest Expense Total noninterest expense declined $68,000 in the first quarter of 2022 compared to the fourth quarter of 2021 and increased $1.2 million compared to the first quarter of 2021.  The increase since the first quarter of 2021 is related to an increase in salaries and wages due to new commercial loan production staff and wealth management staff.  Data processing and other expenses have also increased in the first quarter of 2022 compared to the same quarter in the prior year as ChoiceOne looks to improve its efficiency through automation and use of digital tools. Income Tax Expense Income tax expense was $948,000 in the first quarter of 2022 compared to $ 1,272,000 for the same period in 2021 . The decrease was due to a higher level of income before income tax in 2021. The effective tax rate was 14.6% for the first quarter of 2022 compared to 16.9% for the first quarter of 2021.  The decline in the effective tax rate resulted from increased interest income from tax-exempt securities in 2022 compared to 2021. 27 FINANCIAL CONDITION Securities In the last two years ChoiceOne has grown its securities portfolio substantially.  Total available for sale securities on December 31, 2020, amounted to $577.7 million and grew steadily to an available for sale balance on December 31, 2021, of $1.1 billion.  Many of the securities making up this balance include local municipals and other securities ChoiceOne has no intent to sell prior to maturity.  During the three months ended March 31, 2022, ChoiceOne elected to move $428.4 million of the portfolio into a held to maturity status.  Management believes the $641.0 million in available for sale securities at March 31, 2022 to be sufficient for any future liquidity needs. There were no sales of securities in the first three months of 2022; however, $3.8 million of securities were called or matured during that same period. Principal repayments on securities totaled $10.4 million in the first three months of 2022. Loans Core loans, which exclude PPP loans, held for sale loans, and loans to other financial institutions, grew organically by $121.3 million from March 31, 2021 to March 31, 2022. Additions to our commercial lending staff in 2021 and investments in the automation of our commercial loan process have helped drive our pipeline of commercial loans and corresponding growth.  Loans to other financial institutions decreased $7.3 million from March 31, 2021 to March 31, 2022. Loans to other financial institutions is comprised of a warehouse line of credit to facilitate mortgage loan originations and fluctuates with the national mortgage market.  In the first quarter of 2022, $24.7 million of PPP loans were forgiven resulting in $869,000 of fee income.  $8.5 million in PPP loans and $351,000 in deferred PPP fee income remains outstanding as of March 31, 2022.  During the first quarter of 2022, ChoiceOne recorded accretion income in the amount of $818,000, while the remaining credit mark on acquired loans from the recent mergers with County Bank Corp. and Community Shores totaled $4.5 million as of March 31, 2022. Excluding PPP loans, ChoiceOne saw an increase to commercial and industrial loans of $20.0 million and commercial real estate loans of $10.3 million during the first three months of 2022.  Excluding PPP loans, ChoiceOne saw declines of $3.3 million in agricultural loans and $3.4 million in construction real estate loans in the first three months of 2022.  The other changes resulted from normal fluctuations in borrower activity. Asset Quality Information regarding impaired loans can be found in Note 3 to the consolidated financial statements included in this report.  The total balance of loans classified as impaired was $4.9 million at March 31, 2022, compared to $5.4 million as of December 31, 2021.  The change in the first three months of 2022 was primarily comprised of a decrease of $338,000 in impaired residential real estate loans. As part of its review of the loan portfolio, management also monitors the various nonperforming loans.  Nonperforming loans are comprised o (1) loans accounted for on a nonaccrual basis; (2) loans, not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments; and (3) loans, not included in nonaccrual or loans past due 90 days or more, which are considered troubled debt restructurings ("TDRs"). The balances of these nonperforming loans were as follows: (Dollars in thousands) March 31, December 31, 2022 2021 Loans accounted for on a nonaccrual basis $ 1,167 $ 1,727 Accruing loans which are contractually past due 90 days or more as to principal or interest payments - - Loans defined as "troubled debt restructurings " which are not included above 3,513 3,816 Total $ 4,680 $ 5,543 The reduction in the balance of nonaccrual loans in the first three months of 2022 was primarily due to loans that were paid off.  It is also noted that 90% of loans considered TDRs were performing according to their restructured terms as of March 31, 2022.  Management believes the allowance for loan losses allocated to its nonperforming loans is sufficient at March 31, 2022. 28 Goodwill Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value.  Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required. ChoiceOne acquired Valley Ridge Financial Corp. in 2006, County in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $13.7 million, $38.9 million and $7.3 million, respectively. Management performed its annual qualitative assessment of goodwill as of June 30, 2021. In evaluating whether it is more likely than not that the fair value of ChoiceOne's operations was less than the carrying amount, management assessed the relevant events and circumstances such as the ones noted in ASC 350-20-35-3c. The analysis consisted of a review of ChoiceOne’s current and expected future financial performance, the potential impact of the COVID-19 pandemic on the ability of ChoiceOne’s borrowers to comply with loan terms, and the impact that both short-term and long-term interest rates have had and may continue to have on net interest margin and mortgage sales activity. The share price and book value of ChoiceOne’s stock were also compared to the prior year. Management also compared average deal values for recent closed bank transactions to ChoiceOne transactions.  Despite ChoiceOne's market capitalization declining slightly from November 30, 2020 to June 30, 2021, ChoiceOne's financial performance remained positive. In assessing the totality of the events and circumstances, management determined that it was more likely than not that the fair value of ChoiceOne’s operations, from a qualitative perspective, exceeded the carrying value as of June 30, 2021 and impairment of goodwill was not necessary. ChoiceOne’s stock price per share was less than its book value as of March 31, 2022.  This indicated that goodwill may be impaired and resulted in management performing another qualitative goodwill impairment assessment as of the end of the first quarter of 2022.  As a result of the analysis, management concluded that it was more-likely-than-not that the fair value of the reporting unit was greater than the carrying value.  This was evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In addition, revenue in the first three months of 2022 reflected significant and continuing growth in ChoiceOne's interest income.  Based on the results of the qualitative analysis, management believed that a quantitative analysis was not necessary as of March 31, 2022. Deposits and Borrowings Total deposits increased $93.3 million in the first quarter of 2022 and 305.6 million since March 31, 2021. The change in deposits was due in part to funds related to the increased savings from the pandemic as well as funds on deposit from the PPP loans that were not fully utilized as of March 31, 2022. In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031.  ChoiceOne also holds $3.2 million in subordinated debentures issued in connection with a $4.5 million trust preferred securities offering, which were obtained in the merger with Community Shores, offset by the merger mark-to-market adjustment.   ChoiceOne may use Federal Home Loan Bank advances and advances from the Federal Reserve Bank Discount Window to meet short-term funding needs if needed in the remainder of 2022. Shareholders' Equity Total shareholders' equity declined $30.6 million in the first three months of 2022.  During the first quarter of 2022, the Federal Reserve increased the federal funds rate by 25 basis points in response to published inflation rates, causing interest rates generally to sharply increase.  This change in interest rates increased ChoiceOne's unrealized pre-tax loss on the available for sale securities portfolio from $3.3 million at December 31, 2021 to $42.8 million at March 31, 2022.  Additionally, meeting minutes from the Federal Open Market Committee indicated that additional increases in the federal funds rate are expected in order to combat inflation in the coming quarters.  As such, ChoiceOne has elected to utilize interest rate derivatives in order to better manage its interest rate risk position.  On April 21, 2022, ChoiceOne purchased five forward-starting interest rate caps with a total notional amount of $200 million and entered into a $200 million forward-starting pay-fixed interest rate swap.  These strategies create accounting symmetry between available for sale securities and other comprehensive income (equity), thus protecting tangible capital from further increases in interest rates.  ChoiceOne also entered into a $200 million receive-fixed interest rate swap, which, in the current environment, offsets the cost of the rising rate protection. These three strategies, in the aggregate, are expected to be modestly accretive to net income in 2022 and better position ChoiceOne Bank should rates continue to rise.  Importantly, the transactions were structured to qualify for hedge accounting, which means that changes in the fair value of the instruments flow through other comprehensive income (equity).  Refer to further details in subsequent event footnote 8. The reduction in common stock and paid in capital resulted from ChoiceOne's repurchase of 25,899 shares for $683,000, or a weighted average all-in cost per share of $26.35, during the first quarter of 2022. We do not expect further buybacks for the remainder of the year.  This was part of the common stock repurchase program announced in April 2021 which authorized repurchases of up to 390,114 shares, representing 5% of the total outstanding shares of common stock as of the date the program was adopted.  This program replaced and superseded all prior repurchase programs for ChoiceOne. 29 Regulatory Capital Requirements Following is information regarding compliance of ChoiceOne and ChoiceOne Bank with regulatory capital requirements: Minimum Required to be Well Minimum Required Capitalized Under for Capital Prompt Corrective (Dollars in thousands) Actual Adequacy Purposes Action Regulations Amount Ratio Amount Ratio Amount Ratio March 31, 2022 ChoiceOne Financial Services Inc. Total capital (to risk weighted assets) $ 207,839 14.6 % $ 113,648 8.0 % N/A N/A Common equity Tier 1 capital (to risk weighted assets) weighted assets) 163,875 11.5 63,927 4.5 N/A N/A Tier 1 capital (to risk weighted assets) 168,375 11.9 85,236 6.0 N/A N/A Tier 1 capital (to average assets) 168,375 7.3 92,225 4.0 N/A N/A ChoiceOne Bank Total capital (to risk weighted assets) $ 188,451 13.3 % $ 113,464 8.0 % $ 141,830 10.0 % Common equity Tier 1 capital (to risk weighted assets) weighted assets) 180,850 12.8 63,824 4.5 92,190 6.5 Tier 1 capital (to risk weighted assets) 180,850 12.8 85,098 6.0 113,464 8.0 Tier 1 capital (to average assets) 180,850 7.9 92,130 4.0 115,163 5.0 December 31, 2021 ChoiceOne Financial Services Inc. Total capital (to risk weighted assets) $ 204,353 14.4 % $ 113,604 8.0 % N/A N/A Common equity Tier 1 capital (to risk weighted assets) weighted assets) 160,338 11.3 63,902 4.5 N/A N/A Tier 1 capital (to risk weighted assets) 164,838 11.6 85,203 6.0 N/A N/A Tier 1 capital (to average assets) 164,838 7.4 89,415 4.0 N/A N/A ChoiceOne Bank Total capital (to risk weighted assets) $ 182,275 12.9 % $ 113,444 8.0 % $ 141,806 10.0 % Common equity Tier 1 capital (to risk weighted assets) weighted assets) 174,587 12.3 63,813 4.5 92,174 6.5 Tier 1 capital (to risk weighted assets) 174,587 12.3 85,083 6.0 113,444 8.0 Tier 1 capital (to average assets) 174,587 7.8 89,289 4.0 111,611 5.0 Management reviews the capital levels of ChoiceOne and ChoiceOne Bank on a regular basis. The Board of Directors and management believe that the capital levels as of March 31, 2022 are adequate for the foreseeable future. The Board of Directors’ determination of appropriate cash dividends for future periods will be based on, among other things, market conditions and ChoiceOne’s requirements for cash and capital. Liquidity Net cash provided by operating activities was $2.8 million for the three months ended March 31, 2022 compared to $2.2 million in the same period a year ago.  The change was due to $1.3 million lower net proceeds from loan sales in 2022 compared to 2021, which was offset by the change in other assets and liabilities.  Net cash provided by investing activities was $14.5 million for the first three months of 2022 compared to net cash used of $104.3 million in the same period in 2021. ChoiceOne had $31.4 million of securities purchases and sold $0 of securities in the first three months of 2022 compared to $179.2 million and $0 in the same period in 2021, respectively.  A decline in net loan originations and payments led to cash provided of $31.8 million in the first three months of 2022 compared to $63.1 million in the same period during the prior year.  Net cash provided by financing activities was $40.8 million for the first three months ended 2022, compared to $157.9 million in the same period in the prior year. ChoiceOne experienced growth of $93.3 million in deposits in the first three months of 2022 compared to $165.4 million in 2021, with a $44.2 million decrease in borrowings contributing to the change. ChoiceOne believes that the current level of liquidity is sufficient to meet ChoiceOne Bank's normal operating needs. This belief is based upon the availability of deposits from both the local and national markets, maturities of securities, normal loan repayments, income retention, federal funds purchased from correspondent banks, advances available from the Federal Home Loan Bank, and secured lines of credit available from the Federal Reserve Bank. 30 PART II.  OTHER INFORMATION Item 1. Legal Proceedings . There are no material pending legal proceedings to which ChoiceOne or ChoiceOne Bank is a party or to which any of their properties are subject, except for proceedings that arose in the ordinary course of business. In the belief of management, pending or current legal proceedings should not have a material effect on the consolidated financial condition of ChoiceOne. Item 1A. Risk Factors . Information concerning risk factors is contained in the discussion in Item 1A, “Risk Factors,” in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2021. Item 2. Un registered Sales of Equity Securities and Use of Proceeds . There were no unregistered sales of equity securities in the first quarter of 2022. 31 ISSUER PURCHASES OF EQUITY SECURITIES The following table provides information regarding ChoiceOne's purchases of its common stock during the quarter ended March 31, 2022. Total Number Maximum of Shares Number of Total Purchased as Shares that Number Average Part of a May Yet be of Shares Price Paid Publicly Purchased Period Purchased per Share Announced Plan Under the Plan (1) January 1 - January 31, 2022 Employee Transactions - $ - - - Repurchase Plan 14,391 $ 26.43 14,391 66,449 February 1 - March 1, 2022 Employee Transactions - $ - - - Repurchase Plan 11,508 $ 26.26 11,508 54,941 March 2 - April 1, 2022 Employee Transactions - $ - - - Repurchase Plan - $ - - 54,941 (1) As of March 31, 2022 , there are 54,941 shares remaining that may yet be purchased under approved plans. The repurchase plan was adopted and announced in April 2021. There was no stated expiration date. The plan authorized the repurchase of up to 390,114 shares, representing 5% of the total outstanding shares of common stock as of the date the plan was adopted. Item 5. Other Information None. Item 6. Exhibits The following exhibits are filed or incorporated by reference as part of this repor Exhibit Number Document 3.1 Restated Articles of Incorporation of ChoiceOne Financial Services, Inc. Previously filed as an exhibit to ChoiceOne’s Form 8-A filed February 4, 2020.  Here incorporated by reference. 3.2 Bylaws of ChoiceOne as currently in effect and any amendments thereto. Previously filed as an exhibit to ChoiceOne’s Form 8-K filed April 21, 2021. Here incorporated by reference. 4.1 Advances, Pledge and Security Agreement between ChoiceOne Bank and the Federal Home Loan Bank of Indianapolis. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference. 4.2 Form of 3.25% Fixed-to-Floating Rate Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference. 4.3 Form of 3.25% Fixed-to-Floating Rate Global Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference. 31.1 Certification of Chief Executive Officer 31.2 Certification of Treasurer 32.1 Certification pursuant to 18 U.S.C. § 1350. 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) 32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHOICEONE FINANCIAL SERVICES, INC. Date:   May 13, 2022 /s/ Kelly J. Potes Kelly J. Potes Chief Executive Officer (Principal Executive Officer) Date:   May 13, 2022 /s/ Adom J. Greenland Adom J. Greenland Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 33

WASHINGTON, D.C. 20549 FORM 10-Q ☒ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2022 ☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Numbe 000-19202 ChoiceOne Financial Services, Inc. (Exact Name of Registrant as Specified in its Charter) Michigan (State or Other Jurisdiction of Incorporation or Organization) 38-2659066 (I.R.S. Employer Identification No.) 109 East Division Sparta , Michigan (Address of Principal Executive Offices) 49345 (Zip Code) ( 616 ) 887-7366 (Registrant’s Telephone Number, including Area Code) Indicate by check mark whether the registran (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒        No ☐ Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒        No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☒ Securities registered pursuant to Section 12(b) of the Ac Title of each class Trading symbol(s) Name of each exchange on which registered Common stock COFS NASDAQ Capital Market As of July 31, 2022, the Registra nt had outstanding 7,507,769 shares of common stock. PART I.  FINANCIAL INFORMATION Item 1. Financial Statements . ChoiceOne Financial Services, Inc. CONSOLIDATED BALANCE SHEETS June 30, December 31, (Dollars in thousands, except per share data) 2022 2021 (Unaudited) (Audited) Assets Cash and due from banks $ 39,946 $ 31,537 Time deposits in other financial institutions 350 350 Cash and cash equivalents 40,296 31,887 Equity securities, at fair value (Note 2) 8,288 8,492 Securities available for sale, at fair value (Note 2) 566,142 1,098,885 Securities held to maturity, at amortized cost (Note 2) 429,675 - Federal Home Loan Bank stock 3,493 3,824 Federal Reserve Bank stock 5,064 5,064 Loans held for sale 10,628 9,351 Loans to other financial institutions 37,422 42,632 Loans (Note 3) 1,081,389 1,016,848 Allowance for loan losses (Note 3) ( 7,416 ) ( 7,688 ) Loans, net 1,073,973 1,009,160 Premises and equipment, net 29,122 29,880 Other real estate owned, net - 194 Cash value of life insurance policies 43,774 43,356 Goodwill 59,946 59,946 Core deposit intangible 3,358 3,962 Other assets 49,024 20,049 Total assets $ 2,360,205 $ 2,366,682 Liabilities Deposits – noninterest-bearing $ 578,927 $ 560,931 Deposits – interest-bearing 1,559,577 1,491,363 Total deposits 2,138,504 2,052,294 Borrowings 7,000 50,000 Subordinated debentures 35,140 35,017 Other liabilities 13,101 7,702 Total liabilities 2,193,745 2,145,013 Shareholders' Equity Preferred stock; shares authoriz 100,000 ; shares outstandin none - - Common stock and paid-in capital, no par value; shares authoriz 12,000,000 ; shares outstandin 7,503,072 at June 30, 2022 and 7,510,379 at December 31, 2021 171,804 171,913 Retained earnings 59,728 52,332 Accumulated other comprehensive loss, net ( 65,072 ) ( 2,576 ) Total shareholders’ equity 166,460 221,669 Total liabilities and shareholders’ equity $ 2,360,205 $ 2,366,682 See accompanying notes to interim consolidated financial statements. 2 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Six Months Ended (Dollars in thousands, except per share data) June 30, June 30, 2022 2021 2022 2021 Interest income Loans, including fees $ 12,523 $ 11,565 $ 24,821 $ 24,247 Securiti Taxable 3,522 2,396 7,029 4,252 Tax exempt 1,559 1,446 3,214 2,543 Other 62 12 76 32 Total interest income 17,666 15,419 35,140 31,074 Interest expense Deposits 996 839 1,779 1,719 Advances from Federal Home Loan Bank 2 2 3 3 Other 379 70 748 156 Total interest expense 1,377 911 2,530 1,878 Net interest income 16,289 14,508 32,610 29,196 Provision for loan losses - 166 - 416 Net interest income after provision for loan losses 16,289 14,342 32,610 28,780 Noninterest income Customer service charges 2,353 2,134 4,542 4,054 Insurance and investment commissions 233 198 438 471 Gains on sales of loans 887 1,771 1,691 3,917 Net gains (losses) on sales of securities ( 427 ) 2 ( 427 ) 3 Net gains on sales and write downs of other assets 1 ( 4 ) 172 1 Earnings on life insurance policies 254 191 534 377 Trust income 176 253 354 425 Change in market value of equity securities ( 327 ) ( 119 ) ( 683 ) 489 Other 280 306 655 595 Total noninterest income 3,430 4,732 7,276 10,332 Noninterest expense Salaries and benefits 7,537 6,999 15,143 14,167 Occupancy and equipment 1,518 1,498 3,143 3,053 Data processing 1,578 1,673 3,322 3,102 Professional fees 559 943 1,069 1,672 Supplies and postage 166 124 357 224 Advertising and promotional 147 207 279 352 Intangible amortization 322 352 604 659 FDIC insurance 225 156 450 308 Other 1,105 1,177 2,480 2,120 Total noninterest expense 13,157 13,129 26,847 25,657 Income before income tax 6,562 5,945 13,039 13,455 Income tax expense 947 902 1,896 2,174 Net income $ 5,615 $ 5,043 $ 11,143 $ 11,281 Basic earnings per share (Note 4) $ 0.75 $ 0.65 $ 1.49 $ 1.45 Diluted earnings per share (Note 4) $ 0.75 $ 0.65 $ 1.49 $ 1.45 Dividends declared per share $ 0.25 $ 0.22 $ 0.50 $ 0.44 See accompanying notes to interim consolidated financial statements. 3 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) Three Months Ended Six Months Ended (Dollars in thousands) June 30, June 30, 2022 2021 2022 2021 Net income $ 5,615 $ 5,043 $ 11,143 $ 11,281 Other comprehensive income: Change in net unrealized gain (loss) on available-for-sale securities ( 31,574 ) 11,662 ( 74,512 ) ( 5,291 ) Income tax benefit (expense) 6,631 ( 2,449 ) 15,648 1,111 L reclassification adjustment for net (gain) loss included in net income 427 ( 1 ) 427 ( 3 ) Income tax benefit (expense) ( 90 ) - ( 90 ) 1 L net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity - - 3,404 - Income tax benefit (expense) - - ( 715 ) - Unrealized gain (loss) on available-for-sale securities, net of tax ( 24,606 ) 9,212 ( 55,838 ) ( 4,182 ) Reclassification of unrealized gain (loss) upon transfer of securities from available-for-sale to held-to-maturity - - ( 3,404 ) - Income tax benefit (expense) - - 715 - L amortization of net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity 74 - 244 - Income tax benefit (expense) ( 16 ) - ( 51 ) - Unrealized loss on held to maturity securities, net of tax 58 - ( 2,496 ) - Change in net unrealized gain (loss) on derivatives ( 5,576 ) - ( 5,576 ) - Income tax benefit (expense) 1,171 - 1,171 - L amortization of net unrealized (gains) losses included in net income 307 - 307 - Income tax benefit (expense) ( 64 ) - ( 64 ) - Unrealized gain (loss) on derivative instruments, net of tax ( 4,162 ) - ( 4,162 ) - Other comprehensive income (loss), net of tax ( 28,710 ) 9,212 ( 62,496 ) ( 4,182 ) Comprehensive income (loss) $ ( 23,095 ) $ 14,255 $ ( 51,353 ) $ 7,099 See accompanying notes to interim consolidated financial statements. 4 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited) For the three months ended June 30, Accumulated Common Other Stock and Comprehensive Number of Paid in Retained Income/(Loss), (Dollars in thousands, except per share data) Shares Capital Earnings Net Total Balance, April 1, 2021 7,802,285 $ 178,993 $ 42,012 $ ( 2,366 ) $ 218,639 Net income 5,043 5,043 Other comprehensive income 9,212 9,212 Shares issued 5,953 106 106 Effect of employee stock purchases - 9 9 Stock-based compensation expense - 112 112 Shares repurchased ( 115,701 ) ( 2,897 ) ( 2,897 ) Cash dividends declared ($ 0.22 per share) ( 1,703 ) ( 1,703 ) Balance, June 30, 2021 7,692,537 $ 176,323 $ 45,352 $ 6,846 $ 228,521 Balance, April 1, 2022 7,489,812 $ 171,492 $ 55,988 $ ( 36,362 ) $ 191,118 Net income 5,615 5,615 Other comprehensive income (loss) ( 28,710 ) ( 28,710 ) Shares issued 13,260 139 139 Effect of employee stock purchases 6 6 Stock-based compensation expense 167 167 Cash dividends declared ($ 0.25 per share) ( 1,875 ) ( 1,875 ) Balance, June 30, 2022 7,503,072 $ 171,804 $ 59,728 $ ( 65,072 ) $ 166,460 5 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited) For the six months ended June 30, Accumulated Common Other Stock and Comprehensive Number of Paid in Retained Income/(Loss), (Dollars in thousands, except per share data) Shares Capital Earnings Net Total Balance, January 1, 2021 7,796,352 $ 178,750 $ 37,490 $ 11,028 $ 227,268 Net income 11,281 11,281 Other comprehensive loss ( 4,182 ) ( 4,182 ) Shares issued 11,886 281 281 Effect of employee stock purchases - 13 13 Stock-based compensation expense - 176 176 Shares repurchased ( 115,701 ) ( 2,897 ) ( 2,897 ) Cash dividends declared ($ 0.44 per share) ( 3,419 ) ( 3,419 ) Balance, June 30, 2021 7,692,537 $ 176,323 $ 45,352 $ 6,846 $ 228,521 Balance, January 1, 2022 7,510,379 $ 171,913 $ 52,332 $ ( 2,576 ) $ 221,669 Net income 11,143 11,143 Other comprehensive income (loss) ( 62,496 ) ( 62,496 ) Shares issued 18,592 272 272 Effect of employee stock purchases 13 13 Stock-based compensation expense 288 288 Shares repurchased ( 25,899 ) ( 682 ) ( 682 ) Cash dividends declared ($ 0.50 per share) ( 3,747 ) ( 3,747 ) Balance, June 30, 2022 7,503,072 $ 171,804 $ 59,728 $ ( 65,072 ) $ 166,460 See accompanying notes to interim consolidated financial statements. 6 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended (Dollars in thousands) June 30, 2022 2021 Cash flows from operating activiti Net income $ 11,143 $ 11,281 Adjustments to reconcile net income to net cash from operating activiti Provision for loan losses - 416 Depreciation 1,356 1,299 Amortization 5,506 4,336 Compensation expense on employee and director stock purchases, stock options, and restricted stock units 493 404 Net losses (gains) on sales of available for sale securities 427 ( 3 ) Net change in market value of equity securities 683 ( 489 ) Gains on sales of loans ( 1,691 ) ( 3,917 ) Loans originated for sale ( 53,750 ) ( 122,993 ) Proceeds from loan sales 53,480 125,714 Earnings on bank-owned life insurance ( 534 ) ( 377 ) Proceeds from BOLI policy 130 - Earnings on death benefit from bank-owned life insurance ( 14 ) - (Gains)/losses on sales of other real estate owned ( 41 ) ( 4 ) Proceeds from sales of other real estate owned 235 270 Deferred federal income tax (benefit)/expense 169 506 Net change in: Other assets ( 768 ) ( 992 ) Other liabilities 5,480 1,693 Net cash provided by operating activities 22,304 17,144 Cash flows from investing activiti Sales of securities available for sale 31,828 - Maturities, prepayments and calls of securities available for sale 27,404 28,104 Maturities, prepayments and calls of securities held to maturity 3,485 - Purchases of securities available for sale ( 32,676 ) ( 322,009 ) Purchases of securities held to maturity ( 5,748 ) - Loan originations and payments, net ( 59,602 ) 100,799 Additions to premises and equipment ( 701 ) ( 1,461 ) Proceeds from (payments for) derivative contracts, net ( 16,745 ) - Net cash provided by (used in) investing activities ( 52,755 ) ( 194,567 ) Cash flows from financing activiti Net change in deposits 86,210 206,157 Net change in short term borrowings ( 43,000 ) ( 6,685 ) Issuance of common stock 80 66 Repurchase of common stock ( 682 ) ( 2,897 ) Cash dividends ( 3,747 ) ( 3,419 ) Net cash provided by financing activities 38,861 193,222 Net change in cash and cash equivalents 8,409 15,799 Beginning cash and cash equivalents 31,887 79,519 Ending cash and cash equivalents $ 40,296 $ 95,318 Supplemental disclosures of cash flow informati Cash paid for interest $ 2,182 $ 1,965 Cash paid for income taxes - 901 Loans transferred to other real estate owned - 260 See accompanying notes to interim consolidated financial statements. 7 ChoiceOne Financial Services, Inc. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include ChoiceOne Financial Services, Inc. ("ChoiceOne"), its wholly-owned subsidiary, ChoiceOne Bank, and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. Intercompany transactions and balances have been eliminated in consolidation. ChoiceOne owns all of the common securities of Community Shores Capital Trust I (the “Capital Trust”). Under U.S. generally accepted accounting principles ("GAAP"), the Capital Trust is not consolidated because it is a variable interest entity and ChoiceOne is not the primary beneficiary. The accompanying unaudited consolidated financial statements and notes thereto reflect all adjustments ordinary in nature which are, in the opinion of management, necessary for a fair presentation of such financial statements.  Operating results for the six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 . The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in ChoiceOne’s Annual Report on Form 10 -K for the year ended December 31, 2021 . Use of Estimates To prepare financial statements in conformity with GAAP, ChoiceOne’s management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. These estimates and assumptions are subject to many risks and uncertainties, including changes in interest rates and other general economic, business and political conditions, including the effects of the COVID- 19 pandemic, and its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic. Actual results may differ from these estimates. Estimates associated with the allowance for loan losses are particularly susceptible to change. Investment Securities Investment securities for which ChoiceOne has the intent and ability to hold to maturity are classified as held to maturity and are carried at amortized cost.  Investment securities not classified as held to maturity are classified as available for sale and are reported at fair value with unrealized gains and losses, net of income taxes, as a separate component of other comprehensive income. ChoiceOne determines the appropriate classification of investment securities at the time of purchase and reassesses the classification at each reporting date. Loans to Other Financial Institutions Loans to other financial institutions are made for the purpose of providing a warehouse line of credit to facilitate funding of residential mortgage loan originations at other financial institutions. The loans are short-term in nature and are designed to provide funding for the time period between the loan origination and its subsequent sale in the secondary market. Loans to other financial institutions earn a share of interest income, determined by the contract, from when the loan is funded to when the loan is sold on the secondary market. Loans to other financial institutions are excluded from Note 3. No loans to other financial institutions were impaired, nonaccrual, or past due greater than 30 days as of June 30, 2022. Credit risk associated with the participating interest is measured as an allowance for loan losses when necessary. Losses are charged off against the allowance when incurred and recoveries of loan charge-offs are recorded when received. At least quarterly, ChoiceOne Bank reviews the portfolios of participating interests for potential losses including any participating interest that is outstanding over 90 days (even if the advance and participating interest is current). Goodwill Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of the acquired tangible assets and liabilities and identifiable intangible assets. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. Core Deposit Intangible Core deposit intangible represents the value of the acquired customer core deposit bases and is included as an asset on the consolidated balance sheets. The core deposit intangible has an estimated finite life, is amortized on an accelerated basis over a 120 month period and is subject to periodic impairment evaluation. 8 Stock Transactions A total of 7,407 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of $ 192,000 under the terms of the Directors’ Stock Purchase Plan in the first half of 2022 . A total of 4,257 shares for a cash price of $ 80,000 were issued under the Employee Stock Purchase Plan in the first six months of 2022 .  ChoiceOne repurchased 25,899 shares for $ 682,000 , or a weighted average all-in cost per share of $ 26.35 , during the first quarter of 2022. This was part of the common stock repurchase program announced in April 2021 which authorized repurchases of up to 390,114 shares, representing 5 % of the total outstanding shares of common stock as of the date the program was adopted. No shares were repurchased under this program in the second quarter of 2022. Allowance for Loan Losses The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan losses is increased by the provision for loan losses and decreased by loans charged off less any recoveries of charged off loans. Management estimates the allowance for loan losses required based on past loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance for loan losses when management believes that collection of a loan balance is not possible. The allowance for loan losses consists of general and specific components. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. Management's adjustment for current factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, experience and ability of lending staff, national and economic trends and conditions, industry conditions, trends in real estate values, and other conditions.  The specific component relates to loans that are individually classified as impaired. A loan is impaired when full payment under the loan terms is not expected. Troubled debt restructuring of loans is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule. All modified loans are evaluated to determine whether the loans should be reported as Troubled Debt Restructurings ("TDR"). A loan is a TDR when ChoiceOne Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower by modifying a loan. To make this determination, ChoiceOne Bank must determine whether (a) the borrower is experiencing financial difficulties and (b) ChoiceOne Bank granted the borrower a concession. This determination requires consideration of all facts and circumstances surrounding the modification. An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically mean the borrower is experiencing financial difficulties. Commercial loans are evaluated for impairment on an individual loan basis. If a loan is considered impaired or if a loan has been classified as a TDR, a portion of the allowance for loan losses is allocated to the loan so that it is reported, at the net present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller-balance homogeneous loans such as consumer and residential real estate mortgage loans are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures. Reclassifications Certain amounts presented in prior periods have been reclassified to conform to the current presentation. Recent Accounting Pronouncements The Financial Accounting Standards Board (FASB) issued ASU No. 2016 - 13 , Financial Instruments — Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments . This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance attempts to reflect an entity’s current estimate of all expected credit losses and broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity may apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. Additionally, credit losses on available-for-sale debt securities will have to be presented as an allowance rather than as a write-down. This ASU is effective for fiscal years beginning after December 15, 2022, and for interim periods within those years for companies considered smaller reporting companies with the Securities and Exchange Commission. ChoiceOne was classified as a smaller reporting company as of the measurement date. Management is currently evaluating the impact of this new ASU on its consolidated financial statements which may be significant.  Management has selected representative peer groups for each loan type and determined economic factors which have a strong correlation with our historical loss data. 9 NOTE 2 – SECURITIES On January 1, 2022, ChoiceOne reassessed and transferred, at fair value $ 428.4 million of securities classified as available for sale to the held to maturity classification.  The net unrealized after-tax loss of $ 2.7 million as of the transfer date remained in accumulated other comprehensive income to be amortized over the remaining life of the securities, offsetting the related amortization of discount or premium on the transferred securities. No gains or losses were recognized at the time of the transfer.  The remaining net unamortized unrealized loss on transferred securities included in accumulated other comprehensive income was $ 2.5 million after tax as of June 30, 2022. The fair value of equity securities and the related gross unrealized gains and (losses) recognized in noninterest income were as follows: June 30, 2022 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity securities $ 8,432 $ 405 $ ( 549 ) $ 8,288 December 31, 2021 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity securities $ 7,953 $ 665 $ ( 126 ) $ 8,492 The following tables present the amortized cost and fair value of investment securities at the dates indicated and the corresponding amounts of gross unrealized gains and losses, including the corresponding amounts of gross unrealized gains and losses on investment securities available for sale recognized in accumulated other comprehensive income: June 30, 2022 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Available for S Cost Gains Losses Value U.S. Treasury notes and bonds $ 93,040 $ - $ ( 9,397 ) $ 83,643 State and municipal 300,824 34 ( 44,197 ) 256,661 Mortgage-backed 230,842 5 ( 19,719 ) 211,128 Corporate 1,256 - ( 18 ) 1,238 Asset-backed securities 14,122 - ( 650 ) 13,472 Total $ 640,084 $ 39 $ ( 73,981 ) $ 566,142 Held to Maturity: U.S. Government and federal agency $ 2,963 $ - $ ( 283 ) $ 2,680 State and municipal 203,267 - ( 32,638 ) 170,629 Mortgage-backed 202,595 - ( 23,007 ) 179,588 Corporate 19,593 - ( 1,013 ) 18,580 Asset-backed securities 1,257 - ( 67 ) 1,190 Total $ 429,675 $ - $ ( 57,008 ) $ 372,667 December 31, 2021 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Available for S Cost Gains Losses Value U.S. Government and federal agency $ 2,001 $ 7 $ - $ 2,008 U.S. Treasury notes and bonds 93,267 23 ( 1,311 ) 91,979 State and municipal 528,252 10,704 ( 4,109 ) 534,847 Mortgage-backed 441,383 781 ( 9,049 ) 433,115 Corporate 20,856 19 ( 233 ) 20,642 Asset-backed securities 16,387 - ( 93 ) 16,294 Total $ 1,102,146 $ 11,534 $ ( 14,795 ) $ 1,098,885 ChoiceOne reviews its securities portfolio on a quarterly basis to determine whether unrealized losses are considered to be temporary or other-than-temporary. No other-than-temporary impairment charges were recorded in the three and six months ended June 30, 2022 or in the same periods in 2021 . ChoiceOne believes that unrealized losses on securities were temporary in nature and were due to changes in interest rates and reduced market liquidity and not as a result of credit quality issues. 10 Presented below is a schedule of maturities of securities as of June 30, 2022 , and the fair value of securities available for sale and the amortized cost of securities held to maturity as of June 30, 2022 .  Callable securities in the money are presumed called and matured at the callable date. Available for Sale Securities maturing within: Fair Value Less than 1 Year - 5 Years - More than at June 30, (Dollars in thousands) 1 Year 5 Years 10 Years 10 Years 2022 U.S. Treasury notes and bonds $ 2,000 $ - $ 81,643 $ - $ 83,643 State and municipal 16,426 8,873 75,501 155,861 256,661 Corporate 500 505 233 - 1,238 Asset-backed securities - 9,741 3,731 - 13,472 Total debt securities 18,926 19,119 161,108 155,861 355,014 Mortgage-backed securities 18,793 101,454 90,244 637 211,128 Total Available for Sale $ 37,719 $ 120,573 $ 251,352 $ 156,498 $ 566,142 Held to Maturity Securities maturing within: Amortized Cost Less than 1 Year - 5 Years - More than at June 30, (Dollars in thousands) 1 Year 5 Years 10 Years 10 Years 2022 U.S. Government and federal agency $ - $ - $ 2,963 $ - $ 2,963 State and municipal 2,724 5,112 89,248 106,183 203,267 Corporate - 250 18,343 1,000 19,593 Asset-backed securities - 1,257 - - 1,257 Total debt securities 2,724 6,619 110,554 107,183 227,080 Mortgage-backed securities 6,525 45,672 150,398 - 202,595 Total Held to Maturity $ 9,249 $ 52,291 $ 260,952 $ 107,183 $ 429,675 Following is information regarding unrealized gains and losses on equity securities for the three and six months ended June 30, 2022 and 2021: Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Net gains and (losses) recognized during the period $ ( 327 ) $ ( 119 ) $ ( 683 ) $ 489 L Net gains and (losses) recognized during the period on securities sold — — — — Unrealized gains and (losses) recognized during the reporting period on securities still held at the reporting date $ ( 327 ) $ ( 119 ) $ ( 683 ) $ 489 11 NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses and balances in the loan portfolio were as follows: Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses Three Months Ended June 30, 2022 Beginning balance $ 387 $ 1,752 $ 304 $ 3,690 $ 37 $ 589 $ 842 $ 7,601 Charge-offs — ( 100 ) ( 144 ) - — - — ( 244 ) Recoveries — 2 55 1 — 1 — 59 Provision ( 255 ) ( 41 ) 94 533 8 101 ( 440 ) - Ending balance $ 132 $ 1,613 $ 309 $ 4,224 $ 45 $ 691 $ 402 $ 7,416 Allowance for Loan Losses Six Months Ended June 30, 2022 Beginning balance $ 448 $ 1,454 $ 290 $ 3,705 $ 110 $ 671 $ 1,010 $ 7,688 Charge-offs ( 131 ) ( 255 ) — — — — ( 386 ) Recoveries 4 106 2 — 2 — 114 Provision ( 316 ) 286 168 517 ( 65 ) 18 ( 608 ) - Ending balance $ 132 $ 1,613 $ 309 $ 4,224 $ 45 $ 691 $ 402 $ 7,416 Individually evaluated for impairment $ 1 $ 52 $ 1 $ 7 $ — $ 154 $ — $ 215 Collectively evaluated for impairment $ 131 $ 1,561 $ 308 $ 4,217 $ 45 $ 537 $ 402 $ 7,201 Loans June 30, 2022 Individually evaluated for impairment $ 320 $ 159 $ 7 $ 149 $ — $ 2,052 $ 2,687 Collectively evaluated for impairment 58,743 204,149 38,359 555,787 17,950 188,257 1,063,245 Acquired with deteriorated credit quality — 4,549 10 9,227 — 1,671 15,457 Ending balance $ 59,063 $ 208,857 $ 38,376 $ 565,163 $ 17,950 $ 191,980 $ 1,081,389 Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses Three Months Ended June 30, 2021 Beginning balance $ 342 $ 1,599 $ 247 $ 4,345 $ 74 $ 1,024 $ 109 $ 7,740 Charge-offs - ( 24 ) ( 76 ) - - - - ( 100 ) Recoveries - 64 35 42 - 3 - 144 Provision 32 ( 116 ) 37 ( 10 ) - ( 167 ) 390 166 Ending balance $ 374 $ 1,523 $ 243 $ 4,377 $ 74 $ 860 $ 499 $ 7,950 Allowance for Loan Losses Six Months Ended June 30, 2021 Beginning balance $ 257 $ 1,327 $ 317 $ 4,178 $ 97 $ 1,300 $ 117 $ 7,593 Charge-offs — ( 98 ) ( 147 ) ( 48 ) — - — ( 293 ) Recoveries — 73 113 43 — 5 — 234 Provision 117 221 ( 40 ) 204 ( 23 ) ( 445 ) 382 416 Ending balance $ 374 $ 1,523 $ 243 $ 4,377 $ 74 $ 860 $ 499 $ 7,950 Individually evaluated for impairment $ 138 $ 20 $ - $ 56 $ — $ 148 $ — $ 362 Collectively evaluated for impairment $ 236 $ 1,503 $ 243 $ 4,321 $ 74 $ 712 $ 499 $ 7,588 Loans June 30, 2021 Individually evaluated for impairment $ 3,167 $ 184 $ - $ 1,140 $ — $ 2,333 $ 6,824 Collectively evaluated for impairment 43,400 259,034 33,354 461,941 15,440 165,318 978,487 Acquired with deteriorated credit quality — 5,814 16 10,906 — 2,540 19,276 Ending balance $ 46,567 $ 265,032 $ 33,370 $ 473,987 $ 15,440 $ 170,191 $ 1,004,587 12 Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses December 31, 2021 Individually evaluated for impairment $ 251 $ 95 $ 2 $ 9 $ - $ 146 $ - $ 503 Collectively evaluated for impairment $ 197 $ 1,359 $ 288 $ 3,696 $ 110 $ 525 $ 1,010 $ 7,185 Loans December 31, 2021 Individually evaluated for impairment $ 2,616 $ 339 $ 14 $ 273 $ - $ 2,191 $ 5,433 Collectively evaluated for impairment 62,203 197,656 35,148 515,528 19,066 164,647 994,248 Acquired with deteriorated credit quality - 5,029 12 10,083 - 2,043 17,167 Ending balance $ 64,819 $ 203,024 $ 35,174 $ 525,884 $ 19,066 $ 168,881 $ 1,016,848 The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking ( 1 ) the risk ratings of business loans, ( 2 ) the level of classified business loans, and ( 3 ) delinquent and nonperforming consumer loans. Business loans are risk rated on a scale of 1 to 9. A description of the characteristics of the ratings follows: Risk Rating 1 through 5 or pass: These loans are considered pass credits. They exhibit acceptable credit risk and demonstrate the ability to repay the loan from normal business operations. Risk rating 6 or special menti  Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions that have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that ChoiceOne Ban k will sustain some future loss if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual assets classified as substandard. Loans falling into this category should have clear action plans and timelines with benchmarks to determine which direction the relationship will move. Risk rating 7 or substandar Loans and other credit extensions graded “7” have all the weaknesses inherent in those graded “6”, with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. Loans in this classification should be evaluated for non-accrual status. All nonaccrual commercial and Retail loans must be at a minimum graded a risk code “7”. Risk rating 8 or doubtfu Loans and other credit extensions bearing this grade have been determined to have the extreme probability of some loss, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral. Risk rating 9 or l Loans in this classification are considered uncollectible and cannot be justified as a viable asset of ChoiceOne Bank. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future. 13 Information regarding ChoiceOne Bank's credit exposure was as follows: Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category (Dollars in thousands) Agricultural Commercial and Industrial Commercial Real Estate June 30, December 31, June 30, December 31, June 30, December 31, 2022 2021 2022 2021 2022 2021 Pass $ 58,429 $ 61,864 $ 206,399 $ 201,202 $ 559,653 $ 519,537 Special Mention 313 339 1,342 300 739 778 Substandard 321 2,616 1,116 1,266 4,771 5,569 Doubtful - - - 256 - - $ 59,063 $ 64,819 $ 208,857 $ 203,024 $ 565,163 $ 525,884 Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity (Dollars in thousands) Consumer Construction Real Estate Residential Real Estate June 30, December 31, June 30, December 31, June 30, December 31, 2022 2021 2022 2021 2022 2021 Performing $ 38,368 $ 35,174 $ 17,950 $ 19,066 $ 191,152 $ 168,031 Nonperforming - - - - - - Nonaccrual 8 - - - 828 850 $ 38,376 $ 35,174 $ 17,950 $ 19,066 $ 191,980 $ 168,881 The following table provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the three and six months ended June 30, 2022 and June 30, 2021 . Three Months Ended June 30, 2022 Six Months Ended June 30, 2022 Pre- Post- Pre- Post- Modification Modification Modification Modification Outstanding Outstanding Outstanding Outstanding (Dollars in thousands) Number of Recorded Recorded Number of Recorded Recorded Loans Investment Investment Loans Investment Investment Agricultural - $ - $ - 1 $ 258 $ 258 Commercial and industrial 1 19 19 1 19 19 Total 1 $ 19 $ 19 2 $ 277 $ 277 Three Months Ended June 30, 2021 Six Months Ended June 30, 2021 Pre- Post- Pre- Post- Modification Modification Modification Modification Outstanding Outstanding Outstanding Outstanding (Dollars in thousands) Number of Recorded Recorded Number of Recorded Recorded Loans Investment Investment Loans Investment Investment Agricultural - $ - $ - 6 $ 2,320 $ 2,320 Commercial Real Estate - - - 2 1,210 1,210 Total - $ - $ - 8 $ 3,530 $ 3,530 There were no TDRs as of June 30, 2022 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three and six months ended June 30, 2022, which loans had been modified and classified as TDRs during the year prior to the default.  The following schedule provides information on TDRs as of June 30, 2021 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three and six months ended June 30, 2021, which loans had been modified and classified as TDRs during the year prior to the default. Three Months Ended Six Months Ended June 30, 2021 June 30, 2021 (Dollars in thousands) Number Recorded Number Recorded of Loans Investment of Loans Investment Commercial and industrial 1 $ 52 1 $ 52 Commercial Real Estate 1 184 1 184 Total 2 $ 236 2 $ 236 14 Impaired loans by loan category fol Unpaid (Dollars in thousands) Recorded Principal Related Investment Balance Allowance June 30, 2022 With no related allowance recorded Agricultural $ 314 $ 428 $ - Commercial and industrial - - - Consumer - - - Construction real estate - - - Commercial real estate - - - Residential real estate 439 469 - Subtotal 753 897 - With an allowance recorded Agricultural 6 7 1 Commercial and industrial 159 190 52 Consumer 7 8 1 Construction real estate 149 149 - Commercial real estate - - 7 Residential real estate 1,613 1,644 154 Subtotal 1,934 1,998 215 Total Agricultural 320 435 1 Commercial and industrial 159 190 52 Consumer 7 8 1 Construction real estate 149 149 - Commercial real estate - - 7 Residential real estate 2,052 2,113 154 Total $ 2,687 $ 2,895 $ 215 Unpaid (Dollars in thousands) Recorded Principal Related Investment Balance Allowance December 31, 2021 With no related allowance recorded Agricultural $ 314 $ 428 $ - Commercial and industrial - - - Consumer - - - Construction real estate - - - Commercial real estate 94 94 - Residential real estate 164 172 - Subtotal 572 694 - With an allowance recorded Agricultural 2,302 2,302 251 Commercial and industrial 339 363 95 Consumer 14 15 2 Construction real estate - - - Commercial real estate 179 179 9 Residential real estate 2,027 2,084 146 Subtotal 4,861 4,943 503 Total Agricultural 2,616 2,730 251 Commercial and industrial 339 363 95 Consumer 14 15 2 Construction real estate - - - Commercial real estate 273 273 9 Residential real estate 2,191 2,256 146 Total $ 5,433 $ 5,637 $ 503 15 The following schedule provides information regarding average balances of impaired loans and interest recognized on impaired loans for the three and six months ended June 30, 2022 and June 30, 2021: Average Interest (Dollars in thousands) Recorded Income Investment Recognized Three Months Ended June 30, 2022 With no related allowance recorded Agricultural $ 314 $ - Commercial and industrial 46 - Consumer - - Construction real estate - - Commercial real estate - - Residential real estate 220 - Subtotal 580 - With an allowance recorded Agricultural 1,117 - Commercial and industrial 211 1 Consumer 20 - Construction real estate - - Commercial real estate 153 2 Residential real estate 1,733 12 Subtotal 3,234 15 Total Agricultural 1,431 - Commercial and industrial 257 1 Consumer 20 - Construction real estate - - Commercial real estate 153 2 Residential real estate 1,953 12 Total $ 3,814 $ 15 Average Interest (Dollars in thousands) Recorded Income Investment Recognized Three Months Ended June 30, 2021 With no related allowance recorded Agricultural $ 778 $ 24 Commercial and industrial 993 - Consumer - - Construction real estate 27 - Commercial real estate 1,749 13 Residential real estate 267 - Subtotal 3,814 37 With an allowance recorded Agricultural 1,451 16 Commercial and industrial 165 - Consumer 3 - Construction real estate - - Commercial real estate 642 3 Residential real estate 2,280 15 Subtotal 4,541 34 Total Agricultural 2,229 40 Commercial and industrial 1,158 - Consumer 3 - Construction real estate 27 - Commercial real estate 2,391 16 Residential real estate 2,547 15 Total $ 8,355 $ 71 16 Average Interest (Dollars in thousands) Recorded Income Investment Recognized Six Months Ended June 30, 2022 With no related allowance recorded Agricultural $ 314 $ - Commercial and industrial 31 - Consumer - - Construction real estate - - Commercial real estate 31 - Residential real estate 201 - Subtotal 577 - With an allowance recorded Agricultural 1,512 - Commercial and industrial 254 2 Consumer 18 - Construction real estate - - Commercial real estate 162 5 Residential real estate 1,831 29 Subtotal 3,777 36 Total Agricultural 1,826 - Commercial and industrial 285 2 Consumer 18 - Construction real estate - - Commercial real estate 193 5 Residential real estate 2,032 29 Total $ 4,354 $ 36 Average Interest (Dollars in thousands) Recorded Income Investment Recognized Six Months Ended June 30, 2021 With no related allowance recorded Agricultural $ 993 $ 52 Commercial and industrial 731 - Consumer - - Construction real estate - - Commercial real estate 1,698 32 Residential real estate 320 - Subtotal 3,742 84 With an allowance recorded Agricultural 2,177 35 Commercial and industrial 174 1 Consumer - - Construction real estate - - Commercial real estate 372 6 Residential real estate 2,141 33 Subtotal 4,864 75 Total Agricultural 3,170 87 Commercial and industrial 905 1 Consumer - - Construction real estate - - Commercial real estate 2,070 38 Residential real estate 2,461 33 Total $ 8,606 $ 159 17 An aging analysis of loans by loan category follows: Loans Loans Loans Past Due Loans Past Due Past Due Greater 90 Days Past (Dollars in thousands) 30 to 59 60 to 89 Than 90 Loans Not Total Due and Days (1) Days (1) Days (1) Total (1) Past Due Loans Accruing June 30, 2022 Agricultural $ - $ - $ - $ - $ 59,063 $ 59,063 $ - Commercial and industrial 142 - 93 235 208,622 208,857 - Consumer - - - - 38,376 38,376 - Commercial real estate - - - - 565,163 565,163 - Construction real estate - - - - 17,950 17,950 - Residential real estate 29 197 580 806 191,174 191,980 - $ 171 $ 197 $ 673 $ 1,041 $ 1,080,348 $ 1,081,389 $ - December 31, 2021 Agricultural $ - $ - $ - $ - $ 64,819 $ 64,819 $ - Commercial and industrial 21 - 88 109 202,915 203,024 - Consumer 70 15 - 85 35,089 35,174 - Commercial real estate 422 13 279 714 525,170 525,884 - Construction real estate 1,149 1,235 - 2,384 16,682 19,066 - Residential real estate 1,489 306 454 2,249 166,632 168,881 - $ 3,151 $ 1,569 $ 821 $ 5,541 $ 1,011,307 $ 1,016,848 $ - ( 1 ) Includes nonaccrual loans. Nonaccrual loans by loan category fol (Dollars in thousands) June 30, December 31, 2022 2021 Agricultural $ 314 $ 313 Commercial and industrial 92 285 Consumer 8 - Commercial real estate - 279 Residential real estate 828 850 $ 1,242 $ 1,727 18 The table below details the outstanding balances of the County Bank Corp. acquired loan portfolio and the acquisition fair value adjustments at acquisition date of October 1, 2019 ( dollars in thousands): Acquired Acquired Acquired Impaired Non-impaired Total Loans acquired - contractual payments $ 7,729 $ 387,394 $ 395,123 Nonaccretable difference ( 2,928 ) - ( 2,928 ) Expected cash flows 4,801 387,394 392,195 Accretable yield ( 185 ) ( 1,894 ) ( 2,079 ) Carrying balance at acquisition date $ 4,616 $ 385,500 $ 390,116 The table below presents a roll forward of the accretable yield on the County Bank Corp. acquired loan portfolio for the years ended December 31, 2019, December 31, 2020, and December 31, 2021 and the six months ended June 30, 2022 (dollars in thousands): (Dollars in thousands) Acquired Acquired Acquired Impaired Non-impaired Total Balance, January 1, 2019 $ - $ - $ - Merger with County Bank Corp. on October 1, 2019 185 1,894 2,079 Accretion October 1, 2019 through December 31, 2019 - ( 75 ) ( 75 ) Balance January 1, 2020 185 1,819 2,004 Accretion January 1, 2020 through December 31, 2020 ( 50 ) ( 295 ) ( 345 ) Balance January 1, 2021 135 1,524 1,659 Accretion January 1, 2021 through December 31, 2021 ( 247 ) ( 348 ) ( 595 ) Transfer from non-accretable to accretable yield 400 - 400 Balance January 1, 2022 288 1,176 1,464 Transfer from non-accretable to accretable yield 1,150 - 1,150 Accretion January 1, 2022 through June 30, 2022 ( 222 ) 34 ( 188 ) Balance, June 30, 2022 $ 1,216 $ 1,210 $ 2,426 The table below details the outstanding balances of the Community Shores Bank Corporation acquired loan portfolio and the acquisition fair value adjustments at acquisition date of July 1, 2020 ( dollars in thousands): Acquired Acquired Acquired Impaired Non-impaired Total Loans acquired - contractual payments $ 20,491 $ 158,495 $ 178,986 Nonaccretable difference ( 2,719 ) - ( 2,719 ) Expected cash flows 17,772 158,495 176,267 Accretable yield ( 869 ) ( 596 ) ( 1,465 ) Carrying balance at acquisition date $ 16,903 $ 157,899 $ 174,802 The table below presents a roll forward of the accretable yield on Community Shores Bank Corporation acquired loan portfolio for the years ended December 31, 2020 and December 31, 2021 and the six months ended June 30, 2022 (dollars in thousands): Acquired Acquired Acquired Impaired Non-impaired Total Balance January 1, 2020 $ - $ - $ - Merger with Community Shores Bank Corporation on July 1, 2020 869 596 1,465 Accretion July 1, 2020 through December 31, 2020 ( 26 ) ( 141 ) ( 167 ) Balance, January 1, 2021 843 455 1,298 Accretion January 1, 2021 through December 31, 2021 ( 321 ) ( 258 ) ( 579 ) Balance January 1, 2022 522 197 719 Transfer from non-accretable to accretable yield 874 - 874 Accretion January 1, 2022 through June 30, 2022 ( 578 ) ( 197 ) ( 775 ) Balance, June 30, 2022 $ 818 $ - $ 818 19 NOTE 4 – EARNINGS PER SHARE Earnings per share are based on the weighted average number of shares outstanding during the period. A computation of basic earnings per share and diluted earnings per share follows: Three Months Ended Six Months Ended (Dollars in thousands, except share data) June 30, June 30, 2022 2021 2022 2021 Basic Net income $ 5,615 $ 5,043 $ 11,143 $ 11,281 Weighted average common shares outstanding 7,499,497 7,769,485 7,497,492 7,785,098 Basic earnings per common shares $ 0.75 $ 0.65 $ 1.49 $ 1.45 Diluted Net income $ 5,615 $ 5,043 $ 11,143 $ 11,281 Weighted average common shares outstanding 7,499,497 7,769,485 7,497,492 7,785,098 Plus dilutive stock options and restricted stock units 11,027 9,600 13,766 10,577 Weighted average common shares outstanding and potentially dilutive shares 7,510,524 7,779,085 7,511,258 7,795,675 Diluted earnings per common share $ 0.75 $ 0.65 $ 1.49 $ 1.45 There were 15,000 stock options that were considered anti-dilutive to earnings per share for the three and six months ended June 30, 2022. There were 15,000 stock options that were considered anti-dilutive to earnings per share for the three months ended June 30, 2021 and 12,000 stock options that were considered anti-dilutive to earnings per share for the six months ended June 30, 2021. There were 6,396 performance awards and 27,592 restricted stock units that were considered anti-dilutive for the three months ended June 30, 2022. There were no performance awards or restricted stock units that were considered anti-dilutive for the six months ended June 30, 2022. There were 18,985 restricted stock units that were considered anti-dilutive for the three months ended June 30, 2021. There were no restricted stock units that were considered anti-dilutive for the six months ended June 30, 2021. There were no performance awards issued prior to 2022. 20 Note 5 – Financial Instruments Financial instruments as of the dates indicated were as follows: Quoted Prices In Active Significant Markets for Other Significant Identical Observable Unobservable (Dollars in thousands) Carrying Estimated Assets Inputs Inputs Amount Fair Value (Level 1) (Level 2) (Level 3) June 30, 2022 Assets Cash and cash equivalents $ 40,296 $ 40,296 $ 40,296 $ - $ - Equity securities at fair value 8,288 8,288 6,462 - 1,826 Securities available for sale 566,142 566,142 - 566,142 - Securities held to maturity 429,675 372,667 - 357,723 14,944 Federal Home Loan Bank and Federal Reserve Bank stock 8,557 8,557 - 8,557 - Loans held for sale 10,628 10,947 - 10,947 - Loans to other financial institutions 37,422 37,422 - 37,422 - Loans, net 1,073,973 1,037,946 - - 1,037,946 Accrued interest receivable 8,239 8,239 - 8,239 - Interest rate lock commitments 140 140 - 140 - Mortgage loan servicing rights 4,679 5,932 - 5,932 - Interest rate derivative contracts 14,209 14,209 - 14,209 - Liabilities Noninterest-bearing deposits 578,927 578,927 - 578,927 - Interest-bearing deposits 1,559,577 1,556,523 - 1,556,523 - Borrowings 7,000 6,995 - 6,995 - Subordinated debentures 35,140 30,785 - 30,785 - Accrued interest payable 418 418 - 418 - Interest rate derivative contracts 2,393 2,393 - 2,393 - December 31, 2021 Assets Cash and cash equivalents $ 31,887 $ 31,887 $ 31,887 $ - $ - Equity securities at fair value 8,492 8,492 6,724 - 1,768 Securities available for sale 1,098,885 1,098,885 - 1,077,835 21,050 Federal Home Loan Bank and Federal Reserve Bank stock 8,888 8,888 - 8,888 - Loans held for sale 9,351 9,632 - 9,632 - Loans to other financial institutions 42,632 42,632 - 42,632 - Loans, net 1,009,160 999,393 - - 999,393 Accrued interest receivable 8,211 8,211 - 8,211 - Interest rate lock commitments 172 172 - 172 - Mortgage loan servicing rights 4,666 5,522 - 5,522 - Liabilities Noninterest-bearing deposits 560,931 560,931 - 560,931 - Interest-bearing deposits 1,491,363 1,491,135 - 1,491,135 - Borrowings 50,000 50,000 - 50,000 - Subordinated debentures 35,017 33,414 - 33,414 - Accrued interest payable 441 441 - 441 - 21 NOTE 6 – FAIR VALUE MEASUREMENTS The following tables present information about assets and liabilities measured at fair value on a recurring basis and the valuation techniques used to determine those fair values. In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that ChoiceOne Bank has the ability to access. Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability. In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. ChoiceOne Bank’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability. Disclosures concerning assets and liabilities measured at fair value are as follows: Assets and Liabilities Measured at Fair Value on a Recurring Basis Quoted Prices In Active Significant Markets for Other Significant Identical Observable Unobservable Balance (Dollars in thousands) Assets Inputs Inputs at Date (Level 1) (Level 2) (Level 3) Indicated Equity Securities Held at Fair Value - June 30, 2022 Equity securities $ 6,462 $ - $ 1,826 $ 8,288 Investment Securities, Available for Sale - June 30, 2022 U. S. Treasury notes and bonds $ - $ 83,643 $ - $ 83,643 State and municipal - 256,661 - 256,661 Mortgage-backed - 211,128 - 211,128 Corporate - 1,238 - 1,238 Asset-backed securities - 13,472 - 13,472 Total $ - $ 566,142 $ - $ 566,142 Derivative Instruments - June 30, 2022 Interest rate derivative contracts - assets $ - $ 14,209 $ - $ 14,209 Interest rate derivative contracts - liabilities $ - $ 2,393 $ - $ 2,393 Equity Securities Held at Fair Value - December 31, 2021 Equity securities $ 6,724 $ - $ 1,768 $ 8,492 Investment Securities, Available for Sale - December 31, 2021 U. S. Government and federal agency $ - $ 2,008 $ - $ 2,008 U. S. Treasury notes and bonds - 91,979 - 91,979 State and municipal - 514,797 20,050 534,847 Mortgage-backed - 433,115 - 433,115 Corporate - 19,642 1,000 20,642 Asset-backed securities - 16,294 - 16,294 Total $ - $ 1,077,835 $ 21,050 $ 1,098,885 22 Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis Six Months Ended (Dollars in thousands) June 30, 2022 2021 Equity Securities Held at Fair Value Balance, January 1 $ 1,768 $ 1,485 Total realized and unrealized gains included in noninterest income ( 5 ) ( 39 ) Net purchases, sales, calls, and maturities 63 220 Net transfers into Level 3 - - Balance, June 30 $ 1,826 $ 1,666 Amount of total losses for the period included in earning attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at June 30 $ ( 5 ) $ ( 39 ) Investment Securities, Available for Sale Balance, January 1 $ 21,050 $ 11,423 Total unrealized gains included in other comprehensive income - ( 264 ) Net purchases, sales, calls, and maturities - 1,966 Net transfers into Level 3 - - Transfer to held to maturity ( 21,050 ) - Balance, June 30 $ - $ 13,125 Amount of total losses for the period included in earning attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at June 30 $ - $ ( 250 ) Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 investment securities and liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs. Securities categorized as Level 3 assets as of June 30, 2022 primarily consist of common and preferred equity securities of community banks. As of December 31, 2021, bonds issued by local municipalities and corporate issuers were classified as available for sale and were included as Level 3 securities. ChoiceOne estimates the fair value of these bonds and equity securities based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved. ChoiceOne also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment.  Disclosures concerning assets measured at fair value on a non-recurring basis are as follows: Assets Measured at Fair Value on a Non-recurring Basis Quoted Prices In Active Significant Markets for Other Significant Balances at Identical Observable Unobservable (Dollars in thousands) Dates Assets Inputs Inputs Indicated (Level 1) (Level 2) (Level 3) Impaired Loans June 30, 2022 $ 2,687 $ - $ - $ 2,687 December 31, 2021 $ 5,433 $ - $ - $ 5,433 Other Real Estate June 30, 2022 $ - $ - $ - $ - December 31, 2021 $ 194 $ - $ - $ 194 Mortgage Loan Servicing Rights June 30, 2022 $ 4,679 $ - $ 4,679 $ - December 31, 2021 $ 4,666 $ - $ 4,666 $ - Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired.  ChoiceOne estimates the fair value of the loans based on the present value of expected future cash flows using management’s estimate of key assumptions.  These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). The changes in fair value consisted of charge-downs of impaired loans that were posted to the allowance for loan losses and write-downs of other real estate that were posted to a valuation account. 23 NOTE 7 – REVENUE FROM CONTRACTS WITH CUSTOMERS ChoiceOne has a variety of sources of revenue, which include interest and fees from customers as well as revenue from non-customers.  ASC Topic 606, Revenue from Contracts With Customers, covers certain sources of revenue that are classified within noninterest income in the Consolidated Statements of Income.  Sources of revenue that are included in the scope of ASC Topic 606 include service charges and fees on deposit accounts, interchange income, investment asset management income and transaction-based revenue, and other charges and fees for customer services. Service Charges and Fees on Deposit Accounts Revenue includes charges and fees to provide account maintenance, overdraft services, wire transfers, funds transfer, and other deposit-related services.  Account maintenance fees such as monthly service charges are recognized over the period of time that the service is provided.  Transaction fees such as wire transfer charges are recognized when the service is provided to the customer. Interchange Income Revenue includes debit card interchange and network revenues.  This revenue is earned on debit card transactions that are conducted through payment networks such as MasterCard. The revenue is recorded as services are delivered and is presented net of interchange expenses. Investment Commission Income Revenue includes fees from the investment management advisory services and revenue is recognized when services are rendered.  Revenue also includes commissions received from the placement of brokerage transactions for purchase or sale of stocks or other investments. Commission income is recognized when the transaction has been completed. Trust Fee Income Revenue includes fees from the management of trust assets and from other related advisory services. Revenue is recognized when services are rendered. Following is noninterest income separated by revenue within the scope of ASC 606 and revenue within the scope of other GAAP topics: Three Months Ended Six Months Ended June 30, June 30, (Dollars in thousands) 2022 2021 2022 2021 Service charges and fees on deposit accounts $ 1,036 $ 822 $ 2,067 $ 1,608 Interchange income 1,317 1,312 2,475 2,446 Investment commission income 233 198 438 471 Trust fee income 176 253 354 425 Other charges and fees for customer services 125 138 274 304 Noninterest income from contracts with customers within the scope of ASC 606 2,887 2,723 5,608 5,254 Noninterest income within the scope of other GAAP topics 543 2,009 1,668 5,078 Total noninterest income $ 3,430 $ 4,732 $ 7,276 $ 10,332 NOTE 8 – DERIVATIVE AND HEDGING ACTIVITIES ChoiceOne is exposed to certain risks relating to its ongoing business operations. ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. Derivatives are also implicit in certain contracts and commitments. ChoiceOne currently uses interest rate swaps and interest rate caps to manage its exposure to certain fixed and variable rate assets and variable rate liabilities. ChoiceOne recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. ChoiceOne records derivative assets and derivative liabilities on the balance sheet within other assets and other liabilities, respectively. Changes in the fair value of derivative financial instruments are either recognized in income or in shareholders’ equity as a component of accumulated other comprehensive income or loss depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge. Interest rate swaps ChoiceOne uses interest rate swaps as part of its interest rate risk management strategy to add stability to net interest income and to manage its exposure to interest rate movements. Interest rate swaps designated as hedges involve the receipt of variable-rate amounts from a counterparty in exchange for ChoiceOne making fixed-rate payments or the receipt of fixed-rate amounts from a counterparty in exchange for ChoiceOne making variable rate payments, over the life of the agreements without the exchange of the underlying notional amount. In the first six months of 2022, ChoiceOne entered into two pay-floating/receive-fixed interest rate swaps (the “Pay Floating Swap Agreements”) for a total notional amount of $ 200.0 million that were designated as cash flow hedges.  These derivatives hedge the variable cash flows of specifically identified available-for-sale securities, cash and loans.  The Pay Floating Swap Agreements were determined to be highly effective during the periods presented and therefore no amount of ineffectiveness has been included in net income.   The Pay Floating Swap Agreements will pay a coupon rate equal to SOFR while receiving a fixed coupon rate of 2.41 %. In the first six months of 2022, ChoiceOne entered into one forward starting pay-fixed/receive-floating interest rate swap (the “Pay Fixed Swap Agreement”) for a notional amount of $ 200.0 million that was designated as a cash flow hedge. This derivative hedges the risk of variability in cash flows attributable to forecasted payments on future deposits or floating rate borrowings indexed to the SOFR Rate. The Pay Fixed Swap Agreement is two years forward starting with an eight -year term set to expire in 2032. The Pay Fixed Swap Agreements will pay a fixed coupon rate of 2.75 % while receiving the SOFR Rate. Interest rate caps ChoiceOne also uses interest rate caps to provide stability to net interest income and to manage its exposure to interest rate movements. Interest rate caps designated as hedges involve the payment of a fixed premium by ChoiceOne who will then receive payment equivalent to the spread between the current rate and the strike rate until the conclusion of the term from the counterparty. In the first six months of 2022, ChoiceOne entered into four forward starting interest rate cap agreements with a total notional amount of $ 200.0 million (“SOFR Cap Agreements”). Three of the SOFR Cap Agreements with a total notional amount of $ 100.0 million are designated as fair value hedges and hedge against changes in the fair value of certain fixed rate tax-exempt municipal bonds. ChoiceOne utilizes the interest rate caps as hedges against adverse changes in interest rates on the designated securities attributable to fluctuations in the SOFR rate above 2.68 %, as applicable. An increase in the benchmark interest rate hedged reduces the fair value of these assets. The remaining SOFR Cap Agreement with a notional amount of $ 100.0 million is designated as a cash flow hedge and hedges against the risk of variability in cash flows attributable to fluctuations in the SOFR rate above 2.68 % for forecasted payments on future deposits or borrowings indexed to the SOFR Rate.  All of the SOFR Cap Agreements are two year forward starting with an eight year term set to expire in 2032. June 30, 2022 December 31, 2021 (Dollars in thousands) Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments Interest rate contracts Other Assets $ 14,209 Other Assets $ - Interest rate contracts Other Liabilities $ 2,393 Other Liabilities $ - Location and Amount of Gain or (Loss) Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships Recognized in Income on Fair Value and Cash Flow Hedging Relationships Three months ended June 30, 2022 Six months ended June 30, 2022 Interest Income Interest Expense Interest Income Interest Expense Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded $ 422 $ ( 155 ) $ 422 $ ( 155 ) Gain or (loss) on fair value hedging relationships: Interest rate contra Hedged items $ ( 71 ) $ - $ - $ - Derivatives designated as hedging instruments $ 71 $ - $ - $ - Amount excluded from effectiveness testing recognized in earnings based on amortization approach $ ( 153 ) $ - $ ( 153 ) $ - Gain or (loss) on cash flow hedging relationships: Interest rate contra Amount of gain or (loss) reclassified from accumulated other comprehensive income into income $ - $ - $ - $ - Amount excluded from effectiveness testing recognized in earnings based on amortization approach $ - $ ( 155 ) $ - $ ( 155 ) 24 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations . The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (“ChoiceOne”), its wholly-owned subsidiary ChoiceOne Bank, and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc.  This discussion should be read in conjunction with the interim consolidated financial statements and related notes. FORWARD-LOOKING STATEMENTS This discussion and other sections of this quarterly report contain forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and ChoiceOne.  Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “look forward,” “continue”, “future”, and variations of such words and similar expressions are intended to identify such forward-looking statements.  Management’s determination of the provision and allowance for loan losses, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management’s assumptions that are inherently forward-looking.  Examples of forward-looking statements also include, but are not limited to, statements related to risks and uncertainties related to, and the impact of, the COVID-19 pandemic on the businesses, financial condition and results of operations of ChoiceOne and its customers and statements regarding the outlook and expectations of ChoiceOne and its customers.  All of the information concerning interest rate sensitivity is forward-looking.  All statements with references to future time periods are forward-looking.  These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence.  Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements.  Furthermore, ChoiceOne undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. Additional risk factors include, but are not limited to, the risk factors discussed in Item 1A of ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2021 and in Part II, Item 1A of this Quarterly Report on Form 10-Q.  These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. 25 RESULTS OF OPERATIONS Net income for the second quarter of 2022 was $ 5,615,000 , which represented an increase of $ 572,000 or 11% compared to the second quarter of 2021 .  Basic and diluted earnings per common share were $0.75 for the second quarter of 2022 compared to $0.65 for the second quarter of the prior year.  The increase in the second quarter 2022 is largely related to the increase in interest income due to strong loan growth. Net income for the first half of 2022 was $11,143,000 , which represented a decline of $138,000 or 1% compared to the first half of 2021 .  Basic and diluted earnings per common share were $1.49 for the first half of 2022 compared to $1.45 for the first half of the prior year.  The decline in net income in the first half of 2022 compared to the same period in the prior year resulted in part from a decline of refinancing activity within ChoiceOne's mortgage portfolio due to a rise in mortgage rates since the first quarter of the prior year.  Net income also declined as noninterest expense increased partially related to salaries and wages of new commercial loan production and wealth management staff.  These factors were largely offset by an increase of $4.1 million in interest income as the balance of both core loans and securities continued to grow.  Core loans (defined as loans excluding loans held for sale, loans to other financial institutions, and Paycheck Protection Program (“PPP”) loans) increased by $60.7 million or 23.8% on an annualized basis in the second quarter of 2022 and $184.9 million or 20.7% since the end of the second quarter in 2021. The return on average assets and return on average shareholders’ equity were 0.95% and 12.68%, respectively, for the second quarter of 2022 , compared to 0.96% and 8.97%, respectively, for the same period in 2021 .  The return on average assets and return on average shareholders’ equity were 0.94% and 11.62%, respectively, for the first six months of 2022 , compared to 1.10% and 10.01%, respectively, for the same period in 2021 .  The increase in the return on average shareholders' equity is related to the decline in equity caused by the increase in unrealized losses on available-for-sale securities during the first six months of 2022. Paycheck Protection Program ChoiceOne processed over $126 million in PPP loans in 2020, acquired an additional $37 million in PPP loans in the merger with Community Shores Bank Corporation ("Community Shores"), and originated $89.1 million in PPP loans in 2021.  PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. PPP loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven in whole or in part.  Payments are deferred until either the date on which the Small Business Administration ("SBA") remits the amount of forgiveness proceeds to the lender or the date that is ten months after the last day of the covered period if the borrower does not apply for forgiveness within that ten-month period.  The loans are 100% guaranteed by the SBA.  The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. Upon SBA forgiveness, unrecognized fees are recognized into interest income.  In the second quarter and first half of 2022, $6.7 million and $31.4 million of PPP loans were forgiven resulting in $283,000 and $1.2 million of fee income, respectively.  $1.8 million in PPP loans and $68,000 in deferred PPP fee income remains outstanding as of June 30, 2022.  Management expects the remaining PPP loans to be forgiven in the second half of 2022. Dividends Cash dividends of $1,875,000 or $0.25 per share were declared in the second quarter of 2022 , compared to $1,703,000 or $0.22 per share declared in the second quarter of 2021 .  Cash dividends declared in the first six months of 2022 were $3,747,000 or $0.50 per share, compared to $3,419,000 or $0.44 per share in the same period during the prior year.   The cash dividend payout percentage was 33.6% for the first six months of 2022 , compared to 30.3% in the same period in the prior year. Interest Income and Expense Tables 1 and 2 on the following pages provide information regarding interest income and expense for the three- and six-month periods ended June 30, 2022 and 2021. Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities.  Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates.  These tables are referred to in the discussion of interest income, interest expense and net interest income. 26 Table 1 – Average Balances and Tax-Equivalent Interest Rates Three Months Ended June 30, 2022 2021 (Dollars in thousands) Average Average Balance Interest Rate Balance Interest Rate Assets: Loans (1)(3)(4)(5) $ 1,076,934 $ 12,529 4.65 % $ 1,041,118 $ 11,567 4.44 % Taxable securities (2) 780,689 3,522 1.80 547,388 2,396 1.75 Nontaxable securities (1) 317,730 1,973 2.48 277,365 1,832 2.64 Other 40,728 63 0.61 57,782 12 0.08 Interest-earning assets 2,216,081 18,087 3.26 1,923,653 15,807 3.29 Noninterest-earning assets 145,398 170,684 Total assets $ 2,361,479 $ 2,094,337 Liabilities and Shareholders' Equity: Interest-bearing demand deposits $ 911,936 $ 627 0.27 % $ 750,535 $ 465 0.25 % Savings deposits 461,934 157 0.14 391,745 133 0.14 Certificates of deposit 181,851 211 0.47 185,556 241 0.52 Borrowings 5,765 21 1.44 2,758 22 3.13 Subordinated debentures 35,095 361 4.11 3,123 50 6.44 Interest-bearing liabilities 1,596,581 1,377 0.34 1,333,717 911 0.27 Demand deposits 578,943 529,359 Other noninterest-bearing liabilities 8,870 6,268 Total liabilities 2,184,394 1,869,344 Shareholders' equity 177,085 224,993 Total liabilities and shareholders' equity $ 2,361,479 $ 2,094,337 Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 16,711 $ 14,896 Net interest margin (tax-equivalent basis) (Non-GAAP) (1) 3.02 % 3.10 % Reconciliation to Reported Net Interest Income Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 16,711 $ 14,896 Adjustment for taxable equivalent interest (422 ) (388 ) Net interest income (GAAP) $ 16,289 $ 14,508 Net interest margin (GAAP) 2.94 % 3.02 % (1) Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%.  The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry.  These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities. (2) Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock. (3) Loans include both loans to other financial institutions and loans held for sale. (4) Non-accruing loan and PPP loan balances are included in the balances of average loans.  Non-accruing loan average balances were $1.3 million and $3.2 million in the second quarter of 2022 and 2021, respectively.  PPP loan average balances were $5.1 million and $123.7 million in the second quarter of 2022 and 2021, respectively. (5) Interest on loans included net origination fees, accretion income, and PPP fees.  Accretion income was $408,000 and $320,000 in the first quarter of 2022 and 2021, respectively. PPP fees were approximately $283,000 and $756,000 in the second quarter of 2022 and 2021, respectively. 27 Six Months Ended June 30, 2022 2021 (Dollars in thousands) Average Average Balance Interest Rate Balance Interest Rate Assets: Loans (1)(3) $ 1,056,155 $ 24,832 4.70 % $ 1,060,543 $ 24,254 4.57 % Taxable securities (2) 786,620 7,029 1.79 492,170 4,252 1.73 Nontaxable securities (1) 326,687 4,068 2.49 239,507 3,221 2.69 Other 38,521 76 0.39 70,188 32 0.09 Interest-earning assets 2,207,983 36,005 3.26 1,862,408 31,759 3.41 Noninterest-earning assets 155,796 179,949 Total assets $ 2,363,779 $ 2,042,357 Liabilities and Shareholders' Equity: Interest-bearing demand deposits $ 920,141 $ 1,062 0.23 % $ 733,298 $ 894 0.24 % Savings deposits 451,462 303 0.13 373,671 247 0.13 Certificates of deposit 180,620 413 0.46 190,298 578 0.61 Borrowings 1,872 27 2.85 5,594 57 2.03 Subordinated debentures 36,509 725 3.97 3,111 102 6.58 Interest-bearing liabilities 1,590,604 2,530 0.32 1,305,972 1,878 0.29 Demand deposits 566,177 504,641 Other noninterest-bearing liabilities 15,235 6,265 Total liabilities 2,172,016 1,816,878 Shareholders' equity 191,763 225,479 Total liabilities and shareholders' equity $ 2,363,779 $ 2,042,357 Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 33,476 $ 29,881 Net interest margin (tax-equivalent basis) (Non-GAAP) (1) 3.03 % 3.21 % Reconciliation to Reported Net Interest Income Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 33,476 $ 29,881 Adjustment for taxable equivalent interest (866 ) (685 ) Net interest income (GAAP) $ 32,610 $ 29,196 Net interest margin (GAAP) 2.95 % 3.12 % (1) Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%.  The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry.  These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities. (2) Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock. (3) Loans include both loans to other financial institutions and loans held for sale. (4) Non-accruing loan and PPP loan balances are included in the balances of average loans.  Non-accruing loan average balances were $1.4 million and $4.4 million in the half quarter of 2022 and 2021, respectively.  PPP loan average balances were $14.5 million and $128.5 million in the first half of 2022 and 2021, respectively. (5) Interest on loans included net origination fees, accretion income, and PPP fees.  Accretion income was $1.2 million and $671,000 in the first half of 2022 and 2021, respectively. PPP fees were approximately $1.2 million and $2.4 million in the first half of 2022 and 2021, respectively. 28 Table 2 – Changes in Tax-Equivalent Net Interest Income Three Months Ended June 30, (Dollars in thousands) 2022 Over 2021 Total Volume Rate Increase (decrease) in interest income (1) Loans (2) $ 962 $ 401 $ 561 Taxable securities 1,126 1,049 77 Nontaxable securities (2) 141 715 (574 ) Other 51 (24 ) 75 Net change in interest income 2,280 2,141 139 Increase (decrease) in interest expense (1) Interest-bearing demand deposits 162 111 51 Savings deposits 24 46 (22 ) Certificates of deposit (30 ) (5 ) (25 ) Borrowings (1 ) 62 (63 ) Subordinated debentures 311 441 (130 ) Net change in interest expense 466 655 (189 ) Net change in tax-equivalent net interest income $ 1,814 $ 1,486 $ 328 Six Months Ended June 30, (Dollars in thousands) 2022 Over 2021 Total Volume Rate Increase (decrease) in interest income (1) Loans (2) $ 578 $ (279 ) $ 857 Taxable securities 2,777 2,632 145 Nontaxable securities (2) 847 1,497 (650 ) Other 44 (45 ) 89 Net change in interest income 4,246 3,805 441 Increase (decrease) in interest expense (1) Interest-bearing demand deposits 168 263 (95 ) Savings deposits 56 49 7 Certificates of deposit (165 ) (28 ) (137 ) Borrowings (30 ) (76 ) 46 Subordinated debentures 623 757 (134 ) Net change in interest expense 652 965 (313 ) Net change in tax-equivalent net interest income $ 3,594 $ 2,840 $ 754 (1) The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s interest rate.  The rate variance is computed as the change in interest rate multiplied by the previous year’s volume (average balance).  The change in interest due to both volume and rate has been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. (2) Interest on nontaxable investment securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21%. Net Interest Income Tax-e quivalent net interest income increased $1.8 million and $3.6 million in the second quarter and first half of 2022, respectively, compared to the same periods in 2021.  This was largely due to an increase in the average balance of securities of $273.7 million and $381.6 million in the second quarter and first half of 2022, respectively, compared to the same periods in 2021.  Net interest margin on a tax-equivalent basis declined by 8 basis points and 18 basis points in the second quarter and first half of 2022 , respectively, compared to the same periods in 2021 . The decline was due to lower PPP fees and a higher percentage of securities to total assets. The average balance of loans increased $35.8 million in the second quarter of 2022 and declined $4.4 million in the first half of 2022 compared to the same periods in 2021.  The large increase in average loan balance in the second quarter of 2022 compared to the second quarter of 2021 is due to average core loans balance growth of $153.1 million partially offset by a decline in the average PPP loans balance of $118.6 million.   The decline in average loan balance in the first half of 2022 compared to the first half of 2021 is due to average PPP loans balance declining $114.0 million and a small decline in the average balance of loans to other financial institutions during that time, partially offset by the average balance of core loans increasing $119.4 million.  The average balance of total securities increased $273.7 million in the second quarter of 2022 compared to the same period in 2021 offset by a decline in the average rate earned of 5 basis points. The average balance of total securities increased $381.6 million in the first half of 2022 compared to the same period in 2021 offset by a decline in the average rate earned of 5 basis points. The securities portfolio has grown as ChoiceOne has deployed excess deposit dollars into securities with the intent to transition to loans as good credits become available.  The effect of the average balance growth, partially offset by a combined 5 basis point reduction in the average rate earned on securities, caused tax-equivalent securities income to increase $1.3 million in the second quarter of 2022 and $3.6 million in the first half of 2022, respectively, compared to the same period in 2021. 29 Growth of $231.6 million in the average balance of interest-bearing demand deposits and savings deposits and a combined 2 basis point increase in the average rate paid, caused interest expense to be $186,000 higher in the first quarter of 2022 compared to the first quarter of the prior year.  Growth of $264.6 million in the average balance of interest-bearing demand deposits and savings deposits, partially offset by a combined 1 basis point decrease in the average rate paid, caused interest expense to be $224,000 higher in the first half of 2022 compared to the first half of the prior year. The average balance of certificates of deposit decreased $3.7 million and $9.7 million in the second quarter and first half of 2022, respectively, compared to the same periods in 2021. The decreased balances and a reduction of 5 basis points and 15 basis points in the average rate paid on certificates of deposit caused interest expense to decrease $30,000 and $165,000 in the second quarter and first half of 2022, respectively, compared to the same periods in 2021.  In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031.  In addition, ChoiceOne holds certain subordinated debentures issued in connection with a trust preferred securities offering that were obtained as part of the merger with Community Shores.  These increased the average balance of subordinated debentures by $32.0 million and $33.4 million in the second quarter and first half of 2022, respectively, compared to the same period in the prior year and caused interest expense to increase by $311,000 and $623,000 in the second quarter and first half of 2022, respectively, compared to the same periods in 2021. Provision and Allowance for Loan Losses The provision for loan losses was $0 in the first six months of 2022, compared to $416,000 in the same period in the prior year. No provision in the second quarter of 2022 was deemed prudent based on our assessment of the probable estimated losses inherent in the loan portfolio. Our methodology for measuring the appropriate level of allowance for loan losses and related provision for loan losses involves specific allocations for loans considered impaired, and general allocations for homogeneous loans based on historical loss experience. Loans classified as impaired loans declined by $2.7 million during the six months ended June 30, 2022.  The specific allowance for loan losses for impaired loans decreased by $288,000 during the six months ended June 30, 2022 largely due to the decrease in balance of impaired loans compared to December 31, 2021. The determination of our loss factors is based, in part, upon our actual loss history adjusted for significant qualitative factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date.  ChoiceOne uses a rolling 20 quarter actual net charge-off history as the base for the computation. Nonperforming loans were $2.7 million as of June 30, 2022 , compared to $5.5 million as of December 31, 2021 .  The allowance for loan losses was 0.69% of total loans at June 30, 2022 , compared to 0.76% at December 31, 2021 .  Loans acquired in the mergers with County Bank Corp. and Community Shores were recorded at fair value and as a result do not have an allowance for loan losses allocated to them unless credit deteriorates subsequent to acquisition.  ChoiceOne has $3.1 million in credit mark remaining on loans acquired in the mergers. Charge-offs and recoveries for respective loan categories for the six months ended June 30, 2022 and 2021 were as follows: (Dollars in thousands) 2022 2021 Charge-offs Recoveries Charge-offs Recoveries Agricultural $ - $ - $ - $ - Commercial and industrial 131 4 98 73 Consumer 255 106 147 113 Commercial real estate - 2 48 43 Residential real estate - 2 - 5 $ 386 $ 114 $ 293 $ 234 Net charge-offs were $272,000 in the first six months of 2022, compared to net charge-offs of $59,000 during the same period in 2021. Checking account charge-off and recovery activity is included in the consumer charge-off activity above.  Net charge-offs for checking accounts for the second quarter and first half of 2022 was $60,000 and $113,000, respectively, compared to $27,000 and $41,000 for the same periods in the prior year.  Net charge-offs on an annualized basis as a percentage of average loans were 0.05% in the first six months of 2022 compared to annualized net charge-offs of 0.01% of average loans in the same period in the prior year. Management is aware that the economic climate in Michigan will continue to affect businesses and individual borrowers.  Management has worked and intends to continue to work with delinquent borrowers in an attempt to lessen the negative impact to ChoiceOne. As charge-offs, changes in the level of nonperforming loans, and changes within the composition of the loan portfolio occur throughout 2022, the provision and allowance for loan losses will be reviewed by ChoiceOne’s management and adjusted as determined to be necessary. Noninterest Income Total noninterest income was $3.4 million in the second quarter and $7.3 million in the first half of 2022 compared to $4.7 million and $10.3 million in the same periods in the prior year.  Total noninterest income in the first six months of 2021 was bolstered by heightened levels of refinancing activity within ChoiceOne's mortgage portfolio, with gains on sales of loans $2.2 million larger than in the first six months of 2022.  Customer service charges increased $488,000 in the first half of 2022 compared to the first half of 2021 as prior year service charges were depressed by the effects of the COVID-19 pandemic. The market value of equity securities declined during the first half of 2022 compared to the first half of 2021 consistent with general market conditions.  Equity securities include local community bank stocks and Community Reinvestment Act bond mutual funds.  During the second quarter of 2022, ChoiceOne liquidated $31.5 million in securities resulting in a $427,000 realized loss, in order to redeploy the funds into higher yielding loans and reduce the risk of extension on certain fixed income securities which include a call option. Noninterest Expense Total noninterest expense increased $28,000 and $1.2 million in the second quarter and first half of 2022, respectively, compared to the same periods in 2021.   Salaries and wages increased $538,000 and $976,000 in the second quarter and first half of 2022, respectively, compared to the same periods in 2021.  The increase as compared to the first six months of 2022 is related to an increase in salaries and wages due to new commercial loan production staff and wealth management staff.  This investment in people will increase expenses short term, but is expected to drive long term value to ChoiceOne through the building of new relationships.  Other expenses have also increased in the first half of 2022 compared to the same period in the prior year due to an increase to our FDIC insurance related expenses and other expenses.  ChoiceOne continues to monitor expenses and looks to improve our efficiency through automation and use of digital tools. Income Tax Expense Income tax expense was $1.9 million in the first six months of 2022 compared to $2.2 million for the same period in 2021 .  The decrease was due to a higher level of income before income tax in 2021. The effective tax rate was 14.5% for the first six months of 2022 compared to 16.2% for the first six months of 2021.  The decline in the effective tax rate resulted from increased interest income from tax-exempt securities in the first half of 2022 compared to 2021. 30 FINANCIAL CONDITION Securities In the last two years ChoiceOne has grown its securities portfolio substantially.  Total available for sale securities on December 31, 2020, amounted to $577.7 million and grew steadily to an available for sale balance on December 31, 2021, of $1.1 billion.  Many of the securities making up this balance include local municipals and other securities ChoiceOne has no intent to sell prior to maturity.  During the first quarter of 2022, ChoiceOne elected to move $428.4 million of the portfolio into a held to maturity status.  Management believes the $566.1 million in available for sale securities at June 30, 2022 to be sufficient for any future liquidity needs. $31.8 million of securities were sold in the six months ended June 30, 2022 to be replaced with higher yielding assets. $8.7 million of securities were called or matured during that same period. Principal repayments on securities totaled $22.2 million in the six months ended June 30, 2022. Loans Core loans, which exclude PPP loans, held for sale loans, and loans to other financial institutions, grew organically by $184.9 million from June 30, 2021 to June 30, 2022. Additions to our commercial lending staff in 2021 and investments in the automation of our commercial loan process have helped drive our pipeline of commercial loans and corresponding growth.  Loans to other financial institutions increased $37.4 million from June 30, 2021 to June 30, 2022. Loans to other financial institutions is comprised of a warehouse line of credit to facilitate mortgage loan originations and fluctuates with the national mortgage market.  In the second quarter of 2022, $6.7 million of PPP loans were forgiven, resulting in $283,000 of fee income.  $1.8 million in PPP loans and $68,000 in deferred PPP fee income remains outstanding as of June 30, 2022.  During the second quarter and first half of 2022, ChoiceOne recorded accretion income related to acquired loans in the amount of $346,000 and $1.2 million, respectively.  The remaining credit mark on acquired loans from the recent mergers with County Bank Corp. and Community Shores totaled $3.1 million as of June 30, 2022. Excluding PPP loans, ChoiceOne saw an increase of $31.4 million of commercial and industrial loans, $37.7 million of commercial real estate loans and $23.3 million of residential real estate during the first six months of 2022.  Excluding PPP loans, ChoiceOne saw declines of $6.0 million in agricultural loans and $1.1 million in construction real estate loans in the first six months of 2022.  The other changes resulted from normal fluctuations in borrower activity. Asset Quality Information regarding impaired loans can be found in Note 3 to the consolidated financial statements included in this report.  The total balance of loans classified as impaired was $2.7 million at June 30, 2022, compared to $5.4 million as of December 31, 2021.  The change in the first six months of 2022 was primarily comprised of a decrease of $2.3 million in impaired agricultural loans. As part of its review of the loan portfolio, management also monitors the various nonperforming loans.  Nonperforming loans are comprised o (1) loans accounted for on a nonaccrual basis; (2) loans, not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments; and (3) loans, not included in nonaccrual or loans past due 90 days or more, which are considered troubled debt restructurings ("TDRs"). The balances of these nonperforming loans were as follows: (Dollars in thousands) June 30, December 31, 2022 2021 Loans accounted for on a nonaccrual basis $ 1,242 $ 1,727 Accruing loans which are contractually past due 90 days or more as to principal or interest payments - - Loans defined as "troubled debt restructurings " which are not included above 1,472 3,816 Total $ 2,714 $ 5,543 The reduction in the balance of nonaccrual loans in the first six months of 2022 was primarily due to loans that were paid off.  It is also noted that 82% of loans considered TDRs were performing according to their restructured terms as of June 30, 2022.  Management believes the allowance for loan losses allocated to its nonperforming loans is sufficient at June 30, 2022. 31 Goodwill Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value.  Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required. ChoiceOne acquired Valley Ridge Financial Corp. in 2006, County Bank Corp. in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $13.7 million, $38.9 million and $7.3 million, respectively. ChoiceOne management performs an annual qualitative assessment and periodically performs a quantitative assessment.  Management will perform a quantitative assessment of goodwill during the third quarter of 2022. Deposits and Borrowings Total deposits decreased $7.1 million in the second quarter of 2022 and have increased $257.8 million since June 30, 2021.  Deposit remained relatively flat in the second quarter primarily due to the seasonality of ChoiceOne's municipal clients and some modest deposit runoff as ChoiceOne has held deposit rates steady through the rapidly rising rate environment.  Despite the 13.7% growth in deposits since June 30, 2021, ChoiceOne has been able to maintain relatively low deposit costs, with an increase in interest expense of only 3.5% for the first six months of 2022 compared to the first six months of 2021. In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031.  ChoiceOne also holds $3.2 million in subordinated debentures issued in connection with a $4.5 million trust preferred securities offering, which were obtained in the merger with Community Shores, offset by the merger mark-to-market adjustment.   ChoiceOne may use Federal Home Loan Bank advances and advances from the Federal Reserve Bank Discount Window to meet short-term funding needs in the remainder of 2022. Shareholders' Equity Total shareholders' equity declined $55.2 million in the first six months of 2022.  The Federal Reserve increased the federal funds rate by 2.25% during the first half of 2022 in response to published inflation rates, causing interest rates to increase.  This change in interest rates increased ChoiceOne's unrealized pre-tax loss on the available for sale securities portfolio from $3.3 million at December 31, 2021 to $73.9 million at June 30, 2022.  Additionally, meeting minutes from the Federal Open Market Committee indicated that additional increases in the federal funds rate are expected in order to combat inflation in the coming quarters.  An increase of an additional 75 basis points to the federal funds rate occurred in July 2022. As such, ChoiceOne has elected to utilize interest rate derivatives in order to better manage its interest rate risk position.  On April 21, 2022, ChoiceOne purchased four forward-starting interest rate caps with a total notional amount of $200.0 million and entered into a $200.0 million forward-starting pay-fixed interest rate swap.  These strategies create accounting symmetry between available for sale securities and other comprehensive income (equity), thus protecting tangible capital from further increases in interest rates.  ChoiceOne also entered into two received-fixed interest rate swaps with a total notional amount of $200.0 million, which, in the current environment, offsets the cost of the rising rate protection. These three strategies, in the aggregate, are expected to be neutral to net income in 2022 and better position ChoiceOne Bank should rates continue to rise.  Importantly, the transactions were structured to qualify for hedge accounting, which means that changes in the fair value of the instruments flow through other comprehensive income (equity).  Refer to further details in Note 8 to the consolidated financial statements included in this report. A reduction in common stock and paid in capital resulted from ChoiceOne's repurchase of 25,899 shares for $682,000, or a weighted average all-in cost per share of $26.35, during the first quarter of 2022.  No shares of common stock were repurchased during the second quarter of 2022; however, ChoiceOne may strategically repurchase shares of common stock in the future depending on market and other conditions. 32 Regulatory Capital Requirements Following is information regarding compliance of ChoiceOne and ChoiceOne Bank with regulatory capital requirements: Minimum Required to be Well Minimum Required Capitalized Under for Capital Prompt Corrective (Dollars in thousands) Actual Adequacy Purposes Action Regulations Amount Ratio Amount Ratio Amount Ratio June 30, 2022 ChoiceOne Financial Services Inc. Total capital (to risk weighted assets) 212,043 13.8 % 122,636 8.0 % N/A N/A Common equity Tier 1 capital (to risk weighted assets) 168,228 11.0 68,983 4.5 N/A N/A Tier 1 capital (to risk weighted assets) 172,728 11.3 91,977 6.0 N/A N/A Tier 1 capital (to average assets) 172,728 7.5 92,046 4.0 N/A N/A ChoiceOne Bank Total capital (to risk weighted assets) 194,686 12.7 % 122,439 8.0 % 153,049 10.0 % Common equity Tier 1 capital (to risk weighted assets) 187,270 12.2 68,872 4.5 99,482 6.5 Tier 1 capital (to risk weighted assets) 187,270 12.2 91,830 6.0 122,439 8.0 Tier 1 capital (to average assets) 187,270 8.1 91,953 4.0 114,941 5.0 December 31, 2021 ChoiceOne Financial Services Inc. Total capital (to risk weighted assets) $ 204,353 14.4 % $ 113,604 8.0 % N/A N/A Common equity Tier 1 capital (to risk weighted assets) 160,338 11.3 63,902 4.5 N/A N/A Tier 1 capital (to risk weighted assets) 164,838 11.6 85,203 6.0 N/A N/A Tier 1 capital (to average assets) 164,838 7.4 89,415 4.0 N/A N/A ChoiceOne Bank Total capital (to risk weighted assets) $ 182,275 12.9 % $ 113,444 8.0 % $ 141,806 10.0 % Common equity Tier 1 capital (to risk weighted assets) 174,587 12.3 63,813 4.5 92,174 6.5 Tier 1 capital (to risk weighted assets) 174,587 12.3 85,083 6.0 113,444 8.0 Tier 1 capital (to average assets) 174,587 7.8 89,289 4.0 111,611 5.0 Management reviews the capital levels of ChoiceOne and ChoiceOne Bank on a regular basis. The Board of Directors and management believe that the capital levels as of June 30, 2022 are adequate for the foreseeable future. The Board of Directors’ determination of appropriate cash dividends for future periods will be based on, among other things, market conditions and ChoiceOne’s requirements for cash and capital. Liquidity Net cash provided by operating activities was $22.3 million for the six months ended June 30, 2022 compared to $17.1 million in the same period a year ago.  The change was due to lower net proceeds from loan sales in 2022 compared to 2021, which was offset by the change in other assets and liabilities.  Net cash used in investing activities was $52.8 million for the six months ended June 30, 2022 compared to $194.6 million in the same period in 2021. ChoiceOne had $32.7 million of securities purchases and sold $31.8 million of securities in the first half of 2022 compared to $322.0 million and $0 in the same period in 2021, respectively.  An increase in net loan originations led to cash used in of $59.6 million in the first six months of 2022 compared to cash provided of $100.8 million in the same period during the prior year.  Net cash provided by financing activities was $38.9 million for the first six months ended 2022, compared to $193.2 million in the same period in the prior year. ChoiceOne experienced growth of $86.2 million in deposits in the first six months of 2022 compared to $206.2 million in 2021, with a $36.3 million decrease in borrowings contributing to the change. ChoiceOne believes that the current level of liquidity is sufficient to meet ChoiceOne Bank's normal operating needs. This belief is based upon the availability of deposits from both the local and national markets, maturities of securities, normal loan repayments, income retention, federal funds purchased from correspondent banks, advances available from the Federal Home Loan Bank, and secured lines of credit available from the Federal Reserve Bank. 33 PART II.  OTHER INFORMATION Item 1. Legal Proceedings . There are no material pending legal proceedings to which ChoiceOne or ChoiceOne Bank is a party or to which any of their properties are subject, except for proceedings that arose in the ordinary course of business. In the belief of management, pending or current legal proceedings should not have a material effect on the consolidated financial condition of ChoiceOne. Item 1A. Risk Factors . Information concerning risk factors is contained in the discussion in Item 1A, “Risk Factors,” in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2021 . Item 2. Unregistered Sales of Equity Securities and Use of Proceeds . There were no unregistered sales of equity securities in the second quarter of 2022. 34 ISSUER PURCHASES OF EQUITY SECURITIES There were no issuer purchases of equity securities during the second quarter of 2022. Item 5. Other Information None. Item 6. Exhibits The following exhibits are filed or incorporated by reference as part of this repor Exhibit Number Document 3.1 Restated Articles of Incorporation of ChoiceOne Financial Services, Inc. Previously filed as an exhibit to ChoiceOne’s Form 8-A filed February 4, 2020.  Here incorporated by reference. 3.2 Bylaws of ChoiceOne as currently in effect and any amendments thereto. Previously filed as an exhibit to ChoiceOne’s Form 8-K filed April 21, 2021. Here incorporated by reference. 4.1 Advances, Pledge and Security Agreement between ChoiceOne Bank and the Federal Home Loan Bank of Indianapolis. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference. 4.2 Form of 3.25% Fixed-to-Floating Rate Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference. 4.3 Form of 3.25% Fixed-to-Floating Rate Global Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference. 10.1 ChoiceOne Financial Services, Inc. Equity Incentive Plan of 2022.  Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Registration on Form S-8 filed May 27, 2022.  Here incorporated by reference. 10.2 ChoiceOne Financial Services, Inc. 2022 Employee Stock Purchase Plan.  Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Registration Statement on Form S-8 filed May 27, 2022.  Here incorporated by reference. 31.1 Certification of Chief Executive Officer 31.2 Certification of Treasurer 32.1 Certification pursuant to 18 U.S.C. § 1350. 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) 35 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHOICEONE FINANCIAL SERVICES, INC. Date:   August 12, 2022 /s/ Kelly J. Potes Kelly J. Potes Chief Executive Officer (Principal Executive Officer) Date:   August 12, 2022 /s/ Adom J. Greenland Adom J. Greenland Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 36

WASHINGTON, D.C. 20549 FORM 10-Q ☒ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2022 ☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Numbe 000-19202 ChoiceOne Financial Services, Inc. (Exact Name of Registrant as Specified in its Charter) Michigan (State or Other Jurisdiction of Incorporation or Organization) 38-2659066 (I.R.S. Employer Identification No.) 109 East Division Sparta , Michigan (Address of Principal Executive Offices) 49345 (Zip Code) ( 616 ) 887-7366 (Registrant’s Telephone Number, including Area Code) Indicate by check mark whether the registran (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒        No ☐ Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒        No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☒ Securities registered pursuant to Section 12(b) of the Ac Title of each class Trading symbol(s) Name of each exchange on which registered Common stock COFS NASDAQ Capital Market As of October 31, 2022, the Registrant had outstanding 7,514,076 shares of common stock. PART I.  FINANCIAL INFORMATION Item 1. Financial Statements . ChoiceOne Financial Services, Inc. CONSOLIDATED BALANCE SHEETS September 30, December 31, (Dollars in thousands, except per share data) 2022 2021 (Unaudited) (Audited) Assets Cash and due from banks $ 51,144 $ 31,537 Time deposits in other financial institutions 350 350 Cash and cash equivalents 51,494 31,887 Equity securities, at fair value (Note 2) 7,977 8,492 Securities available for sale, at fair value (Note 2) 530,093 1,098,885 Securities held to maturity, at amortized cost (Note 2) 428,205 - Federal Home Loan Bank stock 3,493 3,824 Federal Reserve Bank stock 5,064 5,064 Loans held for sale 8,848 9,351 Loans to other financial institutions 70 42,632 Loans (Note 3) 1,132,401 1,016,848 Allowance for loan losses (Note 3) ( 7,457 ) ( 7,688 ) Loans, net 1,124,944 1,009,160 Premises and equipment, net 28,947 29,880 Other real estate owned, net - 194 Cash value of life insurance policies 44,033 43,356 Goodwill 59,946 59,946 Core deposit intangible 3,062 3,962 Other assets 67,353 20,049 Total assets $ 2,363,529 $ 2,366,682 Liabilities Deposits – noninterest-bearing $ 599,360 $ 560,931 Deposits – interest-bearing 1,557,294 1,491,363 Total deposits 2,156,654 2,052,294 Borrowings - 50,000 Subordinated debentures 35,201 35,017 Other liabilities 15,017 7,702 Total liabilities 2,206,872 2,145,013 Shareholders' Equity Preferred stock; shares authoriz 100,000 ; shares outstandin none - - Common stock and paid-in capital, no par value; shares authoriz 12,000,000 ; shares outstandin 7,510,036 at September 30, 2022 and 7,510,379 at December 31, 2021 171,975 171,913 Retained earnings 63,664 52,332 Accumulated other comprehensive loss, net ( 78,982 ) ( 2,576 ) Total shareholders’ equity 156,657 221,669 Total liabilities and shareholders’ equity $ 2,363,529 $ 2,366,682 See accompanying notes to interim consolidated financial statements. 2 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Nine Months Ended (Dollars in thousands, except per share data) September 30, September 30, 2022 2021 2022 2021 Interest income Loans, including fees $ 13,611 $ 12,408 $ 38,432 $ 36,655 Securiti Taxable 3,972 2,821 11,001 7,073 Tax exempt 1,464 1,459 4,678 4,002 Other 238 38 314 70 Total interest income 19,285 16,726 54,425 47,800 Interest expense Deposits 1,563 837 3,342 2,556 Advances from Federal Home Loan Bank 5 18 8 21 Other 379 171 1,127 327 Total interest expense 1,947 1,026 4,477 2,904 Net interest income 17,338 15,700 49,948 44,896 Provision for loan losses 100 - 100 416 Net interest income after provision for loan losses 17,238 15,700 49,848 44,480 Noninterest income Customer service charges 2,458 2,255 7,000 6,309 Insurance and investment commissions 158 153 596 624 Gains on sales of loans 432 1,798 2,123 5,715 Net gains (losses) on sales of securities ( 378 ) — ( 805 ) 3 Net gains on sales and write downs of other assets — — 172 — Earnings on life insurance policies 259 194 793 570 Trust income 174 187 528 612 Change in market value of equity securities ( 323 ) ( 28 ) ( 1,006 ) 461 Other 267 159 922 756 Total noninterest income 3,047 4,718 10,323 15,050 Noninterest expense Salaries and benefits 7,668 7,552 22,811 21,719 Occupancy and equipment 1,545 1,538 4,688 4,591 Data processing 1,734 1,471 5,056 4,573 Professional fees 559 754 1,628 2,426 Supplies and postage 184 171 541 395 Advertising and promotional 199 183 478 535 Intangible amortization 297 346 901 1,005 FDIC insurance 195 225 645 533 Other 1,035 1,266 3,515 3,386 Total noninterest expense 13,416 13,506 40,263 39,163 Income before income tax 6,869 6,912 19,908 20,367 Income tax expense 1,056 1,163 2,952 3,337 Net income $ 5,813 $ 5,749 $ 16,956 $ 17,029 Basic earnings per share (Note 4) $ 0.77 $ 0.75 $ 2.26 $ 2.20 Diluted earnings per share (Note 4) $ 0.77 $ 0.75 $ 2.26 $ 2.20 Dividends declared per share $ 0.25 $ 0.25 $ 0.75 $ 0.69 See accompanying notes to interim consolidated financial statements. 3 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) Three Months Ended Nine Months Ended (Dollars in thousands) September 30, September 30, 2022 2021 2022 2021 Net income $ 5,813 $ 5,749 $ 16,956 $ 17,029 Other comprehensive income: Change in net unrealized gain (loss) on available-for-sale securities ( 25,073 ) ( 6,173 ) ( 99,584 ) ( 11,464 ) Income tax benefit (expense) 5,265 1,296 20,913 2,407 L reclassification adjustment for net (gain) loss included in net income 378 - 805 ( 3 ) Income tax benefit (expense) ( 79 ) - ( 169 ) 1 L net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity - - 3,404 - Income tax benefit (expense) - - ( 715 ) - Unrealized gain (loss) on available-for-sale securities, net of tax ( 19,509 ) ( 4,877 ) ( 75,346 ) ( 9,059 ) Reclassification of unrealized gain (loss) upon transfer of securities from available-for-sale to held-to-maturity - - ( 3,404 ) - Income tax benefit (expense) - - 715 - L amortization of net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity 53 - 297 - Income tax benefit (expense) ( 11 ) - ( 62 ) - Unrealized loss on held to maturity securities, net of tax 42 - ( 2,454 ) - Change in net unrealized gain (loss) on derivatives 6,618 - 1,042 - Income tax benefit (expense) ( 1,390 ) - ( 219 ) - L amortization of net unrealized (gains) losses included in net income 416 - 723 - Income tax benefit (expense) ( 87 ) - ( 152 ) - Unrealized gain (loss) on derivative instruments, net of tax 5,557 - 1,394 - Other comprehensive income (loss), net of tax ( 13,910 ) ( 4,877 ) ( 76,406 ) ( 9,059 ) Comprehensive income (loss) $ ( 8,097 ) $ 872 $ ( 59,450 ) $ 7,970 See accompanying notes to interim consolidated financial statements. 4 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited) For the three months ended September 30, Accumulated Common Other Stock and Comprehensive Number of Paid in Retained Income/(Loss), (Dollars in thousands, except per share data) Shares Capital Earnings Net Total Balance, July 1, 2021 7,692,537 $ 176,323 $ 45,352 $ 6,846 $ 228,521 Net income 5,749 5,749 Other comprehensive income ( 4,877 ) ( 4,877 ) Shares issued 5,924 139 139 Effect of employee stock purchases 6 6 Stock-based compensation expense 84 84 Shares repurchased ( 107,240 ) ( 2,664 ) ( 2,664 ) Cash dividends declared ($0.25 per share) ( 1,903 ) ( 1,903 ) Balance, September 30, 2021 7,591,221 $ 173,888 $ 49,198 $ 1,969 $ 225,055 Balance, July 1, 2022 7,503,072 $ 171,804 $ 59,728 $ ( 65,072 ) $ 166,460 Net income 5,813 5,813 Other comprehensive income (loss) ( 13,910 ) ( 13,910 ) Shares issued 6,964 32 32 Effect of employee stock purchases 6 6 Stock-based compensation expense 133 133 Cash dividends declared ($0.25 per share) ( 1,877 ) ( 1,877 ) Balance, September 30, 2022 7,510,036 $ 171,975 $ 63,664 $ ( 78,982 ) $ 156,657 5 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited) For the nine months ended September 30, Accumulated Common Other Stock and Comprehensive Number of Paid in Retained Income/(Loss), (Dollars in thousands, except per share data) Shares Capital Earnings Net Total Balance, January 1, 2021 7,796,352 $ 178,750 $ 37,490 $ 11,028 $ 227,268 Net income 17,029 17,029 Other comprehensive loss ( 9,059 ) ( 9,059 ) Shares issued 17,810 420 420 Effect of employee stock purchases 19 19 Stock-based compensation expense 260 260 Shares repurchased ( 222,941 ) ( 5,561 ) ( 5,561 ) Cash dividends declared ($0.69 per share) - - ( 5,322 ) ( 5,322 ) Balance, September 30, 2021 7,591,221 $ 173,888 $ 49,198 $ 1,969 $ 225,055 Balance, January 1, 2022 7,510,379 $ 171,913 $ 52,332 $ ( 2,576 ) $ 221,669 Net income 16,956 16,956 Other comprehensive income (loss) ( 76,406 ) ( 76,406 ) Shares issued 25,556 304 304 Effect of employee stock purchases 19 19 Stock-based compensation expense 421 421 Shares repurchased ( 25,899 ) ( 682 ) ( 682 ) Cash dividends declared ($0.75 per share) ( 5,624 ) ( 5,624 ) Balance, September 30, 2022 7,510,036 $ 171,975 $ 63,664 $ ( 78,982 ) $ 156,657 See accompanying notes to interim consolidated financial statements. 6 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended (Dollars in thousands) September 30, 2022 2021 Cash flows from operating activiti Net income $ 16,956 $ 17,029 Adjustments to reconcile net income to net cash from operating activiti Provision for loan losses 100 416 Depreciation 2,041 1,949 Amortization 8,145 6,989 Compensation expense on employee and director stock purchases, stock options, and restricted stock units 726 596 Net losses (gains) on sales of available for sale securities 805 ( 3 ) Net change in market value of equity securities 1,006 ( 461 ) Gains on sales of loans ( 2,123 ) ( 5,715 ) Loans originated for sale ( 68,434 ) ( 162,579 ) Proceeds from loan sales 70,155 171,882 Earnings on bank-owned life insurance ( 793 ) ( 570 ) Proceeds from BOLI policy 130 - Earnings on death benefit from bank-owned life insurance ( 14 ) - (Gains)/losses on sales of other real estate owned ( 41 ) ( 4 ) Proceeds from sales of other real estate owned 235 407 Deferred federal income tax (benefit)/expense 169 634 Net change in: Other assets ( 4,461 ) ( 2,805 ) Other liabilities 7,423 1,797 Net cash provided by operating activities 32,025 29,562 Cash flows from investing activiti Sales of securities available for sale 47,167 - Maturities, prepayments and calls of securities available for sale 39,024 39,772 Maturities, prepayments and calls of securities held to maturity 6,277 - Purchases of securities available for sale ( 54,347 ) ( 514,204 ) Purchases of securities held to maturity ( 7,505 ) - Loan originations and payments, net ( 73,321 ) 78,067 Additions to premises and equipment ( 1,238 ) ( 2,193 ) Proceeds from (payments for) derivative contracts, net ( 16,547 ) - Net cash provided by (used in) investing activities ( 60,490 ) ( 398,558 ) Cash flows from financing activiti Net change in deposits 104,360 337,572 Net change in short term borrowings ( 50,000 ) 22,464 Issuance of common stock 80 104 Repurchase of common stock ( 682 ) ( 5,561 ) Share based compensation withholding obligation ( 62 ) - Cash dividends ( 5,624 ) ( 5,322 ) Net cash provided by financing activities 48,072 349,257 Net change in cash and cash equivalents 19,607 ( 19,739 ) Beginning cash and cash equivalents 31,887 79,519 Ending cash and cash equivalents $ 51,494 $ 59,780 Supplemental disclosures of cash flow informati Cash paid for interest $ 4,738 $ 2,885 Cash paid for income taxes 200 2,501 Loans transferred to other real estate owned - 298 See accompanying notes to interim consolidated financial statements. 7 ChoiceOne Financial Services, Inc. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include ChoiceOne Financial Services, Inc. ("ChoiceOne"), its wholly-owned subsidiary, ChoiceOne Bank, and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. Intercompany transactions and balances have been eliminated in consolidation. ChoiceOne owns all of the common securities of Community Shores Capital Trust I (the “Capital Trust”). Under U.S. generally accepted accounting principles ("GAAP"), the Capital Trust is not consolidated because it is a variable interest entity and ChoiceOne is not the primary beneficiary. The accompanying unaudited consolidated financial statements and notes thereto reflect all adjustments ordinary in nature which are, in the opinion of management, necessary for a fair presentation of such financial statements.  Operating results for the nine months ended September 30, 2022 , are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 . The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in ChoiceOne’s Annual Report on Form 10 -K for the year ended December 31, 2021 . Use of Estimates To prepare financial statements in conformity with GAAP, ChoiceOne’s management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. These estimates and assumptions are subject to many risks and uncertainties, including changes in interest rates and other general economic, business and political conditions, including the effects of the COVID- 19 pandemic, and its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic. Actual results may differ from these estimates. Estimates associated with the allowance for loan losses are particularly susceptible to change. Investment Securities Investment securities for which ChoiceOne has the intent and ability to hold to maturity are classified as held to maturity and are carried at amortized cost.  Investment securities not classified as held to maturity are classified as available for sale and are reported at fair value with unrealized gains and losses, net of income taxes, as a separate component of other comprehensive income. ChoiceOne determines the appropriate classification of investment securities at the time of purchase and reassesses the classification at each reporting date. Loans to Other Financial Institutions Loans to other financial institutions are made for the purpose of providing a warehouse line of credit to facilitate funding of residential mortgage loan originations at other financial institutions. The loans are short-term in nature and are designed to provide funding for the time period between the loan origination and its subsequent sale in the secondary market. Loans to other financial institutions earn a share of interest income, determined by the contract, from when the loan is funded to when the loan is sold on the secondary market. Loans to other financial institutions are excluded from Note 3. Management has elected to suspend the warehouse line of credit program as of the end of the third quarter of 2022. A small balance of loans remains in the pipeline from prior to the suspension; however, these are expected to be paid off quickly, with no losses, and are immaterial. Goodwill Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of the acquired tangible assets and liabilities and identifiable intangible assets. Goodwill and intangible assets acquired in a purchase or business combination and determined to have an indefinite useful life are not amortized but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. Core Deposit Intangible Core deposit intangible represents the value of the acquired customer core deposit bases and is included as an asset on the consolidated balance sheets. The core deposit intangible has an estimated finite life, is amortized on an accelerated basis over a 120 month period and is subject to periodic impairment evaluation. 8 Stock Transactions A total of 12,104 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of $ 286,000 under the terms of the Directors’ Stock Purchase Plan in the first nine months of 2022 . A total of 6,524 shares for a cash price of $ 80,000 were issued under the Employee Stock Purchase Plan in the first nine months of 2022 .  ChoiceOne repurchased 25,899 shares for $ 682,000 , or a weighted average all-in cost per share of $ 26.35 , during the first quarter of 2022. This was part of the common stock repurchase program announced in April 2021 which authorized repurchases of up to 390,114 shares, representing 5 % of the total outstanding shares of common stock as of the date the program was adopted. No shares were repurchased under this program in the second or third quarter of 2022. Allowance for Loan Losses The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan losses is increased by the provision for loan losses and decreased by loans charged off less any recoveries of charged off loans. Management estimates the allowance for loan losses required based on past loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance for loan losses when management believes that collection of a loan balance is not possible. The allowance for loan losses consists of general and specific components. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. Management's adjustment for current factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, experience and ability of lending staff, national and economic trends and conditions, industry conditions, trends in real estate values, and other conditions.  The specific component relates to loans that are individually classified as impaired. A loan is impaired when full payment under the loan terms is not expected. Troubled debt restructuring of loans is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule. All modified loans are evaluated to determine whether the loans should be reported as Troubled Debt Restructurings ("TDR"). A loan is a TDR when ChoiceOne Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower by modifying a loan. To make this determination, ChoiceOne Bank must determine whether (a) the borrower is experiencing financial difficulties and (b) ChoiceOne Bank granted the borrower a concession. This determination requires consideration of all facts and circumstances surrounding the modification. An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically mean the borrower is experiencing financial difficulties. Commercial loans are evaluated for impairment on an individual loan basis. If a loan is considered impaired or if a loan has been classified as a TDR, a portion of the allowance for loan losses is allocated to the loan so that it is reported, at the net present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller-balance homogeneous loans such as consumer and residential real estate mortgage loans are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures. Reclassifications Certain amounts presented in prior periods have been reclassified to conform to the current presentation. Recent Accounting Pronouncements The Financial Accounting Standards Board (FASB) issued ASU No. 2016 - 13 , Financial Instruments — Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments . This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance attempts to reflect an entity’s current estimate of all expected credit losses and broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity may apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. Additionally, credit losses on available-for-sale debt securities will have to be presented as an allowance rather than as a write-down. This ASU is effective for fiscal years beginning after December 15, 2022, and for interim periods within those years for companies considered smaller reporting companies with the Securities and Exchange Commission. ChoiceOne was classified as a smaller reporting company as of the measurement date. Management is currently evaluating the impact of this new ASU on its consolidated financial statements which may be significant.  Management has selected representative peer groups for each loan type and determined economic factors which have a strong correlation with our historical loss data. 9 NOTE 2 – SECURITIES On January 1, 2022, ChoiceOne reassessed and transferred, at fair value $ 428.4 million of securities classified as available for sale to the held to maturity classification.  The net unrealized after-tax loss of $ 2.7 million as of the transfer date remained in accumulated other comprehensive income to be amortized over the remaining life of the securities, offsetting the related amortization of discount or premium on the transferred securities. No gains or losses were recognized at the time of the transfer.  The remaining net unamortized unrealized loss on transferred securities included in accumulated other comprehensive income was $ 2.5 million after tax as of September 30, 2022. The fair value of equity securities and the related gross unrealized gains and (losses) recognized in noninterest income were as follows: September 30, 2022 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity securities $ 8,445 $ 272 $ ( 740 ) $ 7,977 December 31, 2021 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity securities $ 7,953 $ 665 $ ( 126 ) $ 8,492 The following tables present the amortized cost and fair value of investment securities at the dates indicated and the corresponding amounts of gross unrealized gains and losses, including the corresponding amounts of gross unrealized gains and losses on investment securities available for sale recognized in accumulated other comprehensive income: September 30, 2022 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Available for S Cost Gains Losses Value U.S. Treasury notes and bonds $ 90,926 $ - $ ( 13,372 ) $ 77,554 State and municipal 281,298 - ( 57,311 ) 223,987 Mortgage-backed 242,095 - ( 27,404 ) 214,691 Corporate 757 - ( 41 ) 716 Asset-backed securities 13,653 - ( 508 ) 13,145 Total $ 628,729 $ - $ ( 98,636 ) $ 530,093 Held to Maturity: U.S. Government and federal agency $ 2,965 $ - $ ( 415 ) $ 2,550 State and municipal 202,406 - ( 42,485 ) 159,921 Mortgage-backed 202,131 - ( 31,296 ) 170,835 Corporate 19,597 - ( 2,068 ) 17,529 Asset-backed securities 1,106 - ( 83 ) 1,023 Total $ 428,205 $ - $ ( 76,347 ) $ 351,858 December 31, 2021 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Available for S Cost Gains Losses Value U.S. Government and federal agency $ 2,001 $ 7 $ - $ 2,008 U.S. Treasury notes and bonds 93,267 23 ( 1,311 ) 91,979 State and municipal 528,252 10,704 ( 4,109 ) 534,847 Mortgage-backed 441,383 781 ( 9,049 ) 433,115 Corporate 20,856 19 ( 233 ) 20,642 Asset-backed securities 16,387 - ( 93 ) 16,294 Total $ 1,102,146 $ 11,534 $ ( 14,795 ) $ 1,098,885 10 Available for sale securities with unrealize losses as of September 30, 2022 and 2021, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows: September 30, 2022 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Available for S Value Losses Value Losses Value Losses U.S. Government and federal agency $ - $ - $ - $ - $ - $ - U.S. Treasury notes and bonds - - 77,554 13,372 77,554 13,372 State and municipal 181,857 44,576 40,756 12,735 222,613 57,311 Mortgage-backed 86,499 4,410 125,765 22,994 212,264 27,404 Corporate 716 41 - - 716 41 Asset-backed securities - - 13,145 508 13,145 508 Total temporarily impaired $ 269,072 $ 49,027 $ 257,220 $ 49,609 $ 526,292 $ 98,636 December 31, 2021 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Available for S Value Losses Value Losses Value Losses U.S. Government and federal agency $ - $ - $ - $ - $ - $ - U.S. Treasury notes and bonds 89,958 1,311 - - 89,958 1,311 State and municipal 130,001 3,253 15,237 856 145,238 4,109 Mortgage-backed 261,560 5,709 86,974 3,340 348,534 9,049 Corporate 17,369 233 - - 17,369 233 Asset-backed securities 16,294 93 - - 16,294 93 Total temporarily impaired $ 515,182 $ 10,599 $ 102,211 $ 4,196 $ 617,393 $ 14,795 Held to maturity securities with unrealize losses as of September 30, 2022, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, in the table below.  There were no held to maturity securities as of December 31, 2021. September 30, 2022 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Held to Maturity: Value Losses Value Losses Value Losses U.S. Government and federal agency $ - $ - $ 2,550 $ 415 $ 2,550 $ 415 U.S. Treasury notes and bonds - - - - - - State and municipal 105,390 25,177 54,531 17,308 159,921 42,485 Mortgage-backed 59,007 6,495 111,828 24,801 170,835 31,296 Corporate 11,371 1,512 4,909 556 16,280 2,068 Asset-backed securities - - 1,023 83 1,023 83 Total temporarily impaired $ 175,768 $ 33,184 $ 174,841 $ 43,163 $ 350,609 $ 76,347 ChoiceOne reviews its securities portfolio on a quarterly basis to determine whether unrealized losses are considered to be temporary or other-than-temporary. No other-than-temporary impairment charges were recorded in the three and nine months ended September 30, 2022 , or in the same periods in 2021 . ChoiceOne believes that unrealized losses on securities were temporary in nature and were due to changes in interest rates and reduced market liquidity and not as a result of credit quality issues. 11 Presented below is a schedule of maturities of securities as of September 30, 2022 , and the fair value of securities available for sale and the amortized cost of securities held to maturity as of September 30, 2022 .  Callable securities in the money are presumed called and matured at the callable date. Available for Sale Securities maturing within: Fair Value Less than 1 Year - 5 Years - More than at September 30, (Dollars in thousands) 1 Year 5 Years 10 Years 10 Years 2022 U.S. Treasury notes and bonds $ - $ - $ 77,554 $ - $ 77,554 State and municipal 9,609 7,929 38,202 168,247 223,987 Corporate - 497 219 - 716 Asset-backed securities - 9,481 3,664 - 13,145 Total debt securities 9,609 17,907 119,639 168,247 315,402 Mortgage-backed securities 19,362 98,970 90,161 6,198 214,691 Total Available for Sale $ 28,971 $ 116,877 $ 209,800 $ 174,445 $ 530,093 Held to Maturity Securities maturing within: Amortized Cost Less than 1 Year - 5 Years - More than at September 30, (Dollars in thousands) 1 Year 5 Years 10 Years 10 Years 2022 U.S. Government and federal agency $ - $ - $ 2,965 $ - $ 2,965 State and municipal 2,348 5,180 68,447 126,431 202,406 Corporate - 250 18,347 1,000 19,597 Asset-backed securities - 1,106 - - 1,106 Total debt securities 2,348 6,536 89,759 127,431 226,074 Mortgage-backed securities - 56,033 146,098 - 202,131 Total Held to Maturity $ 2,348 $ 62,569 $ 235,857 $ 127,431 $ 428,205 Following is information regarding unrealized gains and losses on equity securities for the three and nine months ended September 30, 2022 and 2021: Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Net gains and (losses) recognized during the period $ ( 323 ) $ ( 28 ) $ ( 1,006 ) $ 461 L Net gains and (losses) recognized during the period on securities sold — — — — Unrealized gains and (losses) recognized during the reporting period on securities still held at the reporting date $ ( 323 ) $ ( 28 ) $ ( 1,006 ) $ 461 12 NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses and balances in the loan portfolio were as follows: Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses Three Months Ended September 30, 2022 Beginning balance $ 132 $ 1,613 $ 309 $ 4,224 $ 45 $ 691 $ 402 $ 7,416 Charge-offs — ( 47 ) ( 128 ) - — — — ( 175 ) Recoveries — 59 56 1 — — — 116 Provision 8 ( 252 ) 66 384 14 178 ( 298 ) 100 Ending balance $ 140 $ 1,373 $ 303 $ 4,609 $ 59 $ 869 $ 104 $ 7,457 Allowance for Loan Losses Nine Months Ended September 30, 2022 Beginning balance $ 448 $ 1,454 $ 290 $ 3,705 $ 110 $ 671 $ 1,010 $ 7,688 Charge-offs — ( 177 ) ( 383 ) — — — — ( 560 ) Recoveries — 62 162 3 — 2 — 229 Provision ( 308 ) 34 234 901 ( 51 ) 196 ( 906 ) 100 Ending balance $ 140 $ 1,373 $ 303 $ 4,609 $ 59 $ 869 $ 104 $ 7,457 Individually evaluated for impairment $ 1 $ 6 $ 1 $ 6 $ — $ 143 $ — $ 157 Collectively evaluated for impairment $ 139 $ 1,367 $ 302 $ 4,603 $ 59 $ 726 $ 104 $ 7,300 Loans September 30, 2022 Individually evaluated for impairment $ 312 $ 108 $ 7 $ 140 $ — $ 2,070 $ — $ 2,637 Collectively evaluated for impairment 63,035 204,686 38,340 584,274 14,299 210,867 — 1,115,501 Acquired with deteriorated credit quality — 3,796 9 8,781 — 1,677 — 14,263 Ending balance $ 63,347 $ 208,590 $ 38,356 $ 593,195 $ 14,299 $ 214,614 $ 1,132,401 Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses Three Months Ended September 30, 2021 Beginning balance $ 374 $ 1,523 $ 243 $ 4,377 $ 74 $ 860 $ 499 $ 7,950 Charge-offs — ( 96 ) ( 98 ) ( 63 ) — - — ( 257 ) Recoveries — 7 54 — — 1 — 62 Provision 144 168 33 ( 154 ) 39 80 ( 310 ) - Ending balance $ 518 $ 1,602 $ 232 $ 4,160 $ 113 $ 941 $ 189 $ 7,755 Allowance for Loan Losses Nine Months Ended September 30, 2021 Beginning balance $ 257 $ 1,327 $ 317 $ 4,178 $ 97 $ 1,300 $ 117 $ 7,593 Charge-offs — ( 195 ) ( 244 ) ( 111 ) — — — ( 550 ) Recoveries — 80 168 43 — 5 — 296 Provision 261 390 ( 9 ) 50 16 ( 364 ) 72 416 Ending balance $ 518 $ 1,602 $ 232 $ 4,160 $ 113 $ 941 $ 189 $ 7,755 Individually evaluated for impairment $ 124 $ 174 $ - $ 8 $ - $ 177 $ - $ 483 Collectively evaluated for impairment $ 394 $ 1,428 $ 232 $ 4,152 $ 113 $ 764 $ 189 $ 7,272 Loans September 30, 2021 Individually evaluated for impairment $ 3,051 $ 296 $ - $ 418 $ - $ 2,191 $ 5,956 Collectively evaluated for impairment 60,394 211,695 33,793 474,425 18,238 165,913 964,458 Acquired with deteriorated credit quality — 5,251 13 10,489 — 2,190 17,943 Ending balance $ 63,445 $ 217,242 $ 33,806 $ 485,332 $ 18,238 $ 170,294 $ 988,357 13 Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses December 31, 2021 Individually evaluated for impairment $ 251 $ 95 $ 2 $ 9 $ - $ 146 $ - $ 503 Collectively evaluated for impairment $ 197 $ 1,359 $ 288 $ 3,696 $ 110 $ 525 $ 1,010 $ 7,185 Loans December 31, 2021 Individually evaluated for impairment $ 2,616 $ 339 $ 14 $ 273 $ - $ 2,191 $ 5,433 Collectively evaluated for impairment 62,203 197,656 35,148 515,528 19,066 164,647 994,248 Acquired with deteriorated credit quality - 5,029 12 10,083 - 2,043 17,167 Ending balance $ 64,819 $ 203,024 $ 35,174 $ 525,884 $ 19,066 $ 168,881 $ 1,016,848 The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking ( 1 ) the risk ratings of business loans, ( 2 ) the level of classified business loans, and ( 3 ) delinquent and nonperforming consumer loans. Business loans are risk rated on a scale of 1 to 9. A description of the characteristics of the ratings follows: Risk Rating 1 through 5 or pass: These loans are considered pass credits. They exhibit acceptable credit risk and demonstrate the ability to repay the loan from normal business operations. Risk rating 6 or special menti  Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions that have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that ChoiceOne Bank will sustain some future loss if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual assets classified as substandard. Loans falling into this category should have clear action plans and timelines with benchmarks to determine which direction the relationship will move. Risk rating 7 or substandar Loans and other credit extensions graded “7” have all the weaknesses inherent in those graded “6”, with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. Loans in this classification should be evaluated for non-accrual status. All nonaccrual commercial and Retail loans must be at a minimum graded a risk code “7”. Risk rating 8 or doubtfu Loans and other credit extensions bearing this grade have been determined to have the extreme probability of some loss, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral. Risk rating 9 or l Loans in this classification are considered uncollectible and cannot be justified as a viable asset of ChoiceOne Bank. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future. 14 Information regarding ChoiceOne Bank's credit exposure was as follows: Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category (Dollars in thousands) Agricultural Commercial and Industrial Commercial Real Estate September 30, December 31, September 30, December 31, September 30, December 31, 2022 2021 2022 2021 2022 2021 Pass $ 62,733 $ 61,864 $ 208,087 $ 201,202 $ 588,066 $ 519,537 Special Mention 302 339 344 300 729 778 Substandard 312 2,616 159 1,266 4,400 5,569 Doubtful - - - 256 - - $ 63,347 $ 64,819 $ 208,590 $ 203,024 $ 593,195 $ 525,884 Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity (Dollars in thousands) Consumer Construction Real Estate Residential Real Estate September 30, December 31, September 30, December 31, September 30, December 31, 2022 2021 2022 2021 2022 2021 Performing $ 38,349 $ 35,174 $ 14,299 $ 19,066 $ 213,777 $ 168,031 Nonperforming - - - - - - Nonaccrual 7 - - - 837 850 $ 38,356 $ 35,174 $ 14,299 $ 19,066 $ 214,614 $ 168,881 The following table provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the three and nine months ended September 30, 2022 and September 30, 2021 . Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022 Pre- Post- Pre- Post- Modification Modification Modification Modification Outstanding Outstanding Outstanding Outstanding (Dollars in thousands) Number of Recorded Recorded Number of Recorded Recorded Loans Investment Investment Loans Investment Investment Agricultural - $ - $ - 1 $ 253 $ 253 Commercial and industrial - - - 1 18 18 Total - $ - $ - 2 $ 271 $ 271 Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021 Pre- Post- Pre- Post- Modification Modification Modification Modification Outstanding Outstanding Outstanding Outstanding (Dollars in thousands) Number of Recorded Recorded Number of Recorded Recorded Loans Investment Investment Loans Investment Investment Agricultural - $ - $ - 6 $ 2,210 $ 2,210 Commercial Real Estate 1 493 493 2 931 931 Total 1 $ 493 $ 493 8 $ 3,141 $ 3,141 There were no TDRs where the borrower was past due with respect to principal and/or interest for 30 days or more during the three and nine months ended September 30, 2022 , or September 30, 2021, which loans had been modified and classified as TDRs during the year prior to the default. 15 Impaired loans by loan category fol Unpaid (Dollars in thousands) Recorded Principal Related Investment Balance Allowance September 30, 2022 With no related allowance recorded Agricultural $ 307 $ 428 $ - Commercial and industrial - - - Consumer - - - Construction real estate - - - Commercial real estate - - - Residential real estate - - - Subtotal 307 428 - With an allowance recorded Agricultural 5 5 1 Commercial and industrial 108 185 6 Consumer 7 7 1 Construction real estate - - - Commercial real estate 140 140 6 Residential real estate 2,070 2,149 143 Subtotal 2,330 2,486 157 Total Agricultural 312 433 1 Commercial and industrial 108 185 6 Consumer 7 7 1 Construction real estate - - - Commercial real estate 140 140 6 Residential real estate 2,070 2,149 143 Total $ 2,637 $ 2,914 $ 157 Unpaid (Dollars in thousands) Recorded Principal Related Investment Balance Allowance December 31, 2021 With no related allowance recorded Agricultural $ 314 $ 428 $ - Commercial and industrial - - - Consumer - - - Construction real estate - - - Commercial real estate 94 94 - Residential real estate 164 172 - Subtotal 572 694 - With an allowance recorded Agricultural 2,302 2,302 251 Commercial and industrial 339 363 95 Consumer 14 15 2 Construction real estate - - - Commercial real estate 179 179 9 Residential real estate 2,027 2,084 146 Subtotal 4,861 4,943 503 Total Agricultural 2,616 2,730 251 Commercial and industrial 339 363 95 Consumer 14 15 2 Construction real estate - - - Commercial real estate 273 273 9 Residential real estate 2,191 2,256 146 Total $ 5,433 $ 5,637 $ 503 16 The following schedule provides information regarding average balances of impaired loans and interest recognized on impaired loans for the three and nine months ended September 30, 2022 and September 30, 2021: Average Interest (Dollars in thousands) Recorded Income Investment Recognized Three Months Ended September 30, 2022 With no related allowance recorded Agricultural $ 310 $ - Commercial and industrial - - Consumer - - Construction real estate - - Commercial real estate - - Residential real estate 220 - Subtotal 530 - With an allowance recorded Agricultural 6 - Commercial and industrial 134 1 Consumer 7 - Construction real estate - - Commercial real estate 145 2 Residential real estate 1,842 16 Subtotal 2,134 19 Total Agricultural 316 - Commercial and industrial 134 1 Consumer 7 - Construction real estate - - Commercial real estate 145 2 Residential real estate 2,062 16 Total $ 2,664 $ 19 Average Interest (Dollars in thousands) Recorded Income Investment Recognized Three Months Ended September 30, 2021 With no related allowance recorded Agricultural $ 989 $ - Commercial and industrial - - Consumer - - Construction real estate - - Commercial real estate 507 2 Residential real estate 320 - Subtotal 1,816 2 With an allowance recorded Agricultural 2,119 36 Commercial and industrial 240 2 Consumer - - Construction real estate - - Commercial real estate 272 2 Residential real estate 1,943 14 Subtotal 4,574 54 Total Agricultural 3,108 36 Commercial and industrial 240 2 Consumer - - Construction real estate - - Commercial real estate 779 4 Residential real estate 2,263 14 Total $ 6,390 $ 56 17 Average Interest (Dollars in thousands) Recorded Income Investment Recognized Nine Months Ended September 30, 2022 With no related allowance recorded Agricultural $ 312 $ - Commercial and industrial 23 - Consumer - - Construction real estate - - Commercial real estate 23 - Residential real estate 151 - Subtotal 509 - With an allowance recorded Agricultural 1,136 - Commercial and industrial 217 3 Consumer 15 - Construction real estate - - Commercial real estate 156 7 Residential real estate 1,891 49 Subtotal 3,415 59 Total Agricultural 1,448 - Commercial and industrial 240 3 Consumer 15 - Construction real estate - - Commercial real estate 179 7 Residential real estate 2,042 49 Total $ 3,924 $ 59 Average Interest (Dollars in thousands) Recorded Income Investment Recognized Nine Months Ended September 30, 2021 With no related allowance recorded Agricultural $ 669 $ 52 Commercial and industrial 745 - Consumer - - Construction real estate 20 - Commercial real estate 1,372 34 Residential real estate 243 - Subtotal 3,049 86 With an allowance recorded Agricultural 1,766 71 Commercial and industrial 198 3 Consumer 2 - Construction real estate - - Commercial real estate 525 8 Residential real estate 2,215 47 Subtotal 4,706 129 Total Agricultural 2,435 123 Commercial and industrial 943 3 Consumer 2 - Construction real estate 20 - Commercial real estate 1,897 42 Residential real estate 2,458 47 Total $ 7,755 $ 215 18 An aging analysis of loans by loan category follows: Loans Loans Loans Past Due Loans Past Due Past Due Greater 90 Days Past (Dollars in thousands) 30 to 59 60 to 89 Than 90 Loans Not Total Due and Days (1) Days (1) Days (1) Total (1) Past Due Loans Accruing September 30, 2022 Agricultural $ - $ - $ - $ - $ 63,347 $ 63,347 $ - Commercial and industrial 1,065 - 46 1,111 207,479 208,590 - Consumer 17 - - 17 38,339 38,356 - Commercial real estate - - - - 593,195 593,195 - Construction real estate - - - - 14,299 14,299 - Residential real estate 48 615 31 694 213,920 214,614 $ 1,130 $ 615 $ 77 $ 1,822 $ 1,130,579 $ 1,132,401 $ - December 31, 2021 Agricultural $ - $ - $ - $ - $ 64,819 $ 64,819 $ - Commercial and industrial 21 - 88 109 202,915 203,024 - Consumer 70 15 - 85 35,089 35,174 - Commercial real estate 422 13 279 714 525,170 525,884 - Construction real estate 1,149 1,235 - 2,384 16,682 19,066 - Residential real estate 1,489 306 454 2,249 166,632 168,881 - $ 3,151 $ 1,569 $ 821 $ 5,541 $ 1,011,307 $ 1,016,848 $ - ( 1 ) Includes nonaccrual loans. Nonaccrual loans by loan category fol (Dollars in thousands) September 30, December 31, 2022 2021 Agricultural $ 307 $ 313 Commercial and industrial 46 285 Consumer 7 - Commercial real estate - 279 Residential real estate 837 850 $ 1,197 $ 1,727 19 The table below details the outstanding balances of the County Bank Corp. acquired loan portfolio and the acquisition fair value adjustments at acquisition date of October 1, 2019 ( dollars in thousands): Acquired Acquired Acquired Impaired Non-impaired Total Loans acquired - contractual payments $ 7,729 $ 387,394 $ 395,123 Nonaccretable difference ( 2,928 ) - ( 2,928 ) Expected cash flows 4,801 387,394 392,195 Accretable yield ( 185 ) ( 1,894 ) ( 2,079 ) Carrying balance at acquisition date $ 4,616 $ 385,500 $ 390,116 The table below presents a roll forward of the accretable yield on the County Bank Corp. acquired loan portfolio for the years ended December 31, 2019, December 31, 2020, and December 31, 2021 and the nine months ended September 30, 2022 (dollars in thousands): (Dollars in thousands) Acquired Acquired Acquired Impaired Non-impaired Total Balance, January 1, 2019 $ - $ - $ - Merger with County Bank Corp. on October 1, 2019 185 1,894 2,079 Accretion October 1, 2019 through December 31, 2019 - ( 75 ) ( 75 ) Balance January 1, 2020 185 1,819 2,004 Accretion January 1, 2020 through December 31, 2020 ( 50 ) ( 295 ) ( 345 ) Balance January 1, 2021 135 1,524 1,659 Accretion January 1, 2021 through December 31, 2021 ( 247 ) ( 348 ) ( 595 ) Transfer from non-accretable to accretable yield 400 - 400 Balance January 1, 2022 288 1,176 1,464 Transfer from non-accretable to accretable yield 2,192 - 2,192 Accretion January 1, 2022 through September 30, 2022 ( 396 ) ( 32 ) ( 428 ) Balance, September 30, 2022 $ 2,084 $ 1,144 $ 3,228 The table below details the outstanding balances of the Community Shores Bank Corporation acquired loan portfolio and the acquisition fair value adjustments at acquisition date of July 1, 2020 ( dollars in thousands): Acquired Acquired Acquired Impaired Non-impaired Total Loans acquired - contractual payments $ 20,491 $ 158,495 $ 178,986 Nonaccretable difference ( 2,719 ) - ( 2,719 ) Expected cash flows 17,772 158,495 176,267 Accretable yield ( 869 ) ( 596 ) ( 1,465 ) Carrying balance at acquisition date $ 16,903 $ 157,899 $ 174,802 The table below presents a roll forward of the accretable yield on Community Shores Bank Corporation acquired loan portfolio for the years ended December 31, 2020 and December 31, 2021 and the nine months ended September 30, 2022 (dollars in thousands): Acquired Acquired Acquired Impaired Non-impaired Total Balance January 1, 2020 $ - $ - $ - Merger with Community Shores Bank Corporation on July 1, 2020 869 596 1,465 Accretion July 1, 2020 through December 31, 2020 ( 26 ) ( 141 ) ( 167 ) Balance, January 1, 2021 843 455 1,298 Accretion January 1, 2021 through December 31, 2021 ( 321 ) ( 258 ) ( 579 ) Balance January 1, 2022 522 197 719 Transfer from non-accretable to accretable yield 1,086 - 1,086 Accretion January 1, 2022 through September 30, 2022 ( 837 ) ( 197 ) ( 1,034 ) Balance, September 30, 2022 $ 771 $ - $ 771 20 NOTE 4 – EARNINGS PER SHARE Earnings per share are based on the weighted average number of shares outstanding during the period. A computation of basic earnings per share and diluted earnings per share follows: Three Months Ended Nine Months Ended (Dollars in thousands, except share data) September 30, September 30, 2022 2021 2022 2021 Basic Net income $ 5,813 $ 5,749 $ 16,956 $ 17,029 Weighted average common shares outstanding 7,507,538 7,621,423 7,500,877 7,730,135 Basic earnings per common shares $ 0.77 $ 0.75 $ 2.26 $ 2.20 Diluted Net income $ 5,813 $ 5,749 $ 16,956 $ 17,029 Weighted average common shares outstanding 7,507,538 7,621,423 7,500,877 7,730,135 Plus dilutive stock options and restricted stock units 12,820 12,644 17,279 13,766 Weighted average common shares outstanding and potentially dilutive shares 7,520,358 7,634,067 7,518,156 7,743,901 Diluted earnings per common share $ 0.77 $ 0.75 $ 2.26 $ 2.20 There were 15,000 stock options that were considered anti-dilutive to earnings per share for the three and nine months ended September 30, 2022 and September 30, 2021. There were no performance awards or restricted stock units that were considered anti-dilutive for the three and nine months ended September 30, 2022 and September 30, 2021. 21 Note 5 – Financial Instruments Financial instruments as of the dates indicated were as follows: Quoted Prices In Active Significant Markets for Other Significant Identical Observable Unobservable (Dollars in thousands) Carrying Estimated Assets Inputs Inputs Amount Fair Value (Level 1) (Level 2) (Level 3) September 30, 2022 Assets Cash and cash equivalents $ 51,494 $ 51,494 $ 51,494 $ - $ - Equity securities at fair value 7,977 7,977 6,116 - 1,861 Securities available for sale 530,093 530,093 - 530,093 - Securities held to maturity 428,205 351,858 - 336,795 15,063 Federal Home Loan Bank and Federal Reserve Bank stock 8,557 8,557 - 8,557 - Loans held for sale 8,848 9,113 - 9,113 - Loans to other financial institutions 70 70 - 70 - Loans, net 1,124,944 1,063,833 - - 1,063,833 Accrued interest receivable 9,273 9,273 - 9,273 - Interest rate lock commitments 51 51 - 51 - Mortgage loan servicing rights 4,537 5,853 - 5,853 - Interest rate derivative contracts 28,185 28,185 - 28,185 - Liabilities Noninterest-bearing deposits 599,360 599,360 - 599,360 - Interest-bearing deposits 1,557,294 1,553,133 - 1,553,133 - Borrowings - - - - - Subordinated debentures 35,201 29,836 - 29,836 - Accrued interest payable 180 180 - 180 - Interest rate derivative contracts 5,524 5,524 - 5,524 - December 31, 2021 Assets Cash and cash equivalents $ 31,887 $ 31,887 $ 31,887 $ - $ - Equity securities at fair value 8,492 8,492 6,724 - 1,768 Securities available for sale 1,098,885 1,098,885 - 1,077,835 21,050 Federal Home Loan Bank and Federal Reserve Bank stock 8,888 8,888 - 8,888 - Loans held for sale 9,351 9,632 - 9,632 - Loans to other financial institutions 42,632 42,632 - 42,632 - Loans, net 1,009,160 999,393 - - 999,393 Accrued interest receivable 8,211 8,211 - 8,211 - Interest rate lock commitments 172 172 - 172 - Mortgage loan servicing rights 4,666 5,522 - 5,522 - Liabilities Noninterest-bearing deposits 560,931 560,931 - 560,931 - Interest-bearing deposits 1,491,363 1,491,135 - 1,491,135 - Borrowings 50,000 50,000 - 50,000 - Subordinated debentures 35,017 33,414 - 33,414 - Accrued interest payable 441 441 - 441 - 22 NOTE 6 – FAIR VALUE MEASUREMENTS The following tables present information about assets and liabilities measured at fair value on a recurring basis and the valuation techniques used to determine those fair values. In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that ChoiceOne Bank has the ability to access. Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability. In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. ChoiceOne Bank’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability. Disclosures concerning assets and liabilities measured at fair value are as follows: Assets and Liabilities Measured at Fair Value on a Recurring Basis Quoted Prices In Active Significant Markets for Other Significant Identical Observable Unobservable Balance (Dollars in thousands) Assets Inputs Inputs at Date (Level 1) (Level 2) (Level 3) Indicated Equity Securities Held at Fair Value - September 30, 2022 Equity securities $ 6,116 $ - $ 1,861 $ 7,977 Investment Securities, Available for Sale - September 30, 2022 U. S. Treasury notes and bonds $ - $ 77,554 $ - $ 77,554 State and municipal - 223,987 - 223,987 Mortgage-backed - 214,691 - 214,691 Corporate - 716 - 716 Asset-backed securities - 13,145 - 13,145 Total $ - $ 530,093 $ - $ 530,093 Derivative Instruments - September 30, 2022 Interest rate derivative contracts - assets $ - $ 28,185 $ - $ 28,185 Interest rate derivative contracts - liabilities $ - $ 5,524 $ - $ 5,524 Equity Securities Held at Fair Value - December 31, 2021 Equity securities $ 6,724 $ - $ 1,768 $ 8,492 Investment Securities, Available for Sale - December 31, 2021 U. S. Government and federal agency $ - $ 2,008 $ - $ 2,008 U. S. Treasury notes and bonds - 91,979 - 91,979 State and municipal - 514,797 20,050 534,847 Mortgage-backed - 433,115 - 433,115 Corporate - 19,642 1,000 20,642 Asset-backed securities - 16,294 - 16,294 Total $ - $ 1,077,835 $ 21,050 $ 1,098,885 23 Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis Nine Months Ended (Dollars in thousands) September 30, 2022 2021 Equity Securities Held at Fair Value Balance, January 1 $ 1,768 $ 1,485 Total realized and unrealized gains included in noninterest income 18 ( 51 ) Net purchases, sales, calls, and maturities 75 262 Net transfers into Level 3 - - Balance, September 30, $ 1,861 $ 1,696 Amount of total losses for the period included in earning attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at September 30, $ 18 $ ( 51 ) Investment Securities, Available for Sale Balance, January 1 $ 21,050 $ 11,423 Total unrealized gains included in other comprehensive income - ( 369 ) Net purchases, sales, calls, and maturities - 7,979 Net transfers into Level 3 - - Transfer to held to maturity ( 21,050 ) - Balance, September 30, $ - $ 19,033 Amount of total losses for the period included in earning attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at September 30, $ - $ ( 366 ) Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 investment securities and liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs. Securities categorized as Level 3 assets as of September 30, 2022 primarily consist of common and preferred equity securities of community banks. As of December 31, 2021, bonds issued by local municipalities and corporate issuers were classified as available for sale and were included as Level 3 securities.  ChoiceOne estimates the fair value of these bonds and equity securities based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved. ChoiceOne also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment.  Disclosures concerning assets measured at fair value on a non-recurring basis are as follows: Assets Measured at Fair Value on a Non-recurring Basis Quoted Prices In Active Significant Markets for Other Significant Balances at Identical Observable Unobservable (Dollars in thousands) Dates Assets Inputs Inputs Indicated (Level 1) (Level 2) (Level 3) Impaired Loans September 30, 2022 $ 2,637 $ - $ - $ 2,637 December 31, 2021 $ 5,433 $ - $ - $ 5,433 Other Real Estate September 30, 2022 $ - $ - $ - $ - December 31, 2021 $ 194 $ - $ - $ 194 Mortgage Loan Servicing Rights September 30, 2022 $ 4,537 $ - $ 4,537 $ - December 31, 2021 $ 4,666 $ - $ 4,666 $ - Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired.  ChoiceOne estimates the fair value of the loans based on the present value of expected future cash flows using management’s estimate of key assumptions.  These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). The changes in fair value consisted of charge-downs of impaired loans that were posted to the allowance for loan losses and write-downs of other real estate that were posted to a valuation account. 24 NOTE 7 – REVENUE FROM CONTRACTS WITH CUSTOMERS ChoiceOne has a variety of sources of revenue, which include interest and fees from customers as well as revenue from non-customers.  ASC Topic 606, Revenue from Contracts With Customers, covers certain sources of revenue that are classified within noninterest income in the Consolidated Statements of Income.  Sources of revenue that are included in the scope of ASC Topic 606 include service charges and fees on deposit accounts, interchange income, investment asset management income and transaction-based revenue, and other charges and fees for customer services. Service Charges and Fees on Deposit Accounts Revenue includes charges and fees to provide account maintenance, overdraft services, wire transfers, funds transfer, and other deposit-related services.  Account maintenance fees such as monthly service charges are recognized over the period of time that the service is provided.  Transaction fees such as wire transfer charges are recognized when the service is provided to the customer. Interchange Income Revenue includes debit card interchange and network revenues.  This revenue is earned on debit card transactions that are conducted through payment networks such as MasterCard. The revenue is recorded as services are delivered and is presented net of interchange expenses. Investment Commission Income Revenue includes fees from the investment management advisory services and revenue is recognized when services are rendered.  Revenue also includes commissions received from the placement of brokerage transactions for purchase or sale of stocks or other investments. Commission income is recognized when the transaction has been completed. Trust Fee Income Revenue includes fees from the management of trust assets and from other related advisory services. Revenue is recognized when services are rendered. Following is noninterest income separated by revenue within the scope of ASC 606 and revenue within the scope of other GAAP topics: Three Months Ended Nine Months Ended September 30, September 30, (Dollars in thousands) 2022 2021 2022 2021 Service charges and fees on deposit accounts $ 1,152 $ 977 $ 3,218 $ 2,585 Interchange income 1,306 1,278 3,782 3,724 Investment commission income 158 153 596 624 Trust fee income 174 187 528 612 Other charges and fees for customer services 113 153 387 458 Noninterest income from contracts with customers within the scope of ASC 606 2,903 2,748 8,511 8,003 Noninterest income within the scope of other GAAP topics 144 1,970 1,812 7,047 Total noninterest income $ 3,047 $ 4,718 $ 10,323 $ 15,050 25 NOTE 8 – DERIVATIVE AND HEDGING ACTIVITIES ChoiceOne is exposed to certain risks relating to its ongoing business operations. ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. Derivatives are also implicit in certain contracts and commitments. ChoiceOne currently uses interest rate swaps and interest rate caps to manage its exposure to certain fixed and variable rate assets and variable rate liabilities. ChoiceOne recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. ChoiceOne records derivative assets and derivative liabilities on the balance sheet within other assets and other liabilities, respectively. Changes in the fair value of derivative financial instruments are either recognized in income or in shareholders’ equity as a component of accumulated other comprehensive income or loss depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge. Interest rate swaps ChoiceOne uses interest rate swaps as part of its interest rate risk management strategy to add stability to net interest income and to manage its exposure to interest rate movements. Interest rate swaps designated as hedges involve the receipt of variable-rate amounts from a counterparty in exchange for ChoiceOne making fixed-rate payments or the receipt of fixed-rate amounts from a counterparty in exchange for ChoiceOne making variable rate payments, over the life of the agreements without the exchange of the underlying notional amount. In the second quarter of 2022, ChoiceOne entered into two pay-floating/receive-fixed interest rate swaps (the “Pay Floating Swap Agreements”) for a total notional amount of $ 200.0 million that were designated as cash flow hedges.  These derivatives hedge the variable cash flows of specifically identified available-for-sale securities, cash and loans.  The Pay Floating Swap Agreements were determined to be highly effective during the periods presented and therefore no amount of ineffectiveness has been included in net income.   The Pay Floating Swap Agreements will pay a coupon rate equal to SOFR while receiving a fixed coupon rate of 2.41 %.   Net cash settlements received YTD on pay-floating/ received-fixed swaps were $ 773,000 as of September 30, 2022, which were included in interest income. In the second quarter of 2022, ChoiceOne entered into one forward starting pay-fixed/receive-floating interest rate swap (the “Pay Fixed Swap Agreement”) for a notional amount of $ 200.0 million that was designated as a cash flow hedge. This derivative hedges the risk of variability in cash flows attributable to forecasted payments on future deposits or floating rate borrowings indexed to the SOFR Rate. The Pay Fixed Swap Agreement is two years forward starting with an eight -year term set to expire in 2032. The Pay Fixed Swap Agreements will pay a fixed coupon rate of 2.75 % while receiving the SOFR Rate. Interest rate caps ChoiceOne also uses interest rate caps to provide stability to net interest income and to manage its exposure to interest rate movements. Interest rate caps designated as hedges involve the payment of a fixed premium by ChoiceOne who will then receive payment equivalent to the spread between the current rate and the strike rate until the conclusion of the term from the counterparty. In the second quarter of 2022, ChoiceOne entered into four forward starting interest rate cap agreements with a total notional amount of $ 200.0 million (“SOFR Cap Agreements”). Three of the SOFR Cap Agreements with a total notional amount of $ 100.0 million are designated as fair value hedges and hedge against changes in the fair value of certain fixed rate tax-exempt municipal bonds. ChoiceOne utilizes the interest rate caps as hedges against adverse changes in interest rates on the designated securities attributable to fluctuations in the SOFR rate above 2.68 %, as applicable. An increase in the benchmark interest rate hedged reduces the fair value of these assets. The remaining SOFR Cap Agreement with a notional amount of $ 100.0 million is designated as a cash flow hedge and hedges against the risk of variability in cash flows attributable to fluctuations in the SOFR rate above 2.68 % for forecasted payments on future deposits or borrowings indexed to the SOFR Rate.  All of the SOFR Cap Agreements are two -year forward starting with an eight -year term set to expire in 2032. The initial amount excluded from hedge effectiveness testing and amortized into earnings over the life of the interest rate cap derivatives is $ 16.5 million. September 30, 2022 December 31, 2021 (Dollars in thousands) Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments Interest rate contracts Other Assets $ 28,185 Other Assets $ - Interest rate contracts Other Liabilities $ 5,524 Other Liabilities $ - 26 Location and Amount of Gain or (Loss) Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships Recognized in Income on Fair Value and Cash Flow Hedging Relationships Three months ended September 30, 2022 Nine months ended September 30, 2022 Interest Income Interest Expense Interest Income Interest Expense Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded $ ( 8 ) $ ( 209 ) $ 414 $ ( 364 ) Gain or (loss) on fair value hedging relationships: Interest rate contra Hedged items $ ( 4,229 ) $ - $ ( 4,300 ) $ - Derivatives designated as hedging instruments $ 4,229 $ - $ 4,300 $ - Amount excluded from effectiveness testing recognized in earnings based on amortization approach $ ( 206 ) $ - $ ( 359 ) $ - Gain or (loss) on cash flow hedging relationships: Interest rate contra Amount of gain or (loss) reclassified from accumulated other comprehensive income into income $ - $ - $ - $ - Amount excluded from effectiveness testing recognized in earnings based on amortization approach $ - $ ( 209 ) $ - $ ( 364 ) 27 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations . The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (“ChoiceOne”), its wholly-owned subsidiary ChoiceOne Bank, and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc.  This discussion should be read in conjunction with the interim consolidated financial statements and related notes. FORWARD-LOOKING STATEMENTS This discussion and other sections of this quarterly report contain forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and ChoiceOne.  Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “look forward,” “continue”, “future”, “will” and variations of such words and similar expressions are intended to identify such forward-looking statements.  Management’s determination of the provision and allowance for loan losses, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management’s assumptions that are inherently forward-looking.  All of the information concerning interest rate sensitivity is forward-looking.  All statements with references to future time periods are forward-looking.  These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence.  Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements.  Furthermore, ChoiceOne undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. Additional risk factors include, but are not limited to, the risk factors discussed in Item 1A of ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2021 and in Part II, Item 1A of this Quarterly Report on Form 10-Q.  These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. 28 RESULTS OF OPERATIONS Net income for the third quarter of 2022 was $5,813,000, which represented an increase of $64,000 or 1% compared to the third quarter of 2021.  Basic and diluted earnings per common share were $0.77 for the third quarter of 2022 compared to $0.75 for the third quarter of the prior year.  The increase in the third quarter of 2022 is largely related to the increase in interest income due to strong loan growth. Net income for the first nine months of 2022 was $16,956,000, which represented a decline of $74,000 or less than 1% compared to the first three quarters of 2021.  Basic and diluted earnings per common share were $2.26 for the first three quarters of 2022 compared to $2.20 for the first three quarters of the prior year.  The modest decline in net income in the first nine months of 2022 compared to the same period in the prior year resulted in part from a decline of refinancing activity within ChoiceOne's mortgage portfolio due to a rise in mortgage rates since the first quarter of the prior year.  Net income also declined as interest expense increased mostly due to expense from a private placement of $32.5 million of fixed-to-floating rate subordinated notes late in the third quarter of the prior year and organic deposit interest expense.  These factors were largely offset by an increase of $6.6 million in interest income as the balance of both core loans and securities continued to grow.  Core loans (defined as loans excluding loans held for sale, loans to other financial institutions, and Paycheck Protection Program (“PPP”) loans) increased by $52.8 million or 19.6% on an annualized basis in the third quarter of 2022 and $205.2 million or 22.1% since the end of the third quarter in 2021. The return on average assets and return on average shareholders’ equity were 0.98% and 12.67%, respectively, for the third quarter of 2022, compared to 1.03% and 10.03%, respectively, for the same period in 2021.  The return on average assets and return on average shareholders’ equity were 0.97% and 14.11%, respectively, for the first nine months of 2022, compared to 1.08% and 10.01%, respectively, for the same period in 2021.  The increase in the return on average shareholders' equity is related to the decline in equity caused by the increase in unrealized losses on available-for-sale securities during the first nine months of 2022. Paycheck Protection Program ChoiceOne processed over $126 million in PPP loans in 2020, acquired an additional $37 million in PPP loans in the merger with Community Shores Bank Corporation ("Community Shores"), and originated $89.1 million in PPP loans in 2021.  In the third quarter of 2022, the remaining $1.8 million of PPP loans were forgiven resulting in $68,000 of fee income.  For the nine months ended September 30, 2022, $33.1 million of PPP loans were forgiven resulting in $1.2 million of fee income. At September 30, 2022, no PPP loans remain in ChoiceOne’s loan portfolio. Dividends Cash dividends of $1.9 million or $0.25 per share were declared in the third quarter of 2022, and the third quarter of 2021.  Cash dividends declared in the first nine months of 2022 were $5.6 million or $0.75 per share, compared to $5.3 million or $0.69 per share in the same period during the prior year.   The cash dividend payout percentage was 33.2% for the first nine months of 2022, compared to 31.3% in the same period in the prior year. Interest Income and Expense Tables 1 and 2 on the following pages provide information regarding interest income and expense for the three- and nine-month periods ended September 30, 2022 and 2021.  Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities.  Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates.  These tables are referred to in the discussion of interest income, interest expense and net interest income. 29 Table 1 – Average Balances and Tax-Equivalent Interest Rates Three Months Ended September 30, 2022 2021 (Dollars in thousands) Average Average Balance Interest Rate Balance Interest Rate Assets: Loans (1)(3)(4)(5) $ 1,128,679 $ 13,622 4.83 % $ 1,021,326 $ 12,412 4.86 % Taxable securities (2) 774,040 3,943 2.04 641,430 2,821 1.76 Nontaxable securities (1) 305,661 1,853 2.43 281,223 1,850 2.63 Other 43,418 238 2.19 106,831 38 0.14 Interest-earning assets 2,251,798 19,656 3.49 2,050,810 17,121 3.34 Noninterest-earning assets 137,752 183,418 Total assets $ 2,389,550 $ 2,234,228 Liabilities and Shareholders' Equity: Interest-bearing demand deposits $ 915,698 $ 972 0.42 % $ 850,963 $ 485 0.23 % Savings deposits 464,382 182 0.16 407,765 144 0.14 Certificates of deposit 196,160 410 0.84 183,103 208 0.45 Borrowings 2,414 8 1.40 2,667 38 5.70 Subordinated debentures 35,168 375 4.27 9,154 151 6.60 Interest-bearing liabilities 1,613,822 1,947 0.48 1,453,652 1,026 0.28 Demand deposits 593,793 545,251 Other noninterest-bearing liabilities 17,177 5,956 Total liabilities 2,224,792 2,004,859 Shareholders' equity 164,758 229,369 Total liabilities and shareholders' equity $ 2,389,550 $ 2,234,228 Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 17,709 $ 16,095 Net interest margin (tax-equivalent basis) (Non-GAAP) (1) 3.15 % 3.14 % Reconciliation to Reported Net Interest Income Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 17,709 $ 16,095 Adjustment for taxable equivalent interest (371 ) (395 ) Net interest income (GAAP) $ 17,338 $ 15,700 Net interest margin (GAAP) 3.08 % 3.06 % (1) Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%.  The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry.  These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities. (2) Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock. (3) Loans include both loans to other financial institutions and loans held for sale. (4) Non-accruing loan and PPP loan balances are included in the balances of average loans.  Non-accruing loan average balances were $1.2 million and $1.5 million in the third quarter of 2022 and 2021, respectively.  PPP loan average balances were $879,000 and $85.5 million in the third quarter of 2022 and 2021, respectively. At September 30, 2022 no PPP loans remain in ChoiceOne’s loan portfolio. (5) Interest on loans included net origination fees, accretion income, and PPP fees.  Accretion income was $440,000 and $253,000 in the third quarter of 2022 and 2021, respectively. PPP fees were approximately $68,000 and $1.6 million in the third quarter of 2022 and 2021, respectively. 30 Nine Months Ended September 30, 2022 2021 (Dollars in thousands) Average Average Balance Interest Rate Balance Interest Rate Assets: Loans (1)(3) $ 1,081,943 $ 38,454 4.74 % $ 1,047,326 $ 36,666 4.67 % Taxable securities (2) 782,378 11,001 1.87 542,216 7,073 1.74 Nontaxable securities (1) 319,381 5,921 2.47 253,565 5,070 2.67 Other 40,217 314 1.04 81,912 70 0.11 Interest-earning assets 2,223,919 55,691 3.34 1,925,019 48,879 3.39 Noninterest-earning assets 149,813 180,522 Total assets $ 2,373,732 $ 2,105,541 Liabilities and Shareholders' Equity: Interest-bearing demand deposits $ 918,644 $ 2,034 0.30 % $ 772,950 $ 1,379 0.24 % Savings deposits 455,816 485 0.14 385,160 391 0.14 Certificates of deposit 185,857 823 0.59 187,873 786 0.56 Borrowings 5,708 35 0.83 4,608 95 2.76 Subordinated debentures 35,205 1,099 4.16 5,147 253 6.55 Interest-bearing liabilities 1,601,230 4,477 0.37 1,355,738 2,904 0.29 Demand deposits 575,483 518,327 Other noninterest-bearing liabilities 13,528 4,745 Total liabilities 2,190,241 1,878,810 Shareholders' equity 183,491 226,731 Total liabilities and shareholders' equity $ 2,373,732 $ 2,105,541 Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 51,214 $ 45,975 Net interest margin (tax-equivalent basis) (Non-GAAP) (1) 3.07 % 3.18 % Reconciliation to Reported Net Interest Income Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 51,214 $ 45,975 Adjustment for taxable equivalent interest (1,265 ) (1079 ) Net interest income (GAAP) $ 49,948 $ 44,896 Net interest margin (GAAP) 2.99 % 3.11 % (1) Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%.  The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry.  These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities. (2) Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock. (3) Loans include both loans to other financial institutions and loans held for sale. (4) Non-accruing loan and PPP loan balances are included in the balances of average loans.  Non-accruing loan average balances were $1.3 million and $3.7 million in the first nine months of 2022 and 2021, respectively.  PPP loan average balances were $10.8 million and $111.6 million in the first nine months of 2022 and 2021, respectively. At September 30, 2022 no PPP loans remain in ChoiceOne’s loan portfolio. (5) Interest on loans included net origination fees, accretion income, and PPP fees.  Accretion income was $1.7 million and $924,000 in the first nine months of 2022 and 2021, respectively. PPP fees were approximately $1.2 million and $4.0 million in the first nine months of 2022 and 2021, respectively. 31 Table 2 – Changes in Tax-Equivalent Net Interest Income Three Months Ended September 30, (Dollars in thousands) 2022 Over 2021 Total Volume Rate Increase (decrease) in interest income (1) Loans (2) $ 1,210 $ 1,354 $ (144 ) Taxable securities 1,122 942 $ 180 Nontaxable securities (2) 3 238 $ (235 ) Other 200 (125 ) $ 325 Net change in interest income 2,535 2,409 126 Increase (decrease) in interest expense (1) Interest-bearing demand deposits 487 129 358 Savings deposits 38 31 7 Certificates of deposit 202 50 152 Borrowings (30 ) (10 ) (20 ) Subordinated debentures 224 321 (97 ) Net change in interest expense 921 521 400 Net change in tax-equivalent net interest income $ 1,614 $ 1,888 $ (274 ) Nine Months Ended September 30, (Dollars in thousands) 2022 Over 2021 Total Volume Rate Increase (decrease) in interest income (1) Loans (2) $ 1,789 $ 1,329 $ 460 Taxable securities 3,928 3,470 458 Nontaxable securities (2) 851 1,313 (462 ) Other 244 (69 ) 313 Net change in interest income 6,812 6,043 769 Increase (decrease) in interest expense (1) Interest-bearing demand deposits 655 334 321 Savings deposits 94 79 15 Certificates of deposit 37 (11 ) 48 Borrowings (60 ) 23 (83 ) Subordinated debentures 847 985 (138 ) Net change in interest expense 1,573 1,410 163 Net change in tax-equivalent net interest income $ 5,239 $ 4,633 $ 606 (1) The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s interest rate.  The rate variance is computed as the change in interest rate multiplied by the previous year’s volume (average balance).  The change in interest due to both volume and rate has been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. (2) Interest on nontaxable investment securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21%. Net Interest Income Tax-equivalent net interest income increased $1.6 million and $5.2 million in the third quarter and first nine months of 2022, respectively, compared to the same periods in 2021.  Growth in the three months ended and nine months ended September 30, 2022 compared to the same time periods in 2021 were affected by an increased average balance of securities as ChoiceOne deployed excess deposit dollars into securities with the intent to transition to loans as good credits become available.  ChoiceOne has also experienced core loan growth during 2022 leading to growth in interest income from loans of $1.2 million and $1.8 million during the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year.  Core loans exclude PPP loans, loans held for sale, and loans to other financial institutions.  Net interest margin on a tax-equivalent basis increased by 1 basis points and declined by 11 basis points in the third quarter and first nine months of 2022, respectively, compared to the same periods in 2021. The Federal Reserve increased the federal funds rate by 3.00% during the first nine months of 2022 in response to published inflation rates, causing interest rates to increase on all new loan originations.  This led to the modest increase in net interest margin in the third quarter of 2022 compared to the third quarter of 2021.  The decline in net interest margin on a tax-equivalent basis for the nine months ended September 30, 2022 compared to the same time period in the prior year, is due the asset mix as ChoiceOne grew securities faster than it grew loans. The average balance of loans increased $107.4 million in the third quarter of 2022 and $34.6 million in the first nine months of 2022 compared to the same periods in 2021, as core loans grew offset by a decline in PPP loans.  Average core loans increased $195.1 million in the third quarter of 2022 and $140.9 million in the first nine months of 2022 compared to the same periods in 2021.  Average PPP loans declined $84.7 million in the third quarter of 2022 and $100.8 million in the first nine months of 2022 compared to the same periods in 2021.  The rate earned on loans in the third quarter of 2022 declined slightly due to a reduction in PPP fees which declined $1.6 million in the third quarter of 2022 compared to the third quarter of 2021.  The rate earned on loans increased by 7 basis points during the nine months ended September 30, 2022 compared to the same time period in 2021 as new loan originations have been at higher rates due to market conditions offset by a $2.8 million decline in PPP fees earned during nine months ended September 30, 2022 compared to the same period in 2021. The average balance of total securities increased $157.0 million, and the average rate earned increased 12 basis points in the third quarter of 2022 compared to the same period in 2021.  The average balance of total securities increased $306.0 million and the average rate earned increased 1 basis point in the first nine months of 2022 compared to the same period in 2021. 32 Growth of $121.4 million in the average balance of interest-bearing demand deposits and savings deposits and a combined 13 basis point increase in the average rate paid, caused interest expense to increase $525,000 in the third quarter of 2022 compared to the third quarter of the prior year.  Growth of $216.4 million in the average balance of interest-bearing demand deposits and savings deposits and a combined 4 basis point increase in the average rate paid, caused interest expense to increase $749,000 in the first nine months of 2022 compared to the first nine months of the prior year. The average balance of certificates of deposit increased $13.1 million and declined $2.0 million in the third quarter and first nine months of 2022, respectively, compared to the same period in 2021. The increase in balances and a 39 basis points increase in the average rate paid on certificates of deposit caused interest expense to increase $202,000 in the third quarter 2022, compared to the same periods in 2021.  The decline in balances offset by a 3 basis points increase in the average rate paid on certificates of deposit caused interest expense to increase $37,000 in the first nine months of 2022, compared to the same periods in 2021.  In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031.  In addition, ChoiceOne holds certain subordinated debentures issued in connection with a trust preferred securities offering that were obtained as part of the merger with Community Shores.  These increased the average balance of subordinated debentures by $26.0 million and $30.0 million in the third quarter and first nine months of 2022, respectively, compared to the same period in the prior year and caused interest expense to increase by $224,000 and $847,000 in the third quarter and first nine months of 2022, respectively, compared to the same periods in 2021. Provision and Allowance for Loan Losses The provision for loan losses was $100,000 in the first nine months of 2022, compared to $416,000 in the same period in the prior year.  Provision expense was deemed necessary to reserve for core loan growth of $52.8 million in the third quarter of 2022.  Based on our assessment of the probable estimated losses inherent in the loan portfolio no additional provision was necessary for existing loans. Our methodology for measuring the appropriate level of allowance for loan losses and related provision for loan losses involves specific allocations for loans considered impaired, and general allocations for homogeneous loans based on historical loss experience. Loans classified as impaired loans declined by $2.8 million during the nine months ended September 30, 2022.  The specific allowance for loan losses for impaired loans decreased by $346,000 during the nine months ended September 30, 2022 largely due to the decrease in balance of impaired loans compared to December 31, 2021. The determination of our loss factors is based, in part, upon our actual loss history adjusted for significant qualitative factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date.  ChoiceOne uses a rolling 20 quarter actual net charge-off history as the basis for the computation. Nonperforming loans were $2.6 million as of September 30, 2022, compared to $5.5 million as of December 31, 2021.  The allowance for loan losses was 0.66% of total loans at September 30, 2022, compared to 0.76% at December 31, 2021.  Loans acquired in the mergers with County Bank Corp. and Community Shores were recorded at fair value and as a result do not have an allowance for loan losses allocated to them unless credit deteriorates subsequent to acquisition.  ChoiceOne has $1.8 million in credit mark remaining on loans acquired in the mergers. Charge-offs and recoveries for respective loan categories for the nine months ended September 30, 2022 and 2021 were as follows: (Dollars in thousands) 2022 2021 Charge-offs Recoveries Charge-offs Recoveries Agricultural $ - $ - $ - $ - Commercial and industrial 177 62 195 80 Consumer 383 162 244 168 Commercial real estate - 3 111 43 Construction real estate - - - - Residential real estate - 2 - 5 $ 560 $ 229 $ 550 $ 296 Net charge-offs were $331,000 in the first nine months of 2022, compared to net charge-offs of $254,000 during the same period in 2021. Checking account charge-off and recovery activity is included in the consumer charge-off activity above.  Net charge-offs for checking accounts for the third quarter and first nine months of 2022 were $73,000 and $186,000, respectively, compared to $49,000 and $90,000 for the same periods in the prior year.  Net charge-offs on an annualized basis as a percentage of average loans were 0.04% in the first nine months of 2022 compared to annualized net charge-offs of 0.03% of average loans in the same period in the prior year. Management is aware that the economic climate in Michigan will continue to affect businesses and individual borrowers.  Management has worked and intends to continue to work with delinquent borrowers in an attempt to lessen the negative impact to ChoiceOne. As charge-offs, changes in the level of nonperforming loans, and changes within the composition of the loan portfolio occur throughout 2022, the provision and allowance for loan losses will be reviewed by ChoiceOne’s management and adjusted as determined to be necessary. 33 Noninterest Income Total noninterest income declined $1.7 million and $4.7 million in the third quarter and first nine months of 2022 compared to the same periods in the prior year.  Total noninterest income in 2021 was bolstered by heightened levels of refinancing activity within ChoiceOne's mortgage portfolio, with gains on sales of loans $1.4 million and $3.6 million larger than in the third quarter and first nine months of 2022.  Customer service charges increased $203,000 and $691,000 in the third quarter and first nine months of 2022 compared to the same periods in the prior year.  Service charges were depressed by the effects of the COVID 19 pandemic.  The change in the market value of equity securities declined $295,000 and $1.5 million during the third quarter and first nine months of 2022 compared to the same periods in the prior year consistent with general market conditions.  Equity securities include local community bank stocks and Community Reinvestment Act bond mutual funds.  During the third quarter and first nine months of 2022, ChoiceOne has liquidated $15.3 million and $47.2 million in securities respectively, resulting in $378,000 and $805,000 of realized loss, respectively, in order to redeploy the funds into higher yielding loans and reduce the risk of extension on certain fixed income securities which include a call option. Noninterest Expense Total noninterest expense decreased $90,000 and increased $1.1 million in the third quarter and first nine months of 2022, respectively, compared to the same time periods in 2021.  The increase during the first nine months of 2022 is related to an increase in salaries and wages due to annual wage increases and the addition of new commercial loan production and wealth management staff.  This investment in people will increase expenses in the short term but is expected to drive long term value to ChoiceOne through the building of new relationships.  Other expenses have also increased in the first nine months of 2022 compared to the same period in the prior year due to an increase to our FDIC insurance related expenses, business travel expenses which were still being affected by the pandemic last year.  ChoiceOne continues to monitor expenses and looks to improve our efficiency through automation and use of digital tools. Income Tax Expense Income tax expense was $3.0 million in the first nine months of 2022 compared to $3.3 million for the same period in 2021.  The decrease was due to a higher level of income before income tax in 2021 and a $65.8 million dollar increase in the average balance of nontaxable securities in the first nine months of 2022 compared to the same period in 2021. The effective tax rate was 14.8% for the first nine months of 2022 compared to 16.4% for the first nine months of 2021. 34 FINANCIAL CONDITION Securities In the last two years ChoiceOne has grown its securities portfolio substantially.  Total available for sale securities on December 31, 2020, amounted to $577.7 million and grew steadily to an available for sale balance on December 31, 2021, of $1.1 billion.  Many of the securities making up this balance include local municipals and other securities ChoiceOne has no intent to sell prior to maturity.  During the first quarter of 2022, ChoiceOne elected to move $428.4 million of the portfolio into a held to maturity status.  Management believes the $530.1 million in available for sale securities at September 30, 2022 to be sufficient for any future liquidity needs. $47.2 million of securities were sold in the nine months ended September 30, 2022 to be replaced with higher yielding assets. $13.7 million of securities were called or matured during that same period. Principal repayments on securities totaled $31.6 million in the nine months ended September 30, 2022. Loans Core loans, which exclude PPP loans, held for sale loans, and loans to other financial institutions, grew organically by $205.2 million from September 30, 2021 to September 30, 2022.  Excluding PPP loans, ChoiceOne saw growth of $160.2 million in commercial loans and $40.4 million in retail loans from September 30, 2021 to September 30, 2022.  Additions to our commercial lending staff in 2021 and investments in the automation of our commercial loan process have helped drive our pipeline of commercial loans and corresponding growth.  ChoiceOne has ample on balance sheet liquidity to fund future loan growth, including an expected $183.1 million of cash flow from securities over the next two years. Loans to other financial institutions declined $38.8 million from September 30, 2021 to September 30, 2022 as management chose to suspend the program at the end of the third quarter 2022.  During the nine months ended September 30, 2022, the remaining $33.1 million of PPP loans were forgiven resulting in $1.2 million of fee income.  At September 30, 2022 all PPP loans have been fully forgiven, and the associated fee income has been recognized. During the first nine months of 2022, ChoiceOne recorded accretion income related to acquired loans in the amount of $1.7 million.  The remaining credit mark on acquired loans from the recent mergers with County Bank Corp. and Community Shores totaled $1.8 million as of September 30, 2022. Asset Quality Information regarding impaired loans can be found in Note 3 to the consolidated financial statements included in this report.  The total balance of loans classified as impaired was $2.6 million on September 30, 2022, compared to $5.5 million as of December 31, 2021.  The change in the first nine months of 2022 was primarily comprised of a decrease of $2.3 million in impaired agricultural loans. As part of its review of the loan portfolio, management also monitors the various nonperforming loans.  Nonperforming loans are comprised o (1) loans accounted for on a nonaccrual basis; (2) loans, not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments; and (3) loans, not included in nonaccrual or loans past due 90 days or more, which are considered troubled debt restructurings ("TDRs"). The balances of these nonperforming loans were as follows: (Dollars in thousands) September 30, December 31, 2022 2021 Loans accounted for on a nonaccrual basis $ 1,197 $ 1,727 Accruing loans which are contractually past due 90 days or more as to principal or interest payments - - Loans defined as "troubled debt restructurings " which are not included above 1,431 3,816 Total $ 2,628 $ 5,543 The reduction in the balance of nonaccrual loans in the first nine months of 2022 was primarily due to loans that were paid off.  It is also noted that 82% of loans considered TDRs were performing according to their restructured terms as of September 30, 2022.  Management believes the allowance for loan losses allocated to its nonperforming loans is sufficient at September 30, 2022. 35 Goodwill Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value.  Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required. ChoiceOne acquired Valley Ridge Financial Corp. in 2006, County Bank Corp. in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $13.7 million, $38.9 million and $7.3 million, respectively. ChoiceOne management performs an annual qualitative assessment and periodically performs a quantitative assessment.  Management will perform a quantitative assessment of goodwill during the fourth quarter of 2022. Deposits and Borrowings Deposits in the third quarter of 2022 continue to hold strong with an increase of $18.1 million compared to the second quarter of 2022, which is attributed to organic growth of new relationships, seasonal fluctuations in our municipal clients and some modest deposit runoff as ChoiceOne has held deposit rates.  Despite the rapidly rising rate environment, deposit costs have only increased 12 basis points since the third quarter of 2021, as ChoiceOne is actively managing these costs and will continue to lag the expected increases in the federal funds rate. In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031.  ChoiceOne also holds $3.2 million in subordinated debentures issued in connection with a $4.5 million trust preferred securities offering, which were obtained in the merger with Community Shores, offset by the merger mark-to-market adjustment.   ChoiceOne may use Federal Home Loan Bank advances and advances from the Federal Reserve Bank Discount Window to meet short-term funding needs in the remainder of 2022. Shareholders' Equity Total shareholders' equity declined $65.0 million in the first nine months of 2022.  As previously referenced the Federal Reserve increased the federal funds rate by 3.00% during the first nine months of 2022 in response to published inflation rates, causing interest rates to increase.  This change in interest rates increased ChoiceOne's unrealized pre-tax loss on the available for sale securities portfolio from $3.3 million on December 31, 2021 to $102.9 million on September 30, 2022.  Additionally, meeting minutes from the Federal Open Market Committee indicated that additional increases in the federal funds rate are expected in order to combat inflation in the coming quarters. As such, ChoiceOne elected to utilize interest rate derivatives in order to better manage its interest rate risk position.  On April 21, 2022, ChoiceOne purchased four 2-year forward-starting interest rate caps with a total notional amount of $200.0 million and entered into a $200.0 million 2-year forward-starting pay-fixed interest rate swap.  All forward starting instruments have an 8-year term expiring in 2032.  These strategies provide $400 million of notional value protection and also create accounting symmetry between available for sale securities and other comprehensive income (equity), thus protecting tangible capital from further increases in interest rates.  ChoiceOne also entered into multiple received-fixed interest rate swaps with a total notional amount of $200.0 million with a 2-year term, which, in the current environment, offsets the cost of the rising rate protection. These three strategies, in the aggregate, are expected to be neutral to net income in 2022 and better position ChoiceOne Bank should rates continue to rise and remain elevated.  Importantly, the transactions were structured to qualify for hedge accounting, which means that changes in the fair value of certain instruments flow through other comprehensive income (equity).  Refer to further details in Note 8 to the consolidated financial statements included in this report. A reduction in common stock and paid in capital resulted from ChoiceOne's repurchase of 25,899 shares for $682,000, or a weighted average all-in cost per share of $26.35, during the first quarter of 2022.  No shares of common stock were repurchased during the second or third quarters of 2022; however, ChoiceOne may strategically repurchase shares of common stock in the future depending on market and other conditions. 36 Regulatory Capital Requirements Following is information regarding compliance of ChoiceOne and ChoiceOne Bank with regulatory capital requirements: Minimum Required to be Well Minimum Required Capitalized Under for Capital Prompt Corrective (Dollars in thousands) Actual Adequacy Purposes Action Regulations Amount Ratio Amount Ratio Amount Ratio September 30, 2022 ChoiceOne Financial Services Inc. Total capital (to risk weighted assets) $ 216,524 13.7 % $ 126,267 8.0 % N/A N/A Common equity Tier 1 capital (to risk weighted assets) 172,632 10.9 71,025 4.5 N/A N/A Tier 1 capital (to risk weighted assets) 177,132 11.2 94,700 6.0 N/A N/A Tier 1 capital (to average assets) 177,132 7.6 93,179 4.0 N/A N/A ChoiceOne Bank Total capital (to risk weighted assets) $ 201,500 12.8 % $ 126,071 8.0 % $ 157,589 10.0 % Common equity Tier 1 capital (to risk weighted assets) 194,043 12.3 70,915 4.5 102,433 6.5 Tier 1 capital (to risk weighted assets) 194,043 12.3 94,553 6.0 126,071 8.0 Tier 1 capital (to average assets) 194,043 8.3 93,081 4.0 116,351 5.0 December 31, 2021 ChoiceOne Financial Services Inc. Total capital (to risk weighted assets) $ 204,353 14.4 % $ 113,604 8.0 % N/A N/A Common equity Tier 1 capital (to risk weighted assets) 160,338 11.3 63,902 4.5 N/A N/A Tier 1 capital (to risk weighted assets) 164,838 11.6 85,203 6.0 N/A N/A Tier 1 capital (to average assets) 164,838 7.4 89,415 4.0 N/A N/A ChoiceOne Bank Total capital (to risk weighted assets) $ 182,275 12.9 % $ 113,444 8.0 % $ 141,806 10.0 % Common equity Tier 1 capital (to risk weighted assets) 174,587 12.3 63,813 4.5 92,174 6.5 Tier 1 capital (to risk weighted assets) 174,587 12.3 85,083 6.0 113,444 8.0 Tier 1 capital (to average assets) 174,587 7.8 89,289 4.0 111,611 5.0 Management reviews the capital levels of ChoiceOne and ChoiceOne Bank on a regular basis. The Board of Directors and management believe that the capital levels as of September 30, 2022 are adequate for the foreseeable future. The Board of Directors’ determination of appropriate cash dividends for future periods will be based on, among other things, market conditions and ChoiceOne’s requirements for cash and capital. Liquidity Net cash provided by operating activities was $32.0 million for the nine months ended September 30, 2022 compared to $29.6 million in the same period a year ago.  The change was due to lower net proceeds from loan sales in 2022 compared to 2021, which was offset by the change in other assets and liabilities.  Net cash used in investing activities was $60.5 million for the nine months ended September 30, 2022 compared to $398.6 million in the same period in 2021. ChoiceOne purchased $61.9 million of securities and had maturities or sales of securities of $92.5 million in the first nine months of 2022 compared to $514.2 million and $39.8 million in the same periods in 2021, respectively.  An increase in net loan originations led to cash used of $73.3 million in the first nine months of 2022 compared to cash provided of $78.1 million in the same period during the prior year.  Net cash provided by financing activities was $48.1 million for the first nine months of 2022, compared to $349.3 million in the same period in the prior year. ChoiceOne experienced growth of $104.4 million in deposits in the first nine months of 2022 compared to $337.6 million in 2021, while also seeing a $72.5 million decrease in borrowings, which led to the change. ChoiceOne believes that the current level of liquidity is sufficient to meet ChoiceOne Bank's normal operating needs. This belief is based upon the availability of deposits from both the local and national markets, maturities of securities, normal loan repayments, income retention, federal funds purchased from correspondent banks, advances available from the Federal Home Loan Bank, and secured lines of credit available from the Federal Reserve Bank. 37 PART II.  OTHER INFORMATION Item 1. Legal Proceedings . There are no material pending legal proceedings to which ChoiceOne or ChoiceOne Bank is a party or to which any of their properties are subject, except for proceedings that arose in the ordinary course of business. In the belief of management, pending or current legal proceedings should not have a material effect on the consolidated financial condition of ChoiceOne. Item 1A. Risk Factors . Information concerning risk factors is contained in the discussion in Item 1A, “Risk Factors,” in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2021. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds . There were no unregistered sales of equity securities in the third quarter of 2022. 38 ISSUER PURCHASES OF EQUITY SECURITIES There were no issuer purchases of equity securities during the third quarter of 2022. Item 4. Controls and Procedures. An evaluation was performed under the supervision and with the participation of ChoiceOne’s management, including the Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of ChoiceOne’s disclosure controls and procedures as of September 30, 2022. Based on and as of the time of that evaluation, ChoiceOne’s management, including the Chief Executive Officer and Principal Financial Officer, concluded that ChoiceOne’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that material information required to be disclosed in the reports that ChoiceOne files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that ChoiceOne files or submits under the Exchange Act is accumulated and communicated to management, including ChoiceOne’s principal executive and principal financial officers, as appropriate to allow for timely decisions regarding required disclosure. There was no change in ChoiceOne’s internal control over financial reporting that occurred during the three months ended September 30, 2022 that has materially affected, or that is reasonably likely to materially affect, ChoiceOne’s internal control over financial reporting. Item 5. Other Information None. Item 6. Exhibits The following exhibits are filed or incorporated by reference as part of this repor Exhibit Number Document 3.1 Restated Articles of Incorporation of ChoiceOne Financial Services, Inc. Previously filed as an exhibit to ChoiceOne’s Form 8-A filed February 4, 2020.  Here incorporated by reference. 3.2 Bylaws of ChoiceOne as currently in effect and any amendments thereto. Previously filed as an exhibit to ChoiceOne’s Form 8-K filed April 21, 2021. Here incorporated by reference. 4.1 Advances, Pledge and Security Agreement between ChoiceOne Bank and the Federal Home Loan Bank of Indianapolis. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference. 4.2 Form of 3.25% Fixed-to-Floating Rate Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference. 4.3 Form of 3.25% Fixed-to-Floating Rate Global Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference. 31.1 Certification of Chief Executive Officer 31.2 Certification of Treasurer 32.1 Certification pursuant to 18 U.S.C. § 1350. 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) 39 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHOICEONE FINANCIAL SERVICES, INC. Date:   November 10, 2022 /s/ Kelly J. Potes Kelly J. Potes Chief Executive Officer (Principal Executive Officer) Date:   November 10, 2022 /s/ Adom J. Greenland Adom J. Greenland Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 40

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Emerging growth company ☐ Smaller reporting company ☒ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public acco unting firm that prepared or issued its audit report. ☐ If securities are registered pursuant to 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.  ☐ Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).  ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒ As of June 30, 2022, the aggregate market value of common stock held by non-affiliates of the Registrant was $ 136.1 million. This amount is based on an average bid price of $20.14 per share for the Registrant's stock as of such date. As of February 28, 2023, the Registrant had 7,519,318 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement of ChoiceOne Financial Services, Inc. for the Annual Meeting of Shareholders to be held on May 24, 2023, are inc orporated by reference into Part III of this Form 10-K. 2 Table of Contents ChoiceOne Financial Services, Inc. Form 10-K ANNUAL REPORT Contents Page PART 1 Item 1: Business 5 Item 1A: Risk Factors 13 Item 1B: Unresolved Staff Comments 18 Item 2: Properties 18 Item 3: Legal Proceedings 18 Item 4: Mine Safety Disclosures 18 PART II Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 19 Item 6: Reserved 19 Item 7: Management’s Discussion and Analysis of Results of Operations and Financial Condition 20 Item 7A: Quantitative and Qualitative Disclosures About Market Risk 33 Item 8: Financial Statements and Supplementary Data 35 Item 9: Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 73 Item 9A: Controls and Procedures 73 Item 9B: Other Information 73 Item 9C: Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 73 PART III Item 10: Directors, Executive Officers and Corporate Governance 74 Item 11: Executive Compensation 74 Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 74 Item 13: Certain Relationships and Related Transactions, and Director Independence 75 Item 14: Principal Accountant Fees and Services 75 PART IV Item 15: Exhibits and Financial Statement Schedules 75 SIGNATURES 77 3 Table of Contents FORWARD-LOOKING STATEMENTS This report and the documents incorporated into this report contain forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and ChoiceOne Financial Services, Inc. Words such as “anticipates,” “believes,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “estimates,” “look forward,” “continue,” “future,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Management’s determination of the provision and allowance for loan losses, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management’s assumptions concerning pension and other postretirement benefit plans involve judgments that are inherently forward-looking. All of the information concerning interest rate sensitivity is forward-looking. All statements with references to future time periods are forward-looking. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, ChoiceOne Financial Services, Inc. undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. Risk factors include, but are not limited to, the risk factors disclosed in Item 1A of this report. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. 4 Table of Contents PART I Item 1. Business General ChoiceOne is a financial holding company registered under the Bank Holding Company Act of 1956, as amended (“BHC Act”). The Company was incorporated on February 24, 1986, as a Michigan corporation. The Company was formed to create a bank holding company for the purpose of acquiring all of the capital stock of ChoiceOne Bank, which became a wholly owned subsidiary of the Company on April 6, 1987. Effective November 1, 2006, the Company merged with Valley Ridge Financial Corp., a one-bank holding company for Valley Ridge Bank (“VRB”). In December 2006, VRB was consolidated into ChoiceOne Bank. Effective October 1, 2019, County Bank Corp. ("County"), a one-bank holding company for Lakestone Bank & Trust (“Lakestone”), merged with and into the Company.  Lakestone was consolidated into ChoiceOne Bank in May 2020.  On July 1, 2020, Community Shores Bank Corporation ("Community Shores"), a one bank holding company for Community Shores Bank, merged with and into the Company.   Community Shores Bank was consolidated into ChoiceOne Bank in October 2020. ChoiceOne Bank owns all of the outstanding common stock of ChoiceOne Insurance Agencies, Inc., an independent insurance agency headquartered in Sparta, Michigan (the "Insurance Agency"). The Company's business is primarily concentrated in a single industry segment, banking. ChoiceOne Bank (referred to as the “Bank”) is a full-service banking institution that offers a variety of deposit, payment, credit and other financial services to all types of customers. These services include time, savings, and demand deposits, safe deposit services, and automated transaction machine services. Loans, both commercial and consumer, are extended primarily on a secured basis to corporations, partnerships and individuals. Commercial lending covers such categories as business, industry, agricultural, construction, inventory and real estate. The Bank’s consumer loan departments make direct and indirect loans to consumers and purchasers of residential and real property. In addition, the Bank offers trust and wealth management services. No material part of the business of the Company or the Bank is dependent upon a single customer or very few customers, the loss of which would have a materially adverse effect on the Company. The Bank’s primary market areas lie within Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan, and Lapeer, Macomb, and St. Clair counties in southeastern Michigan in the communities where the Bank's respective offices are located. The Bank serves these markets through 31 full-service offices and five loan production offices. The Company and the Bank have no foreign assets or income. At December 31, 2022 , the Company had consolidated total assets of $2.4 billion, net loans of $1.2 billion, total deposits of $2.1 billion and total shareholders' equity of $168.9 million. For the year ended December 31, 2022 , the Company recognized consolidated net income of $23.6 million. The principal source of revenue for the Company and the Bank is interest and fees on loans. On a consolidated basis, interest and fees on loans accounted for 59%, 58%, and 60% of total revenues in 2022, 2021, and 2020 , respectively. Interest on securities accounted for 24%, 19%, and 11% of total revenues in 2022, 2021, and 2020 , respectively. For more information about the Company's financial condition and results of operations, see the consolidated financial statements and related notes included in Item 8 of this report. Competition The Bank’s competition primarily comes from other financial institutions located within Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan and Lapeer, Macomb, and St. Clair counties in southeastern Michigan. There are a number of larger commercial banks within the Bank’s primary market areas. The Bank also competes with a large number of other financial institutions, such as savings and loan associations, insurance companies, consumer finance companies, credit unions, internet banks and other financial technology companies, and commercial finance and leasing companies for deposits, loans and service business. Money market mutual funds, brokerage houses and nonfinancial institutions provide many of the financial services offered by the Bank. Many of these competitors have substantially greater resources than the Bank. The principal methods of competition for financial services are price (the rates of interest charged for loans, the rates of interest paid for deposits and the fees charged for services) and the convenience and quality of services rendered to customers. 5 Table of Contents Supervision and Regulation Banks and bank holding companies are extensively regulated. The Company is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Company's activities are generally limited to owning or controlling banks and engaging in such other activities as the Federal Reserve Board may determine to be closely related to banking. Prior approval of the Federal Reserve Board, and in some cases various other government agencies, is required for the Company to acquire control of any additional bank holding companies, banks or other operating subsidiaries. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support it. The Bank is chartered under state law and is subject to regulation by the Michigan Department of Insurance and Financial Services (“DIFS”). State banking laws place restrictions on various aspects of banking, including permitted activities, loan interest rates, branching, payment of dividends and capital and surplus requirements. The Bank is a member of the Federal Reserve System and is also subject to regulation by the Federal Reserve Board. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) to the maximum extent provided by law. The Bank is a member of the Federal Home Loan Bank system, which provides certain advantages to the Bank, including favorable borrowing rates for certain funds. The Company is a legal entity separate and distinct from the Bank. The Company's primary source of funds available to pay dividends to shareholders is dividends paid to it by the Bank. There are legal limitations on the extent to which the Bank can lend or otherwise supply funds to the Company. In addition, payment of dividends to the Company by the Bank is subject to various state and federal regulatory limitations. The Deposit Insurance Funds Act of 1996 authorized the Financing Corporation (“FICO”) to impose periodic assessments on all depository institutions. The purpose of these periodic assessments is to spread the cost of the interest payments on the outstanding FICO bonds issued to recapitalize the Savings Association Insurance Fund (“SAIF”) over a larger number of institutions. The federal banking agencies have adopted guidelines to promote the safety and soundness of federally-insured depository institutions. These guidelines establish standards for, among other things, internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. The Company and the Bank are subject to regulatory “risk-based” capital guidelines. Failure to meet these capital guidelines could subject the Company or the Bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and other restrictions on its business. In addition, the Bank would generally not receive regulatory approval of any application that requires the consideration of capital adequacy, such as a branch or merger application, unless it could demonstrate a reasonable plan to meet the capital requirement within a reasonable period of time. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank. In addition, if DIFS deems the Bank's capital to be impaired, DIFS may require the Bank to restore its capital by a special assessment on the Company as the Bank's sole shareholder. If the Company fails to pay any assessment, the Company’s directors will be required, under Michigan law, to sell the shares of the Bank's stock owned by the Company to the highest bidder at either a public or private auction and use the proceeds of the sale to restore the Bank's capital. 6 Table of Contents The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) requires, among other things, federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. FDICIA sets forth the following five capital categori “well-capitalized,” “adequately-capitalized,” “undercapitalized,” “significantly-undercapitalized” and “critically-undercapitalized.” A depository institution's capital category will depend upon how its capital levels compare with various relevant capital measures as established by regulation, which include a common equity Tier I risk-based capital ratio, Tier 1 risk-based and total risk-based capital ratio measures and a leverage capital ratio measure. In addition, a capital conservation buffer is required. Under certain circumstances, the appropriate banking agency may treat a well-capitalized, adequately-capitalized, or undercapitalized institution as if the institution were in the next lower capital category. Federal banking regulators are required to take specified mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Subject to a narrow exception, the banking regulator must generally appoint a receiver or conservator for an institution that is critically undercapitalized. An institution in any of the undercapitalized categories is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. An undercapitalized institution is also generally prohibited from paying any dividends, increasing its average total assets, making acquisitions, establishing any branches, accepting or renewing any brokered deposits or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. Banks are subject to a number of federal and state laws and regulations, which have a material impact on their business. These include, among others, minimum capital requirements, state usury laws, state laws relating to fiduciaries, the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, the Expedited Funds Availability Act, the Community Reinvestment Act, the Real Estate Settlement Procedures Act, the Service Members Civil Relief Act, the USA PATRIOT Act, the Bank Secrecy Act, regulations of the Office of Foreign Assets Controls, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, electronic funds transfer laws, redlining laws, predatory lending laws, antitrust laws, environmental laws, money laundering laws and privacy laws. The monetary policy of the Federal Reserve Board may influence the growth and distribution of bank loans, investments and deposits, and may also affect interest rates on loans and deposits. These policies may have a significant effect on the operating results of banks. In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the Federal Reserve Board has determined to be closely related to the business of banking. In addition, bank holding companies that qualify and elect to be financial holding companies may engage in any activities that are financial in nature or complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system without prior approval of the Federal Reserve Board. Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments.  The Company has elected to be a financial holding company. In order for the Company to maintain financial holding company status, the Bank must be categorized as "well-capitalized" and "well-managed" under applicable regulatory guidelines. If the Company or the Bank ceases to meet these requirements, the Federal Reserve Board may impose corrective capital and/or managerial requirements and place limitations on the Company’s ability to conduct the broader financial activities permissible for financial holding companies. In addition, if the deficiencies persist, the Federal Reserve Board may require the Company to divest of the Bank. The Bank was categorized as "well-capitalized" and "well-managed" as of December 31, 2022. Bank holding companies may acquire banks and other bank holding companies located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state banking law. Banks may also establish interstate branch networks through acquisitions of and mergers with other banks. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed only if specifically authorized by state law. 7 Table of Contents Michigan banking laws do not significantly restrict interstate banking. The Michigan Banking Code permits, in appropriate circumstances and with the approval of DIFS, (1) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, (4) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of branches located in Michigan. Banks are subject to the provisions of the Community Reinvestment Act ("CRA"). Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with its examination of a bank, to assess the bank's record in meeting the credit needs of the community served by that bank, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the institution. Under the CRA, institutions are assigned a rating of "outstanding," "satisfactory," "needs to improve," or "substantial non-compliance." The regulatory agency's assessment of the bank's record is made available to the public. Further, a bank's federal regulatory agency is required to assess the CRA compliance record of any bank that has applied to establish a new branch office that will accept deposits, relocate an office, or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or another bank holding company, the Federal Reserve Board will assess the CRA compliance record of each subsidiary bank of the applicant bank holding company, and such compliance records may be the basis for denying the application. Upon receiving notice that a subsidiary bank is rated less than "satisfactory," a financial holding company will be prohibited from additional activities that are permitted to be conducted by a financial holding company and from acquiring any company engaged in such activities. The CRA rating of the Bank was "Satisfactory" as of its most recent examination. Effects of Compliance With Environmental Regulations The nature of the business of the Bank is such that it holds title, on a temporary or permanent basis, to a number of parcels of real property. These include properties owned for branch offices and other business purposes as well as properties taken in or in lieu of foreclosure to satisfy loans in default. Under current state and federal laws, present and past owners of real property may be exposed to liability for the cost of cleanup of environmental contamination on or originating from those properties, even if they are wholly innocent of the actions that caused the contamination. These liabilities can be material and can exceed the value of the contaminated property. Management is not presently aware of any instances where compliance with these provisions will have a material effect on the capital expenditures, earnings or competitive position of the Company or the Bank, or where compliance with these provisions will adversely affect a borrower's ability to comply with the terms of loan contracts. Employees As of February 28, 2023, the Company, on a consolidated basis, e mp loyed 402 employees, of which 332 we re full -time employees.  Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good. Statistical Information Additional statistical information describing the business of the Company appears on the following pages and in Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this report and in the Consolidated Financial Statements and the notes thereto in Item 8 of this report. The following statistical information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and notes in this report.  Average balances used in statistical information are calculated using daily averages, unless otherwise specified. 8 Table of Contents The Company did not hold investment securities from any one issuer at December 31, 2022 , that were greater than 10% of the Company's shareholders' equity, exclusive of U.S. Government and U.S. Government agency securities. Presented below is the fair value of securities available for sale and amortized cost for held to maturity securities as of December 31, 2022 and 2021 , a schedule of maturities of securities as of December 31, 2022 , and the weighted average yields of securities as of December 31, 2022 .  Callable securities in the money are presumed called and matured at the callable date. Available for Sale Securities maturing within: Fair Value Less than 1 Year - 5 Years - More than at December 31, (Dollars in thousands) 1 Year 5 Years 10 Years 10 Years 2022 U.S. Government and federal agency $ - $ - $ - $ - $ - U.S. Treasury notes and bonds - - 78,204 - 78,204 State and municipal 5,474 7,315 48,326 168,823 229,938 Corporate 498 - 213 - 711 Asset-backed securities - 8,861 3,472 - 12,333 Total debt securities 5,972 16,176 130,215 168,823 321,186 Mortgage-backed securities 10,980 94,718 89,652 13,213 208,563 Total Available for Sale $ 16,952 $ 110,894 $ 219,867 $ 182,036 $ 529,749 Available for Sale weighted average yields: Less than 1 Year - 5 Years - More than 1 Year 5 Years 10 Years 10 Years Total U.S. Government and federal agency - % - % - % - % - % U.S. Treasury notes and bonds - - 1.16 - 1.16 State and municipal 2.53 2.92 2.35 2.53 2.51 Corporate 3.21 - 3.75 - 3.37 Asset-backed securities - 4.76 4.79 - 4.77 Mortgage-backed securities 2.67 3.73 1.82 1.81 2.73 Held to Maturity Securities maturing within: Amortized Cost Less than 1 Year - 5 Years - More than at December 31, (Dollars in thousands) 1 Year 5 Years 10 Years 10 Years 2022 U.S. Government and federal agency $ - $ - $ 2,966 $ - $ 2,966 State and municipal 2,417 5,038 87,944 106,491 201,890 Corporate - 250 18,353 1,000 19,603 Asset-backed securities - 974 - - 974 Total debt securities 2,417 6,262 109,263 107,491 225,433 Mortgage-backed securities 16,983 33,367 145,926 4,197 200,473 Total Held to Maturity $ 19,400 $ 39,629 $ 255,189 $ 111,688 $ 425,906 Held to Maturity weighted average yields: Less than 1 Year - 5 Years - More than 1 Year 5 Years 10 Years 10 Years Total U.S. Government and federal agency - % - % 1.61 % - % 1.61 % State and municipal 2.17 1.76 2.04 2.40 2.22 Corporate - 3.50 3.67 - 3.48 Asset-backed securities - 1.10 - - 1.10 Mortgage-backed securities 5.92 3.83 2.23 2.49 2.81 (1) The yield is computed for tax-exempt securities on a fully tax-equivalent basis at an incremental tax rate of 21% for 2022. Weighted average yields are based on the fair value of securities available for sale and amortized cost of securities held to maturity which are denoted in the table above. 9 Table of Contents Maturities and Sensitivities of Loans to Changes in Interest Rates The following schedule presents the maturities of loans as of December 31, 2022. Loans are also classified according to the sensitivity to changes in interest rates as of December 31, 2022. (Dollars in thousands) In one year After one year After five years After fifteen or less through five years through fifteen years years Total Agricultural $ 12,762 $ 17,159 $ 33,020 $ 1,218 $ 64,159 Commercial and industrial 56,698 83,093 70,003 416 210,210 Commercial real estate 40,701 329,902 254,144 6,206 630,953 Construction real estate 14,157 3 - 576 14,736 Consumer 651 21,338 15,921 1,898 39,808 Residential real estate 2,737 11,785 96,943 118,451 229,916 Totals $ 127,706 $ 463,280 $ 470,031 $ 128,765 $ 1,189,782 (Dollars in thousands) Fixed or Floating or predetermined rates variable rates Total Loans maturing after one y Agricultural $ 50,872 $ 13,287 $ 64,159 Commercial and industrial 137,697 72,513 210,210 Commercial real estate 521,075 109,878 630,953 Construction real estate 14,736 - 14,736 Consumer 39,340 468 39,808 Residential real estate 114,121 115,795 229,916 Totals $ 877,841 $ 311,941 $ 1,189,782 Loan maturities are classified according to the contractual maturity date or the anticipated amortization period, whichever is appropriate. The anticipated amortization period is used in the case of loans where a balloon payment is due before the end of the loan’s normal amortization period. At the time the balloon payment is due, the loan can either be rewritten or payment in full can be requested. The decision regarding whether the loan will be rewritten or a payment in full will be requested will be based upon the loan’s payment history, the borrower’s current financial condition, and other relevant factors. 10 Table of Contents The following table reflects the composition of our allowance for loan loss, non-accrual loans, and nonperforming loans as a percentage of total loans represented by each class of loans as of the dates indicat (Dollars in thousands) Agricultural Commercial and industrial Consumer Commercial real estate Construction real estate Residential real estate Totals Loans December 31, 2022 $ 64,159 $ 210,210 $ 39,808 $ 630,953 $ 14,736 $ 229,916 $ 1,189,782 Allowance for loan losses year ended December 31, 2022 $ 144 $ 1,361 $ 310 $ 4,822 $ 63 $ 906 $ 7,619 Allowance as a percentage of loan category 0.22 % 0.65 % 0.78 % 0.76 % 0.43 % 0.39 % 0.64 % Nonaccrual loans year ended December 31, 2022 $ - $ - $ - $ - $ - $ 1,263 $ 1,263 Nonaccrual as a percentage of loan category 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.55 % 0.11 % Allowance as a percentage of nonaccrual loans NA NA NA NA NA 71.73 % 603.25 % Nonperforming loans year ended December 31, 2022 $ 3 $ 58 $ - $ 131 $ - $ 2,474 $ 2,667 Nonperforming loans as a percentage of loan category 0.00 % 0.03 % 0.00 % 0.02 % 0.00 % 1.08 % 0.22 % Net charge-offs during the year ended December 31, 2022 $ - $ (34 ) $ (290 ) $ 3 $ - $ 2 $ (319 ) Net charge-offs during the year to average loans outstanding 0.00 % 0.00 % -0.03 % 0.00 % 0.00 % 0.00 % -0.03 % (Dollars in thousands) Agricultural Commercial and industrial Consumer Commercial real estate Construction real estate Residential real estate Totals Loans December 31, 2021 $ 64,819 $ 203,024 $ 35,174 $ 525,884 $ 19,066 $ 168,881 $ 1,016,848 Allowance for loan losses year ended December 31, 2021 $ 448 $ 1,454 $ 290 $ 3,705 $ 110 $ 671 $ 7,688 Allowance as a percentage of loan category 0.69 % 0.72 % 0.82 % 0.70 % 0.58 % 0.40 % 0.76 % Nonaccrual loans year ended December 31, 2021 $ 313 $ 285 $ - $ 279 $ - $ 850 $ 1,727 Nonaccrual as a percentage of loan category 0.48 % 0.14 % 0.00 % 0.05 % 0.00 % 0.50 % 0.17 % Allowance as a percentage of nonaccrual loans 143.13 % 510.18 % NA 1327.96 % NA 78.94 % 445.17 % Nonperforming loans year ended December 31, 2021 $ 2,117 $ 358 $ - $ 880 $ - $ 2,189 $ 5,543 Nonperforming loans as a percentage of loan category 3.27 % 0.18 % 0.00 % 0.17 % 0.00 % 1.30 % 0.55 % Net charge-offs during the year ended December 31, 2021 $ - $ (109 ) $ (156 ) $ (63 ) $ - $ 7 $ (321 ) Net charge-offs during the year to average loans outstanding 0.00 % -0.01 % -0.01 % -0.01 % 0.00 % 0.00 % -0.03 % Additions to the allowance for loan losses charged to operations during the periods shown were based on management’s judgment after considering factors such as loan loss experience, evaluation of the loan portfolio, and prevailing and anticipated economic conditions. There were no material changes to the factors considered since the prior year.  The evaluation of the loan portfolio is based upon various risk factors such as the financial condition of the borrower, the value of collateral and other considerations, which, in the opinion of management, deserve current recognition in estimating loan losses.  Note that NA means there are no non-accrual loans in the designated loan category. 11 Table of Contents The following schedule presents an allocation of the allowance for loan losses to the various loan categories as of the years ended December 31: 2022 2021 2020 Agricultural $ 144 $ 448 $ 257 Commercial and industrial 1,361 1,454 1,327 Real estate - commercial 4,822 3,705 4,178 Real estate - construction 63 110 97 Real estate - residential 906 671 1,300 Consumer 310 290 317 Unallocated 13 1,010 117 Total allowance for loan losses $ 7,619 $ 7,688 $ 7,593 Management periodically reviews the assumptions, loss ratios and delinquency trends in estimating the appropriate level of its allowance for loan losses and believes the unallocated portion of the total allowance was sufficient at December 31, 2022. Deposits The following schedule presents the average deposit balances by category and the average rates paid thereon for the respective yea (Dollars in thousands) 2022 2021 2020 Average Balance Average Rate Average Balance Average Rate Average Balance Average Rate Noninterest-bearing demand $ 582,992 - % $ 527,876 - % $ 398,422 - % Interest-bearing demand and money market deposits 902,090 0.39 791,886 0.23 571,693 0.32 Savings 452,542 0.16 398,969 0.14 267,217 0.11 Certificates of deposit 196,166 0.83 186,898 0.51 183,836 1.11 Total $ 2,133,790 0.27 % $ 1,905,629 0.17 % $ 1,421,168 0.29 % At December 31, 2022, the aggregate balance of time deposits exceeding the FDIC insured limit of $250,000 for individual and $500,000 for joint accounts totaled $108.7 million.  At December 31, 2022, 99.5% of uninsured time deposit accounts were scheduled to mature within one year.  The maturity profile of uninsured time deposits at December 31, 2022 is as follows: Amount of time deposits in uninsured accounts (Dollars in thousands) Maturing in less than 3 months $ 30,173 Maturing in 3 to 6 months 34,842 Maturing in 6 to 12 months 43,146 Maturing in more than 12 months 497 Total uninsured time deposits $ 108,658 At December 31, 2022, the aggregate balance of all deposits exceeding the FDIC insured limit of $250,000 totaled $823.2 million, or 39% of total deposits, compared to $889.2 million, or 43% of total deposits and $583.7 million, or 35% of total deposits at December 31, 2021 and 2020, respectively.  Certificate of Deposit Account Registry Service ("CDARs") deposits are excluded from the above table as all CDARs deposits are 100% guaranteed. Core deposits, which we define as insured branch deposits less certificates of deposit, totaled $1.2 billion or 55.0% of total deposits at December 31, 2022. At December 31, 2022, the Bank had no material foreign deposits. 12 Table of Contents Return on Equity and Assets The following schedule presents certain financial ratios of the Company for the years ended December 31: 2022 2021 2020 Return on assets (net income divided by average total assets) 1.00 % 1.02 % 0.94 % Return on equity (net income divided by average equity) 13.25 % 9.79 % 7.28 % Dividend payout ratio (dividends declared per share divided by net income per share) 32.06 % 32.67 % 39.54 % Equity to assets ratio (average equity divided by average total assets) 7.52 % 10.44 % 12.97 % Item 1A. Risk Factors The Company is subject to many risks and uncertainties. Although the Company seeks ways to manage these risks and develop programs to control risks to the extent that management can control them, the Company cannot predict the future. Actual results may differ materially from management’s expectations. Some of these significant risks and uncertainties are discussed below. The risks and uncertainties described below are not the only ones that the Company faces. Additional risks and uncertainties of which the Company is unaware, or that it currently does not consider to be material, also may become important factors that affect the Company and its business. If any of these risks were to occur, the Company’s business, financial condition or results of operations could be materially and adversely affected. Risks Related to the Company ’ s Business Asset quality could be less favorable than expected. A significant source of risk for the Company arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loan agreements. Most loans originated by the Company are secured, but some loans are unsecured depending on the nature of the loan. With respect to secured loans, the collateral securing the repayment of these loans includes a wide variety of real and personal property that may be insufficient to cover the obligations owed under such loans. Collateral values may be adversely affected by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, terrorist activity, environmental contamination, public health crisis, and other external events. The Company’s allowance for loan losses may not be adequate to cover actual loan losses. The risk of nonpayment of loans is inherent in all lending activities and nonpayment of loans may have a material adverse effect on the Company’s earnings and overall financial condition, and the value of its common stock. The Company makes various assumptions and judgments about the collectability of its loan portfolio and provides an allowance for potential losses based on a number of factors. If its assumptions are wrong, the allowance for loan losses may not be sufficient to cover losses, which could have an adverse effect on the Company’s operating results and may cause it to increase the allowance in the future. The actual amount of future provisions for loan losses cannot now be determined and may exceed the amounts of past provisions for loan losses. Federal and state banking regulators, as an integral part of their supervisory function, periodically review the allowance for loan losses. These regulatory agencies may require the Company to increase its provision for loan losses or to recognize further loan charge-offs based upon their judgments, which may be different from the Company’s judgments. Any increase in the allowance for loan losses could have a negative effect on the Company’s regulatory capital ratios, net income, financial condition and results of operations. In addition, a large portion of the loan portfolio was marked to fair value as part of the mergers with County and Community Shores and does not carry an allowance as management determined no credit deterioration had occurred since the effective date of the merger. ChoiceOne adopted ASU 2016-13 current expected credit loss ("CECL") on January 1, 2023.  CECL changes the allowance for loan losses methodology from an incurred loss impairment methodology to an expected loss methodology, which is more dependent on future economic forecasts and models than previous accounting standards and could result in increases in, and add volatility to, our allowance for loan losses and future provisions for loan losses.  These forecasts and models are inherently uncertain and are based upon management's reasonable judgment in light of information currently available. We believe the adoption of CECL as of January 1, 2023 will result in an estimated increase in our current allowance for loan losses of between $6.5 million and $7.0 million. If we misinterpret or make inaccurate assumptions under the new guidance, we may need to make significant and unanticipated changes in our allowance for loan losses in the future, and our results of operations or financial condition could be adversely affected. 13 Table of Contents General economic conditions in the state of Michigan could have a material adverse effect on the Company ’ s results of operations or financial condition. The Company is affected by general economic conditions in the United States, although most directly within Michigan. An economic downturn within Michigan caused by inflation, recession or a recessionary environment, unemployment, changes in financial or capital markets or other factors, could negatively impact household and corporate incomes. This impact may lead to decreased demand for both loan and deposit products and increase the number of customers who fail to pay interest or principal on their loans. The Company could be adversely affected by the soundness of other financial institutions, including defaults by larger financial institutions. The Company's ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of credit, trading, clearing, counterparty or other relationships between financial institutions. The Company has exposure to multiple counterparties, and it routinely executes transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by the Company or by other institutions. This is sometimes referred to as "systemic risk" and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which the Company interacts on a daily basis, and therefore could adversely affect the Company. If the Company does not adjust to changes in the financial services industry, its financial performance may suffer. The Company’s ability to maintain its financial performance and return on investment to shareholders will depend in part on its ability to maintain and grow its core deposit customer base and expand its financial services to its existing customers. In addition to other banks, competitors include credit unions, securities dealers, brokers, mortgage bankers, investment advisors, internet banks and other financial technology companies, and finance and insurance companies. The increasingly competitive environment is, in part, a result of changes in the economic environment within the state of Michigan, regulation, changes in technology and product delivery systems and consolidation among financial service providers. New competitors may emerge to increase the degree of competition for the Company’s customers and services. Financial services and products are also constantly changing. The Company’s financial performance will also depend in part upon customer demand for the Company’s products and services and the Company’s ability to develop and offer competitive financial products and services. We are subject to significant government regulation, and any regulatory changes may adversely affect us. We are subject to extensive government regulation under both federal and state law.  We are subject to regulation by the Federal Reserve, the FDIC and the DIFS, in addition to other regulatory and self-regulatory organizations. Current laws and applicable regulations are subject to change and any new regulatory change could make compliance more expensive, difficult, or otherwise adversely affect our business. Specifically, regulation changes to overdraft fees could adversely affect our business.  We cannot predict the ultimate effect of any changes to regulations affecting us, but such changes could have a material adverse effect on our results of operation or financial condition. Changes in interest rates could reduce the Company's income and cash flow. The Company’s income and cash flow depends, to a great extent, on the difference between the interest earned on loans and securities, and the interest paid on deposits and other borrowings. Market interest rates are beyond the Company’s control, and they fluctuate in response to general economic conditions and the policies of various governmental and regulatory agencies including, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates and interest rate relationships, will influence the origination of loans, the purchase of investments, the generation of deposits and the rate received on loans and securities and paid on deposits and other borrowings. Interest rates on our outstanding financial instruments might be subject to change based on regulatory developments, which could adversely affect our revenue, expenses, and the value of those financial instruments . On July 27, 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. In November 2020, the FCA announced that it would continue to publish LIBOR rates through June 30, 2023. It is unclear whether, or in what form, LIBOR will continue to exist after that date. Any uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could adversely affect the value of our floating rate obligations, loans, deposits, and other financial instruments tied to LIBOR rates, as well as the revenue and expenses associated with those financial instruments. While, at this time, it appears that consensus is growing around using the Secured Overnight Financing Rate (“SOFR”) as an alternative to LIBOR, it remains to be determined whether this will ultimately be the case and what the impact of a possible transition to SOFR or other alternative reference rates may have on our business, financial results and results of operations.  We could become subject to litigation and other types of disputes as a consequence of the transition from LIBOR to SOFR or another alternative reference rate, which could subject us to increased legal expenses, monetary damages and reputational harm. The Company is subject to liquidity risk in its operations, which could adversely affect its ability to fund various obligations. Liquidity risk is the possibility of being unable to meet obligations as they come due or capitalize on growth opportunities as they arise because of an inability to liquidate assets or obtain adequate funding on a timely basis, at a reasonable cost and within acceptable risk tolerances. Liquidity is required to fund various obligations, including credit obligations to borrowers, loan originations, withdrawals by depositors, repayment of debt, dividends to shareholders, operating expenses and capital expenditures. Liquidity is derived primarily from retail deposit growth and earnings retention, principal and interest payments on loans and investment securities, net cash provided from operations and access to other funding. If the Company is unable to maintain adequate liquidity, then its business, financial condition and results of operations would be negatively affected. If the Company were required to sell investment securities in an unrealized loss position to meet liquidity needs and realize losses, that could have a material adverse impact on its results of operation and financial condition. At December 31, 2022, the Company had $161.0 million in unrealized losses on its investment securities, including $89.0 million in unrealized losses on available for sale securities and $72.0 in unrealized losses on held to maturity securities. If the Company were required to sell investment securities in an unrealized loss position to meet liquidity needs and realize losses, that could have a material adverse impact on its results of operations and financial condition, including a negative impact on net income and a permanent reduction in equity capital. 14 Table of Contents The Company has significant exposure to risks associated with commercial and residential real estate. A substantial portion of the Company’s loan portfolio consists of commercial and residential real estate-related loans, including real estate development, construction and residential and commercial mortgage loans.  As of December 31, 2022, the Company had approximately $645.7 million of commercial and construction real estate loans outstanding, which represented approximately 54.3% of its loan portfolio.  As of that same date, the Company had approximately $229.9 million in residential real estate loans outstanding, or approximately 19.3% of its loan portfolio. Consequently, real estate-related credit risks are a significant concern for the Company. The adverse consequences from real estate-related credit risks tend to be cyclical and are often driven by national economic developments that are not controllable or entirely foreseeable by the Company or its borrowers. Commercial loans may expose the Company to greater financial and credit risk than other loans. The Company’s commercial and industrial loan portfolio, including commercial mortgages, was approximately $210.2 million at December 31, 2022, comprising approximately 17.7% of its total loan portfolio. Commercial loans generally carry larger loan balances and can involve a greater degree of financial and credit risk than other loans. Any significant failure to pay on time by the Company’s customers would hurt the Company’s earnings. The increased financial and credit risk associated with these types of loans are a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. Legislative or regulatory changes or actions could adversely impact the Company or the businesses in which it is engaged. The Company and the Bank are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of their operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance fund, and not to benefit the Company's shareholders. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact the Company or its ability to increase the value of its business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution's allowance for loan losses. Future regulatory changes or accounting pronouncements may increase the Company's regulatory capital requirements or adversely affect its regulatory capital levels. Additionally, actions by regulatory agencies against the Company or the Bank could require the Company to devote significant time and resources to defending its business and may lead to penalties that materially affect the Company. The Company relies heavily on its management and other key personnel, and the loss of any of them may adversely affect its operations. The Company is and will continue to be dependent upon the services of its management team and other key personnel. Losing the services of one or more key members of the Company’s management team could adversely affect its operations. The Company ’ s controls and procedures may fail or be circumvented. Management regularly reviews and updates the Company’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met.  If the Company fails to identify and remediate control deficiencies, it is possible that a material misstatement of interim or annual financial statements will not be prevented or detected on a timely basis.  In addition, any failure or circumvention of the Company’s other controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s business, results of operations and financial condition. The Company may be a defendant in a variety of litigation and other actions, which may have a material adverse effect on the Company's financial condition and results of operations. The Company and the Bank are regularly involved in a variety of litigation arising out of the normal course of business. The Company's insurance may not cover all claims that may be asserted against it, and any claims asserted against it, regardless of merit or eventual outcome, may harm its reputation or cause the Company to incur unexpected expenses, which could be material in amount. Should the ultimate expenses, judgments or settlements in any litigation exceed the Company's insurance coverage, they could have a material adverse effect on the Company's financial condition and results of operations. In addition, the Company may not be able to obtain appropriate types or levels of insurance in the future, nor may it be able to obtain adequate replacement policies with acceptable terms, if at all. If the Company cannot raise additional capital when needed, its ability to further expand its operations through organic growth or acquisitions could be materially impaired. The Company is required by federal and state regulatory authorities to maintain specified levels of capital to support its operations. The Company may need to raise additional capital to support its current level of assets or its growth. The Company’s ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside its control, and on its financial performance. The Company cannot assure that it will be able to raise additional capital in the future on terms acceptable to it or at all. If the Company cannot raise additional capital when needed, its ability to maintain its current level of assets or to expand its operations through organic growth or acquisitions could be materially limited. Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of computer systems or otherwise, could severely harm the Company's business. As part of its business, the Company collects, processes and retains sensitive and confidential client and customer information on behalf of itself and other third parties. Despite the security measures the Company has in place for its facilities and systems, and the security measures of its third party service providers, the Company may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by the Company or by its vendors, could severely damage the Company's reputation, expose it to the risks of litigation and liability, disrupt the Company's operations and have a material adverse effect on the Company's business. 15 Table of Contents The Company's information systems may experience an interruption or breach in security. The Company relies heavily on communications and information systems to conduct its business and deliver its products. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company's customer relationship management, general ledger, deposit, loan and other systems. While the Company has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches of the Company's information systems or its customers' information or computer systems would not damage the Company's reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and financial liability, any of which could have a material adverse effect on the Company's financial condition and results of operations. Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations. Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to information technology (IT) systems to sophisticated and targeted measures known as advanced persistent threats, directed at the Company and/or its third party service providers. Although we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, employee training, data encryption, vulnerability assessments, continuous monitoring of our IT networks and systems and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. The potential consequences of a material cybersecurity incident include reputational damage, litigation with third parties and increased cybersecurity protection and remediation costs, which in turn could materially adversely affect our results of operations. Employee misconduct could adversely impact our reputation and results of operations. Our reputation is crucial to maintaining and developing relationships with our customers. There is a risk our employees could engage in misconduct that adversely affects our business. For example, if an employee were to engage (or be accused of engaging) in fraudulent, illegal, or suspicious activities, including fraud or theft, we could be subject to regulatory sanctions or penalties, or litigation, and suffer significant harm to our reputation, financial position, and customer relationships as a result. Additionally, our business often requires that we deal with sensitive customer information. If our employees were to improperly use or disclose this information, even inadvertently, we could suffer significant harm to our reputation, financial position and current and future business relationships. We may not be able to deter all employee misconduct, and the precautions we take to detect and prevent this misconduct may not be effective in all circumstances. Misconduct or harassment by our employees (or unsubstantiated allegations of the same), or improper use or disclosure of confidential information by our employees, even inadvertently, could result in a material adverse effect on our business, reputation, or results of operations. Environmental liability associated with commercial lending could result in losses. In the course of its business, the Company may acquire, through foreclosure, properties securing loans it has originated or purchased that are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, the Company might be required to remove these substances from the affected properties at the Company's sole cost and expense. The cost of this removal could substantially exceed the value of affected properties. The Company may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have an adverse effect on the Company's business, results of operations and financial condition. The Company depends upon the accuracy and completeness of information about customers. In deciding whether to extend credit to customers, the Company relies on information provided to it by its customers, including financial statements and other financial information. The Company may also rely on representations of customers as to the accuracy and completeness of that information and on reports of independent auditors on financial statements. The Company's financial condition and results of operations could be negatively impacted to the extent that the Company extends credit in reliance on financial statements that do not comply with generally accepted accounting principles or that are misleading or other information provided by customers that is false or misleading. Our reliance on third party vendors could cause operational losses or business interruptions. We rely on third party service providers for certain components of our business activity. If these third party service providers experience difficulties or terminate their services and we are unable to replace them with other service providers, our operations could be interrupted. Even if we are able to replace them with another service provider, the replacement may be more expensive or offer an inferior service. Any of these outcomes could have a material adverse effect on our business, financial condition or results of operations. The Company operates in a highly competitive industry and market area. The Company faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national and regional banks within the various markets where the Company operates, as well as internet banks and other financial technology companies. The Company also faces competition from many other types of financial institutions, including savings and loan associations, credit unions, finance companies, brokerage firms, insurance companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. The Company competes with these institutions both in attracting deposits and in making new loans. Technology has lowered barriers to entry into the market and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Company's competitors have fewer regulatory constraints and may have lower cost structures, such as credit unions that are not subject to federal income tax. Due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Company can. 16 Table of Contents Severe weather, natural disasters, acts of war or terrorism, public health crisis, and other external events could significantly impact the Company's business. Severe weather, natural disasters, acts of war or terrorism, risks posed by an outbreak of a widespread epidemic or pandemic of disease (or widespread fear thereof) or other public health crisis, and other adverse external events could have a significant impact on the Company's ability to conduct business. Such events could affect the stability of the Company's deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. The Company relies on dividends from the Bank for most of its revenue. The Company is a separate and distinct legal entity from the Bank. It receives substantially all of its revenue from dividends from the Bank. These dividends are the principal source of funds to pay cash dividends on the Company's common stock. Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay to the Company. If the Bank is unable to pay dividends to the Company, the Company may not be able to pay cash dividends on its common stock. The earnings of the Bank have been the principal source of funds to pay cash dividends to shareholders. Over the long-term, cash dividends to shareholders are dependent upon earnings, as well as capital requirements, regulatory restraints and other factors affecting the Company and the Bank. Additional risks and uncertainties could have a negative effect on financial performance. Additional factors could have a negative effect on the financial performance of the Company and the Company’s common stock. Some of these factors are financial market conditions, changes in financial accounting and reporting standards, new litigation or changes in existing litigation, regulatory actions and losses. Risks Related to the Company ’ s Common Stock Investments in the Company ’ s common stock involve risk. The market price of the Company’s common stock may fluctuate significantly in response to a number of factors, includin ● Variations in quarterly or annual operating results ● Changes in dividends per share ● Changes in interest rates ● New developments, laws or regulations in the banking industry ● Acquisitions or business combinations involving the Company or its competition ● Regulatory actions, including changes to regulatory capital levels, the components of regulatory capital and how regulatory capital is calculated ● Volatility of stock market prices and volumes ● Changes in market valuations of similar companies ● New litigation or contingencies or changes in existing litigation or contingencies ● Changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies ● Rumors or erroneous information ● Credit and capital availability ● Issuance of additional shares of common stock or other debt or equity securities of the Company ● Market conditions ● General economic conditions The Company's common stock, while publicly traded, has less liquidity than the average liquidity of stocks listed on the Nasdaq Stock Market. The Company's common stock is listed for trading on the Nasdaq Capital Market.  However, the Company's common stock has less liquidity than the average liquidity for companies listed in the Nasdaq Stock Market.  The public trading market for the Company's common stock depends on a marketplace of willing buyers and sellers at any given time, which in turn depends on factors outside of the Company's control, including general economic and market conditions and the decisions of individual investors.  The limited market for the Company's common stock may affect a shareholder's ability to sell their shares at any given time, and the sale of a large number of shares at one time could temporarily adversely affect the market price of our common stock. The Company's common stock is not insured by any government entity. The Company's common stock is not insured by the FDIC or any other government entity.  Investment in the Company's common stock is subject to risk and potential loss. A shareholder's ownership of common stock may be diluted if the Company issues additional shares of common stock in the future. The Company's articles of incorporation authorize the Company's Board of Directors to issue additional shares of common stock or preferred stock without shareholder approval.  To the extent the Company issues additional shares of common stock or preferred stock, or issues options or warrants permitting the holder to purchase or acquire common stock in the future and such warrants or options are exercised, the Company's shareholders may experience dilution in their ownership of the Company's common stock.  Holders of the Company's common stock do not have any preemptive or similar rights to purchase a pro rata share of any additional shares offered or issued by the Company. 17 Table of Contents The value of the Company's common stock may be adversely affected if the Company issues debt and equity securities that are senior to the Company's common stock in liquidation or as to distributions. The Company may increase its capital by issuing debt or equity securities or by entering into debt or debt-like financing.  This may include the issuance of common stock, preferred stock, senior notes, or subordinated notes.  Upon any liquidation of the Company, the Company's lenders and holders of its debt securities would be entitled to distribution of the Company's available assets before distributions to the holders of the Company's common stock, and holders of preferred stock may be granted rights to similarly receive a distribution upon liquidation prior to distribution to holders of the Company's common stock.  The Company cannot predict the amount, timing or nature of any future debt financings or stock offerings, and the decision of whether to incur debt or issue securities will depend on market conditions and other factors beyond the Company's control.  Future offerings could dilute a shareholder's interests in the Company or reduce the per-share value of the Company's common stock. The Company's articles of incorporation and bylaws, and certain provisions of Michigan law, contain provisions that could make a takeover effort more difficult. The Michigan Business Corporation Act, and the Company's articles of incorporation and bylaws, include provisions intended to protect shareholders and prohibit, discourage, or delay certain types of hostile takeover activities.  In addition, federal law requires the Federal Reserve Board's prior approval for acquisition of "control" of a bank holding company such as the Company, including acquisition of 10% or more of the Company's outstanding securities by any person not defined as a company under the Bank Holding Company Act of 1956, as amended (the "BHC Act").  These provisions and requirements could discourage potential acquisition proposals, delay or prevent a change in control, diminish the opportunities for a shareholder to participate in tender offers, prevent transactions in which our shareholders might otherwise receive a premium for their shares, or limit the ability for our shareholders to approve transactions that they may believe to be in their best interests. An entity or group holding a certain percentage of the Company's outstanding securities could become subject to regulation as a "bank holding company" or may be required to obtain prior approval of the Federal Reserve Board. Any bank holding company or foreign bank with a presence in the United States may be required to obtain approval of the Federal Reserve Board under the BHC Act to acquire or retain 5% or more of the Company's outstanding securities.  Further, if any entity (including a "group" comprised of individual persons) owns or controls the power to vote 25% or more of the Company's outstanding securities, or 5% or more of the outstanding securities if the entity otherwise exercises a "controlling influence" over the Company, the entity may become subject to regulation as a "bank holding company" under the BHC Act.  An entity that is subject to regulation as a bank holding company would be subject to regulatory and statutory obligations and restrictions, and could be required to divest all or a portion of the entity's investment in the Company's securities or in other investments that are not permitted for a bank holding company. Item 1B. Unresolved Staff Comments None. Item 2. Properties The Company’s headquarters are located at 109 East Division, Sparta, Michigan 49345. The headquarters location is owned by the Company and is not subject to any mortgage. 31 of the Company’s 36 locations are designed for use and operation as a bank, are well maintained, and are suitable for current operations. The remaining five locations are comprised of loan production offices. Banking offices generally range in size from 1,200 to 3,200 square feet, based on the location and number of employees located at the facility. All of our banking offices are owned by the Bank excep t for six that are le ased under various operating lease agreements.  The Company’s management believes all offices are adequately covered by property insurance. Item 3. Legal Proceedings As of December 31, 2022, there were no significant pending legal proceedings to which the Company or the Bank is a party or to which any of their properties were subject, except for legal proceedings arising in the ordinary course of business. In the opinion of management, pending legal proceedings will not have a material adverse effect on the consolidated financial condition of the Company. Item 4. Mine Safety Disclosures Not applicable. 18 Table of Contents PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Stock Information The Company’s common stock is traded on the NASDAQ Capital Market under the symbol COFS. As of February 28, 2023, there were approximately 1,137 owners of record and approximately 1,195 beneficial owners of our common sto ck. The following table summarizes the quarterly cash dividends declared per share of common stock during 2022 and 2021: 2022 2021 First Quarter $ 0.25 $ 0.22 Second Quarter 0.25 0.22 Third Quarter 0.25 0.25 Fourth Quarter 0.26 0.25 Total $ 1.01 $ 0.94 ChoiceOne’s principal source of funds to pay cash dividends is the earnings and dividends paid by the Bank. The Bank is restricted in its ability to pay cash dividends under current banking regulations. See Note 21 to the consolidated financial statements for a description of these restrictions. Based on information presently available, management expects ChoiceOne to declare and pay regular quarterly cash dividends in 2023, although the amount of the quarterly dividends will be dependent on market conditions and ChoiceOne’s requirements for cash and capital, among other things. Information regarding the Company’s equity compensation plans may be found in Item 12 of this report and is here incorporated by reference. ISSUER PURCHASES OF EQUITY SECURITIES ChoiceOne repurchased 25,899 shares for $682,000, or a weighted average all-in cost per share of $26.35, during the first quarter of 2022. This was part of the common stock repurchase program announced in April 2021 which authorized repurchases of up to 390,114 shares, representing 5% of the total outstanding shares of common stock as of the date the program was adopted.  No shares were repurchased under this program in the second quarter.  In the third quarter of 2022, management amended the stock repurchase program to authorize the repurchase of up to 375,388 shares representing 5% of the total outstanding shares of common stock as of the date the amendment was approved.  There were no additional stock purchases in the third or fourth quarter of 2022. ChoiceOne repurchased approximately 309,000 shares for $7.8 million, or a weighted average cost per share of $25.17 during the year ended December 31, 2021. Total Number Maximum of Shares Number of Total Purchased as Shares that Number Average Part of a May Yet be of Shares Price Paid Publicly Purchased Period Purchased per Share Announced Plan Under the Plan October 1 - October 31, 2022 Employee Transactions - $ - - Repurchase Plan - $ - - 375,388 November 1 - November 30, 2022 Employee Transactions - $ - - Repurchase Plan - $ - - 375,388 December 1 - December 31, 2022 - Employee Transactions - $ - - Repurchase Plan - $ - - 375,388 As of December 31, 2022, there are 375,388 shares remaining that may yet be purchased under approved plans. There was no stated expiration date. Item 6. Reserved 19 Table of Contents Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (“ChoiceOne” or the “Company”), and its wholly-owned subsidiaries. This discussion should be read in conjunction with the consolidated financial statements and related footnotes. We have omitted discussion of 2021 results where it would be redundant to the discussion previously included in Part II, Item 7 of our 2021 Annual Report on Form 10-K. Selected Financial Data (Dollars in thousands, except per share data) 2022 2021 2020 For the year Net interest income $ 67,314 $ 60,641 $ 51,071 Provision for loan losses 250 416 4,000 Noninterest income 14,072 19,194 22,698 Noninterest expense 53,478 52,921 50,884 Income before income taxes 27,658 26,498 18,885 Income tax expense 4,018 4,456 3,272 Net income 23,640 22,042 15,613 Cash dividends declared 7,578 7,200 6,174 Per share Basic earnings $ 3.15 $ 2.87 $ 2.08 Diluted earnings 3.15 2.86 2.07 Cash dividends declared 1.01 0.94 0.82 Shareholders' equity (at year end) 22.47 29.52 29.15 Average for the year Securities $ 1,094,559 $ 869,788 $ 388,797 Gross loans 1,104,030 1,040,430 1,014,959 Deposits 2,133,790 1,905,629 1,421,168 Borrowings 13,537 5,465 16,712 Subordinated debt 35,211 12,841 1,532 Shareholders' equity 178,415 225,120 214,591 Assets 2,373,374 2,156,774 1,654,873 At year end Securities $ 972,802 $ 1,116,265 $ 585,687 Gross loans 1,194,616 1,068,831 1,117,798 Deposits 2,118,003 2,052,294 1,674,578 Borrowings 50,000 50,000 9,327 Subordinated debt 35,262 35,017 3,089 Shareholders' equity 168,874 221,669 227,268 Assets 2,385,915 2,366,682 1,919,342 Selected financial ratios Return on average assets 1.00 % 1.02 % 0.94 % Return on average shareholders' equity 13.25 9.79 7.28 Cash dividend payout as a percentage of net income 32.06 32.67 39.54 Shareholders' equity to assets (at year end) 7.08 9.37 11.84 Note - 2020 financial data includes the impact of the merger with Community Shores, which was effective July 1, 2020. 20 Table of Contents Explanatory Note On July 1, 2020, ChoiceOne completed the merger of Community Shores Bank Corporation ("Community Shores") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2020, December 31, 2021, and December 31, 2022 include the impact of the merger, which was effective as of July 1, 2020. On October 1, 2019, ChoiceOne completed the merger of County Bank Corp. ("County") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2020, December 31, 2021, and December 31, 2022 include the impact of the merger, which was effective as of October 1, 2019. For additional details regarding the mergers with Community Shores and County, see Note 22 (Business Combinations) of the Notes to the Consolidated Financial Statements included in Item 8 of this report. RESULTS OF OPERATIONS Summary ChoiceOne's net income for 2022 was $23.6 million, compared to $22.0 million in 2021 .  Diluted earnings per share was $3.15 in the twelve months ended December 31, 2022, compared to $2.86 per share in the twelve months ended December 31, 2021. ChoiceOne's asset mix has shifted from loans held for investment of 51.6% at December 31, 2021 to 56.2% at December 31, 2022. Core loans, which exclude PPP loans, loans held for sale, and loans to other financial institutions, grew organically by $206.1 million or 21.0% during the full year 2022.  Loans to other financial institutions, consisting of a warehouse line of credit, were suspended at the end of the third quarter 2022 to preserve liquidity for loan growth. ChoiceOne continues to have ample on balance sheet liquidity to fund future loan growth, including an estimated $178.7 million of cash flow from securities over the next two years.  Overall, t otal assets grew less than 1% or $19.2 million in 2022. ChoiceOne saw deposits decline $38.7 million in the fourth quarter of 2022 due to some seasonality in municipal deposits and increased competition.  The cost of these deposits also increased by $940,000 in the fourth quarter of 2022 compared to the third quarter of 2022 and $1.8 million compared to the fourth quarter of 2021.  Deposits have increased by $65.7 million in the twelve months ended December 31, 2022; however, during that time deposit expense has increased $2.5 million.  Cost of interest-bearing deposits increased to 0.66% in the fourth quarter of 2022 primarily due to the increases in rates offered to retain clients and an increased customer interest in certificates of deposit. ChoiceOne is actively managing these costs while still retaining funds, and anticipates that deposit expense will continue to lag the cumulative increases in the federal funds rate.  Borrowing interest expense for the twelve months ended December 31, 2022, increased $1.2 million as compared to the same period in 2021 primarily due to the issuance of $32.5 million in subordinated debt that was completed in the third quarter of 2021 and the increase in rates on short-term borrowings. Interest income increased $10.4 million in the twelve months ended December 31, 2022, compared to the same period in 2021.  The increase was driven by a $6.3 million increase in securities interest income largely due to an increase in the average balance of securities of $190.1 million during 2022.  In 2022, ChoiceOne liquidated a total of $47.2 million in securities resulting in an $809,000 realized loss, in order to redeploy funds into higher yielding loans and securities, and to reduce the risk of extension on certain fixed income securities which include a call option.  Interest income on loans increased $4.2 million during 2022 and was primarily a result of higher loan balances and $919,000 of additional accretion income from acquired loans, partially offset by a decrease in PPP fee income of $3.9 million. ChoiceOne had $250,000 of provision for loan losses expense for the year ended December 31, 2022.  Management has seen declining deferrals and very few past due loans during 2022; however, the additional provision was deemed necessary due to increased loan growth in 2022.  On December 31, 2022, the allowance for loan losses represented 0.64% of total loans.  ChoiceOne adopted ASU 2016-13 current expected credit loss ("CECL") on January 1, 2023.  Due to the current economic environment, the nature of the new calculation, and purchase accounting with our recent mergers, we anticipate an increase in our current allowance for loan losses of between $6.5 million and $7.0 million, which will result in an expected allowance for loan losses to total loan coverage ratio between 1.15% and 1.25% on January 1, 2023.  Approximately 20% to 25% of this increase is related to the migration of purchased loans into the portfolio assessed by the CECL calculation.  Purchased loans carry approximately $4.0 million of accretable yield, which will be recognized into income over the remaining life of the loans.  ChoiceOne will also record a liability for expected credit losses on unfunded loans and other commitments of between $2.5 million to $3.0 million related to the adoption of CECL.  These unfunded loans and other commitments are open credit lines with current customers and loans approved by ChoiceOne but not yet funded.  The increase in the reserve and the cost of the liability will result in a decrease in retained earnings account on our Consolidated Balance Sheet equal to the after-tax impact, with the tax impact portion being recorded in deferred taxes in our Consolidated balance Sheet in accordance with FASB guidance.  Further discussion of the change in accounting policy can be found in Item 8 Note 1. Noninterest Income Total noninterest income declined $5.1 million during 2022 compared to 2021.  $4.4 million of this decline is due to the change in the mortgage sales environment from the prior year.  With the rapid rise in interest rates, refinancing activity has slowed, and demand has shifted toward adjustable-rate products, which ChoiceOne keeps in portfolio. Customer service charges increased $722,000 during 2022 compared to 2021 as prior year service charges were depressed by the effects of the COVID-19 pandemic.  The change in market value of equity securities declined $1.4 million during 2022 compared to 2021 consistent with general market conditions.  Equity investments include local community bank stocks and Community Reinvestment Act bond mutual funds. Noninterest Expense Total noninterest expense increased $557,000, or 1.1%, in 2022 compared to 2021.  Expense management was a focus in 2022 and will continue to be a focus in 2023 given inflationary pressures.  The increase in total noninterest expense was related to an increase in salaries and wages due to annual wage increases and the addition of new commercial loan production and wealth management staff.   This increase was offset by decreases in other categories including professional fees and loan-driven incentive-based compensation.  ChoiceOne continues to monitor expenses and looks to improve our efficiency through automation and use of digital tools. 21 Table of Contents Paycheck Protection Program ChoiceOne processed over $126 million in PPP loans in 2020, acquired an additional $37 million in PPP loans in the merger with Community Shores, and originated $89.1 million in PPP loans in 2021.  In the third quarter of 2022, the remaining $1.8 million of PPP loans were forgiven resulting in $68,000 of fee income.  For the full year 2022, $33.1 million of PPP loans were forgiven resulting in $1.2 million of fee income. At December 31, 2022, no PPP loans remain in ChoiceOne’s loan portfolio. Dividends Cash dividends of $7.6 million or $1.01 per common share were declared in 2022 compared to $7.2 million or $0.94 per common share in 2021.  The dividend yield for ChoiceOne’s common stock was 3.48% as of the end of 2022, compared to 3.55% as of the end of 2021. The cash dividend payout as a percentage of net income was 32% as of December 31, 2022, compared to 33% as of December 31, 2021. Inco me Taxes Income tax expense was $438,000 lower in

2022 than in

2021. The decline is related to additional tax-exempt interest income from securities and additional tax-exempt earnings on bank-owned life insurances in

2022 compared to

2021.  The effective tax rate was 15% in

2022 compared to 17% in

2021.  For further details, refer to Note 12 (Income Taxes) of the Notes to the Consolidated Financial Statements included in Item 8 of this report. 22 Table of Contents Table 1 – Average Balances and Tax-Equivalent Interest Rates Tables 1 and 2 on the following pages provide information regarding interest income and expense for the years ended December 31, 2022, 2021, and 2020. Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities.  Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates. Year Ended December 31, 2022 2021 2020 (Dollars in thousands) Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate Assets: Loans (1) (3)(4)(5) $ 1,104,030 $ 52,861 4.79 % $ 1,040,430 $ 48,672 4.68 % $ 1,014,959 $ 46,893 4.62 % Taxable securities (2) 779,915 15,583 2.00 599,902 10,260 1.71 276,085 5,891 2.13 Nontaxable securities (1) 314,644 7,790 2.48 269,886 7,098 2.63 112,712 3,402 3.02 Other 34,255 491 1.43 68,879 84 0.12 71,417 266 0.37 Interest-earning assets 2,232,844 76,725 3.44 1,979,097 66,114 3.34 1,475,173 56,452 3.83 Noninterest-earning assets 140,530 177,677 179,699 Total assets $ 2,373,374 $ 2,156,774 $ 1,654,872 Liabilities and Shareholders' Equity: Interest-bearing demand deposits $ 902,090 $ 3,514 0.39 % $ 791,886 $ 1,797 0.23 % $ 571,693 $ 1,832 0.32 % Savings deposits 452,542 711 0.16 398,969 551 0.14 267,217 300 0.11 Certificates of deposit 196,166 1,620 0.83 186,898 957 0.51 183,836 2,046 1.11 Borrowings 13,537 410 3.02 5,465 101 1.86 16,712 327 1.96 Subordinated debentures 35,211 1,491 4.23 12,841 571 4.45 1,532 139 9.07 Interest-bearing liabilities 1,599,546 7,746 0.48 1,396,059 3,977 0.28 1,040,990 4,644 0.45 Demand deposits 582,992 527,876 398,422 Other noninterest-bearing liabilities 12,421 7,719 870 Total liabilities 2,194,959 1,931,654 1,440,282 Shareholders' equity 178,415 225,120 214,591 Total liabilities and shareholders' equity $ 2,373,374 $ 2,156,774 $ 1,654,873 Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 68,979 $ 62,137 $ 51,808 Net interest margin (tax-equivalent basis) (Non-GAAP) (1) 3.09 % 3.14 % 3.51 % Reconciliation to Reported Net Interest Income Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 68,979 $ 62,137 $ 51,808 Adjustment for taxable equivalent interest (1,665 ) (1,513 ) (737 ) Net interest income (GAAP) $ 67,314 $ 60,624 $ 51,071 Net interest margin (GAAP) 3.01 % 3.08 % 3.38 % (1) Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%. The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry. These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities. (2) Interest on taxable securities includes dividends on Federal Home Loan Bank and Federal Reserve Bank stock. (3) Loans include both loans to other financial institutions and loans held for sale. (4) Non-accruing loan and PPP loan balances are included in the balances of average loans. Non-accruing loan average balances were $1.3 million, $3.3 million, and $5.0 million for the year ended 2022, 2021, and 2020, respectively. PPP loan average balances were $8.7 million, $95.9 million, and $84.2 million for the year ended 2022, 2021, and 2020, respectively. At December 31, 2022 no PPP loans remain in ChoiceOne’s loan portfolio. (5) Interest on loans included net origination fees, accretion income, and PPP fees. Accretion income was $2.0 million, $1.1 million, and $420,000 for the full year 2022, 2021 and 2020, respectively. PPP fees were approximately $1.2 million, $5.2 million, and $3.0 million for the full year 2022, 2021, and 2020, respectively. 23 Table of Contents Table 2 – Changes in Tax-Equivalent Net Interest Income Year Ended December 31, (Dollars in thousands) 2022 Over 2021 2021 Over 2020 Total Volume Rate Total Volume Rate Increase (decrease) in interest income (1) Loans (2) $ 4,189 $ 3,026 $ 1,163 $ 1,779 $ 1,187 $ 592 Taxable securities 5,323 3,410 1,913 4,369 5,737 (1,368 ) Nontaxable securities (2) 692 1,126 (434 ) 3,696 4,185 (489 ) Other 407 (62 ) 469 (182 ) (9 ) (173 ) Net change in interest income $ 10,611 $ 7,500 $ 3,111 $ 9,662 $ 11,099 $ (1,437 ) Increase (decrease) in interest expense (1) Interest-bearing demand deposits $ 1,717 $ 279 $ 1,438 $ (35 ) $ 588 $ (623 ) Savings deposits 159 79 80 251 171 80 Certificates of deposit 664 50 614 (1,089 ) 34 (1,123 ) Borrowings 309 217 92 (226 ) (210 ) (16 ) Subordinated debentures 920 948 (28 ) 432 1,516 (37 ) Net change in interest expense $ 3,769 $ 1,573 $ 2,196 $ (667 ) $ 2,099 $ (1,719 ) Net change in tax-equivalent net interest income $ 6,841 $ 5,927 $ 915 $ 10,329 $ 9,001 $ 282 (1) The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s interest rate. The rate variance is computed as the change in interest rate multiplied by the previous year’s volume (average balance). The change in interest due to both volume and rate has been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. (2) Interest on tax-exempt securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21% for 2022, 2021, and 2020. Net I nterest Income Tax-equivalent net interest income increased $6.8 million for the full year 2022, compared to the same period in 2021.  The Federal Reserve increased the federal funds rate by 4.0% during 2022 in response to published inflation rates.  This both increased rates on newly originated loans and increased the rates paid on deposits and led to a net decline in tax equivalent net interest margin of 5 basis points in 2022 compared to 2021.  GAAP based net interest margin declined 7 basis points in 2022 compared to 2021. The following table presents the cost of deposits and the cost of funds for the years ended December 31, 2022, December 31, 2021, and December 31, 2020. Year Ended December 31, 2022 2021 2020 Cost of deposits 0.27 % 0.17 % 0.29 % Cost of funds 0.35 % 0.21 % 0.32 % Net interest income increased $6.7 million in 2022 compared to 2021 due to the $224.8 million increase in the average balance of securities and a 14 basis point increase in the average rate earned on securities during the full year 2022 as ChoiceOne deployed excess deposit dollars into securities with the intent to transition to loans as good credits become available.  ChoiceOne has also experienced core loan growth during 2022 leading to an increase in interest income from loans of $4.2 million in the full year 2022, compared to the same period in the prior year.  Average core loans, which exclude PPP loans, loans held for sale, and loans to other financial institutions, grew $153.9 million during the full year 2022.  In addition, the average rate earned on loans increased 11 basis points in 2022 compared to 2021.  The increase in interest income from loans and the average rate increase on loans is muted by a $3.9 million decline in PPP fee income in the full year 2022 compared to 2021.  This decline was somewhat offset by a $919,000 increase in accretion income from acquired loans in 2022 compared to 2021. Interest expense increased $3.8 million for the full year 2022, compared to the same period in 2021.  Growth of $163.8 million in the average balance of interest-bearing demand deposits and savings deposits and a combined 11 basis point increase in the average rate paid, caused interest expense to increase $1.9 million in 2022 compared to the prior year.  The increase in the average balance of certificates of deposit of $9.3 million, combined with a 31 basis point increase in the rate paid on certificates of deposits in 2022 compared to 2021, led to an increase in interest expense of $664,000. In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031.  In addition, ChoiceOne holds certain subordinated debentures issued in connection with a trust preferred securities offering that were obtained as part of the merger with Community Shores.  These increased the average balance of subordinated debentures by $22.4 million in 2022 compared to the same period in the prior year and caused interest expense to increase by $920,000 over the same period. The rise in interest rates has led to ChoiceOne's cost of funds increasing 15 basis points from 0.21% in 2021 to 0.35% in 2022.  10 basis points of this increase is due to the rising cost of deposits, while the remainder is due to the increased cost of borrowing and a full year's expense of the subordinated notes completed in September of 2021. 24 Table of Contents Provision and Allowance For Loan Losses Table 3 – Provision and Allowance For Loan Losses (Dollars in thousands) 2022 2021 2020 Allowance for loan losses at beginning of year $ 7,688 $ 7,593 $ 4,057 Charge-offs: Agricultural - - 15 Commercial and industrial 177 195 148 Consumer 496 370 329 Real estate - commercial - 111 254 Real estate - construction - - - Real estate - residential - - 8 Total 673 676 754 Recoveri Agricultural - - - Commercial and industrial 143 86 57 Consumer 206 214 204 Real estate - commercial 3 48 10 Real estate - construction - - - Real estate - residential 2 7 19 Total 354 355 290 Net charge-offs (recoveries) 319 321 464 Provision for loan losses 250 416 4,000 Allowance for loan losses at end of year $ 7,619 $ 7,688 $ 7,593 Allowance for loan losses as a percentage o Total loans as of year end 0.64 % 0.76 % 0.71 % Nonaccrual loans, accrual loans past due 90 days or more and troubled debt restructurings 286 % 139 % 92 % Ratio of net charge-offs during the period to average loans outstanding during the period 0.03 % 0.03 % 0.05 % Loan recoveries as a percentage of prior year's charge-offs 52 % 47 % 29 % 25 Table of Contents The provision for loan losses was $250,000 in 2022, compared to $416,000 in the prior year.  The provision for loan losses expense was deemed necessary to reserve for core loan growth of $206.1 million in 2022.  Our methodology for measuring the appropriate level of allowance for loan losses and related provision for loan losses involves specific allocations for loans considered impaired, and general allocations for homogeneous loans based on historical loss experience. Loans classified as impaired loans declined by $2.6 million during 2022 which led to a decline in the specific allowance for loan losses for impaired loans of $350,000 in 2022 compared to 2021. The determination of our loss factors is based, in part, upon our actual loss history adjusted for significant qualitative factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date.  ChoiceOne uses a rolling 20 quarter actual net charge-off history as the basis for the computation. Nonperforming loans were $2.7 million as of December 31, 2022 compared to $5.5 million as of December 31, 2021. The allowance for loan losses was 0.64% of total loans at December 31, 2022, compared to 0.76% at December 31, 2021. Loans acquired in the mergers with County and Community Shores were recorded at fair value and as a result do not have an allowance for loan losses allocated to them unless credit deteriorates subsequent to acquisition. Net charge-offs were $319,000 in 2022 compared to net charge-offs of $321,000 during the same period in 2021.  Net charge-offs on an annualized basis as a percentage of average loans were 0.03% in 2022 compared to 0.03% in 2021. Management is aware that the economic climate in Michigan will continue to affect business and individual borrowers. ChoiceOne adopted ASU 2016-13 current expected credit loss ("CECL") on January 1, 2023.  Due to the current economic environment, the nature of the new calculation, and purchase accounting with our recent mergers, we anticipate an increase in our current allowance for loan losses of between $6.5 million and $7.0 million, which will result in an expected allowance for loan losses to total loan coverage ratio between 1.15% and 1.25% on January 1, 2023.  Approximately 20% to 25% of this increase is related to the migration of purchased loans into the portfolio assessed by the CECL calculation.  ChoiceOne will also record a liability for expected credit losses on unfunded loans and other commitments of between $2.5 million to $3.0 million related to the adoption of CECL.  These unfunded loans and other commitments are open credit lines with current customers and loans approved by ChoiceOne but not yet funded.  The increase in the reserve and the cost of the liability will result in a decrease in retained earnings account on our Consolidated Balance Sheet equal to the after-tax impact, with the tax impact portion being recorded in deferred taxes in our Consolidated balance Sheet in accordance with FASB guidance.  Further discussion of the change in accounting policy can be found in Item 8 Note 1. 26 Table of Contents Financial Condition Summary Total assets grew $19.2 million in the twelve months ended December 31, 2022.  Core loans grew $206.1 million or 21.0% and were offset by a decline in securities of $143.2 million, and a decline in loans to other financial institutions of $42.6 million.  ChoiceOne also grew deposits by $65.7 million during 2022.  Deposit costs rose steadily during the year with larger increases coming in the fourth quarter as competition and rate awareness has amplified. Securities The Company’s securities balances as of December 31 were as follows: (Dollars in thousands) 2022 2021 Equity securities $ 8,566 $ 8,492 Available for Sale Securities at fair value U.S. Government and federal agency $ - $ 2,008 U.S. Treasury notes and bonds 78,204 91,979 State and municipal 229,938 534,847 Mortgage-backed 208,563 433,115 Corporate 711 20,642 Asset-backed securities 12,333 16,294 Total $ 529,749 $ 1,098,885 Held to Maturity Securities at amortized cost U.S. Government and federal agency $ 2,966 $ - U.S. Treasury notes and bonds - - State and municipal 201,890 - Mortgage-backed 200,473 - Corporate 19,603 - Asset-backed securities 974 - Total $ 425,906 $ - In the last two years ChoiceOne has grown its securities portfolio substantially. Total available for sale securities on December 31, 2020, amounted to $577.7 million and grew steadily to an available for sale balance on December 31, 2021, of $1.1 billion.  Many of the securities making up this balance include local municipals and other securities ChoiceOne has no intent to sell prior to maturity.  During the first quarter of 2022, ChoiceOne elected to move $428.4 million of the portfolio into a held to maturity status. Total investment securities declined $143.2 million from December 31, 2021 to December 31, 2022 .  ChoiceOne purchased $63.6 million of securities in 2022.  This was offset by the liquidation of $47.2 million in securities during 2022, resulting in an $809,000 realized loss and reduced the risk of extension on certain fixed income securities which included a call option. Securities totaling $19.6 million were called or matured in 2022 . ChoiceOne received principal payments for municipal and mortgage-backed securities totaling $40.1 million during 2022 . At December 31, 2022, the Company had $161.0 million in unrealized losses on its investment securities, including $89.0 million in unrealized losses on available for sale securities and $72.0 in unrealized losses on held to maturity securities.  Unrealized losses on corporate and municipal bonds have not been recognized into income because the issuers’ bonds are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity. ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position.  In order to hedge the risk of rising rates and unrealized losses on securities resulting from the rising rates, ChoiceOne currently holds four interest rate swaps with a total notional value of $400.1 million. These derivative instruments increase in value as long-term interest rates rise, which offsets the reduction in equity due to unrealized losses on securities available for sale.  Refer to footnote 8 and 23 for more discussion on ChoiceOne’s derivative position. The Bank’s Investment Committee continues to monitor the portfolio and purchases securities as it considers prudent. Equity securities included a money market preferred security ("MMP") of $1.0 million and common stock of $7.6 million as of December 31, 2022 . As of December 31, 2021 , equity securities included an MMP of $1.0 million and common stock of $7.5 million. 27 Table of Contents Loans The Company’s loan portfolio as of December 31 was as follows: (Dollars in thousands) 2022 2021 Agricultural $ 64,159 $ 64,819 Commercial and industrial 210,210 203,024 Consumer 39,808 35,174 Real estate - commercial 630,953 525,884 Real estate - construction 14,736 19,066 Real estate - residential 229,916 168,881 Loans, gross $ 1,189,782 $ 1,016,848 Core loans, which exclude PPP loans, held for sale loans, and loans to other financial institutions, grew organically by $206.1 million in 2022.  Excluding PPP loans, ChoiceOne saw growth of $144.7 million in commercial loans and $56.7 million in retail loans in 2022.  Additions to our commercial lending staff in 2021 and 2022 as well as investments in the automation of our commercial loan process have helped drive our pipeline of commercial loans and corresponding growth. Loans to other financial institutions declined $42.6 million from December 31, 2021 to December 31, 2022, as management chose to suspend the program at the end of the third quarter 2022.  Additionally, the remaining $33.1 million of PPP loans were forgiven resulting in $1.2 million of fee income.  At December 31, 2022, all PPP loans have been fully forgiven, and the associated fee income has been recognized. ChoiceOne recorded accretion income related to acquired loans in the amount of $2.0 million during 2022.  Remaining credit and yield mark on acquired loans from the recent mergers with County Bank Corp. and Community Shores will accrete into income as the acquired loans mature.  ChoiceOne estimates that roughly $4.0 million will accrete into income over the next two to four years. Information regarding impaired loans can be found in Note 3 to the consolidated financial statements included in this report. In addition to its review of the loan portfolio for impaired loans, management also monitors various nonperforming loans. Nonperforming loans are comprised of (1) loans accounted for on a nonaccrual basis; (2) loans, not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments; and (3) loans, not included in nonaccrual or past due 90 days or more, which are considered troubled debt restructurings. Troubled debt restructurings consist of loans where the terms have been modified to assist the borrowers in making their payments. The modifications can include capitalization of interest onto the principal balance, reduction in interest rate, and extension of the loan term. The balances of these nonperforming loans as of December 31 were as follows: (Dollars in thousands) 2022 2021 Loans accounted for on a nonaccrual basis $ 1,263 $ 1,727 Loans contractually past due 90 days or more as to principal or interest payments - - Loans considered troubled debt restructurings which are not included above 1,404 3,816 Total $ 2,667 $ 5,543 Nonaccrual loans included $1.3 million in residential real estate loans as of December 31, 2022, compared to $313,000 in agricultural loans, $285,000 in commercial and industrial loans, $279,000 in commercial real estate loans, and $850,000 in residential real estate loans as of December 31, 2021.  Loans considered troubled debt restructurings which were not on a nonaccrual basis and were not 90 days or more past due as to principal or interest payments consisted of $3,000 in agricultural loans, $58,000 in commercial and industrial loans, $131,000 in commercial real estate loans and $1.2 million in residential real estate loans at December 31, 2022, compared to $1.8 million in agricultural loans, $73,000 in commercial and industrial loans, $601,000 in commercial real estate loans and $1.3 million in residential real estate loans at December 31, 2021. Management also maintains a list of loans that are not classified as nonperforming loans but where some concern exists as to the borrowers’ abilities to comply with the original loan terms. There were 10 loans totaling $180,000 fitting this description as of December 31, 2022 , and no loans fitting that description on December 31, 2021 . 28 Table of Contents Deposits and Other Funding Sources The Company’s deposit balances as of December 31 were as follows: (Dollars in thousands) 2022 2021 Noninterest-bearing demand deposits $ 599,579 $ 560,931 Interest-bearing demand deposits 638,641 665,482 Money market deposits 214,026 218,211 Savings deposits 427,583 425,626 Local certificates of deposit 236,431 182,044 Brokered certificates of deposit 1,743 - Total deposits $ 2,118,003 $ 2,052,294 Total deposits increased $65.7 million from December 31, 2021 to December 31, 2022 ; however, most of this was in the first half of 2022. ChoiceOne saw deposits decline $38.7 million in the fourth quarter of 2022 due to some seasonality in municipal deposits and increased competition. The Federal Reserve increased the federal funds rate by 4.0% during 2022 in response to published inflation rates. In response, the cost of interest-bearing deposits increased to 0.66% in the fourth quarter of 2022 primarily due to the increases in rates offered to retain clients and an increased interest in certificates of deposit. ChoiceOne is actively managing these costs while still retaining funds, and anticipates that deposit expense will continue to lag the cumulative increases in the federal funds rate. The actual cost of deposits increased by $940,000 in the fourth quarter of 2022 compared to the third quarter of 2022 and $1.9 million compared to the fourth quarter of 2021. In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. ChoiceOne used a portion of net proceeds from the private placement to redeem senior debt, fund common stock repurchases, and support bank-level capital ratios. ChoiceOne also holds $3.2 million in subordinated debentures issued in connection with a $4.5 million trust preferred securities offering, which were obtained in the merger with Community Shores, offset by the mark-to-market adjustment. At December 31, 2022, the aggregate balance of all deposits exceeding the FDIC insured limit of $250,000 totaled $823.2 million, or 39% of total deposits, compared to $889.2 million, or 43% of total deposits and $583.7 million, or 35% of total deposits at December 31, 2021 and 2020, respectively. Core deposits, which we define as insured branch deposits less certificates of deposit, totaled $1.2 billion or 55.0% of total deposits at December 31, 2022. Shareholders’ Equity Total shareholders' equity declined $52.8 million in 2022. Accumulated other comprehensive income declined $69.2 million in 2022 as a result of market value declines in ChoiceOne’s available for sale securities. The change was caused by increases in certain general market interest rates since the beginning of 2022.  ChoiceOne's derivative strategy implemented during the second quarter of 2022 and repositioned during the fourth quarter of 2022, is expected to better position the Bank should rates continue to rise.  The net impact on equity of the derivative strategy as of December 31, 2022, was $957,000 net of tax. For further details refer to Footnote 8 "Derivatives and Hedging Activities".  As permitted by U.S. generally accepted accounting principles, unrecognized losses on securities held to maturity do not reduce other comprehensive income and, as a result, are not reflected as a reduction to shareholders’ equity on our balance sheet. ChoiceOne Bank remains “well-capitalized” with a total risk-based capital ratio of 13.0% as of December 31, 2022, compared to 12.9% on December 31, 2021. ChoiceOne repurchased 25,899 shares for $683,000, or a weighted average all-in cost per share of $26.35, during the first quarter of 2022. This was part of the common stock repurchase program announced in April 2021 which authorized repurchases of up to 390,114 shares, representing 5% of the total outstanding shares of common stock as of the date the program was adopted.  No shares of common stock were repurchased for the remainder of 2022; however, ChoiceOne may strategically repurchase shares of common stock in the future depending on market and other conditions. Note 21 to the consolidated financial statements presents regulatory capital information for ChoiceOne and the Bank at the end of 2022 and 2021. Management will monitor these capital ratios during 2023 as they relate to asset growth and earnings retention. ChoiceOne’s Board of Directors and management do not plan to allow capital to decrease below those levels necessary to be considered "well capitalized" by regulatory guidelines. At December 31, 2022, the Bank was categorized as "well-capitalized" under regulatory guidelines. 29 Table of Contents Table 4 – Contractual Obligations The following table discloses information regarding the maturity of ChoiceOne’s contractual obligations at

December 31, 2022: Payment Due by Period Less More than 1 - 3 3 - 5 than (Dollars in thousands) Total 1 year Years Years 5 Years Time deposits $ 238,174 $ 210,989 $ 22,113 $ 5,072 $ - Borrowings 50,000 50,000 - - - Cumulative Preferred Securities (1) 3,795 - - - 3,795 ChoiceOne Subordinated Debenture (2) 32,500 - - - 32,500 Operating leases 1,012 322 459 231 - Other obligations 164 70 62 18 14 Total $ 325,645 $ 261,381 $ 22,634 $ 5,321 $ 36,309 (1) Cumulative preferred securities on the balance sheet include $504,000 of discount due to a mark to market adjustment which is not reflected in the table above. (2) ChoiceOne subordinated debenture on the balance sheet includes $529,000 of capitalized issuance cost which is not reflected in the table above. Liquidity and Interest Rate Risk Net cash provided by operating activities was $45.0 million in 2022 compared to $37.7 million in 2021.  The change was due to lower net proceeds from loan sales in 2022 compared to 2021, which was offset by the change in other assets and liabilities.  Net cash used in investing activities was $90.5 million in 2022 compared to $521.4 million in 2021. ChoiceOne purchased $63.6 million of securities and had maturities or sales of securities of $106.4 million in 2022 compared to $637.9 million in purchases and $83.9 million in maturities or sales in 2021, respectively.  An increase in net loan originations led to cash used of $130.6 million in 2022 compared to cash provided of $45.4 million in the prior year.  Net cash provided by financing activities was $57.5 million in 2022, compared to $436.0 million in 2021. ChoiceOne experienced growth of $65.7 million in deposits in 2022 compared to growth of $377.7 million in 2021, while also seeing a $73.2 million decrease in borrowings in 2022, which led to the change. ChoiceOne's primary market risk exposure occurs in the form of interest rate risk. Liquidity risk also can have an impact but to a lesser extent. ChoiceOne's business is transacted in U.S. dollars with no foreign exchange risk exposure. Agricultural loans comprise a relatively small portion of ChoiceOne's total assets. Management believes that ChoiceOne's exposure to changes in commodity prices is insignificant. Management believes that the current level of liquidity and sources of additional liquidity are sufficient to meet the Bank's future liquidity needs. This belief is based upon the availability of deposits from both the local and national markets, our core deposit base, maturities of and cash flows from securities, normal loan repayments, income retention, federal funds purchased and advances available from the FHLB. Liquidity risk deals with ChoiceOne's ability to meet its cash flow requirements. These requirements include depositors desiring to withdraw funds and borrowers seeking credit. The Bank also has a line of credit secured by ChoiceOne’s commercial loans with the Federal Reserve Bank of Chicago for $380.4 million, which is designated for nonrecurring short-term liquidity needs. Longer-term liquidity needs may be met through core deposit growth, maturities of and cash flows from securities, normal loan repayments, advances from the FHLB, brokered certificates of deposit, and income retention. ChoiceOne had $50.0 million in outstanding borrowings at FHLB as of December 31, 2022, and $39.6 million of additional borrowing capacity was available based on residential real estate loans pledged as collateral at the end of 2022. The acceptance of brokered certificates of deposit is not limited as long as the Bank is categorized as “well capitalized” under regulatory guidelines. ChoiceOne continues to review its liquidity management and has taken steps in an effort to ensure adequacy.  These steps include limiting bond purchases in the first two months of 2023, moving safekeeping of securities to FHLB in order to increase borrowing capacity, if pledged, by an amount of roughly $300.0 million, and using alternative funding sources such as brokered deposits.  ChoiceOne is also investigating additional borrowing capacity by use of the new Bank Term Funding Program announced March 12, 2023.  As of February 28, 2023 ChoiceOne estimates that it has total borrowing capacity of $398.3 million, and if additional securities are pledged with the FHLB, will have the ability to borrow up to $716.3 million. 30 Table of Contents NON-GAAP FINANCIAL MEASURES This report contains financial measures that are not defined in U.S. generally accepted accounting principles ("GAAP"). Management believes this non-GAAP financial measure provides additional information that is useful to investors in helping to understand the underlying financial performance of ChoiceOne. Non-GAAP financial measures have inherent limitations. Readers should be aware of these limitations and should be cautious with respect to the use of such measures. To compensate for these limitations, we use non-GAAP measures as comparative tools, together with GAAP measures, to assist in the evaluation of our operating performance or financial condition. Also, we ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and that they are computed in a manner intended to facilitate consistent period-to-period comparisons. ChoiceOne’s method of calculating these non-GAAP financial measures may differ from methods used by other companies. These non-GAAP financial measures should not be considered in isolation or as a substitute for those financial measures prepared in accordance with GAAP or in-effect regulatory requirements. 31 Table of Contents Critical Accounting Policies And Estimates Management’s discussion and analysis of financial condition and results of operations as well as disclosures found elsewhere in this report are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the market value of securities, the amount of the allowance for loan losses, loan servicing rights, carrying value of goodwill, and income taxes. Actual results could differ from those estimates. Securities Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity.  Debt securities available for sale may be sold prior to maturity due to changes in interest rates, prepayment risks, yield, availability of alternative investments, liquidity needs, credit rating changes, or other factors. Debt securities classified as available for sale are reported at their fair value with changes flowing through other comprehensive income. Declines in the fair value of securities below their cost that are considered to be “other than temporary” are recorded as losses in the income statement. In estimating whether a fair value decline is considered to be “other than temporary,” management considers the length of time and extent that the security’s fair value has been less than its carrying value, the financial condition and near-term prospects of the issuer, and the Bank’s ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. Market values for securities available for sale are obtained from outside sources and applied to individual securities within the portfolio. The difference between the amortized cost and the fair value of securities is recorded as a valuation adjustment and reported net of tax effect in other comprehensive income. Equity securities are reported at their fair value with changes in market value flowing through net income. Prior to 2018, equity securities were accounted for in a manner similar to available for sale debt securities. Allowance for Loan Losses The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses inherent in the consolidated loan portfolio. Management’s evaluation of the adequacy of the allowance for loan losses is an estimate based on reviews of individual loans, assessments of the impact of current economic conditions on the portfolio and historical loss experience of seasoned loan portfolios. Management believes the accounting estimate related to the allowance for loan losses is a “critical accounting estimate” because (1) the estimate is highly susceptible to change from period to period because of assumptions concerning the changes in the types and volumes of the portfolios and current economic conditions and (2) the impact of recognizing an impairment or loan loss could have a material effect on the Company’s assets reported on the balance sheet as well as its net income. Loan Servicing Rights Loan servicing rights represent the estimated value of servicing loans that are sold with servicing retained by ChoiceOne and are initially recorded at estimated fair value. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Management’s accounting treatment of loan servicing rights is estimated based on current prepayment speeds that are typically market driven. Management believes the accounting estimate related to loan servicing rights is a “critical accounting estimate” because (1) the estimate is highly susceptible to change from period to period because of significant changes within long-term interest rates affecting the prepayment speeds for current loans being serviced and (2) the impact of recognizing an impairment loss could have a material effect on ChoiceOne’s net income. Management has obtained a third-party valuation of its loan servicing rights to corroborate its current carrying value at the end of each reporting period. Goodwill Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value.  Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required. The Company acquired Valley Ridge Financial Corp. in 2006, County in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $13.7 million, $38.9 million and $7.3 million, respectively. We conducted an annual assessment of goodwill as of June 30, 2022 and no impairment was identified. The Company used a qualitative assessment to determine goodwill was not impaired as of June 30, 2022. Additionally, the Company engaged a third party valuation firm to assist in performing a quantitative analysis of goodwill as of November 30, 2022 ("the valuation date"). In deriving the fair value of the reporting unit (the Bank), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events to financial performance; the market price of ChoiceOne’s common stock and other relevant events. In addition, the valuation relied on financial projections through 2027 and growth rates prepared by management. Based on the valuation prepared, it was determined that ChoiceOne's estimated fair value of the reporting unit at the valuation date was greater than its book value and impairment of goodwill was not required. Management concurred with the conclusion derived from the quantitative goodwill analysis as of the valuation date and determined that there were no material changes and that no triggering events had occurred that indicated impairment from the valuation date through December 31, 2022, and as a result that it is more likely than not that there was no goodwill impairment as of December 31, 2022. 32 Table of Contents Deferred Tax Assets and Liabilities Income taxes include both a current and deferred portion. Deferred tax assets and liabilities are recorded to account for differences in the timing of the recognition of revenues and expenses for financial reporting and tax purposes. Generally accepted accounting principles require that deferred tax assets be reviewed to determine whether a valuation allowance should be established using a “more likely than not” standard. Based on its review of ChoiceOne’s deferred tax assets as of

December 31, 2022, management determined that no valuation allowance was necessary. The valuation of current and deferred income tax assets and liabilities is considered critical, as it requires management to make estimates based on provisions of the enacted tax laws. The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and the federal tax code. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest rate risk is related to liquidity because each is affected by maturing assets and sources of funds. ChoiceOne’s Asset/Liability Management Committee (the "ALCO") attempts to stabilize the interest rate spread and avoid possible adverse effects when unusual or rapid changes in interest rates occur. The ALCO uses a simulation model to measure the Bank's interest rate risk. The model incorporates changes in interest rates on rate-sensitive assets and liabilities. The degree of rate sensitivity is affected by prepayment assumptions that exist in the assets and liabilities. One method the ALCO uses of measuring interest rate sensitivity is the ratio of rate-sensitive assets to rate-sensitive liabilities. An asset or liability is considered to be rate-sensitive if it matures or otherwise reprices within a given time frame. Table 5 documents the maturity or repricing schedule for ChoiceOne’s rate-sensitive assets and liabilities for selected time periods: Table 5 – Maturities and Repricing Schedule As of December 31, 2022 (Dollars in thousands) 0 - 3 3 - 12 1 - 5 Over Months Months Years 5 Years Total Assets Equity securities at fair value $ 8,566 $ - $ - $ - $ 8,566 Securities available for sale 101,285 15,385 36,210 376,869 529,749 Securities held to maturity 34,815 9,690 21,685 359,716 425,906 Federal Home Loan Bank stock 3,517 - - - 3,517 Federal Reserve Bank stock - - - 5,064 5,064 Loans held for sale 4,834 - - - 4,834 Loans 226,530 158,176 577,920 227,156 1,189,782 Cash surrender value of life insurance policies - - - 43,978 43,978 Interest rate derivative contracts 2,171 - 7,033 - 9,204 Rate-sensitive assets $ 381,718 $ 183,251 $ 642,848 $ 1,012,783 $ 2,220,600 Liabilities Interest-bearing demand deposits $ 638,641 $ - $ - $ - $ 638,641 Money market deposits 214,026 - - - 214,026 Savings deposits 427,583 - - - 427,583 Certificates of deposit 55,701 155,288 27,184 - 238,173 Borrowings 50,000 - - - 50,000 Subordinated debentures 3,795 - 32,500 - 36,295 Interest rate derivative contracts 5,823 - - - 5,823 Rate-sensitive liabilities $ 1,395,569 $ 155,288 $ 59,684 $ - $ 1,610,541 Rate-sensitive assets less rate-sensitive liabiliti Asset (liability) gap for the period $ (1,013,851 ) $ 27,963 $ 583,164 $ 1,012,783 $ 610,059 Cumulative asset (liability) gap $ (1,013,851 ) $ (985,888 ) $ (402,724 ) $ 610,059 Under this method, the ALCO measures interest rate sensitivity by focusing on the one-year repricing gap. ChoiceOne’s ratio of rate-sensitive assets to rate-sensitive liabilities that matured or repriced within a one-year time frame was 36% at

December 31, 2022, compared to 43% at

December 31, 2021. Table 5 above shows the entire balance of interest-bearing demand deposits, savings deposits, and money market deposits in the shortest repricing term. Although these categories have the ability to reprice immediately, management has some control over the actual timing or extent of the changes in interest rates on these liabilities. The ALCO plans to continue to monitor the ratio of rate-sensitive assets to rate-sensitive liabilities on a quarterly basis in 2023. As interest rates change, the ALCO will attempt to match its maturing assets with corresponding liabilities to maximize ChoiceOne’s net interest income. Another method the ALCO uses to monitor its interest rate sensitivity is to subject rate-sensitive assets and liabilities to interest rate shocks. At December 31, 2022 , management used a simulation model to subject its assets and liabilities up to an immediate 200 basis point increase and decline. The maturities of loans and mortgage-backed securities were affected by certain prepayment assumptions. Maturities for interest-bearing core deposits were based on an estimate of the period over which they would be outstanding. The maturities of advances from the FHLB were based on their contractual maturity dates. In the case of variable rate assets and liabilities, repricing dates were used to determine their values. The simulation model measures the effect of immediate interest rate changes on both net interest income and shareholders' equity. 33 Table of Contents Table 6 provides an illustration of hypothetical interest rate changes as of

December 31, 2022 and 2021: Table 6 – Sensitivity to Changes in Interest Rates 2022 Net Market (Dollars in thousands) Interest Percent Value of Percent Income Change Equity Change Change in Interest Rate 200 basis point rise 61,826 -11 % 355,701 15 % 100 basis point rise 66,025 -5 % 338,913 9 % Base rate scenario 69,734 0 % 309,801 0 % 100 basis point decline 71,788 3 % 260,889 -16 % 200 basis point decline 71,276 2 % 181,078 -42 % 2021 Net Market (Dollars in thousands) Interest Percent Value of Percent Income Change Equity Change Change in Interest Rate 200 basis point rise 60,058 -1 % 416,435 -5 % 100 basis point rise 60,482 -1 % 437,975 - % Base rate scenario 60,970 - % 439,144 - % 100 basis point decline 59,132 -3 % 390,180 -11 % 200 basis point decline 57,503 -6 % 326,201 -26 % As of December 31, 2022, the Bank was within its guidelines for immediate rate shocks up and down for all net interest income scenarios and for the up rate scenarios for the market value of shareholders’ equity. The Bank’s percent change in the 100 and 200 basis points down scenarios for the market value of shareholders’ equity was higher than the policy guidelines. As of December 31, 2021, the Bank was within its guidelines for immediate rate shocks up and down for all net interest income scenarios and for the up rate scenarios and the down 100 and down 200 basis points scenarios for the market value of shareholders’ equity.  The ALCO plans to continue to monitor the effect of changes in interest rates on both net interest income and shareholders’ equity and will make changes in the duration of its rate-sensitive assets and rate-sensitive liabilities where necessary. 34 Table of Contents Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of ChoiceOne Financial Services, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of ChoiceOne Financial Services, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion The Company's management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which it relates. 35 Table of Contents Allowance for Loan Losses - Current Factor Adjustments - Refer to Notes 1 and 3 to the Consolidated Financial Statements Critical Audit Matter Description The general component of management’s estimate of the allowance for loan losses covers nonimpaired loans and is based on historical loss experience adjusted for current factors. Management’s adjustment for current factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, experience and ability of lending staff, national and economic trends and conditions, industry conditions, trends in real estate values, and other conditions. Identification of factors to consider and adjustments to those factors involve management’s judgement. Given the significant estimates and assumptions management makes to estimate the current factor adjustments of the allowance for loan losses, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the current factor adjustments used in the estimate of the allowance for loan losses included the following, among othe ● We obtained an understanding of management’s process for determining the current factor adjustments, which included identification of internal and external data used in the analysis and understanding how management selects inputs from a range of potential assumptions. ● We evaluated the design of controls over management’s allowance for loan losses estimate, including those over current factor adjustments. ● We evaluated management’s selection of factors to consider when making current factor adjustments. ● We evaluated management's determination of adjustments for each factor, including evaluation of each adjustment for consistency with the direction and magnitude of changes in internal and external data. /s/Plante & Moran, PLLC We have served as the Company’s auditor since 2006. Grand Rapids, MI March 22, 2023 36 Table of Contents ChoiceOne Financial Services, Inc. Consolidated Balance Sheets December 31, (Dollars in thousands) 2022 2021 Assets Cash and due from banks $ 43,593 $ 31,537 Time deposits in other financial institutions 350 350 Cash and cash equivalents 43,943 31,887 Equity securities, at fair value (Note 2) 8,566 8,492 Securities available for sale, at fair value (Note 2) 529,749 1,098,885 Securities held to maturity, at amortized cost (Note 2) 425,906 - Federal Home Loan Bank stock 3,517 3,824 Federal Reserve Bank stock 5,064 5,064 Loans held for sale 4,834 9,351 Loans to other financial institutions - 42,632 Loans (Note 3) 1,189,782 1,016,848 Allowance for loan losses (Note 3) ( 7,619 ) ( 7,688 ) Loans, net 1,182,163 1,009,160 Premises and equipment, net (Note 5) 28,232 29,880 Other real estate owned, net (Note 7) - 194 Cash value of life insurance policies 43,978 43,356 Goodwill (Note 6) 59,946 59,946 Core deposit intangible (Note 6) 2,809 3,962 Other assets 47,208 20,049 Total assets $ 2,385,915 $ 2,366,682 Liabilities Deposits – noninterest-bearing (Note 9) $ 599,579 $ 560,931 Deposits – interest-bearing (Note 9) 1,518,424 1,491,363 Total deposits 2,118,003 2,052,294 Borrowings (Note 10) 50,000 50,000 Subordinated debentures (Note 11) 35,262 35,017 Other liabilities 13,776 7,702 Total liabilities 2,217,041 2,145,013 Shareholders' Equity Preferred stock; shares authoriz 100,000 ; shares outstandin none - - Common stock and paid-in capital, no par value; shares authoriz 15,000,000 ; shares outstandin 7,516,098 at December 31, 2022 and 7,510,379 at December 31, 2021 (Note 16) 172,277 171,913 Retained earnings 68,394 52,332 Accumulated other comprehensive income, net ( 71,797 ) ( 2,576 ) Total shareholders’ equity 168,874 221,669 Total liabilities and shareholders’ equity $ 2,385,915 $ 2,366,682 See accompanying notes to consolidated financial statements. 37 Table of Contents ChoiceOne Financial Services, Inc. Consolidated Statements of Income Years Ended (Dollars in thousands, except per share data) December 31, 2022 2021 2020 Interest income Loans, including fees $ 52,823 $ 48,657 $ 46,874 Securiti Taxable 15,583 10,260 5,891 Tax exempt 6,163 5,617 2,684 Other 491 84 266 Total interest income 75,060 64,618 55,715 Interest expense Deposits 5,845 3,305 4,178 Advances from Federal Home Loan Bank 117 22 220 Other 1,784 650 246 Total interest expense 7,746 3,977 4,644 Net interest income 67,314 60,641 51,071 Provision for loan losses 250 416 4,000 Net interest income after provision for loan losses 67,064 60,225 47,071 Noninterest income Customer service charges 9,350 8,628 7,252 Insurance and investment commissions 779 765 541 Mortgage servicing rights (Note 4) 1,007 2,335 3,180 Gains on sales of loans (Note 4) 1,336 4,441 8,133 Net (losses) gains on sales of securities (Note 2) ( 809 ) ( 40 ) 1,308 Net (losses) gains on sales and write-downs of other assets (Note 7) 99 6 ( 13 ) Earnings on life insurance policies 1,312 809 772 Trust income 734 790 739 Change in market value of equity securities ( 955 ) 479 ( 155 ) Other 1,219 981 941 Total noninterest income 14,072 19,194 22,698 Noninterest expense Salaries and benefits (Note 14 and 15) 30,391 29,300 26,539 Occupancy and equipment (Note 5) 6,189 6,168 5,783 Data processing 6,729 6,189 6,765 Professional fees 2,175 3,009 3,716 Supplies and postage 719 614 844 Advertising and promotional 764 848 588 Intangible amortization (Note 6) 1,153 1,307 1,498 FDIC insurance 722 804 450 Other 4,636 4,682 4,701 Total noninterest expense 53,478 52,921 50,884 Income before income tax 27,658 26,498 18,885 Income tax expense 4,018 4,456 3,272 Net income $ 23,640 $ 22,042 $ 15,613 Basic earnings per share (Note 16) $ 3.15 $ 2.87 $ 2.08 Diluted earnings per share (Note 16) $ 3.15 $ 2.86 $ 2.07 Dividends declared per share $ 1.01 $ 0.94 $ 0.82 See accompanying notes to consolidated financial statements. 38 Table of Contents ChoiceOne Financial Services, Inc. Consolidated Statements of Comprehensive Income Years Ended (Dollars in thousands) December 31, 2022 2021 2020 Net income $ 23,640 $ 22,042 $ 15,613 Other comprehensive income: Change in net unrealized gain (loss) on available-for-sale securities ( 91,923 ) ( 17,261 ) 13,554 Income tax benefit (expense) 19,304 3,625 ( 2,846 ) L reclassification adjustment for net (gain) loss included in net income 809 39 ( 1,308 ) Income tax benefit (expense) ( 170 ) ( 7 ) 275 L reclassification adjustment for net (gain) loss for fair value hedge 1,930 - - Income tax benefit (expense) ( 405 ) - - L net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity 3,404 - - Income tax benefit (expense) ( 715 ) - - Unrealized gain (loss) on available-for-sale securities, net of tax ( 67,766 ) ( 13,604 ) 9,675 Reclassification of unrealized gain (loss) upon transfer of securities from available-for-sale to held-to-maturity ( 3,404 ) - - Income tax benefit (expense) 715 - - L amortization of net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity 351 - - Income tax benefit (expense) ( 74 ) - - Unrealized loss on held to maturity securities, net of tax ( 2,412 ) - - Change in net unrealized gain (loss) on derivatives ( 558 ) - - Income tax benefit (expense) 117 - - L reclassification adjustment for net (gain) loss on derivatives 771 - - Income tax benefit (expense) ( 162 ) - - L amortization of net unrealized (gains) losses included in net income 999 - - Income tax benefit (expense) ( 210 ) - - Unrealized gain (loss) on derivative instruments, net of tax 957 - - Change in adjustment for postretirement - - ( 158 ) Income tax benefit (expense) - - 33 Unrealize gain (loss) on postretirement - - ( 125 ) Other comprehensive income (loss), net of tax ( 69,221 ) ( 13,604 ) 9,550 Comprehensive income (loss) $ ( 45,581 ) $ 8,438 $ 25,163 See accompanying notes to consolidated financial statements. 39 Table of Contents ChoiceOne Financial Services, Inc. Consolidated Statements of Changes in Shareholders’ Equity Accumulated Common Other Stock and Comprehensive Number of Paid in Retained Income/(Loss), (Dollars in thousands, except per share data) Shares Capital Earnings Net Total Balance, January 1, 2020 7,245,088 $ 162,610 $ 28,051 $ 1,478 $ 192,139 Net income 15,613 15,613 Other comprehensive income 9,550 9,550 Shares issued 19,583 451 451 Effect of employee stock purchases 24 24 Stock options exercised and issued (1) 7,261 - Stock-based compensation expense 171 171 Restricted stock units issued 365 - Merger with Community Shores Bank Corporation 524,055 15,494 15,494 Cash dividends declared ($ 0.82 per share) ( 6,174 ) ( 6,174 ) Balance, December 31, 2020 7,796,352 $ 178,750 $ 37,490 $ 11,028 $ 227,268 Net income 22,042 22,042 Other comprehensive income ( 13,604 ) ( 13,604 ) Shares issued 23,301 509 509 Effect of employee stock purchases 25 25 Stock-based compensation expense - 415 415 Shares repurchased ( 309,274 ) ( 7,786 ) ( 7,786 ) Cash dividends declared ($ 0.94 per share) ( 7,200 ) ( 7,200 ) Balance, December 31, 2021 7,510,379 $ 171,913 $ 52,332 $ ( 2,576 ) $ 221,669 Net income 23,640 23,640 Other comprehensive income (loss) ( 69,221 ) ( 69,221 ) Shares issued 31,618 461 461 Effect of employee stock purchases 31 31 Stock-based compensation expense 554 554 Shares repurchased ( 25,899 ) ( 682 ) ( 682 ) Cash dividends declared ($ 1.01 per share) ( 7,578 ) ( 7,578 ) Balance, December 31, 2022 7,516,098 $ 172,277 $ 68,394 $ ( 71,797 ) $ 168,874 (1) The amount shown represents the number of shares issued in cashless transactions where some taxes are netted on a portion of the exercises. See accompanying notes to consolidated financial statements. 40 Table of Contents ChoiceOne Financial Services, Inc. Consolidated Statements of Cash Flows Years Ended (Dollars in thousands) December 31, 2022 2021 2020 Cash flows from operating activiti Net income $ 23,640 $ 22,042 $ 15,613 Adjustments to reconcile net income to net cash from operating activiti Provision for loan losses $ 250 416 4,000 Depreciation 2,658 2,624 2,721 Amortization 10,684 9,801 4,985 Compensation expense on employee and director stock purchases, stock options, and restricted stock units 958 812 512 Net (gains) losses on sales of securities 809 40 ( 1,308 ) Net change in market value of equity securities 955 ( 479 ) 155 Gains on sales of loans and capitalized servicing rights ( 2,343 ) ( 6,776 ) ( 11,313 ) Loans originated for sale ( 71,829 ) ( 197,387 ) ( 326,286 ) Proceeds from loan sales 77,681 205,398 325,306 Earnings on bank-owned life insurance ( 1,038 ) ( 778 ) ( 772 ) Proceeds from BOLI policy 690 204 - Earnings on death benefit from bank-owned life insurance ( 274 ) ( 31 ) - (Gains) on sales of other real estate owned ( 41 ) ( 19 ) ( 64 ) Write downs of ORE - - 80 Proceeds from sales of other real estate owned 235 611 1,384 Costs capitalized to other real estate - - ( 19 ) Deferred federal income tax expense ( 15 ) 924 202 Net change in: Other assets ( 4,208 ) ( 5,418 ) ( 3,186 ) Other liabilities 6,205 5,715 ( 3,532 ) Net cash provided by operating activities $ 45,017 37,699 8,478 Cash flows from investing activiti Sales of securities available for sale 47,167 29,742 121,942 Maturities, prepayments and calls of securities available for sale 51,570 54,202 48,787 Maturities, prepayments and calls of securities held to maturity 8,091 - - Purchases of securities available for sale ( 55,053 ) ( 632,826 ) ( 375,470 ) Purchases of securities held to maturity ( 7,505 ) - - Purchases of equity securities ( 1,029 ) ( 5,117 ) ( 200 ) Purchase of bank-owned life insurance policies - ( 10,000 ) - Loan originations and payments, net ( 130,620 ) 45,384 ( 79,594 ) Additions to premises and equipment ( 1,164 ) ( 2,759 ) ( 1,852 ) Proceeds from (payments for) derivative contracts, net ( 1,953 ) - - Cash received from merger with Community Shores Bank Corporation - - 35,636 Net cash (used in)/provided by investing activities ( 90,496 ) ( 521,374 ) ( 250,751 ) Cash flows from financing activiti Net change in deposits 65,709 377,716 292,145 Proceeds from borrowings 726,000 87,500 10,050 Payments on borrowings ( 726,000 ) ( 14,326 ) ( 33,921 ) Issuance of common stock 172 139 134 Repurchase of common stock ( 767 ) ( 7,786 ) - Cash dividends and fractional shares from merger ( 7,578 ) ( 7,200 ) ( 6,174 ) Net cash provided by/(used in) financing activities 57,536 436,043 262,234 Net change in cash and cash equivalents 12,057 ( 47,632 ) 19,961 Beginning cash and cash equivalents 31,887 79,519 59,558 Ending cash and cash equivalents $ 43,943 $ 31,887 $ 79,519 Supplemental disclosures of cash flow informati Cash paid for interest $ 7,577 $ 3,718 $ 4,872 Cash paid for income taxes 1,989 3,251 5,001 Loans transferred to other real estate owned - 520 372 See accompanying notes to consolidated financial statements. 41 Table of Contents Note 1 – Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include ChoiceOne Financial Services, Inc. ("ChoiceOne"), its wholly-owned subsidiary, ChoiceOne Bank (the "Bank"), and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"). Intercompany transactions and balances have been eliminated in consolidation. ChoiceOne owns all of the common securities of Community Shores Capital Trust I (the “Capital Trust”).  Under U.S. generally accepted accounting principles ("GAAP"), the Capital Trust is not consolidated because it is a variable interest entity and ChoiceOne is not the primary beneficiary. Recent Mergers On July 1, 2020, ChoiceOne completed the merger of Community Shores Bank Corporation ("Community Shores") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2020 and December 31, 2021 include the impact of the merger. On October 1, 2019, ChoiceOne completed the merger of County Bank Corp. ("County") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2019, December 31, 2020, and December 31, 2021 include the impact of the merger. Nature of Operations The Bank is a full-service community bank that offers commercial, consumer, and real estate loans as well as traditional demand, savings and time deposits to both commercial and consumer clients within the Bank’s primary market areas in Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan and Lapeer, Macomb, and St. Clair counties in southeastern Michigan. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and real estate. Commercial loans are expected to be repaid from the cash flows from operations of businesses. Real estate loans are collateralized by either residential or commercial real estate. The Insurance Agency is a wholly-owned subsidiary of the Bank. The Insurance Agency sells insurance policies such as life and health for both commercial and consumer clients. The Insurance Agency also offers alternative investment products such as annuities and mutual funds through a registered broker. Together, the Bank and ChoiceOne's other direct and indirect subsidiaries account for substantially all of ChoiceOne’s assets, revenues and operating income. 42 Table of Contents Use of Estimates To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, ChoiceOne’s management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. These estimates and assumptions are subject to many risks and uncertainties,  Actual results may differ from these estimates. Estimates associated with the allowance for loan losses are particularly susceptible to change. Cash and Cash Equivalents Cash and cash equivalents are defined to include cash on hand, demand deposits with other banks, and federal funds sold. Cash flows are reported on a net basis for customer loan and deposit transactions, deposits with other financial institutions, and short-term borrowings with original terms of 90 days or less. Securities Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. ​ Debt securities are classified as available for sale because they might be sold before maturity. Debt securities classified as available for sale are carried at fair value, with unrealized holding gains and losses reported separately in the accumulated other comprehensive income or loss section of shareholders’ equity, net of tax effect. Restricted investments in Federal Reserve Bank stock and Federal Home Loan Bank stock are carried at cost. Equity securities consist of investments in preferred stock and investments in common stock of other financial institutions. Equity securities are reported at their fair value with changes in market value reported through current earnings. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized using the level-yield method without anticipating prepayments. Gains or losses on sales are recorded on the trade date based on the amortized cost of the security sold. Management evaluates debt securities for other-than-temporary impairment ("OTTI") on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The evaluation of securities includes consideration of the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether ChoiceOne has the intent to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. In analyzing an issuer's financial condition, management may consider whether the securities are issued by the federal government or its agencies, or U.S. Government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether ChoiceOne intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If ChoiceOne intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. If a security is determined to be other-than-temporarily impaired, but ChoiceOne does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, remaining purchase accounting adjustments, and an allowance for loan losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis. Interest income on loans is reported on the interest method and includes amortization of net deferred loan fees and costs over the estimated loan term. Interest on loans is accrued based upon the principal balance outstanding. The accrual of interest is discontinued at the time at which loans are 90 days past due unless the loan is secured by sufficient collateral and is in the process of collection. Past due status is based on the contractual terms of the loan. Loans are placed into nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. Interest accrued but not received is reversed against interest income when the loans are placed into nonaccrual status. Interest received on such loans is applied to principal until qualifying for return to accrual. Loans are returned to accrual basis when all the principal and interest amounts contractually due are brought current and future payment is reasonably assured. No allowance for loan loss is recorded for loans acquired in a business combination unless losses are incurred subsequent to the acquisition date. Acquired loans are considered purchased credit impaired (“PCI”) if as of the acquisition date, management determines the loan has evidence of deterioration in credit quality since origination and it is probable at acquisition the Company will be unable to collect all contractually required payments. The discount related to credit quality for PCI loans is recorded as an adjustment to the loan balance as of the acquisition date and is not accreted into income. Management subsequently estimates expected cash flows on an individual loan basis. If the present value of expected cash flows is less than a loan's carrying amount, an allowance for loan loss is recorded through the provision for loan losses. If the present value of expected cash flows is greater than the carrying amount, the excess may be reclassified to an accretable difference and recognized into income over the loan's remaining life. For non-PCI loans, the difference between acquisition date fair value and expected cash flows is accreted into income over a pool's expected life using the level yield method. 43 Table of Contents Loans to Other Financial Institutions Loans to other financial institutions are made for the purpose of providing a warehouse line of credit to facilitate funding of residential mortgage loan originations at other financial institutions. The loans are short-term in nature and are designed to provide funding for the time period between the loan origination and its subsequent sale in the secondary market. Loans to other financial institutions earn a share of interest income, determined by the contract, from when the loan is funded to when the loan is sold on the secondary market.  Loans to other financial institutions are excluded from Note 3. Loans to other financial institutions were suspended at the end of the third quarter 2022 to preserve liquidity for loan growth. Allowance for Loan Losses The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan losses is increased by the provision for loan losses and decreased by loans charged off less any recoveries of charged off loans. Management estimates the allowance for loan losses balance required based on past loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance for loan losses when management believes that collection of a loan balance is not possible. The allowance for loan losses consists of general and specific components. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful.  The general component of management's estimate of the allowance for loan losses covers non-impaired loans and is based on historical loss experience adjusted for current factors. Management's adjustment for current factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, experience and ability of lending staff, national and economic trends and conditions, industry conditions, trends in real estate values, and other conditions. A loan is impaired when full payment under the loan terms is not expected. Troubled debt restructuring of loans is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule. All modified loans are evaluated to determine whether the loans should be reported as Troubled Debt Restructurings ("TDR"). A loan is a TDR when the Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower by modifying a loan. To make this determination, the Bank must determine whether (a) the borrower is experiencing financial difficulties and (b) the Bank granted the borrower a concession. This determination requires consideration of all facts and circumstances surrounding the modification. An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically mean the borrower is experiencing financial difficulties. Commercial loans are evaluated for impairment on an individual loan basis. If a loan is considered impaired or if a loan has been classified as a TDR, a portion of the allowance for loan losses is allocated to the loan so that it is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller-balance homogeneous loans such as consumer and residential real estate mortgage loans are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Land is carried at cost. Land improvements are depreciated using the straight-line method with useful lives ranging from 7 to 15 years. Building and related components are depreciated using the straight-line method with useful lives ranging from 5 to 39 years. Leasehold improvements are depreciated over the shorter of the estimated life or the lease term. Furniture and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7 years. Fixed assets are periodically reviewed for impairment. If impaired, the assets are recorded at fair value. Other Real Estate Owned Real estate properties acquired in the collection of a loan are initially recorded at the lower of the Bank’s basis in the loans or fair value at acquisition establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan is accounted for as a loan loss. After acquisition, a valuation allowance reduces the reported amount to the lower of the initial amount or fair value less costs to sell. Expenses to repair or maintain properties are included within other noninterest expenses. Gains and losses upon disposition and changes in the valuation allowance are reported net within noninterest income. Bank Owned Life Insurance Bank owned life insurance policies are stated at the current cash surrender value of the policy, or the policy death proceeds less any obligation to provide a death benefit to an insured’s beneficiaries if that value is less than the cash surrender value. Increases in the asset value are recorded as earnings in other income. Loan Servicing Rights Loan servicing rights represent the allocated value of servicing rights on loans sold with servicing retained. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Servicing rights are initially recorded at estimated fair value and fair value is determined using prices for similar assets with similar characteristics when available or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance. Goodwill and Intangible Assets Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of the acquired tangible assets and liabilities and identifiable intangible assets. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. 44 Table of Contents Core Deposit Intangible Core deposit intangible represents the value of the acquired customer core deposit bases and is included as an asset on the consolidated balance sheets. The core deposit intangible has an estimated finite life, is amortized on an accelerated basis over a 120 month period and is subject to periodic impairment evaluation. Loan Commitments and Related Financial Instruments Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet financing needs of customers. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Employee Benefit Plans ChoiceOne’s 401 (k) plan allows participants to make contributions to their individual accounts under the plan in amounts up to the IRS maximum. Employer matching contributions from ChoiceOne to its 401 (k) plan are discretionary. Income Taxes Income tax expense is the sum of the current year income tax due and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. Earnings Per Share Basic earnings per common share ("EPS") is based on weighted-average common shares outstanding. Diluted EPS assumes issuance of any dilutive potential common shares issuable under stock options or restricted stock units granted. Comprehensive Income Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss includes unrealized gains and losses on securities available for sale and changes in the funded status of derivative instruments, net of tax, which are also recognized as a separate component of shareholders’ equity. Accumulated other comprehensive income was as follows: (Dollars in thousands) As of December 31, 2022 2021 Unrealized gain (loss) on available-for-sale securities $ ( 89,041 ) $ ( 3,261 ) Unrealized gain (loss) on held to maturity securities ( 3,053 ) — Unrealized gain (loss) on derivative instruments 1,212 Tax effect 19,085 685 Accumulated other comprehensive income (loss) $ ( 71,797 ) $ ( 2,576 ) L oss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe that there are any such matters that may have a material effect on the financial statements as of December 31, 2022 . Cash Restrictions Cash on hand or on deposit with the Federal Reserve Bank was 

$ 0 at both December 31, 2022 and 2021, as the Federal Reserve revoked the reserve requirement due to the COVID- 19 pandemic. Leases Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. 45 Table of Contents Stock-Based Compensation The Company values share-based stock option awards granted using the Black-Scholes option-pricing model. The Company recognizes compensation expense for its awards on a straight-line basis over the requisite service period for the entire award (straight-line attribution method), ensuring that the amount of compensation cost recognized at any date at least equals the portion of the grant-date fair value of the award that is vested at that time. Compensation costs related to stock options granted are disclosed in Note 15. ChoiceOne has granted restricted stock units to a select group of employees under the Stock Incentive Plan of 2012. Each unit, once vested, is settled by delivery of one share of ChoiceOne common stock. Dividend Restrictions Banking regulations require the maintenance of certain capital levels and may limit the amount of dividends that may be paid by the Bank to ChoiceOne (see Note 21 ). Fair Value of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions, which are more fully documented in Note 18 to the consolidated financial statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Derivatives At the inception of a derivative contract, ChoiceOne designates the derivative as one of two types based on our intention and belief as to the likely effectiveness of the hedge. These two types are ( 1 ) a hedge of changes in fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), and ( 2 ) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge"). For a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same period during which the hedged transaction affects the earnings. The changes in fair value of derivatives that do not qualify for hedge accounting are reported in current earnings, as noninterest income. Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Cash flows on hedges are classified in the cash flow statement in the same line item as the cash flows of the item being hedged. The initial fair value of hedge components excluded from the assessment of effectiveness are recognized in the statement of financial condition under a systematic and rational method over the life of the hedging relationship and are presented in the same income statement line item as the earnings effect of the hedged item. Any difference between the change in the fair value of the hedge components excluded from the assessment of effectiveness and the amounts recognized in earnings are recorded as a component of other comprehensive income. ChoiceOne discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in fair values or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or the treatment of the derivative as a hedge is no longer appropriate or intended. When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods in which the hedged transactions will affect earnings. ChoiceOne is exposed to losses if a counterparty fails to make its payments under a contract in which the Company is in the net receiving position. ChoiceOne anticipates that the counterparties will be able to fully satisfy their obligation under the agreements. All the contracts to which we are a party have cash flows that settle monthly or semiannually. Operating Segments While ChoiceOne’s management monitors the revenue streams of various products and services for the Bank and the Insurance Agency, operations and financial performance are evaluated on a company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated into one reportable operating segment. Recent Accounting Pronouncements The FASB issued ASU No. 2016 - 13 , Financial Instruments — Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments . This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current generally accepted accounting principles ("GAAP") with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance attempts to reflect an entity’s current estimate of all expected credit losses and broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity may apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for loan losses, under the new rules, the inputs used to record the allowance for loan losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. Additionally, credit losses on available-for-sale debt securities will have to be presented as an allowance rather than as a write-down. This ASU is effective for fiscal years beginning after December 15, 2022, and for interim periods within those years for companies considered smaller reporting filers with the Securities and Exchange Commission.  ChoiceOne adopted ASU 2016 - 13 current expected credit loss ("CECL") on January 1, 2023. Due to the current economic environment, the nature of the new calculation, and purchase accounting with our recent mergers, we anticipate an increase in our current allowance for loan losses of between

$ 6.5 million and

$ 7.0 million, which will result in an expected allowance for loan losses to total loan coverage ratio between 1.15 % and 1.25 % on January 1, 2023. Approximately 20 % to 25 % of this increase is related to the migration of purchased loans into the portfolio assessed by the CECL calculation.  ChoiceOne will also record a liability for expected credit losses on unfunded loans and other commitments of between

$ 2.5 million to

$ 3.0 million related to the adoption of CECL.  These unfunded loans and other commitments are open credit lines with current customers and loans approved by ChoiceOne but not yet funded.  The increase in the reserve and the cost of the liability will result in a decrease in retained earnings account on our Consolidated Balance Sheet equal to the after-tax impact, with the tax impact portion being recorded in deferred taxes in our Consolidated balance Sheet in accordance with FASB guidance. 46 Table of Contents ChoiceOne has elected the discounted cash flow methodology for all loan types, and will be utilizing third party software to store and measure historical loss experience.  ChoiceOne has worked with a third party advisory group to develop loss drivers which we believe have a strong correlation to our historical loss trends.  The loss drivers ChoiceOne has elected are unemployment and GDP growth which have readily available 12 month forecast data from the FOMC. Reclassifications Certain amounts presented in prior year consolidated financial statements have been reclassified to conform to the 2022 presentation. Note 2 – Securities On January 1, 2022, ChoiceOne reassessed and transferred, at fair value, $ 428.4 million of securities classified as available for sale to the held to maturity classification.  The net unrealized after-tax loss of $ 2.7 million as of the transfer date remained in accumulated other comprehensive income to be amortized over the remaining life of the securities, offsetting the related amortization of discount or premium on the transferred securities. No gains or losses were recognized at the time of the transfer.  The remaining net unamortized unrealized loss on transferred securities included in accumulated other comprehensive income was $ 2.4 million after tax as of December 31, 2022. The fair value of equity securities and the related gross unrealized gains and losses recognized in noninterest income at December 31 were as follows: December 31, 2022 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity securities $ 8,982 $ 305 $ ( 721 ) $ 8,566 December 31, 2021 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity securities $ 7,953 $ 665 $ ( 126 ) $ 8,492 The fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows: December 31, 2022 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Available for S Cost Gains Losses Value U.S. Government and federal agency $ - $ - $ - $ - U.S. Treasury notes and bonds 90,810 - ( 12,606 ) 78,204 State and municipal 277,489 - ( 47,551 ) 229,938 Mortgage-backed 236,703 - ( 28,140 ) 208,563 Corporate 757 - ( 46 ) 711 Asset-backed securities 13,031 - ( 698 ) 12,333 Total $ 618,790 $ - $ ( 89,041 ) $ 529,749 December 31, 2021 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Available for S Cost Gains Losses Value U.S. Government and federal agency $ 2,001 $ 7 $ - $ 2,008 U.S. Treasury notes and bonds 93,267 23 ( 1,311 ) 91,979 State and municipal 528,252 10,704 ( 4,109 ) 534,847 Mortgage-backed 441,383 781 ( 9,049 ) 433,115 Corporate 20,856 19 ( 233 ) 20,642 Asset-backed securities 16,387 - ( 93 ) 16,294 Total $ 1,102,146 $ 11,534 $ ( 14,795 ) $ 1,098,885 The fair value of securities held to maturity and the related gross unrealized gains and losses were as follows: December 31, 2022 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Held to Maturity: Cost Gains Losses Value U.S. Government and federal agency $ 2,966 $ - $ ( 421 ) $ 2,545 State and municipal 201,890 1 ( 39,355 ) 162,536 Mortgage-backed 200,473 - ( 29,868 ) 170,605 Corporate 19,603 - ( 2,285 ) 17,318 Asset-backed securities 974 - ( 77 ) 897 Total $ 425,906 $ 1 $ ( 72,006 ) $ 353,901 There were no securities held to maturity at December 31, 2021. 47 Table of Contents Information regarding sales of securities available for sale for the year ended December 31 follows: (Dollars in thousands) 2022 2021 2020 Proceeds from sales of securities $ 47,167 $ 29,742 $ 121,942 Gross realized gains - - 1,308 Gross realized losses ( 809 ) ( 40 ) - Contractual maturities of securities available for sale at December 31, 2022 were as follows: (Dollars in thousands) Amortized Fair Cost Value Due within one year $ 6,035 $ 5,972 Due after one year through five years 17,069 16,176 Due after five years through ten years 149,578 130,215 Due after ten years 209,405 168,823 Total debt securities 382,087 321,186 Mortgage-backed securities 236,703 208,563 Total $ 618,790 $ 529,749 Contractual maturities of securities held to maturity at December 31, 2022 were as follows: (Dollars in thousands) Amortized Fair Cost Value Due within one year $ 2,417 $ 2,389 Due after one year through five years 6,262 5,834 Due after five years through ten years 109,263 92,553 Due after ten years 107,491 82,520 Total debt securities 225,433 183,296 Mortgage-backed securities 200,473 170,605 Total $ 425,906 $ 353,901 Certain securities were pledged as collateral for participation in a program that provided Community Reinvestment Act credits. The carrying amount of the securities pledged as collateral at December 31 was as follows: (Dollars in thousands) 2022 2021 Securities pledged for Community Reinvestment Act credits $ 250 $ 273 Securities with unrealized losses at year-end 2022 and 2021 , aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows: 2022 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Available for S Value Losses Value Losses Value Losses U.S. Government and federal agency $ - $ - $ - $ - $ - $ - U.S. Treasury notes and bonds - - 78,204 12,606 78,204 12,606 State and municipal 89,158 12,612 140,390 34,939 229,548 47,551 Mortgage-backed 63,249 3,093 144,318 25,047 207,567 28,140 Corporate 711 46 - - 711 46 Asset-backed securities - - 12,333 698 12,333 698 Total temporarily impaired $ 153,118 $ 15,751 $ 375,245 $ 73,290 $ 528,363 $ 89,041 2021 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Available for S Value Losses Value Losses Value Losses U.S. Government and federal agency $ - $ - $ - $ - $ - $ - U.S. Treasury notes and bonds 89,958 1,311 - - 89,958 1,311 State and municipal 130,001 3,253 15,237 856 145,238 4,109 Mortgage-backed 261,560 5,709 86,974 3,340 348,534 9,049 Corporate 17,369 233 - - 17,369 233 Asset-backed securities 16,294 93 - - 16,294 93 Total temporarily impaired $ 515,182 $ 10,599 $ 102,211 $ 4,196 $ 617,393 $ 14,795 48 Table of Contents 2022 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Held to Maturity: Value Losses Value Losses Value Losses U.S. Government and federal agency $ - $ - $ 2,545 $ 421 $ 2,545 $ 421 State and municipal 13,457 1,899 149,016 37,456 162,473 39,355 Mortgage-backed 25,582 822 145,024 29,046 170,606 29,868 Corporate 5,296 603 10,771 1,682 16,067 2,285 Asset-backed securities - - 897 77 897 77 Total temporarily impaired $ 44,335 $ 3,324 $ 308,253 $ 68,682 $ 352,588 $ 72,006 There were no securities classified as held to maturity as of December 31, 2021. ChoiceOne evaluates all securities on a quarterly basis to determine whether unrealized losses are temporary or other than temporary. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of ChoiceOne to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value of amortized cost basis. Management believed that unrealized losses as of December 31, 2022 were temporary in nature and were caused primarily by changes in interest rates, increased credit spreads, and reduced market liquidity and were not caused by the credit status of the issuer. No other than temporary impairments were recorded in 2022 or 2021. Following is information regarding unrealized gains and losses on equity securities for the years ending December 31: 2022 2021 2020 Net gains and losses recognized during the period $ ( 955 ) $ 479 $ ( 155 ) L Net gains and losses recognized during the period on securities sold - — — Unrealized gains and losses recognized during the reporting period on securities still held at the reporting date $ ( 955 ) $ 479 $ ( 155 ) At December 31, 2022 , there were 611 securities with an unrealized loss, compared to 247 securities with an unrealized loss as of December 31, 2021 . Unrealized losses on corporate and municipal bonds have not been recognized into income because the issuers’ bonds are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity. The majority of unrealized losses at December 31, 2022, are related to U.S. Treasury notes and bonds, State and municipal bonds and mortgage backed.  U.S. Treasury notes are guaranteed by the U.S. government and of which 100 % are rated AA or better. State and municipal bonds are backed by the taxing authority of the bond issuer or the revenues from the bond. On December 31, 2022, 86 % of state and municipal bonds held are rated AA or better.  Agency issued securities are generally guaranteed by a U.S. government agency, such as the government national mortgage association which give 100 % of these AA ratings or better. Of the mortgage-backed securities held on December 31, 2022, 38 % were issued by US government sponsored entities and agencies, and rated AA, 31 % are AAA rated private issue, and 13 % are unrated privately issued mortgage-backed securities with structured credit enhancement. Note 3 – Loans and Allowance for Loan Losses The Bank’s loan portfolio as of December 31 was as follows: (Dollars in thousands) 2022 2021 Agricultural $ 64,159 $ 64,819 Commercial and industrial 210,210 203,024 Consumer 39,808 35,174 Real estate - commercial 630,953 525,884 Real estate - construction 14,736 19,066 Real estate - residential 229,916 168,881 Loans, gross $ 1,189,782 $ 1,016,848 Allowance for Loan Losses ( 7,619 ) ( 7,688 ) Loans, net $ 1,182,163 $ 1,009,160 ChoiceOne manages its credit risk through the use of its loan policy and its loan approval process and by monitoring of loan credit performance. The loan approval process for commercial loans involves individual and group approval authorities. Individual authority levels are based on the experience of the lender. Group authority approval levels can consist of an internal loan committee that includes the Bank’s President or Senior Lender and other loan officers for loans that exceed individual approval levels, or a loan committee of the Board of Directors for larger commercial loans. Most consumer loans are approved by individual loan officers based on standardized underwriting criteria, with larger consumer loans subject to approval by the internal loan committee. Ongoing credit review of commercial loans is the responsibility of the loan officers. ChoiceOne’s internal credit committee meets at least monthly and reviews loans with payment issues and loans with a risk rating of 6, 7, or 8. Risk ratings of commercial loans are reviewed periodically and adjusted if needed. ChoiceOne’s consumer loan portfolio is primarily monitored on an exception basis. Loans where payments are past due are turned over to the applicable Bank’s collection department, which works with the borrower to bring payments current or take other actions when necessary. In addition to internal reviews of credit performance, ChoiceOne contracts with a third party for independent loan review that monitors the loan approval process and the credit quality of the loan portfolio. 49 Table of Contents The table below details the outstanding balances of the County Bank Corp. acquired portfolio and the acquisition fair value adjustments at acquisition date: (Dollars in thousands) Acquired Acquired Acquired Impaired Non-impaired Total Loans acquired - contractual payments $ 7,729 $ 387,394 $ 395,123 Nonaccretable difference ( 2,928 ) - ( 2,928 ) Expected cash flows 4,801 387,394 392,195 Accretable yield ( 185 ) ( 1,894 ) ( 2,079 ) Carrying balance at acquisition date $ 4,616 $ 385,500 $ 390,116 The table below presents a roll-forward of the accretable yield on County Bank Corp. acquired loans for the year ended December 31, 2022: (Dollars in thousands) Acquired Acquired Acquired Impaired Non-impaired Total Balance, January 1, 2019 $ - $ - $ - Merger with County Bank Corp. on October 1, 2019 185 1,894 2,079 Accretion October 1, 2019 through December 31, 2019 - ( 75 ) -75 Balance January 1, 2020 185 1,819 2,004 Accretion January 1, 2020 through December 31, 2020 ( 50 ) ( 295 ) ( 345 ) Balance January 1, 2021 135 1,524 1,659 Accretion January 1, 2021 through December 31, 2021 ( 247 ) ( 348 ) ( 595 ) Transfer from non-accretable to accretable yield 400 - 400 Balance January 1, 2022 288 1,176 1,464 Transfer from non-accretable to accretable yield 2,192 - 2,192 Accretion January 1, 2022 through December 31, 2022 ( 553 ) ( 98 ) ( 651 ) Balance, December 31, 2022 $ 1,927 $ 1,078 $ 3,005 The table below details the outstanding balances of the Community Shores Bank Corporation acquired loan portfolio and the acquisition fair value adjustments at acquisition date: (Dollars in thousands) Acquired Acquired Acquired Impaired Non-impaired Total Loans acquired - contractual payments $ 20,491 $ 158,495 $ 178,986 Nonaccretable difference ( 2,719 ) - ( 2,719 ) Expected cash flows 17,772 158,495 176,267 Accretable yield ( 869 ) ( 596 ) ( 1,465 ) Carrying balance at acquisition date $ 16,903 $ 157,899 $ 174,802 The table below presents a roll-forward of the accretable yield on Community Shores Bank Corporation acquired loans for the year ended December 31, 2022: (Dollars in thousands) Acquired Acquired Acquired Impaired Non-impaired Total Balance January 1, 2020 $ - $ - $ - Merger with Community Shores Bank Corporation on July 1, 2020 869 596 1,465 Accretion July 1, 2020 through December 31, 2020 ( 26 ) ( 141 ) ( 167 ) Balance, January 1, 2021 843 455 1,298 Accretion January 1, 2021 through December 31, 2021 ( 321 ) ( 258 ) ( 579 ) Balance January 1, 2022 522 197 719 Transfer from non-accretable to accretable yield 1,086 - 1,086 Accretion January 1, 2022 through December 31, 2022 ( 993 ) ( 197 ) ( 1,190 ) Balance, December 31, 2022 $ 615 $ - $ 615 50 Table of Contents Activity in the allowance for loan losses and balances in the loan portfolio was as follows: Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses Year Ended December 31, 2022 Beginning balance $ 448 $ 1,454 $ 290 $ 3,705 $ 110 $ 671 $ 1,010 $ 7,688 Charge-offs — ( 177 ) ( 496 ) — — — — ( 673 ) Recoveries — 143 206 3 — 2 — 354 Provision ( 304 ) ( 59 ) 310 1,114 ( 47 ) 233 ( 997 ) 250 Ending balance $ 144 $ 1,361 $ 310 $ 4,822 $ 63 $ 906 $ 13 $ 7,619 Individually evaluated for impairment $ 2 $ 14 $ 1 $ 5 $ — $ 131 $ — $ 153 Collectively evaluated for impairment $ 142 $ 1,347 $ 309 $ 4,817 $ 63 $ 775 $ 13 $ 7,466 Loans December 31, 2022 Individually evaluated for impairment $ 23 $ 177 $ 7 $ 165 $ — $ 2,474 $ 2,846 Collectively evaluated for impairment 64,136 206,074 39,793 622,131 14,736 225,792 1,172,662 Acquired with deteriorated credit quality — 3,959 8 8,657 — 1,650 14,274 Ending balance $ 64,159 $ 210,210 $ 39,808 $ 630,953 $ 14,736 $ 229,916 $ 1,189,782 Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses Year Ended December 31, 2021 Beginning balance $ 257 $ 1,327 $ 317 $ 4,178 $ 97 $ 1,300 $ 117 $ 7,593 Charge-offs — ( 195 ) ( 370 ) ( 111 ) — — — ( 676 ) Recoveries — 86 214 48 — 7 — 355 Provision 191 236 129 ( 410 ) 13 ( 636 ) 893 416 Ending balance $ 448 $ 1,454 $ 290 $ 3,705 $ 110 $ 671 $ 1,010 $ 7,688 Individually evaluated for impairment $ 251 $ 95 $ 2 $ 9 $ — $ 146 $ — $ 503 Collectively evaluated for impairment $ 197 $ 1,359 $ 288 $ 3,696 $ 110 $ 525 $ 1,010 $ 7,185 Loans December 31, 2021 Individually evaluated for impairment $ 2,616 $ 339 $ 14 $ 273 $ — $ 2,191 $ 5,433 Collectively evaluated for impairment 62,203 197,656 35,148 515,528 19,066 164,647 994,248 Acquired with deteriorated credit quality — 5,029 12 10,083 — 2,043 17,167 Ending balance $ 64,819 $ 203,024 $ 35,174 $ 525,884 $ 19,066 $ 168,881 $ 1,016,848 Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses Year Ended December 31, 2020 Beginning balance $ 471 $ 655 $ 270 $ 1,663 $ 76 $ 640 $ 282 $ 4,057 Charge-offs ( 15 ) ( 148 ) ( 329 ) ( 254 ) - ( 8 ) - ( 754 ) Recoveries - 57 204 10 - 19 - 290 Provision ( 199 ) 763 172 2,759 21 649 ( 165 ) 4,000 Ending balance $ 257 $ 1,327 $ 317 $ 4,178 $ 97 $ 1,300 $ 117 $ 7,593 Individually evaluated for impairment $ - $ 19 $ 1 $ 157 $ - $ 254 $ - $ 431 Collectively evaluated for impairment $ 257 $ 1,308 $ 316 $ 4,021 $ 97 $ 1,046 $ 117 $ 7,162 Loans December 31, 2020 Individually evaluated for impairment $ 348 $ 1,663 $ 8 $ 3,032 $ 80 $ 2,720 $ 7,851 Collectively evaluated for impairment 53,387 295,154 33,982 453,681 16,559 186,982 1,039,745 Acquired with deteriorated credit quality - 6,710 24 12,534 - 2,804 22,072 Ending balance $ 53,735 $ 303,527 $ 34,014 $ 469,247 $ 16,639 $ 192,506 $ 1,069,668 51 Table of Contents The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking ( 1 ) the risk ratings of business loans, ( 2 ) the level of classified business loans, and ( 3 ) delinquent and nonperforming consumer loans. Business loans are risk rated on a scale of 1 to 9. A description of the characteristics of the ratings follows: Risk Rating 1 through 5 or pass: These loans are considered pass credits. They exhibit acceptable credit risk and demonstrate the ability to repay the loan from normal business operations. Risk rating 6 or special menti Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions that have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that ChoiceOne Bank will sustain some future loss if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual assets classified as substandard. Loans falling into this category should have clear action plans and timelines with benchmarks to determine which direction the relationship will move. Risk rating 7 or substandar Loans and other credit extensions graded “7” have all the weaknesses inherent in those graded “6”, with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. Loans in this classification should be evaluated for non-accrual status. All nonaccrual commercial and Retail loans must be at a minimum graded a risk code “7”. Risk rating 8 or doubtfu Loans and other credit extensions bearing this grade have been determined to have the extreme probability of some loss, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral. Risk rating 9 or l Loans in this classification are considered uncollectible and cannot be justified as a viable asset of ChoiceOne Bank. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future. Information regarding the Bank’s credit exposure as of December 31 was as follows: Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category (Dollars in thousands) Agricultural Commercial and Industrial Commercial Real Estate December 31, December 31, December 31, December 31, December 31, December 31, 2022 2021 2022 2021 2022 2021 Pass $ 63,867 $ 61,864 $ 209,700 $ 201,202 $ 624,555 $ 519,537 Special Mention 289 339 400 300 2,048 778 Substandard 3 2,616 110 1,266 4,350 5,569 Doubtful - - - 256 - - Loss - - - - - - $ 64,159 $ 64,819 $ 210,210 $ 203,024 $ 630,953 $ 525,884 Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity (Dollars in thousands) Consumer Construction Real Estate Residential Real Estate December 31, December 31, December 31, December 31, December 31, December 31, 2022 2021 2022 2021 2022 2021 Performing $ 39,808 $ 35,174 $ 14,736 $ 19,066 $ 228,653 $ 168,031 Nonperforming - - - - - - Nonaccrual - - - - 1,263 850 $ 39,808 $ 35,174 $ 14,736 $ 19,066 $ 229,916 $ 168,881 Included within the loan categories above were loans in the process of foreclosure. As of December 31, 2022 and 2021 , loans in the process of foreclosure totaled $ 1.1 million an d $ 813,000 , respectively. Loans are classified as performing when they are current as to principal and interest payments or are past due on payments less than 90 days. Loans are classified as nonperforming when they are past due 90 days or more as to principal and interest payments or are considered a troubled debt restructuring. The following schedule provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the years ended December 31, 2022 and 2021: Year Ended December 31, 2022 Year Ended December 31, 2021 Year Ended December 31, 2020 Pre- Post- Pre- Post- Pre- Post- Modification Modification Modification Modification Modification Modification Outstanding Outstanding Outstanding Outstanding Outstanding Outstanding (Dollars in thousands) Number of Recorded Recorded Number of Recorded Recorded Number of Recorded Recorded Loans Investment Investment Loans Investment Investment Loans Investment Investment Agricultural - $ - $ - 5 $ 1,803 $ 1,803 5 $ 1,803 $ 1,803 Commercial and Industrial 1 15 15 4 270 270 4 270 270 Commercial Real Estate - - - 2 619 619 2 619 619 Total 1 $ 15 $ 15 11 $ 2,692 $ 2,692 11 $ 2,692 $ 2,692 52 Table of Contents There were no TDRs as of December 31, 2022 where the borrower was past due with respect to principal and interest for 30 days or more during the year ended December 31, 2022. The following schedule provides information on TDRs as of December 31, 2021 where the borrower was past due with respect to principal and/or interest for 30 days or more during the year ended December 31, 2021 that had been modified during the year prior to the defaul Year Ended Year Ended Year Ended December 31, 2022 December 31, 2021 December 31, 2020 (Dollars in thousands) Number Recorded Number Recorded Number Recorded of Loans Investment of Loans Investment of Loans Investment Commercial Real Estate - - 1 185 - - Total - $ - 1 $ 185 - $ - Impaired loans by loan category as of December 31 were as follows: Unpaid Average Interest (Dollars in thousands) Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized December 31, 2022 With no related allowance recorded Agricultural $ - $ - $ - $ 250 $ - Commercial and industrial - - - 18 - Consumer - - - - - Construction real estate - - - - - Commercial real estate - - - 19 - Residential real estate 550 595 - 231 1 Subtotal 550 595 - 518 1 With an allowance recorded Agricultural 23 27 2 913 2 Commercial and industrial 177 177 14 209 13 Consumer 7 7 1 14 1 Construction real estate - - - - - Commercial real estate 165 165 5 158 13 Residential real estate 1,924 1,954 131 1,897 93 Subtotal 2,296 2,330 153 3,191 122 Total Agricultural 23 27 2 1,163 2 Commercial and industrial 177 177 14 227 13 Consumer 7 7 1 14 1 Construction real estate - - - - - Commercial real estate 165 165 5 177 13 Residential real estate 2,474 2,549 131 2,128 94 Total $ 2,846 $ 2,925 $ 153 $ 3,709 $ 123 Unpaid Average Interest (Dollars in thousands) Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized December 31, 2021 With no related allowance recorded Agricultural $ 314 $ 428 $ - $ 598 $ - Commercial and industrial - - - 596 - Consumer - - - - - Construction real estate - - - 16 - Commercial real estate 94 94 - 1,117 5 Residential real estate 164 172 - 228 - Subtotal 572 694 - 2,555 5 With an allowance recorded Agricultural 2,302 2,302 251 1,873 139 Commercial and industrial 339 363 95 226 5 Consumer 14 15 2 4 - Construction real estate - - - - - Commercial real estate 179 179 9 456 10 Residential real estate 2,027 2,084 146 2,177 64 Subtotal 4,861 4,943 503 4,736 218 Total Agricultural 2,616 2,730 251 2,471 139 Commercial and industrial 339 363 95 822 5 Consumer 14 15 2 4 - Construction real estate - - - 16 - Commercial real estate 273 273 9 1,573 15 Residential real estate 2,191 2,256 146 2,405 64 Total $ 5,433 $ 5,637 $ 503 $ 7,291 $ 223 53 Table of Contents Unpaid Average Interest (Dollars in thousands) Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized December 31, 2020 With no related allowance recorded Agricultural $ 348 $ 434 $ - $ 329 $ - Commercial and industrial 1,516 1,629 - 464 2 Consumer - - - 1 - Construction real estate 80 80 - 16 - Commercial real estate 1,852 2,664 - 1,495 14 Residential real estate 162 162 - 99 3 Subtotal 3,958 4,969 - 2,404 19 With an allowance recorded Agricultural - - - 152 - Commercial and industrial 147 147 19 111 12 Consumer 8 8 1 16 - Construction real estate - - - - - Commercial real estate 1,180 1,180 157 897 35 Residential real estate 2,558 2,651 254 2,330 87 Subtotal 3,893 3,986 431 3,506 134 Total Agricultural 348 434 - 481 - Commercial and industrial 1,663 1,776 19 575 14 Consumer 8 8 1 17 - Construction real estate 80 80 - 16 - Commercial real estate 3,032 3,844 157 2,392 49 Residential real estate 2,720 2,813 254 2,429 90 Total $ 7,851 $ 8,955 $ 431 $ 5,910 $ 153 An aging analysis of loans by loan category as of December 31 follows: Loans Loans Loans Past Due Loans Past Due Past Due Greater 90 Days Past (Dollars in thousands) 30 to 59 60 to 89 Than 90 Loans Not Total Due and Days (1) Days (1) Days (1) Total (1) Past Due Loans Accruing December 31, 2022 Agricultural $ - $ - $ - $ - $ 64,159 $ 64,159 $ - Commercial and industrial - 171 - 171 210,039 210,210 - Consumer 39 7 - 46 39,762 39,808 - Commercial real estate - - - - 630,953 630,953 - Construction real estate - - - - 14,736 14,736 - Residential real estate 682 - 842 1,524 228,392 229,916 - $ 721 $ 178 $ 842 $ 1,741 $ 1,188,041 $ 1,189,782 $ - December 31, 2021 Agricultural $ - $ - $ - $ - $ 64,819 $ 64,819 $ - Commercial and industrial 21 - 88 109 202,915 203,024 - Consumer 70 15 - 85 35,089 35,174 - Commercial real estate 422 13 279 714 525,170 525,884 - Construction real estate 1,149 1,235 - 2,384 16,682 19,066 - Residential real estate 1,489 306 454 2,249 166,632 168,881 - $ 3,151 $ 1,569 $ 821 $ 5,541 $ 1,011,307 $ 1,016,848 $ - ( 1 ) Includes nonaccrual loans Nonaccrual loans by loan category as of December 31 as follows: (Dollars in thousands) 2022 2021 Agricultural $ - $ 313 Commercial and industrial - 285 Consumer - - Commercial real estate - 279 Construction real estate - - Residential real estate 1,263 850 $ 1,263 $ 1,727 54 Table of Contents Note 4 – Mortgage Banking Activity in secondary market loans during the year was as follows: (Dollars in thousands) 2022 2021 2020 Loans originated for resale, net of principal payments $ 71,829 $ 197,387 $ 326,286 Proceeds from loan sales 77,681 205,398 325,306 Net gains on sales of loans held for sale 2,343 6,776 11,313 Loan servicing fees, net of amortization 175 ( 163 ) ( 129 ) Net gains on sales of loans held for sale include capitalization of loan servicing rights. Loans serviced for others are not reported as assets in the accompanying consolidated balance sheets. The unpaid principal balances of these loans were $ 488.6 million and $ 481.9 million at December 31, 2022 and 2021 , respectively. The Bank maintains custodial escrow balances in connection with these serviced loans; however, such escrows were immaterial at December 31, 2022 and 2021 . Activity for loan servicing rights (included in other assets) was as follows: (Dollars in thousands) 2022 2021 2020 Balance, beginning of year $ 4,667 $ 3,967 $ 2,131 Capitalized 1,007 1,961 3,554 Amortization ( 1,352 ) ( 1,635 ) ( 1,344 ) Market valuation allowance change - 374 ( 374 ) Balance, end of year $ 4,322 $ 4,667 $ 3,967 The fair value of loan servicing rights was $ 5,855,000 and $ 5,521,000 as of December 31, 2022 and 2021, respectively. Valuation allowances of $ 0 were recorded at December 31, 2022 and December 31, 2021, respectively. The fair value of the Bank’s servicing rights at December 31, 2022 was determined using a discount rate of 8.00 % and prepayment speeds ranging from 5.2 % to 6.7 %.  The fair value of the Bank’s servicing rights at December 31, 2021 was determined using a discount rate of 8.00 % and prepayment speeds ranging from 5 % to 27 %. Note 5 – Premises and Equipment As of December 31, premises and equipment consisted of the followin (Dollars in thousands) 2022 2021 Land and land improvements $ 8,327 $ 8,888 Leasehold improvements 81 69 Buildings 26,823 26,091 Furniture and equipment 11,208 11,145 Total cost 46,439 46,193 Accumulated depreciation ( 18,207 ) ( 16,313 ) Premises and equipment, net $ 28,232 $ 29,880 Depreciation expense was $ 2.7 million, and $ 2.6 million in 2022 and 2021 , respectively. The Bank leases certain branch properties and automated-teller machine locations in its normal course of business. Rent expense totaled $ 211,000 , and $ 153,000 for 2022 and 2021 , respectively. The associated right of use assets are included in the applicable categories of fixed assets in the above table and the net book value of such assets approximates the operating lease liability. Rent commitments under non-cancelable operating leases were as follows, before considering renewal options that generally are present (dollars in thousands): 2023 $ 322 2024 232 2025 227 2026 166 2027 65 Total undiscounted cash flows 1,012 Less discount 119 Total operating lease liabilities $ 893 55 Table of Contents Note 6 - Goodwill and Acquired Intangible Assets Goodwill The change in the balance for goodwill was as follows: (Dollars in thousands) 2022 2021 Balance, beginning of year $ 59,946 $ 60,506 Goodwill adjustment from merger with Community Shores Bank Corporation - ( 560 ) Balance, end of year $ 59,946 $ 59,946 Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value.  Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required. The Company acquired Valley Ridge Financial Corp. in 2006, County in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $ 13.7 million, $ 38.9 million and $ 7.3 million, respectively. We conducted an annual assessment of goodwill as of June 30, 2022 and no impairment was identified. The Company used a qualitative assessment to determine goodwill was not impaired as of June 30, 2022. Additionally, the Company engaged a third party valuation firm to assist in performing a quantitative analysis of goodwill as of November 30, 2022 ( "the valuation date"). In deriving the fair value of the reporting unit (the Bank), the third -party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events to financial performance; the market price of ChoiceOne’s common stock and other relevant events. In addition, the valuation relied on financial projections through 2027 and growth rates prepared by management. Based on the valuation prepared, it was determined that ChoiceOne's estimated fair value of the reporting unit at the valuation date was greater than its book value and impairment of goodwill was not required. Management concurred with the conclusion derived from the quantitative goodwill analysis as of the valuation date and determined that there were no material changes and that no triggering events had occurred that indicated impairment from the valuation date through December 31, 2022, and as a result that it is more likely than not that there was no goodwill impairment as of December 31, 2022. Acquired Intangible Assets Information for acquired intangible assets at December 31 is as follows: 2022 2021 Gross Gross Carrying Accumulated Carrying Accumulated (Dollars in thousands) Amount Amortization Amount Amortization Core deposit intangible $ 7,120 $ 4,311 $ 7,120 $ 3,158 The core deposit intangible from the County and Community Shores mergers is being amortized on a sum-of-the-years digits basis over ten years and eight years, respectively.  Amortization expense was $ 1,153,000 in 2022 and $ 1,307,000 in 2021. The estimated amortization expense for the next five years ending December 31 is as follows (dollars in thousands): 2023 $ 955 2024 757 2025 560 2026 362 2027 164 Thereafter 11 Total $ 2,809 56 Table of Contents Note 7 – Other Real Estate Owned Other real estate owned represents residential and commercial properties primarily owned as a result of loan collection activities and is reported net of a valuation allowance. Activity within other real estate owned was as follows: (Dollars in thousands) 2022 2021 2020 Balance, beginning of year $ 194 $ 266 $ 929 Transfers from loans - 520 391 Additions from merger - - 346 Proceeds from sales ( 235 ) ( 611 ) ( 1,384 ) Write-downs - - ( 80 ) Gains on sales 41 19 64 Balance, end of year $ - $ 194 $ 266 Included in the balances above were residential real estate mortgage loans of $ 0 , $ 80,000 , and $ 61,000 as of December 31, 2022, 2021, and 2020, respectively, and $ 0 , $ 114,000 , and $ 205,000 of commercial real estate loans as of December 31, 2022, 2021, and 2020 respectively. Note 8 – Derivatives and Hedging Activities ChoiceOne is exposed to certain risks relating to its ongoing business operations. ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. Derivatives are also implicit in certain contracts and commitments. ChoiceOne recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. ChoiceOne records derivative assets and derivative liabilities on the balance sheet within other assets and other liabilities, respectively. Changes in the fair value of derivative financial instruments are either recognized in income or in shareholders’ equity as a component of accumulated other comprehensive income or loss depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge. ChoiceOne currently uses interest rate swaps and interest rate caps to manage its exposure to certain fixed and variable rate assets and variable rate liabilities. Interest rate swaps ChoiceOne uses interest rate swaps as part of its interest rate risk management strategy to add stability to net interest income and to manage its exposure to interest rate movements. Interest rate swaps designated as hedges involve the receipt of variable-rate amounts from a counterparty in exchange for ChoiceOne making fixed-rate payments or the receipt of fixed-rate amounts from a counterparty in exchange for ChoiceOne making variable rate payments, over the life of the agreements without the exchange of the underlying notional amount. In the second quarter of 2022, ChoiceOne entered into two pay-floating/receive-fixed interest rate swaps (the “Pay Floating Swap Agreements”) for a total notional amount of $ 200.0 million that were designated as cash flow hedges. These derivatives hedge the variable cash flows of specifically identified available-for-sale securities, cash and loans. The Pay Floating Swap Agreements were determined to be highly effective during the periods presented and therefore no amount of ineffectiveness has been included in net income. The Pay Floating Swap Agreements will pay a coupon rate equal to SOFR while receiving a fixed coupon rate of 2.41 %. Net cash settlements received for the twelve months ended December 31, 2022, on pay-floating/ received-fixed swaps were $ 161,000 as of December 31, 2022, which were included in interest income. In the second quarter of 2022, ChoiceOne entered into one forward starting pay-fixed/receive-floating interest rate swap (the “Pay Fixed Swap Agreement”) for a notional amount of $ 200.0 million that was designated as a cash flow hedge. This derivative hedges the risk of variability in cash flows attributable to forecasted payments on future deposits or floating rate borrowings indexed to the SOFR Rate. The Pay Fixed Swap Agreement is two years forward starting with an eight -year term set to expire in 2032. The Pay Fixed Swap Agreements will pay a fixed coupon rate of 2.75 % while receiving the SOFR Rate. In the fourth quarter of 2022, ChoiceOne entered into four pay-fixed/receive-floating interest rate swaps for a total notional amount of $ 201.0 million that were designated as fair value hedges. These derivatives hedge the risk of changes in fair value of certain available for sale securities for changes in the SOFR benchmark interest rate component of the fixed rate bonds. All four of these hedges were effective immediately on December 22, 2022. Of the total notional value, $ 101.9 million has a ten -year term set to expire in 2032, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.390 %. Of the total notional value, $ 50.0 million has a nine -year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.4015 %. The remaining notional value of $ 49.1 million has a nine -year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.4030 %. ChoiceOne adopted ASC2022 - 01, as of December 20, 2022, to use the portfolio layer method. The fair value basis adjustment associated with an available-for-sale fixed rate bonds initially results in an adjustment to AOCI.  For available-for-sale securities subject to fair value hedge accounting, the changes in the fair value of the fixed rate bonds related to the hedged risk (the benchmark interest rate component and the partial term) are then reclassed from AOCI to current earnings offsetting the fair value measurement change of the interest rate swap, which is also recorded in current earnings. Net cash settlements are received/paid semi-annually, with the first starting in March 2023, and will be included in interest income. Subsequent to December 31, 2022, ChoiceOne terminated all pay-floating/receive-fixed (“pay floating swap agreements”) interest rate swaps with a notational amount of $ 200.0 million which resulted in a loss of $ 4.2 million.  The pay floating swap agreements were designated as cash flow hedges against specifically identified available-for-sale securities, cash and loans.  The loss was capitalized to available for sale securities and loans on the statement of financial condition and will be amortized into interest income over 13 months, or the remaining period of the agreements.  Refer to footnote 23 for further discussion. 57 Table of Contents Interest rate caps ChoiceOne also uses interest rate caps to provide stability to net interest income and to manage its exposure to interest rate movements. Interest rate caps designated as hedges involve the payment of a fixed premium by ChoiceOne who will then receive payments equivalent to the spread between the current rate and the strike rate until the conclusion of the term from the counterparty. In the second quarter of 2022, ChoiceOne entered into four forward starting interest rate cap agreements with a total notional amount of $ 200.0 million (“SOFR Cap Agreements”). Three of the SOFR Cap Agreements with a total notional amount of $ 100.0 million are designated as fair value hedges and hedge against changes in the fair value of certain fixed rate tax-exempt municipal bonds. ChoiceOne utilizes the interest rate caps as hedges against adverse changes in interest rates on the designated securities attributable to fluctuations in the SOFR rate above 2.68 %, as applicable. An increase in the benchmark interest rate hedged reduces the fair value of these assets. The remaining SOFR Cap Agreement with a notional amount of $ 100.0 million is designated as a cash flow hedge and hedges against the risk of variability in cash flows attributable to fluctuations in the SOFR rate above 2.68 % for forecasted payments on future deposits or borrowings indexed to the SOFR Rate. All of the SOFR Cap Agreements are two -year forward starting with an eight -year term set to expire in 2032. The initial amount excluded from hedge effectiveness testing and amortized into earnings over the life of the interest rate cap derivatives is $ 16.5 million. In the fourth quarter of 2022, ChoiceOne sold all four of the SOFR Cap Agreements for a total of $ 15,550,000 , which resulted in a loss of $ 770,803 . Of the total loss, $ 321,903 was related to the SOFR Cap Agreements designated as a cash flow hedge and recognized immediately in interest expense. The remaining loss of $ 448,900 was related to the SOFR Cap Agreements designated as fair value hedges and was capitalized to available for sale securities on the statement of financial condition and will be amortized into interest income over the weighted average life of the available for sale securities hedged. The table below presents the fair value of derivative financial instruments as well as the classification within the consolidated statements of financial condition. December 31, 2022 December 31, 2021 (Dollars in thousands) Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments Interest rate contracts Other Assets $ 9,204 Other Assets $ - Interest rate contracts Other Liabilities $ 5,823 Other Liabilities $ - The table below presents the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost of those items as of the periods presented. Location and Amount of Gain or (Loss) Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships Recognized in Income on Fair Value and Cash Flow Hedging Relationships Year Ended December 31, 2022 Year Ended December 31, 2021 (Dollars in thousands) Interest Income Interest Expense Interest Income Interest Expense Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded $ ( 55 ) $ ( 825 ) $ - $ - Gain or (loss) on fair value hedging relationships: Hedged items $ ( 1,930 ) $ - $ - $ - Derivatives designated as hedging instruments $ 2,171 $ - $ - $ - Amount excluded from effectiveness testing recognized in earnings based on amortization approach $ ( 496 ) $ - $ - $ - Gain or (loss) on cash flow hedging relationships: Interest rate contra Amount of gain or (loss) reclassified from accumulated other comprehensive income into income $ - $ - $ - $ - Amount excluded from effectiveness testing recognized in earnings based on amortization approach $ - $ ( 503 ) $ - $ - The table below presents the effect of fair value and cash flow hedge accounting on the consolidated statements of operations for the periods presented. 12/31/2022 Cumulative amount of Fair (Dollars in thousands) Value Hedging Adjustment Line Item in the Statement of included in the carrying Financial Position in which the Amortized cost of the amount of the Hedged Hedged Item is included Hedged Assets/(Liabilities) Assets/(Liabilities) Securities available for sale $ 225,851 $ 1,930 58 Table of Contents Note 9 – Deposits Deposit balances as of December 31 consisted of the followin (Dollars in thousands) 2022 2021 Noninterest-bearing demand deposits $ 599,579 $ 560,931 Interest-bearing demand deposits 638,641 665,482 Money market deposits 214,026 218,211 Savings deposits 427,583 425,626 Local certificates of deposit 236,431 182,044 Brokered certificates of deposit 1,743 - Total deposits $ 2,118,003 $ 2,052,294 Scheduled maturities of certificates of deposit as of December 31, 2022 were as follows: (Dollars in thousands) 2023 $ 210,989 2024 16,334 2025 5,778 2026 2,619 2027 2,452 Total $ 238,174 The Bank had certificates of deposit issued in denominations of $250,000 or greater totaling $ 148.9 million and $ 87.3 million at December 31, 2022 and 2021, respectively. The Bank held $ 1.7 million and $ 0 in brokered certificates of deposit at December 31, 2022 and 2021, respectively. In addition, the Bank had $ 17.3 million and $ 13.7 million of certificates of deposit as of December 31, 2022, and December 31, 2021, respectively, that had been issued through the Certificate of Deposit Account Registry Service ("CDARS"). 59 Table of Contents Note 10 – Borrowings Federal Home Loan Bank Advances At December 31, advances from the FHLB were as follows: (Dollars in thousands) 2022 2021 Maturity of January 2023 with fixed interest rate of 4.16 % $ 50,000 $ - Maturity of January 2022 with fixed interest rate of .21 % - 50,000 Total advances outstanding at year-end $ 50,000 $ 50,000 Fees are charged on fixed rate advances that are paid prior to maturity. Fees of $ 0 and $ 16,000 were charged in 2022 and 2021, respectively.  Advances were secured by residential real estate loans with a carrying value of approximately $ 169.7 million and $ 127.5 million at December 31, 2022 and December 31, 2021, respectively. Based on this collateral, the Bank was eligible to borrow an additional $ 39.6 million at year-end 2022. FHLB Advances matured in January 2023. In June 2021, ChoiceOne obtained a $ 20,000,000 line of credit with an annual renewal.  The line carries a floating rate of prime rate with a floor of 3.25 %.  The credit agreement includes certain financial covenants, including minimum capital ratios, asset quality ratios, and the requirements of achieving certain profitability thresholds.  ChoiceOne was in compliance with all covenants as of December 31, 2022. The line of credit balance was $ 0 at December 31, 2022. Note 11 – Subo rdinated Debentures The Capital Trust sold 4,500 Cumulative Preferred Securities (“trust preferred securities”) at $ 1,000 per security in a December 2004 offering. The proceeds from the sale of the trust preferred securities were used by the Capital Trust to purchase an equivalent amount of subordinated debentures from Community Shores. The trust preferred securities and subordinated debentures carry a floating rate of 2.05 % over the 3 -month LIBOR and the rate was 5.72 % at December 31, 2022 and 2.27 % at December 31, 2021. The stated maturity is December 30, 2034. The trust preferred securities are redeemable at par value on any interest payment date and are, in effect, guaranteed by ChoiceOne. Interest on the subordinated debentures is payable quarterly on March 30, June 30, September 30 and December 30. ChoiceOne is not considered the primary beneficiary of the Capital Trust (under the variable interest entity rules), therefore the Capital Trust is not consolidated in the consolidated financial statements, rather the subordinated debentures are shown as a liability, and the interest expense is recorded in the consolidated statement of income. The terms of the subordinated debentures, the trust preferred securities and the agreements under which they were issued give ChoiceOne the right, from time to time, to defer payment of interest for up to 20 consecutive quarters, unless certain specified events of default have occurred and are continuing. The deferral of interest payments on the subordinated debentures results in the deferral of distributions on the trust preferred securities. In September 2021, ChoiceOne completed a private placement of $ 32.5 million in aggregate principal amount of 3.25 % fixed-to-floating rate subordinated notes due 2031. The notes will initially bear interest at a fixed interest rate of 3.25% per annum until September 3, 2026, after which time the interest rate will reset quarterly to a floating rate equal to a benchmark rate, which is expected to be the then current three -month term Secured Overnight Financing Rate ("SOFR") plus 255 basis points until the notes’ maturity on September 3, 2031. The notes are redeemable by ChoiceOne, in whole or in part, on or after September 3, 2026, and at any time upon the occurrence of certain events. The notes have been structured to qualify as Tier 2 capital for ChoiceOne for regulatory capital purposes.  ChoiceOne used a portion of net proceeds from the private placement to redeem senior debt, fund common stock repurchases, and support bank-level capital ratios. 60 Table of Contents Note 12 – Income Taxes Information as of December 31 and for the year follows: (Dollars in thousands) 2022 2021 2020 Provision for Income Taxes Current federal income tax expense $ 4,033 $ 3,532 $ 3,070 Deferred federal income tax expense/(benefit) ( 15 ) 924 202 Income tax expense $ 4,018 $ 4,456 $ 3,272 Reconciliation of Income Tax Provision to Statutory Rate Income tax computed at statutory federal rate of 21 % $ 5,808 $ 5,565 $ 3,966 Tax exempt interest income ( 1,323 ) ( 1,190 ) ( 574 ) Tax exempt earnings on bank-owned life insurance ( 276 ) ( 170 ) ( 162 ) Tax credits ( 289 ) ( 284 ) ( 240 ) Nondeductible merger expenses - - 182 Disallowed interest expense 179 74 64 Other items ( 81 ) 461 36 Income tax expense $ 4,018 $ 4,456 $ 3,272 Effective income tax rate 15 % 17 % 17 % (Dollars in thousands) Components of Deferred Tax Assets and Liabilities 2022 2021 Deferred tax assets: Purchase accounting adjustments from mergers with County and Community Shores $ 945 $ 1,374 Allowance for loan losses 1,600 1,614 Unrealized losses on securities available for sale 19,745 685 Net operating loss carryforward 505 544 Deferred loan fees and costs, net - 319 Compensation 299 286 Other 716 68 Total deferred tax assets 23,810 4,890 Deferred tax liabiliti Purchase accounting adjustments from mergers with County and Community Shores 844 1,107 Loan servicing rights 908 980 Depreciation 605 540 Interest rate derivative contracts 660 - Deferred loan fees and costs, net 15 - Other 404 323 Total deferred tax liabilities 3,436 2,950 Net deferred tax asset (liability) $ 20,374 $ 1,940 As of December 31, 2022, deferred tax assets included federal net operating loss carryforwards of approximately $ 2.4 million which was acquired through the merger with Community Shores.  The loss carryforwards expire at various dates from 2031 to 2035. Deferred tax assets are recognized for net operating losses because the benefit is more likely than not to be realized.  Under Code Section 382, ChoiceOne is limited to applying approximately $ 185,000 of net operating losses per year. 61 Table of Contents Note 13 – Related Party Transactions Loans to executive officers, directors and their affiliates were as follows at December 31: (Dollars in thousands) 2022 2021 Balance, beginning of year $ 24,000 $ 20,724 New loans 9,684 13,188 Repayments ( 9,259 ) ( 9,912 ) Effect of changes in related parties ( 389 ) - Balance, end of year $ 24,036 $ 24,000 Deposits from executive officers, directors and their affiliates were $ 30.0 million and $ 16.8 million at December 31, 2022 and 2021 , respectively. Note 14 – Employee Benefit Plans 401 (k) Plan : The 401 (k) plan allows employees to contribute to their individual accounts under the plan amounts up to the IRS maximum. Matching company contributions to the plan are discretionary. Expense for matching company contributions under the plan was $ 650,000 and $ 627,000 in 2022 and 2021, respectively. Note 15 - Stock Based Compensation Options to buy stock have been granted to key employees to provide them with additional equity interests in ChoiceOne. Compensation expense in connection with stock options granted was $ 4,000 in 2022 and $ 15,000 in 2021. The Stock Incentive Plan of 2022 was approved by the Company’s shareholders at the Annual Meeting held on May 25, 2022. The Stock Incentive Plan of 2022 provides for the issuance of up to 200,000 shares of common stock. At December 31, 2022, there were 200,000 shares available for future grants. A summary of stock options activity during the year ended December 31, 2022 was as follows: Weighted Weighted average average exercise Grant Date Shares price Fair Value Options outstanding at January 1, 2022 20,631 $ 25.30 $ 3.46 Options granted - - - Options exercised - - - Options forfeited or expired - - - Options outstanding, end of year 20,631 $ 25.30 $ 3.46 Options exercisable at December 31, 2022 20,631 $ 25.30 $ 3.46 The exercise prices for options outstanding and exercisable at the end of 2022 ranged from $ 20.86 to $ 27.25 per share. The weighted average remaining contractual life of options outstanding and exercisable at the end of 2022 was approximately 5.57 years. The intrinsic value of all outstanding stock options and exercisable stock options was $ 76,000 and $ 34,000 respectively, at December 31, 2022 and December 31, 2021. The aggregate intrinsic values of outstanding and exercisable options at December 31, 2022 were calculated based on the closing market price of the Company’s common stock on December 31, 2022 of $ 29.00 per share less the exercise price. Information pertaining to options outstanding at December 31, 2022 was as follows: Exercise price of stock optio Number of options outstanding at year-end Number of options exercisable at year-end Average remaining contractual life (in years) $ 27.25 12,000 12,000 6.42 $ 25.65 3,000 3,000 5.50 $ 20.86 3,306 3,306 4.35 $ 21.13 2,325 2,325 3.00 The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. ChoiceOne uses historical data to estimate the volatility of the market price of ChoiceOne stock and employee terminations within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. As of December 31, 2022, there was no unrecognized compensation expense related to stock options. 62 Table of Contents ChoiceOne has granted restricted stock units to a select group of employees under the Stock Incentive Plan of 2012. Restricted stock units outstanding as of December 31, 2022 vest on the three year anniversary of the grant date. Certain additional vesting provisions apply. Each restricted stock unit, once vested, is settled by delivery of one share of ChoiceOne common stock. ChoiceOne recognized compensation expense of $ 503,000 and $ 320,000 , in 2022 and 2021, respectively, in connection with restricted stock units for current participants during these years. A summary of the activity for restricted stock units outstanding during the year ended December 31, 2022 is presented be Outstanding Stock Awards Shares Weighted Average Grant Date Fair Value Per Share Outstanding at January 1, 2022 35,684 $ 28.36 Granted 28,660 26.34 Vested ( 10,442 ) 27.34 Forfeited ( 35 ) 26.34 Outstanding at December 31, 2022 53,867 $ 27.48 At December 31, 2022, there were 53,867 restricted stock units outstanding with an approximate stock value of $ 1.6 million based on ChoiceOne’s December 31, 2022 stock price.  At December 31, 2021, there were 35,684 restricted stock units outstanding with an approximate stock value of $ 945,000 based on ChoiceOne’s December 31, 2021 stock price.  The grant date fair value of restricted stock units granted was $ 755,000 and $ 558,000 in 2022 and 2021, respectively.  The cost is expected to be recognized over a weighted average period of 1.68 years.  As of December 31, 2022, there was $ 753,000 of unrecognized compensation cost related to unvested shares granted. ChoiceOne has granted performance stock units to a select group of employees under the Stock Incentive Plan of 2012. Restricted stock units outstanding as of December 31, 2022 vest on the three year anniversary of the grant date based on earnings per share growth rate from the date of the grant. Shares can vest at a rate of 125 %, 100 %, 75 %, or 0 % based on the growth rate achieved over the three year time frame.  Certain additional vesting provisions apply. Each restricted stock unit, once vested, is settled by delivery of one share of ChoiceOne common stock. ChoiceOne recognized compensation expense of $ 47,000 in 2022 in connection with performance stock units for current participants during the year. A summary of the activity for performance stock units outstanding during the year ended December 31, 2022 is presented be Weighted Average Grant Date Fair Value Outstanding Stock Awards Shares Per Share Outstanding at January 1, 2022 - $ - Granted 6,396 26.34 Vested - - Forfeited - - Outstanding at December 31, 2022 6,396 $ 26.34 At December 31, 2022, there were 6,396 performance stock units outstanding assuming 100% vesting with an approximate stock value of $ 185,000 based on ChoiceOne’s December 31, 2022 stock price.  The grant date fair value of restricted stock units granted was $ 168,000 in 2022. The cost is expected to be recognized over a weighted average period of 2.36 years.  As of December 31, 2022, there was $ 122,000 of unrecognized compensation cost related to unvested shares granted. Note 16 - Earnings Per Share (Dollars in thousands, except share data) 2022 2021 2020 Basic Net income $ 23,640 $ 22,042 $ 15,613 Weighted average common shares outstanding 7,504,173 7,685,459 7,521,771 Basic earnings per common shares $ 3.15 $ 2.87 $ 2.08 Diluted Net income $ 23,640 $ 22,042 $ 15,613 Weighted average common shares outstanding 7,504,173 7,685,459 7,521,771 Plus dilutive stock options and restricted stock units 23,198 17,255 9,846 Weighted average common shares outstanding and potentially dilutive shares 7,527,371 7,702,714 7,531,617 Diluted earnings per common share $ 3.15 $ 2.86 $ 2.07 Stock options considered anti-dilutive to earnings per share were 15,000 , 15,000 , and 0 as of December 31, 2022 , December 31, 2021 , and December 31, 2020 , respectively. This calculation is based on the average stock price during the year. 63 Table of Contents Note 17 – Condensed Financial Statements of Parent Company Condensed Balance Sheets (Dollars in thousands) December 31, 2022 2021 Assets Cash $ 8,310 $ 17,622 Equity securities at fair value 3,199 2,555 Other assets 586 553 Investment in subsidiaries 192,540 236,462 Total assets $ 204,635 $ 257,192 Liabilities Subordinated debentures $ 31,971 $ 31,827 Trust preferred securities 3,291 3,190 Other liabilities 499 506 Total liabilities 35,761 35,523 Shareholders' equity 168,874 221,669 Total liabilities and shareholders’ equity $ 204,635 $ 257,192 Condensed Statements of Income (Dollars in thousands) Years Ended December 31, 2022 2021 2020 Interest income Interest and dividends from ChoiceOne Bank $ - $ 6,125 $ 12,942 Interest and dividends from other securities 27 10 13 Total interest income 27 6,135 12,955 Interest expense Borrowings 1,491 645 239 Net interest income ( 1,464 ) 5,490 12,716 Noninterest income Gains on sales of securities - - 26 Change in market value of equity securities ( 385 ) 554 ( 155 ) Other 2 4 - Total noninterest income ( 383 ) 558 ( 129 ) Noninterest expense Salaries and benefits - - 1,201 Professional fees 40 15 1,093 Other 174 203 217 Total noninterest expense 214 218 2,511 Income before income tax and equity in undistributed net income of subsidiary ( 2,061 ) 5,830 10,076 Income tax (expense)/benefit 433 64 431 Income before equity in undistributed net income of subsidiary ( 1,628 ) 5,894 10,507 Equity in undistributed net income of subsidiary 25,268 16,148 5,106 Net income $ 23,640 $ 22,042 $ 15,613 64 Table of Contents Condensed Statements of Cash Flows (Dollars in thousands) Years Ended December 31, 2022 2021 2020 Cash flows from operating activiti Net income $ 23,640 $ 22,042 $ 15,613 Adjustments to reconcile net income to net cash from operating activiti Equity in undistributed net income of subsidiary ( 25,268 ) ( 16,148 ) ( 5,106 ) Amortization 245 101 51 Compensation expense on employee and director stock purchases, stock options, and restricted stock units 928 787 488 Net gain on sale of securities - - ( 26 ) Change in market value of equity securities 385 ( 554 ) 155 Changes in other assets ( 33 ) ( 260 ) 582 Changes in other liabilities ( 7 ) ( 2,982 ) 551 Net cash from operating activities ( 110 ) 2,986 12,308 Cash flows from investing activiti Sales of securities - - 958 Purchases of securities ( 1,029 ) ( 117 ) ( 200 ) Investment in Subsidiary - ( 5,000 ) - Cash acquired from mergers with Community Shores Bank Corporation - - 142 Net cash from investing activities ( 1,029 ) ( 5,117 ) 900 Cash flows from financing activiti Issuance of common stock 172 139 134 Repurchase of common stock ( 767 ) ( 7,786 ) - Proceeds from borrowings - 36,827 10,000 Payments on borrowings - ( 14,166 ) ( 833 ) Cash used as part of equity issuance for merger - - ( 5,387 ) Cash dividends paid ( 7,578 ) ( 7,200 ) ( 6,174 ) Net cash from financing activities ( 8,173 ) 7,814 ( 2,260 ) Net change in cash ( 9,312 ) 5,683 10,948 Beginning cash 17,622 11,939 991 Ending cash $ 8,310 $ 17,622 $ 11,939 65 Table of Contents Note 18 – Financial Instruments Financial instruments as of the dates indicated were as follows: Quoted Prices In Active Significant Markets for Other Significant Identical Observable Unobservable (Dollars in thousands) Carrying Estimated Assets Inputs Inputs Amount Fair Value (Level 1) (Level 2) (Level 3) December 31, 2022 Assets Cash and cash equivalents $ 43,943 $ 43,943 $ 43,943 $ - $ - Equity securities at fair value 8,566 8,566 6,024 - 2,542 Securities available for sale 529,749 529,749 78,204 451,545 - Securities held to maturity 425,906 353,901 - 338,583 15,318 Federal Home Loan Bank and Federal Reserve Bank stock 8,581 8,581 - 8,581 - Loans held for sale 4,834 4,979 - 4,979 - Loans, net 1,182,163 1,123,198 - - 1,123,198 Accrued interest receivable 8,949 8,949 - 8,949 - Interest rate lock commitments 28 28 - 28 - Mortgage loan servicing rights 4,322 5,855 - 5,855 - Interest rate derivative contracts 9,204 9,204 - 9,204 - Liabilities Noninterest-bearing deposits 599,579 599,579 - 599,579 - Interest-bearing deposits 1,518,424 1,514,294 - 1,514,294 - Borrowings 50,000 50,000 - 50,000 - Subordinated debentures 35,262 30,304 - 30,304 - Accrued interest payable 610 610 - 610 - Interest rate derivative contracts 5,823 5,823 - 5,823 - December 31, 2021 Assets Cash and cash equivalents $ 31,887 $ 31,887 $ 31,887 $ - $ - Equity securities at fair value 8,492 8,492 6,724 - 1,768 Securities available for sale 1,098,885 1,098,885 91,979 985,856 21,050 Federal Home Loan Bank and Federal Reserve Bank stock 8,888 8,888 - 8,888 - Loans held for sale 9,351 9,632 - 9,632 - Loans to other financial institutions 42,632 42,632 - 42,632 - Loans, net 1,009,160 999,393 - - 999,393 Accrued interest receivable 8,211 8,211 - 8,211 - Interest rate lock commitments 172 172 - 172 - Liabilities Noninterest-bearing deposits 560,931 560,931 - 560,931 - Interest-bearing deposits 1,491,363 1,491,135 - 1,491,135 - Borrowings 50,000 50,000 - 50,000 - Subordinated debentures 35,017 33,414 - 33,414 - Accrued interest payable 441 441 - 441 - The estimated fair values approximate the carrying amounts for all financial instruments except those described later in this paragraph. The methodology for determining the estimated fair value for securities available for sale is described in Note 18. The estimated fair value for loans follows an “exit price” approach, which incorporates discounts for credit, liquidity, and marketability. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. The estimated fair value of loans also included the mark to market adjustments related to the Company’s mergers. The estimated fair value of deposits is based on comparing the average rate paid on deposits compared to the three month LIBOR rate which is assumed to be the replacement value of these deposits. The estimated fair values for time deposits and FHLB advances are based on the rates paid at December 31 for new deposits or FHLB advances, applied until maturity. The estimated fair values for other financial instruments and off-balance sheet loan commitments are considered nominal. 66 Table of Contents Note 19 – Fair Value Measurements The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2022 and December 31, 2021 , and the valuation techniques used by the Company to determine those fair values. In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability. In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability. Disclosures concerning assets and liabilities measured at fair value as of December 31, 2021 or December 31, 2022 are as follows: Assets and Liabilities Measured at Fair Value on a Recurring Basis Quoted Prices In Active Significant Markets for Other Significant Identical Observable Unobservable (Dollars in thousands) Assets Inputs Inputs Balance at (Level 1) (Level 2) (Level 3) Date Indicated Equity Securities Held at Fair Value - December 31, 2022 Equity securities $ 6,024 $ - $ 2,542 $ 8,566 Investment Securities, Available for Sale - December 31, 2022 U. S. Government and federal agency $ - $ - $ - $ - U. S. Treasury notes and bonds 78,204 - - 78,204 State and municipal - 229,938 - 229,938 Mortgage-backed - 208,563 - 208,563 Corporate - 711 - 711 Asset-backed Securities - 12,333 - 12,333 Total $ 78,204 $ 451,545 $ - $ 529,749 Derivative Instruments - December 31, 2022 Interest rate derivative contracts - assets $ - $ 9,204 $ - $ 9,204 Interest rate derivative contracts - liabilities $ - $ 5,823 $ - $ 5,823 Equity Securities Held at Fair Value - December 31, 2021 Equity securities $ 6,724 $ - $ 1,768 $ 8,492 Investment Securities, Available for Sale - December 31, 2021 U. S. Government and federal agency $ - $ 2,008 $ - $ 2,008 U. S. Treasury notes and bonds 91,979 - - 91,979 State and municipal - 514,797 20,050 534,847 Mortgage-backed - 433,115 - 433,115 Corporate - 19,642 1,000 20,642 Asset-backed Securities - 16,294 - 16,294 Total $ 91,979 $ 985,856 $ 21,050 $ 1,098,885 Securities classified as available for sale are generally reported at fair value utilizing Level 2 inputs. ChoiceOne’s external investment advisor obtained fair value measurements from an independent pricing service that uses matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). The fair value measurements considered observable data that may include dealer quotes, market spreads, cash flows and the bonds' terms and conditions, among other things. Securities classified in Level 2 included U.S. Government and federal agency securities, state and municipal securities, mortgage-backed securities, corporate bonds, and asset backed securities. The Company classified certain state and municipal securities and corporate bonds, and equity securities as Level 3. Based on the lack of observable market data, estimated fair values were based on the observable data available and reasonable unobservable market data. 67 Table of Contents Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis (Dollars in thousands) 2022 2021 Equity Securities Held at Fair Value Balance, January 1 $ 1,768 $ 1,485 Total realized and unrealized gains included in noninterest income 161 166 Net purchases, sales, calls, and maturities 613 117 Balance, December 31 $ 2,542 $ 1,768 Investment Securities, Available for Sale Balance, January 1 $ 21,050 $ 11,423 Total unrealized gains/(losses) included in other comprehensive income - 1,720 Net purchases, sales, calls, and maturities - 7,907 Transfer to held to maturity ( 21,050 ) - Balance, December 31 $ - $ 21,050 Of the Level 3 assets that were held by the Company at December 31, 2022, the net unrealized gain as of December 31, 2022 was $ 161,000 , compared to $ 591,000 as of December 31, 2021. The change in the net unrealized gain or loss is recognized in noninterest income or other comprehensive income in the consolidated balance sheets and income statements. Amounts recognized in noninterest income relate to changes in equity securities. A total of $ 613,000 and $ 8,839,000 of Level 3 securities were purchased in 2022 and 2021, respectively. Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets and liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs. Available for sale investment securities categorized as Level 3 assets consist of bonds issued by local municipalities and a trust-preferred security. The Company estimates the fair value of these assets based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved. The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment. Disclosures concerning assets measured at fair value on a non-recurring basis are as follows: Assets Measured at Fair Value on a Non-recurring Basis Quoted Prices In Active Significant Markets for Other Significant Balances at Identical Observable Unobservable (Dollars in thousands) Dates Assets Inputs Inputs Indicated (Level 1) (Level 2) (Level 3) Impaired Loans December 31, 2022 $ 2,846 $ - $ - $ 2,846 December 31, 2021 $ 5,433 $ - $ - $ 5,433 Other Real Estate December 31, 2022 $ - $ - $ - $ - December 31, 2021 $ 194 $ - $ - $ 194 Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Company estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). The changes in fair value consisted of charge-downs of impaired loans that were posted to the allowance for loan losses and write-downs of other real estate owned that were posted to a valuation account. The fair value of other real estate owned was based on appraisals or other reviews of property values, adjusted for estimated costs to sell. 68 Table of Contents Note 20 – Off-Balance Sheet Activities Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customers’ financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment. The contractual amount of financial instruments with off-balance sheet risk was as follows at December 31: 2022 2021 Fixed Variable Fixed Variable (Dollars in thousands) Rate Rate Rate Rate Unused lines of credit and letters of credit $ 54,523 $ 148,497 $ 63,001 $ 275,170 Commitments to fund loans (at market rates) 35,789 12,565 72,257 25,545 Commitments to fund loans are generally made for periods of 180 days or less. The fixed rate loan commitments have interest rates ranging from 2.375 % to 6.00 % and maturities ranging from 1 year to 30 years. 69 Table of Contents Note 21 – Regulatory Capital ChoiceOne and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. Depending upon the capital category to which an institution is assigned, the regulators' corrective powers inclu prohibiting the acceptance of brokered deposits; requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution. At year-end 2022 and 2021 , the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. Actual capital levels and minimum required levels for ChoiceOne and the Bank were as follows: Minimum Required to be Well Minimum Required Capitalized Under for Capital Prompt Corrective (Dollars in thousands) Actual Adequacy Purposes Action Regulations Amount Ratio Amount Ratio Amount Ratio December 31, 2022 ChoiceOne Financial Services Inc. Total capital (to risk weighted assets) $ 222,006 13.8 % $ 128,545 8.0 % N/A N/A Common equity Tier 1 capital (to risk weighted assets) 177,916 11.1 72,307 4.5 N/A N/A Tier 1 capital (to risk weighted assets) 182,416 11.4 96,409 6.0 N/A N/A Tier 1 capital (to average assets) 182,416 7.9 92,558 4.0 N/A N/A ChoiceOne Bank Total capital (to risk weighted assets) $ 208,696 13.0 % $ 128,294 8.0 % $ 160,367 10.0 % Common equity Tier 1 capital (to risk weighted assets) 201,077 12.5 72,165 4.5 104,239 6.5 Tier 1 capital (to risk weighted assets) 201,077 12.5 96,220 6.0 128,294 8.0 Tier 1 capital (to average assets) 201,077 8.7 92,449 4.0 115,562 5.0 December 31, 2021 ChoiceOne Financial Services Inc. Total capital (to risk weighted assets) $ 204,353 14.4 % $ 113,604 8.0 % N/A N/A Common equity Tier 1 capital (to risk weighted assets) 160,338 11.3 63,902 4.5 N/A N/A Tier 1 capital (to risk weighted assets) 164,838 11.6 85,203 6.0 N/A N/A Tier 1 capital (to average assets) 164,838 7.4 89,415 4.0 N/A N/A ChoiceOne Bank Total capital (to risk weighted assets) $ 182,275 12.9 % $ 113,444 8.0 % $ 141,806 10.0 % Common equity Tier 1 capital (to risk weighted assets) 174,587 12.3 63,813 4.5 92,174 6.5 Tier 1 capital (to risk weighted assets) 174,587 12.3 85,083 6.0 113,444 8.0 Tier 1 capital (to average assets) 174,587 7.8 89,289 4.0 111,611 5.0 Banking laws and regulations limit capital distributions by state-chartered banks. Generally, capital distributions are limited to undistributed net income for the current and prior two years. At December 31, 2022, approximately $ 53.3 million was available for the Bank to pay dividends to ChoiceOne assuming regulatory approval of any amount in excess of the applicable capital conservation buffer.  ChoiceOne’s ability to pay dividends to shareholders is dependent on the payment of dividends from the Bank, which is restricted by state law and regulations. 70 Table of Contents Note 22 – Business Combinations Community Shores Bank Corporation ChoiceOne completed the acquisition of Community Shores Bank Corporation (“Community Shores”) with and into ChoiceOne, with ChoiceOne as the surviving entity, effective on July 1, 2020. Community Shores had 4 branch offices as of the date of the merger. Total assets of Community Shores as of July 1, 2020 were $ 244.5 million, including total loans of $ 174.8 million. Deposits acquired in the merger, the majority of which were core deposits, totaled $ 227.8 million. The impact of the merger has been included in ChoiceOne’s results of operations since the effective date of the merger. As con sideration in the merger, ChoiceOne issued 524,139 shares of ChoiceOne common stock and cash in the amount of $ 5,390,000 with an approximate total value of $ 20.9 million. During 2021 management finalized accounting for certain loans and deferred tax accounts, resulting in measurement period adjustments increasing the acquisition date fair value of loans by $ 828,000 and decreasing the acquisition date fair value of other assets by $ 268,000 . As a result, goodwill recognized as a result of the acquisition was reduced by $ 560,000 . The table below presents the allocation of purchase price for the merger with Community Shores (dollars in thousands): Purchase Price Consideration $ 20,881 Net assets acquir Cash and cash equivalents 41,023 Securities available for sale 20,023 Federal Home Loan Bank and Federal Reserve Bank stock 300 Originated loans 174,802 Premises and equipment 6,204 Other real estate owned 346 Deposit based intangible 760 Other assets 1,077 Total assets 244,535 Non-interest bearing deposits 65,499 Interest bearing deposits 162,333 Total deposits 227,832 Trust preferred securities 3,039 Other liabilities 136 Total liabilities 231,007 Net assets acquired 13,528 Goodwill $ 7,353 71 Table of Contents County Bank Corp. ChoiceOne completed the merger of County Bank Corp. (“County”) with and into ChoiceOne effective on October 1, 2019. County had 14 branch offices and one loan production office as of the date of the merger. Total assets of County as of October 1, 2019 were $ 673 million, including total loans of $ 424 million. Deposits acquired in the merger, the majority of which were core deposits, totaled $ 574 million. The impact of the merger has been included in ChoiceOne’s results of operations since the effective date of the merger. As consideration in the merger, ChoiceOne issued 3,603,872 shares of ChoiceOne common stock with an approximate value of $ 108 million. During 2020, management finalized accounting for acquired loans and deferred taxes. As a result, the acquisition date fair value of loans was decreased by $ 238,000 , other liabilities were decreased by $ 502,000 , and goo dwill recognized as a result of the acquisition was reduced by $ 276,000 . The table below highlights the allocation of purchase price for the merger with County (dollars in thousands): Purchase Price Consideration $ 107,945 Net assets acquir Cash and cash equivalents 20,638 Equity securities at fair value 474 Securities available for sale 187,230 Federal Home Loan Bank and Federal Reserve Bank stock 2,915 Loans to other financial institutions 33,481 Originated loans 390,116 Premises and equipment 9,271 Other real estate owned 1,364 Deposit based intangible 6,359 Bank owned life insurance 16,912 Other assets 4,002 Total assets 672,762 Non-interest bearing deposits 124,113 Interest bearing deposits 449,488 Total deposits 573,601 Federal funds purchased 3,800 Advances from Federal Home Loan Bank 23,000 Other liabilities 3,282 Total liabilities 603,683 Net assets acquired 69,079 Goodwill $ 38,866 72 Table of Contents Note 23 – Subsequent Event Sale of Derivatives On March 15, 2023, ChoiceOne terminated all pay-floating/receive-fixed (“pay floating swap agreements”) interest rate swaps with a notational amount of $ 200.0 million which resulted in a loss of $ 4.2 million.  The pay floating swap agreements were designated as cash flow hedges against specifically identified available-for-sale securities, cash and loans.  The loss was capitalized to available for sale securities and loans on the statement of financial condition and will be amortized into interest income over 13 months, or the remaining period of the agreements. With the rapid increase in interest rates during 2022 and 2023 the pay floating swap agreements were in a loss position.  At termination, the expected negative carry for the remainder of the term was greater than the exit price of the agreements. ChoiceOne has four remaining interest rate swaps with a total notional value of $ 400.1 million. These derivative instruments increase in value as long-term interest rates rise, which offsets the reduction in equity due to unrealized losses on securities available for sale. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on and as of the time of that evaluation, the Company’s management, including the Chief Executive Officer and principal financial officer, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods. Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation. Management assessed the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2022, as required by Section 404 of the Sarbanes-Oxley Act of 2002. Management’s assessment is based on the criteria for effective internal control over financial reporting as described in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that, as of December 31, 2022, its system of internal control over financial reporting was effective and meets the criteria of the “Internal Control – Integrated Framework." There was no change in the Company’s internal control over financial reporting that occurred during the three months ended December 31, 2022 that has materially affected, or that is reasonably likely to materially affect, the Company’s internal control over financial reporting. Item 9B. Other Information None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections None. 73 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance The information under the captions “ChoiceOne's Board of Directors and Executive Officers and “Corporate Governance” in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 24, 2023, is incorporated herein by reference. The Company has adopted a Code of Ethics for Executive Officers and Senior Financial Officers, which applies to the Chief Executive Officer and the Chief Financial Officer, as well as all other senior financial and accounting officers. The Code of Ethics is posted on the Company’s website at “ www.choiceone.com. ” The Company intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, a provision of the Code of Ethics by posting such information on its website at “ www.choiceone.com. ” Item 11. Executive Compensation The information under the captions “Executive Compensation” in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 24, 2023, is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information under the caption "Ownership of ChoiceOne Common Stock" in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 24, 2023, is incorporated herein by reference. The following table presents information regarding the equity compensation plans both approved and not approved by shareholders at December 31, 2022: Number of securities remaining available for Number of securities to Weighted-average future issuance under be issued upon exercise exercise price of equity compensation plans of outstanding options, outstanding options, (excluding securities warrants and rights warrants and rights reflected in column (a)) (a) (b) (c) Equity compensation plans approved by security holders 74,498 $ 7.01 393,088 Equity compensation plans not approved by security holders - - 166,910 Total 74,498 $ 7.01 559,998 Equity compensation plans approved by security holders include the Stock Incentive Plan of 2012, the Equity Incentive Plan of 2022, and the 2022 Employee Stock Purchase Plan.  As of December 31, 2022, no shares remained available for future issuance under the Stock Incentive Plan of 2012, 200,000 shares remained available for future issuance under the Equity Incentive Plan of 2022, and 193,088 shares remained available for future issuance under the 2022 Employee Stock Purchase Plan, in each case other than upon the exercise of outstanding stock options. The Stock Incentive Plan of 2012 has expired and no further issuance of shares are permitted under the plan other than upon the exercise or vesting of outstanding awards. The Directors’ Stock Purchase Plan and the Directors’ Equity Compensation Plan are the only equity compensation plans not approved by security holders. The Directors’ Stock Purchase Plan is designed to provide directors of the Company the option of receiving their fees in the Company’s common stock. Directors who elect to participate in the plan may elect to contribute to the plan twenty-five, fifty, seventy-five or one hundred percent of their board of director fees and one hundred percent of their director committee fees earned as directors of the Company. Contributions to the plan are made by the Company on behalf of each electing participant. Plan participants may terminate their participation in the plan at any time by written notice of withdrawal to the Company. The Directors’ Equity Compensation Plan provides for the grant and award of stock options, restricted stock, restricted stock units, stock awards, and other stock-based and stock-related awards as part of director compensation. Participants will cease to be eligible to participate in both plans when they cease to serve as directors of the Company. Shares are distributed to participants on a quarterly basis. The Directors' Equity Compensation Plan provides for the issuance of a maximum of 100,000 shares of the Company's common stock thereunder and the Directors' Stock Purchase Plan provides for issuance of a maximum of 100,000 shares thereunder, in each case subject to adjustments for certain changes in the capital structure of the Company. As of December 31, 2022, 85,166 shares remained available for issuance under the Directors' Equity Compensation Plan and 81,744 shares remained available for issuance under the Directors' Stock Purchase Plan. 74 Table of Contents Item 13. Certain Relationships and Related Transactions, and Director Independence The information under the captions “Related Matters - Transactions with Related Persons” and “Corporate Governance” in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 24, 2023, is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information under the caption "Related Matters - Independent Certified Public Accountants" in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 24, 2023, is incorporated herein by reference. Independent Registered Public Accounting F N Plante & Moran, PLLC Locati Grand Rapids, Michigan PCAOB ID: 166 PART IV Item 15. Exhibits and Financial Statement Schedules (a) (1) Financial Statements . The following financial statements and independent auditors' reports are filed as part of this repor Consolidated Balance Sheets at December 31, 2022 and 2021. Consolidated Statements of Income for the years ended December 31, 2022, 2021, and 2020. Consolidated Statement of Comprehensive Income for the years ended December 31, 2022, 2021, and 2020. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2022, 2021, and 2020. Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021, and 2020. Notes to Consolidated Financial Statements. Report of Independent Registered Public Accounting Firm dated March 17, 2021. (2) Financial Statement Schedules . None. Exhibit Document 3.1 Restated Articles of Incorporation of ChoiceOne Financial Services, Inc. 3.2 Bylaws of ChoiceOne Financial Services, Inc., as currently in effect and any amendments thereto. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed April 21, 2021. Here incorporated by reference. 4.1 Advances, Pledge and Security Agreement between ChoiceOne Bank and the Federal Home Loan Bank of Indianapolis. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013.  Here incorporated by reference. 4.2 Form of 3.25% Fixed-to-Floating Rate Subordinated Note due September 3, 2031.  Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference. 4.3 Form of 3.25% Fixed-to-Floating Rate Global Subordinated Note due September 3, 2031.  Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference. 4.4 Description of Rights of Shareholders. 75 Table of Contents 10.1 Employment Agreement between ChoiceOne Financial Services, Inc. and Kelly J. Potes, dated as of September 30, 2019. (1) Previously filed as an exhibit to ChoiceOne’s Form 8-K filed October 1, 2019. Here incorporated by reference. 10.2 Employment Agreement between ChoiceOne Financial Services, Inc. and Michael J. Burke, Jr., dated as of March 22, 2019. (1) Previously filed as exhibit to ChoiceOne’s Pre-Effective Amendment No. 2 to Form S-4 filed August 5, 2019. Here incorporated by reference. 10.3 Stock Incentive Plan of 2012. (1) Previously filed as Appendix A to ChoiceOne’s definitive proxy statement for ChoiceOne’s 2018 Annual Meeting of Shareholders, filed on April 19, 2018. Here incorporated by reference. 10.4 2022 Employee Stock Purchase Plan. (1) Previously filed as an exhibit to ChoiceOne’s Form S-8 filed May 27, 2022. Here incorporated by reference. 10.5 Equity Incentive Plan of 2022. (1) Previously filed as an exhibit to ChoiceOne’s Form S-8 filed May 27, 2022. Here incorporated by reference. 10.6 Directors' Stock Purchase Plan, as amended. (1) Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 10-K Annual Report for the year ended December 31, 2019. Here incorporated by reference. 10.7 Director Equity Compensation Plan of 2019. (1) Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 10-K Annual Report for the year ended December 31, 2019. Here incorporated by reference. 10.8 Former Valley Ridge Executive Employee Salary Continuation Agreements, as amended. (1) Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference. 10.9 Former Valley Ridge Directors’ Deferred Compensation Plan and Agreement. (1) Previously filed as an exhibit to the ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference. 21 Subsidiaries of ChoiceOne Financial Services, Inc. 23 Consent of Independent Registered Public Accounting Firm. 24 Powers of Attorney. 31.1 Certification of Chief Executive Officer. 31.2 Certification of Chief Financial Officer 32 Certification pursuant to 18 U.S.C. § 1350. 101.INS Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) (1) This agreement is a management contract or compensation plan or arrangement to be filed as an exhibit to this Form 10-K. Copies of any exhibits will be furnished to shareholders upon written request. Requests should be directed t Adom J. Greenland, Secretary, Chief Financial Officer and Treasurer, ChoiceOne Financial Services, Inc., 109 East Division, Sparta, Michigan, 49345. 76 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ChoiceOne Financial Services, Inc. By: /s/ Kelly J. Potes March 23, 2023 Kelly J. Potes Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Kelly J. Potes Chief Executive Officer and March 23, 2023 Kelly J. Potes Director (Principal Executive Officer) /s/ Adom J. Greenland Chief Financial Officer and Treasurer (Principal Financial and March 23, 2023 Adom J. Greenland Accounting Officer) */s/ Jack G. Hendon Chairman of the Board and Director March 23, 2023 Jack G. Hendon */s/ Greg L. Armock Director March 23, 2023 Greg L. Armock */s/ Keith Brophy Director March 23, 2023 Keith Brophy */s/ Michael J. Burke, Jr. President and Director March 23, 2023 Michael J. Burke, Jr. */s/ Harold J. Burns Director March 23, 2023 Harold J. Burns */s/ Eric E. Burrough Director March 23, 2023 Eric E. Burrough */s/ David Churchill Director March 23, 2023 David Churchill */s/ Curt E. Coulter Director March 23, 2023 Curt E. Coulter */s/ Bruce John Essex, Jr. Director March 23, 2023 Bruce John Essex, Jr. */s/ Gregory A. McConnell Director March 23, 2023 Gregory A. McConnell */s/ Bradley F. McGinnis Director March 23, 2023 Bradley F. McGinnis */s/ Nels W. Nyblad Director March 23, 2023 Nels W. Nyblad */s/ Roxanne M. Page Director March 23, 2023 Roxanne M. Page */s/ Michelle M. Wendling Director March 23, 2023 Michelle M. Wendling *By /s/ Adom J. Greenland Attorney-in-Fact 77

Washington, D.C.  20549 FORM 10-K ------------------------------ ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31 , 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________to _________ ------------------------------ Commission File Number 2-27985 1st FRANKLIN FINANCIAL CORP ORATION (Exact name of registrant as specified in its charter) Georgia 58-0521233 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 135 East Tugalo Street Post Office Box 880 Toccoa , Georgia 30577 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code : ( 706 ) 886-7571 Securities registered pursuant to Section 12(b) of the Ac None Securities registered pursuant to Section 12(g) of the Ac None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  __ No X Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  __ No X Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No  __ - 1 - (Cover page 1 of 2 pages) Indicate by check mark whether registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes X No ___ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one): Large Accelerated Filer __     Accelerated Filer __ Non-Accelerated Filer X Smaller Reporting Company ☐ Emerging Growth Company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ___ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of it internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  Yes ☐ No [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ☐ No X State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quar $ 0 . Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: Class Outstanding at February 28, 2021 Common Stock, $ 100 Par Value 1,700 Shares Non-Voting Common Stock, No Par Value 168,300 Shares DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Annual Report to security holders for the fiscal year ended December 31, 2021, included as Exhibit 13 hereto, are incorporated by reference into Parts I, II and IV of this Form 10-K. (Cover page 2 of 2 pages) - 2 - PART I Item 1. BUSINESS: The information under the headings “The Company”, page 2 and “Business”, pages 4-10, of the Company’s Annual Report to security holders for the fiscal year ended December 31, 2021 (the “Annual Report”) are incorporated herein by reference. Item 1A. RISK FACTORS: You should carefully consider the risks described below, as well as the other risks and information disclosed from time to time by 1 st Franklin, before deciding whether to invest in the Company.  Additional risks and uncertainties not described below, not presently known to us or that we currently do not consider to be material, could also adversely affect us. If any of the situations described in the following risk factors actually occur, our business, financial condition or results of operations could be materially adversely affected.  In any of these events, an investor may lose part or all of his or her investment. Risks Related to Our Business Because we require a substantial amount of cash to service our debt, we may not be able to pay all of the obligations under our indebtedness. To service our indebtedness, including paying interest and principal on outstanding debt securities and any amounts due under our credit facility, we require a significant amount of cash.  Our ability to generate cash depends on many factors, including our successful financial and operating performance.  We cannot assure you that our business strategy will continue to be successful, or that we will achieve our anticipated or required financial results. If we do not achieve our anticipated or required results, we may not be able to generate sufficient cash flow from operations or obtain sufficient funding to satisfy all of our obligations.  The failure to do this would result in a material adverse effect on our business. Because we depend on liquidity to operate our business, a decrease in the sale of our debt securities, an increase in requests for their redemption or the unavailability of borrowings under our credit facility may make it more difficult for us to operate our business and pay our obligations in a timely manner. Our liquidity depends on, and we fund our operations through, the sale of our debt securities, the collection of our receivables and the continued availability of borrowings under our credit facility.  Numerous available investment alternatives have resulted in investors evaluating more critically their investment opportunities.  We cannot assure you that our debt securities will offer interest rates and redemption terms which will generate sufficient sales to meet our liquidity requirements. Holders of our senior demand notes may request their redemption at any time without penalty.  Our variable rate subordinated debentures also may request that we redeem debentures at the end of any interest rate adjustment period or within the 14-day grace period thereafter without penalty.  As a result, it is possible that a significant number of redemption requests could adversely affect our liquidity. In addition, borrowings under our credit facility are subject to, among other things, a borrowing base.  In the event we are not able to borrow amounts under our credit facility, whether as a result of having reached our maximum borrowing availability thereunder or otherwise or if our current or any future credit facility matures or is terminated without our entering into a replacement facility on acceptable terms, conditions and timing, or at all, we may not be able to fund loans to customers, redeem securities when required or invest in our operations as needed. Our failure to be able to obtain or maintain sufficient liquidity could have a material adverse effect on our business, financial condition and results of operations. - 3 - Adverse changes in the ability or willingness of our customers to meet their repayment obligations to the Company could adversely impact our liquidity, financial condition and results of operations. Our business consists mainly of making loans to salaried people or other wage earners who generally depend on their earnings to meet their repayment obligations, and our ability to collect on loans depends on the willingness and repayment ability of our customers.  Adverse changes in the ability or willingness of a significant portion of our customers to repay their obligations to the Company, whether due to changes in general economic, political or social conditions, the cost of consumer goods, interest rates, natural disasters, acts of war or terrorism, prolonged public health crisis or a pandemic (such as COVID-19), or other causes, or events affecting our customers such as unemployment, major medical expenses, bankruptcy, divorce or death, could have a material effect on our liquidity, financial condition and results of operations. We maintain an allowance for credit losses in our financial statements at a level considered adequate by Management to absorb expected credit losses inherent in the loan portfolio as of the balance sheet date based on estimates and assumptions at that date.  However, the amount of actual future credit losses we may incur is susceptible to changes in economic, operating and other conditions within our various local markets, which may be beyond our control, and such losses may exceed current estimates.  Although Management believes that the Company’s allowance for credit losses is adequate to absorb losses on any existing loans that may become uncollectible, we cannot estimate credit losses with certainty, and we cannot provide any assurances that our allowance for credit losses will prove sufficient to cover actual credit losses in the future.  Credit losses in excess of our reserves may adversely affect our financial condition and results of operations. In any event, any reduced liquidity could negatively impact our ability to be able to fund loans, or to pay the principal and interest on any of our outstanding debt securities at any time, including when due. An increase in the interest we pay on our debt and borrowings could materially and adversely affect our net interest margin. Net interest margin represents the difference between the amount that we earn on loans and investments and the amount that we pay on debt securities and other borrowings.  The loans we make in the ordinary course of our business are subject to interest rate and regulatory provisions of each applicable state's lending laws and are made at fixed rates which are not adjustable during the term of the loan. Since our loans are made at fixed interest rates and are made using the proceeds from the sale of our fixed and variable rate securities, we may experience a decrease in our net interest margin because increased interest costs cannot be passed on to our loan customers.  A reduction in our net interest margin could adversely affect our liquidity, including our ability to make payments on our outstanding debt securities. We operate in a highly competitive environment. The consumer financing industry is highly competitive, and the barriers to entry for new competitors are relatively low in the markets in which we operate.  We compete for customers, locations and other important aspects of our business with, among others, large national and regional finance companies, as well as a variety of local finance companies.  Increased competition, or any failure on our part to compete successfully, could adversely affect our ability to attract and retain business and reduce the profits that would otherwise arise from operations. - 4 - We may not be able to make technological improvements as quickly as some of our competitors, which could harm our competitive ability and adversely affect our business, prospects, financial condition and results of operations. The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products, services and marketing channels.  We rely on our branch offices as the primary point of contact with our active accounts.  In order to serve consumers who want to reach us over the internet, we make available an online loan application on our consumer website, and we provide customers an online customer portal, giving them online access to their account information and an electronic payment option.  Our future success will depend, in part, on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demand for convenience, as well as to create additional efficiencies in our operations.  We expect that new technologies and business processes applicable to the consumer finance industry will continue to emerge, and these new technologies and business processes may be more efficient than those that we currently use.  We cannot ensure that we will be able to effectively implement new technology-driven products and services as quickly as some of our competitors or be successful in marketing these products and services to our customers.  Failure to successfully keep pace with technological change affecting the financial services industry could cause disruptions in our operations, harm our ability to compete with our competitors, and adversely affect our business, prospects, financial condition and results of operations. We are exposed to the risk of technology failures. Our daily operations depend heavily on our computer systems, data system networks and service providers to consistently provide efficient and reliable service.  The Company may be subject to disruptions in its operating systems arising from events that are wholly or partially beyond its control, which in turn may give rise to disruption of service to our customers.  If our systems were to become unreliable, fail, or experience a breach of security, our ability to maintain accurate financial records may be impaired.  In addition, we could be required to spend significant additional amounts to maintain, repair, upgrade or replace our systems.  Any such failures or expenditures could materially adversely impact our business operations and financial condition. A data security breach with regard to personally identifiable information about our customers or employees could negatively affect operations and result in higher costs. In the ordinary course of business, we receive a significant amount of personally identifiable information (“PII”) about our customers.  We also receive PII from our employees.  Numerous state and federal regulations, as well as other vendor standards, govern the collection and maintenance of PII from consumers and other individuals.  There are numerous opportunities for a data security breach, including cyber-security breaches, burglary, lost or misplaced data, scams, or misappropriation of data by employees, vendors or unaffiliated third parties.  Despite the security measures we have in place and any additional measures we may choose to or be required to implement or adopt in the future, our facilities and systems, and those of our third-party service providers, could be vulnerable to intentional or unintentional security breaches, computer viruses, lost or misplaced data, programming or human errors, scams, burglary, acts of vandalism, or other events.  Alleged or actual data security breaches, and costs to avoid the occurrence of those events, can increase costs of doing business, negatively affect customer satisfaction, expose us to negative publicity, individual claims or consumer class actions, administrative, civil or criminal investigations or actions, and infringe upon our proprietary information.  Any of these could significantly increase our costs of doing business and materially adversely affect our business and results of operations. - 5 - Our business could be adversely affected by the loss of one or more key employees. We are heavily dependent upon our senior management and the loss of services of any of our senior executives could adversely affect our business.  Our success has been, and will continue to be, dependent on our ability to retain the services of key employees.  The loss of the services of key employees or senior management could adversely affect the quality and profitability of our business operations. Risks Related to Our Debt Securities Our offers and sales of securities must comply with applicable securities laws, or we could be liable for damages, which could impact our ability to make payments on our outstanding debt securities. Offers and sales of all of our securities must comply with all applicable federal and state securities laws, including Section 5 of the Securities Act of 1933.  If any of our offers, including those deemed made pursuant to newspaper or radio advertisements or on our website, or sales are found not to be in compliance with any of these laws, we could be liable to certain purchasers of the security, could be required to offer to repurchase the security, or could be liable for damages or other penalties.  If we are required to repurchase any of our securities other than in the ordinary course of our business as a result of any such violation, or we are otherwise found to be liable for any damages or penalties as a result of any such violation, our financial condition could be materially adversely affected.  Any such adverse effect on our financial condition could materially impair our ability to fund loans in the ordinary course of business or pay principal and interest on our outstanding debt securities. Neither the Company nor any of its debt securities are or will be rated by any nationally recognized statistical rating agency, and this may increase the risk of your investment. Neither 1 st Franklin nor any of its debt securities are, or are expected to be, rated by any nationally recognized statistical rating organization.  Typically, credit ratings assigned by such organizations are based upon an assessment of a company’s creditworthiness and are often a measure used in establishing the interest rate that a company offers on debt securities it issues.  Without any such rating, it is possible that fluctuations in general economic, or industry specific, business conditions, changes in results of operations, or other factors that affect the creditworthiness of a debt issuer may not be fully reflected in the interest rate on any outstanding indebtedness of that issuer.  Investors in the Company’s securities must depend solely on their own evaluation of the creditworthiness of 1 st Franklin for the payment of principal and interest on those securities.  In the absence of any third party credit rating, it is possible that the interest rates offered by the Company on its debt securities may not represent the credit risk that an investor assumes in purchasing any of these securities. General Risk Factors Uncertain economic conditions could negatively affect our results and profitability. Increases in unemployment levels or other factors indicative of recessionary economic cycles could affect our investors’, customers’, and potential investors’ and customers’ disposable income, confidence, and spending patterns and preferences, which in turn could negatively impact the making of loans, our cost of loans, our sales of investment securities and our customers’ ability to repay their obligations to us. The effects of a pandemic, epidemic or other widespread public health emergency may adversely affect our business, financial condition and results of operations. Our business, financial condition and results of operations could be materially and adversely affected by the effects of a pandemic, epidemic or other widespread public health emergency such as the outbreak of the novel coronavirus, or COVID-19.  Widespread health emergencies - 6 - can disrupt our operations through their impact on our employees, investors, customers and the communities in which we operate.  Disruptions to our customers could result in increased risk of delinquencies, defaults and losses on our loans, negatively impact regional economic conditions, and result in a decline in loan demand and loan originations. The risks related to a widespread health emergency such as COVID-19 could also lead to the temporary closure of one or more of our branch offices.  The ultimate extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions taken to contain or prevent its further spread.  These and other potential impacts could adversely affect our business, financial condition and results of operations. Risks Related to Our Regulatory Environment Consumer finance companies and other companies that offer and sell securities to the public such as the Company are subject to an increasing number of laws and government regulations.  Compliance with these regulations requires significant time and attention of management, and is costly.  Further, if we fail to comply with these laws or regulations, our business may suffer and our ability to pay our obligations may be impaired. Our operations continue to be subject to significant focus by federal, state and local government authorities and state attorneys general and are subject to various laws and judicial and administrative decisions imposing various requirements and restrictions on certain lending practices by companies in the consumer finance industry; sometimes referred to as "predatory lending" practices.  These requirements and restrictions, among other thi • require that we obtain and maintain certain licenses and qualifications; • limit the interest rates, fees and other charges that we are allowed to charge; • require specified disclosures to borrowers; • limit or prescribe other terms of our loans; • govern the sale and terms of insurance products that we offer and the insurers for which we act as agent; and • define our rights to repossess and sell collateral. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) has significantly increased the regulation of financial institutions and the financial services industry in recent periods.  The Dodd-Frank Act established the Bureau of Consumer Financial Protection as an independent entity given the authority to promulgate additional consumer protection regulations applicable to all entities offering consumer financial services or products such as the Company.  Many of the requirements in the Dodd-Frank Act are being implemented over time and are subject to implementing regulations over the course of several years.  Given the uncertainty associated with the manner in which various expected provisions of the Dodd-Frank Act have been and are expected to be implemented by the various regulatory agencies, the full extent of the impact such requirements will have on our operations remains unclear; however, these regulations have increased and are expected to further increase our cost of doing business and time spent by Management on regulatory matters which may have a material adverse effect on the Company’s operations and results. In addition, other state and local laws, public policy and general principles of equity relating to the protection of consumers, unfair and deceptive practices and debt collection practices may apply to the loans we make and our related services.  There can be no assurance that a change in any of those laws, or in their interpretation, will not make our compliance therewith more difficult or expensive, further restrict our ability to originate loans or other financial services, further limit or restrict the amount of interest and other charges we earn under such - 7 - loans or services, or otherwise adversely affect our financial condition or business operations.  The burdens of complying with these laws and regulations, and the possible sanctions if we do not so comply, are significant, and may result in a downturn in our business or our inability to carry on our business in a manner similar to how we currently operate. If we experience unfavorable litigation results, our ability to timely meet our obligations may be impaired. As a consumer finance company, in addition to being subject to stringent regulatory requirements, we may, from time to time, be subject to various consumer claims and litigation seeking damages and statutory penalties.  The damages and penalties claimed by consumers and others can often be substantial.  The relief may vary but generally would be expected to include requests for compensatory, statutory and punitive damages.  Unfavorable outcomes in any litigation or statutory proceedings could materially and adversely affect our results of operations, financial condition and cash flows and our ability to make payments on our outstanding obligations. While we would expect to vigorously defend ourselves against any of these proceedings, there is a chance that our results of operations, financial condition and cash flows in any period could be materially and adversely affected by unfavorable outcomes which, in turn, could affect our ability to fund loans or make payments on, or repay, our outstanding obligations, any of which could materially adversely effect our business, results of operations and financial condition. Item 1B. UNRESOLVED STAFF COMMENTS : Not Applicable. Item 2. PROPERTIES : Paragraph 1 of “The Company”, page 2; paragraph 1 (and the accompanying table) of Footnote 8 (Leases) of the Notes to Consolidated Financial Statements, pages 42-43; and the 1 st Franklin Financial Corporation Branch Offices directory of branch offices, pages 53-54 of the Annual Report are incorporated herein by reference. Item 3. LEGAL PROCEEDINGS: From time to time, the Company is involved in various claims and lawsuits incidental to its business.  In the opinion of Management based on currently available facts, the ultimate resolution of any such known claims and lawsuits is not expected to have a material adverse effect on the Company’s financial position, liquidity, or results of operations. Item 4. MINE SAFETY DISCLOSURES: Not Applicable. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES: "Sources of Funds and Common Stock Matters", page 10 of the Annual Report is incorporated herein by reference. Item 6. [Reserved] - 8 - Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: "Management’s Discussion and Analysis of Financial Condition and Results of Operations", pages 12-20 of the Annual Report is incorporated herein by reference.  This section generally discusses 2021 and 2020 operating results and year-to-year comparisons between 2021 and 2020.  Discussion of 2019 operating results and year-to-year comparisons between 2020 and 2019 that are not included in this Annual Report can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed on March 30, 2021. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK: "Quantitative and Qualitative Disclosures About Market Risk”, page 16 of the Annual Report is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA: "Report of Independent Registered Public Accounting Firm" and the Company’s Consolidated Financial Statements and Notes thereto, pages 21-49 of the Annual Report are incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE: Not applicable. Item 9A. CONTROLS AND PROCEDURES: We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.  Management recognizes that a control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.    Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Executive Vice President and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures as of December 31, 2021.  Based on that evaluation, the CEO and CFO concluded that the Company's disclosure controls and procedures under Rule 15d-15(e) of the Exchange Act were effective at December 31, 2021. There have been no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. - 9 - MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING: The Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.  An internal control system over financial reporting has been designed to provide reasonable assurance regarding the reliability and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Management recognizes that there are inherent limitations in the effectiveness of any internal control system.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 based upon the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013) .  Based on this evaluation, Management believes that the Company’s internal control over financial reporting, as such term is defined in Exchange Act Rule 15d-15(f), was effective as of December 31, 2021. This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding the effectiveness of internal controls over financial reporting.  Management’s report is not subject to attestation by the Company’s registered public accounting firm pursuant to certain rules of the Securities and Exchange Commission that permit the Company to provide only Management’s report in this Annual Report. Item 9B. OTHER INFORMATION: Not Applicable. Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS: Not Applicable. ------------------------------------------ Forward Looking Statements : Certain statements contained or incorporated by reference herein, including under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” may constitute “forward-looking statements” within the meaning of the federal securities laws.  Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements.  Such factors include, among other things, those set out under the caption “Risk Factors”, the ability to manage cash flow and working capital, the accuracy of Management’s estimates and judgments, adverse developments in economic conditions including within the interest rate environment, unfavorable outcomes of litigation, ability to control credit losses, federal and state regulatory changes and other factors referenced elsewhere herein or incorporated herein by reference. - 10 - PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE DIRECTORS Position(s) Name of Director Age Director Since with Company Ben F. Cheek, III (3)(4)(5) 85 1967 Chairman Emeritus Ben F. Cheek, IV (3)(4)(5) 60 2001 Chairman of the Board Virginia C. Herring (3)(4)(5) 58 2020 President / Chief Executive Officer A. Roger Guimond (2)(5) 67 2004 None James H. Harris, III (1)(2)(5) 68 2014 None Jerry J. Harrison, Jr. (1)(2)(5) 59 2020 None John G. Sample, Jr. (1)(2)(5) 65 2004 None C. Dean Scarborough (1)(2)(5) 67 2004 None Keith D. Watson (1)(2)(5) 64 2004 None (1) Member of Audit Committee. (2) Mr. Guimond is the retired EVP and Chief Financial Officer of 1 st Franklin Financial Corporation where he served for more than 45 years. Mr. Harris, III is the retired owner of Unichem Technologies, Inc., a specialty chemicals company which he founded over 20 years ago. Mr. Harris, III is also former owner of Moonrise Distillery, a producer of spirits, which he formed and owned beginning in 2012. Mr. Harrison, Jr. is the Chief Operating Officer at Crider Foods since 2020. Previously Mr. Harrison, Jr. was the Chief Executive Officer at Five Stand Capital, a private equity firm, since 2007. Mr. Sample is the retired Senior Vice President and Chief Financial Officer of Atlantic American Corporation, an insurance holding company, where he served from 2002 through July 31, 2017. Mr. Scarborough is a retired retail business owner. Mr. Watson is Chairman of the Board of Bowen & Watson, Inc., a general contracting company. Mr. Watson has been with Bowen & Watson since 1980. (3) Reference is made to “Executive Officers” for a discussion of business experience. (4) Mr. Ben F. Cheek, III and IV are father and son. Mr. Ben F. Cheek, III and Ms. Virginia C. Herring and father and daughter. Mr. Ben F. Cheek, IV and Ms. Virginia C. Herring are brother and sister. (5) The term of office of each director continues until the next annual meeting of shareholders of the Company and a successor to such director is elected and qualified. There was no, nor is there presently any, arrangement or understanding between any director and any other person (except directors and officers of the registrant acting solely in their capacities as such) pursuant to which the director was selected. - 11 - 1 st Franklin Financial Corporation is a family controlled company, with Mr. Ben F. Cheek, III‘s family directly or indirectly owning all of the Company's stock.  Mr. Cheek, III, who has significant knowledge of all aspects of the Company's business and operations, served as Chairman and Chief Executive Officer through 2014.  Effective January 1, 2015, Mr. Cheek, III transitioned to the role of Vice Chairman and Ben F. Cheek, IV, who previously served as Vice Chairman and has been with the Company since 1988 in roles of increasing responsibility, was appointed Chairman of the Board.  At that time, Mrs. Virginia C. Herring,  the Company’s President, took on the additional role of Chief Executive Officer.  In light of the additional responsibilities assumed by Mr. Cheek, IV and Ms. Herring, and in order to allow them to each focus on the significant responsibilities contained within these new roles, the Board determined at that time that it was appropriate to separate the roles of Chairman and Chief Executive Officer.  Given the separation of the Chairman and Chief Executive Officer roles, relatively low historical turnover of members of the Board of Directors and the strong working relationship between such members, the Board has determined there is not a need to appoint a lead independent director.  The Board continues to believe that such determination is in the best interests of the Company.  During 2020, Mr. Cheek, III transitioned to Chairman Emeritus. The day-to-day management of the Company, including identifying and evaluating current and potential risks within financial operations, compensation related and other processes and development is primarily the responsibility of the Company’s Executive Management Team (the “EMT”).  Individuals comprising the EMT are as follows:  Messrs. Cheek, IV, Clevenger II, Gyomory, Manke, McQuain, Shaw, Scarpitti, Thompson, Vercelli and Ms. Herring.  The Board of Directors maintains the ultimate responsibility for oversight of the Company’s risks.  In fulfilling its duties, the Board allocates a portion of its direct oversight responsibilities to various committees.  The Audit Committee has specific responsibility for oversight of risks associated with financial accounting, reporting and audits, as well as internal control over financial reporting.  The Board regularly receives, evaluates and discusses presentations, at least quarterly, on the financial condition and operating results of the Company.  Management discusses matters of particular importance or concern as they may be materially impacted by risk on an ongoing basis, and members of the EMT remain available to members of the Board for discussion and review both during meetings of the Board of Directors and at other times. Notwithstanding the fact that the Company’s equity securities are not currently traded on any national securities exchange or with any national securities association, as a matter of good corporate governance, the Board of Directors has determined that it is important to have Board members who are independent from management represented on the Board of Directors.  For this purpose, the Board has adopted and considers the independence requirements for companies whose securities are listed for trading on the NASDAQ Stock Market.  The Board has determined that a majority of the members of the Board of Directors, specifically Messrs. Harris, Harrison, Sample, Scarborough, and Watson, are “independent” (as such term is defined in the rules of the Securities and Exchange Commission (the “SEC”) and the NASDAQ Listing Rules).  In making this determination, the Board concluded that none of such persons have a relationship which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The Audit Committee is composed of Messrs. Sample, Scarborough, Watson, Harris and Harrison.  In accordance with the provisions of the charter of the Audit Committee, the Board of Directors has determined that all of the members thereof are “independent” and that Mr. Sample is an “audit committee financial expert” as defined by the SEC in Rule 407(d)(5) of Regulation S-K.  In making such determination, the Board of Directors took into consideration, among other things, the express provision in Item 407(d)(5) of Regulation S-K that the designation of a person as an audit committee financial expert shall not impose any greater responsibility or liability on that person than the responsibility and liability imposed on that person as a member of the Audit Committee, nor shall it affect the duties or obligations of other Audit Committee members.  A copy of the Company’s Audit Committee charter is publicly available on the Company’s website a  https://www.1ffc.com. The Company is a family owned business.  Because of the closely held nature of ownership, the Company does not have an official compensation committee (or other official committee of the Board of - 12 - Directors performing equivalent functions) or a charter outlining the responsibilities thereof.  The EMT establishes the bases for all executive compensation, which compensation is subject to approval by the shareholders in their capacities as such.   Additional information concerning the processes and procedures for the consideration and determination of executive officer and director compensation is contained under the heading “Compensation Discussion and Analysis” below. Because of the closely held nature of the ownership of the Company, the Board has determined that it is not necessary for the Company to have a formal process for shareholders to send communications to the Board. Director Qualificatio The members of the Board of Directors each have the qualifications we believe necessary and desirable to appropriately perform their duties.  Each member has an exemplary record of professional integrity, a dedication to their respective professions and a strong work ethic. Director Summary of Qualifications Ben F. Cheek, III Retired executive officer of the Company.  Previously served as director of a Habersham Bancorp.  Has legal background as an attorney.  Has 61 years experience with the Company.  Has previously served as board member of various consumer industry associations.  He has served as director of the Company for 54 years. Ben F. Cheek, IV Executive officer of the Company.  Highly knowledgeable of the banking and consumer finance industry.  Has been with the Company for 33 years.  Currently serves on two of the industry’s state association boards and has previously served as a board member of our industry’s national association. Virginia C. Herring Executive officer of the Company.  Highly knowledgeable of the banking and consumer finance industry.  Has been with the Company for 33 years. A. Roger Guimond Retired executive officer of the Company.  Highly knowledgeable of the banking and consumer finance industry.  Had been with the Company for more than 45 years. Significant experience in finance and related areas. James H. Harris, III Independent director.  Has significant executive experience in small to mid-size companies and currently maintains executive position, with responsibility for finance and other matters, which provides him significant knowledge to function as an effective member of our Audit Committee. Jerry J. Harrison, Jr. Independent director.  Extensive experience in private equity and technology services industry.  Has a law degree and significant financial and technology related experience. - 13 - Director Summary of Qualifications John G. Sample, Jr. Independent director.  Extensive knowledge of accounting and reporting standards.  Prior experience as an audit partner in an international public accounting firm.  Experience and knowledge of the insurance industry through prior executive management positions at operating companies.  Serves as board member and Chairman of the Audit Committee at Capital City Bank Group, Inc. (a Tallahassee, Florida bank holding company).  Has served as director of the Company for 17 years and is the Company’s Audit Committee Chairman. C. Dean Scarborough Independent director.  Previously served on board of a community bank.  Currently serves as a Commissioner for Stephens County, Georgia, where the Company maintains its headquarters.  Has served as director of the Company for 16 years. Keith D. Watson Independent director.  Previously served on board of a community bank.  Has served as director of the Company for 16 years.  Maintains executive position with significant oversight responsibility in self-owned corporation. EXECUTIVE OFFICERS Name, Age, Position(s) and Family Relationships Business Experience Ben F. Cheek, IV, 60 Chairman of Board Son of Ben F. Cheek, III, Brother of Virginia C. Herring Joined the Company in 1988 working in Statistics and Planning,  Became Vice Chairman in 2001 and Chairman of Board effective January 2015. Ben F. Cheek, III, 85 Chairman Emeritus Father of Ben F. Cheek, IV and Virginia C. Herring Joined the Company in 1961 as attorney and became Vice President in 1962, President in 1972 and Chairman of Board in 1989.   Effective January 2015, assumed role of Vice Chairman of the Board.  During 2020, Mr. Cheek, III transitioned to Chairman Emeritus. Virginia C. Herring, 58 President and Chief Executive Officer Daughter of Ben F. Cheek, III, Sister of Ben F. Cheek, IV Joined the Company on a full time basis in 1988 as Developmental Officer.  Since then, she has worked throughout the Company in different departments on special assignments and consultant projects. Became President in 2001.  Effective January 2015 promoted to Chief Executive Officer in addition to retaining her position as President. Brian J. Gyomory, 54 Executive Vice President, Chief Financial Officer No Family Relationship Joined the Company in December 2019 as Senior Vice President of Finance. Became Executive Vice President and Chief Financial Officer in April 2021.  Prior thereto, was Vice President, Finance at Global Lending Services, LLC beginning 2012. - 14 - EXECUTIVE OFFICERS (continued) Name, Age, Position(s) and Family Relationships Business Experience Todd S. Manke, 53 Executive Vice President – Chief Risk Officer No Family Relationship Joined the Company in August 2020 as Executive Vice President and Chief Risk Officer.  Prior thereto, was Chief Risk Officer at American Credit Acceptance Corporation beginning in 2009.  Prior to that, experiences include work for Capital One, Lincoln Financial and Corning, Inc. Gary L. McQuain, 56 Executive Vice President – Chief Operating Officer No Family Relationship Joined the Company in October 2019 as Senior Operations Vice President.  Became Executive Vice President and Chief Operating Officer in May 2020.  Prior thereto, was President and CEO of Southern Management Corporation, a financial services company, from October 2017 to August 2019.  Prior to that, served as a financial services professional at MidCountry Financial Corp., a financial services holding company, from January 2016 to October 2017, and President of Pioneer Services, a financial services company from January 2016 to October 2017. Jeffrey R. Thompson, 64 Executive Vice President – Human Resources No Family Relationship Joined the Company in 2015 as Project Manager. Became Vice President – Human Resources in May 2019.  Became Executive Vice President - Human Resources in May 2020. Mark J. Scarpitti, 49 Executive Vice President – General Counsel No Family Relationship Joined the Company in November 2015 as Vice President – Deputy General Counsel.  Became Executive Vice President – General Counsel in August 2021. Charles E. Vercelli, Jr., 61 Executive Vice President – Government Affairs No Family Relationship Joined the Company in 2008 as Executive Vice President – General Counsel.  Became Executive Vice President – Government Affairs in 2021.  Prior thereto, he provided legal services in his privately held law firm. Daniel E. Clevenger, II, 48 Executive Vice President – Compliance No Family Relationship Joined the Company in February 2015 as Executive Vice President - Compliance.  Prior thereto, served as General Counsel and Chief Compliance Officer at Millennium Capital and Recovery Corporation, a collateral recovery company, from 2014 to 2015 and prior thereto provided legal services at Day Kettierer, LTD from 2006 to 2013.  Served in private practice of law from 1998 to 2006. - 15 - EXECUTIVE OFFICERS (continued) Name, Age, Position(s) and Family Relationships Business Experience Joseph A. Shaw, 51 Executive Vice President – Chief Information Officer No Family Relationship Joined the Company in July 2017 as Chief Information Officer and became Executive Vice President and Chief Information Officer in January 2018.  Prior thereto, he was a Technology Strategist for a Microsoft consulting firm he founded in 2007. Lynn E. Cox, 64 Vice President - Secretary / Treasurer No Family Relationship Joined the Company in 1983 and became Secretary in 1990. Appointed Treasurer in 2002. Became Area Vice President and Secretary in 2001.  Promoted to Vice President in 2005. The term of office of each executive officer expires when a successor is elected by the Board of Directors and qualified.  There was no, nor is there presently any, arrangement or understanding between any officer and any other person (except directors or officers acting solely in their capacities as such) pursuant to which the officer was elected. The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer and controller, or any persons performing similar functions, as well as to its directors and other employees.  A copy of this code of ethics is publicly available on the Company’s website a  https://www.1ffc.com.  The Company will provide a copy of this code of ethics, free of charge, upon any written request.  Requests should be directed to Lynn Cox, Secretary and Treasurer, 1 st Franklin Financial Corporation, P.O. Box 880, Toccoa, Georgia 30577.  If we enter into any amendment to this code of ethics, other than a technical, administrative, or non-substantive amendment, or we grant any waiver from a provision of the code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or any persons performing similar functions, we will disclose the nature of the amendment or waiver on our website.  Also, we may elect to disclose the amendment or waiver in a report on Form 8-K filed with the SEC. The Company maintains an “Ethics Hotline” which enables employees to report any questionable ethics actions including, but not limited to, fraud or deliberate error in recording and/or maintaining accurate records, deficiencies or noncompliance with the Company’s policies.  The reporting is strictly confidential and is reviewed by our Vice President of Human Resources and the Chairman of the Audit Committee.  Ethics violations that are reported are promptly investigated and appropriate corrective action is taken as warranted by the results of the investigation. Item 11. EXECUTIVE COMPENSATION: Compensation Discussion and Analysis Overall Philosop The overall financial objective of the Company is to achieve or exceed specific annual and long-term strategic goals set by the Executive Management Team (described below, the “EMT”), from time to time, while maintaining a healthy and stable financial position.  It is part of the overall responsibility of our executive officers to successfully manage the Company to reach this objective. Our compensation philosophy revolves around the motivation to achieve, and achievement of, these goals and is designed - 16 - to attract and retain top executives, and to incentivize and reward the executive officers for their efforts and successes, while properly balancing the encouragement of risk-taking behavior. Role of Executive Officers in Compensation Decisio The Company is a family-owned business.  Because of the closely-held nature of ownership, the Company does not have an official compensation committee (or other official committee of the Board of Directors performing equivalent functions).  The EMT, which consists of certain executive officers of the Company, establishes the bases for all executive officer compensation, which compensation is approved by Mr.Cheek IV, and Ms. Herring, who are shareholders of the Company and Mr. Cheek, III, retired executive officer.  At December 31, 2021, the EMT consisted of Messrs. Cheek IV, Guimond, Gyomory, Clevenger, Manke, McQuain, Scarpitti, Shaw and Vercelli, Ms. Herring, and Ms. O’Shields.  For the foregoing reasons the Company has not historically engaged any independent compensation consultant to advise on compensation related matters. Components of Compensati The principal components of the Company’s executive compensation program include base salary, discretionary bonus awards and non-equity incentive plan compensation. The Company also expects that earnings on non-qualified deferred compensation amounts and other compensation opportunities, including certain perquisites as detailed below, will meaningfully add to each executive officer’s overall total compensation each year.  Given the closely held nature of the Company, the Company does not have available for grant, and does not deem it appropriate to pay, any equity-based compensation.  The EMT takes into account this fact annually when determining other components and amounts of compensation. Base Salary: The Company provides executive officers, and other employees, with a base salary intended to provide a level of financial security and appropriately compensate them for services rendered throughout the year.  Salaries for all executive officers are established annually by Messrs. Cheek III and Cheek, IV and Ms. Herring, based on the level of each executive officer’s responsibility, tenure with the Company and certain publicly available market data with respect to salaries paid for like positions at comparable companies.  In addition, base salaries are set at a level designed to take into account the fact that the Company does not provide equity-based compensation, as described elsewhere. Each executive officer has goals set annually which are reviewed with the officer by the President and Chief Executive Officer throughout the year.  These goals typically vary depending on the nature of the executive’s responsibilities but are set at a level that is expected to be challenging but achievable.  A formal individual performance and development review is also held each year with each executive officer and Ms. Herring, in which the level of achievement with respect to such goals is reviewed.  Merit based adjustments to salaries are based on the assessment of each executive’s performance review and overall Company performance. Bonus Awards: Bonus amounts payable to the executive officers include discretionary bonuses and may include certain cash bonuses from time to time for special recognition, each determined at the discretion of the EMT and approved by Mr. Cheek IV, Ms. Herring, who are shareholders of the Company.  The EMT considers, among other factors, the Company’s inability to grant equity-based awards to its officers and employees, as described below, when determining whether and to what extent to make awards.  As in prior years, in 2021 it was determined appropriate to award the executive officers a bonus of 4% of their respective base salaries, which was awarded and paid in November as a “holiday” bonus.   In addition to this 4% bonus, Mr. Cheek, IV and Ms. Herring retain the discretion to award certain additional amounts. - 17 - Non-Equity Incentive Compensati As described elsewhere herein, the Company’s stock is not traded or quoted on any national securities exchange or association, but is closely held by Mr. Cheek, III, and his family.  As a result, the Company does not grant stock or other equity based awards.  In consideration of this and other factors, and in order to establish quantitative financial targets, the achievement of which would trigger the payment of additional compensation, the EMT has, historically, adopted annual incentive compensation plans.  Consistently therewith, in the first quarter of 2021 the EMT approved the Company’s 2021 Executive Bonus Plan (the “2021 Bonus Plan”).  Mr. Cheek, III voluntarily elected not to participate in the 2021 Bonus Plan. The 2021 Bonus Plan was a cash-based incentive plan designed to promote high performance and the achievement of various short-term corporate goals. Under the 2021 Bonus Plan, at inception, a minimum pre-tax income requirement of $14.6 million was established as a threshold goal required to be achieved in order for any payouts to be made under such plan.  The minimum pre-tax income threshold was determined by reference to the average trailing three years' pre-tax income of the Company, plus the Company's projected accrued incentive bonus at December 31, 2020, multiplied by 50%.  The EMT believed using a trailing three-year average metric would incent management to focus on long-term growth, and not be disproportionately focused on short-term results.  The EMT determined that pre-tax income was an appropriate measure upon which to provide a threshold evaluation of our annual performance because the EMT believes pre-tax income represents an appropriate measure of profitability for the Company. If that threshold was met, payouts under the 2021 Bonus Plan were based on the achievement of personal and department goals and the performance evaluation.  The bonus will be paid on an individual basis as a percentage of the participant’s annual salary.  The plan allows for a bonus range of 0% to 65%. In 2021, the Company surpassed the $14.6 million pre-tax threshold goal. In accordance with discretion afforded to the EMT under the 2021 Bonus Plan, amounts paid to each executive officer, other than Mr. Cheek, III, varied within the payout range depending on personal performance milestones and department goals as determined by the EMT.  The actual amounts paid to each executive officer are set out in the Summary Compensation Table which follows, under the heading “Non-Equity Incentive Plan Compensation”. Deferred Compensati The Company offers all eligible employees, including executive officers, the opportunity to participate in a Company-sponsored deferred compensation plan in accordance with Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”).  The Company “matches” employee contributions of up to 6% of their salary, using the following formul 100% of the first 1% and 70% of the next 5% of salary deferred. As a result of certain federal limitations on the ability of management or highly compensated employees (within the respective meanings of Section 201(2), 301(a)(3), 401(a)(1) and 4021(b)(6) of the Employee Retirement Income Security Act of 1974) to participate in such plans, the Company has established the Company’s Executive Nonqualified Deferred Compensation Plan (the “Deferred Compensation Plan”). Pursuant to the Deferred Compensation Plan, the Company annually credits the account of each participant who received more than the Section 401(a)(17) salary limit (as described in the Code) with a discretionary amount that is usually, but not always, equal to the amount the participant would have received as a 401(k) Company matching contribution on the amount of their salary above the Section 401(a)(17) limit had they been allowed to defer 6% of that amount into the qualified plan.  The EMT determined that it was appropriate to offer the Deferred Compensation Plan, and the matching contribution consistent with the level provided by employees generally, to such persons as if they were eligible to participate in Company sponsored plans open to other employees. - 18 - Perquisites and Other Compensati The Company believes that providing its executive officers with certain reasonable perquisites and other compensation is appropriate and consistent with the Company’s overall compensation philosophy designed to attract and retain top executives.  The EMT periodically reviews the types and amounts of perquisites and other compensation provided to the Company’s executive officers.  In conducting this review, the EMT considers, among other things, the types and ranges of compensation provided at various similar sized or situated companies and, in 2021, determined that these amounts were appropriate. The Company’s executive officers are provided the use of Company-owned automobiles and granted a travel allowance to cover certain costs of business-related travel when an overnight stay is not required and the Company’s travel expense policy is not otherwise involved.  These amounts are included in the taxable income of the executive officers.  In addition, the Company generally provides certain insurance benefits to its executive officers.  This includes long-term disability and travel accident insurance (which pays a benefit upon the occurrence of certain specific events), as well as basic life and accidental death insurance coverage, which coverage is provided on a graduated scale based on seniority.  In addition, in recognition of the commitment to the Company by those individuals with twenty or more years of service to the Company, the Company also pays the premiums for their personal medical benefits.  In 2021, Messrs. Cheek, IV, Guimond (retired effective December 31, 2021) and Morrow (retired effective January 1, 2021), Ms. Herring and Ms. O’Shields (retired effective December 31, 2021), received this benefit.  In addition, during 2021, Messrs. Cheek, III and Cheek, IV, and Ms. Herring, based on positions as shareholders and executive officers, were determined eligible to participate in the Company’s medical expenses reimbursement program (“MERP”), which provides reimbursement for amounts not otherwise covered under policies for which these officers are eligible to participate in. These amounts for each named executive officer are reflected in the Summary Compensation Table and related notes below. Employment Agreements and Change in Control Arrangements: The Company does not enter into employment agreements with its executive officers.  Given the nature of its business, and the fact that the Company is a family owned business whose stock is not publicly traded, the Company has not had significant turnover among its senior management, and has determined that it is not necessary to enter into such agreements with its executives. For similar reasons, due to the nature of compensation and the fact that a change in control of the Company is unlikely without significant input and approval from the EMT and the Company’s closely-held ownership, the EMT has determined that it is not necessary to condition any payments upon, or make any amounts contractually payable upon, any change in control of the Company. Compensation Committee Repor In the absence of a standing compensation committee, the Board of Directors has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with Management and, based on such review and discussions, determined that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K. The Board of Directo Ben F. Cheek, III Jerry L. Harrison, Jr. Ben F. Cheek. IV John G. Sample, Jr. Virginia C. Herring C. Dean Scarborough A. Roger Guimond Keith D. Watson James H. Harris, III - 19 - Summary Compensation Table Name and Principal Position Year Salary Bonus (1) Non-Equity Incentive Plan Compensation (2) All Other Compensation (3) Total Ben F. Cheek, IV Chairman 2021 2020 2019 $ 321,384 $ 321,384 $ 297,384 $ 95,301 $ 96,157 $ 95,855 $ 208,899 $ 114,965 $ 32,138 $ 59,602 $ 58,192 $ 123,757 $ 685,186 $ 590,698 $ 549,134 Virginia C. Herring President and CEO 2021 2020 2019 $ 402,000 $ 398,833 $ 383,000 $ 251,477 $ 247,667 $ 247,892 $ 261,300 $ 145,709 $ 57,450 $ 99,484 $ 66,425 $ 35,549 $ 1,014,261 $ 858,634 $ 723,891 A. Roger Guimond Executive Vice President of Finance and Investor Relations (4) 2021 2020 2019 $ 491,741 $ 465,500 $ 450,917 $ 38,313 $ 23,805 $ 33,449 $ 319,632 $ 170,065 $ 90,183 $ 74,306 $ 60,655 $ 74,715 $ 923,992 $ 720,025 $ 649,264 Brian J. Gyomory Executive Vice President and Chief Financial Officer 2021 2020 2019 $   265,500 $              - $              - $   11,053 $             - $             - $ 172,575 $ - $            - $ 3,609 $            - $            - $ 452,737 $ - $ - Gary L. McQuain Executive Vice President and Chief Operating Officer 2021 2020 2019 $ 398,750 $ 366,667 $ - $ 16,051 $ 14,667 $ - $ 259,188 $ 133,957 $ - $ 21,726 $ 17,188 $ - $ 695,715 $ 532,479 $ - Charles E. Vercelli, Jr. Executive Vice President of Government and Regulatory Affairs 2021 2020 2019 $ 315,500 $ 315,668 $ 319,140 $ 15,020 $ 15,341 $ 14,014 $ 244,075 $ 132,862 $ 70,068 $ 71,333 $ 56,179 $ 42,720 $ 645,928 $ 520,050 $ 445,942 (1) For additional information on the payments of discretionary bonus awards, see “Compensation Discussion and Analysis – Bonus Awards” above. (2) For additional information on the payments of non-equity incentive plan compensation, see “Compensation Discussion and Analysis – Non-Equity Incentive Compensation” above. (3) All other compensation for the Company’s named executive officers for 2021 is detailed as follows: (4) Title changed from Executive Vice President and Chief Financial Officer to Executive Vice President of Finance and Investor Relations effective April 2021. All Other Compensation Name Personal Use of Company Auto or Airplane Travel Allowance and/or Travel Expense Reimb . Insurance Premiums Director Fees and/or Deferred Salary (a) Company Contribution To Deferred Compensation Plan Total Ben F. Cheek, IV $ 5,425 $ - $ 12,013 $ 35,000 $ 7,164 $ 59,602 Virginia C. Herring $ 46,857 $ - $ 5,306 $ 35,000 $ 12,321 $ 99,484 A. Roger Guimond $ 11,563 $ - $ 2,301 $ 35,000 $ 25,442 $ 74,306 Brian J. Gyomory $ - $ - $ 819 $ - $ 2,790 $ 3,609 Gary L. McQuain $ 9,267 $ - $ 819 $ - $ 11,640 $ 21,726 Charles E. Vercelli, Jr. $ - $ - $ 831 $ 60,000 $ 10,502 $ 71,333 (a) Mr. Vercelli elected to defer $60,000 in salary in 2021.  See “Executive Nonqualified Deferred Compensation Plan” and “Director Fees” below. Grants of Plan-Based Awards In 2021, the named executive officers were eligible to receive non-equity incentive plan payouts under the Company’s 2021 Bonus Plan.  The following table sets forth certain information with respect to award eligibility and payments for the fiscal year ended December 31, 2021 to our named executive officers. - 20 - Estimated Future Payouts Under Non-Equity Incentive Plan Awards (1) Name Grant Date Threshold $ Target $ Maximum $ Ben F. Cheek, IV 3/01/2021 $ - $ 104,450 $ 208,899 Virginia C. Herring 3/01/2021 $ - $ 130,651 $ 259,242 A. Roger Guimond 3/01/2021 $ - $ 159,816 $ 319,632 Brian J. Gyomory 3/01/2021 $ - $ 86,288 $ 172,575 Gary L. McQuain 3/01/2021 $ - $ 129,594 $ 259,188 Charles E. Vercelli, Jr. 3/01/2021 $ - $ 122,038 $ 244,075 (1) Represented estimated possible payouts under the 2021 Bonus Plan.  The “Threshold” column reflects the payout which would have occurred if each performance goal as set out in the 2021 Bonus Plan was met, and payouts were made at the minimum level (0%) of salary.  The “Target” column reflects the payout which would have occurred if each performance goal as set out in the 2021 Bonus Plan was met, and payouts were made at the midpoint of bonus payout as a percent of salary (32.5%).  The “Maximum” column reflects the payout which would have occurred if each performance goal as set out in the 2021 Bonus Plan was met, and payouts were made at the maximum level (65.0%) of salary. Compensation Committee Interlocks and Insider Participation The Company is a family owned business and because of the closely held nature of ownership, the Company does not have an official compensation committee (or other official committee of the Board of Directors performing equivalent functions) or a charter outlining the responsibilities thereof.  The EMT establishes the bases for all executive compensation, which compensation is approved by shareholders Messrs. Cheek, III and Cheek, IV and Ms. Herring. During 2021, none of the Company’s executive officers served as a member of the board of directors or compensation committee of any entity for which a member of our Board served as an executive officer. Executive Nonqualified Deferred Compensation Plan Any management or highly compensated employee who has been designated by the Administrative Committee for the Company’s Deferred Compensation Plan as an eligible employee may participate in the Company’s Executive Nonqualified Deferred Compensation Plan (the “Plan”). Non-employee directors are also eligible to defer their respective director fees into the Deferred Compensation Plan. The Plan does not require any contribution to be made by a participant therein. Interest is credited on the participant’s account on the last day of each quarter at an interest rate equal to the average of the interest rate during such quarter paid on the Company’s Variable Rate Subordinated Debentures with a one-year interest adjustment period. Nonqualified Deferred Compensation Table Name Executive Contributions In Last Fiscal Year (1) Registrant Contributions In Last Fiscal Year (2) Aggregate Earnings In Last Fiscal Year Aggregate Withdrawals / Distributions Aggregate Balance At Last Fiscal Year End Ben F. Cheek, IV $ - $ 7,164 $ 18,025 $ - $ 703,081 Virginia C. Herring $ - $ 12,321 $ 3,207 $ - $ 142,154 A. Roger Guimond $ - $ 25,442 $ 25,938 $ - $ 1,027,102 Brian J. Gyomory $ - $ 2,790 $ - $ - $               - - 21 - Nonqualified Deferred Compensation Table (continued) Name Executive Contributions In Last Fiscal Year (1) Registrant Contributions In Last Fiscal Year (2) Aggregate Earnings In Last Fiscal Year Aggregate Withdrawals / Distributions Aggregate Balance At Last Fiscal Year End Gary L. McQuain $ - $ 11,640 $ - $ - $ 16,673 Charles E. Vercelli, Jr. $ 60,000 $ 10,502 $ 6,974 $ - $ 366,773 (1) Includes $60,000 in deferred salary by Mr. Vercelli.  See the “All Other Compensation” portion of the “Summary Compensation Table” above, and “Director Compensation” below. (2) Company contributions are included in the “All Other Compensation” portion of the Summary Compensation Table above. Director Compensation Name Fees Earned Or Paid In Cash All Other Compensation Total Ben F. Cheek, III $ -- $ -- $ -- Ben F. Cheek, IV $ 35,000 $ -- $ 35,000 A. Roger Guimond $ 35,000 $ -- $ 35,000 James H. Harris, III $ 35,000 $ -- $ 35,000 Jerry J. Harrison, Jr. $ 35,000 $ -- $ 35,000 Virginia C. Herring $ 35,000 $ -- $ 35,000 John G. Sample, Jr. $ 40,000 $ -- $ 40,000 C. Dean Scarborough $ 35,000 $ -- $ 35,000 Keith D. Watson $ 35,000 $ -- $ 35,000 In 2021, each member of the Board was entitled to receive $35,000 per year for service as a member of the Board of Directors, including service on any committee thereof. The Chairman of the Audit Committee was entitled to additional $5,000.  Messrs. Cheek IV and Sample elected to receive their 2021 director fees as deferred compensation (see “Executive Nonqualified Deferred Compensation Plan” above). Chief Executive Officer Compensation Ratio For the 2021 fiscal year, the ratio of the annual total compensation of Ms. Virginia C. Herring, our Chief Executive Officer (“CEO Compensation”), to the median of the annual total compensation of all of our employees other than our Chief Executive Officer (“Median Annual Compensation”) was 23 to 1.  This ratio is a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K using the data and assumptions summarized below.  In this summary, we refer to the employee who received such Median Annual Compensation as the “Median Employee.”  For purposes of this disclosure, the date used to identify the Median Employee was December 31, 2021 (the “Determination Date”). CEO Compensation for purposes of this disclosure represents the total compensation reported for Ms. Virginia C. Herring for 2021 under the “Total” column of the “Summary Compensation Table” for the 2021 fiscal year.  For purposes of this disclosure, Median Annual Compensation was $44,009, and was calculated by totaling for our Median Employee all applicable elements of compensation for the 2021 fiscal year in accordance with Item 402(c)(2)(x) of Regulation S-K. To identify the Median Employee, we first determined our employee population as of the Determination Date.  We had 1,442 employees, representing all full-time and part-time employees.  This number does not include any independent contractors, as permitted by the applicable SEC rules.  We then measured - 22 - compensation for the period beginning on January 1, 2021 and ending on December 31, 2021.  This compensation measurement was calculated by totaling for each employee gross taxable earnings salary, bonus, sick pay, vacation pay and other compensation as shown in our payroll and human resources records for 2021. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS: (a) Security Ownership of Certain Beneficial Owne Information listed below represents ownership in the Company with respect to any person (including any “group” as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) who is known to the Company to be the beneficial owner of more than five percent of any class of the Company’s voting securities as of December 31, 2021.  Each such person has sole “beneficial” ownership of such shares (as determined in accordance with applicable SEC rules relating to share ownership). Name and Address of Amount and Nature of Percent of Beneficial Owner Title of Class Beneficial Ownership Class Ben F. Cheek, IV Voting Common Stock 644 Shares - Direct 37.88% 135 East Tugalo Street Toccoa, Georgia  30577 Virginia C. Herring Voting Common Stock 644 Shares - Direct 37.88% 135 East Tugalo Street Toccoa, Georgia  30577 David W. Cheek Voting Common Stock 412 Shares - Direct 24.24% 4500 Barony Dr. Suwanee, Georgia  30024 (b) Security Ownership of Managemen Ownership listed below represents ownership in each class of equity securities of the Company as of December 31, 2021, by (i) Directors who were then serving in such capacity and executive officers of the Company named in the summary compensation table and (ii) all directors and executive officers of the Company as a group.  Except as described below, each person has sole “beneficial” ownership of such shares. Amount and Nature of Percent of Name Title of Class Beneficial Ownership Class Ben F. Cheek, III Voting Common Stock None None Non-Voting Common Stock None None Ben F. Cheek, IV Voting Common Stock 644 Shares - Direct 37.88% Non-Voting Common Stock 7,405 Shares - Direct 4.40% Non-Voting Common Stock 38,089 Shares – Indirect (1) 22.63% Virginia C. Herring Voting Common Stock 644 Shares - Direct 37.88% Non-Voting Common Stock 7,911 Shares - Direct 4.70% Non-Voting Common Stock 38,088 Shares – Indirect (1) 22.63% A. Roger Guimond Voting Common Stock None None Non-Voting Common Stock None None - 23 - Security Ownership of Management (continued): Amount and Nature of Percent of Name Title of Class Beneficial Ownership Class Brian J. Gyomory Voting Common Stock None None Non-Voting Common Stock None None James H. Harris, III Voting Common Stock None None Non-Voting Common Stock None None Jerry J. Harrison, Jr. Voting Common Stock None None Non-Voting Common Stock None None John G. Sample, Jr. Voting Common Stock None None Non-Voting Common Stock None None C. Dean Scarborough Voting Common Stock None None Non-Voting Common Stock None None Keith D. Watson Voting Common Stock None None Non-Voting Common Stock None None All directors and executive officers Voting Common Stock 1,288 Shares - Direct 75.76% as a group Non-Voting Common Stock 15,316 Shares - Direct 9.10% (11 persons) Non-Voting Common Stock 76,177 Shares- Indirect (1) 45.26% (1) Various trusts have been established for the benefit of each of Ben F. Cheek, IV, Virginia C. Herring and David W. Cheek.  The trustees of each of the trusts, who by virtue of dispositive power over the assets thereof are deemed to be the beneficial owners of shares of the Company’s non-voting common stock contained therein, are two children of Ben F. Cheek, III named above who are not the named beneficiaries of each of the respective trusts. Trustees Trust for Benefit of Number of Shares % David W. Cheek and Virginia C. Herring Ben F. Cheek, IV 38,089 22.63% David W. Cheek and Ben F. Cheek, IV Virginia C. Herring 38,088 22.63% Ben F. Cheek, IV and Virginia C. Herring David W. Cheek 38,089 22.63% (c) The Company knows of no contractual arrangements which may at a subsequent date result in a change in control of the Company. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE: Related Party Transactio In accordance with the provisions of the written charter of the Audit Committee of the Board of Directors, the Audit Committee approves all related party transactions that are required to be disclosed pursuant to the rules and regulations of the SEC. The Company leases its home office building and print shop for a total of $151,200 per year from Franklin Enterprises, Inc. under leases which expired December 31, 2021.  The Company continues to make monthly rent payments to Franklin Enterprises, Inc. while renewal of the lease is being negotiated.  Effective July 1, 2017, the Company entered into a lease with Franklin - 24 - Enterprises, Inc. for rental of office space for its marketing department at a cost of $9,600 per year.  This lease expires June 30, 2022.  Messrs. Cheek, III and Cheek, IV, both directors and executive officers of the Company, and Ms. Herring, executive officer of the Company, own 66.67%, 11.11% and 11.11% of the shares of Franklin Enterprises, Inc., respectively. In Management's opinion, these leases are at rates and on terms which approximate those obtainable from independent third parties.  The aggregate dollar amount of all remaining periodic payments due during these lease terms is $4,800. The Company leased its Clarkesville, Georgia branch office for a total of $5,400 per year from Cheek Investments, Inc. In July of 2021 the lease was terminated when the Company purchased the land and building from Cheek Investments, Inc.  Messrs. Cheek, III and Cheek, IV and Ms. Herring, own .50%, 33.17% and 33.17%, respectively, of the shares of Cheek Investments, Inc. During 1998, the Company extended a loan was extended to a real estate development partnership of which David Cheek (the adult son of Ben F. Cheek, III) who beneficially owns 24.24% of the Company’s voting stock, is a partner.  The loan was renewed effective July 20, 2021.  The balance on this commercial loan (including principal and accrued interest) was $1,841,381 at December 31, 2021, which was also the maximum amount outstanding during the year.  There were no principal or interest payments applied against this loan during 2021.  The loan is a variable-rate loan with the interest based on the prime rate plus 1%.  Interest is currently computed at an annual rate of 4.25%.  The interest rate adjusts whenever the prime rate changes. Effective September 23, 1995, the Company and Deborah A. Guimond, Trustee of the Guimond Trust (an irrevocable life insurance trust, the “Trust”) entered into a Split-Dollar Life Insurance Agreement.  The life insurance policy insures A. Roger Guimond, retired executive officer of the Company.  As a result of certain changes in tax regulations relating to split-dollar life insurance policies, the agreement was amended, effectively making the premium payments a loan to the Trust.  The interest on the loan is a variable rate adjusting monthly based on the federal mid-term Applicable Federal Rate.  A payment of $3,960 for interest accrued during 2021 was applied to the loan on December 31, 2021.   No principal payments on this loan were made in 2021.  The balance on this loan at December 31, 2021 was $434,550.  This was the maximum amount outstanding during the year. In accordance with the provisions of the written charter of the Audit Committee of the Board of Directors, the Audit Committee approves all related party transactions that are required to be disclosed pursuant to the rules and regulations of the SEC. Director Independen See Part III, Item 10.  Directors, Executive Officers and Corporate Governance, of this Annual Report on Form 10-K for a discussion on director independence matters, which discussion is incorporated herein by reference. Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES: The Company was billed for professional services provided during fiscal years 2021 and 2020 by Deloitte & Touche LLP, the Company's independent registered public accounting firm, in the amounts set out in the following table, all of which were pre-approved by the Audit Committee.  Other than as set out below, the Company was not billed for any services provided by Deloitte & Touche LLP. The Audit Committee of the Board of Directors has considered the services rendered by Deloitte & Touche LLP for services other than the audit of the Company’s financial statements and has determined that the provision of these services is compatible with maintaining the independence of Deloitte & Touche LLP. - 25 - Fee Fee Amount Amount 2021 2020 Services Provid Audit Fees (1) $ 361,900 $ 474,600 Audit Related Fees (2) 27,150 26,900 Tax Fees (3) 132,394 117,068 All Other Fees - - Total $ 521,444 $ 626,236 (1) Fees in connection with the audit of the Company’s annual financial statements for the fiscal years ended December 31, 2021 and 2020, and reviews of the financial statements included in the Company’s quarterly reports on Form 10-Q during the 2021 and 2020 fiscal years. (2) Fees in connection with the audit of the Company’s 401(k) retirement plan. (3) Fees billed by Deloitte Tax LLP for professional services rendered for tax compliance, tax advice and tax planning.  The services included the preparation of the Company’s and its subsidiaries’ tax returns. All audit and non-audit services to be performed by the Company’s independent registered public accounting firm must be approved in advance by the Audit Committee. Pursuant to the Audit Committee Pre-Approval Policy (the “Policy”), and as permitted by SEC rules, the Audit Committee may delegate pre-approval authority to any of its members, provided that any service approved in this manner is reported to the full Audit Committee at its next meeting.  The Policy provides for a general pre-approval of certain specifically enumerated services that are to be provided within specified fee levels.  With respect to requests to provide services not specifically pre-approved pursuant to the general grant, such requests must be submitted to the Audit Committee by the Company’s independent registered public accounting firm and the Company's Chief Financial Officer and must include a joint statement as to whether, in their view, the request is consistent with SEC rules on auditor independence. PART IV Item 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES: (a) (1) The following Report of Independent Registered Public Accounting Firm and financial statements are incorporated by reference herein from Exhibit 13 heret Report of Independent Registered Public Accounting Firm. Consolidated Statements of Financial Position at December 31, 2021 and 2020. Consolidated Statements of Income for the three years ended December 31, 2021. Consolidated Statements of Comprehensive Income for the three years ended December 31, 2021. Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2021. Consolidated Statements of Cash Flows for the three years ended December 31, 2021. Notes to Consolidated Financial Statements. - 26 - (2) Financial Statement Schedu Report of Independent Registered Public Accounting Firm. Condensed Statements of Financial Position at December 31, 2021 and 2020. Condensed Statements of Income for the three years ended December 31, 2021. Condensed Statements of Comprehensive Income for the three years ended December 31, 2021. Condensed Statements of Stockholders’ Equity for the three years ended December 31, 2021. Condensed Statements of Cash Flows for the three years ended December 31, 2021. (3) Exhibits: 3. (a) Restated Articles of Incorporation as amended January 26, 1996 (incorporated by reference to Exhibit 3(a) to Form 10-K for the year ended December 31, 1995). (b) Bylaws (incorporated by reference to Exhibit 3(b) to Form 10-K for the year ended December 31, 1995). 4. (a) Indenture dated October 31, 1984, between the Company and The First National Bank of Gainesville, Trustee (incorporated by reference to Exhibit 4(a) to Amendment No. 1 to the Registration Statement on Form S-2 dated April 24, 1998, File No. 333-47515). (b) Form of Series 1 Variable Rate Subordinated Debenture (incorporated by reference to Exhibit 4(b) to Amendment No. 3 to the Registration Statement on Form S-2 dated November 14, 2005, File No. 333-126589). (c) Agreement of Resignation, Appointment and Acceptance dated as of May 28, 1993 between the Company, The First National Bank of Gainesville, and Columbus Bank and Trust Company (incorporated by reference to Exhibit 4(c) to the Company’s Post-Effective Amendment No. 1 to the Registration Statement on Form S-2 dated June 8, 1993, File No. 33-49151). (d) Modification of Indenture, dated March 30, 1995, by and among Columbus Bank and Trust Company, Synovus Trust Company and the Company (incorporated by reference to Exhibit 4(b) to the Company’s Form 10-K for the year ended December 31, 1994). (e) Second Modification of Indenture dated December 2, 2004 by and among Synovus Trust Company and the Company (incorporated by reference to Exhibit 4(e) to the Registration Statement on Form S-2 dated July 14, 2005, File No. 333-126589). (f) Form of Indenture by and between the Company and U.S. Bank National Association (incorporated by reference to Exhibit 4(a) to the Company’s Registration Statement on Form S-1 dated December 27, 2007, File No. 333-148331). - 27 - (g) Third Modification of Indenture dated March 26, 2010 by and between U.S. Bank National Association and the Company (incorporated by reference to Exhibit 4(h) to the Company’s Form 10-K for the year ended December 31, 2009). (h) Tri-party Agreement by and among the Company, Synovus Trust Company and U.S. Bank National Association (incorporated by reference to Exhibit 4(i) to the Company’s Form 10-K for the year ended December 31, 2009). (i) Fourth Modification of Indenture dated March 26, 2010 by and between U.S. Bank National Association and the Company (incorporated by reference to Exhibit 4(j) to the Company’s Form 10-K for the year ended December 31, 2009). (j) Form of Series 1 Variable Rate Subordinated Debenture (incorporated by reference to Exhibit 4(b) to Pre-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the SEC on June 30, 2011, File No. 333-173684). (k) Form of Indenture by and between the Company and U.S. Bank National Association as of April 3, 2008 (incorporated by reference to Exhibit 4(a) to Pre-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the SEC on June 30, 2011, File No. 333-173685). (l) Form of Senior Demand Note (incorporated by reference to Exhibit 4(b) to Pre-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the SEC on June 30, 2011, File No. 333-173685). (m) Form of Overdraft Protection Agreement, Security Agreement and Assignment (incorporated by reference to Exhibit 4(c) to Pre-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the SEC on June 30, 2011, File No. 333-173685). (n) Form of Senior Demand Note Check Redemption Agreement (incorporated by reference to Exhibit 4(d) to Pre-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the SEC on June 30, 2011, File No. 333-173685). (o) Form of Check (incorporated by reference to Exhibit 4(e) to Pre-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the SEC on June 30, 2011, File No. 333-173685). 10. (a) Amended and Restated Loan and Security Agreement, dated as of November 19, 2019, by and among the Company, Wells Fargo Bank, N.A., as Agent for the lenders, and other financial institutions from time to time party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on November 22, 2019). (b) First Amendment to Amended and Restated Loan and Security Agreement, dated as of August 17, 2020, by and among the Company, Wells Fargo Bank, N.A., as agent for the lenders, and other financial institutions party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on August 19, 2020). - 28 - (c) Second Amendment to Amended and Restated Loan and Security Agreement, dated as of March 25, 2021, by and among the Company, Wells Fargo Bank, N.A., as Agent for the lenders, and other financial institutions from time to time party thereto . (d) Third Amendment to the Amended and Restated Loan and Security Agreement, dated as of November 17, 2021, by and among the Company, Wells Fargo Bank, N.A. as Agent for the lenders, and other financial institutions party thereto (incorporated by reference to Exhibit 10(d) to the Companys Form 8-K filed with the SEC on November 19, 2021). * (e) Director Compensation Summary Term Sheet. * (f) Form of the Company’s 2022 Executive Bonus Plan. * 13. Annual Report. 21. Subsidiaries of the Company (incorporated by reference to Exhibit 21 to the Company’s Form 10-K for the year ended December 31, 2010). 23. Consent of Independent Registered Public Accounting Firm. 31.1 Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934. 31.2 Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934. 32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 101.INS 101.SCH 101.CAL 101.LAB 101.PRE 101.DEF Certification of Principal Financial Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. XBRL Instance Document. XBRL Taxonomy Extension Schema Document. XBRL Taxonomy Extension Calculation Linkbase Document. XBRL Taxonomy Extension Label Linkbase Document. XBRL Taxonomy Extension Presentation Linkbase Document. XBRL Taxonomy Extension Definition Linkbase Document. 104 Cover Page Interactive Data File (embedded within the Inline XBRL document). * Management contract or compensatory plan or arrangement filed pursuant to Item 601(b)(10)(iii) of Regulation S-K. Item 16. FORM 10-K SUMMARY: NONE. - 29 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authoriz 1st FRANKLIN FINANCIAL CORPORATION March 31, 2022 By: s/ Virginia C. Herring Date Virginia C. Herring President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicat Signatures Title Date /s/ Ben F. Cheek, IV (Ben F. Cheek, IV) Chairman of Board March 31, 2022 /s/ Ben F. Cheek, III (Ben F. Cheek, III) Chairman Emeritus March 31, 2022 /s/ Virginia C. Herring (Virginia C. Herring) Director, President and Chief Executive Officer March 31, 2022 /s/ A. Roger Guimond (A. Roger Guimond) Director March 31, 2022 /s/ Brian J. Gyomory (Brian J. Gyomory) Executive Vice President and Chief Financial Officer March 31, 2022 /s/ James H. Harris, III (James H. Harris, III) Director March 31, 2022 /s/ Jerry J. Harrison, Jr. (Jerry J. Harrison, Jr.) Director March 31, 2022 /s/ John G. Sample, Jr. (John G. Sample, Jr.) Director March 31, 2022 /s/ C. Dean Scarborough (C. Dean Scarborough) Director March 31, 2022 /s/ Keith D. Watson (Keith D. Watson) Director March 31, 2022 - 30 - Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act. (a) Except to the extent that the materials enumerated in (1) and/or (2) below are specifically incorporated into this Form by reference, every registrant which files an annual report on this Form pursuant to Section 15(d) of the Act shall furnish to the Commission for its information, at the time of filing its report on this Form, four copies of the followin (1) Any annual report to security holders covering the registrant's last fiscal year; and (2) Every proxy statement, form of proxy or other proxy soliciting material sent to more than ten of the registrant's security holders with respect to any annual or other meeting of security holders. (b) The foregoing material shall not be deemed to be "filed" with the Commission or otherwise subject to the liabilities of Section 18 of the Act, except to the extent that the registrant specifically incorporates it in its annual report on this Form by reference. (c) This Annual Report on Form 10-K incorporates by reference portions of the Registrant's Annual Report to security holders for the fiscal year ended December 31, 2021, which is filed as Exhibit 13 hereto.  The Registrant is a privately held corporation and therefore does not distribute proxy statements or information statements to its shareholders. - 31 - Schedule I REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of 1 st Franklin Financial Corporation Opinion on the Financial Statement Schedule We have audited the consolidated financial statements of 1st Franklin Financial Corporation and subsidiaries (the “Company”) as of December 31, 2021 and 2020, and for each of the three years in the period ended December 31, 2021, and have issued our report thereon dated March 31, 2022; such consolidated financial statements and report are included in your 2021 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedule of the Company listed in the Index at Item 15. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ Deloitte & Touche LLP Atlanta, Georgia March 31, 2022 - 32 - SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT 1 st FRANKLIN FINANCIAL CORPORATION (Parent Company Only) STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 2021 AND 2020 ASSETS 2021 2020 CASH AND CASH EQUIVALENTS $ 694,240 $ 6,825,410 RESTRICTED CASH 1,107,688 910,575 LOANS: Direct Cash Loans 873,432,972 777,568,737 Real Estate Loans 45,972,414 39,960,390 Sales Finance Contracts 118,959,994 103,258,326 1,038,365,380 920,787,453 L Unearned Finance Charges 151,081,033 132,703,130 Unearned Insurance Commissions 28,486,409 25,660,690 Allowance for Credit Losses 67,311,208 66,327,674 791,486,730 696,095,959 INVESTMENTS IN SUBSIDIARIES 262,106,133 247,466,895 INVESTMENT SECURITIES: Available for Sale, at fair market value 418,548 391,113 OTHER ASSETS: Land, Buildings, Equipment and Leasehold Improvements, Less accumulated depreciation and amortization of $46,347,589 and $42,477,600 in 2021 and 2020, respectively 12,265,626 13,577,945 Operating Lease Right-of-Use Assets 34,768,208 33,610,067 Miscellaneous 8,877,807 7,865,964 55,911,641 55,053,976 TOTAL ASSETS $ 1,111,724,980 $ 1,006,743,928 - 33 - SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT 1 st FRANKLIN FINANCIAL CORPORATION (Parent Company Only) STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 2021 AND 2020 LIABILITIES AND STOCKHOLDERS' EQUITY 2021 2020 SENIOR DEBT: Notes Payable to Banks $ 60,300,000 $ 118,900,000 Senior Demand Notes, including accrued interest 104,043.479 86,622,503 Commercial Paper 552,192,882 432,273,538 716,536,361 637,796,041 ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Operating Lease Liabilities 35,439,377 34,163,153 Other Accounts Payable and Accrued Expenses 33,299,145 26,270,007 68,738,522 60,433,160 SUBORDINATED DEBT 29,692,344 30,075,399 Total Liabilities 814,967,227 728,304,600 STOCKHOLDERS' EQUITY: Preferred Stock; $100 par value 6,000 shares authorized; no shares issued or outstanding -- -- Common Stoc Voting Shares; $100 par value; 2,000 shares authorized; 1,700 shares issued and outstanding as of December 31, 2021 and 2020 170,000 170,000 Non-Voting Shares; no par value; 198,000 shares authorized; 168,300 shares issued and outstanding as of December 31, 2021 and 20120 -- -- Accumulated Other Comprehensive Income 9,736,651 13,266,927 Retained Earnings 286,851,102 265,002,401 Total Stockholders' Equity 296,757,753 278,439,328 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,111,724,980 $ 1,006,743,928 - 34 - SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT 1 st FRANKLIN FINANCIAL CORPORATION (Parent Company Only) STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019 2021 2020 2019 INTEREST INCOME: Finance Charges $ 236,651,728 $ 213,087,060 $ 200,577,584 Investment Income 309,412 21,732 22,439 236,961,140 213,108,792 200,600,023 INTEREST EXPENSE: Senior Debt 22,786,460 20,748,957 18,859,410 Subordinated Debt 977,093 922,083 849,174 23,763,553 21,671,040 19,708,584 NET INTEREST INCOME 213,197,587 191,437,752 180,891,439 PROVISION FOR CREDIT LOSSES 42,183,163 56,689,484 59,695,888 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 171,014,424 134,748,268 121,195,551 NET INSURANCE INCOME 20,664,481 19,663,742 19,498,208 OTHER REVENUE 7,029,120 5,527,562 6,154,716 OPERATING EXPENSES: Personnel Expense 109,011,575 99,684,473 93,820,162 Occupancy Expense 17,382,787 17,568,423 18,167,252 Other Expense 47,765,457 43,592,038 40,305,817 174,159,819 160,844,934 152,293,231 (LOSS) INCOME BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF SUBSIDIARIES 24,548,206 (905,362) (5,444,756) PROVISION FOR INCOME TAXES 595,915 205,779 126,466 EQUITY IN EARNINGS OF SUBSIDIARIES, Net of Tax 17,908,716 17,001,403 18,919,595 NET INCOME $ 41,861,007 $ 15,890,262 $ 13,348,373 - 35 - SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT 1 st FRANKLIN FINANCIAL CORPORATION (Parent Company Only) STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019 2021 2020 2019 Net Income $ 41,861,007 $ 15,890,262 $ 13,348,373 Other Comprehensive Income (Loss): Net changes related to available-for-sale Securiti Unrealized (losses) gains (3,858,538) 4,658,116 12,972,947 Income tax benefit (provision) 816,053 (989,588) (2,696,204) Net unrealized (losses) gains (3,042,485) 3,668,528 10,276,743 Less reclassification of gains to net income 487,791 16,447 269,918 Total Other Comprehensive (Loss) Income (3,530,276) 3,652,081 10,006,825 Total Comprehensive Income $ 38,330,731 $ 19,542,343 $ 23,355,198 - 36 - uu CONDENSED FINANCIAL INFORMATION OF REGISTRANT 1 st FRANKLIN FINANCIAL CORPORATION (Parent Company Only) STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019 Accumulated Other Common Stock Retained Comprehensive Shares Amount Earnings Income (Loss) Total Balance at December 31, 2018 170,000 $170,000 $241,082,137 $  (391,979) $240,860,158 Comprehensive Income: Net Income for 2019 — — 13,348,373 — Other Comprehensive Loss — — — 10,006,825 Total Comprehensive Loss — — — — 23,355,198 Distributions — — (2,719,240) — (2,719,240) Balance at December 31, 2019 170,000 170,000 251,711,270 9,614,846 261,496,116 Comprehensive Income: Net Income for 2020 — — 15,890,262 — Other Comprehensive Income — — — 3,652,081 Total Comprehensive Income — — — — 19,542,343 Cumulative Change in Accounting Principal (Note 1) — — (2,158,161) — (2,158,161) Distributions — — (440,970) — (440,970) Balance at December 31, 2020 170,000 170,000 265,002,401 13,266,927 278,439,328 Comprehensive Income: Net Income for 2021 — — 41,861,007 — Other Comprehensive Loss — — — (3,530,276) Total Comprehensive Income — — — — 38,330,731 Distributions — (20,012,306) — (20,012,306) Balance at December 31, 2021 170,000 $170,000 $286,851,102 $9,736,651 $296,757,753 - 37 - SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT 1 st FRANKLIN FINANCIAL CORPORATION (Parent Company Only) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019 2021 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 41,861,007 $ 15,890,262 $ 13,348,373 Adjustments to reconcile net income to net cash provided by operating activiti Provision for credit losses 42,183,163 56,689,484 59,695,888 Depreciation and amortization 4,629,756 4,837,876 4,906,380 Equity in undistributed earnings of subsidiaries (17,908,716) (17,001,403) (18,919,595) Gain on sale of marketable securities and equipment and premium amortization on securities (301,151) (50,194) (53,786) (Increase) decrease in miscellaneous assets (893,761) (4,754,772) (1,416,265) Increase (decrease) in other liabilities 7,029,138 8,728,119 (2,011,372) Net Cash Provided 76,599,436 64,339,372 55,549,623 CASH FLOWS FROM INVESTING ACTIVITIES: Loans originated or purchased (588,636,277) (516,978,375) (540,426,634) Loan payments 451,062,343 410,369,366 403,271,166 Purchases of securities, available for sale — — — Sales of securities, available for sale — — — Capital expenditures (3,339,606) (3,022,147) (5,047,495) Proceeds from sale of equipment 35,088 67,462 132,478 Net Cash Used (140,878,452) (109,563,694) (142,070,485) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in Senior Demand Notes 17,420,976 10,372,708 2,910,714 Advances on credit line 164,964,653 193,849,330 189,428,300 Payments on credit line (223,564,653) (186,299,330) (131,258,300) Commercial paper issued 161,768,917 139,155,810 76,624,561 Commercial paper redeemed (41,849,573) (110,373,572) (46,936,830) Subordinated debt issued 6,963,742 6,916,788 6,677,992 Subordinated debt redeemed (7,346,797) (5,846,413) (7,943,418) Dividends / distributions paid (20,012,306) (440,970) (2,719,240) Net Cash Provided 58,344,959 47,334,351 86,783,779 NET INCREASE (DECREASE) IN CASH CASH EQUIVALENTS AND RESTRICTED CASH (5,934,057) 2,110,029 262,917 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning 7,735,985 5,625,956 5,363,039 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, ending $ 1,801,928 $ 7,735,985 $ 5,625,956 Cash paid during the year Interest $ 23,000,475 $ 21,119,661 $ 19,156,155 Income Taxes 219,000 126,629 189,023 Lease Assets and Associated Liabilities — — 29,781,213 - 38 - NOTES TO PARENT COMPANY FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019 Basis of Presentation The parent company financial statements should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes thereto.  For purposes of these condensed financial statements, the Company’s wholly owned subsidiaries are recorded based on the subsidiaries net assets (similar to presenting them on the equity method). Substantially all of the other comprehensive income included in these condensed financial statements is attributable to the Company's wholly owned subsidiaries. Guarantees Frandisco Life Insurance Company (“Guarantor”) executed a guaranty in favor of Wells Fargo Bank, N.A. (“Agent”) on November 19, 2019, in conjunction with 1 st Franklin Financial Corporation executing an amended and restated loan and security agreement as described in the Company’s consolidated financial statements and accompanying notes thereto.  The Guarantor’s liability shall be limited to an amount equal to the lesser of (a) one-half of one percent (0.50%) of Guarantor’s admitted assets or (b) ten percent (10%) of surplus as regards policy holders as of December 31, 2018. Frandisco Property and Casualty Insurance Company (“Guarantor”) executed a guaranty in favor of Wells Fargo Bank, N.A. (“Agent”) on November 19, 2019, in conjunction with 1 st Franklin Financial Corporation executing an amended and restated loan and security agreement as described in the Company’s consolidated financial statements and accompanying notes thereto.  The Guarantor’s liability shall be limited to an amount equal to the lesser of (a) one-half of one percent (0.50%) of Guarantor’s admitted assets or (b) ten percent (10%) of surplus as regards policy holders as of December 31, 2018. - 39 -

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0000038723 2022-04-14 2022-04-14 0000038723 2022-01-01 2022-03-31 0000038723 2022-01-01 2022-03-31 0000038723 2022-01-01 2022-03-31 0000038723 2022-01-01 2022-03-31 0000038723 2022-01-01 2022-03-31 0000038723 2022-01-01 2022-03-31 0000038723 2022-01-01 2022-03-31 0000038723 2022-01-01 2022-03-31 0000038723 2021-01-01 2021-03-31 0000038723 2021-01-01 2021-03-31 0000038723 2021-01-01 2021-03-31 0000038723 2021-01-01 2021-03-31 0000038723 2021-01-01 2021-03-31 0000038723 2021-01-01 2021-03-31 0000038723 2021-01-01 2021-03-31 0000038723 2021-01-01 2021-03-31 0000038723 2022-03-31 0000038723 2022-03-31 0000038723 2022-03-31 0000038723 2022-03-31 0000038723 2022-03-31 0000038723 2022-03-31 0000038723 2022-03-31 0000038723 2022-03-31 0000038723 2021-12-31 0000038723 2021-12-31 0000038723 2021-12-31 0000038723 2021-12-31 0000038723 2021-12-31 0000038723 2021-12-31 0000038723 2021-12-31 0000038723 2021-12-31 SECURITIES AND EXCHANGE COMMISSION Washington, D.C.  20549 ------------------------------ FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to _____________ ------------------------------ Commission File Number 2-27985 ------------------------------ 1st FRANKLIN FINANCIAL CORP A Georgia Corporation I.R.S. Employer Identification No. 58-0521233 135 East Tugalo Street Post Office Box 880 Toccoa , Georgia 30577 ( 706 ) 886-7571 ------------------------------ Securities registered pursuant to Section 12(b) of the Ac None Indicate by check mark whether the registran  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),  and  (2) has been subject to such filing requirements for the past 90 days. Yes [x]  No [  ] Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [x]   No [  ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one) Large Accelerated Filer __ Accelerated Filer ___ Non-Accelerated Filer X _  Smaller Reporting Company ☐ Emerging Growth Company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ___ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No [ X ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding April 30, 2022 Voting Common Stock, par value $ 100 per share 1,700 Shares Non-Voting Common Stock, no par value 168,300 Shares PART I.  FINANCIAL INFORMATION ITEM 1. Financial Statements: The information contained under the following captions in the Company's Quarterly Report to Investors as of and for the three months ended March 31, 2022 is incorporated by reference herein.  See Exhibit 13. Condensed Consolidated Statements of Financial Position (Unaudited): March 31, 2022 and December 31, 2021 Condensed Consolidated Statements of Income and Retained Earnings (Unaudited): Three Months Ended March 31, 2022 and March 31, 2021 Condensed Consolidated Statements of Comprehensive Income (Unaudited): Three Months Ended March 31, 2022 and March 31, 2021 Condensed Consolidated Statements of Stockholders’ Equity (Unaudited): Three Months Ended March 31, 2022 and March 31, 2021 Condensed Consolidated Statements of Cash Flows (Unaudited): Three Months Ended March 31, 2022 and March 31, 2021 Notes to Unaudited Condensed Consolidated Financial Statements ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operatio The information contained under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations” in the Company's Quarterly Report to Investors as of and for the three months ended March 31, 2022 is incorporated by reference herein.  See Exhibit 13. ITEM 3. Quantitative and Qualitative Disclosures About Market Ris The information contained under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quantitative and Qualitative Disclosures About Market Risk" in the Company's Quarterly Report to Investors as of and for the three months ended March 31, 2022 is incorporated by reference herein.  See Exhibit 13. ITEM 4. Controls and Procedu We maintain a set of disclosure controls and procedures, as such term is defined in Rule 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  An evaluation was carried out as of the end of the period covered by this report, under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures.  Based on that evaluation, the CEO and CFO have concluded that, as of March 31, 2022, the Company’s disclosure controls and procedures were effective.  No system of controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. <PAGE> 1 There were no changes in the Company's internal control over financial reporting that occurred during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II.  OTHER INFORMATION ITEM 1. Legal Proceedi The Company is, and expects to be, involved in various legal proceedings incidental to its business from time to time.  In the opinion of Management, the ultimate resolution of any such known claims or proceedings is not expected to have a material adverse effect on the Company’s financial position, liquidity or results of operations. ITEM 6. Exhibits: (a) Exhibits: 13 31.1 31.2 32.1 32.2 101.INS 101.SCH 101.CAL 101.LAB 101.PRE 101.DEF 104 Quarterly Report to Investors as of and for the Three Months Ended March 31, 2022 . Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934. Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934. Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Inline XBRL Instance Document. Inline XBRL Taxonomy Extension Schema Document. Inline XBRL Taxonomy Extension Calculation Linkbase Document. Inline XBRL Taxonomy Extension Label Linkbase Document. Inline XBRL Taxonomy Extension Presentation Linkbase Document. Inline XBRL Taxonomy Extension Definition Linkbase Document. Cover Page Interactive Data File (embedded within the Inline XBRL document). PAGE <2> SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 1 st FRANKLIN FINANCIAL CORPORATION Registrant /s/ Virginia C. Herring President and Chief Executive Officer (Principal Executive Officer) /s/ Brian J. Gyomory Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: May 16, 2022 <PAGE> 3

PART I FORWARD-LOOKING INFORMATION This Annual Report on Form 10-K (including the section regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations) contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements but are not deemed to represent an all- inclusive means of identifying forward-looking statements as denoted in this Annual Report on Form 10-K. Additionally, statements concerning future matters are forward-looking statements. Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our Management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading “Risks Factors” below, as well as those discussed elsewhere in this Annual Report on Form 10-K. Readers are urged not to place undue reliance on these forward- looking statements, which speak only as of the date of this Annual Report on Form 10-K. We file reports with the Securities and Exchange Commission (“SEC”). You can read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. A 170 to 1 Reverse Stock Split became effective with the Financial Industry Regulatory Authority (“Finra”) on January 4, 2021, when our common stock began to trade on a reverse split adjusted basis. All per share numbers and share prices included herein have been adjusted to reflect this Reverse Stock Split, including the audited financial statements. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that may arise after the date of this Annual Report on Form 10-K. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this Annual Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects. This Annual Report on Form 10-K includes the accounts of ABCO Energy, Inc., a Nevada Corporation, (“Company”) and its wholly owned subsidiaries, as follows, collectively referred to as “we”, “us” or the “Company”. Wholly owned subsidiaries inclu ● ABCO Solar, Inc., an Arizona Corporation ● ABCO Air Conditioning Services, Inc., an Arizona Corporation ● Alternative Energy Finance Corporation, (AEFC), a Wyoming LLC Company (provides funding for leases of Solar systems) ● Alternative Energy Finance Corp., an Arizona Corporation ITEM 1. BUSINESS. OVERALL STRATEGIC DIRECTION The Company is in the Photo Voltaic (PV) solar systems industry, the LED and energy efficient lighting business, is an air conditioning system contractor (HVAC) and is an electrical product and services supplier. The Company plans to build out a network of operations, through internal growth and acquisitions, in major cities in the USA to establish a national base of PV suppliers, lighting suppliers, HVAC and electrical service operations centers. This combination of services, solar PV, solar AC Systems, lighting and electric, provides the Company with a solid base in the electrical services business and a solid base in the growth markets of solar PV industry and the LED lighting industry. 5 Table of Contents OVERVIEW As of December 31, 2022, we operated in Tucson and Phoenix, Arizona. We believe that the solar and energy efficiency business functions better if the employees are local individuals working and selling in their own community. Our customers have indicated a preference for dealing with local firms and we will continue our focus on company-owned integrated product and services offices. Once a local firm is established, growth tends to come from experience, quality and name recognition. We remain committed to high quality operations. Our unaudited statements for the years ended December 31, 2022, and 2021 are presented below with major category details of revenue and expense including the components of operating expenses. DESCRIPTION OF PRODUCTS ABCO sells and installs Solar Photovoltaic electric systems that allow the customer to produce their own power on their residence or business property. These products are installed by our crews and are purchased from both the USA and offshore manufacturers. We have available and utilize many suppliers of US manufactured solar products from such companies as Peimar, Mia Soleil, Canadian Solar, Boviet, Westinghouse Solar and various Korean, German, Italian and Chinese suppliers. In addition, we purchase from several local and regional distributors whose products are readily available and selected for markets and prices. ABCO offers solar leasing and long-term financing programs from Service Finance Corporation, Green Sky, AEFC and others that are offered to ABCO customers and other marketing and installation organizations. ABCO also sells and installs energy efficient lighting products, solar powered streetlights, and lighting accessories. ABCO contracts directly with manufacturers to purchase its lighting products which are sold to residential and commercial customers. ABCO has Arizona statewide approval as a registered electrical services and solar products installer and as an air conditioning and refrigeration installer. Our license is ROC 258378 electrical and ROC 323162 Air Conditioning (HVAC0 and we are fully licensed to offer commercial and residential electrical services, HVAC and solar. The ABCO subsidiary, Alternative Energy Finance Corporation, (AEFC) a Wyoming Company provides funding for leases of photovoltaic systems. AEFC financed its owned leases from its own cash and now arranges financing with funds provided by other lessors. ABCO Solar offers solar systems “Operations and Maintenance Services” to residential and commercial customers that have solar systems built by ABCO or other solar installers. Many installers have gone out of business and ABCO’s service enables these customers’ system to continue to operate. ABCO’s service enables customers to maintain their warranties, remove and replace their systems for roof maintenance, clean solar panels and to maintain peak efficiency. ABCO now operates and maintains systems in many cities in Arizona and intends to continue to expand this operation and maintenance segment of its business. COMPETITION The solar power market itself is intensely competitive and rapidly evolving. Price and available financing are the principal methods of competition in the industry. Based upon these two criteria, our position in the industry is relatively small. There is no competitive data available to us in our competitive position within the industry. Our competitors have established market positions more prominent than ours, and if we fail to attract and retain customers and establish a successful distribution network, we may be unable to achieve sales and market share. There are several major multi-national corporations that produce solar power products, including Suntech, Sunpower, First Solar, Kyocera, Sharp, GE, Mitsubishi, Solar World AG and Sanyo. Also, established integrators are growing and consolidating, including GoSolar, Sunwize and Sunenergy and we expect that future competition will include new entrants to the solar power market. Further, many of our competitors are developing and are currently producing products based on new solar power technologies that may have costs similar to, or lower than, our projected costs. COMPETITIVE ADVANTAGES The Company believes that its key competitive advantages 1. The ability to make decisions and use management’s many years of business experience to make the right decisions. 2. Experience with National expansion programs by management. 3. Experience with management of employee operated facilities from a central management office. 4. Experience with multi-media promotional program for name recognition and product awareness. 5. Alternative energy is a fast growing and popular industry that relates well to customers and current or future shareholders that recognize the market, products and business focus. 6 Table of Contents ADVANTAGES OF COMPETITORS OVER US The Company believes the following are advantages of Competitors over us. 1. Larger competitors have more capital. 2. Larger companies have more experience in the market. 3. Larger companies will get the larger contracts because of the level of experience. 4. We have the same products but must pay more because of the volume. This will be a price consideration in bidding competition 5. We are a small company that may not be able to compete because we do not have experience or working capital adequate to compete with other companies. CURRENT BUSINESS FOCUS We have developed very good promotional material and advertising products. We have developed key messages and promotional pieces that are relevant to our business and inexpensive to produce. We have built an informative and interactive web site that will allow people to assess their requirements and partially build and price a system, much like the automobile dealers utilize. Additional sales promotion will increase when we have secured outside financing or increased sales through direct sales efforts. Readers should review our websites at www.abcosolar.com and www.abcoac.com. We have established a direct sales force to sell to Government agencies including State, Local and Federal resources and a separate division to call on the many American Indian governments in the US. This allows us to quote with our specifications, products and services on Requests for Proposals (RFP’s) that are issued by the Government Services Agency (GSA), Bureau of Indian Affairs (BIA) and other agencies. We have found that many projects are not known to the general public and most contractors because governmental agencies do not widely advertise their projects. By departmentalizing this opportunity, we get more information on projects than is available in the normal course of business. ABCO does not manufacture its solar voltaic (PV) products. We will continue to be a sales and installation contractor with plans to enter the markets of major US and international cities. We will sell and use commercial off the shelf components. Initially this will include the solar panels and LED lighting products purchased to our specification. A strong alliance with a well-respected distributor will be the most conservative decision for the company at this time. ABCO will contract directly with manufacturers for its Solar Street Light and other lighting products and will sell, install and maintain these products. Our business and the industry are reliant upon several state and federal programs to assist our customers in the acquisition of our products and services. Such programs are the utility rebates paid directly to customers for wattage installations and the state and federal tax credit programs that allow a percentage of the actual cost of installations to be refunded in the form of tax credits. Many states have mandated the utilities to collect funds from their customers for the payment of rebates. All of these programs are listed on the website www.dsireusa.org. Most of these programs are slated for expiration at differing times in the future. The federal tax credit (ITC) of 30% of installation cost expired at the end of 2019 but was slated to continue at reduced rates through 2024. The 2020 and 2021 rate was 26%. During 2022, Congress passed an extension of the ITC, raising it to 30% for solar installations completed between 2022-2032. The customers benefit from the federal and state tax credits which pass through to the owners of the solar systems. Investors often require the ownership to remain in their hands so that the tax credits can be passed through to them. This results in a lesser amount to finance and a benefit to the lessee because it lowers the lease payments. We emphasize that we cannot predict any future or the outcome of unknowns. State rebate mandates and state tax credits are variable by state. All of these programs provide incentives for our customers that result in reduced costs. The price of solar products has also been reduced drastically in the past few years which is helping to balance the reduction of the subsidies. The State of Arizona subsidized incentives are not material to our programs at this time. Since the State of Arizona offers $1,000 tax credit per residential installation and no utility rebates for residential or commercial installations of solar systems, this amount of credit is not likely to negatively impact our business because it will not materially affect the price of the installation. This amount currently represents less than 5% of the price of an average residential installation. 7 Table of Contents CUSTOMER BASE Referrals are important in any market and time in business makes the customer base grow. No customer represented a significant percentage of the Company’s total revenue in the fiscal years ended December 31, 2022, or 2021. The company believes that the knowledge, relationships, reputation and successful track record of its management will help it to build and maintain its customer base. EXPERIENCED MANAGEMENT The Company believes that it has experienced management. ABCO’s president, David Shorey, has 15 years of experience in the sales and installation of solar products and more than 40 years of business experience. Mr. Shorey has the ability and experience to attract and hire experienced and talented individuals to help manage the company. ABCO has several experienced and long-term employees on staff with a number of years of experience in the provision of electrical services including lighting, HVAC and solar installations. The Company believes that the knowledge, relationships, reputation and successful track record of its management will help it to build and maintain its customer base. FINANCIAL RESOURCES ABCO’s development activities since inception have been financially sustained through the sale of equity and capital contribution from shareholders. We will continue to source capital from the equity and debt markets in order to fund our plans for expansion if we are unable to produce adequate capital from operations. There is no guarantee that the Company will be able to obtain adequate capital from these sources, or at all. EMPLOYEES The Company presently has [twelve [12]] full-time employees with [four [4]] in management, and [two [2]] in sales and the balance are in various labor crew positions. The Company anticipates that it will need to hire additional employees as the business grows. In addition, the Company may expand the size of our Board of Directors in the future. Mr. Shorey devotes full time (40 plus hours) to the affairs of the Company. No employees are represented by a union and there have not been any work stoppages. IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY We are an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 40(t) of the Sarbanes-Oxley Act (“SOX”) and reduced disclosure obligations regarding executive compensation in our periodic reports. Under the JOBS Act, we will remain an “emerging growth company” until the earliest o ● the last day of the fiscal year during which we have total annual gross revenues of $1 Billion dollars; ● the last day of the fiscal year following the fifth anniversary of completion of our first offering; ● the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; and ● The date on which we are deemed to be “large, accelerated filer” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We will qualify as a “large, accelerated filer” as of the first day of the first fiscal year after we have (i) more than $700 million in accelerated common equity held by our non-affiliated shareholders and (ii) been public for at least 12 months. The value of our outstanding common equity will be measured each year on the last day of our second fiscal quarter. 8 Table of Contents The JOBS Act also provides that an “emerging growth company” can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revisited accounting standards. However, we are choosing to “opt out” of such extended transition period, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for companies that are not “emerging growth companies.” Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable. We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an “emerging growth company,” we may take advantage of exemptions from various reporting requirements that are applicable to either public company that are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements of Section 404 of SOX. As an “emerging growth company” we are required to report fewer years of selected historical financial data than that reported by other public companies. We may take advantage of these exemptions until we are no longer an “emerging growth company.” We could be an “emerging growth company” for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our ordinary shares held by non-affiliates exceeds $700 million as of any June 30 (the end of our second fiscal quarter) in which case we would no longer be an “emerging growth company” as of the following December 31 (our fiscal year end). We cannot predict if investors will find our shares less attractive because we may rely on these exemptions. If some investors find our shares less attractive as a result, there may be less active trading market for our shares and the price of our shares may be more volatile. ITEM 1A. RISK FACTORS See below. Otherwise, not required under Regulation S-K for “smaller reporting companies.” COVID-19 DISCLOSURE COVID-19 is currently impacting countries, communities, businesses, and markets, as well as global financial condition and results of operations for 2022 and 2021. We believe that it could have a bearing on our ability to follow through with our business plan for the next 12 months, including our ability to obtain necessary financing. While acknowledging that the impact of COVID-19 and the new Omicron variant is evolving rapidly and involves uncertainties, the SEC encourages companies to provide disclosures that allow investors to evaluate the current and expected impact of COVID-19 and the new Omicron variant through the eyes of management. The SEC also encourages companies to proactively update disclosures as facts and circumstances change. To that end, we have endeavored to address, where applicable, how COVID-19 and the new Omicron variant have impacted on our financial conditions in MD&A. We do not know how COVID-19 and the new Omicron variant will impact future operating results and our long-term financial condition. We have indicated what our overall liquidity position is now, but we cannot predict the long-term outlook. COVID-19 has had a negative effect on fund raising and both may have a negative effect on our ability to service our debt on a timely basis. We do not currently anticipate any material impairment including increases in allowances for bad debt, restructuring charges or other changes which could have a material impact on our financial statements on a timely basis. We do not expect to experience any significant challenges to implementing our business continuity plans nor do we expect COVID-19 to materially affect the demand for our services nor do we see any material change in the relationship between cost and services. The supply chain disruption and the new Omicron variant have not had any significant effect on our operations to date. ITEM 1B. UNRESOLVED STAFF COMMENTS. None. ITEM 2. PROPERTIES. The Company purchased land and buildings for its operations on December 31, 2019, and moved into the property in October 2020. The property consists of 4800 square foot of office and 1200 square foot of warehouse space and approximately one-half acre of land. The entire cost of the property was $325,000 plus closing costs. The property was financed by a $25,000 loan from Green Capital (GCSG) and a mortgage from the seller for the balance. The purchase price was allocated between Building $125,000 and Land $200,000. The previously occupied space was abandoned at the end of its lease and the Company wrote off the cost of abandoned leasehold improvements in 2020. The Company considers these facilities adequate for current operations level and for substantial growth in the future. Additional space is available in the current locations if needed. ABCO added a full solar electric array to our property during the year ended December 31, 2022 and currently enjoys substantially reduced electric bills. 9 Table of Contents ITEM 3. LEGAL PROCEEDINGS. From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, consolidated financial condition, or operating results. ITEM 4. MINE SAFETY DISCLOSURES. Not applicable. 10 Table of Contents PART II ITEM 5. MARKET FOR REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. A VERY LIMITED MARKET FOR OUR SHARES Our shares are listed on the OTC PINK Market under the symbol ABCE. On December 31, 2022, there were approximately 210 record holders of Company shares, not including all unknown names in the transfer system “CEDE”. The OTC Bulletin Board® is maintained by the National Association of Securities Dealers (the NASD, now known as the Financial Industry Regulatory Authority (FINRA)). The securities traded on the Bulletin Board are not listed or traded on the floor of an organized national or regional stock exchange. Instead, these securities transactions are conducted through a telephone and computer network connecting dealers in stocks. Over-the-counter stocks are traditionally smaller companies that do not meet the financial and other listing requirements of a regional or national stock exchange. Even if our shares are quoted on the OTC Bulletin Board®, a purchaser of our shares may not be able to resell the shares. Broker- dealers may be discouraged from effecting transactions in our shares because they will be considered penny stocks and will be subject to the penny stock rules. Upon becoming a reporting company, Rules 15g-1 through 15g-9 promulgated under the Securities Exchange Act of 1934, as amended, impose sales practice and disclosure requirements on FINRA brokers-dealers who make a market in a “penny stock.” A penny stock generally includes any non-NASDAQ equity security that has a market price of less than $5.00 per share. Under the penny stock regulations, a broker-dealer selling penny stock to anyone other than an established customer or “accredited investor” (generally, an individual with net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or her spouse) must make a special suitability determination for the purchaser and must receive the purchaser’s written consent to the transaction prior to sale, unless the broker-dealer or the transaction is otherwise exempt. In addition, the penny stock regulations require the broker-dealer to deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared by the Commission relating to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt. A broker-dealer is also required to disclose commissions payable to the broker-dealer and the registered representative and current quotations for the securities. Finally, a broker-dealer is required to send monthly statements disclosing recent price information with respect to the penny stock held in a customer’s account and information with respect to the limited market in penny stocks. The additional sales practice and disclosure requirements imposed upon broker-dealers may discourage broker-dealers from effecting transactions in our shares, which could severely limit the market liquidity of the shares and impede the sale of our shares in the secondary market, assuming one develops. We are currently trading on the gray Market after OTC Markets removed ABCO from the OTC Pink Market for failure to file audited financial statements for the fiscal years ended December 31, 2020, 2021 and for 2022 (“Audited Financial Statements”). Upon filing of the Audited Financial Statements for the 3 years ended 12/31/22, we be reinstated on the OTC Pink Market. In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares. MARKET INFORMATION HOLDERS As of April 1, 2023, we had approximately 210 shareholders of record of our common stock. The number of record holders was determined from the records of our transfer agent. Shareholders not included on the transfer agents listing include shareholders from other sources including beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies for which we have no record. The transfer agent of our common stock is VStock Transfer LLC, 18 Lafayette Place, Woodmere, New York, 17598. DIVIDENDS We have never paid any cash dividends on our capital stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We intend to retain future earnings to fund ongoing operations and future capital requirements of our business. Any future determination to pay cash dividends will be at the discretion of the Board and will be dependent upon our consolidated financial condition, results of operations, capital requirements, and such other factors as the Board deems relevant. 11 Table of Contents ITEM 6. SELECTED FINANCIAL DATA. Not required under Regulation S-K for “smaller reporting companies.” ITEM 7. MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements This Management ’ s Discussion and Analysis of Financial Condition and Results of Operations include several forward-looking statements that reflect management ’ s current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “ may, ” “ will, ” “ expect, ” “ anticipate, ” “ believe, ” “ estimate ” and “ continue, ” or similar words. Those statements include statements regarding the intent, belief or current expectations of us and the management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward- looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors not currently known to management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and business and operations of the Company. No assurances are made that the actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing for materials, and competition. RESULTS OF OPERATION MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER 31, 2022, AND 2021 The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes. This discussion and analysis contain certain statements that are not historical facts, including, among others, those relating to our anticipated financial performance for fiscal 2022 and 2021, cash requirements, and our expansion plans. Only statements which are not historical facts are forward-looking and speak only as of the date on which they are made. Information included in this discussion and analysis includes commentary on company-owned offices and sales volumes. Management believes such sales information is an important measure of our performance and is useful in assessing consumer acceptance of the ABCO Energy Business Model and the overall health of the Company. All our financial information is reported in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Such financial information should not be considered in isolation or as a substitute for other measures of performance prepared in accordance with GAAP. 12 Table of Contents OVERVIEW As of December 31, 2022, we operated in Tucson and Phoenix, Arizona. The Company’s plan is to expand to more locations in North America in the next year. We believe that the solar and energy efficiency business functions better if the employees are local individuals working and selling in their own community. Our customers have indicated a preference for dealing with local firms and we will continue our focus on company-owned integrated product and services offices. Once a local firm is established, growth tends to come from experience, quality and name recognition. This will result in larger contracting jobs, statewide expansion and growth in revenue. We remain committed to high quality operations. Our operating results for the years ended December 31, 2022, and 2021 are presented below with major category details of revenue and expense including the components of operating expenses. The footnotes to the financial statements disclose the related party transactions of Officer, Directors and other related parties. FISCAL YEAR ENDED DECEMBER 31, 2022, COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2021 Sales increased to $1,980,504 in 2022, an increase of $608,094 or 45% over 2021 sales of $1,372,410. The Covid 19 Pandemic, Lack of funds and available staff has reduced our ability to maintain our sales momentum. Our experience has shown us that there is going to be such pressure on our market, and we are changing to prevent decreases in sales in the future. We have added new products and new sales personnel and intend to find merger and acquisition funding and acquisition or merger candidates during the current year. There is no assurance that ABCO will be able to accomplish these goals in the coming year. Cost of sales increased by $328,831, or 35% to $1,277,722 in 2022 from $948,891 in 2021 due primarily to the increase in sales. The Company also changed its focus from residential installations to a commercial focus in order to meet changes in the market. Gross margin as a percentage of total sales was at 36% in 2022 from 31% in 2021, primarily due to higher margins associated with commercial jobs and better management of costs on the larger commercial jobs in 2022. We hope to bid these contracts more favorably in the future to prevent negative cost of sales numbers. We hope that more efficient production and a sales mix shift to the higher profit commercial market emphasis will improve these numbers. General and administrative expenses increased by $246,785 to $1,093,425 in 2022 from $846,640 in 2021 due primarily to increases in stock-based compensation to management which accounted for more than the total increase for the period. We also decreased our administration staff from 2021 in order to control operating expenses and to closely administer public company expenses. Net loss from operations decreased by $626,280 to $(43,626) for the year ended December 31, 2022, as compared to a loss from operations of $(669,906) for the year ended December 31, 2021. This increase is attributable to expenses from stock-based compensation and financing. We had similar margins in 2022 as in 2021 due to the emphasis on commercial projects. Total Net loss for the twelve months ended December 31, 2022, was $(173,259) and $(668,375) for the year ended December 31, 2021. This decrease is attributable to expenses from stock-based compensation, financing and professional fee charges in 2022 that did not occur in 2021. LIQUIDITY AND CAPITAL RESOURCES Our primary liquidity and capital requirements have been for carrying cost of accounts receivable and inventory during and after completion of contracts. This process can easily exceed 90 days and requires the contractor to pay all or most of the cost of the project without assistance from suppliers. Our working capital on December 31, 2022, was $(1,597,509) and it was $(1,390,788) on December 31, 2021. This decrease of $206,721 was primarily funded by our officer’s loans and private equity offerings. ABCO Energy has decreased its loan obligations or long-term debt in 2022 and 2021. Our long-term debt net of current portion totaled $454,041 on December 31, 2022, and $495,525 on December 31, 2021, due mainly to the payments on SBA loans and equipment purchase loans obtained by the Company. On December 31, 2022, and 2021, the Company owed its President and Director $634,733 and $533,244 respectively on demand notes. This is an increase of $101,489 which represents an additional loan from the President of ABCO. Bank financing has not been available to the Company. 13 Table of Contents STATEMENTS OF CASH FLOWS During the years ended December 31, 2022, and 2021 our net cash used in operating activities was $5,487 and $(612,949) respectively. Net cash used by operating activities in the period ended December 31, 2022, and 2021 consisted primarily of net loss from operations adjusted for non-cash expenses, stock-based compensation expense and a decrease in accounts payable and accrued expenses. Net cash provided by (used in) investing activities for the years ended December 31, 2022, and 2021 was $(25,788) and $667 respectively. This is primarily due to the purchase of autos for operations and investment in our building improvements, including the addition of a solar array. Net cash provided by financing activities for the years ended December 31, 2022, and 2021 was $8,988 and $589,428 respectively. Net cash provided by financing activities for 2022 and 2021 resulted primarily from the issuance of common stock and the conversion of convertible debt into common stock and officer’s loans. Since our inception on August 8, 2008, through December 31, 2022, we have incurred net losses of $(7,919,619), including the effects of derivatives on convertible debt totaling $2,305,951 and stock-based compensation of $562,699 over the last few years. Our cash and cash equivalent balances were $20,101 and $31,414 as of December 31, 2022, and 2021 respectively. On December 31, 2022, we had total liabilities of $2,783,415 as opposed to $2,249,620 on December 31, 2021, an increase of $533,795. Most of the increase occurred because of the SBA long term loan, officer’s loans, the auto purchases, excess billings on contracts in process and derivative liabilities. We plan to satisfy our future cash requirements, primarily the working capital required for the marketing of our products and services, by additional financing and more operations income. This will likely be in the form of future debt or equity financing. Based on our current operating plan, we have sufficient working capital to sustain operations in the short term if we do not expand our business. We will not, however, be able to reach our goals and projections for multistate expansion without a cash infusion. We expect that our revenue will increase at a steady pace and that this volume of business will result in profitable operations in the future. OFF BALANCE SHEET TRANSACTIONS The Company has no off-balance sheet transactions during the years ended December 31, 2022, and 2021. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not required under Regulation S-K for “smaller reporting companies.” 14 Table of Contents ITEM 8. FINANCIAL STATEMENTS. ABCO ENERGY, INC. FOR CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 16 Consolidated Balance Sheets as of December 31, 2022, and 2021 17 Consolidated Statements of Operations for the years ended December 31, 2022, and 2021 18 Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2022, and 2021 19 Consolidated Statements of Cash Flows for the years ended December 31, 2022, and 2021 21 Notes to Consolidated Financial Statements 22 15 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM IS NOT INCLUDED. SEE THE EXPLANATORY NOTE ON PAGE 3 HEREIN ABOVE RESPECTING THE LACK OF THE AUDITED REPORT. 16 Table of Contents ABCO ENERGY, INC. UNAUDITED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2022, and 2021 December 31 2022 December 31 2021 ASSETS Current Assets Cash $ 20,101 $ 31,414 Accounts receivable on completed projects 94,121 33,772 Costs and estimated earnings on contracts in progress 617,549 298,121 Total Current Assets 731,771 363,307 Fixed Assets Fixed assets – net of accumulated depreciation 391,903 378,891 Other Assets Investment in long term leases 3,431 3,641 Total Other Assets 3,431 3,641 Total Assets $ 1,127,105 $ 745,839 LIABILITIES AND STOCKHOLDERS ’ DEFICIT Current liabilities Accounts payable and accrued expenses $ 541,752 $ 521,819 Short term notes payable 117,687 155,979 Excess billing on contracts in progress 549,900 268,435 Notes payable from officers 634,733 533,244 Derivative liability on convertible debt 268,311 - Convertible debentures – net of discount 175,000 233,810 Current portion of long-term debt 41,991 40,808 Total Current Liabilities 2,329,374 1,754,095 Long term debt, net of current portion 454,041 495,525 Total Liabilities 2,783,415 2,249,620 Commitments and contingencies - - Stockholders ’ Defic Preferred stock, 100,000,000 shares authorized, $ 0.001 par value, and 12,800,000 shares issued and outstanding on December 31, 2022, and on December 31, 2021 12,800 12,800 Common stock, 2,000,000,000 shares authorized, $ 0.001 par value, 260,515,166 and 255,308,636 issued and outstanding on December 31, 2022, and December 31, 2021, respectively 260,515 255,309 Additional paid-in capital 5,989,994 5,982,752 Accumulated deficit ( 7,919,619 ) ( 7,754,642 ) Total Stockholders ’ Deficit ( 1,656,310 ) ( 1,503,781 ) Total Liabilities and Stockholders ’ Deficit $ 1,127,105 $ 745,839 See accompanying notes to the consolidated financial statements. 17 Table of Contents ABCO ENERGY, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2022, and 2021 December 31, 2022 December 31, 2021 Revenues, net $ 1,980,504 $ 1,372,410 Cost of Sales 1,277,722 948,891 Gross Profit 702,782 423,519 Operating Expens Payroll 185,047 217,735 Stock based compensation - 300,700 Advertising and marketing 44,617 53,372 Consulting expense 60,000 69,703 Corporate expense 48,871 62,648 Insurance 76,597 75,768 Professional fees 13,764 35,227 Rent - 10,049 Other selling and administrative expense 317,512 268,223 Total operating expense 746,408 1,093,425 Net (Loss) from operations ( 43,626 ) ( 669,906 ) Other expens Interest expense, net ( 83,180 ) ( 64,475 ) Amortization of original issue discount ( 9,127 ) ( 33,543 ) Change in derivative liability (Gain) Loss ( 169,277 ) ( 12,792 ) Finance Fees – derivatives - ( 93,706 ) Loss on sale of vehicles ( 4,027 ) Gain on extinguishment of debt 135,978 206,047 Total other expenses ( 129,633 ) 1,531 Net (Loss) before provision for income taxes ( 173,259 ) ( 668,375 ) Provision for income tax - - Net (loss) $ ( 173,259 ) $ ( 668,375 ) Net (loss) Per Share (Basic and Fully Diluted) $ ( 0.01 ) $ ( 0.01 ) Weighted average number of common shares used in the calculation 257,911,901 135,505,337 See accompanying notes to the consolidated financial statements. 18 Table of Contents ABCO ENERGY, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER ’ S EQUITY FOR THE YEAR ENDED DECEMBER 31, 2022 (UNAUDITED) Common Stock Shares Amount $0.001 Par Preferred Stock Additional Paid in Capital Accumulated Deficit Total Stockholders’ Deficit Balance on January 1, 2022 255,308,636 $ 255,309 $ 12,800 $ 5,982,752 $ ( 7,754,642 ) $ ( 1,503,781 ) Common Shares issued for warrants net of expenses 5,206,530 5,206 36,811 42,017 Loss on warrants for payment of debt ( 29,569 ) ( 29,569 ) Equity consolidation with AEFC 8,282 8,282 Net loss for the years ended December 31, 2022 ( 173,259 ) ( 173,259 ) Balance at December 31, 2022 260,515,166 260,515 12,800 5,989,994 ( 7,919,619 ) ( 1,656,310 ) 19 Table of Contents ABCO ENERGY, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER ’ S EQUITY FOR THE YEAR ENDED DECEMBER 31, 2021 (UNAUDITED) Common Stock Shares are recast in 2021 and 2020 for 170 for 1 reverse of common stock Shares Amount $0.001 Par Preferred Stock Additional Paid in Capital Accumulated Deficit Total Stockholders’ Deficit Balance - December 31, 2020, UNAUDITED 15,702,037 $ 15,702 $ 30,000 $ 5,456,438 $ ( 7,086,267 ) $ ( 1,584,127 ) Common shares issued for warrants under private placement offering - net of expenses 11,864,969 11,865 96,635 108,500 Common shares issued for conversion of convertible debenture notes - net of expenses 48,121,630 48,122 291,399 339,521 Common shares issued for compensation to insiders 172,000,000 172,000 ( 17,200 ) 17,200 172,000 Common shares issued for compensation to non-insiders 7,620,000 7,620 121,080 128,700 Net (loss) for the year ( 668,375 ) ( 668,375 ) Balance - December 31, 2021, UNAUDITED 255,308,636 $ 255,309 $ 12,800 $ 5,982,752 $ ( 7,754,642 ) $ ( 1,503,781 ) 20 Table of Contents ABCO ENERGY, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2022, and 2021 December 31 December 31 2022 2021 Cash Flows from Operating Activiti Net loss $ ( 173,259 ) $ ( 668,375 ) Adjustments to reconcile net loss to net cash used in operating activiti Depreciation 12,986 14,683 Change in amortizable debt discount on convertible debt 9,127 ( 33,543 ) Shares issued to officers and consultants - 300,700 Change in derivative liability 268,311 - Derivative liability (Gain) Loss ( 169,277 ) ( 12,792 ) Finance fees on derivatives - ( 93,706 ) Increase (decrease) in billings in excess of costs on incomplete contracts 281,465 - Gain (loss) on extinguishment of debt 135,978 206,047 Changes in operating assets and liabiliti Changes in Accounts receivable ( 60,349 ) ( 30,329 ) Change in accounts receivable on incomplete contracts ( 319,428 ) ( 290,472 ) Accounts payable and accrued expenses 19,933 ( 5,162 ) Net cash used in operating activities 5,487 ( 612,949 ) Cash Flows used in Investing Activiti Cash paid for land and building ( 21,851 ) ( 10,044 ) Purchase of equipment ( 4,147 ) 10,357 Proceeds from investments in long term leases 210 354 Net cash used in investing activities ( 25,788 ) 667 Cash Flows from Financing Activiti Proceeds from sale of common stock net of expenses 4,166 448,021 Proceeds from convertible debenture ( 58,810 ) 92,785 Payments on financial institution loans ( 37,857 ) - Proceeds (Payments) on related party notes payable 101,489 221,904 Increase in loans from material lenders - ( 18,140 ) Proceeds (Payment) on long term debt - 36,338 Payments on short term debt - ( 191,480 ) Net cash provided by financing activities 8,988 589,428 Net increase (decrease) in cash ( 11,313 ) ( 22,854 ) Cash, beginning of period 31,414 54,268 Cash, end of period $ 20,101 $ 31,414 Supplemental disclosures of cash flow informati Cash paid for interest $ 83,180 $ 64,475 Proceeds from SBA loan 30 years - 149,900 Proceeds from SBA payroll loan EIDL loan forgiveness ( 135,978 ) ( 123,999 ) Supplemental Disclosure of Non-cash investing and financing activiti Shares issued or to be issued for services $ - $ 300,700 Common shares issued for conversion of convertible debenture notes - net of expenses - 339,521 See accompanying notes to the consolidated financial statements. 21 Table of Contents ABCO ENERGY, INC. UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2022 AND DECEMBER 31, 2021 Note 1 – Overview and Description of the Company ABCO Energy, Inc. was organized on July 29, 2004, and operated until July 1, 2011, as Energy Conservation Technologies, Inc. (ENYC). On July 1, 2011, ENYC entered into a share exchange agreement (SEA) with ABCO Energy, Inc. (“Company”) and acquired all the assets of ABCO. ENYC changed its name to ABCO Energy, Inc. on October 31, 2011. As a result of the SEA, the outstanding shares of ENYC as of June 30, 2011, were restated in a one for twenty-three ( 1 for 23 ) reverse stock split prior to the exchange to approximately 9% of the post-exchange outstanding common shares of the Company. On January 13, 2017, the Board of Directors of the Company approved a reverse stock split of its common stock, at a ratio of 1-for-10 (the “Reverse Stock Split”). The Reverse Stock Split became effective with FINRA (the Financial Industry Regulatory Authority) and in the marketplace on January 13, 2017 (the “Effective Date”), whereupon the shares of common stock began trading on a split adjusted basis. As a result of the Reverse Stock Split the number of authorized shares of common stock was reduced to 50,000,000 from 500,000,000 shares. The Company held a Special Meeting of Stockholders in May 2017 which authorized an amendment to the Articles of Incorporation to increase the authorized common share capital to 2,000,000,000 common shares and 100,000,000 preferred shares. Thereafter, on September 27, 2017, by written consent the holders of a majority of the outstanding shares voted to authorize an additional amendment to increase the authorized common shares to 2,000,000,000 shares. On December 13, 2020, the Board of Directors of the Company approved a reverse stock split of its common stock, at a ratio of 1-for-170 (the “Reverse Stock Split”). The Reverse Stock Split became effective with FINRA (the Financial Industry Regulatory Authority) and in the marketplace on January 4, 2021 (the “Effective Date”), whereupon the shares of common stock began trading on a split adjusted basis. On December 23, 2018, the Board of Directors of the Company approved a reverse stock split of its common stock, at a ratio of 1-for 20 (the “Reverse Stock Split”). The Reverse Stock Split became effective with FINRA (the Financial Industry Regulatory Authority) and in the marketplace on December 23, 2018 (the “Effective Date”), whereupon the shares of common stock began trading on a split adjusted basis. On November 8, 2018, by written consent the holders of a majority of the outstanding shares voted to authorize an additional amendment to increase the authorized common shares to 5,000,000,000 shares. All share numbers through-out these financial statements and notes thereto have been adjusted to reflect this reverse split. The Company is in the Photo Voltaic (PV) solar systems industry, the LED and energy efficient commercial lighting business and is an electrical product and services supplier. In 2018 ABCO entered the HVAC business with the acquisition of a small company’s assets and qualifying license. The Company plans to build out a network of operations in major cities in the USA to establish a national base of PV, HVAC, lighting and electrical service operations centers. This combination of services, solar and electric, provides the Company with a solid base in the standard electrical services business and a solid base in the growth markets of the solar systems industry. DESCRIPTION OF PRODUCTS ABCO sells and installs Solar Photovoltaic electric systems that allow the customer to produce their own power on their residence or business property. These products are installed by our crews and are purchased from both the USA and offshore manufacturers. We have available and utilize many suppliers of US manufactured solar products from such companies as Mia Soleil, Canadian Solar, Westinghouse Solar and various Italian, Korean, German, and Chinese suppliers. In addition, we purchase from several local and regional distributors whose products are readily available and selected for markets and price. ABCO offers solar leasing and long-term financing programs from Service Finance Corporation, Green Sky, AEFC and others that are offered to ABCO customers and other marketing and installation organizations. ABCO also sells and installs energy efficient lighting products, solar powered streetlights and lighting accessories. ABCO contracts directly with manufacturers to purchase its lighting products which are sold to residential and commercial customers. ABCO has Arizona statewide approval as a registered electrical services and solar products installer and as an air conditioning and refrigeration installer. Our license is ROC 258378 Electrical and ROC 323162 HVAC, and we are fully licensed to offer commercial and residential electrical services, HVAC and Solar Electric. 22 Table of Contents ABCO ENERGY, INC. UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2022 AND DECEMBER 31, 2021 ABCO has three subsidiaries, ABCO Solar, Inc. an Arizona Corporation which provides solar and electric services and products, Alternative Energy Finance Corporation, (AEFC) a Wyoming Company which provides funding for leases of photovoltaic systems, and ABCO Air Conditioning Services, Inc., an Arizona Corporation which sells residential and commercial air conditioning equipment and services in Arizona. In addition, AEFC has two subsidiaries, Alternative Energy Solar Fund, LLC, and Arizona limited liability Company that was formed to invest in solar projects and Alternative Energy Finance Corporation, LLC, an Arizona limited liability company formed so AEFC could do business in Arizona. ABCO Solar offers solar systems “Operations and Maintenance Services” to residential and commercial customers that have solar systems built by ABCO or other solar installers. Many installers have gone out of business and ABCO’s service enables these customers’ system to continue to operate. ABCO’s service enables customers to maintain their warranties, remove and replace their systems for roof maintenance and to maintain peak efficiency. ABCO now operates and maintains systems in many cities in Arizona and intends to continue to expand this operation and maintenance segment of its business. Note 2 – Summary of significant accounting policies. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or “GAAP.” The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Intercompany transactions and balances have been eliminated. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have identified the following to be critical accounting policies whose application have a material impact on our reported results of operations, and which involve a higher degree of complexity, as they require us to make judgments and estimates about matters that are inherently uncertain. C ash and Cash Equivalents There are only cash accounts included in our cash equivalents in these statements. For purposes of the statement of cash flows, the Company considers all short-term securities with a maturity of three months or less to be cash equivalents. There are no short-term cash equivalents reported in these financial statements. Fixed Assets Property and equipment are to be stated at cost less accumulated depreciation. Depreciation is recorded on the straight-line basis according to IRS guidelines over the estimated useful lives of the assets, which range from three to ten years . Maintenance and repairs are charged to operations as incurred. Revenue Recognition The Company generates revenue from sales of solar products, LED lighting, installation services and leasing fees. During the last two fiscal years, the company had product sales as follows: Sales Product and Services Description December 31, 2022 December 31, 2021 Solar PV residential and commercial sales $ 1,421,009 72 % $ 1,181,805 86 % Air conditioning sales and service 448,372 23 % 65,128 5 % Energy efficient lighting & other income 110,848 5 % 125,165 9 % Interest Income 275 - % 312 - % Total revenue $ 1,980,504 100 % $ 1,372,410 100 % The Company recognizes product revenue, net of sales discounts, returns and allowances. These statements establish that revenue can be recognized when persuasive evidence of an arrangement exists, delivery has occurred, and all significant contractual obligations have been satisfied, the fee is fixed or determinable, and collection is considered probable. 23 Table of Contents ABCO ENERGY, INC. UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2022 AND DECEMBER 31, 2021 Our revenue recognition is recorded on the percentage of completion method for sales and installation revenue and on the accrual basis for fees and interest income. We recognize and record income when the customer has a legal obligation to pay. All our revenue streams are acknowledged by written contracts for any of the revenue we record. There are no differences between major classes of customers or customized orders. We record discounts, product returns, rebates and other related accounting issues in the normal business manner and experience a very small number of adjustments to our written contractual sales. There are no post-delivery obligations because warranties are maintained by our suppliers. Our lease fees are earned by providing services to contractors for financing solar systems. Normally we will acquire the promissory note (lease) on a leased system that will provide cash flow for up to 20 years. Interest is recorded in the books when earned on amortized leases. Accounts Receivable and work-in-progress The Company recognizes revenue upon delivery of products to customers and does not make bill-and-hold sales. Contracts spanning reporting periods are recorded on the percentage of completion method, based on the ratio of total costs to total estimated costs by project, for recognition of revenue and expenses. Accounts receivable include fully completed and partially completed projects and partially billed statements for completed work and product delivery. The Company records a reserve for bad debts in the amount of 2 % of earned accounts receivable. When the Company determines that an account is uncollectible, the account is written off against the reserve and the balance to expense. If the reserve is deemed to be inadequate after annual reviews, the reserve will be increased to an adequate level. Inventory The Company records inventory of construction supplies at cost using the first in first out method. After reviewing the inventory on an annual basis, the Company discounts all obsolete items to fair market value and has established a valuation reserve of 10% of the inventory at total cost to account for obsolescence. As of December 31, 2019, all inventory was written off resulting in balances on December 31, 2022, of $ 0 and on December 31, 2021, of $ 0 . Income Taxes The Company has net operating loss carryforwards as of December 31, 2022, totaling approximately $ 5,059,251 net of accrued derivative liabilities and stock-based compensation, which are assumed to be non-tax events. A deferred 21 % tax benefit of approximately $ 1,062,442 has been offset by a valuation allowance of the same amount as its realization is not assured. The full realization of the tax benefit associated with the carry-forward depends predominately upon the Company’s ability to generate taxable income during future periods, which is not assured. The Company files in the US only and is not subject to taxation in any foreign country. There are three open years for which the Internal Revenue Service can examine our tax returns so 2019, 2020 and 2021 are still open years and 2022 will replace 2019 when the tax return is filed. Fair Values of Financial Instruments ASC 825 requires the Corporation to disclose the estimated fair value for its financial instruments. Fair value estimates, methods, and assumptions are set forth as follows for the Corporation’s financial instruments. The carrying amounts of cash, receivables, other current assets, payables, accrued expenses and notes payable are reported at cost but approximate fair value because of the short maturity of those instruments. The Company measures assets and liabilities at fair value based on expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale date of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. 24 Table of Contents ABCO ENERGY, INC. UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2022 AND DECEMBER 31, 2021 The following are the hierarchical levels of inputs to measure fair val Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3: Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available. The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts payable and accrued expenses, approximate their fair values because of the current nature of these instruments. Debt approximates fair value based on interest rates available for similar financial arrangements. Derivative liabilities which have been bifurcated from host convertible debt agreements are presented at fair value. See note 11 for complete derivative and convertible debt disclosure. Derivative Financial Instruments Fair value accounting requires bifurcation of embedded derivative instruments such as convertible features in convertible debts or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the binomial option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments. Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments, such as warrants, are also valued using the binomial option-pricing model. Effects of Recently Issued Accounting Pronouncements The Company has reviewed all recently issued accounting pronouncements and have determined the following have an effect on our financial statements: Stock-Based Compensation The Company accounts for employee and non-employee stock awards under ASC 505 and ASC 718, whereby equity instruments issued to employees for services are recorded based on the fair value of the instrument issued and those issued to non-employees are recorded based on the fair value of the consideration received or the fair value of the equity instrument, whichever is more reliably measurable. For employees, the Company recognizes compensation expense for share-based awards based on the estimated fair value of the award on the date of grant and the probable attainment of a specified performance condition or over a service period. Per Share Computations Basic net earnings per share are computed using the weighted-average number of common shares outstanding, which was 260,515,166 on December 31, 2022 and 255,308,636 on December 31, 2021. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares and the dilutive potential common shares outstanding during the period. All shares were considered anti-dilutive on December 31, 2022, and 2021. Potentially dilutive share issues 1) all unissued common shares sold, 2) all convertible debentures have a possibility of a large number of shares being issued and would result in a larger number of shares issued if the price remains low, 3) the preferred stock of the company held by insiders is convertible into common shares and the preferred stock is voted on a 20 to 1 basis, 4) all options issued. All of the above are potentially dilutive items. 25 Table of Contents ABCO ENERGY, INC. UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2022 AND DECEMBER 31, 2021 Stock subscriptions executed under an earlier offering included a provision whereby ABCO agrees to pay a dividend (defined as interest) of from 6 % to 12 % of the total amount invested for a period of one year from receipt of the invested funds. This dividend (defined as interest) is allocated between the broker and the investor with amounts paid to the broker treated as a cost of the offering and netted against additional paid in capital and amounts paid to the investor treated as interest expense. Total amounts paid or accrued under this agreement and charged to additional paid-in capital for the years ended December 31, 2022, and 2021, amounted to $ 0 and $ 0 , respectively. Total amounts paid under this agreement and charged to interest expense for the years ended December 31, 2022, and 2021, amounted to $ 0 and $ 0 , respectively. The accrued balance due on this obligation to shareholders totals $ 49,290 on December 31, 2022, and 2021. ABCO has evaluated these agreements under ASC 480-10: Certain Financial Instruments with Characteristics of Both Liabilities and Equity and determined that the capital contributions made under these subscription agreement more closely resemble equity than liabilities as they can only be settled through the issuance of shares and although they have a stated cost associated with them which accrues in the same manner as interest, the cost is only incurred in the first twelve months after placement as is more closely associated with a cost of raising funds than interest expense. Note 3 – Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. Since its inception, the Company has been engaged substantially in financing activities and developing its business plan and marketing. The Company incurred a net loss of $( 173,259 ), the net cash flow used in operations was $ 5,487 and its accumulated net losses from inception through the period ended December 31, 2022, is $( 7,919,619 ), which raises substantial doubt about the Company’s ability to continue as a going concern. In addition, the Company’s development activities since inception have been financially sustained through capital contributions from shareholders. The ability of the Company to continue as a going concern is dependent upon its ability to raise additional capital from the sale of common stock or through debt financing and, ultimately, the achievement of significant operating revenues. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might result from this uncertainty. Note 4 – Accounts Receivable Accounts receivable as of December 31, 2022, and 2021, consists of the followin Description December 31, 2022 December 31, 2021 Accounts receivable on completed contracts $ 94,121 $ 33,772 Costs and estimated earnings on contracts in progress 617,549 298,121 Total $ 711,670 $ 331,893 Costs and Estimated Earnings on projects are recognized on the percentage of completion method for work performed on contracts in progress on December 31, 2022, and December 31, 2021. The Company records contracts for future payments based on contractual agreements entered into at the inception of construction contracts. Amounts are payable from customers based on milestones established in each contract. Larger contracts are billed and recorded in advance and unearned profits are netted against the billed amounts such that accounts receivable reflect current amounts due from customers on completed projects and amounts earned on projects in process are reflected in the balance sheet as costs and estimated earnings in excess of billings on contracts in progress. Excess billings on contracts in process are recorded as liabilities and were $ 549,900 on December 31, 2022, and $ 268,435 on December 31, 2021. 26 Table of Contents ABCO ENERGY, INC. UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2022 AND DECEMBER 31, 2021 Note 5 – Inventory The inventory of construction supplies not yet charged to specific projects was $ 0 on December 31, 2022, and $ 0 as of December 31, 2021. The Company values items of inventory at the lower of cost or net realizable value and uses the first in first out method to charge costs to jobs. The Company wrote off all of its inventory during 2018. Note 6 – Investment in long term leases Long term leases recorded on the consolidated financial statements were $ 3,431 on December 31, 2022, and $ 3,641 at December 31, 2021, respectively. Note 7 – Fixed Assets The Company has acquired all its office and field work equipment with cash payments and financial institution loans. The total fixed assets consist of land and building, vehicles, office furniture, tools and various equipment items and the totals are as follows: December 31, December 31, Asset 2022 2021 Land and Building $ 358,295 $ 336,444 Equipment 167,781 163,634 Accumulated depreciation ( 134,173 ) ( 121,187 ) Fixed Assets, net of accumulated depreciation $ 391,903 $ 378,891 Depreciation expenses for the years ended December 31, 2022, and 2021 were $ 12,986 and $ 14,683 respectively. On December 31, 2019, the Company purchased a building at 2505 N Alvernon consisting of 4,800 SF building and approximately ½ acre of land. The property was financed by a $ 25,000 loan from Green Capital (GCSG) and a mortgage from the seller for the $ 300,000 balance. The purchase price was $ 325,000 plus closing costs of $ 1,400 . During 2021 the Company invested $ 10,044 in improvements to the attached warehouse on the property. During 2022 the company added a solar array at a cost of $ 21,851 . Note 8 – Notes Payable to Officer Notes payable to Officer as of December 31, 2022, and December 31, 2021, have a current balance of $ 634,733 and $ 533,244 as of December 31. The note is a secured demand note and bears interest at 12 % per annum. This note resulted in an interest charge of $ 134,817 accrued and unpaid on December 31, 2022, and $ 83,258 on December 31, 2021. The Note was converted to a secured note on April 1, 2021, granting a security interest in all assets of the Company. 27 Table of Contents ABCO ENERGY, INC. UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2022 AND DECEMBER 31, 2021 Note 9 – Short Term Notes Payable Description December 31, 2022 December 31, 2021 Bill’d Exchange, LLC, an equipment capital lender, initial financing August 2, 2019, finances equipment for commercial contracted customers in varying amounts – Now included in Accounts Payable - Vendors $ - $ 20,000 Merchant loan – Green Capital -This note has been written off - 7,747 SBA loan for payroll This loan has been forgiven by the SBA - 128,232 Note due to former Director 60,000 - Interest on Directors note 57,687 - Total $ 117,687 $ 155,979 The Former Director of ABCO Energy made a loan to the Company in 2010 in the amount of $ 60,000 for initial working capital. This demand note provides for interest at 12 % per annum and is unsecured. This note resulted in an accrued interest total of $ 57,687 accrued and unpaid on December 31, 2022 and $ 50,465 at December 31, 2021. Bill’d Exchange, LLC, a customer equipment capital lender, made their initial financing on August 2, 2019. They finance equipment for commercial contracted customers in varying amounts. These loans bear interest at varying rates and are paid weekly for the amount of interest due on the account at each date. Each loan is secured by the accounts receivable from the customer and by the personal guarantee of an affiliated officer of ABCO Solar, Inc. On March 2, 2021, the Company made an agreement to pay $ 20,000 to settle this note in 5 payments of $ 4,000 . This note is classified as short-term debt but is included in accounts payable in 2022. The balance on December 31, 2022 was recorded as a vendor in accounts payable and $ 20,000 on December 31, 2021. On December 31, 2019, ABCO borrowed $ 25,000 from Green Capital Funding, LLC. The proceeds from this loan were used to acquire the real estate purchased on the date of the loan. This unsecured loan bears interest at approximately 36 % and has a repayment obligation in the amount of $ 35,250 in 76 payments. The unpaid balance of principal and interest on December 31, 2020, was $ 11,748 after several months of daily payment and a default on February 18, 2020, due to the reduction in business from Covid-19. As of the date of filing this report, no arrangements for resuming payments had been accomplished however the Company has been paying $ 1,000 per month for several months. As of December 31, 2022, the Company has reduced the balance to $ 0 . On February 24, 2021, the Company executed a promissory note evidencing an unsecured loan (“Loan”) for $ 128,232 under the Paycheck Protection Plan (“PPP”). The terms of the Loan are 3.75 % interest and delayed payments until notified. The Loan is from the Bank of America and is guaranteed by the SBA under the PPP program resulting from the COVID-19 pandemic. This Loan was forgiven during 2022. The Company borrowed $ 123,999 from Bank of America and the SBA guaranteed the loan under the EIDL program because of Covid-19 pandemic. This loan was forgiven in March of 2021 and the Company has no further obligation to the SBA or the Bank of America under this note. The forgiveness of this note was classified as “gain on extinguishment of debt” on our income statement. 28 Table of Contents ABCO ENERGY, INC. UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2022 AND DECEMBER 31, 2021 Note 10 – Convertible debentures -net of discounts. During the year ended December 31, 2022, the Company [partially] funded operations with borrowing on new convertible promissory notes. This table presents the positions on the notes as of December 31, 2022, and 2021. Holder Date of Loan Loan amount OID and discounts and fees Interest rate Balance December 31, 2022 Balance December 31, 2021 Power Up Lending Group, Ltd 3-29-21 $ 80,000 7,500 12 % $ 0 $ 0 Power Up Lending Group, Ltd 5-25-21 53,625 4,875 10 % 0 0 Power Up Lending Group Ltd 10-06-21 50,000 $ 3,750 8 % 53,750 53,750 6th Street Lending LLC 11-10-21 35,000 3,750 12 % 38,750 38,750 6th Street Lending LLC 12-17-21 40,000 3,750 12 % 43,750 43,750 6 th Street Lending 2-22-22 35,000 3,750 12 % 38,750 0 Oasis Capital 07-19-21 118,000 10,000 8 % 0 7,653 Total convertible debt $ 376,625 $ 33,625 175,000 143,883 Derivative liability - Net of OID 268,311 58,810 Less Original issue discounts - - Balances at 12-31-22 and 2021 $ 443,311 $ 233,810 On March 29, 2021, the Board of Directors of the Company deem it in the best interests of the Company to enter into the Securities Purchase Agreement dated March 29, 2021 (the “Agreement”) with Power Up Lending Group Ltd. (“PowerUp”), in connection with the issuance o (i) a promissory note of the Company, in the aggregate principal amount of $ 80,000.00 (including $ 7,500.00 of Original Issue Discount) (the “Note”), (ii) Three Hundred Seventy Three Thousand Three Hundred Thirty Three ( 373,333 ) restricted common shares of the Company (“Commitment Shares”) to be delivered to PowerUp in book entry with the Company’s transfer agent prior to the Closing Date, (iii) Seventy Hundred Forty Six Thousand Six Hundred Sixty Seven ( 746,667 ) restricted common shares of the Company (“Security Shares” and together with the Note and the Commitment Shares, collectively, the “Securities”) to be delivered to PowerUp in book entry with the Company’s transfer agent prior to the Closing Date; and in connection therewith to enter into an irrevocable letter agreement with Vstock Transfer LLC, the Company’s transfer agent, with respect to the reserve of shares of common stock of the Company to be issued upon any conversion of the Note (only upon default); the issuance of such shares of common stock in connection with a conversion of the Note (the “Letter Agreement”). The Conversion terms of this note allow for a 25% discount to the market based upon the price on the day before the announced date of conversion. The proceeds of this note were specifically slated for payment of the settlement of the Knight Capital Merchant Loan for $ 22,000 and the final payment of the Pearl Capital merchant note for $ 36,998 . These discounted payoffs of these notes saved the company $ 26,446 plus future interest. During 2021 the Company paid $ 26,880 in payments on this note and PowerUp converted the balance of $ 62,720 into 3,318,505 shares of stock. The balance of this note on December 31, 2022, and December 31, 2021, is $ 0 . On May 25, 2021, the Board of Directors of the Company deem it in the best interests of the Company to enter into the Securities Purchase Agreement (the “Agreement”) with Power Up Lending Group Ltd. (“PowerUp”), in connection with the issuance o (i) a promissory note of the Company, in the aggregate principal amount of $ 53,625 (including $ 4,875 of Original Issue Discount and $ 3,750 for legal expenses.) (the “Note”), (ii) 1,340,625 restricted common shares of the Company (“Commitment Shares”) to be delivered to PowerUp in book entry with the Company’s transfer agent prior to the Closing Date, to be issued upon any conversion of the Note (only upon default); the issuance of such shares of common stock in connection with a conversion of the Note (the “Letter Agreement. The Conversion terms of this note allow for a 25% discount to market based upon the price on the day before the announced date of conversion”. During 2021 the Company paid $ 11,798 in payments on this note and PowerUp converted the balance of $ 58,785 into 11,080,577 shares of stock. The balance of this note on December 31, 2021, is $ 0 . 29 Table of Contents ABCO ENERGY, INC. UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2022 AND DECEMBER 31, 2021 On September 30, 2021, the Board of Directors of the Company deem it in the best interests of the Company to enter into the Securities Purchase Agreement (the “Agreement”) with Power Up Lending Group Ltd. (“PowerUp”), in connection with the issuance o (i) a promissory note of the Company, in the aggregate principal amount of $ 53,750 (including $ 3,750 for legal expenses.) (the “Note”), (ii) restricted common shares of the Company (“Commitment Shares”) to be delivered to PowerUp in book entry with the Company’s transfer agent prior to the Closing Date, to be issued upon any conversion of the Note (only upon default); the issuance of such shares of common stock in connection with a conversion of the Note (the “Letter Agreement”). The Conversion terms of this note allow for a 42% discount to the market based upon the lowest trading price during the 20-day period before the announced date of conversion. The balance of this note on December 31, 2021, is $ 53,750 . On November 10, 2021, the Board of Directors of the Company deem it in the best interests of the Company to enter into the Securities Purchase Agreement (the “Agreement”) with 6th Street Lending LLC, of Alexandria Virginia, in connection with the issuance of a promissory note of the Company, in the aggregate principal amount of $ 38,750 (including $ 3,750 for legal expenses.) (the “Note”), bearing interest at the rate of 12 % per annum and convertible into common stock at the rate of 58% of the lowest market price in the 20-trading day period prior to the conversion date . The balance of this note on December 31, 2021, is $ 38,750 . On December 17, 2021, the Board of Directors of the Company deem it in the best interests of the Company to enter into the Securities Purchase Agreement (the “Agreement”) with 6th Street Lending LLC, of Alexandria Virginia, in connection with the issuance of a promissory note of the Company, in the aggregate principal amount of $ 43,750 (including $ 3,750 for legal expenses.) (the “Note”), bearing interest at the rate of 12 % per annum and convertible into common stock at the rate of 58% of the lowest market price in the 20-trading day period prior to the conversion date . The balance of this note on December 31, 2021, is $ 43,750 . On July 19, 2021, The Company entered into a “Senior Secured Convertible Promissory Note” agreement with Oasis Capital, LLC in the amount of $ 118,000 that bears interest at 8 % per annum. The first nine months of the interest was guaranteed. The note was secured with a securities purchase agreement that contained a $ 10,000 Original Issue Discount (OID) and an $ 8,000 transaction fee. The note was to be paid to ABCO (Borrower) in tranches as requested by the borrower. The first tranche paid was $ 20,000 and the note then accrued the $ 8,000 fee and prorated segment of $ 2,000 of the OID. The second tranche was for $ 25,000 and the prorated OID was $ 2,500 . The company accrued interest of $ 1,090 on these two loans. As of December 31, 2021, the Company owed $ 7,653 on this note. The note also entitled Oasis to a warrant to acquire 7,379,612 shares of common stock. With the two tranches of borrowing, Oasis has earned 1,718,861 warrants. The balance on this note on December 31, 2022 is $ 0 . On July 19, 2021, the Company entered into an Equity Purchase Agreement (“EPA”) with Oasis Capital, LLC, a Puerto Rico limited liability company (“Investor”) pursuant to which Investor agreed to purchase up to $ 2,500,000 of the Company’s common stock at a price equal to 80% of the lowest traded price of the common stock during the five trading days immediately preceding the applicable purchase (“Put Shares”). In addition, the Company entered into a Registration Rights Agreement (“RRA”) with Investor pursuant to which the Company agreed to register all Put Shares acquired under the Equity Purchase Agreement. The Company agreed to file a new registration statement on or before August 18, 2021, to register for resale of the Put Shares. The Registration Statement must be effective with the SEC before Investor is obligated to purchase any Put Shares. The parties subsequently agreed that the requirement to file the Registration Statement would terminate the agreement, so the Company elected to terminate both the EPA and RRA. During 2021 Oasis converted $ 282,241 of debt consisting of payments of principal, interest and penalties and received 39,931,068 shares of common stock. In addition, Oasis received 5,545,039 shares of common stock upon exercise of warrants during 2021. On January 3, 2022, Oasis received an additional 5,206,350 common stock shares upon exercise of warrants during 2022. The shareholders on January 11, 2021, authorized an increase in the Authorized Common Shares to 2,000,000,000 from 29,411,765 . Our board of directors believes that it is desirable to have additional authorized shares of common stock available for possible future financing, acquisition transactions, joint ventures and other general corporate purposes. Our board of directors believes that having such additional authorized shares of common stock available for issuance in the future will give us greater flexibility and may allow such shares to be issued without the expense and delay of a special shareholders’ meeting unless such approval is expressly required by applicable law. Although such issuance of additional shares with respect to future financing and acquisitions would dilute existing shareholders, management believes that such transactions would increase the overall value of the Company to its shareholders. 30 Table of Contents ABCO ENERGY, INC. UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2022 AND DECEMBER 31, 2021 Effective March 3, 2021, the Company issued an aggregate of 5,000,000 restricted common shares for services rendered, of which 500,000 were awarded to Wayne Marx, a former Officer and Director, 3,500,000 shares to an LLC controlled by David Shorey, President, CEO and CFO, and 1,000,000 shares to an outside consultant. Note 11 – Derivative Instruments The Financial Accounting Standard ASC 815 Accounting for Derivative Instruments and Hedging Activities require that instruments with embedded derivative features be valued at their market values. The Black Scholes model was used to value the derivative liability for the fiscal year ending December 31, 2022, and December 31, 2021. The initial valuation of the derivative liability on the non-converted common shares totaled $ 0 on December 31, 2022. This value includes the fair value of the shares that may be issued according to the contracts of the holders and valued according to our common share price at the time of acquisition. The Company complies with the provisions of FASB ASC No. 820, Fair Value Measurements and Disclosures (“ASC 820”), in measuring fair value and in disclosing fair value measurements at the measurement date. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements. FASB ASC No. 820-10-35, Fair Value Measurements and Disclosures- Subsequent Measurement (“ASC 820-10-35”), clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10-35-3 also requires that a fair value measurement reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model. The following table shows the change in the fair value of the derivative liabilities on all outstanding convertible debt on December 31, 2022, and on December 31, 2021: Description December 31, 2022 December 31, 2021 Purchase price of the convertible debenture - net of discount -total at year end $ 175,000 $ 136,250 Derivative Valuation increase during the period 268,311 97,560 Balance of convertible debenture and derivative liability net of discount on the notes (See Consolidated Balance sheet liabilities) $ 443,311 $ 233,810 Derivative calculations and presentations on the Statement of Operations Loss on note issuance $ - $ 106,498 Change in Derivative (Gain) Loss ( 169,277 ) - Derivative Finance fees - ( 93,706 ) Gain (loss) on extinguishment of debt derivatives only - - Derivative expense charged to operations in 2020 and 2019 (See Consolidated Statement of Operations) $ ( 169,277 ) $ ( 12,792 ) 31 Table of Contents ABCO ENERGY, INC. UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2022 AND DECEMBER 31, 2021 Note 12 – Long term debt Holder Date issued Interest rate Amount due December 31, 2022 Amount due December 31, 2021 Real Estate Note Allen-Neisen Family trust – Et. Al. 12-31-19 5.00 % $ 270,867 $ 280,811 US Treasury SBA guaranteed loan 07-21-20 3.75 % 149,900 149,900 Ascentium Capital 10-01-18 13.00 % 0 2,757 Charles O’Dowd 05-20-21 imputed 45,000 63,000 GMAC Chev truck 09-26-20 5.99 % 14,697 19,725 Mechanics bank – Chev Truck 11-15-20 8.99 % 15,568 20,140 Total long-term debt 496,032 536,333 Less Current portion 41,991 40,808 Total long-term debt $ 454,041 $ 495,525 On December 31, 2019, ABCO completed negotiations, financial arrangements and closed on the purchase of a 4,800 square foot office and warehouse building located on one/half acre of paved land on one of Tucson’s busiest streets. This property will be more than adequate to house both the Solar business and our HVAC expansion. The land and outbuildings will accommodate all of our equipment. The property acquisition was priced at $ 325,000 the company paid $ 25,000 down payment and the seller financed $ 300,000 mortgage based on a twenty-year amortization and a 5 % interest rate with a balloon payment at the end of five (5) years. The monthly payment is $ 1,980 . On July 21, 2020, the Company received an SBA loan from Bank of America in the amount of $ 149,900 that is guaranteed by the US Treasury Department. Installment payments, including principal and interest, of $ 731.00 monthly, will begin Twelve (12) months from the date of the promissory Note. The balance of principal and interest will be payable Thirty (30) years from the date of the promissory Note. Interest will accrue at the rate of 3.75 % per annum and will accrue only on funds actually advanced from the date(s) of each advance. Each payment will be applied first to interest accrued to the date of receipt of each payment, and the balance, if any, will be applied to the principal. For loan amounts of greater than $25,000, Borrower hereby grants to SBA, the secured party hereunder, a continuing security interest in and to any and all “Collateral” as described herein to secure payment and performance of all debts, liabilities and obligations of Borrower to SBA hereunder without limitation, including but not limited to all interest, other fees and expenses (all hereinafter called “Obligations”). The Collateral includes the following property that Borrower now owns or shall acquire or create immediately upon the acquisition or creation thereo all tangible and intangible personal property, including, but not limited t (a) inventory, (b) equipment, (c) instruments, including promissory notes (d) chattel paper, including tangible chattel paper and electronic chattel paper, (e) documents, (f) letter of credit rights, (g) accounts, including health-care insurance receivables and credit card receivables, (h) deposit accounts, (i) commercial tort claims, (j) general intangibles, including payment intangibles and software and (k) as-extracted collateral as such terms may from time to time be defined in the Uniform Commercial Code. The security interest the Borrower grants includes all accessions, attachments, accessories, parts, supplies and replacements for the Collateral, all products, proceeds and collections thereof and all records and data relating thereto. Since the inception of this Loan, the Company recorded $ 14,053 in unpaid interest on this loan. ABCO acquired the assets of Dr. Fred Air Conditioning services on September 2, 2018, for the total price of $ 22,000 . The allocation of the purchase price was to truck and equipment at $ 15,000 and the balance was allocated to inventory and the license for a period of five or more years. The truck and equipment were financed by Ascentium Capital. The payments on the Ascentium capital note are $ 435 and the payments on the Donze note are $ 212 each per month. The balance on the Ascentium note on December 31, 2022, and 2021 was $ 0 and $ 0 respectively. 32 Table of Contents ABCO ENERGY, INC. UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2022 AND DECEMBER 31, 2021 The Company and its prior President Mr. Charles O’Dowd negotiated the short-term loan the Company received from Mr. O’Dowd on several occasions that totaled $ 61,052 in principal when Mr. O’Dowd left the Company. On May 20, 2021, the Company issued Mr. O’Dowd a Promissory Note for the balance of his note. The terms of the settlement were that the Company paid $ 5,000 in cash and agreed to pay $ 1,500 per month for 48 months for a total settlement of $ 77,000 including all interest owed at that time. The note did not include a stated interest rate, so no interest is calculated on this note after settlement. The balance on this note was $ 45,000 on December 31, 2022. Mr. Charles O’Dowd, former President and Director of ABCO Energy, resigned from all positions with the Company on October 7, 2019. During September 2020 and December 2020, the Company purchased two new Chevrolet trucks for operations. The trucks were financed by GMAC and Mechanics bank for the full purchase price and Mr. Shorey, the President, guaranteed the debt. The balance on the two notes was $ 14,697 and $ 15,569 on December 31, 2022, and $ 19,725 and $ 20,140 on December 31, 2021. On April 1, 2022, the promissory note payable to the President in the amount of $ 311,896 was converted into a secured note covering all assets of the Company. The Note bears interest at the rate of 12 % per annum and is due on demand. Financing statements are expected to be filed in Pima County, AZ and in Las Vegas County, NV covering the assets which are securing this Note. The note has unpaid interest due in the amount of $ 134,817 . See Exhibit 99.2 for a form of the Note. This note had a balance of $ 634,733 and $ 533,244 on December 31, 2022 and 2021 respectively. Note 13 – Stockholder ’ s Deficit Common Stock During the year ended December 31, 2022, the following warrants were exercised, and shares were issued. Capital Company Warrants Exercised Exercise price Dollars converted Oasis Capital 5,206,530 .00807 42,017 Total (weighted average price is $.00915) 5,206,530 .00807 $ 42,017 Debenture and warrant holders converted debt of $ 448,021 into 59,986,599 shares which were issued upon conversion of the notes referred to in Note 10 above for the year ended December 31, 2021, and additional warrants aggregating 5,545,039 shares were issued. Capital Company Shares converted Dollars converted Power Up 11,864,969 $ 108,500 Oasis Capital 48,121,630 339,521 Total 59,986,599 $ 448,021 33 Table of Contents ABCO ENERGY, INC. UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2022 AND DECEMBER 31, 2021 Preferred Stock On September 15, 2017, and on September 15, 2018, the Board of Directors authorized on each such date the issuance of 15,000,000 preferred shares for an aggregate of 30,000,000 shares of Class B Convertible Preferred Stock [“Series B”] to both Directors of the Company and to two Consultants, of which, David Shorey, President of the Company, is the beneficial owner thereof, a total of 30,000,000 shares of Series B. The Company assigned a value of $ 15,000 for the shares for 2017 and 2018. Of the Series B, 12,000,000 shares were issued to the President and 2,000,000 to Wayne Marx, the Directors. Each Consultant received 8,000,000 shares. See the Company’s Schedule 14C filed with the Commission on September 28, 2018. Upon their resignations the shares of Mr. O’Dowd and Mr. Marx were cancelled and reissued to two Consultants. These shares have no market pricing and management assigned an aggregate value of $ 30,000 to the stock issued based on the par value of $ 0.001 . The 30,000,000 shares of Preferred Stock, each has 200 votes for each Preferred share held by of record . The holders of the Preferred are also entitled to an additional 8,823,930 common shares upon conversion of the Preferred Stock. As a result of owning these shares of Common and Preferred Stock, the Control Shareholders will have voting control the Company. At various times the Board of Directors decided to issue shares to insiders in order to provide for financing the operations of the Company. The following preferred shares were converted to common shares and issued to the control group as follows: Issued t Date Shares Valuation Absaroka Communication Corporation – President Shorey controlled corporation 7-7-21 10,000,000 $ 10,000 Absaroka Communication Corporation – President Shorey controlled corporation 8-19-21 12,000,000 12,000 Absaroka Communication Corporation – President Shorey controlled corporation 11-19-21 120,000,000 120,000 Dommer, LLC - Consultant 11-19-21 30,000,000 30,000 Total shares and valuation 172,000,000 $ 172,000 Note 14 – Equity Awards The following table sets forth information on outstanding option and stock awards held by the named executive officers of the Company on December 31, 2021, and December 31, 2020, including the number of shares underlying both exercisable and un-exercisable portions of each stock option as well as the exercise price and the expiration date of each outstanding option. See Note to Notes to Consolidated Financial Statements. Outstanding Equity Awards After Fiscal Year-End (1) Name Number of securities underlying unexercised options exercisable (1) Number of securities underlying unexercised options un-exercisable (2) Option Exercise Price ($) Option Grant Date Option Expiration Date Michael Mildebrandt 3,704 (3)(4) 8 $ .001 11/01/2019 11/01/2023 Adrian Balinski 3,704 (3)(4) 8 $ .001 11/01/2019 11/01/2023 (1) 7,408 shares were issued for Equity Awards during the year ended December 31, 2020. (2) All options vest 20% per year beginning on the first anniversary of their grant date. (3) Messrs. Mildebrandt and Balinski were each awarded 3,704 shares of restricted common stock as of October 31, 2020, for being officers and directors of the Company. (4) Messer’s. Mildebrandt and Balinski have resigned as officers and directors. An aggregate of 7,408 stock awards is outstanding under the Equity Incentive Plan (“EIP”) as of December 31, 2022. An aggregate of 5,000,000 stock awards were issued in 2021, of which, 3,500,000 were held by Consultants controlled by Mr. Shorey, 500,000 were held by Mr. Marx and 1,000,000 which are held by an unrelated consultant. 34 Table of Contents ABCO ENERGY, INC. UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2022 AND DECEMBER 31, 2021 Note 15 – Subsequent events. There are no reportable subsequent events known to Management at the time of filing. 35 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. As of the end of the reporting period, December 31, 2022, we carried out an evaluation, under the supervision and with the participation of our management, including the Company’s Chairman and Chief Executive Officer/Principal Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), which disclosure controls and procedures are designed to insure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods specified by the SEC’s rules and forms. Based upon that evaluation, the Chairman/CEO and the Chief Financial Officer concluded that our disclosure controls and procedures are not effective in timely alerting them to material information relating to the Company required to be included in the Company’s period SEC filings. The Company is attempting to expand such controls and procedures, however, due to a limited number of resources the complete segregation of duties is not currently in place. (b) Report of Management on Internal Control over Financial Reporting We are responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our management including the chief executive officer and the principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 2013 framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Based on our evaluation under the Internal Control-Integrated Framework, our chief executive officer and chief financial officer concluded that our internal control over financial reporting was not effective as of December 31, 2019. Management believes that this conclusion results in a large part from [i] maintaining some segregation of duties within the Company due to its reliance on individuals to fill multiple roles and responsibilities and [ii] the Company having limited personnel to prepare its financial statements. During the year ended December 31, 2022, the Company continued its reliance on the Internal Control – Integrated Framework in the same manner as in prior periods due to the same limitations of personnel. (c) Changes in Internal Control. Subsequent to the date of such evaluations as described in subparagraphs (a) and (b) above, there were no changes in our internal controls or other factors that could significantly affect these controls, including any corrective action with regard to significant deficiencies and material weaknesses. (d) Limitations. Our management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. However, we believe that our disclosure controls and procedures are designed to provide reasonable assurance of achieving this objective. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 36 Table of Contents ITEM 9B. OTHER INFORMATION None ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not applicable. 37 Table of Contents PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE The following table sets forth the name and age of officers and director as of December 31, 2022. Our Executive Officers are elected annually by our board of directors. Our executive officers hold their offices until they resign, are removed by the Board, or his successor is elected and qualified. Mr. Marx was a member of the Board and was an Officer prior to the acquisition of Energy Conservation Technologies, Inc. and afterward he was reappointed to the Board on the effective day July 1, 2011. Mr. Marx resigned in November 2021. David Shorey, President, CEO, Chief Financial Officer, Secretary and Director, is a “Promoter” within the meaning of Rule 405 of Regulation C in that he was instrumental in founding and organizing ABCO Energy, Inc. Officer ’ s Name Directors Name Age Officer ’ s Position Appointment date David Shorey David Shorey 80 President, CEO, CFO and Director December 1, 2020 The Board of Directors consists of one individual, David Shorey, President, CEO, CFO, Secretary and Director. Mr. Shorey also serves as Director and Officer of the predecessor companies and all of the Subsidiary Companies. Biographies of the Executive Officer and Member of the Board of Directors are set forth be David Shorey, President, CFO and Director Mr. Shorey is a Veteran of the US Navy and has a Bachelor’s degree in Business Administration and Accounting from the University of Oregon. He has been in the solar business for 14 years, was the Founder of ABCO and has been an Executive with ABCO Energy for 12 years. Mr. Shorey practiced as a certified public accountant for over 30 years. He is also an experienced manufacturer of electric components and has audit certification in ISO-9000 quality inspection and training. He has previously been a real estate business broker and owned and operated an electronic manufacturing firm for nine years and a metal building construction company for over ten years. Family Relationships There are no family relationships between any of our directors, executive officers or directors because it is represented by only one individual. Code of Ethics We have a Code of Ethics in place for the Company. The Company seeks advice and counsel from outside experts such as our lawyers and accountants on matters relating to corporate governance and financial reporting. 38 Table of Contents AUDIT COMMITTEE The Audit Committee for the Company currently consists of the single member of the Board which acts in such a capacity and will do so for the immediate future due to the limited size of the Board. The Company intends to increase the size of its Board in the future, at which time it may appoint a separate Audit Committee. The Audit Committee will be empowered to make such examinations as are necessary to monitor the corporate financial reporting and the external audits of the Company, to provide to the Board of Directors (the “Board”) the results of its examinations and recommendations derived there from, to outline to the Board improvements made, or to be made, in internal control, to nominate independent auditors, and to provide to the Board such additional information and materials as it may deem necessary to make the Board aware of significant financial matters that require Board attention. COMPENSATION COMMITTEE The Company does not presently have a Compensation Committee and the Board acts in such a capacity and will do so for the immediate future due to the limited size of the Board. The Company intends to increase the size of its Board in the future, at which time it may appoint a Compensation Committee. The Compensation Committee will be authorized to review and make recommendations to the Board regarding all forms of compensation to be provided to the executive officers and directors of the Company, including salary, stock compensation and bonus compensation to all employees. NOMINATING COMMITTEE The Company Board acts as the Nominating Committee. Independence We are not required to have any independent members of the Board of Directors. The board of directors has determined that each of the Directors has a relationship which, in the opinion of the board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and each is not an “independent director” as defined in the Marketplace Rules of The NASDAQ Stock Market. Involvement in Certain Legal Proceedings Our Directors and Executive Officers have not been involved in any of the following events during the past ten yea 1. any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; 2. any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); 3. being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities; 4. being found by a court of competent jurisdiction in a civil action, the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; 5. being subject of, or a party to, any federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or 6. being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. 39 Table of Contents Section 16(a) Beneficial Owner Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers and holders of more than 10% of our common stock to file with the SEC reports regarding their ownership and changes in ownership of our securities We believe that, during fiscal 2022, our directors, executive officer and 10% stockholders have complied with all Section 16(a) filing requirements. ITEM 11. EXECUTIVE COMPENSATION REMUNERATION OF DIRECTORS AND OFFICERS Summary Compensation Table The following table sets forth certain summary information concerning the cash and non-cash compensation awarded to, earned by, or paid to David Shorey as current President and Secretary for the fiscal years ended December 31, 2022. Mr. Shorey is referred to as the “named executive officer” in this Report. Name and Principal Position (1) Year Compensation Salary ($) Bonus ($) Share Awards ($) All Other Compensation ($) Total Compensation ($) David Shorey, President 2021 $ 50,000 0 155,500,000 (1) 155,500 $ 205,500 2022 60,000 0 0 0 60,000 (1) Mr. Shorey receives contractual compensation of $60,000 per year. $60,000 was accrued and unpaid in 2022. In addition, Mr. Shorey received 3,500,000 shares as a bonus on March 3, 2021, and received 152,000,000 shares from conversion of preferred shares and recorded compensation totaling $152,000. There is no family relationship between any of the current officers or directors of the Company and any other employees of the Company. The Company is a Nevada corporation with principal offices located at 2505 N Alvernon Way, Tucson, AZ 85712. On December 31, 2019, the Company purchased an office and warehouse building and land at 2505 North Alvernon, Tucson Arizona. On October 1, 2020, the Company moved all Tucson operations to this location. On January 15, 2017, the Company’s Board of Directors, after careful consideration, approved our 2017 Stock Option and Incentive Stock Plan (the “Plan”), pursuant to which the Company has reserved 200,000,000 shares for issuance thereunder. The Plan enables the Board to provide equity-based incentives through grants of Awards to the Company’s present and future employees, directors, consultants and other third-party service providers. Shares issued under the Plan through the settlement, assumption or substitution of outstanding Awards or obligations to grant future Awards as a condition of acquiring another entity will not reduce the maximum number of shares of Common Stock reserved for issuance under the Plan. In addition, the number of shares of Common Stock subject to the Plan, any number of shares subject to any numerical limit in the Equity Incentive Plan, and the number of shares and terms of any incentive award may be adjusted in the event of any change in our outstanding Common Stock by reason of any stock dividend, spin-off, split-up, stock split, reverse stock split, recapitalization, reclassification, merger, consolidation, liquidation, business combination or exchange of shares or similar transaction. Outstanding Equity Awards at Fiscal Year End There were no stock awards outstanding under the Equity Incentive Plan as of December 31, 2022. 40 Table of Contents ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The following tables set forth certain information regarding beneficial ownership of our securities by (i) each person who is known by us to own beneficially more than five percent (5%) of the outstanding shares of each class of our voting securities, (ii) each of our directors and executive officers, and (iii) all of our directors and executive officers as a group. We believe that each individual or entity named has sole investment and voting power with respect to the securities indicated as beneficially owned by them, subject to community property laws, where applicable, except where otherwise noted. Name and Address of Owner (1) Title of Securities Amount and nature of common stock Percent of class (3) Amount and nature of preferred stock (2) (4) Percentage of class (5) David Shorey Common 141,504,707 (6) 55 % 12,800,000 100 % All Officers, Directors and 5% Shareholders - As a Group Common 141,504,707 55 % 12,800,000 100 % (1) The address is c/o ABCO Energy, Inc., 2505 N. Alvernon Way, Tucson, AZ 85712 (2) Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable or convertible, or exercisable or convertible within 60 days of March 31, 2019 (none are eligible) are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person. (3) Based upon 260,515,166 shares outstanding on December 31, 2022. (4) These shares are convertible into 128,000,000 shares of common stock at an exercise price of $.001 per share. (5) Based upon 12,800,000 shares of Preferred Stock, outstanding as December 31, 2022. (6) These shares are held of record by a corporate entity owned by David Shorey. The aggregate of 0 stock awards were outstanding under the Equity Incentive Plan as of December 31, 2022. On September 15, 2017, and on August 30, 2018, the Board of Directors authorized the issuance of an aggregate of 30,000,000 shares of Class B Convertible Preferred Stock [“Series B”] to Mr. O’Dowd and to Wayne Marx of the Company and to two Consultant Companies owned by David Shorey, President, CEO, CFO and Director. Of the Series B, 12,000,000 shares were issued to Charles O’Dowd and 2,000,000 to Wayne Marx, the Directors. Each Consultant received 8,000,000 shares. See the Company’s Schedule 14C filed with the Commission on September 28, 2018. Upon his resignation Mr. O’Dowd’s preferred shares were cancelled and issued to the two consultants. These preferred shares have no market pricing and management assigned the value of $15,000 to the stock issue based on the par value of the preferred stock of $0.001. Mr. Marx’s preferred stock was re-issued to a consultant upon his resignation in November 2021. The 30,000,000 shares of Preferred Stock had 200 votes for each share of record. The holders of the Preferred are also entitled to be issued an additional 300,000,000 common shares upon conversion of the Preferred Stock. Series B have anti-dilution provisions. Accordingly, as a result of owning these shares of Common and Preferred Stock, the Control Shareholders will have voting control over the Company. During 2021, David Shorey converted 17,200,000 shares of preferred stock into 172,000,000 shares of common stock and distributed 32,000,000 shares to a consultant of the company. The shareholders on January 11, 2021, authorized an increase in authorized common shares to 2,000,000,000 from 29,411,765 shares. Our board of directors believes that it is desirable to have additional authorized shares of common stock available for possible future financing, acquisition transactions, joint ventures and other general corporate purposes. Our board of directors believes that having such additional authorized shares of common stock available for issuance in the future will give us greater flexibility and may allow such shares to be issued without the expense and delay of a special shareholders’ meeting unless such approval is expressly required by applicable law. Although such issuance of additional shares with respect to future financing and acquisitions would dilute existing shareholders, management believes that such transactions would increase the overall value of the Company to its shareholders. 41 Table of Contents ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Other than as disclosed below, during the last two fiscal years, there have been no transactions, or proposed transactions, which have materially affected or will materially affect us in which any director, executive officer or beneficial holder of more than 5% of the outstanding common, or any of their respective relatives, spouses, associates or affiliates, has had or will have any direct or material indirect interest. We have no policy regarding entering into transactions with affiliated parties. Other than as disclosed below, during the last two fiscal years, there have been no transactions, or proposed transactions, which have materially affected or will materially affect us in which any director, executive officer or beneficial holder of more than 5% of the outstanding common, or any of their respective relatives, spouses, associates or affiliates, has had or will have any direct or material indirect interest. We have no policy regarding entering into transactions with affiliated parties. Any future material transactions and loans will be made or entered into on terms that are no less favorable to the Company that those that can be obtained from unaffiliated third parties. Any forgiveness of loans must be approved by a majority of the Company’s independent directors who do not have an interest in the transactions and who have access, at the Company’s expense, to the Company’s or independent counsel. Until the Company has more than two directors, this policy will not be in effect. Officers and director’s loans are demand notes with accrued interest totaling $634,733 as of December 31, 2022, and $533,244 as of December 31, 2021. The following table indicates the balances due on demand notes and the accrued interest on these notes. Related party notes payable as of December 31, 2022, and December 31, 2021, consists of the followin Description December 31, 2022 December 31, 2021 Notes payable – Director bearing interest at 12% per annum, unsecured, demand notes. $ 499,916 $ 449,986 Accrued interest 134,817 83,258 Total $ 634,733 $ 533,244 The Officer and Directors note is a secured demand note and bears interest at 12% per annum. This note resulted in an interest charge of $134,817 accrued and unpaid on December 31, 2022, and $83,258 on December 31, 2021. The combined total funds due to Officers and related parties totaled $634,733 with principal and interest on December 31, 2022. Any future material transactions and loans will be made or entered into on terms that are no less favorable to the Company that those that can be obtained from unaffiliated third parties. Any forgiveness of loans must be approved by a majority of the Company’s independent directors who do not have an interest in the transactions and who have access, at the Company’s expense, to the Company’s or independent counsel. Until the Company has more than two directors, this policy will not be in effect. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. Audit Fees The aggregate fees contracted by our auditors, for professional services rendered for the audit of our annual consolidated financial statements during the years ended December 31, 2022, and 2021, and for the reviews of the consolidated financial statements are included in our Quarterly Reports on Form 10-Q during the fiscal years. 42 Table of Contents During 2022 and 2021, the Company paid Slack & Company CPA, LLC $10,000 for the audit for the fiscal year ended December 31, 2020 and has paid Hudgens CPA a total of $5,000 as of the date of this report for the audit of 2021. Audit-Related Fees Our independent registered public accounting firms did not bill us during the years ended December 31, 2022, and 2021 for non- audit related services. Tax Fees Our independent registered public accounting firms did not bill us during fiscal years ended December 31, 2022, and 2021 for tax related services. All Other Fees Our independent registered public accounting firms did not bill us during the years ended December 31, 2022, and 2021 for other services. The Board of Directors has considered whether the provision of non-audit services is compatible with maintaining the principal accountant’s independence. 43 Table of Contents PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Exhibit No. Description of Exhibit 3(i) Articles of Incorporation, as amended (1) 3(ii) By-Laws (1) 5 Legal Opinion of John F. Wolcott, Esq. (11) 10(a) Share Exchange Agreement dated July 15, 2011 (1) 10(b) 12% $40,000 Convertible Note dated March 16, 2016 (4) 10(c) 8% $25,000 Convertible Note dated March 23, 2016 (4) 10(d) 10% $55,000 Convertible Note dated April 1, 2016 (5) 10(e) 5% $42,000 Convertible Note dated April 5, 2016 (5) 10(f) 10% $40,000 Convertible Note dated May 3, 2016 (5) 10(g) 8% $30,000 Convertible Note dated May 6, 2016 (5) 10(h) Consulting Agreement between ABCO Energy, Inc. and Benchmark Advisory Partners effective September 20, 2016 (6) 10(i) Agreement effective October 19, 2016 between the Company and Joshua Tyrell (7) 10(j) Amendment No. 1 to Consulting Agreement effective November 11, 2016 between the Company and Joshua Tyrell (8) 10(k) Securities Purchase Agreement dated as of November 7, 2016 between the Company and Blackbridge Capital Growth Fund (9) 10(l) Equity Purchase Agreement dated August 6, 2018 between the Company and Oasis Capital (10) 10(m) Registration Rights Agreement dated August 6, 2018 between the Company and Oasis Capital (10) 10(n) 7% $150,000 Convertible Note dated August 6, 2018 (10) 21 Subsidiaries of Registrant (1) 23.1 Consent of Slack and Company CPAs, LLC (11) 44 Table of Contents 31.01 Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (2) 31.02 Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (2) 32.01 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2) 99.1 Equity Purchase Agreement dated 12/1/21 among the Company, Absaroka Communications Corporation (“ACC”) AND Domer LLC (12) 99.2 Registration Rights Agreement dated 12/1/21 among Company, ACC and Domer LLC (12) 101 INS Inline XBRL Instance Document 101 SCH Inline XBRL Taxonomy Extension Schema Document 101 CAL Inline XBRL Taxonomy Calculation Linkbase Document 101 DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101 LAB Inline XBRL Taxonomy Labels Linkbase Document 101 PRE Inline XBRL Taxonomy Labels Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) (1) Previously filed with the Company’s Form 10, SEC File No. 000-55235 filed on July 1, 2014, and incorporated herein by this reference as an exhibit to this Form S-1. (2) Attached. (3) Previously filed with Pre-Effective Amendment No. 1 to Form S-1 Registration Statement File No. 333-231047, filed with the Commission on May 3, 2019. (4) Previously filed with the Company’s Form 10-K, File No. 000-55235, filed with the Commission on April 11, 2016 and incorporated herein by this reference. (5) Previously filed with the Company’s Form 10-Q, File No. 000-55235, filed with the Commission on May 20, 2016 and incorporate herein by this reference. (6) Previously filed with and incorporated herein by this reference the Company’s Form 8-K, filed with the Commission on October 24, 2016. (7) Previously filed with and incorporated herein by this reference the Company’s Form 8-K filed with the Commission on October 24, 2016. (8) Previously filed with and incorporated herein by this reference the Company’s Form 8-K, filed with the Commission on November 29, 2016. (9) Previously filed with and incorporated herein by this reference the Company’s Form 8-K, filed with the Commission on November 29, 2016. (10) Previously filed with and incorporated herein by this reference to the Company’s Form 8-K filed with the Commission on September 7, 2018. (11) Previously filed with Pre-Effective Amendment No. 1 to Form 1 Registration Statement filed with the Commission on January 19, 2022 (12) Previously filed with Pre-Effective Amendment No. 2 to Form Registration Statement filed with the Commission on January 28, 2022. 45 Table of Contents SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ABCO ENERGY, INC. Date: April 17, 2023 By: /s/ DAVID SHOREY David Shorey Chief Executive Officer Date: April 17, 2023 By: /s/ DAVID SHOREY David Shorey Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. 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Table of Contents PART I Item 1. Business 3 Item 1A. Risk Factors 12 Item 1B. Unresolved Staff Comments 25 Item 2. Properties 25 Item 3. Legal Proceedings 25 Item 4. Mine Safety Disclosures 25 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 26 Item 6. [Reserved] 27 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 44 Item 8. Financial Statements and Supplementary Data 45 Consolidated Statements of Operations and Comprehensive Income (Loss) 45 Consolidated Balance Sheets 46 Consolidated Statements of Stockholders’ Equity 47 Consolidated Statements of Cash Flows 48 Index for Notes to Consolidated Financial Statements 49 Notes to Consolidated Financial Statements 50 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 81 Item 9A. Controls and Procedures 81 Item 9B. Other Information 81 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 82 PART III Item 10. Directors, Executive Officers and Corporate Governance 83 Item 11. Executive Compensation 84 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 84 Item 13. Certain Relationships and Related Transactions, and Director Independence 84 Item 14. Principal Accountant Fees and Services 84 PART IV Item 15. Exhibits and Financial Statement Schedules 85 Item 16. Form 10-K Summary 85 Index to Exhibits 86 Signatures 91 Table of Contents PART I Item 1.    Business GENERAL Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as the “Company” and “we”), is a global, digitally led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. The Company’s two brand-based operating segments are Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These five brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company operates primarily in North America, Europe and Asia. The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a fifty-two-week year, but occasionally gives rise to an additional week, resulting in a fifty-three-week year. Fiscal years are designated in the Consolidated Financial Statements and Notes thereto, as well as the remainder of this Annual Report on Form 10-K, by the calendar year in which the fiscal year commenced. All references herein to the Company’s fiscal years are as follows: Fiscal year Year ended/ ending Number of weeks Fiscal 2019 February 1, 2020 52 Fiscal 2020 January 30, 2021 52 Fiscal 2021 January 29, 2022 52 Fiscal 2022 January 28, 2023 52 For additional information about the Company’s business, see “ ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ,” as well as “ ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ,” of this Annual Report on Form 10-K. Impact of COVID-19 In March 2020, the COVID-19 outbreak was declared to be a global pandemic by the World Health Organization. In response to COVID-19, certain governments imposed travel restrictions and local statutory quarantines and the Company experienced widespread temporary store closures. As of January 29, 2022, all U.S. Company-operated stores were fully open for in-store service; however, temporary store closures have subsequently been mandated in certain parts of the Asia-Pacific (“APAC”) region in response to COVID-19. During periods of temporary store closures, reductions in revenue have not been offset by proportional decreases in expense, as the Company continues to incur store occupancy costs such as operating lease costs, net of rent abatements agreed upon during the period, depreciation expense, and certain other costs such as compensation, net of government payroll relief, and administrative expenses resulting in a negative effect on the relationship between the Company’s costs and revenues. Although U.S. and global economies have begun to recover from the COVID-19 pandemic as many health and safety restrictions have been lifted and vaccine distribution has increased, certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time, including labor shortages and disruptions of global supply chains and temporary store closures. The extent of future impacts of COVID-19 on the Company’s business, including the duration and impact on overall customer demand, are uncertain as current circumstances are dynamic and depend on future developments, including, but not limited to, the emergence of new variants of coronavirus, such as the Delta and Omicron variants, and the availability and acceptance of effective vaccines, boosters or medical treatments. The Company plans to follow the guidance of local governments to evaluate whether future store closures will be necessary. The Company’s digital operations across brands have continued to serve the Company’s customers during periods of temporary store closures. In response to elevated digital demand during this period, the Company leveraged its omnichannel capabilities by continuing to offer Purchase-Online-Pickup-in-Store, including curbside pickup at a majority of U.S. locations, and by utilizing ship-from-store capabilities, including same-day delivery across its entire U.S. store fleet. Despite the recent strength in digital sales, the Company has historically generated the majority of its annual net sales through stores and there can be no assurance that the current level of digital penetration will continue when stores operate at full capacity. For further information about COVID-19, refer to  “ ITEM 1A. RISK FACTORS ,” and “ ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ," of this Annual Report on Form 10-K. Abercrombie & Fitch Co. 3 2021 Form 10-K Table of Contents BRANDS AND SEGMENT INFORMATION The Company’s brands are as follows: Brand Description Hollister The quintessential apparel brand of the global Gen Z consumer, Hollister Co. believes in liberating the spirit of an endless summer inside everyone. At Hollister, summer isn’t just a season, it’s a state of mind. Hollister creates carefree style designed to make everyone feel celebrated and comfortable in their own skin, so they can live in a summer mindset all year long, whatever the season. Gilly Hicks At Gilly Hicks, we know everyone has their own unique happy place. We exist to help you find yours. Gilly Hicks focuses on underwear, loungewear and activewear designed to give all Gen Z customers their daily dose of happy. Social Tourist Social Tourist is the creative vision of Hollister and social media personalities Charli and Dixie D’Amelio. The lifestyle brand creates trend-forward apparel that allows teens to experiment with their style, while exploring the duality of who they are both on social media and in real life. Abercrombie & Fitch Abercrombie & Fitch believes that every day should feel as exceptional as the start of the long weekend. Since 1892, the brand has been a specialty retailer of quality apparel, outerwear and fragrance - designed to inspire our global customers to feel confident, be comfortable and face their Fierce. abercrombie kids A global specialty retailer of quality, comfortable, made-to-play favorites, abercrombie kids sees the world through kids’ eyes, where play is life and every day is an opportunity to be anything and better everything. The Company determines its segments after taking into consideration a variety of factors, including its organizational structure and the basis that it uses to allocate resources and assess performance. The Company’s two operating segments as of January 29, 2022 are brand-bas Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These two operating segments have similar economic characteristics, classes of consumers, products, production and distribution methods, operate in the same regulatory environments, and have been aggregated into one reportable segment. Additional information concerning the Company’s segment and geographic information is contained in Note 18, “ SEGMENT REPORTING ” of the Notes to Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K. STRATEGY AND KEY BUSINESS PRIORITIES The Company remains committed to, and confident in, its long-term vision of being a leading digitally-led omnichannel global apparel retailer. The Company continues to evaluate opportunities to make progress against initiatives that support this vision, while balancing the near-term challenges and the continued global uncertainty presented by COVID-19 and the changing global geopolitical environment. Navigating COVID-19 and current geopolitical landscape As discussed above under “ Impact of COVID-19” , the Company’s progress executing against its key transformation initiatives prior to Fiscal 2020 created the foundation to allow the Company to respond quickly to COVID-19. The Company remains focused on navigating the challenges presented by COVID-19. The Company continues to monitor the latest developments regarding the ongoing conflict between Russia and Ukraine and the related economic measures taken by the United States, European Union and others. The Company has no associates, stores or direct operations in Russia or Ukraine, and no significant direct exposure to the Russian ruble. The duration and outcome of this conflict, any retaliatory actions taken by Russia and the impact on regional or global economies is unknown, but could have a material adverse effect on our business, financial condition and results of our operations. Abercrombie & Fitch Co. 4 2021 Form 10-K Table of Contents Long-term strategy The Company remains committed to meeting its customers’ needs whenever, wherever and however they choose to shop and works to accomplish this, in a rapidly evolving retail landscape, through the following strategic pilla • Inspiring customers; • Innovating relentlessly; and • Developing leaders. • The Company continues to evaluate opportunities to make progress on initiatives that position the business for sustainable long-term growth and align with its strategic pillars. The following priorities serve as a framework for the Company’s achievement of its long-term vision of being a leading digitally-led omnichannel global apparel retailer and achieving sustainable long-term operating margin expansi • Transform to a leading digitally-led omnichannel global business model, by creating best-in-class customer experiences across channels; • Continue to make progress against stated transformation initiatives , includin optimizing global store square footage while remaining opportunistic in global expansion of intimate, omni-enabled store experiences; enhancing digital and omnichannel capabilities; increasing the speed and efficiency of our concept-to-customer product life cycle; and improving customer engagement; • Address market opportunities for the Company’s brands across Europe and Asia through the ongoing build-out of the Company’s London and Shanghai teams, which are focused on providing localized products, marketing, and the rollout of omni-enabled new store experiences that cater to local customers in under penetrated international markets.; • Focus on Gilly Hicks growth by increasing domestic and international awareness through new store experiences, engaging product launches and thoughtful marketing. • Improve customer engagement by leveraging data and analytics to retrieve timely customer insights that will accelerate responsiveness to customer demands and by introducing additional personalization measures; • Attract, retain, and develop the Company’s human capital resources by building upon the strength of its unique culture and by executing against the key initiatives discussed below under “HUMAN CAPITAL MANAGEMENT”; and • Integrate environment, social and governance practices and standards throughout the organization through collaboration with the Company’s associates, partners and communities. OVERVIEW OF OPERATIONS Omnichannel initiatives As customer shopping preferences continue to shift and customers increasingly shop across multiple channels, the Company aims to create best-in-class customer experiences and grow total company profitability by delivering improvements through a continuous test-and-learn approach. Stores were the primary fulfillment point for orders prior to Fiscal 2020. With the impact of the COVID-19 pandemic in Fiscal 2020, the Company experienced an acceleration in sales fulfilled through the digital channel. Despite, this acceleration in channel shift, stores continue to be an important part of the customers’ omnichannel experience and the Company believes that the customers’ experience is improved by its offering of omnichannel capabilities, which inclu • Purchase-Online-Pickup-in-Store, allowing customers to purchase merchandise through one of the Company’s websites or mobile apps and pick-up the merchandise in store, which often drives incremental in-store sales; • Curbside pickup at a majority of U.S. locations. • Same-day delivery service across its entire U.S. store fleet. Each brand’s website features a “Get It Fast” filter to easily find products that are available, or shoppers can choose the same-day delivery option for available items at checkout. • Order-in-Store, allowing customers to shop the brands’ in-store and online offerings while in-store; • Reserve-in-Store, allowing customers to reserve merchandise online and try it on in-store before purchase; • Ship-from-Store, which allows the Company to ship in-store merchandise to customers and increases inventory productivity; and • Cross-channel returns, allowing customers to return merchandise purchased through one channel to a different channel. The Company also believes that its loyalty programs, Hollister’s Club Cali ® and Abercrombie’s myAbercrombie ® , are important parts of its omnichannel strategy as the Company aims to seamlessly interact and connect with customers across all touchpoints through members-only offers, items and experiences. Under these programs, customers accumulate points primarily based on purchase activity and earn rewards as points are converted at certain thresholds. These rewards can be redeemed for merchandise discounts either in-store or online. The loyalty programs continue to provide timely customer insights and the Company believes these programs contribute to higher average transaction value. Abercrombie & Fitch Co. 5 2021 Form 10-K Table of Contents Digital operations In order to create a more seamless shopping experience for its customers, the Company continues to invest in its digital infrastructure. The Company has the capability to ship merchandise to customers in more than 110 countries and process transactions in 28 currencies and through 28 forms of payment globally. The Company operates desktop and mobile websites for its brands globally, which are available in various local languages, and four mobile apps. In addition, in its efforts to expand its international brand reach, the Company also partners with certain third-party e-commerce platforms. The Company continues to develop its mobile capabilities as mobile engagement continues to grow, with over 80% of the Company’s digital traffic generated from mobile devices in Fiscal 2021. Store operations The Company continues to thoughtfully open new stores and invest in smaller omni-enabled store experiences that align with local customer shopping preferences. New store formats are designed to provide the opportunity for higher productivity in a smaller footprint. During Fiscal 2021, the Company opened 38 new store locations, remodeled two store locations and right-sized an additional five store locations. Hollister and Abercrombie both have stores in updated formats, which are designed to be open and inviting, and include accommodating features such as innovative fitting rooms and omnichannel capabilities. These stores are tailored to reflect the personality of each brand, with unique furniture, fixtures, music and scent adding to a rich brand experience. The Company’s stores continue to play an essential role in creating brand awareness serving as physical gateways to the brands. Stores also serve as local hubs for online engagement as the Company continues to grow its omnichannel capabilities to create seamless shopping experiences. The Company continues to evaluate and manage its store fleet through its ongoing global store network optimization initiative and has taken actions to optimize store productivity by remodeling, right-sizing or relocating stores to smaller square footage locations, and closing legacy stores. As part of this initiative, the Company closed two flagship locations during Fiscal 2021, leaving the Company with five operating flagships at the end of Fiscal 2021, down from seven at the beginning of the year. In addition, the Company closed 42 non-flagship locations, resulting in 44 total store closures during Fiscal 2021. These actions reduced total Company store gross square footage by approximately 0.2 million gross square feet, or 3%, as compared to Fiscal 2020 year-end. The actions taken in Fiscal 2021 continued to transform the Company's operating model and reposition the Company for the future as the Company continues to focus on aligning store square footage with digital penetration. All of the retail stores operated by the Company, as of January 29, 2022, are located in leased facilities, primarily in shopping centers. These leases generally have initial terms of between five and ten years. Certain leases also include early termination options, which can be exercised under specific conditions. The leases expire at various dates between Fiscal 2022 and Fiscal 2032. As of January 29, 2022, the Company operated 729 retail stores as detailed in the table be Hollister (1) Abercrombie (2) Total (3) Europe 109 18 127 Asia 29 21 50 Canada 10 6 16 Middle East 6 6 12 International 154 51 205 United States 351 173 524 Total 505 224 729 (1) Includes the Hollister and Gilly Hicks brands. Locations with Gilly Hicks carveouts within Hollister stores are represented as a single store count. Excludes nine international franchise stores and 14 U.S. Company-operated temporary stores as of January 29, 2022. (2) Includes Abercrombie & Fitch and abercrombie kids brands. Locations with abercrombie kids carveouts within Abercrombie & Fitch stores are represented as a single store count. Excludes 10 international franchise stores and five U.S. Company-operated temporary stores as of January 29, 2022. (3) This store count excludes one international third-party operated multi-brand outlet store as of January 30, 2021. For store count and gross square footage by brand and geographic region as of January 29, 2022 and January 30, 2021, refer to “ ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .” Third-party operations The Company continues to expand its international brand reach, create brand awareness and develop local expertise through various wholesale, franchise, and licensing arrangements. As of January 29, 2022, the Company had nine wholesale partnerships, primarily internationally. As of January 29, 2022, the Company’s franchisees operated 23 international franchise stores across the brands located in Mexico, Qatar and Saudi Arabia. Abercrombie & Fitch Co. 6 2021 Form 10-K Table of Contents SOURCING OF MERCHANDISE INVENTORY The Company works with its network of third-party vendors to supply compelling, on-trend and high-quality product assortments to its customers. These vendors are expected to respect local laws and have committed to follow the standards set forth in the Company’s Vendor Code of Conduct, which details the Company’s dedication to human rights, labor rights, environmental responsibility and workplace safety. The Company sourced merchandise through approximately 114 vendors located in 16 countries, including the U.S., during Fiscal 2021. The Company’s largest vendor accounted for approximately 14% of merchandise sourced in Fiscal 2021, based on the cost of sourced merchandise. The Company believes its product sourcing is appropriately distributed among vendors. Refer to Note 6, “ INVENTORIES ,” for a summary of inventory sourced based on vendor location and dollar cost of merchandise receipts during Fiscal 2021. DISTRIBUTION OF MERCHANDISE INVENTORY The Company’s distribution network is built to deliver inventory to Company-operated and international franchise stores and fulfill digital and wholesale orders with speed and efficiency. Generally, merchandise is shipped directly from vendors to the Company’s distribution centers, where it is received and inspected before being shipped to the Company’s stores or its digital or wholesale customers. The Company relies on both Company-owned and third-party distribution centers to manage the receipt, storage, sorting, packing and distribution of its merchandise. Additional information pertaining to certain of the Company’s distribution centers as of January 29, 2022 follows: Location Company-owned or third-party New Albany, Ohio (Primarily serves store and digital operations) Company-owned New Albany, Ohio (Serves only digital operations) Company-owned Bergen op Zoom, Netherlands Third-party Shanghai, China Third-party During Fiscal 2021, the Company opened a facility in the Phoenix, Arizona, which replaced the Company’s third-party distribution center in Reno, Nevada to increase capacity and improve fulfillment capabilities. The Company primarily used four contract carriers to ship merchandise and related materials to its North American customers, and several contract carriers for its international customers during Fiscal 2021. COMPETITION The Company operates in a rapidly evolving and highly competitive retail business environment. Competitors inclu individual and chain specialty apparel retailers; local, regional, national and international department stores; discount stores; and online- exclusive businesses. Additionally, the Company competes for consumers’ discretionary spend with businesses in other product and experiential categories such as technology, restaurants, travel and media content. The Company competes primarily on the basis of differentiating its brands from competition throug product, higher quality and increased newness; brand voice, amplifying and consolidating brand messaging; and experience, investing in immersive, participatory omnichannel shopping environments. Operating in a highly competitive industry environment can cause the Company to engage in greater than expected promotional activity, which would result in pressure on average unit retail and gross profit. Refer to “ ITEM 1A. RISK FACTORS - Our failure to operate in a highly competitive and constantly evolving industry could have a material adverse impact on our business ” of this Annual Report on Form 10-K for further discussion of the potential impacts competition may have on the Company. SEASONAL BUSINESS Historically, the Company’s operations have been seasonal in nature and consist of two principal selling seaso the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”). The Company experiences its greatest sales activity during Fall, due to Back-to-School and Holiday sales periods. Refer to “ ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ” of this Annual Report on Form 10-K for further discussion. Abercrombie & Fitch Co. 7 2021 Form 10-K Table of Contents TRADEMARKS The trademarks Abercrombie & Fitch ® , abercrombie ® , Hollister ® , Gilly Hicks ® , Social Tourist ® and the “Moose” and “Seagull” logos are registered with the U.S. Patent and Trademark Office and registered, or the Company has applications for registration pending, with the registries of countries in key markets within the Company’s sales and distribution channels. In addition, these trademarks are either registered, or the Company has applications for registration pending, with the registries of many of the foreign countries in which the manufacturers of the Company’s products are located. The Company has also registered, or has applied to register, certain other trademarks in the U.S. and around the world. The Company believes its products are identified by its trademarks and, therefore, its trademarks are of significant value. Each registered trademark has a duration of 10 to 20 years, depending on the date it was registered, and the country in which it is registered, and is subject to an indefinite number of renewals for a like period upon continued use and appropriate application. The Company intends to continue using its core trademarks and to timely renew each of its registered trademarks that remain in use. INFORMATION SYSTEMS The Company’s Company-owned and third-party-operated management information systems consist of a full range of retail, merchandising, human resource and financial systems. These systems include applications related to point-of-sale, digital operations, inventory management, supply chain, planning, sourcing, merchandising, payroll, scheduling and financial reporting. The Company continues to invest in technology to upgrade its core systems to create efficiencies and to support its digital operations, omnichannel capabilities, customer relationship management tools and loyalty programs. WORKING CAPITAL Refer to “ ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ” of this Annual Report on Form 10-K for a discussion of the Company’s cash requirements and sources of cash available for working capital needs and investment opportunities. HUMAN CAPITAL MANAGEMENT The Company strives to create a culture that not only drives strategic and key business priorities forward, but is welcoming, inclusive, diverse and encourages associates to create a positive impact in their global communities. The Company believes that the strength of its unique culture is a competitive advantage, and intends to continue building upon that culture to improve performance across its business. This will become even more important as the Company expands globally and works towards achieving its long-term vision of being a leading digitally-led omnichannel global apparel retailer. Therefore, the Company believes that the attraction, retention, and management of qualified talent representing diverse backgrounds, experiences, and skill sets - and fostering a diverse, equitable and inclusive work environment - are integral to its success in advancing the Company’s strategies and key business priorities and avoiding disruptions in the business. The Company relies on its associates across the organization, including those at its corporate offices, stores, and distribution centers, as well as their experience and expertise in the retail business.   Examples of key initiatives that are intended to attract, retain, and manage the Company’s human capital resources include the followin • Offering competitive compensation and benefits , including cash-based and equity-based incentive awards in order to align the interests of associates and stockholders. Maintaining competitive compensation and benefit programs helps the Company attract, motivate, and retain the key talent necessary to achieve outstanding business and financial results. In 2021, the Company expanded the pool of associates eligible to receive cash-based, performance-based incentive awards to include additional job levels. In addition, the Company continues to evolve its consideration of and approach to work flexibility, including supporting remote work arrangements for key roles and “work from anywhere days and weeks” for our corporate home office associates where feasible. • Improving associate engagement through open communication channels and with a focus on development. The Company regularly holds all-company meetings to communicate with its associates. The Company also collects feedback through various engagement surveys to better understand associate experience and drive improvements, with the most recent organization-wide survey conducted in August 2021. • Fostering associate development by providing a wide variety of growth and development opportunities throughout associates’ careers in order to be able to pivot resources to align with overall corporate strategies when necessary.  This includes stretch assignments, internal career pathing, self-awareness exercises, and active coaching. The Company also uses leadership standards to help associates identify the core behaviors essential for their career growth, as well as personal growth, on their journey at the Company. Abercrombie & Fitch Co. 8 2021 Form 10-K Table of Contents • Embracing diversity and inclusion in all forms, including gender, race, ethnicity, disability, nationality, religion, age, veteran, LGBTQIA+ status, and other factors. The Company continuously reviews representation, pay, and promotion among associates with diverse backgrounds, including those in senior leadership positions. The Company also encourages associates to enhance their understanding of diversity and inclusion through the Company’s various associate resource groups, which allow associates from different business functions around the world to discuss relevant topics and help address region-specific needs. Additionally, the Company invests in year-round competency building training for associates on topics of bias, allyship, and advocacy. • Encouraging community involvement by promoting various charitable, philanthropic, and social awareness programs, which fosters a collaborative and rewarding work environment. The Company provides support to global organizations in the form of donations, volunteerism and in-kind support. In partnership with its customers and associates, the Company is proud to support community partners with a focus on youth mental health and wellness, diversity, equity and inclusion and environmental advocacy. The Company supports its associates in giving back to the community through volunteering by offering associates a paid volunteer day each year for eligible volunteer work. • Focusing on the health and safety of its associates by investing in various wellness programs throughout the year that are designed to enhance the physical, financial, and mental well-being of its associates globally. The Company is committed to providing a safe working environment for our people, as well as supporting our people in achieving and maintaining their health and well-being goals. To support this commitment, the Company provides benefits-eligible associates and their families with access to free and confidential counseling through our Employee Assistance Program, as well as free access to Headspace, a mediation and mindfulness app, and also provides regular programming on financial planning and mental-health. In response to the ongoing COVID-19 pandemic, we have implemented and continue to implement safety measures in all our facilities to mitigate the spread of COVID-19 and to protect our customers and our store associates, our distribution center associates, and our corporate associates who returned to the office. During Fiscal 2021, certain segments of the Company’s corporate associate population continued to work-from-home, and after thoughtful planning and while following appropriate laws and health guidance, the Company implemented phased return-to-office protocols. The Company also provided associates with access to vaccinations by hosting multiple vaccine and booster clinics for global home office and distribution center associates. The Company employed approximately 31,500 associates globally as of January 29, 2022, of whom approximately 24,500 were part-time associates. As of January 29, 2022, the Company employed approximately 22,800 associates in the U.S., and employed approximately 8,700 associates outside of the U.S. The Company employs temporary, seasonal associates at times, particularly during Fall, when it experiences its greatest sales activity due to Back-to-School and Holiday sales periods. The number of associates represented by works councils and unions is not significant and is generally limited to associates in the Company’s European stores. Board oversight A&F’s Board of Directors and its committees also play an integral role in the Company’s human capital management. For example, the Environmental, Social and Governance Committee of the Board of Directors oversees the Company’s strategies, policies and practices regarding social issues and trends, including diversity and inclusion initiatives, health and safety, human rights, and philanthropy and community investment matters. In addition, among other things, the Compensation and Human Capital Committee of the Board of Directors oversees the Company’s overall compensation structure, policies and programs, as well as administration of our cash-based and equity-based performance incentive programs. Members of the Board of Directors also review succession plans for the Company’s executive officers and discuss with senior leadership the Company’s human capital management strategies, programs, policies and practices, including those relating to organizational structure and key reporting relationships, along with development of strategies and practices relating to recruitment, retention and development of the Company’s associates as needed. Abercrombie & Fitch Co. 9 2021 Form 10-K Table of Contents INFORMATION ABOUT OUR EXECUTIVE OFFICERS The executive officers serve at the pleasure of the Board of Directors of A&F. Set forth below is certain information regarding the executive officers of the Company as of March 25, 2022: Fran Horowitz, Chief Executive Officer and Director A 58 Executive Rol • Chief Executive Officer, Principal Executive Officer and Director (since February 2017) • Former President and Chief Merchandising Officer for all brands of the Company (December 2015 - February 2017), former member of the Office of the Chairman of the Company (December 2014 to February 2017) and former Brand President of Hollister (October 2014 - December 2015) • Former President of Ann Taylor Loft, a division of Ascena Retail Group, Inc., the parent company of specialty retail fashion brands in North America (October 2013 - October 2014) • Formerly held various roles at Express, Inc., a specialty apparel and accessories retailer of women’s and men’s merchandise (February 2005 - November 2012), including Executive Vice President of Women’s Merchandising and Design (May 2010 - November 2012) • Formerly held various merchandising roles at Bloomingdale’s and various positions at Bergdorf Goodman, Bonwit Teller and Saks Fifth Avenue Other Leadership Rol • Member of the Board of Directors of Conagra Brands, Inc., one of North America’s leading branded food companies (July 2021 to present), Audit/Finance Committee • Member of the Board of Directors of SeriousFun Children’s Network, Inc., a non-profit corporation that provides specially-adapted camp experiences for children with serious illnesses and their families, free of charge (since March 2017) • Member of the Board of Directors of Chief Executives for Corporate Purpose (CECP), a CEO-led coalition that helps companies transform their social strategy by providing customized resources (since October 2019) Scott D. Lipesky, Executive Vice President and Chief Financial Officer A 47 Executive Rol • Executive Vice President and Chief Financial Officer of the Company, as well as Principal Financial Officer and Principal Accounting Officer of the Company (since April 2021) • Senior Vice President and Chief Financial Officer of the Company, as well as Principal Financial Officer and Principal Accounting Officer of the Company (October 2017 - April 2021) • Prior to rejoining the Company, formerly served as Chief Financial Officer of American Signature, Inc., a privately-held home furnishings company (October 2016 - October 2017) • Formerly held various leadership roles and finance positions with the Company (November 2007 - October 2016) includin Chief Financial Officer, Hollister Brand (September 2014 - October 2016); Vice President, Merchandise Finance (March 2013 - September 2014); Vice President, Financial Planning and Analysis (November 2012 - March 2013); and Senior Director, Financial Planning and Analysis (November 2010 - November 2012) • Former Corporate Finance Director with FTI Consulting Inc., a global financial services advisory firm • Former Director of Corporate Business Development with The Goodyear Tire & Rubber Company • Formerly held position as a Certified Public Accountant with PricewaterhouseCoopers LLP Kristin Scott, President, Global Brands A 54 Executive Rol • President, Global Brands of the Company (since November 2018) • Former Brand President of Hollister (August 2016 - November 2018) • Formerly held senior positions at Victoria’s Secret, a specialty retailer of women’s intimate and other apparel which sells products at Victoria’s Secret stores and online (December 2007 - April 2016), includin Executive Vice President, General Merchandise Manager (March 2013 - April 2016); Senior Vice President, General Merchandise Manager (March 2009 - March 2013); and Senior Vice President, General Merchandise Manager - Stores (December 2007 - March 2009) • Formerly held various planning and merchandising positions at Gap Inc., Target, and Marshall Fields. Abercrombie & Fitch Co. 10 2021 Form 10-K Table of Contents Samir Desai, Executive Vice President, Chief Digital Technology Officer A 41 Executive Rol • Executive Vice President and Chief Digital and Technology Officer of the Company (since July 2021) • Formerly held various leadership and technology positions at Equinox Group, a luxury fitness company that operates several lifestyle brands (October 2005 – June 2021), includin Chief Technology Officer (April 2016 – June 2021), Vice President, Technology (April 2013 – April 2016), Senior Director Technology(April 2011 – April 2013), Director Technology (October 2005 – April 2011) • Formerly held technology roles at Intertex Apparel Group, a manufacturer and importer of branded and private label apparel (July 2002 – October 2005), including Director, Information Technology. Gregory J. Henchel, Executive Vice President, General Counsel and Corporate Secretary A 54 Executive Rol • Executive Vice President, General Counsel and Corporate Secretary of the Company (since October 2021) • Senior Vice President, General Counsel and Corporate Secretary of the Company (October 2018 - October 2021) • Former Executive Vice President, Chief Legal Officer and Secretary of HSN, Inc., a $3+ billion multi-channel retailer (February 2010 - December 2017) • Former Senior Vice President and General Counsel of Tween Brands, Inc., a specialty retailer (October 2005 - February 2010) and Secretary (August 2008 - February 2010) • Formerly held various roles at Cardinal Health, Inc., a global medical device, pharmaceutical and healthcare technology company, including Assistant General Counsel (2001 - October 2005), and Senior Litigation Counsel (May 1998 - 2001) • Formerly held position as a litigation associate with the law firm of Jones Day (September 1993 - May 1998) GOVERNMENT REGULATIONS As a global organization, the Company is subject to the laws and regulations of the U.S. and multiple foreign jurisdictions in which it operates. These laws and regulations include, but are not limited t trade, transportation and logistic laws, including tariffs and import and export regulations; tax laws and regulations; product and consumer safety laws; anti-bribery and corruption laws; employment and labor laws; antitrust or competition laws; data privacy laws; and environmental regulations. Laws and regulations have had, and may continue to have, a material impact on the Company’s operations. In addition, certain governments’ responses to COVID-19, such as travel restrictions and local statutory quarantines, negatively impacted the Company’s earnings in Fiscal 2021 as is described further within “ ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS " of this Annual Report on Form 10-K. Refer to “ ITEM 1A. RISK FACTORS , ” of this Annual Report on Form 10-K for a discussion of the potential impacts regulatory matters may have on the Company in the future, including those related to environmental matters. Compliance with government laws and regulations has not had a material effect on the Company’s capital expenditures, earnings or competitive position. OTHER INFORMATION A&F makes available free of charge on its website, corporate.abercrombie.com, under the “Investors, Financials, SEC Filings,” section, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after A&F electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”). A&F also makes available free of charge in the same section of the Company’s website the definitive proxy materials filed pursuant to Section 14 of the Exchange Act, as soon as reasonably practicable after the Company electronically files such proxy materials with the SEC. The SEC maintains a website that contains electronic filings by the Company and other issuers at www.sec.gov. A&F has included certain of its website addresses throughout this filing as textual references only. Information on the A&F websites shall not be deemed incorporated by reference into, and do not form any part of, this Form 10-K or any other report or document that A&F files with or furnish to the SEC. Abercrombie & Fitch Co. 11 2021 Form 10-K Table of Contents Item 1A. Risk Factors FORWARD-LOOKING STATEMENTS AND RISK FACTORS. We caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Annual Report on Form 10-K or made by us, our management or our spokespeople involve risks and uncertainties and are subject to change based on various factors, many of which may be beyond our control. Words such as “guidance,” “outlook,” “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “goal,” “should” and similar expressions may identify forward-looking statements. Except as may be required by applicable law, we assume no obligation to publicly update or revise any forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. In March 2020, the COVID-19 outbreak was declared to be a global pandemic by the World Health Organization. In response to COVID-19, certain governments imposed travel restrictions and local statutory quarantines and the Company experienced widespread temporary store closures.The Company has seen a direct, material adverse impact to sales and operations as a result of COVID-19. COVID-19 poses various risks to the Company, certain of which are detailed throughout this “ITEM 1A. RISK FACTORS”. Any one of these risks, or a combination of risks, could result in further adverse impacts on the Company’s business, results of operations, financial condition and cash flows. In addition, the following factors, categorized by the primary nature of the associated risk, could affect our financial performance and cause actual results to differ materially from those expressed or implied in any of the forward-looking statements. Macroeconomic and industry risks inclu • COVID‐19 has and may continue to materially adversely impact and cause disruption to our business; • Changes in global economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits could have a material adverse impact on our business; • Failure to engage our customers, anticipate customer demand and changing fashion trends, and manage our inventory commensurately could have a material adverse impact on our business; • Our failure to operate effectively in a highly competitive and constantly evolving industry could have a material adverse impact on our business; • Fluctuations in foreign currency exchange rates could have a material adverse impact on our business; • Our ability to attract customers to our stores depends, in part, on the success of the shopping malls or area attractions that our stores are located in or around; • The impact of war, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience could have a material adverse impact on our business; and • The impact of extreme weather, infectious disease outbreaks, including COVID-19, and other unexpected events could result in an interruption to our business, as well as to the operations of our third-party partners, and have a material adverse impact on our business. Strategic risks inclu • Failure to successfully develop an omnichannel shopping experience, a significant component of our growth strategy, or failure to successfully invest in customer, digital and omnichannel initiatives could have a material adverse impact on our business; • Our failure to optimize our global store network could have a material adverse impact on our business; • Our failure to execute our international growth strategy successfully and our inability to conduct business in international markets as a result of legal, tax, regulatory, political and economic risks could have a material adverse impact on our business; and • Our failure to appropriately address emerging environmental, social and governance matters could have a material adverse impact on our reputation and, as a result, our business. Operational risks inclu • Failure to protect our reputation could have a material adverse impact on our business; • If our information technology systems are disrupted or cease to operate effectively, it could have a material adverse impact on our business; • We may be exposed to risks and costs associated with cyber-attacks, data protection, credit card fraud and identity theft that could have a material adverse impact on our business; • Our reliance on our distribution centers makes us susceptible to disruptions or adverse conditions affecting our supply chain; • Changes in the cost, availability and quality of raw materials, labor, transportation, and trade relations could have a material adverse impact on our business; • We depend upon independent third parties for the manufacture and delivery of all our merchandise, and a disruption of the manufacture or delivery of our merchandise could have a material adverse impact on our business; Abercrombie & Fitch Co. 12 2021 Form 10-K Table of Contents • We rely on the experience and skills of our executive officers and associates, and the failure to attract or retain this talent, effectively manage succession, and establish a diverse workforce could have a material adverse impact on our business; and • If we identify a material weakness in our internal control over financial reporting, fail to remediate a material weaknesses, or fail to establish and maintain effective internal control over financial reporting, our ability to accurately and timely report our financial results could be adversely affected. Legal, tax, regulatory and compliance risks inclu • Fluctuations in our tax obligations and effective tax rate may result in volatility in our results of operations could have a material adverse impact on our business; • Our litigation and stockholder activism, could have a material adverse impact on our business; • Failure to adequately protect our trademarks could have a negative impact on our brand image and limit our ability to penetrate new markets which could have a material adverse impact on our business; • Changes in the regulatory or compliance landscape could have a material adverse impact on our business; and • The agreements related to our senior secured asset-based revolving credit facility and our senior secured notes include restrictive covenants that limit our flexibility in operating our business and our inability to obtain credit on reasonable terms in the future could have an adverse impact on our business. The factors listed above are not our only risks. Additional risks may arise, and current evaluations of risks may change, which could lead to material, adverse effects on our business, operating results and financial condition. The following sets forth a description of the preceding risk factors that we believe may be relevant to an understanding of our business. These risk factors could cause actual results to differ materially from those expressed or implied in any of our forward-looking statements. MACROECONOMIC AND INDUSTRY RISKS. COVID‐19 has and may continue to materially adversely impact and cause disruption to our business . COVID-19 has had a material adverse effect on our business, including our financial performance and condition, operating results and cash flows, and may continue to materially adversely impact and cause disruption to our business in the future. As a result of COVID-19, numerous state and local jurisdictions have imposed, and others in the future may impose, shelter-in-place orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. Such orders or restrictions have resulted in temporary store closures, modified store operating hours, a decrease in customer traffic, work stoppages, slowdowns and delays, travel restrictions and cancellation of events, among other effects, thereby negatively impacting our operations. The impact of regulations imposed in the future in response to the pandemic, could, among other things, require that we close our stores or distribution centers or otherwise make it difficult or impossible to operate our business. Other factors that would negatively impact our ability to successfully operate during the current COVID-19 pandemic include, but are not limited t • Our ability to keep our stores open if there is a re-emergence or increase in infection rate; • Our ability to attract customers to our stores, given the risks, or perceived risks, of gathering in public places; • Our ability to incentivize and retain associates and to reinstate any furloughed store associates; • Our ability to obtain rent abatements or enter into rent deferral arrangements with our landlords; • Our ability to react to changes in anticipated customer demand and manage inventories, which may result in excess inventories; • Our ability to rely on our distribution centers to manage the receipt, storage, sorting, packing and distribution of our merchandise as the distribution centers are susceptible to local and regional factors, such as system failures, accidents, labor disputes, economic and weather conditions, natural disasters, demographic and population changes; • Supply chain delays due to closed factories, reduced workforces, scarcity of raw materials and scrutiny, as well as carrier constraints due to an increase in digital sales; • Fluctuations in the cost, availability and quality of raw materials, as well as costs of labor and transportation; • A more promotional retail environment or our ability to move existing inventory, may cause us to lower our prices, sell existing inventory at larger discounts than in the past, or write down the value of inventory, and increase the costs and expenses of updating and replacing inventory, negatively impacting our margins; • Delays in, or our ability to complete, planned store openings on the expected terms or timing, or at all based on shortages in labor and materials and delays in the production and delivery of materials ; • The deterioration or fluctuations in the economic conditions in the U.S. or international markets, which could have an impact on consumer confidence and discretionary consumer spending; • Our ability to attract, retain and manage our associates during periods of extended work from home arrangements; • Associates, whether our own or those of our third-party vendors, working offsite through work from home arrangements may rely on residential communication networks and internet providers and may be more susceptible to service interruptions and cyberattacks, and, this period of uncertainty could result in an increase in phishing and other scams, fraud, money laundering, theft and other criminal activity; • Abercrombie & Fitch Co. 13 2021 Form 10-K Table of Contents • Our ability to successfully execute against our international expansion plans; • Our ability to preserve liquidity to be able to take advantage of market conditions during periods of temporary store closures; and • Difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deterioration in credit and financing conditions may affect our access to capital necessary to fund business operations or address maturing liabilities. Factors and uncertainties related to future impacts of COVID-19 on our business, include, but are not limited t • The severity and duration of the pandemic, including additional periods of increases or spikes in the number of COVID-19 cases, future mutations or variants of the virus in areas in which we operate; • The availability and acceptance of effective vaccines or medical treatments; • The nature and size of federal economic stimulus and other governmental efforts; • The impact of the pandemic on overall customer demand and consumer behaviors as well as its impact on macroeconomic factors such as general economic uncertainty, inflation, unemployment rates, and recessionary pressures; and • Any unknown consequences on our business performance and initiatives stemming from the substantial investment of time and other resources to the pandemic response. It is uncertain if and when we will see in-store traffic return to pre-COVID-19 levels in the future. In addition, customers have increasingly relied on technology to shop and to interact with our brands during this unprecedented period and our inability to continue to connect with our customers in this manner going forward could affect our ability to compete and adversely affect our results of operations. The factors described above may exacerbate other risks within this section of “ITEM 1A. RISK FACTORS”. Any future outbreak of any other highly infectious or contagious disease could also have a material adverse impact on our business. The impact of war, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience could have a material adverse impact on our business In the past, the impact of war, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience and the associated heightened security measures in response to these events have disrupted commerce. Further events of this nature, domestic or abroad, including international and domestic unrest, the on-going hostilities in Ukraine, and in China’s Hong Kong Special Administrative Region (“SAR”), may disrupt commerce and undermine consumer confidence and consumer spending by causing a decline in traffic, store closures and a decrease in digital demand adversely affecting our operating results. Furthermore, the existence or threat of any other unforeseen interruption of commerce, could negatively impact our business by interfering with the availability of raw materials or our ability to obtain merchandise from foreign manufacturers. With a substantial portion of our merchandise being imported from foreign countries, failure to obtain merchandise from our foreign manufacturers or substitute other manufacturers, at similar costs and in a timely manner, could adversely affect our operating results and financial condition. Changes in global economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits could have a material adverse impact on our business. Our business depends on consumer demand for our merchandise. Consumer preferences and discretionary spending habits, including purchases of our merchandise, can be adversely impacted by recessionary periods and other periods where disposable income is adversely affected. Our performance is subject to factors that affect worldwide economic conditions including unemployment, consumer credit availability, consumer debt levels, reductions in net worth based on declines in the financial, residential real estate and mortgage markets, sales and personal income tax rates, fuel and energy prices, global food supplies, interest rates, consumer confidence in future economic and political conditions, consumer perceptions of personal well-being and security, the value of the U.S. Dollar versus foreign currencies and other macroeconomic factors. Global uncertainty, including the on-going hostilities in Ukraine, has in the past, and could in the future, cause changes in consumer confidence and in consumers’ discretionary spending habits globally, resulting in a material adverse effect on our results of operations, liquidity and capital resources. The economic conditions and factors described above could adversely impact our results of operations, liquidity and capital resources, and may exacerbate other risks within this section of “ITEM 1A. RISK FACTORS”. Changes in economic conditions could also impact our ability to fund growth and/or result in our becoming reliant on external financing, the availability and cost of which may be uncertain. Failure to engage our customers, anticipate customer demand and changing fashion trends, and manage our inventory commensurately could have a material adverse impact on our business. Our success largely depends on our ability to anticipate and gauge the fashion preferences of our customers and provide merchandise that satisfies constantly shifting demands in a timely manner. Because we may enter into agreements for the Abercrombie & Fitch Co. 14 2021 Form 10-K Table of Contents manufacture and purchase of merchandise well in advance of the applicable selling season, we are vulnerable to changes in consumer preferences and demand, pricing shifts, and the sub-optimal selection and timing of merchandise purchases. Moreover, there can be no assurance that we will continue to anticipate consumer demands and accurately plan inventory successfully in the future. Changing consumer preferences and fashion trends, whether we are able to anticipate, identify and respond to them or not, could adversely impact our sales. Inventory levels for certain merchandise styles no longer considered to be “on trend” may increase, leading to higher markdowns to sell through excess inventory and, therefore, lower than planned margins. Conversely, if we underestimate consumer demand for our merchandise, or if our manufacturers fail to supply quality products in a timely manner, we may experience inventory shortages, which may negatively impact customer relationships, diminish brand loyalty and result in lost sales. We could also be at a competitive disadvantage if we are unable to leverage data analytics to retrieve timely, customer insights to appropriately respond to customer demands and improve customer engagement. Any of these events could significantly harm our operating results and financial condition. In addition to our own execution, we also need to react to factors affecting inventory flow that are outside our control, such as natural disasters or other unforeseen events that may significantly impact anticipated customer demand as we have seen with COVID-19. If we are not able to adjust appropriately to such factors, our inventory management may be affected, which could adversely impact our performance and our reputation. Our failure to operate effectively in a highly competitive and constantly evolving industry could have a material adverse impact on our business. The sale of apparel, personal care products and accessories for men, women and kids is a highly competitive business with numerous participants, including individual and chain specialty apparel retailers, local, regional, national and international department stores, discount stores and online-exclusive businesses. Proliferation of the digital channel within the last few years has encouraged the entry of many new competitors and an increase in competition from established companies. These increases in competition could reduce our ability to retain and grow sales, resulting in an adverse impact to our operating results and business. We also face a variety of challenges in the highly competitive and constantly evolving retail industry, includin • anticipating and quickly responding to changing consumer shopping preferences better than our competitors; • maintaining favorable brand recognition; • marketing our products to consumers in several diverse demographic markets effectively, including through social media platforms which have become increasingly more important in order to stay connected to our customers; as our digital sales penetration has increased. • retaining customers, including our loyalty club members, and the resulting increased marketing costs to acquire new customers; • developing innovative, high-quality merchandise in styles that appeal to consumers and in ways that favorably distinguish us from our competitors; • countering the aggressive pricing and promotional activities of many of our competitors without diminishing the aspirational nature of our brands and brand equity; and • identifying and assessing disruptive innovation, by existing or new competitors, that could alter the competitive landscape improving the customer experience and heightening customer expectations; transforming supply chain and corporate operations through digital technologies and artificial intelligence; and enhancing management decision-making through use of data analytics to develop new, consumer insights. In addition, in order to compete in this highly competitive and constantly evolving industry, at times, we may launch and/or acquire new brands to expand our portfolio. This could result in significant financial and operational investments that do not provide the anticipated benefits or desired rates of return and there can be no guarantee that pursuing these investments will result in improved operating results. In light of the competitive challenges we face, we may not be able to compete successfully in the future. Fluctuations in foreign currency exchange rates could have a material adverse impact on our business. Due to our international operations, we are exposed to foreign currency exchange rate risk with respect to our sales, profits, assets and liabilities denominated in currencies other than the U.S. dollar. In addition, certain of our subsidiaries transact in currencies other than their functional currency, including intercompany transactions, which results in foreign currency transaction gains or losses. Furthermore, we purchase substantially all of our inventory in U.S. Dollars. As a result, our sales, gross profit and gross profit rate from international operations will be negatively impacted during periods of a strengthened U.S. dollar relative to the functional currencies of our foreign subsidiaries.Additionally, changes in the effectiveness of our hedging instruments may negatively impact our ability to mitigate the risks associated with fluctuations in foreign currency exchange rates. Abercrombie & Fitch Co. 15 2021 Form 10-K Table of Contents Fluctuations in foreign currency exchange rates could adversely impact consumer spending, delay or prevent successful penetration into new markets or adversely affect the profitability of our international operations. Certain events, such as the uncertainty as to the on-going hostilities in Ukraine, the ultimate scope and duration of COVID-19, and uncertainty with respect to trade policies, tariffs and government regulations affecting trade between the U.S. and other countries, have increased global economic and political uncertainty in recent years and could result in volatility of foreign currency exchange rates as these events develop. For example, changes in sales assumptions have resulted in changes in the effectiveness to certain of our hedging instruments, and we could see similar impacts in future periods. Our ability to attract customers to our stores depends, in part, on the success of the shopping malls or area attractions that our stores are located in or around. Our stores are primarily located in shopping malls and other shopping centers, certain of which had been experiencing declines in customer traffic prior to COVID-19. Our sales at these stores, as well as sales at our flagship locations, are partially dependent upon the volume of traffic in those shopping centers and the surrounding area. Our stores may benefit from the ability of a shopping center’s other tenants and area attractions to generate consumer traffic in the vicinity of our stores and the continuing popularity of the shopping center. We cannot control the loss of a significant tenant in a shopping mall or area attraction, the development of new shopping malls in the U.S. or around the world, the availability or cost of appropriate locations or the success of individual shopping malls and there is competition with other retailers for prominent locations. If the popularity of shopping malls declines among our customers, our sales may decline, and it may be appropriate to exit leases earlier than originally anticipated. In addition, COVID-19 has caused public health officials to recommend precautions to mitigate the spread of the virus, especially when congregating in heavily populated areas, such as shopping malls, and caused us to enact widespread temporary store closures and our landlords to temporarily close certain of the malls in which our stores operate. While U.S. Company-operated stores were fully open for in-store service, we continue to see temporary reclosures in certain geographic areas as outbreaks of COVID-19 cases continue to occur and localized responses remain unpredictable. Furthermore, declines in traffic beyond our current expectations could result in additional impairment charges. While were successful in obtaining certain rent abatements and landlord concessions of rent payable as a result of COVID-19 store closures, we may be limited in our ability to obtain rent abatements or landlord concessions of rent otherwise payable going forward. All of these factors may impact our ability to meet our productivity or our growth objectives for our stores and could have a material adverse impact on our financial condition or results of operations. Part of our future growth is dependent on our ability to operate stores in desirable locations, with capital investment and lease costs providing the opportunity to earn a reasonable return. We cannot be sure when or whether such desirable locations will become available at reasonable costs. The impact of extreme weather, infectious disease outbreaks, including COVID-19, and other unexpected events could result in an interruption to our business, as well as to the operations of our third-party partners, and have a material adverse impact on our business. Our retail stores, corporate offices, distribution centers, infrastructure projects and digital operations, as well as the operations of our vendors and manufacturers, are vulnerable to disruption from natural disasters, infectious disease outbreaks and other unexpected events, such as COVID-19. These events could disrupt the operations of our corporate offices, global stores and supply chain and those of our third-party partners, including our vendors and manufacturers. In addition to impacts on global operations, these events could result in the potential loss of customers and revenues due to store closures, delay in merchandise deliveries, reduced consumer confidence or changes in consumers’ discretionary spending habits. These events could reduce the availability and quality of the fabrics or other raw materials used to manufacture our merchandise, which could result in delays in responding to consumer demand leading to the potential loss of customers and revenues or we may incur increased costs to meet demand and may not be able to pass all or a portion of higher costs on to our customers, which could adversely affect our gross margin and results of our operations. Our business has been materially, adversely impacted by COVID-19. Refer to risk factor “ COVID‐19 has and may continue to materially adversely impact and cause disruption to our business ,” included within this section for further discussion of the ongoing impacts and risks related to COVID-19. Historically, our operations have been seasonal, and extreme weather conditions, including natural disasters, unseasonable weather or changes in weather patterns, may diminish demand for our seasonal merchandise and could also influence consumer preferences and fashion trends, consumer traffic and shopping habits. In addition, to the extent extreme weather causes a physical loss to our stores, distribution centers or offices,we may incur costs that exceed our applicable insurance coverage for any necessary repairs to damages or business disruption. Abercrombie & Fitch Co. 16 2021 Form 10-K Table of Contents STRATEGIC RISKS. Failure to successfully develop an omnichannel shopping experience, a significant component of our growth strategy, or failure to successfully invest in customer, digital and omnichannel initiatives could have a material adverse impact on our business. As omnichannel retailing continues to grow and evolve, our customers increasingly interact with our brands through a variety of media including smart phones and tablets, and expect seamless integration across all touchpoints. As our success depends on our ability to respond to shifting consumer traffic patterns and engage our customers, we have made significant investments and operational changes to develop our digital and omnichannel capabilities globally, including the development of localized fulfillment, shipping and customer service operations, investments in digital media to attract new customers and the rollout of omnichannel capabilities listed in “ ITEM 1. BUSINESS .” While we must keep up to date with emerging technology trends in the retail environment in order to develop a successful omnichannel shopping experience, it is possible these initiatives may not provide the anticipated benefits or desired rates of return. For example, we could be at a competitive disadvantage if we are unable to leverage data analytics to retrieve timely, customer insights to appropriately respond to customer demands and improve customer engagement across channels. In addition, digital operations are subject to numerous risks, including reliance on third-party computer hardware/software and service providers, data breaches, violations of laws, including those relating to online privacy, credit card fraud, telecommunication failures, electronic break-ins and similar compromises, and disruption of internet service. Changes in foreign governmental regulations may also negatively impact our ability to deliver product to our customers. Failure to successfully respond to these risks may adversely affect sales as well as damage the reputation of our brands. Our failure to optimize our global store network could have a material adverse impact on our business. With the evolution of digital and omnichannel capabilities, customer expectations have shifted and there has been greater pressure for a seamless omnichannel experience across all channels. As a result, global store network optimization is an important part of our business and failure to optimize our global store network could have an adverse impact on our results of operations. Opportunities to open new stores experiences and modify existing leases requires partnership with our landlords. If our partnerships with our landlords were to deteriorate, this could adversely affect the pace of opening new store experiences and/or lead to an increase in store closures. In addition, if there is an increase in events such as landlord bankruptcies, or mall foreclosures, competition between retailers could increase for remaining suitable store locations. Pursuing the wrong opportunities and any delays, cost increases, disruptions or other uncertainties related to those opportunities could adversely affect our results of operations. If our investments in new stores or remodeling and right-sizing existing stores do not achieve appropriate returns, our financial condition and results of operations could be adversely affected. Although we attempt to open new stores in prominent locations, it is possible that prominent locations when we opened our stores lose favor. For example, our flagship stores, large-format stores in tourist locations with higher than average construction and operating costs, were initially successful upon opening, but are now outdated and, in the aggregate, have a disproportionate adverse impact on operating results. The cost involved to modernize many of these flagship stores is significant and oftentimes without promise of a return. As a result, we may elect to exit these leases and other of our store leases earlier than originally anticipated, or modify the leases, which could result in material incremental charges. Abercrombie & Fitch Co. 17 2021 Form 10-K Table of Contents Our failure to execute our international growth strategy successfully and our inability to conduct business in international markets as a result of legal, tax, regulatory, political and economic risks could have a material adverse impact on our business. International expansion is a significant component of our growth strategy and may require significant investment, which could strain our resources and adversely impact current store performance, while adding complexity to our current operations. Operational issues that could have a material adverse effect on our reputation, business and results of operations if we fail to address them include, but are not limited to, the followin • address the different operational characteristics present in each country in which we operate, including employment and labor, transportation, logistics, real estate, lease provisions and local reporting or legal requirements; • support global growth by successfully implementing local customer and product-facing teams and certain corporate support functions at our regional headquarters located in Shanghai, China and London, United Kingdom; • hire, train and retain qualified personnel; • maintain good relations with individual associates and groups of associates; • avoid work stoppages or other labor-related issues in our European stores where associates are represented by workers’ councils and unions; • retain acceptance from foreign customers; • manage inventory effectively to meet the needs of existing stores on a timely basis; and • manage foreign currency exchange rate risks effectively. We are subject to domestic laws, including the Foreign Corrupt Practices Act, in addition to the laws of the foreign countries in which we operate. If any of our overseas operations, or our associates or agents, violate such laws, we could become subject to sanctions or other penalties that could negatively affect our reputation, business and operating results. In addition, there continues to be global uncertainty, such as the uncertainty as to the on-going hostilities in Ukraine, and uncertainty with respect to trade policies, tariffs and government regulations affecting trade between the U.S. and other countries, and similar events of global unrest. These events have increased global economic and political uncertainty in recent years and could affect our international expansion plans. Our failure to appropriately address emerging environmental, social and governance matters could have a material adverse impact on our reputation and, as a result, our business. There is an increased focus from certain investors, customers, associates, business partners and other stakeholders concerning environmental, social and governance matters. The expectations related to environmental, social and governance matters are rapidly evolving, and from time to time, we announce certain initiatives and goals, related to environmental, social or governmental matters, such as those through our participation in the United Nations Global Compact. We could fail, or be perceived to fail to act responsibly, in our environmental, social and governance efforts, or we could fail in accurately reporting our progress on such initiatives and goals. In addition, we could be criticized for the scope of such initiatives or goals. As a result, we could suffer negative publicity and our reputation could be adversely impacted, which in turn could have a negative impact on investor perception and our products' acceptance by consumers. This may also impact our ability to attract and retain talent to compete in the marketplace. There is also uncertainty regarding potential policies related to global environmental sustainability matters. Changes in the legal or regulatory environment affecting responsible sourcing, supply chain transparency, or environmental protection, among others, including regulations to limit carbon dioxide and other greenhouse gas emissions, to discourage the use of plastic or to limit or to impose additional costs on commercial water use may result in increased compliance costs for us and our business partners, all of which may negatively impact our results of operations, financial condition and cash flows. OPERATIONAL RISKS. Failure to protect our reputation could have a material adverse impact on our business. Our ability to maintain our reputation is critical and public perception about our products or operations, whether justified or not, could impair our reputation, involve us in litigation, damage our brands and have a material adverse impact on our business. Events that could jeopardize our reputation, include, but are not limited to, the followin • We fail to maintain high standards for merchandise quality and integrity; • We fall victim to a cyber-attack, resulting in customer data being compromised; • We fail to comply with ethical, social, product, labor, health and safety, legal, accounting or environmental standards, or related political considerations; • Our associates’ actions don’t align with our values and fail to comply with our Associate Code of Conduct; • Third parties with which we have a business relationship, including our brand representatives and influencer network, fail to represent our brands in a manner consistent with our brand image or act in a way that harms their reputation; and Abercrombie & Fitch Co. 18 2021 Form 10-K Table of Contents • Third-party vendors fail to comply with our Vendor Code of Conduct or any third parties with which we have a business relationship with fail to represent our brands in a manner consistent with our brand image. Our position or perceived lack of position on environmental, social, governance, public policy or other similar issues and any perceived lack of transparency about those matters could also harm our reputation with consumers or investors. In addition, in recent years there has been increase in media platforms, and in particular, social media and our use of social media platforms is an important element of our omnichannel marketing efforts. For example, we maintain various social media accounts for our brands, including Instagram, TikTok, Facebook, Twitter and Pinterest accounts. Negative publicity or actions taken by individuals that we partner with, such as brand representatives, influencers or our associates, that fail to represent our brands in a manner consistent with our brand image or act in a way that harms their reputation, whether through our social media platforms or their own, could harm our brand reputation and materially impact our business. Social media also allows for anyone to provide public feedback that could influence perceptions of our brands and reduce demand for our merchandise. Damage to our reputation and loss of consumer confidence for these or any other reasons could lead to adverse consumer actions, including boycotts, negative impacts on investor perception and could impact our ability to attract and retain the talent necessary to compete in the marketplace, all of which could have a material adverse impact on our business, as well as require additional resources to rebuild our reputation. If our information technology systems are disrupted or cease to operate effectively, it could have a material adverse impact on our business. We rely heavily on our information technology systems in both our customer-facing and corporate operations t operate our websites and mobile apps; record and process transactions; respond to customer inquiries; manage inventory; purchase, sell and ship merchandise on a timely basis; maintain cost-efficient operations; create a customer relationship management database through our loyalty programs; and complete other customer-facing and business objectives. Given the significant number of transactions that are completed annually, it is vital to maintain constant operation of our computer hardware, telecommunication systems and software systems, and maintain data security. Despite efforts to prevent such an occurrence, our information technology systems may be vulnerable from time to time to damage or interruption from computer viruses, power system failures, third-party intrusions, inadvertent or intentional breach by our associates or third-party service providers, and other technical malfunctions. If our systems are damaged, fail to function properly, or are obsolete in comparison to those of our competition, we may have to make monetary investments to repair or replace the systems and we could endure delays in our operations. We have made and expect to continue to make significant monetary investments and devote significant attention to modernizing our core systems, and the effectiveness of these investments can be less predictable than others and may fail to provide the expected benefits. While we regularly evaluate our information technology systems and requirements, we are aware of the inherent risks associated with replacing and modifying these systems, including inaccurate system information, system disruptions and user acceptance and understanding. Any material disruption or slowdown of our systems, including a disruption or slowdown caused by our failure to successfully upgrade our systems could cause information to be lost or delayed, including data related to customer orders. Such a loss or delay, especially if the disruption or slowdown occurred during our peak selling seasons, could have a material adverse effect on our results of operations. We may be exposed to risks and costs associated with cyber-attacks, data protection, credit card fraud and identity theft that could have a material adverse impact on our business. In the standard course of business, we receive and maintain confidential information about customers, associates and other third parties. In addition, third parties also receive and maintain certain confidential information. The protection of this information is critical to our business and subjects us to numerous laws, rules and regulations domestically and in foreign jurisdictions. The retail industry in particular has been the target of many cyber-attacks and it is possible that an individual or group could defeat our security measures, or those of a third-party service provider, and access confidential information about our business, customers and associates. Further, like other companies in the retail industry, during the ordinary course of business, we and our vendors have in the past experienced, and we expect to continue to experience, cyber-attacks of varying degrees and types, including phishing, and other attempts to breach, or gain unauthorized access to, our systems. In addition, recent sanctions issued by the U.S. government related to the on-going hostilities in Ukraine, could increase the risk of retaliatory state-sponsored cyber-attacks, phishing and other scams, fraud, money laundering, theft and other criminal activity. To date, these attacks have not had a material impact on our operations, but we cannot provide assurance that cyber attacks will not have a material impact in the future. We have experienced, and expect to continue to experience increased costs associated with protecting confidential information through the implementation of security technologies, processes and procedures, including training programs for associates to raise awareness about phishing, malware and other cyber risks, especially as we implement new technologies, such as new payment capabilities or updates to our mobile apps and websites. Additionally, the techniques and sophistication used to conduct cyber-attacks and breaches of information technology systems change frequently and increase in complexity and are often not recognized until such attacks are launched or have been in place for a period of time. We may not have the resources or technical sophistication to anticipate, prevent, or immediately identify and remediate cyber-attacks. Abercrombie & Fitch Co. 19 2021 Form 10-K Table of Contents Furthermore, the global regulatory environment is increasingly complex and demanding with frequent new and changing requirements surrounding , information security and privacy, including the China Cybersecurity Law, the California Consumer Privacy Act, and the European Union’s General Data Protection Regulation. We may incur significant costs related to compliance with these laws and failure to comply with these regulatory standards, and others, could have a material adverse impact on our business. In addition, as a result of COVID-19, a portion of our corporate associate population continues to work-from-home on a full or part-time basis. We have also implemented a flexible work policy allowing all of our corporate associates to work remotely from time to time, as have certain of our third-party vendors. Offsite working by associates, increased use of public Wi-Fi, and use of office equipment off premises may be necessary, and may make our business more vulnerable to cybersecurity breach attempts,. phishing and other scams, fraud, money laundering, theft and other criminal activity. If we, or a third-party partner, were to fall victim to a successful cyber-attack, suffer intentional or unintentional data and security breaches by associates or third-parties, it could have a material adverse impact on our business, especially an event that compromises customer data or results in the unauthorized release of confidential business or customer information. In addition, if we are unable to avert a denial of service attack that renders our site inoperable, it could result in negative consequences, such as lost sales and customer dissatisfaction. Additional negative consequences that could result from these and similar events may include, but are not limited t • remediation costs, such as liability for stolen assets or information, potential legal settlements to affected parties, repairs of system damage, and incentives to customers or business partners in an effort to maintain relationships after an attack; • increased cybersecurity protection costs, which may include the costs of making organizational changes, deploying additional personnel and protection technologies, training associates, and engaging third party experts and consultants; • lost revenues resulting from the unauthorized use of proprietary information or the failure to retain or attract customers following an attack; • litigation and legal risks, including costs of litigation and regulatory, fines, penalties or actions by domestic or international governmental authorities; • increased insurance premiums; • reputational damage that adversely affects customer or investor confidence; and • damage to the Company’s competitiveness, stock price, and long-term shareholder value. Although we maintain cybersecurity insurance, there can be no assurance that it will be sufficient for a specific cyber incident, or that insurance proceeds will be paid to us in a timely fashion. Our reliance on our distribution centers makes us susceptible to disruptions or adverse conditions affecting our supply chain. Our distribution center operations are susceptible to local and regional factors, such as system failures, accidents, labor disputes, economic and weather conditions, natural disasters, demographic and population changes, as well as other unforeseen events and circumstances, such as COVID-19. We rely on our distribution centers to manage the receipt, storage, sorting, packing and distribution of our merchandise. If our distribution centers are not adequate to support our operations, including as a result of capacity constraints in response to an increase in digital sales, we could experience adverse impacts such as shipping delays and customer dissatisfaction. In addition, if our distribution operations were disrupted, and we were unable to relocate operations or find other property adequate for conducting business, our ability to replace inventory in our stores and process digital and third-party orders could be interrupted, potentially resulting in adverse impacts to sales or increased costs. Refer to “ ITEM 1. BUSINESS ,” for a listing of certain distribution centers on which we utilize. Changes in the cost, availability and quality of raw materials, labor, transportation, and trade relations could have a material adverse impact on our business. Changes in the cost, availability and quality of the fabrics or other raw materials used to manufacture our merchandise and fluctuations in the cost of transportation could have a material adverse effect on our cost of sales, or our ability to meet customer demand. The prices for such fabrics depend largely on the market prices for the raw materials used to produce them, particularly cotton, as well as the cost of compliance with sourcing laws. The price and availability of such raw materials may fluctuate significantly, depending on many factors, including crop yields, weather patterns and other unforeseen events. In addition, we have experienced increasing wage pressures in recent years related to the cost of labor at our third-party manufacturers, at our distribution centers and at our stores. For example, recent government initiatives in the U.S. or changes to existing laws, such as the adoption and implementation of national, state, or local government proposals relating to increases in minimum wage rates, may increase our costs of doing business and adversely affect our results of operations. We may not be able to pass all or a portion of higher labor costs on to our customers, which could adversely affect our gross margin and results of operations. We primarily used four contract carriers to ship merchandise and related materials to our North American customers, and several contract carriers for our international customers. If the shipping operations of these third-parties were disrupted, and we are Abercrombie & Fitch Co. 20 2021 Form 10-K Table of Contents unable to respond in a quick and efficient manner, our ability to replace inventory in our stores and process digital and third-party orders could be interrupted, potentially resulting in adverse impacts to sales or increased costs. In addition, there continues to be global uncertainty, such as to the on-going hostilities in Ukraine, the ultimate impact of uncertainty with respect to trade policies, tariffs and government regulations affecting trade between the U.S. and other countries, and similar events of global, political unrest. These events have increased global uncertainty and have impacted and may in the future impact the cost, availability and quality of merchandise, as well as the cost, availability and quality of the fabrics or other raw materials used to manufacture our merchandise. In addition, compliance with the recent sanctions and customs trade orders issued by the U.S. government related to the on-going hostilities in Ukraine, entities and individuals who are connected to the China’s Xinjiang Uyghur Autonomous Region, could affect the global supply chain and the price of cotton in the marketplace. We may face regulatory challenges in complying with applicable sanctions and trade regulations and reputational challenges with our consumers and other stakeholders if we are unable to sufficiently verify the origins for the material sourced. We may not be able to pass all or a portion of higher raw materials prices or labor or transportation costs on to our customers, which could adversely affect our gross margin and results of operations. Such factors listed above may be exacerbated by legislation and regulations associated with global trade policies and climate change. We depend upon independent third parties for the manufacture and delivery of all our merchandise, and a disruption of the manufacture or delivery of our merchandise could have a material adverse impact on our business. We do not own or operate any manufacturing facilities. As a result, the continued success of our operations is tied to our timely receipt of quality merchandise from third-party manufacturers. We source the majority of our merchandise outside of the U.S. through arrangements with approximately 114 vendors, primarily located in southeast Asia. Political, social or economic instability in the regions in which our manufacturers are located could cause disruptions in trade, including exports to the U.S. In addition, the inability of vendors to access liquidity, or the insolvency of vendors, could lead to their failure to deliver merchandise to us. A manufacturer’s inability to ship orders in a timely manner or meet our quality standards could cause delays in responding to consumer demand and negatively affect consumer confidence or negatively impact our competitive position, any of which could have a material adverse effect on our financial condition and results of operations. All factories that we partner with are contractually required to adhere to the Company’s Vendor Code of Conduct, go through social audits which include on-site walk-throughs to appraise the physical working conditions and health and safety practices, and review payroll and age documentation. If our factories are unwilling or not able to meet the standards set forth within the Company’s Vendor Code of Conduct, it could limit the options available to us and could result in an increase of costs of manufacturing, which we may not able to pass on to our customers. Other events that could disrupt the timely delivery of our merchandise include new trade law provisions or regulations, reliance on a limited number of shipping carriers and associated alliances, weather events, significant labor disputes, port congestion and other unexpected events, such as COVID-19. Furthermore, we are susceptible to increases in fuel costs which may increase the cost of distribution. If we are not able to pass this cost on to our customers, our financial condition and results of operations could be adversely affected. We rely on the experience and skills of our executive officers and associates, and the failure to attract or retain this talent, effectively manage succession, and establish a diverse workforce could have a material adverse impact on our business. Our ability to succeed may be adversely impacted if we are not able to attract, retain and develop talent and future leaders, including our executive officers. We believe that the attraction, retention and management of qualified talent is integral to our success in advancing our strategies and key business priorities and avoiding disruptions in our business. We rely on our associates across the organization, including those at our corporate offices, stores and distribution centers, as well as their experience and expertise in the retail business. Our executive officers closely supervise all aspects of our operations, including the design of our merchandise, have substantial experience and expertise in the retail business and have an integral role in the growth and success of our brands. If we were to lose the benefit of the involvement of executives or other personnel, without adequate succession plans, our business could be adversely affected. In addition, if we are unable to attract and retain talent at the associate level without adequate succession plans, our business could be adversely impacted as competition for such qualified talent is intense, and we cannot be sure we will be able to attract, retain and develop a sufficient number of qualified individuals in future periods. For example, as automation, artificial intelligence and similar technological advancements continue to evolve, we may need to compete for talent that is familiar with these advancements in technologies in order to compete effectively with our industry peers. If we are not successful in these efforts, our business may be adversely affected. Abercrombie & Fitch Co. 21 2021 Form 10-K Table of Contents If we are not successful in these efforts or fail to successfully execute against the key initiatives that are focused on attracting, retaining and managing our human capital resources listed in “ ITEM 1. BUSINESS ,” our business could be adversely impacted. If we identify a material weakness in our internal control over financial reporting, fail to remediate a material weaknesses, or fail to establish and maintain effective internal control over financial reporting, our ability to accurately and timely report our financial results could be adversely affected. The effectiveness of any controls or procedures is subject to certain inherent limitations, and as a result, there can be no assurance that our controls and procedures will prevent or detect misstatements. Even an effective system of internal control over financial reporting will provide only reasonable, not absolute, assurance with respect to financial statement preparation. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. If we fail to remediate a material weakness, or are otherwise unable to maintain effective internal control over financial reporting, management could be required to expend significant resources and we could fail to meet our public reporting requirements on a timely basis, and be subject to fines, penalties, investigations or judgements, all of which could negatively affect investor confidence and adversely impact our stock price. LEGAL, TAX, REGULATORY AND COMPLIANCE RISKS. Fluctuations in our tax obligations and effective tax rate may result in volatility in our results of operations could have a material adverse impact on our business. We are subject to income taxes in many U.S. and foreign jurisdictions. In addition, our products are subject to import and excise duties and/or sales, consumption or value-added taxes (“VAT”) in many jurisdictions. We record tax expense based on our estimates of future payments, which include reserves for estimates of probable settlements of foreign and domestic tax audits. At any time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. As a result, we expect that throughout the year, there could be ongoing variability in our quarterly tax rates as taxable events occur and exposures are evaluated. In addition, our effective tax rate in any given financial reporting period may be materially impacted by changes in the mix and level of earnings or losses by taxing jurisdictions or by changes to existing accounting rules or regulations. Fluctuations in duties could also have a material impact on our financial condition, results of operations or cash flows. In some international markets, we are required to hold and submit VAT to the appropriate local tax authorities. Failure to correctly calculate or submit the appropriate amounts could subject us to substantial fines and penalties that could have an adverse effect on our financial condition, results of operations or cash flows. The Organization for Economic Co-operation and Development, along with members of its inclusive framework, have through the Base Erosion and Profit Shifting project, proposed changes to numerous long-standing tax principles. These proposals, if finalized and adopted by the associated countries, will likely increase tax complexity, and may both create uncertainty and adversely affect our provision for income taxes. In the U.S. the Administration along with some members in Congress have made various tax proposals including an increase in the U.S. corporate income tax rate, an increase in the rate of tax on certain earnings of foreign subsidiaries, a minimum tax on worldwide book income, changes to the deductibility of interest, among other proposals. If any or all of these (or similar) proposals are ultimately enacted into law, in whole or in part, they could have a negative impact to our effective tax rate. In the past, tax law has been enacted, domestically and abroad, impacting our current or future tax structure and effective tax rate, such as the Swiss Tax Reform discussed further in Note 12, “ INCOME TAXES .” Tax law may be enacted in the future, domestically or abroad, that impacts our current or future tax structure and effective tax rate. Our litigation and stockholder activism, could have a material adverse impact on our business. We, along with third parties we do business with, are involved, from time to time, in litigation arising in the ordinary course of business. Litigation matters may include, but are not limited to, contract disputes, employment-related actions, labor relations, commercial litigation, intellectual property rights, product safety, environmental matters and shareholder actions. Litigation, in general, may be expensive and disruptive. We cannot predict with certainty the outcomes of these legal proceedings and other contingencies, and the costs incurred in litigation can be substantial, regardless of the outcome. Substantial unanticipated verdicts, fines and rulings do sometimes occur. As a result, we could from time to time incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations in the period in which the amounts are accrued and/or our cash flows in the period in which the amounts are paid. The outcome of some of these legal proceedings and other contingencies could require us to take, or refrain from taking, actions which could negatively affect our operations and, depending on the nature of the allegations, could negatively impact our reputation. Additionally, defending against these legal proceedings may involve significant expense and diversion of management’s attention and resources. Abercrombie & Fitch Co. 22 2021 Form 10-K Table of Contents Stockholder activism, which could take many forms or arise in a variety of situations, remains popular with many public investors. Due to the potential volatility of our stock price and for a variety of other reasons, we may become the target of securities litigation or stockholder activism. Responding to stockholder activists campaigns may involve significant expense and diversion of management’s attention and resources without yielding any improvement in our results of operations or financial condition. Failure to adequately protect our trademarks could have a negative impact on our brand image and limit our ability to penetrate new markets which could have a material adverse impact on our business. We believe our core trademarks, Abercrombie & Fitch ® , abercrombie ® , Hollister ® , Gilly Hicks ® , Social Tourist ® and the “Moose” and “Seagull” logos, are essential to the effective implementation of our strategy. We have obtained or applied for federal registration of these trademarks with the U.S. Patent and Trademark Office and the registries of countries in key markets within the Company’s sales and distribution channels. In addition, these trademarks are either registered, or the Company has applications for registration pending, with the registries of many of the foreign countries in which the manufacturers of the Company’s products are located. There can be no assurance that we will obtain registrations that have been applied for or that the registrations we obtain will prevent the imitation of our products or infringement of our intellectual property rights by others. Although brand security initiatives are in place, we cannot guarantee that our efforts against the counterfeiting of our brands will be successful. If a third party copies our products in a manner that projects lesser quality or carries a negative connotation, our brand image could be materially adversely affected. Because we have not yet registered all of our trademarks in all categories, or in all foreign countries in which we source or offer our merchandise now, or may in the future, our international expansion and our merchandising of products using these marks could be limited. The pending applications for international registration of various trademarks could be challenged or rejected in those countries because third parties of whom we are not currently aware have already registered similar marks in those countries. Accordingly, it may be possible, in those foreign countries where the status of various applications is pending or unclear, for a third-party owner of the national trademark registration for a similar mark to prohibit the manufacture, sale or exportation of branded goods in or from that country. Failure to register our trademarks or purchase or license the right to use our trademarks or logos in these jurisdictions could limit our ability to obtain supplies from, or manufacture in, less costly markets or penetrate new markets should our business plan include selling our merchandise in those non-U.S. jurisdictions. Additionally, if a third party claims to have licensing rights with respect to merchandise we have produced or purchased from a vendor, we may be obligated to remove this merchandise from our inventory offering and incur related costs, and could be subject to liability under various civil and criminal causes of action, including actions to recover unpaid royalties and other damages. Changes in the regulatory or compliance landscape could have a material adverse impact on our business. We are subject to numerous laws and regulations, including customs, truth-in-advertising, securities laws, consumer protection, general privacy, health information privacy, identity theft, online privacy, general employment laws, employee health and safety, minimum wage laws, unsolicited commercial communication and zoning and occupancy laws and ordinances that regulate retailers generally and/or govern the importation, intellectual property, promotion and sale of merchandise and the operation of retail stores, digital operations and distribution centers. If these laws and regulations were to change, or were violated by our management, associates, suppliers, vendors or other parties with whom we do business, the costs of certain merchandise could increase, or we could experience delays in shipments of our merchandise, be subject to fines or penalties, temporary or permanent store closures, increased regulatory scrutiny or suffer reputational harm, which could reduce demand for our merchandise and adversely affect our business and results of operations. Any changes in regulations, the imposition of additional regulations, or the enactment of any new or more stringent legislation including the areas referenced above, could adversely affect our business and results of operations. Laws and regulations at the local, state, federal and various international levels frequently change, and the ultimate cost of compliance cannot be precisely estimated. Changes in the legal or regulatory environment affecting responsible sourcing, supply chain transparency, or environmental protection, among others, may result in increased compliance costs for us and our business partners. In addition, we are subject to a variety of regulatory, reporting requirements, including, but not limited to, those related to corporate governance and public disclosure. Stockholder activism, the current political environment, financial reform legislation, government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations. New requirements or changes in current regulatory reporting requirements may introduce additional complexities, lead to additional compliance costs, divert management’s time and attention from strategic business activities, and could have a significant effect on our reported results for the affected periods. Failure to comply with such regulations could result in fines, penalties, or lawsuits and could have a material adverse impact on our business. Abercrombie & Fitch Co. 23 2021 Form 10-K Table of Contents The agreements related to our senior secured asset-based revolving credit facility and our senior secured notes include restrictive covenants that limit our flexibility in operating our business and our inability to obtain credit on reasonable terms in the future could have an adverse impact on our business. Our senior secured asset-based revolving credit agreement, as amended (the “ABL Facility”), expires on April 29, 2026 and our senior secured notes, which have a fixed 8.75% interest rate, will mature on July 15, 2025 (the “Senior Secured Notes”). Both our ABL Facility and the indenture governing our Senior Secured Notes contain restrictive covenants that, subject to specified exemptions, restrict, among other things, the followin our ability to incur, assume or guarantee additional indebtedness; grant or incur liens; sell or otherwise dispose of assets, including capital stock of subsidiaries; make investments in certain subsidiaries; pay dividends or make distributions on our capital stock; redeem or repurchase capital stock; change the nature of our business; and consolidate or merge with or into, or sell substantially all of our assets to another entity. If an event of default occurs, any outstanding obligations under the Senior Secured Notes and the ABL Facility could be declared immediately due and payable or the lenders could foreclose on or exercise other remedies with respect to the assets securing the indebtedness under the Senior Secured Notes and the ABL Facility. In addition, there is no assurance that we would have the cash resources available to repay such accelerated obligations. In addition, the Senior Secured Notes and ABL Facility are secured by certain of our real property, inventory, intellectual property, general intangibles and receivables, among other things, and lenders may exercise remedies against the collateral in the event of our default. We have, and expect to continue to have, a level of indebtedness. In addition, we may, from time to time, incur additional indebtedness. We may need to refinance all or a portion of our existing indebtedness before maturity, including the Senior Secured Notes, and any indebtedness under the ABL Facility. There can be no assurance that we would be able to obtain sufficient funds to enable us to repay or refinance our debt obligations on commercially reasonable terms, or at all. Changes in market conditions could potentially impact the size and terms of a replacement facility or facilities in the future. The inability to obtain credit on commercially reasonable terms in the future could adversely impact our liquidity and results of operations as well as limit our ability to take advantage of business opportunities that may arise. Abercrombie & Fitch Co. 24 2021 Form 10-K Table of Contents Item 1B. Unresolved Staff Comments None. Item 2. Properties The Company’s global headquarters is located on a campus-like setting in New Albany, Ohio, which is owned by the Company. The Company also leases property for its regional headquarters located in London, United Kingdom and Shanghai, China. In addition, the Company owns or leases facilities both domestically and internationally to support the Company’s operations, such as its distribution centers and various support centers. The Company does not believe any individual regional headquarters, distribution center or support center lease is material as, if necessary or desirable to relocate an operation, other suitable property could be found. These properties are utilized by both of the Company’s operating segments, and are currently suitable and adequate for conducting the Company’s business. As of January 29, 2022, the Company operated 729 retail stores across its brands. The Company does not believe that any individual store lease is material; however, certain geographic areas may have a higher concentration of store locations. Item 3. Legal Proceedings For information regarding legal proceedings, see Note 20 “ CONTINGENCIES ”, to the Consolidated Financial Statements included in this Annual report on Form 10-K. The Company’s accrued charges for certain legal contingencies are classified within accrued expenses on the Consolidated Balance Sheets included in “ ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ,” of this Annual Report on Form 10-K. The Company notes that in connection with the SEC’s recent modernization of the disclosures of legal proceedings required under Item 103 of Regulation S-K, the Company has elected to apply the threshold of $1 million in potential monetary sanctions (with such amount being the lesser of $1 million or 1% of the current assets of the Company on a consolidated basis) pursuant to Item 103(c)(3)(iii) of Regulation S-K in connection with determining the required disclosure with respect to environmental proceedings to which a governmental authority is a party. Item 4. Mine Safety Disclosures Not applicable. Abercrombie & Fitch Co. 25 2021 Form 10-K Table of Contents PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities A&F’s Class A Common Stock (“Common Stock”) is traded on the New York Stock Exchange under the symbol “ANF.” The following graph shows the changes, over the five-year period ended January 29, 2022 (the last day of A&F’s Fiscal 2021) in the value of $100 invested in (i) shares of A&F’s Common Stock; (ii) Standard & Poor’s 500 Stock Index (the “S&P 500”); and (iii) Standard & Poor’s Apparel Retail Composite Index (the “S&P Apparel Retail”), including reinvestment of dividends. The plotted points represent the closing price on the last trading day of the fiscal year indicated. PERFORMANCE GRAPH (1) COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Abercrombie & Fitch Co., the S&P 500 Index and the S&P Apparel Retail Index 1/28/17 2/3/18 2/2/19 2/1/20 1/30/21 1/29/22 Abercrombie & Fitch Co. $ 100.00 $ 191.87 $ 207.08 $ 165.85 $ 237.88 $ 376.26 S&P 500 $ 100.00 $ 126.41 $ 123.48 $ 150.26 $ 176.18 $ 217.21 S&P Apparel Retail $ 100.00 $ 108.83 $ 120.76 $ 138.82 $ 151.49 $ 169.74 *    $100 invested on 1/27/17 in stock or 1/31/17 in index, including reinvestment of dividends. Indexes calculated on month-end basis. Copyright© 2021 Standard & Poor’s, a division of S&P Global. All rights reserved. (1) This graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to SEC Regulation 14A or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), except to the extent that A&F specifically requests that the graph be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act. As of March 25, 2022, there were approximately 2,700 stockholders of record. However, when including investors holding shares of Common Stock in broker accounts under street name, A&F estimates that there were approximately 34,000 stockholders. Abercrombie & Fitch Co. 26 2021 Form 10-K Table of Contents There were no sales of equity securities during Fiscal 2021 that were not registered under the Securities Act. The following table provides information regarding the purchase of shares of the Common Stock of A&F made by or on behalf of A&F or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Exchange Act during each fiscal month of the thirteen weeks ended January 29, 2022: Period (fiscal month) Total number of shares purchased (1) Average price paid per share Total number of shares purchased as part of publicly announced plans or programs (2) Maximum Number of Shares (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans or Programs (3) October 31, 2021 through November 27, 2021 1,964 $ 45.36 — $ 500,000,000 November 28, 2021 through January 1, 2022 2,866,256 $ 35.29 2,865,332 $ 398,872,318 January 2, 2022 through January 29, 2022 1,191,165 $ 34.35 1,191,165 $ 357,959,371 Total 4,059,385 $ 35.02 4,056,497 $ 357,959,371 (1) An aggregate of 2,888 shares of A&F’s Common Stock purchased during the thirteen weeks ended January 29, 2022 were withheld for tax payments due upon the vesting of employee restricted stock units and exercise of employee stock appreciation rights. (2) On November 23, 2021, we announced that the A&F Board of Directors approved a new $500 million share repurchase authorization, replacing the prior 2021 share repurchase authorization of 10.0 million shares, which had approximately 3.9 million shares remaining available (3) The number shown represents, as of the end of each period, the approximate dollar value of Common Stock that may yet be purchased under A&F’s publicly announced stock repurchase authorization described in footnote 2 above. The shares may be purchased, from time to time depending on business and market conditions. Dividends are declared at the discretion of A&F’s Board of Directors. In May 2020, the Company announced that it had temporarily suspended its dividend program. The Company’s dividend program remains suspended. The Company may in the future review its dividend program to determine, in light of facts and circumstances at that time, whether and when to reinstate. A&F’s Board of Directors reviews and establishes a dividend amount, if any, based on A&F’s financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors and any restrictions under the Company’s agreements related to the Senior Secured Notes and the ABL Facility. There can be no assurance that the Company will pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends. Item 6. [Reserved] Abercrombie & Fitch Co. 27 2021 Form 10-K Table of Contents Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) generally discusses our results of operations for Fiscal 2021 and Fiscal 2020 and provides comparisons between such fiscal years. For our discussion and comparison of Fiscal 2020 and Fiscal 2019, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 30, 2021. This MD&A should be read together with the Company’s audited Consolidated Financial Statements and notes thereto included in this Annual Report on Form 10-K in “ ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA , ” to which all references to Notes in MD&A are made. INTRODUCTION MD&A is provided as a supplement to the accompanying Consolidated Financial Statements and notes thereto to help provide an understanding of the Company’s results of operations, financial condition, and liquidity. MD&A is organized as follows: • Overview . A general description of the Company’s business and certain segment information, and an overview of key performance indicators reviewed by various members of management to gauge the Company’s results. • Current Trends and Outlook . A discussion of the Company’s long-term plans for growth. In addition, this section also provides a summary of the Company’s performance over recent years, primarily Fiscal 2021 and Fiscal 2020. • Results of Operations . An analysis of certain components of the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for Fiscal 2021 as compared to Fiscal 2020. • Liquidity and Capital Resources . A discussion of the Company’s financial condition, changes in financial condition and liquidity as of January 29, 2022, which includes (i) an analysis of changes in cash flows for Fiscal 2021 as compared to Fiscal 2020, (ii) an analysis of liquidity, including the availability under credit facilities, and outstanding debt and covenant compliance and (iii) a summary of contractual and other obligations as of January 29, 2022. • Recent Accounting Pronouncements . The recent accounting pronouncements the Company has adopted or is currently evaluating, including the dates of adoption or expected dates of adoption, as applicable, and anticipated effects on the Company’s audited Consolidated Financial Statements, are included in Note 2 “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES .” • Critical Accounting Policies and Estimates . The accounting policies considered to be important to the Company’s results of operations and financial condition, which typically require significant judgment and estimation on the part of the Company’s management in their application. • Non-GAAP Financial Measures . MD&A provides a discussion of certain financial measures that have been determined to not be in accordance with accounting principles generally accepted in the U.S. (“GAAP”). This section includes certain reconciliations for non-GAAP financial measures and additional details on these financial measures, including information as to why the Company believes the non-GAAP financial measures provided within MD&A are useful to investors. A discussion of the Company’s financial condition, changes in financial condition and results of operations for Fiscal 2020 as compared to Fiscal 2019, is incorporated by reference from “ ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ,” in PART II of A&F’s Annual Report on Form 10-K for Fiscal 2020, filed with the SEC on March 29, 2021. Safe harbor statement under the Private Securities Litigation Reform Act of 1995 The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Annual Report on Form 10-K or made by the Company, its management or its spokespeople involve risks and uncertainties and are subject to change based on various factors, many of which may be beyond the Company’s control. Words such as “guidance,” “outlook,” “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “goal,” “should,” and similar expressions may identify forward-looking statements. Future economic and industry trends that could potentially impact revenue and profitability are difficult to predict. Therefore, there can be no assurance that the forward-looking statements included in this Annual Report on Form 10-K will prove to be accurate. In light of the significant uncertainties in the forward-looking statements included herein, including the on-going hostilities in Ukraine, the uncertainty surrounding COVID-19, the inclusion of such information should not be regarded as a representation by the Company, or any other person, that the objectives of the Company will be achieved. The forward-looking statements included herein are based on information presently available to the management of the Company. Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. A discussion of material risks that could affect the Company’s financial performance and cause actual results to differ materially from those expressed or implied in any of the forward-looking statements is included in  “ ITEM 1A. RISK FACTORS ,” of this Annual Report on Form 10-K. Abercrombie & Fitch Co. 28 2021 Form 10-K Table of Contents OVERVIEW Business summary The Company is a global, digitally led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. The Company’s two brand-based operating segments are Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These five brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company operates primarily in North America, Europe and Asia. The Company’s fiscal year ends on the Saturday closest to January 31. All references herein to the Company’s fiscal years are as follows: Fiscal year Year ended/ ending Number of weeks Fiscal 2019 February 1, 2020 52 Fiscal 2020 January 30, 2021 52 Fiscal 2021 January 29, 2022 52 Fiscal 2022 January 28, 2023 52 Due to the seasonal nature of the retail apparel industry, the results of operations for any interim period are not necessarily indicative of the results expected for the full fiscal year and the Company could experience significant fluctuations in certain asset and liability accounts. The Company experiences its greatest sales activity during Fall, due to Back-to-School and Holiday sales periods, respectively. Key performance indicators The following measurements are among the key performance indicators reviewed by various members of the Company’s management to gauge the Company’s results: • Changes in net sales and comparable sales; • Comparative results of operations on a constant currency basis with the prior year’s results converted at the current year’s foreign currency exchange rate to remove the impact of foreign currency exchange rate fluctuation; • Gross profit and gross profit rate; • Cost of sales, exclusive of depreciation and amortization, as a percentage of net sales; • Stores and distribution expense as a percentage of net sales; • Marketing, general and administrative expense as a percentage of net sales; • Operating income and operating income as a percentage of net sales (“operating margin”); • Net income and net income attributable to A&F; • Cash flow and liquidity measures, such as the Company’s current ratio, working capital and free cash flow; • Inventory metrics, such as inventory turnover; • Return on invested capital and return on equity; • Store metrics, such as net sales per gross square foot, and store 4-wall operating margins; • Digital and omnichannel metrics, such as total shipping expense as a percentage of digital sales, and certain metrics related to our purchase-online-pickup-in-store and order-in-store programs; • Transactional metrics, such as traffic and conversion, performance across key product categories, average unit retail, average unit cost, average units per transaction and average transaction values; and • Customer-centric metrics such as customer satisfaction, customer retention and acquisition, and certain metrics related to the loyalty programs. While not all of these metrics are disclosed publicly by the Company due to the proprietary nature of the information, the Company publicly discloses and discusses many of these metrics within this MD&A. Abercrombie & Fitch Co. 29 2021 Form 10-K Table of Contents CURRENT TRENDS AND OUTLOOK Focus areas for Fiscal 2022 The Company remains committed to, and confident in, its long-term vision of being a digitally-led global omnichannel apparel retailer and continues to evaluate opportunities to make progress against initiatives that support this vision. The Company entered Fiscal 2021 with positive momentum, and has made progress towards recovering from COVID-19 sales losses. Reflecting ongoing global uncertainty, the Company plans to continue to actively manage inventories, optimize its distribution center capacity for digital demand and tightly manage expenses. The following focus areas for Fiscal 2022 serve as a framework to the Company achieving sustainable growth and long-term operating margin expansi • Accelerate digital, data and technology investments to increase agility and improve the customer experience; • Create a more personalized customer experience through a connected omnichannel ecosystem, • Optimize our global distribution network to expand digital capacity and improve product delivery speed • Opportunistically open new, omni-enabled stores in under penetrated markets, and • Integrate environmental, social and governance practices and standards throughout the organization. Global Store Network Optimization Reflecting a continued focus on its key transformation initiative ‘Global Store Network Optimization,’ the Company delivered new store experiences across brands during Fiscal 2021 and Fiscal 2020. Details related to these new store experiences fol Type of new store experience Fiscal 2021 Fiscal 2020 New stores 38 15 Remodels 2 4 Right-sizes 5 6 Total 45 25 As part of its ongoing global store network optimization initiative and stated goal of repositioning from larger format, tourist-dependent flagship locations to smaller, omni-enabled stores that cater to local customers, the Company closed its Abercrombie & Fitch brand Singapore and Hamburg flagship locations during Fiscal 2021. This leaves the Company with five operating flagships at the end of Fiscal 2021, down from seven at the beginning of Fiscal 2021 and 15 at the beginning of Fiscal 2020. In addition, the Company closed 42 non-flagship locations, resulting in 44 total store closures during Fiscal 2021. Store optimization efforts in Fiscal 2021 reduced total Company store gross square footage by approximately 0.2 million gross square feet, or 3%, as compared to Fiscal 2020 year-end. The actions taken in Fiscal 2021, combined with ongoing digital sales growth, are expected to continue to transform the Company's operating model and reposition the Company for the future as it continues to focus on aligning store square footage with digital penetration. Store count and gross square footage by brand and geography as of January 30, 2021 and January 29, 2022 were as follows: Hollister (1) Abercrombie (2) Total Company (3) United States International United States International United States International Total Number of sto January 30, 2021 347 150 190 48 537 198 735 New 10 12 7 9 17 21 38 Closed (6) (8) (24) (6) (30) (14) (44) January 29, 2022 351 154 173 51 524 205 729 Gross square footage (in thousands) : January 30, 2021 2,309 1,219 1,311 393 3,620 1,612 5,232 January 29, 2022 2,312 1,212 1,161 367 3,473 1,579 5,052 (1) Hollister includes the Hollister and Gilly Hicks brands. Locations with Gilly Hicks carveouts within Hollister stores are represented as a single store count. Excludes nine international franchise stores as of each of January 29, 2022 and January 30, 2021. Excludes 14 Company-operated temporary stores as of January 29, 2022 and 12 as of January 30, 2021. (2) Abercrombie includes the Abercrombie & Fitch and abercrombie kids brands. Locations with abercrombie kids carveouts within Abercrombie & Fitch stores are represented as a single store count. Excludes 14 international franchise stores as of January 29, 2022 and 10 as of January 30, 2021. Excludes five Company-operated temporary stores as of January 29, 2022 and two as of January 30, 2021. (3) This store count excludes one international third-party operated multi-brand outlet store as of January 30, 2021. Abercrombie & Fitch Co. 30 2021 Form 10-K Table of Contents Impact of COVID-19 In March 2020, the COVID-19 outbreak was declared to be a global pandemic by the World Health Organization. In response to COVID-19, certain governments imposed travel restrictions and local statutory quarantines and the Company experienced widespread temporary store closures. As of January 29, 2022, all U.S. Company-operated stores were fully open for in-store service; however, temporary store closures have subsequently been mandated in certain parts of the APAC region in response to COVID-19. During periods of temporary store closures, reductions in revenue have not been offset by proportional decreases in expense, as the Company continues to incur store occupancy costs such as operating lease costs, net of rent abatements agreed upon during the period, depreciation expense, and certain other costs such as compensation, net of government payroll relief, and administrative expenses resulting in a negative effect on the relationship between the Company’s costs and revenues. Although U.S. and global economies have begun to recover from the COVID-19 pandemic as many health and safety restrictions have been lifted and vaccine distribution has increased, certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time, including labor shortages and disruptions of global supply chains and temporary store closures. The extent of future impacts of COVID-19 on the Company’s business, including the duration and impact on overall customer demand, are uncertain as current circumstances are dynamic and depend on future developments, including, but not limited to, the emergence of new variants of coronavirus, such as the Delta and Omicron variants, and the availability and acceptance of effective vaccines, boosters or medical treatments. The Company plans to follow the guidance of local governments to evaluate whether future store closures will be necessary. The Company’s digital operations across brands have continued to serve the Company’s customers during periods of temporary store closures. In response to elevated digital demand during this period, the Company leveraged its omnichannel capabilities by continuing to offer Purchase-Online-Pickup-in-Store, including curbside pickup at a majority of U.S. locations, and by utilizing ship-from-store capabilities, including same-day delivery across its entire U.S. store fleet. Despite the recent strength in digital sales, the Company has historically generated the majority of its annual net sales through stores and there can be no assurance that the current level of digital penetration will continue when stores operate at full capacity. For further information about how COVID-19 could impact our operations, refer to  “ ITEM 1A. RISK FACTORS ,” of this Annual Report on Form 10-K. Supply chain disruptions, inflation and changing price s The Company has continued to see disruptions in global supply chains, including temporary closures of factories. The inability to receive inventory in a timely manner could cause delays in responding to customer demand and adversely affect sales. In addition, the Company has seen and expects to continue to see inflationary pressures affecting the Company’s transportation and other costs. In order to mitigate the risk associated with supply chain constraints, the Company has taken and expects to continue to take actions to manage through the disruption, including shipping inventory by air and shifting production as necessary and where possible. This adversely impacted the Company during the latter half of Fiscal 2021, and is likely to continue to cause increased inventory costs related to freight. It is possible that responses to extended factory closures and transportation delays are not adequate to mitigate their impact, and that these events could adversely affect the business and results of operations. The Company has also recently experienced inflation in labor, raw materials and other costs. Inflation can have a long-term impact on the Company because increasing costs may impact the ability to maintain satisfactory margins. The Company may be unsuccessful in passing these increases on to the customer through higher ticket prices. Furthermore, Increases in inflation may not be matched by growth in consumer income, which also could have a negative impact on spending. Impact of global events and uncertainty As a global multi-brand omnichannel specialty retailer, with operations in North America, Europe and Asia, among other regions and, as a result, management is are mindful of macroeconomic risks, global challenges and the changing global geopolitical environment, including the on-going hostilities in Ukraine, that could adversely impact certain areas of the business. As a result, in addition to the events listed within MD&A, management continues to monitor certain other global events. The Company continues to assess the potential impacts these events and similar events may have on the business in future periods and continues to develop contingency plans to assist in mitigating potential impacts. It is possible that the Company’s preparations for such events are not adequate to mitigate their impact, and that these events could further adversely affect its business and results of operations. For a discussion of material risks that have the potential to cause actual results to differ materially from expectations, refer to “ ITEM 1A. RISK FACTORS ,” included in this Annual Report on Form 10-K. The Company continues to evaluate opportunities to invest in and make progress on initiatives that position the business for sustainable long-term growth that align with the strategic pillars as described within “ ITEM 1. BUSINESS - STRATEGY AND KEY BUSINESS PRIORITIES ,” included in this Annual Report on Form 10-K. Abercrombie & Fitch Co. 31 2021 Form 10-K Table of Contents Summary of results A summary of results for Fiscal 2021 and Fiscal 2020 follows: GAAP Non-GAAP (1) (in thousands, except change in net sales, gross profit rate, operating margin and per share amounts) Fiscal 2021 Fiscal 2020 Fiscal 2021 Fiscal 2020 Net sales $ 3,712,768 $ 3,125,384 Change in net sales from the prior fiscal year 19 % (14) % Gross profit rate (2) 62.3 60.5 Operating income (loss) $ 343,084 $ (20,469) $ 355,184 $ 52,468 Operating income (loss) margin 9.2 % (0.7) % 9.6 % 1.7 % Net income (loss) attributable to A&F (3) $ 263,010 $ (114,021) $ 272,689 $ (45,383) Net income (loss) per diluted share attributable to A&F (3) 4.20 (1.82) 4.35 (0.73) (1) Refer to “ RESULTS OF OPERATIONS ” for details on excluded items. A reconciliation from each non-GAAP financial measure presented in this Annual Report on Form 10-K to the most directly comparable financial measure calculated in accordance with GAAP, as well as a discussion as to why the Company believes that these non-GAAP financial measures are useful to investors is provided below under “ NON-GAAP FINANCIAL MEASURES .” (2) Gross profit is derived from cost of sales, exclusive of depreciation and amortization. (3) Fiscal 2021 results includes $42.5 million of tax benefits due to the release of valuation allowances as a result of the improvement seen in business conditions. Fiscal 2020 results included $101 million of adverse tax impacts related to valuation allowances on deferred tax assets and other tax charges as a result of the COVID-19 pandemic, which adversely impacted net loss per diluted share by or $1.61 per share. Refer to Note 12, “ INCOME TAXES .” Certain components of the Company’s Consolidated Balance Sheets as of January 29, 2022 and January 30, 2021 and Consolidated Statements of Cash Flows for Fiscal 2021 and Fiscal 2020 were as follows: (in thousands) Balance Sheets data January 29, 2022 January 30, 2021 Cash and equivalents $ 823,139 $ 1,104,862 Gross borrowings outstanding, carrying amount 307,730 350,000 Inventories 525,864 404,053 Statement of Cash Flows data Fiscal 2021 Fiscal 2020 Net cash provided by operating activities $ 277,782 $ 404,918 Net cash used for investing activities (96,979) (51,910) Net cash (used for) provided by financing activities (446,898) 69,717 Abercrombie & Fitch Co. 32 2021 Form 10-K Table of Contents RESULTS OF OPERATIONS The estimated basis point (“BPS”) change disclosed throughout this Results of Operations has been rounded based on the change in the percentage of net sales. Net sales (in thousands) Fiscal 2021 Fiscal 2020 $ Change % Change Hollister $ 2,147,979 $ 1,834,349 $ 313,630 17% Abercrombie 1,564,789 1,291,035 273,754 21% Total Company $ 3,712,768 $ 3,125,384 $ 587,384 19% Net sales by geographic area are presented by attributing revenues on the basis of the country in which the merchandise was sold for in-store purchases and the shipping location provided by customers for digital orders. The Company’s net sales by geographic area for Fiscal 2021 and Fiscal 2020 were as follows: (in thousands) Fiscal 2021 Fiscal 2020 $ Change % Change United States $ 2,652,158 $ 2,127,403 $ 524,755 25% EMEA 755,072 709,451 45,621 6% APAC 171,701 176,636 (4,935) (3)% Other 133,837 111,894 21,943 20% International $ 1,060,610 $ 997,981 $ 62,629 6% Total Company $ 3,712,768 $ 3,125,384 $ 587,384 19% For Fiscal 2021, net sales increased 19% as compared to Fiscal 2020, primarily due to an increase in units sold as a result of increased store traffic relative to last year, which was impacted by widespread temporary store closures due to COVID-19, and 4% digital sales growth. Average unit retail increased year-over-year, driven by less promotions and lower clearance levels, with benefits from changes in foreign currency exchange rates of approximately $26 million. Cost of sales, exclusive of depreciation and amortization Fiscal 2021 Fiscal 2020 (in thousands) % of Net Sales % of Net Sales BPS Change Cost of sales, exclusive of depreciation and amortization $ 1,400,773 37.7% $ 1,234,179 39.5% (180) For Fiscal 2021, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased approximately 180 basis points as compared to Fiscal 2020. The year-over-year decrease was primarily attributable to approximately 550 basis points of increased average unit retail as a result of lower promotions and markdowns, partially offset by higher average unit cost related to approximately 414 basis points of increased freight costs as well as other costs incurred to offset supply chain issues. Gross profit, exclusive of depreciation and amortization Fiscal 2021 Fiscal 2020 % of Net Sales % of Net Sales BPS Change Gross profit, exclusive of depreciation and amortization $ 2,311,995 62.3% $ 1,891,205 60.5% 180 Abercrombie & Fitch Co. 33 2021 Form 10-K Table of Contents Stores and distribution expense Fiscal 2021 Fiscal 2020 (in thousands) % of Net Sales % of Net Sales BPS Change Stores and distribution expense $ 1,429,476 38.5% $ 1,391,584 44.5% (600) For Fiscal 2021, stores and distribution expense increased 3% as compared to Fiscal 2020, primarily driven by a a $42 million increase in digital sales marketing expense, $36 million increase in payroll expense, reflecting the return of certain expenses not incurred in Fiscal 2020 due to COVID-19 temporary store closures, a $15 million increase in digital shipping and handling expense reflecting 4% year-over-year digital sales growth and a $11 million increase in digital direct expense. These increases in expense were partially offset by a $68 million reduction in store occupancy expense, due to a decrease in store count and favorable rent negotiations and include approximately $17.9 million in benefits related to rent abatements and a favorable resolution of a flagship store closure. Marketing, general and administrative expense Fiscal 2021 Fiscal 2020 (in thousands) % of Net Sales % of Net Sales BPS Change Marketing, general and administrative expense $ 536,815 14.5% $ 463,843 14.8% (30) For Fiscal 2021, marketing, general and administrative expense increased 16% as compared to Fiscal 2020, primarily driven by increased digital media spend, performance-based compensation, legal, consulting and information technology expense. These increases were partially offset by a decrease in depreciation expense. Flagship store exit (benefits) charges Fiscal 2021 Fiscal 2020 (in thousands) % of Net Sales % of Net Sales BPS Change Flagship store exit (benefits) charges $ (1,153) 0.0% $ (11,636) (0.4)% 40 For Fiscal 2021, flagship store exit benefits primarily related to the closure of two international Abercrombie & Fitch flagship stores. Refer to Note 19, “ FLAGSHIP STORE EXIT (BENEFITS) CHARGES . ” Asset impairment, exclusive of flagship store exit charges Fiscal 2021 Fiscal 2020 (in thousands) % of Net Sales % of Net Sales BPS Change Asset impairment, exclusive of flagship store exit charges $ 12,100 0.3% $ 72,937 2.3% (200) Excluded items: Asset impairment charges (1) (12,100) (0.3)% (72,937) (2.3)% 200 Adjusted non-GAAP asset impairment, exclusive of flagship store exit charges $ — 0.0% $ — 0.0% — (1) Refer to “ NON-GAAP FINANCIAL MEASURES ,” for further details. Refer to Note 9, “ ASSET IMPAIRMENT ,” for further discussion. Abercrombie & Fitch Co. 34 2021 Form 10-K Table of Contents Other operating income, net Fiscal 2021 Fiscal 2020 (in thousands) % of Net Sales % of Net Sales BPS Change Other operating income, net $ 8,327 0.2% $ 5,054 0.2% — For Fiscal 2021, other operating income, net, increased as compared to Fiscal 2020, primarily due to sublease rental income recognized in Fiscal 2021. Operating income (loss) Fiscal 2021 Fiscal 2020 (in thousands) % of Net Sales % of Net Sales BPS Change Operating (loss) income $ 343,084 9.2% $ (20,469) (0.7)% 990 Excluded items: Asset impairment charges (1) 12,100 0.3% 72,937 2.3% (200) Adjusted non-GAAP operating income $ 355,184 9.6% $ 52,468 1.7% 790 (1) Refer to “ NON-GAAP FINANCIAL MEASURES ,” for further details. Interest expense, net Fiscal 2021 Fiscal 2020 (in thousands) % of Net Sales % of Net Sales BPS Change Interest expense $ 37,958 1.0% $ 31,726 1.0% — Interest income (3,848) (0.1)% (3,452) (0.1)% — Interest expense, net $ 34,110 0.9% $ 28,274 0.9% — For Fiscal 2021, interest expense, net, increased 21% primarily driven by the loss on the extinguishment of debt related to the purchase of Senior Secured Notes and higher interest expense in the current year, reflecting higher average borrowings outstanding than before the completion of the Senior Secured Notes private offering. Income tax expense Fiscal 2021 Fiscal 2020 (in thousands, except ratios) Effective Tax Rate Effective Tax Rate Income tax expense $ 38,908 12.6% $ 60,211 (123.5)% Excluded items: Tax effect of pre-tax excluded items (1) 2,421 4,299 Adjusted non-GAAP income tax expense $ 41,329 12.9% $ 64,510 266.6% (1) Refer to “ Operating income (loss) ” for details of pre-tax excluded items. The tax effect of pre-tax excluded items is the difference between the tax provision calculation on a GAAP basis and an adjusted non-GAAP basis. The Company’s effective tax rate for Fiscal 2021 was impacted by $42.5 million of tax benefits due to the release of valuation allowances, primarily in the U.S. and Germany, and a discrete tax benefit of $3.9 million due to a rate change in the U.K. The Company did not recognize income tax benefits on $25.3 million of pre-tax losses generated in Fiscal 2021 primarily in Switzerland, resulting in adverse tax impacts of $4.6 million. Refer to Note 12, “ INCOME TAXES ,” for further discussion on factors that impacted the effective tax rate in Fiscal 2021 and Fiscal 2020. Abercrombie & Fitch Co. 35 2021 Form 10-K Table of Contents Net income (loss) attributable to A&F Fiscal 2021 Fiscal 2020 (in thousands) % of Net Sales % of Net Sales BPS Change Net income (loss) attributable to A&F $ 263,010 7.1% $ (114,021) (3.6)% 1,070 Excluded items, net of tax (1) 9,679 0.3% 68,638 2.2% (190) Adjusted non-GAAP net income (loss) attributable to A&F (2) $ 272,689 7.3% $ (45,383) (1.5)% 880 (1) Excludes items presented above under “ Operating income (loss) , ” and “ Income tax expense . ” Net income (loss) per diluted share attributable to A&F Fiscal 2021 Fiscal 2020 $ Change Net income (loss) per diluted share attributable to A&F $ 4.20 $ (1.82) $6.02 Excluded items, net of tax (1) 0.15 1.10 (0.95) Adjusted non-GAAP net income (loss) per diluted share attributable to A&F $ 4.35 $ (0.73) $5.08 Impact from changes in foreign currency exchange rates — 0.01 (0.01) Adjusted non-GAAP net income (loss) per diluted share attributable to A&F on a constant currency basis (2) $ 4.35 $ (0.74) $5.09 (1) Excludes items presented above under “ Operating income (loss) , ” and “ Income tax expense . ” (2) Refer to “ NON-GAAP FINANCIAL MEASURES ,” for further details. Abercrombie & Fitch Co. 36 2021 Form 10-K Table of Contents LIQUIDITY AND CAPITAL RESOURCES Overview The Company’s capital allocation strategy, priorities and investments are reviewed by A&F’s Board of Directors considering both liquidity and valuation factors. Regarding returns to shareholders, although the dividend program remains suspended, during Fiscal 2021, the Company resumed share repurchases. The timing and amount of any future share repurchases will depend on various factors, such as market and business conditions, including the Company’s ability to accelerate investments in the business. The Company believes that it will have adequate liquidity to fund operating activities over the next 12 months. The Company monitors financing market conditions and may in the future determine whether and when to amend, modify, or restructure its Credit Facilities and/or Senior Secured Notes. Primary sources and uses of cash The Company’s business has two principal selling seaso Spring and Fall. The Company experiences its greatest sales activity during Fall, due to back-to-school and holiday sales periods. The Company relies on excess operating cash flows, which are largely generated in Fall, to fund operations throughout the year and to reinvest in the business to support future growth. The Company also has the ABL Facility available as a source of additional funding, which is described further below under “ Credit facilities and Senior Secured Notes ”. Over the next 12 months, the Company expects its primary cash requirements to be directed towards funding operating activities, including the acquisition of inventory, and obligations related to compensation, marketing, leases and any lease buyouts or modifications it may exercise, taxes and other operating activities. The Company evaluates opportunities for investments in the business that are in line with initiatives that position the business for sustainable long-term growth that align with its strategic pillars as described within “ ITEM 1. BUSINESS - STRATEGY AND KEY BUSINESS PRIORITIES ”. Examples of potential investment opportunities include, but are not limited to, new store experiences and options to early terminate store leases, investments in its omnichannel initiatives and investments to increase the Company’s capacity to fulfill digital orders. Historically, the Company has utilized cash flow generated from operations to fund any discretionary capital expenditures, which have been prioritized towards new store experiences, as well as digital and omnichannel investments, information technology, and other projects. For Fiscal 2021, the Company used $97.0 million towards capital expenditures, down from $101.9 million of capital expenditures in Fiscal 2020. Total capital expenditures for Fiscal 2022 are expected to be approximately $150 million. Share repurchases and dividends In order to preserve liquidity and maintain financial flexibility in light of COVID-19, the Company announced that it had temporarily suspended its dividend and share repurchase programs in Fiscal 2020.. The Company has since adopted a new share repurchase program and may repurchase shares in the future, but the timing and amount of any further repurchases are dependent on various factors, such as market and business conditions, including the Company’s ability to accelerate investments in the business. The Company’s dividend program remains suspended. The Company may in the future review its dividend program to determine, in light of facts and circumstances at that time, whether and when to reinstate. In November 2021, the A&F Board of Directors approved a new $500 million share repurchase authorization, replacing the prior February 19, 2021 share repurchase authorization of 10.0 million shares, which had approximately 3.9 million shares remaining available at termination. During Fiscal 2021, the Company repurchased 10.2 million shares and returned $377 million to shareholders through share repurchase s . The timing and amount of any future share repurchases will depend on various factors, including market and business conditions. The Company has repurchased shares of its Common Stock from time to time, dependent on market and business conditions, with the objectives of returning excess cash to shareholders and offsetting dilution from issuances of Common Stock associated with the exercise of employee stock appreciation rights and the vesting of restricted stock units. Shares may be repurchased in the open market, including pursuant to any trading plans established in accordance with Rule 10b5-1 of the Exchange Act, through privately negotiated transactions or other transactions or by a combination of such methods. Refer to “ ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ” for additional information regarding the Company’s share repurchases during the fourth quarter of Fiscal 2021 and the number of shares remaining available for purchase under the Company’s publicly announced stock repurchase authorization. A&F’s Board of Directors reviews and establishes a dividend amount, if at all, based on A&F’s financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors, including the potential severity of impacts to the business resulting from COVID-19 and any restrictions under the Company’s agreements related to the Senior Secured Notes and the ABL Facility. There can be no assurance that the Company will declare and pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends. Table of Contents Credit facilities and Senior Secured Notes In July 2020, the Company completed the private offering of the Senior Secured Notes, and received gross proceeds of $350 million. The Senior Secured Notes will mature on July 15, 2025 and bear interest at a rate of 8.75% per annum, with semi-annual interest payments which began in January 2021. The Company’s debt related to the Senior Secured Notes is presented on the Consolidated Balance Sheet, net of the unamortized fees. During Fiscal 2021, the Company repurchased $42.3 million of its outstanding Senior Secured Notes and incurred $5.3 million of loss on extinguishment of debt, comprised of a repayment premium of $4.7 million and the write-off of unamortized fees of $0.6 million. As of January 29, 2022, the Company had $307.7 million of gross indebtedness outstanding under the Senior Secured Notes. On April 29, 2021, A&F Management, in A&F Management’s capacity as the lead borrower, and the other borrowers and guarantors party thereto, amended and restated in its entirety the Credit Agreement, dated as of August 7, 2014, as amended on September 10, 2015 and as further amended on October 19, 2017 (as amended and restated, the “Amended and Restated Credit Agreement”), among A&F Management, the other borrowers and guarantors party thereto, the lenders party thereto, Wells Fargo Bank, National Association, as administrative agent for the lenders, and the other parties thereto. The Amended and Restated Credit Agreement continues to provide for a senior secured revolving credit facility of up to $400.0 million (the “ABL Facility”), and (i) extends the maturity date of the ABL Facility from October 19, 2022 to April 29, 2026; and (ii) modifies the required fee on undrawn commitments under the ABL Facility from 0.25% per annum to either 0.25% or 0.375% per annum (with the ultimate amount dependent on the conditions detailed in the Amended and Restated Credit Agreement). The Company did not have any borrowings outstanding under the ABL Facility as of January 29, 2022 or as of January 30, 2021. Details regarding borrowing available to the Company under the ABL Facility as of January 29, 2022 fol (in thousands) January 29, 2022 Borrowing base $ 279,105 L Outstanding stand-by letters of credit (814) Borrowing capacity 278,291 L Minimum excess availability (1) (30,000) Borrowing available under the ABL Facility $ 248,291 (1) The Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility. Refer to Note 13, “ BORROWINGS ,” for additional information. Income taxes The Company’s earnings and profits from its foreign subsidiaries may be repatriated to the U.S., without incurring additional U.S. federal income tax. The Company determined that the balance of the Company’s undistributed earnings and profits from its foreign subsidiaries as of February 2, 2019 are considered indefinitely reinvested outside of the U.S., and if these funds were to be repatriated to the U.S., the Company would expect to incur an insignificant amount of state income taxes and foreign withholding taxes. The Company accrues for both state income taxes and foreign withholding taxes with respect to earnings and profits earned after February 2, 2019, in such a manner that these funds may be repatriated without incurring additional tax expense. As of January 29, 2022, $380.6 million of the Company’s $823.1 million of cash and equivalents were held by foreign affiliates. The Company is not dependent on dividends from its foreign affiliates to fund its U.S. operations or to fund investing and financing cash flow activities. Refer to Note 12, “ INCOME TAXES ,” for additional details regarding the impact certain events related to the Company’s income taxes had on the Company’s Consolidated Financial Statements. Table of Contents Analysis of cash flows The table below provides certain components of the Company’s Consolidated Statements of Cash Flows for Fiscal 2021 and Fiscal 2020: (in thousands) Fiscal 2021 Fiscal 2020 Cash and equivalents, and restricted cash and equivalents, beginning of period $ 1,124,157 $ 692,264 Net cash provided by operating activities 277,782 404,918 Net cash used for investing activities (96,979) (51,910) Net cash (used for) provided by financing activities (446,898) 69,717 Effects of foreign currency exchange rate changes on cash (23,694) 9,168 Net (decrease) increase in cash and equivalents, and restricted cash and equivalents $ (289,789) $ 431,893 Cash and equivalents, and restricted cash and equivalents, end of period $ 834,368 $ 1,124,157 Operating activities - For Fiscal 2021 the Company recognized higher cash receipts as compared to Fiscal 2020 as a result of the 19% year-over-year increase in net sales as the Company experienced widespread temporary store closures in response to COVID-19 during Fiscal 2020. The Company also took various immediate, aggressive actions during Fiscal 2020 to preserve liquidity and manage cash flows in light of COVID-19 in order to best position the business for key stakeholders, including, but not limited to (i) partnering with merchandise and non-merchandise vendors in regards to payment terms; (ii) tightly managing inventory receipts to align inventory with expected market demand; and (iii) significantly reducing expenses to better align operating costs with sales. The Company also suspended rent payments for a larger proportion of its stores in Fiscal 2020 than it has in Fiscal 2021 related to stores that were closed for a period of time as a result of COVID-19. Certain payment term extensions were temporary and certain previously deferred payments have since been made. There can be no assurance that the Company will be able to maintain extended payment terms or continue to defer payments, which may result in incremental operating cash outflows in future periods. In addition, during Fiscal 2021, the Company finalized an agreement with and paid its landlord partner to settle all remaining obligations related to the SoHo Hollister flagship store in New York City, which closed during the second quarter of Fiscal 2019. Prior to this new agreement, the Company was required to make payments in aggregate of $80.1 million pursuant to the lease agreements through Fiscal 2028. The new agreement resulted in an acceleration of payments and provided for a discount resulting in an operating cash outflow of $63.8 million during Fiscal 2021. While the Company has been successful in obtaining certain rent abatements and landlord concessions of rent payable during Fiscal 2021 as a result of COVID-19 store closures, the Company continues to engage with its landlords to find a mutually beneficial and agreeable path forward for certain of its other leases. Investing activities - For Fiscal 2021, net cash outflows for investing activities were used for capital expenditures of $97.0 million as compared to $101.9 million in Fiscal 2020. In addition, Fiscal 2020 reflects the withdrawal of $50.0 million from the overfunded Rabbi Trust assets, which represented the majority of excess funds, improving the Company’s near-term cash position in light of COVID-19. Financing activities - For Fiscal 2021, net cash used by financing activities primarily consisted of the repurchase of approximately 10.2 million shares of A&F’s Common stock in the open market with a market value of approximately $377 million. In addition, the Company repurchased $42.3 million of its outstanding Senior Secured Notes at a premium of $4.7 million. For Fiscal 2020, net cash provided by financing activities primarily consisted of the issuance of the Senior Secured Notes and receipt of related gross proceeds of $350.0 million and borrowings under the ABL Facility of $210.0 million. The gross proceeds from the Senior Secured Notes offering were used along with existing cash on hand, to repay all then outstanding borrowings and accrued interest under the Term Loan Facility and the ABL Facility, with the remaining net proceeds used towards fees and expenses in connection with such repayments and the offering. In addition, the Company repurchased approximately 1.4 million shares of A&F’s Common Stock with a market value of approximately $15.2 million and paid dividends of $12.6 million during Fiscal 2020, prior to the Company’s decision to temporarily suspend its share repurchase and dividend programs in light of COVID-19. Table of Contents Contractual obligations As of January 29, 2022, the Company’s contractual obligations were as follows: Payments due by period (in thousands) Total Less than 1 year 1-3 years 3-5 years More than 5 years Operating lease obligations (1) $ 1,064,468 $ 266,893 $ 367,746 $ 238,845 $ 190,984 Purchase obligations (2) 369,153 325,963 26,754 5,342 11,094 Long-term debt obligations (3) 307,730 — — 307,730 — Other obligations (4) 172,944 42,221 75,295 33,176 22,252 Total $ 1,914,295 $ 635,077 $ 469,795 $ 585,093 $ 224,330 (1) Operating lease obligations consist of the Company’s future undiscounted operating lease payments, including future fixed lease payments associated with closed flagship stores. Operating lease obligations do not include variable payments related to both lease and nonlease components, such as contingent rent payments made by the Company based on performance, and payments related to taxes, insurance, and maintenance costs. Total variable lease cost was $110.9 million in Fiscal 2021. Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Leases , ” and Note 8, “ LEASES ,” for further discussion. (2) Purchase obligations primarily consist of non-cancelable purchase orders for merchandise to be delivered during Fiscal 2022 and commitments for fabric expected to be used during upcoming seasons. In addition, purchase obligations include agreements to purchase goods or services, including, but not limited to, information technology, digital and marketing contracts, as well as estimated obligations related to the Company’s 13-year, 100% renewable energy supply agreement for its global home office and Company-owned distribution centers which is expected to begin in the Company’s fiscal year ending January 28, 2023. (3) Long-term debt obligations consist of principal payments under the Senior Secured Notes. Refer to Note 13, “ BORROWINGS ,” for further discussion. (4) Other obligations consists o interest payments related to the Senior Secured Notes assuming normally scheduled principal payments; estimated asset retirement obligations; accrued rent related to stores where the Company suspended payments in light of COVID-19 temporary store closures and continues to engage with its landlords on a agreeable path forward; the amount of the employer-paid portion of social security taxes deferred in light of COVID-19; payments from the Supplemental Executive Retirement Plan; known and scheduled payments related to the Company’s deferred compensation and supplemental retirement plans; tax payments associated with the provisional, mandatory one-time deemed repatriation tax on accumulated foreign earnings, net payable over eight years pursuant to the Act; and minimum contractual obligations related to leases signed but not yet commenced, primarily related to the Company’s stores. Refer to Note 8, “ LEASES ,” Note 12, “ INCOME TAXES ,” Note 13, “ BORROWINGS ,” and Note 17, “ SAVINGS AND RETIREMENT PLANS ,” for further discussion. Due to uncertainty as to the amounts and timing of future payments, tax related to uncertain tax positions, including accrued interest and penalties, of $1.2 million as of January 29, 2022 is excluded from the contractual obligations table. Deferred taxes are also excluded in the contractual obligations table. For further discussion, refer to Note 12, “ INCOME TAXES .” As of January 29, 2022, the Company had recorded $2.8 million and $42.3 million of obligations related to its deferred compensation and supplemental retirement plans in accrued expenses and other liabilities on the Consolidated Balance Sheet, respectively. Amounts payable with known payment dates of $14.2 million have been classified in the contractual obligations table based on those scheduled payment dates. However, it is not reasonably practicable to estimate the timing and amounts for the remainder of these obligations, therefore, those amounts have been excluded in the contractual obligations table. A&F had historically paid quarterly dividends on its Common Stock. Due to the fact that the dividend program is currently suspended and given the payment of future dividends are subject to determination and approval by A&F’s Board of Directors, there are no amounts included in the contractual obligations table related to dividends. RECENT ACCOUNTING PRONOUNCEMENTS The Company describes its significant accounting policies in Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES .” The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts. Since actual results may differ from those estimates, the Company revises its estimates and assumptions as new information becomes available. The Company believes the following policies are the most critical to the portrayal of the Company’s financial condition and results of operations. Table of Contents Policy Effect if Actual Results Differ from Assumptions Inventory Valuation The Company reviews inventories on a quarterly basis. The Company reduces the inventory valuation when the carrying cost of specific inventory items on hand exceeds the amount expected to be realized from the ultimate sale or disposal of the goods, through a lower of cost and net realizable value (“LCNRV”) adjustment. The LCNRV adjustment reduces inventory to its net realizable value based on the Company’s consideration of multiple factors and assumptions, including demand forecasts, current sales volumes, expected sell-off activity, composition and aging of inventory, historical recoverability experience and risk of obsolescence from changes in economic conditions or customer preferences. The Company does not expect material changes to the underlying assumptions used to measure the LCNRV estimate as of January 29, 2022. However, actual results could vary from estimates and could significantly impact the ending inventory valuation at cost, as well as gross profit. An increase or decrease in the LCNRV adjustment of 10% would have affected pre-tax loss by approximately $1.7 million for Fiscal 2021. Valuation of deferred tax assets The provision for income taxes is determined using the asset and liability approach. Tax laws often require items to be included in tax filings at different times than the items are being reflected in the financial statements. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. Valuation allowances are recorded in certain jurisdictions to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The Company does not expect material changes in the judgments, assumptions or interpretations used to calculate the tax provision for Fiscal 2022. However, changes in these judgments, assumptions or interpretations may occur and should those changes be significant, they could have a material impact on the Company’s income tax provision. As of the end of Fiscal 2021, the Company had recorded valuation allowances of $110.1 million Policy Effect if Actual Results Differ from Assumptions Long-lived Assets Long-lived assets, primarily operating lease right-of-use assets, leasehold improvements, furniture, fixtures and equipment, are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset group might not be recoverable. These include, but are not limited to, material declines in operational performance, a history of losses, an expectation of future losses, adverse market conditions and store closure or relocation decisions. On at least a quarterly basis, the Company reviews for indicators of impairment at the individual store level, the lowest level for which cash flows are identifiable. Stores that display an indicator of impairment are subjected to an impairment assessment. The Company’s impairment assessment requires management to make assumptions and judgments related, but not limited, to management’s expectations for future operations and projected cash flows. The key assumption used in the Company’s undiscounted future store cash flow models is estimated sales growth rate. An impairment loss may be recognized when these undiscounted future cash flows are less than the carrying amount of the asset group. In the circumstance of impairment, any loss would be measured as the excess of the carrying amount of the asset group over its fair value. Fair value of the Company’s store-related assets is determined at the individual store level based on the highest and best use of the asset group. The key assumptions used in the Company’s fair value analysis are estimated sales growth and comparable market rents. Store assets that were tested for impairment as of January 29, 2022 and not impaired, had long-lived assets with a net book value of $60.6 million, which included $53.6 million of operating lease right-of-use assets as of January 29, 2022. Store assets that were previously impaired as of January 29, 2022, had a remaining net book value of $80.9 million, which included $73.5 million of operating lease right-of-use assets, as of January 29, 2022. While the Company If actual results are not consistent with the estimates and assumptions used in assessing impairment or measuring impairment losses, there may be a material impact on the Company’s financial condition or results of operation. Leases The Company’s lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term. The Company’s lease liabilities represent the Company’s obligation to make lease payments arising from the lease. On the lease commencement date, the Company recognizes an asset for the right to use a leased asset and a liability based on the present value of remaining lease payments over the lease term on the Consolidated Balance Sheets. In measuring the Company’s lease liabilities, the remaining lease payments are discounted to present value using a discount rate. As the rates implicit in the Company’s leases are not readily determinable, the Company uses its incremental borrowing rate based on the transactional currency of the lease and the lease term for the initial measurement of the lease right-of-use asset and the lease liability. For leases existing before the adoption of the new lease accounting standard, the Company used its incremental borrowing rate as of the date of adoption, determined using the remaining lease term as of the date of adoption. For leases commencing on or after the adoption of the new lease accounting standard, the incremental borrowing rate is determined using the remaining lease term as of the lease commencement date. The Company estimates its incremental borrowing rate on a quarterly basis, based on the rate of interest that the Company would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. The Company does not expect material changes to the underlying assumptions used to measure its lease liabilities as of January 29, 2022. An increase or decrease of 10% in the Company’s weighted-average discount rate as of January 29, 2022, would impact both the Company’s total assets and total liabilities by less than 1% and would not have a material impact on the Company’s pre-tax loss for Fiscal 2021. Table of Contents NON-GAAP FINANCIAL MEASURES This Annual Report on Form 10-K includes discussion of certain financial measures on both a GAAP and a non-GAAP basis. The Company believes that each of the non-GAAP financial measures presented in this “ ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ” is useful to investors as it provides a meaningful basis to evaluate the Company’s operating performance excluding the effect of certain items that the Company believes do not reflect its future operating outlook, such as certain asset impairment charges related to the Company’s flagship stores and significant impairments primarily attributable to the COVID-19 pandemic, therefore supplementing investors’ understanding of comparability of operations across periods. Management used these non-GAAP financial measures during the periods presented to assess the Company’s performance and to develop expectations for future operating performance. These non-GAAP financial measures should be used as a supplement to, and not as an alternative to, the Company’s GAAP financial results, and may not be calculated in the same manner as similar measures presented by other companies. Comparable sales At times, the Company provides comparable sales, defined as the year-over-year percentage change in the aggregate of (1) sales for stores that have been open as the same brand at least one year and whose square footage has not been expanded or reduced by more than 20% within the past year, with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations, and (2) digital sales with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations. Comparable sales exclude revenue other than store and digital sales. Historically, management had used comparable sales to understand the drivers of year-over-year changes in net sales as well as a performance metric for certain performance-based restricted stock units. The Company believes comparable sales can be a useful metric as it can assist investors in distinguishing the portion of the Company’s revenue attributable to existing locations from the portion attributable to the opening or closing of stores. The most directly comparable GAAP financial measure is change in net sales. In light of store closures related to COVID-19, the Company has not disclosed comparable sales for Fiscal 2021. Excluded items The following financial measures are disclosed on a GAAP basis and on an adjusted non-GAAP basis excluding the following items, as applicab Financial measures (1) Excluded items Asset impairment, exclusive of flagship store exit charges Certain asset impairment charges Operating (loss) income Certain asset impairment charges Income tax expense (2) Tax effect of pre-tax excluded items Net (loss) income and net (loss) income per share attributable to A&F (2) Pre-tax excluded items and the tax effect of pre-tax excluded items (1) Certain of these financial measures are also expressed as a percentage of net sales. (2) The tax effect of excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. Table of Contents Financial information on a constant currency basis The Company provides certain financial information on a constant currency basis to enhance investors’ understanding of underlying business trends and operating performance by removing the impact of foreign currency exchange rate fluctuations. Management also uses financial information on a constant currency basis to award employee performance-based compensation. The effect from foreign currency exchange rates, calculated on a constant currency basis, is determined by applying the current period’s foreign currency exchange rates to the prior year’s results and is net of the year-over-year impact from hedging. The per diluted share effect from foreign currency exchange rates is calculated using a 26% effective tax rate. A reconciliation of financial metrics on a constant currency basis to GAAP for Fiscal 2021 and Fiscal 2020 is as follows: (in thousands, except change in net sales, gross profit rate, operating margin and per share data) Net sales Fiscal 2021 Fiscal 2020 % Change GAAP $ 3,712,768 $ 3,125,384 19% Impact from changes in foreign currency exchange rates — (25,927) 1% Net sales on a constant currency basis $ 3,712,768 $ 3,151,311 18% Gross profit Fiscal 2021 Fiscal 2020 BPS Change (1) GAAP $ 2,311,995 $ 1,891,205 180 Impact from changes in foreign currency exchange rates — 13,865 0 Gross profit on a constant currency basis $ 2,311,995 $ 1,905,070 180 Operating (loss) income Fiscal 2021 Fiscal 2020 BPS Change (1) GAAP $ 343,084 $ (20,469) 990 Excluded items (2) (12,100) (72,937) 200 Adjusted non-GAAP $ 355,184 $ 52,468 790 Impact from changes in foreign currency exchange rates — (1,399) 10 Adjusted non-GAAP on a constant currency basis $ 355,184 $ 51,069 800 Net (loss) income per diluted share attributable to A&F Fiscal 2021 Fiscal 2020 $ Change GAAP $ 4.20 $ (1.82) $6.02 Excluded items, net of tax (2) (0.15) (1.10) 0.95 Adjusted non-GAAP $ 4.35 $ (0.73) $5.08 Impact from changes in foreign currency exchange rates — 0.01 (0.01) Adjusted non-GAAP on a constant currency basis $ 4.35 $ (0.74) $5.09 (1) The estimated basis point change has been rounded based on the percentage of net sales change. (2) Refer to “ RESULTS OF OPERATIONS ,” for details on excluded items. The tax effect of excluded items is calculated as the difference between the tax provision on a GAAP basis and an adjusted non-GAAP basis. Table of Contents Item 7A. Quantitative and Qualitative Disclosures About Market Risk INVESTMENT SECURITIES The Company maintains its cash equivalents in financial instruments, primarily money market funds and time deposits, with original maturities of three months or less. Due to the short-term nature of these instruments, changes in interest rates are not expected to materially affect the fair value of these financial instruments. Refer to Note 10, “ RABBI TRUST ASSETS ,” of the Notes to Consolidated Financial Statements included in “ ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ” of this Annual Report on Form 10-K for a discussion of the Company’s Rabbi Trust assets. INTEREST RATE RISK Prior to July 2, 2020, our exposure to market risk due to changes in interest rates related primarily to the increase or decrease in the amount of interest expense from fluctuations in the LIBO rate, or an alternate base rate associated with the Term Loan Facility and the ABL Facility. On July 2, 2020, the Company issued the Senior Secured Notes due in 2025 with a 8.75% fixed interest rate per annum and repaid all outstanding borrowings under the Term Loan Facility and the ABL Facility, thereby eliminating any then existing cash flow market risk due to changes in interest rates. The Senior Secured Notes are exposed to interest rate risk that is limited to changes in fair value. This analysis for Fiscal 2022 may differ from the actual results due to potential changes in gross borrowings outstanding under the ABL Facility and potential changes in interest rate terms and limitations described within the associated credit agreement. In July 2017, the Financial Conduct Authority (the authority that regulates LIBO rate) announced it intended to stop compelling banks to submit rates for the calculation of LIBO rate after 2021. Certain publications of the LIBO rate were phased out at the end of 2021 and all LIBO rate publications will cease after June 30, 2023. The transition from the LIBO rate to alternative rates is not expected to have a material impact on the Company’s interest expense. In addition, the Company has seen lower interest income earned on the Company’s investments and cash holdings, reflecting the lower interest rate environment. FOREIGN CURRENCY EXCHANGE RATE RISK A&F’s international subsidiaries generally operate with functional currencies other than the U.S. Dollar. Since the Company’s Consolidated Financial Statements are presented in U.S. Dollars, the Company must translate all components of these financial statements from functional currencies into U.S. Dollars at exchange rates in effect during or at the end of the reporting period. The fluctuation in the value of the U.S. Dollar against other currencies affects the reported amounts of revenues, expenses, assets and liabilities. The potential impact of foreign currency exchange rate fluctuations increases as international operations relative to domestic operations increase. A&F and its subsidiaries have exposure to changes in foreign currency exchange rates associated with foreign currency transactions and forecasted foreign currency transactions, including the purchase of inventory between subsidiaries and foreign-currency-denominated assets and liabilities. The Company has established a program that primarily utilizes foreign currency exchange forward contracts to partially offset the risks associated with the effects of certain foreign currency transactions and forecasted transactions. Under this program, increases or decreases in foreign currency exchange rate exposures are partially offset by gains or losses on foreign currency exchange forward contracts, to mitigate the impact of foreign currency exchange gains or losses. The Company does not use forward contracts to engage in currency speculation. Outstanding foreign currency exchange forward contracts are recorded at fair value at the end of each fiscal period. Foreign currency exchange forward contracts are sensitive to changes in foreign currency exchange rates. The Company assessed the risk of loss in fair values from the effect of a hypothetical 10% devaluation of the U.S. Dollar against the exchange rates for foreign currencies under contract. Such a hypothetical devaluation would decrease derivative instrument fair values by approximately $10.2 million. As the Company’s foreign currency exchange forward contracts are primarily designated as cash flow hedges of forecasted transactions, the hypothetical change in fair values would be expected to be largely offset by the net change in fair values of the underlying hedged items. Refer to Note 15, “ DERIVATIVE INSTRUMENTS ,” included in “ ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ” of this Annual Report on Form 10-K for the fair value of outstanding foreign currency exchange forward contracts included in other current assets and accrued expenses as of January 29, 2022 and January 30, 2021. For a detailed discussion of material risk factors that have the potential to cause our actual results to differ materially from our expectations, refer to “ ITEM 1A. RISK FACTORS ,” included in this Annual Report on Form 10-K. Table of Contents Item 8. Financial Statements and Supplementary Data Abercrombie & Fitch Co. Consolidated Statements of Operations and Comprehensive Income (Loss) (Thousands, except per share amounts) Fiscal 2021 Fiscal 2020 Fiscal 2019 Net sales $ 3,712,768 $ 3,125,384 $ 3,623,073 Cost of sales, exclusive of depreciation and amortization 1,400,773 1,234,179 1,472,155 Gross profit 2,311,995 1,891,205 2,150,918 Stores and distribution expense 1,429,476 1,391,584 1,551,243 Marketing, general and administrative expense 536,815 463,843 464,615 Flagship store exit (benefits) charges ( 1,153 ) ( 11,636 ) 47,257 Asset impairment, exclusive of flagship store exit (benefits) charges 12,100 72,937 19,135 Other operating income, net ( 8,327 ) ( 5,054 ) ( 1,400 ) Operating income (loss) 343,084 ( 20,469 ) 70,068 Interest expense, net 34,110 28,274 7,737 Income (loss) before income taxes 308,974 ( 48,743 ) 62,331 Income tax expense 38,908 60,211 17,371 Net income (loss) 270,066 ( 108,954 ) 44,960 L Net income attributable to noncontrolling interests 7,056 5,067 5,602 Net income (loss) attributable to A&F $ 263,010 $ ( 114,021 ) $ 39,358 Net income (loss) per share attributable to A&F Basic $ 4.41 $ ( 1.82 ) $ 0.61 Diluted $ 4.20 $ ( 1.82 ) $ 0.60 Weighted-average shares outstanding Basic 59,597 62,551 64,428 Diluted 62,636 62,551 65,778 Other comprehensive income (loss) Foreign currency translation, net of tax $ ( 22,917 ) $ 12,195 $ ( 5,080 ) Derivative financial instruments, net of tax 10,518 ( 5,616 ) ( 1,354 ) Other comprehensive (loss) income ( 12,399 ) 6,579 ( 6,434 ) Comprehensive income (loss) 257,667 ( 102,375 ) 38,526 L Comprehensive income attributable to noncontrolling interests 7,056 5,067 5,602 Comprehensive income (loss) attributable to A&F $ 250,611 $ ( 107,442 ) $ 32,924 The accompanying Notes are an integral part of these Consolidated Financial Statements. Table of Contents Abercrombie & Fitch Co. Consolidated Balance Sheets (Thousands, except par value amounts) January 29, 2022 January 30, 2021 Assets Current assets: Cash and equivalents $ 823,139 $ 1,104,862 Receivables 69,102 83,857 Inventories 525,864 404,053 Other current assets 89,654 68,857 Total current assets 1,507,759 1,661,629 Property and equipment, net 508,336 550,587 Operating lease right-of-use assets 698,231 893,989 Other assets 225,165 208,697 Total assets $ 2,939,491 $ 3,314,902 Liabilities and stockholders’ equity Current liabiliti Accounts payable $ 374,829 $ 289,396 Accrued expenses 395,815 396,365 Short-term portion of operating lease liabilities 222,823 248,846 Income taxes payable 21,773 24,792 Total current liabilities 1,015,240 959,399 Long-term liabiliti Long-term portion of operating lease liabilities 697,264 957,588 Long-term portion of borrowings, net 303,574 343,910 Other liabilities 86,089 104,693 Total long-term liabilities 1,086,927 1,406,191 Stockholders’ equity Class A Common Stock - $ 0.01 par val 150,000 shares authorized and 103,300 shares issued for all periods presented 1,033 1,033 Paid-in capital 413,190 401,283 Retained earnings 2,386,156 2,149,470 Accumulated other comprehensive loss, net of tax (“AOCL”) ( 114,706 ) ( 102,307 ) Treasury stock, at average 50,315 and 40,901 shares at January 29, 2022 and January 30, 2021, respectively ( 1,859,583 ) ( 1,512,851 ) Total A&F stockholders’ equity 826,090 936,628 Noncontrolling interests 11,234 12,684 Total stockholders’ equity 837,324 949,312 Total liabilities and stockholders’ equity $ 2,939,491 $ 3,314,902 The accompanying Notes are an integral part of these Consolidated Financial Statements. Table of Contents Abercrombie & Fitch Co. Consolidated Statements of Stockholders’ Equity (Thousands, except per share amounts) Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, February 2, 2019 66,227 $ 1,033 $ 405,379 $ 9,721 $ 2,418,544 $ ( 102,452 ) 37,073 $ ( 1,513,604 ) $ 1,218,621 Impact from adoption of the new lease accounting standard — — — — ( 75,165 ) — — — ( 75,165 ) Net income — — — 5,602 39,358 — — — 44,960 Purchase of common stock ( 3,957 ) — — — — — 3,957 ( 63,542 ) ( 63,542 ) Dividends ($ 0.80 per share) — — — — ( 51,510 ) — — — ( 51,510 ) Share-based compensation issuances and exercises 516 — ( 14,403 ) — ( 17,482 ) — ( 516 ) 25,081 ( 6,804 ) Share-based compensation expense — — 14,007 — — — — — 14,007 Derivative financial instruments, net of tax — — — — — ( 1,354 ) — — ( 1,354 ) Foreign currency translation adjustments, net of tax — — — — — ( 5,080 ) — — ( 5,080 ) Distributions to noncontrolling interests, net — — — ( 2,955 ) — — — — ( 2,955 ) Balance, February 1, 2020 62,786 $ 1,033 $ 404,983 $ 12,368 $ 2,313,745 $ ( 108,886 ) 40,514 $ ( 1,552,065 ) $ 1,071,178 Net loss — — — 5,067 ( 114,021 ) — — — ( 108,954 ) Purchase of common stock ( 1,397 ) — — — — — 1,397 ( 15,172 ) ( 15,172 ) Dividends ($ 0.28 per share) — — — — ( 12,556 ) — — — ( 12,556 ) Share-based compensation issuances and exercises 1,010 — ( 22,382 ) — ( 37,698 ) — ( 1,010 ) 54,386 ( 5,694 ) Share-based compensation expense — — 18,682 — — — — — 18,682 Derivative financial instruments, net of tax — — — — — ( 5,616 ) — — ( 5,616 ) Foreign currency translation adjustments, net of tax — — — — — 12,195 — — 12,195 Distributions to noncontrolling interests, net — — — ( 4,751 ) — — — — ( 4,751 ) Balance, January 30, 2021 62,399 $ 1,033 $ 401,283 $ 12,684 $ 2,149,470 $ ( 102,307 ) 40,901 $ ( 1,512,851 ) $ 949,312 Net income — — — 7,056 263,010 — — — 270,066 Purchase of common stock ( 10,200 ) — — — — — 10,200 ( 377,290 ) ( 377,290 ) Dividends ($ 0.00 per share) — — — — — — — — — Share-based compensation issuances and exercises 786 — ( 17,397 ) — ( 26,324 ) — ( 786 ) 30,558 ( 13,163 ) Share-based compensation expense — — 29,304 — — — — — 29,304 Derivative financial instruments, net of tax — — — — — 10,518 — — 10,518 Foreign currency translation adjustments, net of tax — — — — — ( 22,917 ) — — ( 22,917 ) Distributions to noncontrolling interests, net — — — ( 8,506 ) — — — — ( 8,506 ) Balance, January 29, 2022 52,985 $ 1,033 $ 413,190 $ 11,234 $ 2,386,156 $ ( 114,706 ) 50,315 $ ( 1,859,583 ) $ 837,324 The accompanying Notes are an integral part of these Consolidated Financial Statements. Table of Contents Abercrombie & Fitch Co. Consolidated Statements of Cash Flows (Thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Operating activities Net income (loss) $ 270,066 $ ( 108,954 ) $ 44,960 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization 144,035 166,281 173,625 Asset impairment 12,100 72,937 22,364 Loss on disposal 5,020 16,353 6,298 Deferred income taxes ( 31,922 ) 23,986 9,150 Share-based compensation 29,304 18,682 14,007 Loss on extinguishment of debt 5,347 — — Changes in assets and liabilities Inventories ( 123,221 ) 33,312 2,270 Accounts payable and accrued expenses 77,910 186,747 10,821 Operating lease right-of use assets and liabilities ( 93,827 ) ( 55,700 ) 46,442 Income taxes ( 3,086 ) 10,753 ( 5,473 ) Other assets 396 38,632 ( 20,137 ) Other liabilities ( 14,340 ) 1,889 ( 3,642 ) Net cash provided by operating activities 277,782 404,918 300,685 Investing activities Purchases of property and equipment ( 96,979 ) ( 101,910 ) ( 202,784 ) Withdrawal of funds from Rabbi Trust assets — 50,000 — Net cash used for investing activities ( 96,979 ) ( 51,910 ) ( 202,784 ) Financing activities Proceeds from issuance of senior secured notes — 350,000 — Proceeds from borrowings under the senior secured asset-based revolving credit facility — 210,000 — Repayment of borrowings under the term loan facility — ( 233,250 ) ( 20,000 ) Repayment of borrowings under the senior secured asset-based revolving credit facility — ( 210,000 ) — Purchase of senior secured notes ( 46,969 ) — — Payment of debt issuance costs and fees ( 2,016 ) ( 7,318 ) — Purchases of common stock ( 377,290 ) ( 15,172 ) ( 63,542 ) Dividends paid — ( 12,556 ) ( 51,510 ) Other financing activities ( 20,623 ) ( 11,987 ) ( 12,821 ) Net cash (used for) provided by financing activities ( 446,898 ) 69,717 ( 147,873 ) Effect of foreign currency exchange rates on cash ( 23,694 ) 9,168 ( 3,593 ) Net (decrease) increase in cash and equivalents, and restricted cash and equivalents ( 289,789 ) 431,893 ( 53,565 ) Cash and equivalents, and restricted cash and equivalents, beginning of period 1,124,157 692,264 745,829 Cash and equivalents, and restricted cash and equivalents, end of period $ 834,368 $ 1,124,157 $ 692,264 Supplemental information related to non-cash activities Purchases of property and equipment not yet paid at end of period $ 29,932 $ 16,250 $ 44,199 Operating lease right-of-use assets additions, net of terminations, impairments and other reductions $ 29,241 $ ( 38,279 ) $ 391,753 Supplemental information related to cash activities Cash paid for interest $ 28,413 $ 26,629 $ 17,514 Cash paid for income taxes $ 74,709 $ 15,210 $ 20,717 Cash received from income tax refunds $ 2,292 $ 4,650 $ 8,773 Cash paid for amounts included in measurement of operating lease liabilities, net of abatements received of $ 17.9 million and $ 30.7 million in Fiscal 2021 and 2020, respectively $ 364,842 $ 316,992 $ 422,850 The accompanying Notes are an integral part of these Consolidated Financial Statements. Table of Contents Abercrombie & Fitch Co. Index for Notes to Consolidated Financial Statements Page No. Note 1. NATURE OF BUSINESS 50 Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 50 Note 3. IMPACT OF COVID-19 59 Note 4. REVENUE RECOGNITION 60 Note 5. FAIR VALUE 61 Note 6. INVENTORIES 62 Note 7. PROPERTY AND EQUIPMENT, NET 62 Note 8. LEASES 63 Note 9. ASSET IMPAIRMENT 64 Note 10. RABBI TRUST ASSETS 64 Note 11. ACCRUED EXPENSES 65 Note 12. INCOME TAXES 65 Note 13. BORROWINGS 69 Note 14. SHARE-BASED COMPENSATION 71 Note 15. DERIVATIVE INSTRUMENTS 74 Note 16. ACCUMULATED OTHER COMPREHENSIVE LOSS 75 Note 17. SAVINGS AND RETIREMENT PLANS 76 Note 18. SEGMENT REPORTING 76 Note 19. FLAGSHIP STORE EXIT (BENEFITS) CHARGES 77 Note 20. CONTINGENCIES 77 Note 21 SUBSEQUENT EVENT 78 Table of Contents Abercrombie & Fitch Co. Notes to Consolidated Financial Statements 1. NATURE OF BUSINESS Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a global, digitally led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. The Company’s two brand-based operating segments are Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These five brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company operates primarily in North America, Europe and Asia. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The accompanying Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its financial position, results of operations and cash flows. The Company has interests in an Emirati business venture and in a Kuwaiti business venture with Majid al Futtaim Fashion L.L.C. (“MAF”) and in a United States of America (the “U.S.”) business venture with Dixar L.L.C. (“Dixar”), each of which meets the definition of a variable interest entity (“VIE”). The purpose of the business ventures with MAF is to operate stores in the United Arab Emirates and Kuwait and the purpose of the business venture with Dixar is to hold the intellectual property related to the Social Tourist brand. The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the operating results, assets and liabilities of these VIEs, with the noncontrolling interests’ (“NCI”) portions of net income presented as net income attributable to NCI on the Consolidated Statements of Operations and Comprehensive Income (Loss) and MAF’s portion of equity presented as NCI on the Consolidated Balance Sheets. Fiscal year The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a 52 week year, but occasionally gives rise to an additional week, resulting in a 53 week year. Fiscal years are designated in the Consolidated Financial Statements and notes by the calendar year in which the fiscal year commences. All references herein to the Company’s fiscal years are as follows: Fiscal year Year ended/ ending Number of weeks Fiscal 2019 February 1, 2020 52 Fiscal 2020 January 30, 2021 52 Fiscal 2021 January 29, 2022 52 Fiscal 2022 January 28, 2023 52 Use of estimates The preparation of financial statements, in conformity with U.S. generally accepted accounting principles (“GAAP”), requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved with estimates, actual results may differ. The extent to which the current outbreak of coronavirus disease (“COVID-19”) continues to impact the Company’s business and financial results will depend on numerous evolving factors including, but not limited t the duration and spread of COVID-19 and the emergence of new variants of coronavirus, the availability and acceptance of effective vaccines, boosters or medical treatments, the impact of COVID-19 on the length or frequency of store closures, and the extent to which COVID-19 impacts worldwide macroeconomic conditions including interest rates, the speed of the economic recovery, and governmental, business and consumer reactions to the pandemic. The Company’s assessment of these, as well as other factors, could impact management's estimates and result in material impacts to the Company’s consolidated financial statements in future reporting periods. Table of Contents Abercrombie & Fitch Co. Cash and equivalents A summary of cash and equivalents on the Consolidated Balance Sheets follows: (in thousands) January 29, 2022 January 30, 2021 Cash (1) $ 762,187 $ 796,994 Cash equivalents: (2) Time deposits 11,643 11,589 Money market funds 49,309 296,279 Cash and equivalents $ 823,139 $ 1,104,862 (1) Primarily consists of amounts on deposit with financial institutions. (2) Investments with original maturities of less than three months. Consolidated Statements of Cash Flows reconciliation The following table provides a reconciliation of cash and equivalents and restricted cash and equivalents to the amounts shown on the Consolidated Statements of Cash Flows: (in thousands) Location January 29, 2022 January 30, 2021 February 1, 2020 Cash and equivalents Cash and equivalents $ 823,139 $ 1,104,862 $ 671,267 Long-term restricted cash and equivalents Other assets 11,229 14,814 18,696 Short-term restricted cash and equivalents Other current assets — 4,481 2,301 Restricted cash and equivalents (1) $ 11,229 $ 19,295 $ 20,997 Cash and equivalents and restricted cash and equivalents $ 834,368 $ 1,124,157 $ 692,264 (1) Restricted cash and equivalents primarily consists of amounts on deposit with banks that are used as collateral for customary non-debt banking commitments and deposits into trust accounts to conform to standard insurance security requirements. Receivables Receivables on the Consolidated Balance Sheets primarily include credit card receivables, lessor construction allowances, value added tax (“VAT”) receivables, trade receivables, income tax receivables and other tax credits or refunds. As part of the normal course of business, the Company has approximately three to four days of proceeds from sales transactions outstanding with its third-party credit card vendors at any point. The Company classifies these outstanding balances as credit card receivables. Lessor construction allowances are recorded for certain store lease agreements for improvements completed by the Company. VAT receivables are payments the Company has made on purchases of goods that will be recovered as those goods are sold. Trade receivables are amounts billed by the Company to wholesale, franchise and licensing partners in the ordinary course of business. Income tax receivables represent refunds of certain tax payments along with net operating loss and credit carryback claims for which the Company expects to receive refunds within the next 12 months. Inventories Inventories on the Consolidated Balance Sheets are valued at the lower of cost and net realizable value on a weighted-average cost basis. The Company reduces the carrying value of inventory through a lower of cost and net realizable value adjustment, the impact of which is reflected in cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive Income (Loss). The lower of cost and net realizable value adjustment is based on the Company’s consideration of multiple factors and assumptions including demand forecasts, current sales volumes, expected sell-off activity, composition and aging of inventory, historical recoverability experience and risk of obsolescence from changes in economic conditions or customer preferences. Additionally, as part of inventory valuation, inventory shrinkage estimates based on historical trends from actual physical inventories are made each quarter that reduce the inventory value for lost or stolen items. The Company performs physical inventories on a periodic basis and adjusts the shrink estimate accordingly. Refer to Note 6, “ INVENTORIES .” The Company’s global sourcing of merchandise is generally negotiated and settled in U.S. Dollars. Other current assets Other current assets on the Consolidated Balance Sheets consists o prepaid expenses including those related to rent, information technology maintenance and taxes; current store supplies; derivative contracts; short-term restricted cash and other. Table of Contents Abercrombie & Fitch Co. Property and equipment, net Depreciation of property and equipment is computed for financial reporting purposes on a straight-line basis using the following service liv Category of property and equipment Service lives Information technology 3 - 7 years Furniture, fixtures and equipment 3 - 15 years Leasehold improvements 3 - 15 years Other property and equipment 3 - 20 years Buildings 30 years Leasehold improvements are amortized over either their respective lease terms or their service lives, whichever is shorter. The cost of assets sold or retired and the related accumulated depreciation are removed from the accounts with any resulting gain or loss included in net income on the Consolidated Statements of Operations and Comprehensive Income (Loss). Maintenance and repairs are charged to expense as incurred. Major remodels and improvements that extend the service lives of the related assets are capitalized. The Company capitalizes certain direct costs associated with the development and purchase of internal-use software within property and equipment. Capitalized costs are amortized on a straight-line basis over the estimated useful lives of the software, generally not exceeding seven years. Refer to Note 7, “ PROPERTY AND EQUIPMENT, NET .” Leases The Company determines if an arrangement is an operating lease at inception. For new operating leases, the Company recognizes an asset for the right to use a leased asset and a liability based on the present value of remaining lease payments over the lease term on the lease commencement date. The commencement date for new leases is when the lessor makes the leased asset available for use by the Company, typically the possession date. As the rates implicit in the Company’s leases are not readily determinable, the Company uses its incremental borrowing rate based on the transactional currency of the operating lease and the lease term for the initial measurement of the operating lease right-of-use asset and liability. For operating leases existing before the adoption of the current lease accounting standard, the Company used its incremental borrowing rate as of the date of adoption, determined using the remaining lease term as of the date of adoption. For operating leases commencing on or after the adoption of the current lease accounting standard, the incremental borrowing rate is determined using the remaining lease term as of the lease commencement date. The Company has elected to combine lease and nonlease components for all current classes of underlying leased assets. The measurement of operating lease right-of-use assets and liabilities includes amounts related t • Lease payments made prior to the lease commencement date; • Incentives from landlords received by the Company for signing a lease, including construction allowances or deferred lease credits paid to the Company by landlords towards construction and tenant improvement costs, which are presented as a reduction to the right-of-use asset recorded; • Fixed payments related to operating lease components, such as rent escalation payments scheduled at the lease commencement date; • Fixed payments related to nonlease components, such as taxes, insurance, and maintenance costs; and • Unamortized initial direct costs incurred in conjunction with securing a lease, including key money, which are amounts paid directly to a landlord in exchange for securing the lease, and leasehold acquisition costs, which are amounts paid to parties other than the landlord, such as an existing tenant, to secure the desired lease. The measurement of operating lease right-of-use assets and liabilities excludes amounts related t • Costs expected to be incurred to return a leased asset to its original condition, also referred to as asset retirement obligations, which are classified within other liabilities on the Consolidated Balance Sheets; • Variable payments related to operating lease components, such as contingent rent payments made by the Company based on performance, the expense of which is recognized in the period incurred on the Consolidated Statements of Operations and Comprehensive Income (Loss); • Variable payments related to nonlease components, such as taxes, insurance, and maintenance costs, the expense of which is recognized in the period incurred in the Consolidated Statements of Operations and Comprehensive Income (Loss); and • Leases not related to Company-operated retail stores with an initial term of 12 months or less, the expense of which is recognized in the period incurred in the Consolidated Statements of Operations and Comprehensive Income (Loss). Table of Contents Abercrombie & Fitch Co. Certain of the Company’s operating leases include options to extend the lease or to terminate the lease. The Company assesses these operating leases and, depending on the facts and circumstances, may or may not include these options in the measurement of the Company’s operating lease right-of-use assets and liabilities. Generally, the Company’s options to extend its operating leases are at the Company’s sole discretion and at the time of lease commencement are not reasonably certain of being exercised. There may be instances in which a lease is being renewed on a month-to-month basis and, in these instances, the Company will recognize lease expense in the period incurred in the Consolidated Statements of Operations and Comprehensive Income (Loss) until a new agreement has been executed. Upon the signing of the renewal agreement, the Company recognizes an asset for the right to use the leased asset and a liability based on the present value of remaining lease payments over the lease term. Amortization and interest expense related to operating lease right-of-use assets and liabilities are generally calculated on a straight-line basis over the lease term. Amortization and interest expense related to previously impaired operating lease right-of-use assets are calculated on a front-loaded pattern. Depending on the nature of the operating lease, amortization and interest expense are primarily recorded within stores and distribution expense, marketing, general and administrative expense, or flagship store exit (benefits) charges on the Consolidated Statements of Operations and Comprehensive Income (Loss). The Company’s operating lease agreements do not contain any material residual value guarantees or material restrictive covenants. In addition, the Company does not have any sublease arrangements with any related party. The Company adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) and its subsequent amendments effective February 3, 2019. Adoption of this standard resulted in the Company’s total assets and total liabilities on the Consolidated Balance Sheet each increasing by approximately $ 1.2 billion on the date of adoption, primarily due to the recognition of operating lease right-of-use assets and liabilities. Certain of these newly-established operating lease right-of-use assets related to previously impaired stores and, therefore, were assessed for impairment upon adoption. To the extent that the initial carrying amount for each such lease right-of-use asset was greater than its fair value, an asset impairment charge was recognized as an adjustment to the opening balance of retained earnings on the date of adoption. As a result, the Company recognized a cumulative adjustment decreasing the opening balance of retained earnings by $ 0.1 billion on the date of adoption. Refer to Note 8, “ LEASES .” Long-lived asset impairment For the purposes of asset impairment, the Company’s long-lived assets, primarily operating lease right-of-use assets, leasehold improvements, furniture, fixtures and equipment, are grouped with other assets and liabilities at the store level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. On at least a quarterly basis, management reviews the Company’s asset groups for indicators of impairment, which include, but are not limited to, material declines in operational performance, a history of losses, an expectation of future losses, adverse market conditions, store closure or relocation decisions, and any other events or changes in circumstances that would indicate the carrying amount of an asset group might not be recoverable. If an asset group displays an indicator of impairment, it is tested for recoverability by comparing the sum of the estimated future undiscounted cash flows attributable to the asset group to the carrying amount of the asset group. This recoverability test requires management to make assumptions and judgments related, but not limited, to management’s expectations for future cash flows from operating the store. The key assumption used in developing these projected cash flows used in the recoverability test is estimated sales growth rate. If the sum of the estimated future undiscounted cash flows attributable to an asset group is less than its carrying amount, and it is determined that the carrying amount of the asset group is not recoverable, management determines if there is an impairment loss by comparing the carrying amount of the asset group to its fair value. Fair value of an asset group is based on the highest and best use of the asset group, often using a discounted cash flow model that utilizes Level 3 fair value inputs. The key assumptions used in the Company’s fair value analysis are estimated sales growth rate and comparable market rents. An impairment loss is recognized based on the excess of the carrying amount of the asset group over its fair value. Refer to Note 9, “ ASSET IMPAIRMENT .” Other assets Other assets on the Consolidated Balance Sheets consist primarily of the Company’s trust-owned life insurance policies held in the irrevocable rabbi trust (the “Rabbi Trust”), deferred tax assets, long-term deposits, intellectual property, long-term restricted cash and equivalents, long-term supplies and various other assets. Table of Contents Abercrombie & Fitch Co. Rabbi Trust assets The Rabbi Trust includes amounts, restricted in their use, to meet funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II and the Supplemental Executive Retirement Plan. The Rabbi Trust assets primarily consist of trust-owned life insurance policies which are recorded at cash surrender value and are included in other assets on the Consolidated Balance Sheets. The change in cash surrender value of the life insurance policies in the Rabbi Trust is recorded in interest expense, net on the Consolidated Statements of Operations and Comprehensive Income (Loss). Refer to Note 10, “ RABBI TRUST ASSETS .” Intellectual property Intellectual property primarily includes trademark assets associated with the Company’s international operations, consisting of finite-lived and indefinite-lived intangible assets. The Company’s finite-lived intangible assets are amortized over a useful life of 10 to 20 years. Income taxes Income taxes are calculated using the asset and liability method. Deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using current enacted tax rates in effect for the years in which those temporary differences are expected to reverse. Inherent in the determination of the Company’s income tax liability and related deferred income tax balances are certain judgments and interpretations of enacted tax law and published guidance with respect to applicability to the Company’s operations. The Company is subject to audit by taxing authorities, usually several years after tax returns have been filed, and the taxing authorities may have differing interpretations of tax laws. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company records tax expense or benefit that does not relate to ordinary income in the current fiscal year discretely in the period in which it occurs. Examples of such types of discrete items include, but are not limited t changes in estimates of the outcome of tax matters related to prior years, assessments of valuation allowances, return-to-provision adjustments, tax-exempt income, the settlement of tax audits and changes in tax legislation and/or regulations. Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The amount recognized is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement. The Company’s effective tax rate includes the impact of reserve provisions and changes to reserves on uncertain tax positions that are not more likely than not to be sustained upon examination as well as related interest and penalties. A number of years may elapse before a particular matter, for which the Company has established a reserve, is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes that its reserves reflect the probable outcome of known tax contingencies. Unfavorable settlement of any particular issue may require use of the Company’s cash. Favorable resolution would be recognized as a reduction to the Company’s effective tax rate in the period of resolution. The Company recognizes accrued interest and penalties related to uncertain tax positions as a component of income tax expense on the Consolidated Statements of Operations and Comprehensive Income (Loss). Refer to Note 12, “ INCOME TAXES .” Foreign currency translation and transactions The functional currencies of the Company’s foreign subsidiaries are generally the respective local currencies in the countries in which they operate. Assets and liabilities denominated in foreign currencies are translated into U.S. Dollars (the reporting currency) at the exchange rate prevailing at the balance sheet date. Equity accounts denominated in foreign currencies are translated into U.S. Dollars at historical exchange rates. Revenues and expenses denominated in foreign currencies are translated into U.S. Dollars at the monthly average exchange rate for the period. Gains and losses resulting from foreign currency transactions are included in other operating income, net; whereas, translation adjustments and gains and losses associated with measuring inter-company loans of a long-term investment nature are reported as an element of other comprehensive income (loss). Table of Contents Abercrombie & Fitch Co. Derivative instruments The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes. In order to qualify for hedge accounting treatment, a derivative instrument must be considered highly effective at offsetting changes in either the hedged item’s cash flows or fair value. Additionally, the hedge relationship must be documented to include the risk management objective and strategy, the hedging instrument, the hedged item, the risk exposure, and how hedge effectiveness will be assessed prospectively and retrospectively. The extent to which a hedging instrument has been, and is expected to continue to be, effective at offsetting changes in fair value or cash flows is assessed and documented at least quarterly. If the underlying hedged item is no longer probable of occurring, hedge accounting is discontinued. For derivative instruments that either do not qualify for hedge accounting or are not designated as hedges, all changes in the fair value of the derivative instrument are recognized in earnings. For qualifying cash flow hedges, the change in the fair value of the derivative instrument is recorded as a component of other comprehensive income (loss) (“OCI”) and recognized in earnings when the hedged cash flows affect earnings. If the cash flow hedge relationship is terminated, the derivative instrument gains or losses that are deferred in OCI will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, or a two-month period thereafter, the derivative instrument gains or losses are immediately recognized in earnings, except as allowable under certain extenuating circumstances. The Company uses derivative instruments, primarily forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign-currency-denominated intercompany inventory transactions with foreign subsidiaries before inventory is sold to third parties. Fluctuations in exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These forward contracts typically have a maximum term of twelve months. The conversion of the inventory to cost of sales, exclusive of depreciation and amortization, will result in the reclassification of related derivative gains and losses that are reported in AOCL on the Consolidated Balance Sheets into earnings. The Company also uses foreign currency exchange forward contracts to hedge certain foreign-currency-denominated net monetary assets and liabilities, such as cash balances, receivables and payables. Fluctuations in foreign currency exchange rates result in transaction gains and losses being recorded in earnings as monetary assets and liabilities are remeasured at the spot exchange rate at the Company’s fiscal month-end or upon settlement. The Company has chosen not to apply hedge accounting to these foreign currency exchange forward contracts because there are no differences in the timing of gain or loss recognition on the hedging instruments and the hedged items. The Company presents its derivative assets and derivative liabilities at their gross fair values within other current assets and accrued liabilities, respectively, on the Consolidated Balance Sheets. However, the Company’s derivative instruments allow net settlements under certain conditions. Refer to Note 15, “ DERIVATIVE INSTRUMENTS . ” Stockholders’ equity A summary of the Company’s Class A Common Stock (the “Common Stock”), $ 0.01 par value, and Class B Common Stock, $ 0.01 par value, follows: (in thousands) January 29, 2022 January 30, 2021 Class A Common Stock Shares authorized 150,000 150,000 Shares issued 103,300 103,300 Shares outstanding 52,985 62,399 Class B Common Stock (1) Shares authorized 106,400 106,400 (1) No shares were issued or outstanding as of each of January 29, 2022 and January 30, 2021 . Table of Contents Abercrombie & Fitch Co. Holders of Class A Common Stock generally have identical rights to holders of Class B Common Stock, except holders of Class A Common Stock are entitled to one vote per share while holders of Class B Common Stock are entitled to three votes per share on all matters submitted to a vote of stockholders. Revenue recognition The Company recognizes revenue from product sales when control of the good is transferred to the customer, generally upon pick up at, or shipment from, a Company location. The Company provides shipping and handling services to customers in certain transactions under its digital operations. Revenue associated with the related shipping and handling obligations is deferred until the obligation is fulfilled, typically upon the customer’s receipt of the merchandise. The related shipping and handling costs are classified in stores and distribution expense on the Consolidated Statements of Operations and Comprehensive Income (Loss). Revenue is recorded net of estimated returns, associate discounts, promotions and other similar customer incentives. The Company estimates reserves for sales returns based on historical experience among other factors. The sales return reserve is classified in accrued expenses on the Consolidated Balance Sheets. The Company accounts for gift cards sold to customers by recognizing an unearned revenue liability at the time of sale, which is recognized as net sales when redeemed by the customer or when the Company has determined the likelihood of redemption to be remote, referred to as gift card breakage. Gift card breakage is recognized proportionally with gift card redemptions in net sales. Gift cards sold to customers do not expire or lose value over periods of inactivity and the Company is not required by law to escheat the value of unredeemed gift cards to the jurisdictions in which it operates. The Company also maintains loyalty programs, which primarily provide customers with the opportunity to earn points toward future merchandise discount rewards with qualifying purchases. The Company accounts for expected future reward redemptions by recognizing an unearned revenue liability as customers accumulate points, which remains until revenue is recognized at the earlier of redemption or expiration. Unearned revenue liabilities related to the Company’s gift card program and loyalty programs are classified in accrued expenses on the Consolidated Balance Sheets and are typically recognized as revenue within a 12-month period. For additional details on the Company’s unearned revenue liabilities related to the Company’s gift card and loyalty programs, refer to Note 4, “ REVENUE RECOGNITION .” The Company also recognizes revenue under wholesale arrangements, which revenue is generally recognized upon shipment, when control passes to the wholesale partner. Revenue from the Company’s franchise and license arrangements, primarily royalties earned upon the sale of merchandise, is generally recognized at the time merchandise is sold to the franchisees’ retail customers or to the licensees’ wholesale customers. The Company does not include tax amounts collected from customers on behalf of third parties, including sales and indirect taxes, in net sales. All revenues are recognized in net sales in the Consolidated Statements of Operations and Comprehensive Income (Loss). For a discussion of the disaggregation of revenue, refer to Note 18, “ SEGMENT REPORTING . ” Cost of sales, exclusive of depreciation and amortization Cost of sales, exclusive of depreciation and amortization on the Consolidated Statements of Operations and Comprehensive Income (Loss), primarily consists of cost incurred to ready inventory for sale, including product costs, freight, and import costs, as well as provisions for reserves for shrink and lower of cost and net realizable value. Gains and losses associated with the effective portion of designated foreign currency exchange forward contracts related to the hedging of intercompany inventory transactions are also recognized in cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive Income (Loss). The Company’s cost of sales, exclusive of depreciation and amortization, and consequently gross profit, may not be comparable to those of other retailers, as inclusion of certain costs vary across the industry. Some retailers include all costs related to buying, design and distribution operations in cost of sales, while others may include either all or a portion of these costs in selling, general and administrative expenses. Table of Contents Abercrombie & Fitch Co. Stores and distribution expense Stores and distribution expense on the Consolidated Statements of Operations and Comprehensive Income (Loss) primarily consists o store payroll; store management; operating lease costs; utilities and other landlord expenses; depreciation and amortization, except for those amounts included in marketing, general and administrative expense; repairs and maintenance and other store support functions; marketing and other costs related to the Company’s digital operations; shipping and handling costs; and distribution center (“DC”) expense. A summary of shipping and handling costs, which includes costs incurred to store, move and prepare product for shipment and costs incurred to physically move product to our customers across channels, follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Shipping and handling costs $ 306,222 $ 291,534 $ 224,604 Marketing, general and administrative expense Marketing, general and administrative expense on the Consolidated Statements of Operations and Comprehensive Income (Loss) primarily consists o home office compensation and marketing, except for those departments included in stores and distribution expense; information technology; outside services, such as legal and consulting; depreciation, primarily related to IT and other home office assets; amortization related to trademark assets; costs to design and develop the Company’s merchandise; relocation; recruiting; and travel expenses. Other operating income, net Other operating income, net on the Consolidated Statements of Operations and Comprehensive Income (Loss) primarily consists of gains and losses resulting from foreign-currency-denominated transactions. A summary of foreign-currency-denominated transactions, including those related to derivative instruments, follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Foreign-currency-denominated transaction gains $ 4,232 $ 3,933 $ 348 Interest expense, net Interest expense primarily consisted of interest expense on the Company’s long-term borrowings outstanding. Interest income primarily consisted of interest income earned on the Company’s investments and cash holdings and realized gains from the Rabbi Trust assets. A summary of interest expense, net follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Interest expense $ 37,958 $ 31,726 $ 19,908 Interest income ( 3,848 ) ( 3,452 ) ( 12,171 ) Interest expense, net $ 34,110 $ 28,274 $ 7,737 Advertising costs Advertising costs consist primarily of paid media advertising, direct digital advertising, including e-mail distribution, digital content and in-store photography and signage. Advertising costs related specifically to digital operations are expensed as incurred and the production of in-store photography and signage is expensed when the marketing campaign commences as components of stores and distribution expense. All other advertising costs are expensed as incurred as components of marketing, general and administrative expense. A summary of advertising costs follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Advertising costs $ 204,575 $ 118,537 $ 134,058 Share-based compensation The Company issues shares of Common Stock from treasury stock upon exercise of stock appreciation rights and vesting of Table of Contents Abercrombie & Fitch Co. restricted stock units, including those converted from performance share awards. As of January 29, 2022, the Company had sufficient treasury stock available to settle restricted stock units and stock appreciation rights outstanding. Settlement of stock awards in Common Stock also requires that the Company have sufficient shares available in stockholder-approved plans at the applicable time. In the event, at each reporting date as of which share-based compensation awards remain outstanding, there are not sufficient shares of Common Stock available to be issued under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Directors (as amended effective May 20, 2020, the “2016 Directors LTIP”) and the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates (as amended effective June 9, 2021, the “2016 Associates LTIP”), or under a successor or replacement plan, the Company may be required to designate some portion of the outstanding awards to be settled in cash, which would result in liability classification of such awards. The fair value of liability-classified awards would be re-measured each reporting date until such awards no longer remain outstanding or until sufficient shares of Common Stock become available to be issued under the existing plans or under a successor or replacement plan. As long as the awards are required to be classified as a liability, the change in fair value would be recognized in current period expense based on the requisite service period rendered. Fair value of both service-based and performance-based restricted stock units is calculated using the market price of the underlying Common Stock on the date of grant reduced for anticipated dividend payments on unvested shares. In determining fair value, the Company does not take into account performance-based vesting requirements. Performance-based vesting requirements are taken into account in determining the number of awards expected to vest. For market-based restricted stock units, fair value is calculated using a Monte Carlo simulation with the number of shares that ultimately vest dependent on the Company’s total stockholder return measured against the total stockholder return of a select group of peer companies over a three-year period. For awards with performance-based or market-based vesting requirements, the number of shares that ultimately vest can vary from 0% to 200% of target depending on the level of achievement of performance criteria. The Company estimates the fair value of stock appreciation rights using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the stock appreciation rights and expected future stock price volatility over the expected term. Estimates of expected terms, which represent the expected periods of time the Company believes stock appreciation rights will be outstanding, are based on historical experience. Estimates of expected future stock price volatility are based on the volatility of the Company’s Common Stock price for the most recent historical period equal to the expected term of the stock appreciation rights, as appropriate. The Company calculates the volatility as the annualized standard deviation of the differences in the natural logarithms of the weekly closing price of the Common Stock, adjusted for stock splits and dividends. Service-based restricted stock units are expensed on a straight-line basis over the award’s requisite service period. Performance-based restricted stock units subject to graded vesting are expensed on an accelerated attribution basis. Performance share award expense is primarily recognized in the performance period of the award’s requisite service period. Market-based restricted stock units without graded vesting features are expensed on a straight-line basis over the award’s requisite service period. Compensation expense for stock appreciation rights is recognized on a straight-line basis over the award’s requisite service period. The Company adjusts share-based compensation expense on a quarterly basis for actual forfeitures. For awards that are expected to result in a tax deduction, a deferred tax asset is recorded in the period in which share-based compensation expense is recognized. A current tax deduction arises upon the issuance of restricted stock units and performance share awards or the exercise of stock options and stock appreciation rights and is principally measured at the award’s intrinsic value. If the tax deduction differs from the recorded deferred tax asset, the excess tax benefit or deficit associated with the tax deduction is recognized within income tax expense. Refer to Note 14, “ SHARE-BASED COMPENSATION .” Table of Contents Abercrombie & Fitch Co. Net income (loss) per share attributable to A&F Net income (loss) per basic and diluted share attributable to A&F is computed based on the weighted-average number of outstanding shares of Class A Common Stock. Additional information pertaining to net income (loss) per share attributable to A&F follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Shares of Common Stock issued 103,300 103,300 103,300 Weighted-average treasury shares ( 43,703 ) ( 40,749 ) ( 38,872 ) Weighted-average — basic shares 59,597 62,551 64,428 Dilutive effect of share-based compensation awards 3,039 — 1,350 Weighted-average — diluted shares 62,636 62,551 65,778 Anti-dilutive shares (1) 1,002 3,270 1,462 (1) Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net income (loss) per diluted share because the impact would have been anti-dilutive. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can achieve up to 200% of their target vesting amount and are reflected at the maximum vesting amount less any dilutive portion. Recent accounting pronouncements The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those not expected to have or that did not have a material impact on the Company’s consolidated financial statements. 3. IMPACT OF COVID-19 In March 2020, the COVID-19 outbreak was declared to be a global pandemic by the World Health Organization. In response to COVID-19, certain governments imposed travel restrictions and local statutory quarantines and the Company experienced widespread temporary store closures. As of January 29, 2022, all U.S. Company-operated stores were fully open for in-store service; however, temporary store closures have subsequently been mandated in certain parts of the APAC region in response to COVID-19. During periods of temporary store closures, reductions in revenue have not been offset by proportional decreases in expense, as the Company continues to incur store occupancy costs such as operating lease costs, net of rent abatements agreed upon during the period, depreciation expense, and certain other costs such as compensation, net of government payroll relief, and administrative expenses resulting in a negative effect on the relationship between the Company’s costs and revenues. Although U.S. and global economies have begun to recover from the COVID-19 pandemic as many health and safety restrictions have been lifted and vaccine distribution has increased, certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time, including labor shortages and disruptions of global supply chains and temporary store closures. The extent of future impacts of COVID-19 on the Company’s business, including the duration and impact on overall customer demand, are uncertain as current circumstances are dynamic and depend on future developments, including, but not limited to, the emergence of new variants of coronavirus, such as the Delta and Omicron variants, and the availability and acceptance of effective vaccines, boosters or medical treatments. The Company plans to follow the guidance of local governments to evaluate whether future store closures will be necessary. During Fiscal 2020, the Company experienced a material adverse impact to net sales across brands and regions as a result of widespread temporary store closures in response to COVID-19, which was not offset by year-over-year digital sales growth. As a result, the Company recognized $ 14.8 million of charges to reduce the carrying value of inventory, primarily as a result of COVID-19 and the temporary closure of the Company’s stores, in cost of sales, exclusive of depreciation and amortization on the Consolidated Statements of Operations and Comprehensive Income (Loss). Further negative developments in the COVID-19 pandemic could result in additional charges to reduce the carrying value of inventory. As a result of COVID-19, the Company suspended certain rent payments for periods of store closures, and continues to engage with its landlords to find a mutually beneficial and agreeable path forward. As of January 29, 2022 and January 30, 2021, the Company had $ 13.5 million and $ 24.2 million, respectively, related to suspended rent payments classified within accrued expenses on the Consolidated Balance Sheets. The Company obtained rent abatements of $ 17.9 million and $ 30.7 million, respectively, during Fiscal 2021 and Fiscal 2020. The majority of the benefits related to these abatements was recognized within variable lease cost during the applicable periods. Table of Contents Abercrombie & Fitch Co. During Fiscal 2021 and Fiscal 2020, the Company recognized qualified payroll-related credits reducing payroll expenses by approximately $ 5.6 million and $ 18.1 millions, respectively, in the Consolidated Statements of Operations and Comprehensive Income. There are also instances where governments have provided wage subsidies through direct payments to the Company’s associates. In these instances, no benefits are recognized on the Consolidated Statements of Operations and Comprehensive Income (Loss), but the Company does see a reduction in expense incurred. The Company also intends to continue to defer qualified payroll and other tax payments as permitted by applicable government laws and regulations. The Company has recognized asset impairment charges related to the Company’s operating lease right-of-use assets and property and equipment, which were principally the result of the impact of COVID-19 on store cash flows. Refer to Note 9, “ ASSET IMPAIRMENT ,” for additional information. The Company has also experienced other material impacts as a result of COVID-19, such as the establishment of deferred tax valuation allowances and other tax charges. Refer to Note 12, “ INCOME TAXES ,” for additional information. In March 2020, in an effort to improve the Company’s near-term cash position, as a precautionary measure in response to COVID-19, the Company borrowed $ 210.0 million under its senior secured asset-based revolving credit facility (the “ABL Facility”) and withdrew the majority of excess funds from the overfunded Rabbi Trust assets, providing the Company with $ 50.0 million of additional cash. In July 2020, the Company took additional actions to preserve liquidity in light of the continued global uncertainty then presented by COVID-19, and completed a private offering of $ 350.0 million aggregate principal amount of senior secured notes (the “Senior Secured Notes”). The Company used the net proceeds of such offering to repay all outstanding borrowings under the Company’s term loan facility (the “Term Loan Facility”), to repay a portion of the outstanding borrowings under the ABL Facility and to pay fees and expenses in connection with such repayments and the offering. Refer to Note 13 “ BORROWINGS ,” for additional information. As of January 29, 2022, the Company had liquidity of $ 1.1 billion as compared to liquidity of $ 1.3 billion as of January 30, 2021, comprised of cash and equivalents and borrowing available to the Company under the ABL Facility. 4. REVENUE RECOGNITION Disaggregation of revenue All revenues are recognized in net sales in the Consolidated Statements of Operations and Comprehensive Income (Loss). For information regarding the disaggregation of revenue, refer to Note 18, “ SEGMENT REPORTING . ” Contract liabilities The following table details certain contract liabilities representing unearned revenue as of January 29, 2022 and January 30, 2021: (in thousands) January 29, 2022 January 30, 2021 Gift card liability $ 36,984 $ 28,561 Loyalty programs liability 22,757 20,426 The following table details recognized revenue associated with the Company’s gift card program and loyalty programs for Fiscal 2021 and Fiscal 2020: (in thousands) Fiscal 2021 Fiscal 2020 Revenue associated with gift card redemptions and gift card breakage $ 80,088 $ 58,400 Revenue associated with reward redemptions and breakage related to the Company’s loyalty programs 45,417 37,042 Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Revenue recognition ,” for discussion regarding significant accounting policies related to the Company’s revenue recognition. Table of Contents Abercrombie & Fitch Co. 5. FAIR VALUE Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows: • Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets that the Company can access at the measurement date. • Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly. • Level 3—inputs to the valuation methodology are unobservable. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The three levels of the hierarchy and the distribution of the Company’s assets and liabilities that are measured at fair value on a recurring basis, were as follows: Assets and Liabilities at Fair Value as of January 29, 2022 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 49,309 $ 11,643 $ — $ 60,952 Derivative instruments (2) — 4,973 — 4,973 Rabbi Trust assets (3) 1 62,272 — 62,273 Restricted cash equivalents (1) 5,391 2,326 — 7,717 Total assets $ 54,701 $ 81,214 $ — $ 135,915 Assets and Liabilities at Fair Value as of January 30, 2021 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 296,279 $ 11,589 $ — $ 307,868 Derivative instruments (2) — 79 — 79 Rabbi Trust assets (3) 1 60,789 — 60,790 Restricted cash equivalents (1) 2,943 7,775 — 10,718 Total assets $ 299,223 $ 80,232 $ — $ 379,455 Liabiliti Derivative instruments (2) $ — $ 4,694 $ — $ 4,694 Total liabilities $ — $ 4,694 $ — $ 4,694 (1) Level 1 assets consisted of investments in money market funds and U.S. treasury bills. Level 2 assets consisted of time deposits. (2) Level 2 assets and liabilities consisted primarily of foreign currency exchange forward contracts. (3) Level 1 assets consisted of investments in money market funds. Level 2 assets consisted of trust-owned life insurance policies. The Company’s Level 2 assets and liabilities consisted o • Trust-owned life insurance policies, which were valued using the cash surrender value of the life insurance policies; • Time deposits, which were valued at cost, approximating fair value, due to the short-term nature of these investments; and • Derivative instruments, primarily foreign currency exchange forward contracts, which were valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk. Fair value of long-term borrowings The Company’s borrowings under the Senior Secured Notes are carried at historical cost in the Consolidated Balance Sheets. The carrying amount and fair value of the Company’s long-term gross borrowings were as follows: (in thousands) January 29, 2022 January 30, 2021 Gross borrowings outstanding, carrying amount $ 307,730 $ 350,000 Gross borrowings outstanding, fair value 327,732 389,813 Table of Contents Abercrombie & Fitch Co. 6. INVENTORIES Inventories consisted o (in thousands) January 29, 2022 January 30, 2021 Inventories at original cost $ 549,030 $ 429,993 L Lower of cost and net realizable value adjustment ( 17,196 ) ( 21,076 ) L Shrink estimate ( 5,970 ) ( 4,864 ) Inventories (1) $ 525,864 $ 404,053 (1) Includes $ 142.7 million and $ 106.0 million of inventory in transit, merchandise owned by the Company that has not yet been received at a Company distribution center, as of January 29, 2022 and January 30, 2021, respectively. A summary of the Company’s vendors based on location and the percentage of dollar cost of merchandise receipts during Fiscal 2021, and Fiscal 2020 follows: % of Total Company Merchandise Receipts (1) Location Fiscal 2021 Fiscal 2020 Vietnam 36 % 41 % China (2) 14 12 Cambodia 16 15 Other (3) 34 32 Total 100 % 100 % (1) Calculated as the cost of merchandise receipts from all vendors within a country during the respective fiscal year divided by cost of total merchandise receipts during the respective fiscal year . (2) Only a portion of the Company’s total merchandise sourced from China is subject to the additional U.S. tariffs on imported consumer goods that were effective beginning in Fiscal 2019. The Company estimates approximately 9 %, 7 % and 15 % of total merchandise receipts were directly imported to the U.S. from China in Fiscal 2021, Fiscal 2020 and Fiscal 2019, respectively. (3) No country included within this category sourced more than 10% of total merchandise receipts during any fiscal year presented above . Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Inventories ,” for discussion regarding significant accounting policies related to the Company’s inventories. 7. PROPERTY AND EQUIPMENT, NET Property and equipment, net consisted o (in thousands) January 29, 2022 January 30, 2021 Land $ 28,599 $ 28,599 Buildings 233,523 230,104 Furniture, fixtures and equipment 622,912 608,210 Information technology 643,244 607,062 Leasehold improvements 913,729 990,238 Construction in progress 9,483 22,744 Other 2,003 2,000 Total 2,453,493 2,488,957 L Accumulated depreciation ( 1,945,157 ) ( 1,938,370 ) Property and equipment, net $ 508,336 $ 550,587 Depreciation expense for Fiscal 2021, Fiscal 2020 and Fiscal 2019 was $ 141.4 million, $ 167.2 million and $ 172.6 million, respectively. Refer to Note 9, “ ASSET IMPAIRMENT ,” for details related to property and equipment impairment charges incurred during Fiscal 2021, Fiscal 2020 and Fiscal 2019. Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Property and equipment, net ,” for discussion regarding significant accounting policies related to the Company’s property and equipment, net. Table of Contents Abercrombie & Fitch Co. 8. LEASES The Company is a party to leases related to its Company-operated retail stores as well as for certain of its distribution centers, office space, information technology and equipment. The following table provides a summary of the Company’s operating lease costs for Fiscal 2021, Fiscal 2020 and Fiscal 2019 : (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Single lease cost (1) $ 272,246 $ 346,178 $ 427,982 Variable lease cost (2) 110,889 65,310 143,472 Operating lease right-of-use asset impairment (3) 9,509 57,026 15,812 Sublease Income ( 4,292 ) — — Total operating lease cost $ 388,352 $ 468,514 $ 587,266 (1) Includes amortization and interest expense associated with operating lease right-of-use assets and the impact from remeasurement of operating lease liabilities. (2) Includes variable payments related to both lease and nonlease components, such as contingent rent payments made by the Company based on performance, and payments related to taxes, insurance, and maintenance costs, as well as $ 14.1 million and $ 30.1 million of rent abatements in Fiscal 2021 and Fiscal 2020, respectively, related to the effects of the COVID-19 pandemic that resulted in lease concessions with total payments required by the modified contract being substantially the same as or less than total payments required by the original contract. The total benefit related to rent abatements recognized during Fiscal 2021 and Fiscal 2020 was $ 17.9 million and $ 30.7 million respectively. (3) Refer to Note 9, “ ASSET IMPAIRMENT ,” for details related to operating lease right-of-use asset impairment charges. The following table provides the weighted-average remaining lease term of the Company’s operating leases and the weighted-average discount rate used to calculate the Company’s operating lease liabilities as of January 29, 2022 and January 30, 2021: January 29, 2022 January 30, 2021 Weighted-average remaining lease term (years) 5.3 5.7 Weighted-average discount rate 5.6 % 5.6 % The following table provides a maturity analysis of the Company’s operating lease liabilities, based on undiscounted cash flows, as of January 29, 2022: (in thousands) January 29, 2022 Fiscal 2022 $ 266,893 Fiscal 2023 215,464 Fiscal 2024 152,282 Fiscal 2025 131,972 Fiscal 2026 106,873 Fiscal 2027 and thereafter 190,984 Total undiscounted operating lease payments 1,064,468 L Imputed interest ( 144,381 ) Present value of operating lease liabilities $ 920,087 The Company has suspended rent payments for a number of stores that were closed as a result of COVID-19, and has been successful in obtaining certain rent abatements and landlord concessions of rent payable. Refer to Note 3. “ IMPACT OF COVID-19 ”, for additional details. During Fiscal 2020, the Company entered into a sublease agreement with a third party for the remaining lease term of one of its European Abercrombie & Fitch flagship store locations upon its closure. As of January 29, 2022, the Company's subleased property had a remaining lease term of 5.8 years with the sublease term from February 1, 2021 through November 30, 2027. Future minimum tenant operating lease payments remaining under this sublease as of January 29, 2022 were $ 24.0 million. The Company had minimum commitments related to operating lease contracts that have not yet commenced, primarily for its Company-operated retail stores, of approximately $ 17.4 million as of January 29, 2022. Table of Contents Abercrombie & Fitch Co. 9. ASSET IMPAIRMENT The following table provides additional details related to long-lived asset impairment char (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Operating lease right-of-use asset impairment (1) $ 9,509 $ 57,026 $ 15,812 Property and equipment asset impairment 2,591 15,911 6,552 Total asset impairment $ 12,100 $ 72,937 $ 22,364 (1) Includes $3.2 million of operating lease right-of-use asset impairment included in flagship store exit charges on the Consolidated Statement of Operations and Comprehensive Income for Fiscal 2019. Refer to Note 19, “ FLAGSHIP STORE EXIT (BENEFITS) CHARGES .” Asset impairment charges for Fiscal 2021 were related to certain of the Company’s stores across brands, geographies and store formats. The impairment charges for Fiscal 2021 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $ 18.1 million, including $ 15.6 million related to operating lease right-of-use assets. Asset impairment charges for Fiscal 2020 were principally the result of the impact of COVID-19 and were related to certain of the Company’s stores across brands, geographies and store formats. The impairment charges for Fiscal 2020 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $ 95.0 million, including $ 87.2 million related to operating lease right-of-use assets. Asset impairment charges for Fiscal 2019 primarily related to certain of the Company’s international flagship stores. The impairment charges for Fiscal 2019 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $ 103.4 million, including $ 99.2 million related to operating lease right-of-use assets. Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Long-lived asset impairment ,” for discussion regarding significant accounting policies related to impairment of the Company’s long-lived assets. 10. RABBI TRUST ASSETS Investments of Rabbi Trust assets consisted of the following as of January 29, 2022 and January 30, 2021: (in thousands) January 29, 2022 January 30, 2021 Trust-owned life insurance policies (at cash surrender value) $ 62,272 $ 60,789 Money market funds 1 1 Rabbi Trust assets $ 62,273 $ 60,790 Realized gains resulting from the change in cash surrender value of the Rabbi Trust assets for Fiscal 2021, Fiscal 2020 and Fiscal 2019 were as follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Realized gains related to Rabbi Trust assets $ 1,483 $ 1,740 $ 3,172 Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Rabbi Trust assets ,” for further discussion related to the Company’s Rabbi Trust assets. Table of Contents Abercrombie & Fitch Co. 11. ACCRUED EXPENSES Accrued expenses consisted o (in thousands) January 29, 2022 January 30, 2021 Accrued payroll and related costs (1) $ 90,906 $ 119,978 Accrued costs related to the Company’s DCs and digital operations 48,395 56,135 Other (2) 256,514 220,252 Accrued expenses $ 395,815 $ 396,365 (1) Accrued payroll and related costs include salaries, incentive compensation, benefits, withholdings and other payroll-related costs. (2) Other primarily includes the Company’s gift card and loyalty programs liabilities, accrued taxes, accrued rent and expenses incurred but not yet paid primarily related to outside services associated with store and home office operations and construction in progress. Refer to Note 4, “ REVENUE RECOGNITION .” 12. INCOME TAXES Impact of valuation allowances and other tax charges During Fiscal 2021, as a result of the improvement seen in business conditions, the Company recognized $ 42.5 million of tax benefits due to the release of valuation allowances, primarily in the U.S. and Germany, and a discrete tax benefit of $ 3.9 million due to a rate change in the United Kingdom The Company did not recognize income tax benefits on $ 25.3 million of pre-tax losses generated in Fiscal 2021, primarily in Switzerland, resulting in adverse tax impacts of $ 4.6 million. The Company’s effective tax rate for Fiscal 2020 was impacted by $ 101.4 million of adverse tax impacts, ultimately giving rise to income tax expense on a consolidated pre-tax loss. Further details regarding these adverse tax impacts are as follows: • Due to the significant adverse impacts of COVID-19, the Company did not recognize income tax benefits on $ 203.4 million of pre-tax losses during Fiscal 2020, resulting in an adverse tax impact of $ 39.5 million. • The Company recognized charges of $ 61.9 million related to the establishment of valuation allowances and other tax charges in certain jurisdictions during Fiscal 2020, including, but not limited to, the U.S., Switzerland, Germany and Japan, principally as a result of the significant adverse impacts of COVID-19. Swiss Tax Reform In May 2019, Switzerland voted to approve the Federal Act on Tax Reform and AHV Financing (“Swiss Tax Reform”), effective at the federal level beginning January 2020, which resulted in the abolishment of preferential tax regimes by the cantons. In addition to the abolishment of the preferential tax regimes, the cantons needed to implement new, mandatory tax provisions in their cantonal tax law which were subject to a referendum process as well.  As a result of these changes and actions taken by the Company, both of which occurred in the third quarter of Fiscal 2019, the Company increased its deferred income tax assets and liabilities, which are recorded on the Consolidated Balance Sheets within other assets and other liabilities, respectively, by $ 38.0 million during the third quarter of Fiscal 2019. In the fourth quarter of Fiscal 2019, the canton of Ticino formally enacted the tax reform effective January 1, 2020.  As a result, the tax reform went into effect on January 1, 2020. The Company decreased its deferred income tax assets and liabilities by $ 13.1 million during the fourth quarter of Fiscal 2019 for a net increase of deferred income tax assets and liabilities during Fiscal 2019 of $ 24.9 million as a result of Swiss Tax Reform. In addition, the Company incurred tax benefits in Fiscal 2019 of $ 2.9 million as a result of Swiss Tax Reform. Swiss Tax Reform did not have a material impact to the Consolidated Statements of Operations and Comprehensive Income (Loss) or the Company’s cash flows during Fiscal 2021, Fiscal 2020 or Fiscal 2019. Table of Contents Abercrombie & Fitch Co. Components of income taxes Income (loss) before income taxes consisted o (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Domestic (1) $ 283,793 $ ( 33,417 ) $ 17,590 Foreign 25,181 ( 15,326 ) 44,741 Income (loss) before income taxes $ 308,974 $ ( 48,743 ) $ 62,331 (1) Includes intercompany charges to foreign affiliates for management fees, cost-sharing, royalties and interest and excludes a portion of foreign income that is currently includable on the U.S. federal income tax return. Income tax expense (benefit) consisted o (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Curren Federal $ 51,321 $ 9,434 $ ( 2,193 ) State 14,061 3,751 1,893 Foreign 5,448 23,041 8,521 Total current $ 70,830 $ 36,226 $ 8,221 Deferr Federal (1) $ ( 15,401 ) $ ( 73,104 ) $ 29,012 State ( 8,995 ) 8,828 ( 107 ) Foreign (1) ( 7,526 ) 88,261 ( 19,755 ) Total deferred ( 31,922 ) 23,985 9,150 Income tax expense $ 38,908 $ 60,211 $ 17,371 (1) Fiscal 2020 includes federal deferred tax benefit of $79.0 million and foreign deferred tax expense of $88.6 million due to the establishment of an additional valuation allowance in Switzerland. Fiscal 2019 federal deferred tax expense included charges of $24.9 million and foreign deferred tax expense included benefits of $24.9 million as a result of Swiss Tax Reform. The Company’s earnings and profits from its foreign subsidiaries may be repatriated to the U.S., without incurring additional U.S. federal income tax. The Company determined that the balance of the Company’s undistributed earnings and profits from its foreign subsidiaries as of February 2, 2019 are considered indefinitely reinvested outside of the U.S., and if these funds were to be repatriated to the U.S., the Company would expect to incur an insignificant amount of state income taxes and foreign withholding taxes. The Company accrues for both state income taxes and foreign withholding taxes with respect to earnings and profits earned after February 2, 2019, in such a manner that these funds may be repatriated without incurring additional tax expense. Table of Contents Abercrombie & Fitch Co. Reconciliation between the statutory federal income tax rate and the effective tax rate is as follows: Fiscal 2021 Fiscal 2020 Fiscal 2019 U.S. federal corporate income tax rate 21.0 % 21.0 % 21.0 % Audit and other adjustments to prior years’ accruals, net 4.7 2.6 0.8 State income tax, net of U.S. federal income tax effect 4.4 2.6 1.9 Foreign taxation of non-U.S. operations (1) 3.5 32.7 5.5 Internal Revenue Code Section 162(m) 1.6 ( 5.5 ) 2.2 Additional U.S. taxation of non-U.S. operations 0.6 ( 0.2 ) ( 1.4 ) Permanent items 0.2 — 0.3 Net change in valuation allowances ( 19.7 ) ( 177.2 ) 8.2 Tax (benefit) expense recognized on share-based compensation (2) ( 1.3 ) ( 7.5 ) ( 0.9 ) Other statutory tax rate and law changes ( 1.2 ) 2.3 ( 0.9 ) Credit for increasing research activities ( 0.6 ) 2.6 ( 3.6 ) Net income attributable to noncontrolling interests ( 0.5 ) 2.2 ( 1.9 ) Trust-owned life insurance policies (at cash surrender value) ( 0.1 ) 0.7 ( 1.1 ) Credit items — 0.2 ( 0.8 ) Write-off of stock basis in subsidiary — — 3.2 Statutory tax rate and law changes due to Swiss Tax Reform — — ( 4.6 ) Total 12.6 % ( 123.5 ) % 27.9 % (1) U.S. branch operations in Canada and Puerto Rico were subject to tax at the full U.S. tax rates. As a result, income from these operations do not create reconciling items. Effective in 2019, only Puerto Rico continues to be a branch of the U.S. (2) Refer to Note 14, “ SHARE-BASED COMPENSATION ,” for details on discrete income tax benefits and charges related to share-based compensation awards during Fiscal 2021, Fiscal 2020, and Fiscal 2019. The impact of various tax items on the Company's effective tax rate were amplified on a percentage basis at lower levels of consolidated pre-tax income (loss) in absolute dollars. The effective tax rate remains dependent on jurisdictional mix. The taxation of non-U.S. operations line items in the table above excludes items related to the Company's non-U.S. operations reported separately in the appropriate corresponding line items. For both Fiscal 2021 and Fiscal 2020, the impact of taxation of non-U.S. operations on the Company's effective income tax rate was related to the Company's jurisdictional mix driven primarily by the Company’s operations within Switzerland. For Fiscal 2019, the impact of taxation of non-U.S. operations on the Company's effective income tax rate was primarily related to the Company's Japan subsidiary, along with the Company’s NCI. For Fiscal 2019, the Company’s Japan subsidiary earned pre-tax income of $ 12.0 million with a jurisdictional effective tax rate of 35.1 %. With respect to the NCI, the subsidiary incurred pre-tax income of $ 5.6 million with no jurisdictional tax effect. The Swiss earnings are subject to U.S. tax and the effect is included in the U.S. taxation of non-U.S. operations above. Table of Contents Abercrombie & Fitch Co. Components of deferred income tax assets and deferred income tax liabilities The effect of temporary differences which gives rise to deferred income tax assets (liabilities) were as follows: (in thousands) January 29, 2022 January 30, 2021 Deferred income tax assets: Operating lease liabilities $ 242,290 $ 311,286 Intangibles, foreign step-up in basis (1) 64,281 81,357 Net operating losses (NOL), tax credit and other carryforwards 52,970 56,341 Accrued expenses and reserves 30,026 32,649 Deferred compensation 16,050 16,294 Inventory 3,578 — Rent — 530 Other 45 2,171 Valuation allowances ( 110,057 ) ( 174,302 ) Total deferred income tax assets $ 299,183 $ 326,326 Deferred income tax liabiliti Operating lease right-of-use assets $ ( 202,916 ) $ ( 253,417 ) Property and equipment and intangibles ( 10,150 ) ( 15,328 ) Prepaid expenses ( 2,451 ) ( 387 ) Store supplies ( 1,811 ) ( 2,042 ) Undistributed profits of non-U.S. subsidiaries ( 1,082 ) ( 318 ) Rent ( 360 ) — Inventory — ( 1,499 ) U.S. offset to foreign deferred tax assets, excluding intangibles, foreign step-up in basis (2) — ( 183 ) Other ( 30 ) ( 3,499 ) Total deferred income tax liabilities $ ( 218,800 ) $ ( 276,673 ) Net deferred income tax assets (2) $ 80,383 $ 49,653 (1) The deferred tax asset relates to a step-up in basis associated with the intra-entity transfer of intangible assets to Switzerland which are being amortized for Swiss local tax purposes. As this subsidiary’s income is also taxable in the U.S., a corresponding U.S. deferred tax liability was recognized to reflect lower resulting foreign tax credit due to the amortization of the Swiss step-up in basis. Included in the liability section is the remaining portion of deferred tax liabilities which are properly categorized in the table above. In Fiscal 2020, a full valuation allowance was established in Switzerland and the corresponding US deferred tax liability was released. During Fiscal 2021 an agreement was reached with the Swiss taxing authorities to decrease the basis step up to be amortized in the future thus decreasing the deferred asset by $14.8 million. Because of the valuation allowance, there is no impact on consolidated tax expense for this agreement. (2) This table does not reflect deferred taxes classified within AOCL. As of January 29, 2022 and January 30, 2021, AOCL included deferred tax liabilities of $1.1 million and deferred tax assets of $0.9 million, respectively. As of January 29, 2022, the Company had deferred tax assets related to foreign and state NOL and credit carryforwards of $ 52.5 million and $ 0.4 million, respectively, that could be utilized to reduce future years’ tax liabilities. If not utilized, a portion of the foreign NOL carryforwards will begin to expire in 2025 and a portion of state NOL carryforwards will begin to expire in 2023. Some foreign NOLs have an indefinite carryforward period. As of January 29, 2022, the Company did not have any deferred tax assets related to federal NOL and credit carryforwards that could be utilized to reduce future years’ tax liabilities. As of January 29, 2022, valuation allowances of $ 110.1 million have been established against deferred tax assets. All valuation allowances have been reflected through the Consolidated Statements of Operations and Comprehensive (Loss) Income. The valuation allowances will remain until there is sufficient positive evidence to release them, such positive evidence would include having positive income within the jurisdiction. In such case, the Company will record an adjustment in the period in which a determination is made. The Company continues to review the need for valuation allowances on a quarterly basis. Table of Contents Abercrombie & Fitch Co. Share-based compensation Refer to Note 14, “ SHARE-BASED COMPENSATION ,” for details on income tax benefits and charges related to share-based compensation awards during Fiscal 2021, Fiscal 2020 and Fiscal 2019. Other The amount of uncertain tax positions as of January 29, 2022, January 30, 2021 and February 1, 2020, which would impact the Company’s effective tax rate if recognized and a reconciliation of the beginning and ending amounts of uncertain tax positions, excluding accrued interest and penalties, are as follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Uncertain tax positions, beginning of the year $ 995 $ 1,794 $ 478 Gross addition for tax positions of the current year 490 235 131 Gross (reduction) addition for tax positions of prior years ( 136 ) 395 1,349 Reductions of tax positions of prior years Lapses of applicable statutes of limitations ( 81 ) ( 48 ) ( 151 ) Settlements during the period ( 154 ) ( 1,381 ) ( 13 ) Uncertain tax positions, end of year $ 1,114 $ 995 $ 1,794 The IRS is currently conducting an examination of the Company’s U.S. federal income tax return for Fiscal 2021 as part of the IRS’ Compliance Assurance Process program. The IRS examinations for Fiscal 2020 and prior years have been completed. State and foreign returns are generally subject to examination for a period of three to five years after the filing of the respective return. The Company typically has various state and foreign income tax returns in the process of examination, administrative appeals or litigation. The outcome of the examinations is not expected to have a material impact on the Company’s financial statements. The Company believes that some of these audits and negotiations will conclude within the next 12 months and that it is reasonably possible the amount of uncertain income tax positions, including interest, may change by an immaterial amount due to settlement of audits and expiration of statues of limitations. The Company does not expect material adjustments to the total amount of uncertain tax positions within the next 12 months, but the outcome of tax matters is uncertain and unforeseen results can occur. Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Income taxes ,” for discussion regarding significant accounting policies related to the Company’s income taxes. 13. BORROWINGS Details on the Company’s long-term borrowings, net, as of January 29, 2022 and January 30, 2021 are as follows: (in thousands) January 29, 2022 January 30, 2021 Long-term portion of borrowings, gross at carrying amount $ 307,730 $ 350,000 Unamortized fees ( 4,156 ) ( 6,090 ) Long-term portion of borrowings, net $ 303,574 $ 343,910 Senior Secured Notes On July 2, 2020, Abercrombie & Fitch Management Co. (“A&F Management”), a wholly-owned indirect subsidiary of A&F, completed the private offering of the Senior Secured Notes, with $ 350 million aggregate principal amount due in 2025 at an offering price of 100% of the principal amount thereof. The Senior Secured Notes will mature on July 15, 2025 and bear interest at a rate of 8.75 % per annum, with semi-annual interest payments, which began in January 2021. The Senior Secured Notes were issued pursuant to an indenture, dated as of July 2, 2020, by and among A&F Management, A&F and certain of A&F’s wholly-owned subsidiaries, as guarantors, and U.S. Bank National Association (now known as U.S. Bank Trust National Association), as trustee, and as collateral agent. During Fiscal 2021, A&F Management purchased $ 42.3 million of its outstanding Senior Secured Notes and incurred $ 5.3 million of loss on extinguishment of debt, comprised of a repayment premium of $ 4.7 million and the write-off of unamortized fees of $ 0.6 million, in interest expense, net on the Consolidated Statements of Operations and Comprehensive Income (Loss). Table of Contents Abercrombie & Fitch Co. The Company used the net proceeds from the offering of the Senior Secured Notes to repay outstanding borrowings and accrued interest of $ 233.6 million and $ 110.8 million under the Term Loan Facility and the ABL Facility, respectively, with the remaining net proceeds used towards fees and expenses in connection with such repayments and the offering of the Senior Secured Notes. The Company recorded deferred financing fees associated with the issuance of the Senior Secured Notes, which are being amortized to interest expense over the contractual term of the Senior Secured Notes. ABL Facility On April 29, 2021, A&F Management, in A&F Management’s capacity as the lead borrower, and the other borrowers and guarantors party thereto, amended and restated in its entirety the Credit Agreement, dated as of August 7, 2014, as amended on September 10, 2015 and as further amended on October 19, 2017 (as amended and restated, the “Amended and Restated Credit Agreement”), among A&F Management, the other borrowers and guarantors party thereto, the lenders party thereto, Wells Fargo Bank, National Association, as administrative agent for the lenders, and the other parties thereto. The Amended and Restated Credit Agreement continues to provide for a senior secured revolving credit facility of up to $ 400.0 million (the “ABL Facility”), and (i) extends the maturity date of the ABL Facility from October 19, 2022 to April 29, 2026 ; and (ii) modifies the required fee on undrawn commitments under the ABL Facility from 0.25 % per annum to either 0.25 % or 0.375 % per annum (with the ultimate amount dependent on the conditions detailed in the Amended and Restated Credit Agreement). The Company did not have any borrowings outstanding under the ABL Facility as of January 29, 2022 or as of January 30, 2021. The ABL Facility is subject to a borrowing base, consisting primarily of U.S. inventory, with a letter of credit sub-limit of $50 million and an accordion feature allowing A&F to increase the revolving commitment by up to $100 million subject to specified conditions. The ABL Facility is available for working capital, capital expenditures and other general corporate purposes. As of January 29, 2022, the Company had availability under the ABL Facility of $ 278.3 million, net of $ 0.8 million in outstanding stand-by letters of credit. As the Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility, borrowing available to the Company under the ABL Facility was $ 248.3 million as of January 29, 2022. Obligations under the Amended ABL Facility are unconditionally guaranteed by A&F and certain of A&F’s subsidiaries. The ABL Facility is secured by a first-priority security interest in certain working capital of the borrowers and guarantors consisting of inventory, accounts receivable and certain other assets. The Amended ABL Facility is also secured by a second-priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets, intellectual property, stock of subsidiaries and certain after-acquired material real property. At the Company’s option, borrowings under the ABL Facility will bear interest at either (a) an adjusted LIBO rate plus a margin of 1.25 % to 1.50 % per annum, or (b) an alternate base rate plus a margin of 0.25 % to 0.50 % per annum. As of January 29, 2022, the applicable margins with respect to LIBO rate loans and base rate loans, including swing line loans, under the ABL Facility were 1.25 % and 0.25 % per annum, respectively, and are subject to adjustment each fiscal quarter based on average historical availability during the preceding quarter. Customary agency fees and letter of credit fees are also payable in respect of the ABL Facility. Representations, warranties and covenants The agreements related to the Senior Secured Notes and the ABL Facility contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of the Company and its subsidiaries t grant or incur liens; incur, assume or guarantee additional indebtedness; sell or otherwise dispose of assets, including capital stock of subsidiaries; make investments in certain subsidiaries; pay dividends, make distributions or redeem or repurchase capital stock; change the nature of their business; and consolidate or merge with or into, or sell substantially all of the Company’s or A&F Management’s assets to, another entity. The Senior Secured Notes are guaranteed on a senior secured basis, jointly and severally, by A&F and each of the existing and future wholly-owned domestic restricted subsidiaries of A&F that guarantee or will guarantee A&F Management’s ABL Facility or certain future capital markets indebtedness. The Company was in compliance with all debt covenants under the agreements related to the Senior Secured Notes and the ABL Facility as of January 29, 2022. Table of Contents Abercrombie & Fitch Co. 14. SHARE-BASED COMPENSATION Plans As of January 29, 2022, the Company had two primary share-based compensation pla (i) the 2016 Directors LTIP, with 900,000 shares of the Company’s Common Stock authorized for issuance, under which the Company is authorized to grant restricted stock, restricted stock units, stock appreciation rights, stock options and deferred stock awards to non-associate members of the Company’s Board of Directors; and (ii) the 2016 Associates LTIP, with 10,350,000 shares of the Company’s Common Stock authorized for issuance, under which the Company is authorized to grant restricted stock, restricted stock units, performance share awards, stock appreciation rights and stock options to associates of the Company. The Company also has outstanding shares from four other share-based compensation plans under which the Company granted restricted stock units, performance share awards, stock appreciation rights and stock options to associates of the Company and restricted stock units, stock options and deferred stock awards to non-associate members of the Company’s Board of Directors in prior years. No new shares may be granted under these previously-authorized plans and any outstanding awards continue in effect in accordance with their respective terms. The 2016 Directors LTIP, a stockholder-approved plan, permits the Company to annually grant awards to non-associate directors, subject to the following limits: • For non-associate directo awards with an aggregate fair market value on the date of the grant of no more than $ 300,000 ; • For the non-associate director occupying the role of Non-Executive Chairperson of the Board (if any): additional awards with an aggregate fair market value on the date of grant of no more than $ 500,000 ; and • For the non-associate director occupying the role of Executive Chairperson of the Board (if any): additional awards with an aggregate fair market value on the date of grant of no more than $ 2,500,000 . Under the 2016 Directors LTIP, restricted stock units are subject to a minimum vesting period ending no sooner than the earlier of (i) the first anniversary of the grant date or (ii) the date of the next regularly scheduled annual meeting of stockholders held after the grant date. Any stock appreciation rights or stock options granted under this plan have the same minimum vesting period requirements as restricted stock units and, in addition, must have a term that does not exceed a period of ten years from the grant date, subject to forfeiture under the terms of the 2016 Directors LTIP. The 2016 Associates LTIP, a stockholder-approved plan, permits the Company to annually grant one or more types of awards covering up to an aggregate for all awards of 1.0 million of underlying shares of the Company’s Common Stock to any associate of the Company. Under the 2016 Associates LTIP, for restricted stock units that have performance-based vesting, performance must be measured over a period of at least one year and for restricted stock units that do not have performance-based vesting, vesting in full may not occur more quickly than in pro-rata installments over a period of three years from the date of the grant, with the first installment vesting no sooner than the first anniversary of the date of the grant. In addition, any stock options or stock appreciation rights granted under this plan must have a minimum vesting period of one year and a term that does not exceed a period of ten years from the grant date, subject to forfeiture under the terms of the 2016 Associates LTIP. Each of the 2016 Directors LTIP and the 2016 Associates LTIP provides for accelerated vesting of awards if there is a change of control and certain other conditions specified in each plan are met. Table of Contents Abercrombie & Fitch Co. Financial statement impact The following table details share-based compensation expense and the related income tax benefit for Fiscal 2021, Fiscal 2020 and Fiscal 2019: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Share-based compensation expense $ 29,304 $ 18,682 $ 14,007 Income tax benefit associated with share-based compensation expense recognized during the period (1) 3,338 — 2,649 (1) No income tax benefit was recognized during Fiscal 2020 due to the establishment of a valuation allowance. The following table details discrete income tax benefits and charges related to share-based compensation awards during Fiscal 2021, Fiscal 2020 and Fiscal 2019: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Income tax discrete benefits (charges) realized for tax deductions related to the issuance of shares during the period $ 4,198 $ ( 1,719 ) $ 1,156 Income tax discrete charges realized upon cancellation of stock appreciation rights during the period ( 204 ) ( 1,943 ) ( 611 ) Total income tax discrete benefits (charges) related to share-based compensation awards $ 3,994 $ ( 3,662 ) $ 545 The following table details the amount of employee tax withheld by the Company upon the issuance of shares associated with restricted stock units vesting and the exercise of stock appreciation rights for the Fiscal 2021, Fiscal 2020 and Fiscal 2019: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Employee tax withheld upon issuance of shares (1) $ 13,163 $ 5,694 $ 6,804 (1) Classified within other financing activities on the Consolidated Statements of Cash Flows. Restricted stock units The following table summarizes activity for restricted stock units for Fiscal 2021: Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Number of Underlying Shares Weighted- Average Grant Date Fair Value Number of Underlying Shares (1) Weighted- Average Grant Date Fair Value Number of Underlying Shares (1) Weighted- Average Grant Date Fair Value Unvested at January 30, 2021 3,037,098 $ 11.62 297,216 $ 22.43 721,879 $ 21.46 Granted 730,446 32.80 157,645 32.09 78,827 50.31 Adjustments for performance achievement — — ( 106,715 ) 29.92 ( 6,084 ) 33.69 Vested ( 1,089,706 ) 12.26 — — ( 100,634 ) 33.69 Forfeited ( 145,598 ) 16.67 ( 7,997 ) 29.92 ( 13,804 ) 25.13 Unvested at January 29, 2022 (1) 2,532,240 $ 17.16 340,149 $ 27.08 680,184 $ 22.81 (1) Unvested shares related to restricted stock units with performance-based and market-based vesting conditions are reflected at 100 % of their target vesting amount in the table above. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can be achieved at up to 200% of their target vesting amount. The following table details unrecognized compensation cost and the remaining weighted-average period over which these costs are expected to be recognized for restricted stock units as of January 29, 2022: (in thousands) Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Unrecognized compensation cost $ 28,333 $ — $ 14,173 Remaining weighted-average period cost is expected to be recognized (years) 1.2 0.0 0.8 Table of Contents Abercrombie & Fitch Co. Additional information pertaining to restricted stock units for Fiscal 2021, Fiscal 2020 and Fiscal 2019 follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Service-based restricted stock units: Total grant date fair value of awards granted $ 23,959 $ 19,843 $ 16,175 Total grant date fair value of awards vested 13,360 14,083 13,630 Total intrinsic value of awards vested 36,507 8,147 18,596 Performance-based restricted stock units: Total grant date fair value of awards granted 5,059 — 5,391 Total grant date fair value of awards vested — 4,635 — Market-based restricted stock units: Total grant date fair value of awards granted 3,966 8,443 4,176 Total grant date fair value of awards vested 3,390 4,132 511 Total intrinsic value of awards vested 3,335 3,263 181 The weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during Fiscal 2021, Fiscal 2020 and Fiscal 2019 were as follows: Fiscal 2021 Fiscal 2020 Fiscal 2019 Grant date market price $ 31.78 $ 12.31 $ 25.34 Fair value 49.81 16.24 36.24 Assumptio Price volatility 66 % 67 % 57 % Expected term (years) 2.9 2.4 2.9 Risk-free interest rate 0.3 % 0.2 % 2.2 % Dividend yield — — 3.2 Average volatility of peer companies 72.0 % 66.0 % 40.0 % Average correlation coefficient of peer companies 0.4694 0.4967 0.2407 Stock appreciation rights The following table summarizes stock appreciation rights activity for Fiscal 2021: Number of Underlying Shares Weighted-Average Exercise Price Aggregate Intrinsic Value Weighted-Average Remaining Contractual Life (years) Outstanding at January 30, 2021 384,757 $ 33.04 Granted — — Exercised ( 111,868 ) 26.95 Forfeited or expired ( 36,750 ) 54.73 Outstanding at January 29, 2022 236,139 $ 32.55 $ 1,276,809 2.3 Stock appreciation rights exercisable at January 29, 2022 236,139 $ 32.55 $ 1,276,809 2.3 No stock appreciation rights were exercised during Fiscal 2020. The grant date fair value of awards exercised during Fiscal 2021 and Fiscal 2019 follows: (in thousands) Fiscal 2021 Fiscal 2019 Total grant date fair value of awards exercised $ 1,069 $ 626 Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Share-based compensation ,” for discussion regarding significant accounting policies related to share-based compensation. Table of Contents Abercrombie & Fitch Co. 15. DERIVATIVE INSTRUMENTS As of January 29, 2022, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all, of forecasted foreign-currency-denominated intercompany inventory transactions, the resulting settlement of the foreign-currency-denominated intercompany accounts receivable, or (in thousands) Notional  Amount (1) Euro $ 60,962 British pound 32,044 Canadian dollar 10,026 Japanese yen 4,471 (1) Amounts reported are the U.S. Dollar notional amounts outstanding as of January 29, 2022. The fair value of derivative instruments is determined using quoted market prices of the same or similar instruments, adjusted for counterparty risk. The location and amounts of derivative fair values of foreign currency exchange forward contracts on the Consolidated Balance Sheets as of January 29, 2022 and January 30, 2021 were as follows: (in thousands) Location January 29, 2022 January 30, 2021 Location January 29, 2022 January 30, 2021 Derivatives designated as cash flow hedging instruments Other current assets $ 4,973 $ 79 Accrued expenses $ — $ 4,694 Refer to Note 5, “ FAIR VALUE , ” for further discussion of the determination of the fair value of derivative instruments. Additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts designated as cash flow hedging instruments for Fiscal 2021, Fiscal 2020 and Fiscal 2019 follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Gain recognized in AOCL (1) $ 11,987 $ 7,619 $ 7,495 Gain reclassified from AOCL into cost of sales, exclusive of depreciation and amortization (2) 1,263 13,235 9,160 (1) Amount represents the change in fair value of derivative instruments. As a result of COVID-19 in Fiscal 2020, there was a significant change in the expected timing of previously hedged intercompany sales transactions, resulting in a dedesignation of the related hedge instruments. At the time of dedesignation of these hedges, they were in a net gain position of approximately $ 12.6 million. Due to the extenuating circumstances leading to dedesignation, gains associated with these hedges at the time of dedesignation were deferred in AOCL until being reclassified into cost of goods sold, exclusive of depreciation and amortization when the originally forecasted transactions occurred and the hedged items affected earnings. During Fiscal 2020 and subsequent to the dedesignation of these hedges, these hedge contracts were settled. (2) Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive Income (Loss) when the hedged item affected earnings, which was when merchandise was converted to cost of sales, exclusive of depreciation and amortization. Substantially all of the unrealized gains or losses related to foreign currency exchange forward contracts designated as cash flow hedging instruments as of January 29, 2022 will be recognized within the Consolidated Statements of Operations and Comprehensive Income (Loss) over the next 12 months. Additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts not designated as hedging instruments for Fiscal 2021, Fiscal 2020 and Fiscal 2019 follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Gain (loss) recognized in other operating income, net $ 1,205 $ 742 $ ( 298 ) Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Derivative instruments ,” for discussion regarding significant accounting policies related to the Company’s derivative instruments. Table of Contents Abercrombie & Fitch Co. 16. ACCUMULATED OTHER COMPREHENSIVE LOSS For Fiscal 2021, the activity in AOCL was as follows: Fiscal 2021 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at January 30, 2021 $ ( 97,772 ) $ ( 4,535 ) $ ( 102,307 ) Other comprehensive (loss) income before reclassifications ( 22,917 ) 11,987 ( 10,930 ) Reclassified gain from AOCL (1) — ( 1,263 ) ( 1,263 ) Tax effect — ( 206 ) ( 206 ) Other comprehensive income (loss) after reclassifications ( 22,917 ) 10,518 ( 12,399 ) Ending balance at January 29, 2022 $ ( 120,689 ) $ 5,983 $ ( 114,706 ) (1) Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive (Loss) Income. For Fiscal 2020, the activity in AOCL was as follows: Fiscal 2020 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at February 1, 2020 $ ( 109,967 ) $ 1,081 $ ( 108,886 ) Other comprehensive income before reclassifications 12,195 7,619 19,814 Reclassified gain from AOCL (1) — ( 13,235 ) ( 13,235 ) Tax effect — — — Other comprehensive income (loss) after reclassifications (2) 12,195 ( 5,616 ) 6,579 Ending balance at January 30, 2021 $ ( 97,772 ) $ ( 4,535 ) $ ( 102,307 ) (1) Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive Income (Loss). (2) No income tax benefit was recognized during Fiscal 2020 due to the establishment of a valuation allowance. Fo r Fiscal 2019, the activity in AOCL was as follows: Fiscal 2019 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at February 2, 2019 $ ( 104,887 ) $ 2,435 $ ( 102,452 ) Other comprehensive (loss) income before reclassifications ( 5,080 ) 7,495 2,415 Reclassified gain from AOCL (1) — ( 9,160 ) ( 9,160 ) Tax effect — 311 311 Other comprehensive (loss) income after reclassifications ( 5,080 ) ( 1,354 ) ( 6,434 ) Ending balance at February 1, 2020 $ ( 109,967 ) $ 1,081 $ ( 108,886 ) (1) Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive Income (Loss). Table of Contents Abercrombie & Fitch Co. 17. SAVINGS AND RETIREMENT PLANS The Company maintains the Abercrombie & Fitch Co. Savings and Retirement Plan, a qualified plan. All U.S. associates are eligible to participate in this plan if they are at least 21 years of age. In addition, the Company maintains the Abercrombie & Fitch Nonqualified Savings and Supplemental Retirement Plan, comprised of two sub-plans (Plan I and Plan II). Plan I contains contributions made through December 31, 2004, while Plan II contains contributions made on and after January 1, 2005. Participation in these plans is based on service and compensation. The Company’s contributions to these plans are based on a percentage of associates’ eligible annual compensation. The cost of the Company’s contributions to these plans was $ 15.4 million, $ 14.1 million and $ 14.8 million for Fiscal 2021, Fiscal 2020 and Fiscal 2019, respectively. In addition, the Company maintains the Supplemental Executive Retirement Plan which provides retirement income to its former Chief Executive Officer for life, based on averaged compensation before retirement, including base salary and cash incentive compensation. As of January 29, 2022 and January 30, 2021, the Company has recorded $ 8.4 million and $ 9.2 million, respectively, in other liabilities on the Consolidated Balance Sheets related to future Supplemental Executive Retirement Plan distributions. 18. SEGMENT REPORTING The Company’s two operating segments are brand-bas Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These two operating segments have similar economic characteristics, classes of consumers, products, production and distribution methods, operate in the same regulatory environments, and have been aggregated into one reportable segment. Amounts shown below include net sales from wholesale, franchise and licensing operations, which are not a significant component of total revenue, and are aggregated within their respective operating segment and geographic area. The Company’s net sales by operating segment for Fiscal 2021, Fiscal 2020 and Fiscal 2019 were as follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Hollister $ 2,147,979 $ 1,834,349 $ 2,158,514 Abercrombie 1,564,789 1,291,035 1,464,559 Total $ 3,712,768 $ 3,125,384 $ 3,623,073 Net sales by geographic area are presented by attributing revenues to an individual country on the basis of the country in which the merchandise was sold for in-store purchases and on the basis of the shipping location provided by customers for digital orders. The Company’s net sales by geographic area for Fiscal 2021, Fiscal 2020 and Fiscal 2019 were as follows: (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 U.S. $ 2,652,158 $ 2,127,403 $ 2,410,802 EMEA 755,072 709,451 822,202 APAC 171,701 176,636 264,895 Other 133,837 111,894 125,174 Total international $ 1,060,610 $ 997,981 $ 1,212,271 Total $ 3,712,768 $ 3,125,384 $ 3,623,073 The Company’s long-lived assets and intellectual property, which primarily relates to trademark assets associated with the Company’s international operations, by geographic area as of January 29, 2022 and January 30, 2021 were as follows: (in thousands) January 29, 2022 January 30, 2021 U.S. $ 849,298 $ 963,555 EMEA 272,348 350,136 APAC 83,830 120,256 Other 23,599 33,575 Total international $ 379,777 $ 503,967 Total $ 1,229,075 $ 1,467,522 Table of Contents Abercrombie & Fitch Co. 19. FLAGSHIP STORE EXIT (BENEFITS) CHARGES Global Store Network Optimization Reflecting a continued focus on one of the Company’s key transformation initiatives ‘Global Store Network Optimization,’ the Company continues to pivot away from its large format flagship stores and strives to open smaller, more productive omnichannel focused brand experiences. As a result, the Company has closed certain of its flagship stores and may have additional closures as it executes against this strategy. The Company recognizes impacts related to the exit of its flagship stores in flagship store exit (benefits) charges on the Consolidated Statements of Operations and Comprehensive Income (Loss). Details of the (benefits) charges incurred during Fiscal 2021, Fiscal 2020 and Fiscal 2019 related to this initiative fol (in thousands) Fiscal 2021 Fiscal 2020 Fiscal 2019 Operating lease cost $ ( 841 ) $ ( 6,959 ) $ 46,716 Gain on lease assignment — ( 5,237 ) — Asset disposals and other store-closure benefits (1) ( 514 ) ( 2,658 ) ( 1,687 ) Employee severance and other employee transition costs 202 3,218 2,228 Total flagship store exit (benefits) charges $ ( 1,153 ) $ ( 11,636 ) $ 47,257 (1) Amounts represent costs incurred in returning the store to its original condition, including updates to previous accruals for asset retirement obligations and costs to remove inventory and store assets. During Fiscal 2021, the Company finalized an agreement with and paid its landlord partner to settle all remaining obligations related to the SoHo Hollister flagship store in New York City, which closed during the second quarter of Fiscal 2019. Prior to this new agreement, the Company was required to make payments in aggregate of $ 80.1 million pursuant to the lease agreements through the fiscal year ending January 30, 2029 (“Fiscal 2028”). The new agreement resulted in an acceleration of payments and provided for a discount resulting in a reduction of operating lease liabilities of $ 65.0 million and a cash outflow of $ 63.8 million to settle all remaining obligations related to this location. This cash outflow was classified within operating lease right-of-use assets and liabilities within operating activities on the Consolidated Statement of Cash Flows. The Company recognized a gain of $ 0.9 million in flagship store exit benefits on the Consolidated Statement of Operations and Comprehensive Income (Loss) related to this transaction. As the Company continues its ‘Global Store Network Optimization’ efforts, it may incur future cash expenditures or incremental charges or realize benefits not currently contemplated due to events that may occur as a result of, or that are associated with, previously announced flagship store closures and flagship store closures that have not yet been finalized. At this time, the Company is not able to quantify the amount of future impacts, including any cash expenditures that may take place in future periods resulting from any potential flagship store closures given the unpredictable nature of lease exit negotiations and ultimate lease renewal decisions. 20. CONTINGENCIES The Company is a defendant in lawsuits and other adversarial proceedings arising in the ordinary course of business. The Company’s legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes estimated liabilities for the outcome of litigation where losses are deemed probable and the amount of loss, or range of loss, is reasonably estimable. The Company also determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that a loss is reasonably possible and it is able to determine such estimates. Based on currently available information, the Company cannot estimate a range of reasonably possible losses in excess of the accrued charges for legal contingencies. In addition, the Company has not established accruals for certain claims and legal proceedings pending against the Company where it is not possible to reasonably estimate the outcome or potential liability, and the Company cannot estimate a range of reasonably possible losses for these legal matters. Actual liabilities may differ from the amounts recorded, due to uncertainties regarding final settlement agreement negotiations, court approvals and the terms of any approval by the courts, and there can be no assurance that final resolution of legal matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts. Table of Contents Abercrombie & Fitch Co. 21. SUBSEQUENT EVENT Subsequent to end of Fiscal 2021 and through the period ending March 25, 2022, the Company repurchased 2.7 million shares of common stock at an average price of $ 30.14 per share. Shares were repurchased under the previously announced $ 500 million share repurchase authorization. The timing and amount of any future share repurchases will depend on various factors, including market and business conditions. Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Abercrombie & Fitch Co. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Abercrombie & Fitch Co. and its subsidiaries (the “Company”) as of January 29, 2022 and January 30, 2021, and the related consolidated statements of operations and comprehensive income (loss), of stockholders’ equity and of cash flows for each of the three years in the period ended January 29, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 29, 2022 and January 30, 2021, and the results of its operations and its cash flows for each of the three years in the period ended January 29, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases on February 3, 2019. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Table of Contents Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Impairment of Long-Lived Assets – Stores As described in Notes 2, 7 and 9 to the consolidated financial statements, the Company’s consolidated property and equipment, net balance was $508.3 million and consolidated operating lease right-of-use assets balance was $698.2 million as of January 29, 2022. During fiscal 2021, the Company recognized long-lived asset store impairment charges of $12.1 million. The Company’s long-lived assets, primarily operating lease right-of-use assets, leasehold improvements, furniture, fixtures and equipment, are grouped with other assets and liabilities at the store level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. On at least a quarterly basis, management reviews the Company’s asset groups for indicators of impairment, which include, but are not limited to, material declines in operational performance, a history of losses, an expectation of future losses, adverse market conditions, store closure or relocation decisions, and any other events or changes in circumstances that would indicate the carrying amount of an asset group might not be recoverable. If an asset group displays an indicator of impairment, it is tested for recoverability by comparing the sum of the estimated future undiscounted cash flows attributable to the asset group to the carrying amount of the asset group. This recoverability test requires management to make assumptions and judgments related, but not limited, to management’s expectations for future cash flows from operating the store. The key assumption used in developing these projected cash flows used in the recoverability test is estimated sales growth rate. If the sum of the estimated future undiscounted cash flows attributable to an asset group is less than its carrying amount, and it is determined that the carrying amount of the asset group is not recoverable, management determines if there is an impairment loss by comparing the carrying amount of the asset group to its fair value. Fair value of an asset group is based on the highest and best use of the asset group, often using a discounted cash flow model that utilizes Level 3 fair value inputs. The key assumptions used in the Company’s fair value analysis are estimated sales growth rate and comparable market rents. An impairment loss is recognized based on the excess of the carrying amount of the asset group over its fair value. The principal considerations for our determination that performing procedures relating to the impairment of long-lived assets - stores is a critical audit matter are (i) the significant judgment by management when developing the future undiscounted cash flows attributable to an asset group when testing for recoverability and when determining the fair value of the asset groups to measure for impairment; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to estimated sales growth rate when developing the future undiscounted cash flows, and comparable market rents when estimating the fair value; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s long-lived assets - stores recoverability test and determination of the fair value of the asset groups. These procedures also included, among others (i) testing management’s process for developing the future undiscounted cash flows attributable to an asset group when testing for recoverability and when determining the fair value of the asset groups to measure for impairment; (ii) evaluating the appropriateness of the models used by management in determining the fair value of the asset groups; (iii) testing the completeness and accuracy of underlying data used in the models; and (iv) evaluating the reasonableness of the significant assumptions related to estimated sales growth rate when developing the future undiscounted cash flows and comparable market rents when estimating the fair value. Evaluating management’s assumptions related to estimated sales growth rate and comparable market rents involved evaluating whether the assumptions used by management were reasonable considering the current and past performance of the asset groups and the consistency with evidence obtained in other areas of the audit as it relates to estimated sales growth rate and consistency with external market data as it relates to estimated sales growth rate and comparable market rents. Professionals with specialized skill and knowledge were used to assist in the evaluation of the reasonableness of the comparable market rents significant assumption. /s/ PricewaterhouseCoopers LLP Columbus, Ohio March 28, 2022 We have served as the Company’s auditor since 1996. Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A.    Controls and Procedures DISCLOSURE CONTROLS AND PROCEDURES A&F maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in the reports that A&F files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to A&F’s management, including A&F’s Principal Executive Officer and A&F’s Principal Financial Officer and Principal Accounting Officer, as appropriate to allow timely decisions regarding required disclosure. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met. A&F’s management, including the Chief Executive Officer of A&F (who serves as Principal Executive Officer of A&F) and the Executive Vice President and Chief Financial Officer of A&F (who serves as Principal Financial Officer and Principal Accounting Officer of A&F), evaluated the effectiveness of A&F’s disclosure controls and procedures as of January 29, 2022. The Chief Executive Officer of A&F (in such individual’s capacity as the Principal Executive Officer of A&F) and the Executive Vice President and Chief Financial Officer of A&F (in such individual’s capacity as the Principal Financial Officer of A&F) concluded that A&F’s disclosure controls and procedures were effective at a reasonable level of assurance as of January 29, 2022, the end of the period covered by this Annual Report on Form 10-K. MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of A&F is responsible for establishing and maintaining adequate internal control over financial reporting. A&F’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. With the participation of the Chief Executive Officer of A&F and the Executive Vice President and Chief Financial Officer of A&F, management evaluated the effectiveness of A&F’s internal control over financial reporting as of January 29, 2022 using criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the assessment of A&F’s internal control over financial reporting, under the criteria described in the preceding sentence, management has concluded that, as of January 29, 2022, A&F’s internal control over financial reporting was effective. The effectiveness of A&F’s internal control over financial reporting as of January 29, 2022 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There have been no changes in A&F’s internal control over financial reporting during the quarter ended January 29, 2022 that have materially affected, or are reasonably likely to materially affect, A&F’s internal control over financial reporting. Item 9B.    Other Information None. Table of Contents Item 9C.    Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance DIRECTORS, EXECUTIVE OFFICERS AND PERSONS NOMINATED OR CHOSEN TO BECOME DIRECTORS OR EXECUTIVE OFFICERS Information concerning directors and executive officers of A&F as well as persons nominated or chosen to become directors or executive officers is incorporated by reference from the text to be included under the caption “Proposal 1 — Election of Directors” in A&F’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 8, 2022 and from the text under the caption “INFORMATION ABOUT OUR EXECUTIVE OFFICERS” within “ ITEM 1. BUSINESS ” in PART I of this Annual Report on Form 10-K. Compliance with Section 16(a) of the Exchange Act Information concerning beneficial ownership reporting compliance under Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated by reference from the text to be included under the caption “Ownership of our Shares — Delinquent Section 16(a) Reports ” in A&F’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 8, 2022. CODE OF BUSINESS CONDUCT AND ETHICS The Board of Directors has adopted the Abercrombie & Fitch Co. Code of Business Conduct and Ethics, which is available on the “Corporate Governance” page within the “ Our Company” section of the Company’s website at corporate.abercrombie.com. AUDIT AND FINANCE COMMITTEE Information concerning A&F’s Audit and Finance Committee, including the determination of A&F’s Board of Directors that the Audit and Finance Committee has at least one “audit committee financial expert” (as defined under applicable SEC rules) serving on the Audit and Finance Committee, is incorporated by reference from the text to be included under the captions “Corporate Governance — Committees of the Board and Meeting Attendance — Committees of the Board” and “Audit and Finance Committee Matters” in A&F’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 8, 2022. PROCEDURES BY WHICH STOCKHOLDERS MAY RECOMMEND NOMINEES TO A&F’S BOARD OF DIRECTORS Information concerning the procedures by which stockholders of A&F may recommend nominees to A&F’s Board of Directors is incorporated by reference from the text to be included under the captions “Corporate Governance — Director Nominations — Stockholder Recommendations for Director Candidates,” “Corporate Governance — Director Qualifications and Consideration of Director Candidates,” Stockholder Proposals for 2023 Annual Meeting” and “Additional Information About Our Annual Meeting and Voting — How do I nominate a director using the ‘Proxy Access’ provisions under the Company’s Bylaws?” in A&F’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 8, 2022. The procedures by which stockholders may recommend nominees to A&F’s Board of Directors have not materially changed from those described in A&F’s definitive Proxy Statement for the Annual Meeting of Stockholders held on June 9, 2021. Table of Contents Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the text to be included under the captions “Corporate Governance — Board Role in Risk Oversight,” “Compensation of Directors,” “Compensation Discussion and Analysis,” “Report of the Compensation and Human Capital Committee on Executive Compensation,” and “Executive Compensation Tables” in A&F’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 8, 2022. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information concerning the security ownership of certain beneficial owners and management is incorporated by reference from the text to be included under the caption “Ownership of Our Shares” in A&F’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 8, 2022. Information regarding the number of shares of Common Stock of A&F to be issued and remaining available under equity compensation plans of A&F as of January 29, 2022 is incorporated by reference from the text to be included under the caption “Equity Compensation Plans” in A&F’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 8, 2022. Item 13. Certain Relationships and Related Transactions, and Director Independence Information concerning certain relationships and transactions involving the Company and certain related persons within the meaning of Item 404(a) of SEC Regulation S-K as well as information concerning A&F’s policies and procedures for the review, approval or ratification of transactions with related persons is incorporated by reference from the text to be included under the caption “Corporate Governance — Director Independence and Related Person Transactions” in A&F’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 8, 2022. Information concerning the independence of the directors of A&F is incorporated by reference from the text to be included under the captions “Corporate Governance — Board Leadership Structure,” “Corporate Governance — Committees of the Board and Meeting Attendance,” and “Corporate Governance — Director Independence and Related Person Transactions” in A&F’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 8, 2022. Item 14. Principal Accountant Fees and Services Information concerning the pre-approval policies and procedures of A&F’s Audit and Finance Committee and the fees for services rendered by the Company’s principal independent registered public accounting firm is incorporated by reference from the text to be included under the caption “Audit and Finance Committee Matters -- Audit Fees” in A&F’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 8, 2022. Table of Contents PART IV Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as a part of this Annual Report on Form 10-K: (1) Consolidated Financial Statements: Consolidated Statements of Operations and Comprehensive Income (Loss) for the fiscal years ended January 29, 2022, January 30, 2021 and February 1, 2020. Consolidated Balance Sheets at January 29, 2022 and January 30, 2021. Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 29, 2022, January 30, 2021 and February 1, 2020. Consolidated Statements of Cash Flows for the fiscal years ended January 29, 2022, January 30, 2021 and February 1, 2020. Notes to Consolidated Financial Statements. Report of Independent Registered Public Accounting Firm — PricewaterhouseCoopers LLP. (PCAOB ID 238 ) (2) Consolidated Financial Statement Schedul All financial statement schedules for which provision is made in the applicable accounting regulations of the SEC are omitted because the required information is either not applicable or not material. (3) Exhibits: The documents listed in the Index to Exhibits that immediately precedes the Signatures page of this Annual Report on Form 10-K are filed or furnished with this Annual Report on Form 10-K as exhibits or incorporated into this Annual Report on Form 10-K by reference as noted. Each management contract or compensatory plan or arrangement is identified as such in the Index to Exhibits. (b) The documents listed in the Index to Exhibits that immediately precedes the Signatures page of this Annual Report on Form 10-K are filed or furnished with this Annual Report on Form 10-K as exhibits or incorporated into this Annual Report on Form 10-K by reference. (c) Financial Statement Schedules None Item 16. Form 10-K Summary None. Table of Contents Index to Exhibits Exhibit Document 3.1 Amended and Restated Certificate of Incorporation of A&F as filed with the Delaware Secretary of State on August 27, 1996, incorporated herein by reference to Exhibit 3.1 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended November 2, 1996 (File No. 001-12107). 3.2 Certificate of Designation of Series A Participating Cumulative Preferred Stock of A&F as filed with the Delaware Secretary of State on July 21, 1998, incorporated herein by reference to Exhibit 3.2 to A&F’s Annual Report on Form 10-K for the fiscal year ended January 30, 1999 (File No. 001-12107). 3.3 Certificate of Decrease of Shares Designated as Class B Common Stock as filed with the Delaware Secretary of State on July 30, 1999, incorporated herein by reference to Exhibit 3.3 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 31, 1999 (File No. 001-12107). 3.4 Certificate of Amendment of the Amended and Restated Certificate of Incorporation of A&F, as filed with the Delaware Secretary of State on June 16, 2011, incorporated herein by reference to Exhibit 3.1 to A&F’s Current Report on Form 8-K dated and filed June 17, 2011 (File No. 001-12107). 3.5 Amended and Restated Certificate of Incorporation of A&F, reflecting amendments through the date of this Annual Report on Form 10-K, incorporated herein by reference to Exhibit 3.2 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2011 (File No. 001-12107). [This document represents the Amended and Restated Certificate of Incorporation of Abercrombie & Fitch Co. in compiled form incorporating all amendments. This compiled document has not been filed with the Delaware Secretary of State.] 3.6 Amended and Restated Bylaws of A&F (reflecting amendments through May 20, 2004), incorporated herein by reference to Exhibit 3.7 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended May 1, 2004 (File No. 001-12107). 3.7 Certificate regarding Approval of Amendment to Section 2.03 of Amended and Restated Bylaws of Abercrombie & Fitch Co. by Stockholders of Abercrombie & Fitch Co. at Annual Meeting of Stockholders held on June 10, 2009, incorporated herein by reference to Exhibit 3.1 to A&F’s Current Report on Form 8-K dated and filed June 16, 2009 (File No. 001-12107). 3.8 Certificate regarding Approval of Addition of New Article IX of Amended and Restated Bylaws by Board of Directors of Abercrombie & Fitch Co. on June 10, 2009, incorporated herein by reference to Exhibit 3.2 to A&F’s Current Report on Form 8-K dated and filed June 16, 2009 (File No. 001-12107). 3.9 Certificate regarding Approval of Amendments to Sections 1.09 and 2.04 of Amended and Restated Bylaws of Abercrombie & Fitch Co. by Board of Directors of Abercrombie & Fitch Co. on November 15, 2011, incorporated herein by reference to Exhibit 3.1 to A&F’s Current Report on Form 8-K dated and filed November 21, 2011 (File No. 001-12107). 3.10 Certificate regarding Adoption of Amendments to Section 2.04 of Amended and Restated Bylaws of Abercrombie & Fitch Co. by Board of Directors of Abercrombie & Fitch Co. on February 23, 2018, incorporated herein by reference to Exhibit 3.1 to A&F's Current Report on Form 8-K dated and filed February 27, 2018 (File No. 001-12107). 3.11 Amended and Restated Bylaws of Abercrombie & Fitch Co. reflecting amendments through the date of this Annual Report on Form 10-K, incorporated herein by reference to Exhibit 3.10 to A&F's Annual Report on Form 10-K for the fiscal year ended February 3, 2018 (File No. 001-12107). [This document represents the Amended and Restated Bylaws of Abercrombie & Fitch Co. in compiled form incorporating all amendments.] 4.1 Agreement to furnish instruments and agreements defining rights of holders of long-term debt. 4.2 Description of Abercrombie & Fitch Co.’s Securities Registered under Section 12 of the Securities Exchange Act of 1934. incorporated herein by reference to Exhibit 4.2 to A&F’s Annual Report on Form 10 K for the fiscal year ended January 30, 2021 (File No. 001 12107). 4.3 Indenture, dated as of July 2, 2020, by and among Abercrombie & Fitch Management Co., Abercrombie & Fitch Co., as Parent, the other Guarantors party thereto and U.S. Bank National Association, as Trustee, Registrar, Paying Agent, and Notes Collateral Agent, incorporated herein by reference to Exhibit 4.1 to A&F’s Current Report on Form 8-K dated and filed on July 9, 2020 (File No. 001-12107). 4.4 Form of 8.75% Senior Secured Notes due 2025 (included in Exhibit 4.3), incorporated herein by reference to Exhibit 4.2 (which is in turn included in Exhibit 4.1) to A&F’s Current Report on Form 8-K dated and filed on July 9, 2020 (File No. 001-12107). 4.5 Intercreditor Agreement, entered into as of July 2, 2020, among Wells Fargo Bank, National Association, in its capacity as “ABL Agent,” U.S. Bank National Association, in its capacity as “First Lien Notes Collateral Agent,” and each other "Additional Notes Agent" from time to time party thereto., incorporated herein by reference to Exhibit 4.5 to A&F’s Annual Report on Form 10-K for the fiscal year ended January 30, 2021 (File No. 001-12107). 10.1* 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Plan for Non-Associate Directors (reflects amendments through January 30, 2003 and the two-for-one stock split distributed June 15, 1999 to stockholders of record on May 25, 1999), incorporated herein by reference to Exhibit 10.3 to A&F’s Annual Report on Form 10-K for the fiscal year ended February 1, 2003 (File No. 001-12107). 10.2* Amended and Restated Employment Agreement, entered into as of August 15, 2005, by and between A&F and Michael S. Jeffries, including as Exhibit A thereto the Abercrombie & Fitch Co. Supplemental Executive Retirement Plan (Michael S. Jeffries) effective February 2, 2003, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed August 26, 2005 (File No. 001-12107). [NOTE: Only the Abercrombie & Fitch Co. Supplemental Executive Retirement Plan (Michael S. Jeffries) is still in effect.] Table of Contents 10.3* Abercrombie & Fitch Co. Directors’ Deferred Compensation Plan (as amended and restated May 22, 2003) — as authorized by the Board of Directors of A&F on December 17, 2007, to become one of two plans following the division of said Abercrombie & Fitch Co. Directors’ Deferred Compensation Plan (as amended and restated May 22, 2003) into two separate plans effective January 1, 2005 and to be named the Abercrombie & Fitch Co. Directors’ Deferred Compensation Plan (Plan I) [terms to govern “amounts deferred” (within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended) in taxable years beginning before January 1, 2005 and any earnings thereon], incorporated herein by reference to Exhibit 10.7 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended May 3, 2003 (File No. 001-12107). 10.4* Abercrombie & Fitch Nonqualified Savings and Supplemental Retirement Plan (January 1, 2001 Restatement) — as authorized by the Compensation Committee (now known as the Compensation and Human Capital Committee) of the A&F Board of Directors on August 14, 2008, to become one of two sub-plans following the division of said Abercrombie & Fitch Nonqualified Savings and Supplemental Retirement Plan (January 1, 2001 Restatement) into two sub-plans effective immediately before January 1, 2009 and to be named the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I [terms to govern amounts “deferred” (within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended) before January 1, 2005, and any earnings thereon], incorporated herein by reference to Exhibit 10.9 to A&F’s Annual Report on Form 10-K for the fiscal year ended February 1, 2003 (File No. 001-12107). 10.5* First Amendment to the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I (Plan I) (January 1, 2001 Restatement), as authorized by the Compensation Committee (now known as the Compensation and Human Capital Committee) of the A&F Board of Directors on August 14, 2008 and executed on behalf of A&F on September 3, 2008, incorporated herein by reference to Exhibit 10.13 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended August 2, 2008 (File No. 001-12107). 10.6* Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan (II), as amended and restated effective as of January 1, 2014 [governing amounts “deferred” (within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended) in taxable years beginning on or after January 1, 2005, and any earnings thereon], incorporated herein by reference to Exhibit 10.3 to A&F’s Current Report on Form 8-K dated and filed October 19, 2015 (File No. 001-12107). 10.7* Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed June 17, 2005 (File No. 001-12107). 10.8* Certificate regarding Approval of Amendment of Section 3(b) of the Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan by Board of Directors of Abercrombie & Fitch Co. on August 20, 2014, incorporated herein by reference to Exhibit 10.11 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2016 (File No. 001-12107). 10.9* Trust Agreement, made as of October 16, 2006, between A&F and Wilmington Trust Company, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed October 17, 2006 (File No. 001-12107). 10.10* Amended and Restated Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed June 17, 2011 (File No. 001-12107). 10.11* Certificate regarding Approval of Amendment of Section 3(b) of the Abercrombie & Fitch Co. Amended and Restated 2007 Long-Term Incentive Plan by Board of Directors of Abercrombie & Fitch Co. on August 20, 2014, incorporated herein by reference to Exhibit 10.12 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2016 (File No. 001-12107). 10.12* Abercrombie & Fitch Co. Directors’ Deferred Compensation Plan (Plan II) — as authorized by the Board of Directors of A&F on December 17, 2007, to become one of two plans following the division of the Abercrombie & Fitch Co. Directors’ Deferred Compensation Plan (as amended and restated May 22, 2003) into two separate plans effective January 1, 2005 and to be named Abercrombie & Fitch Co. Directors’ Deferred Compensation Plan (Plan II) [terms to govern “amounts deferred” (within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended) in taxable years beginning on or after January 1, 2005 and any earnings thereon], incorporated herein by reference to Exhibit 10.50 to A&F’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009 (File No. 001-12107). 10.13* Form of Stock Appreciation Right Agreement used to evidence the grant of stock appreciation rights to associates (employees) of A&F and its subsidiaries under the Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan on or after March 26, 2013 and prior to August 20, 2013, incorporated herein by reference to Exhibit 10.2 to A&F’s Current Report on Form 8-K dated and filed April 29, 2013 (File No. 001-12107). 10.14* Form of Stock Appreciation Right Award Agreement used for grants of awards after August 20, 2013 and prior to June 16, 2016 under the Amended and Restated Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan [For associates (employees); grant of award not associated with execution of Non-Competition and Non-Solicitation Agreement], incorporated herein by reference to Exhibit 10.2 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended November 2, 2013 (File No. 001-12107). 10.15* Form of Stock Appreciation Right Award Agreement used for grants of awards after August 20, 2013 and prior to June 16, 2016 under the Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan [For associates (employees); grant of award not associated with execution of Non-Competition and Non-Solicitation Agreement], incorporated herein by reference to Exhibit 10.9 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended November 2, 2013 (File No. 001-12107). 10.16 Amended and Restated Credit Agreement, dated as of April 29, 2021, among Abercrombie & Fitch Management Co., as L ead B orrower; the other B orrowers and G uarantors party thereto; Wells Fargo Bank, National Association, as administrative agent for the lenders, a L/C Issuer and Swing Line Lender; the other lenders party thereto; Citizens Business Capital, as a L/C Issuer; Citizens Bank, N.A., as Syndication Agent; JPMorgan Chase Bank, N.A., as Documentation Agent and a L/C Issuer; and Wells Farg o Bank, National Association, Citizens Bank, N.A. and JPMorgan Chase Bank, N.A., as Joint Lead Arrangers and Joint Bookrunners, incorporated herein by reference to Exhibit 10.3 to A&F’s Quarterly Report on Form 10 Q for the quarterly period ended May 1, 2021 (File No. 001 12107).† Table of Contents 10.17 Guaranty, dated as of August 7, 2014, made by Abercrombie & Fitch Co., as guarantor, and certain of its wholly-owned subsidiaries, each as a guarantor, in favor of Wells Fargo Bank, National Association, as administrative agent and collateral agent for its own benefit and the benefit of the other Credit Parties (as defined in the 2014 ABL Credit Agreement), and the Credit Parties, incorporated herein by reference to Exhibit 10.5 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended August 2, 2014 (File No. 001-12107). 10.18 Security Agreement, dated as of August 7, 2014, made by Abercrombie & Fitch Management Co., as lead borrower for itself and the other Borrowers (as defined in the 2014 ABL Credit Agreement), Abercrombie & Fitch Co. and certain of its wholly-owned subsidiaries, in their respective capacities as a guarantor, and the other borrowers and guarantors from time to time party thereto, in favor of Wells Fargo Bank, National Association, as administrative agent and collateral agent for the Credit Parties (as defined in the 2014 ABL Credit Agreement), incorporated herein by reference to Exhibit 10.7 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended August 2, 2014 (File No. 001-12107).† 10.19 Confirmation, Ratification and Amendment of Ancillary Loan Documents, made as of April 29, 2021, among Abercrombie & Fitch Co., for itself and as Lead Borrower; the other B orrowers from time to time party thereto; the G uarantors from time to time party thereto; and Wells Fargo Bank, National Association, as Administrative Agent and Collateral Agent. † 10.20* Employment Offer, accepted October 9, 2014, between Fran Horowitz and A&F, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed October 15, 2014 (File No. 001-12107). 10.21* Form of Director and Officer Indemnification Agreement, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed October 21, 2014 (File No. 001-12107). 10.22* Retirement Agreement, dated December 8, 2014, between Michael S. Jeffries and A&F, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed December 9, 2014 (File No. 001-12107). 10.23* First Amendment to the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan (II), as approved on October 14, 2015, incorporated herein by reference to Exhibit 10.4 to A&F’s Current Report on Form 8-K dated and filed October 19, 2015 (File No. 001-12107). 10.24* Second Amendment to the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan (II), as approved on December 16, 2019, incorporated herein by reference to Exhibit 10.33 to A&F's Annual Report on Form 10-K for the fiscal year ended February 1, 2020 (File No. 001-12107). 10.25* Letter, dated December 16, 2015, from Abercrombie & Fitch Management Co. to Fran Horowitz setting forth terms of employment as President and Chief Merchandising Officer, and accepted by Fran Horowitz on December 19, 2015, incorporated herein by reference to Exhibit 10.74 to A&F’s Annual Report on Form 10-K for the fiscal year ended January 30, 2016 (File No. 001-12107). 10.26* Offer Letter from Abercrombie & Fitch to Kristin Scott, executed by Ms. Scott on May 15, 2016, incorporated herein by reference to Exhibit 10.3 to A&F’s Current Report on Form 8-K dated and filed May 23, 2016 (File No. 001-12107). 10.27* Form of Restricted Stock Unit Award Agreement used to evidence the grant of restricted stock units to associates (employees) of A&F and its subsidiaries under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates after June 16, 2016, incorporated herein by reference to Exhibit 10.6 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2016 (File No. 001-12107). 10.28* Form of Restricted Stock Unit Award Agreement used to evidence the grant of restricted stock units to associates (employees) of A&F and its subsidiaries, subject to special non-competition and non-solicitation agreements, under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates after June 16, 2016, incorporated herein by reference to Exhibit 10.7 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2016 (File No. 001-12107). 10.29* Form of Performance Share Award Agreement used to evidence the grant of performance shares to associates (employees) of A&F and its subsidiaries under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates after June 16, 2016 and prior to March 27, 2018, incorporated herein by reference to Exhibit 10.8 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2016 (File No. 001-12107). 10.30* Form of Restricted Stock Unit Award Agreement used to evidence the grant of restricted stock units to non-associate directors of A&F under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Directors on and after June 16, 2016, incorporated herein by reference to Exhibit 10.10 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2016 (File No. 001-12107). 10.31* Form of Agreement entered into between Abercrombie & Fitch Management Co. and Fran Horowitz as of May 10, 2017, the execution date by Abercrombie & Fitch Management Co., incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed May 12, 2017 (File No. 001-12107). 10.32* Form of Agreement entered into between Abercrombie & Fitch Management Co. and Kristin Scott as of May 10, 2017, the execution date by Abercrombie & Fitch Management Co., incorporated herein by reference to Exhibit 10.2 to A&F’s Current Report on Form 8-K dated and filed May 12, 2017 (File No. 001-12107). 10.33* Form of Director and Officer Indemnification Agreement entered into by Abercrombie & Fitch Co. with directors and officers of international subsidiaries and other key individuals on or after May 11, 2017, incorporated herein by reference to Exhibit 10.3 to A&F's Quarterly Report on Form 10-Q/A for the quarterly period ended April 29, 2017 (File No. 001-12107). Table of Contents 10.34* Abercrombie & Fitch Co. Short-Term Cash Incentive Compensation Performance Plan, effective from June 15, 2017 to March 20, 2021, incorporated herein by reference to Exhibit 10.1 to A&F's Current Report on Form 8-K dated and filed June 15, 2017 (File No. 001-12107). 10.35* Abercrombie & Fitch Co. Long-Term Cash Incentive Compensation Performance Plan, incorporated herein by reference to Exhibit 10.2 to A&F's Current Report on Form 8-K dated and filed June 15, 2017 (File No. 001-12107). 10.36* Offer Letter from Abercrombie & Fitch to Scott Lipesky, executed by Mr. Lipesky on August 29, 2017, incorporated herein by reference to Exhibit 10.1 to A&F's Current Report on Form 8-K dated and filed September 6, 2017 (File No. 001-12107). 10.37* Agreement entered into between Abercrombie & Fitch Management Co. and Scott Lipesky, effective as of September 7, 2017, the execution date by Abercrombie & Fitch Management Co., incorporated herein by reference to Exhibit 10.2 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended October 28, 2017 (File No. 001-12107). 10.38 Abercrombie & Fitch Co. Associate Stock Purchase Plan (October 1, 2007 Restatement, reflecting amendment and restatement effective as of October 1, 2007 of Associate Stock Purchase Plan which was originally adopted effective July 1, 1998), incorporated herein by reference to Exhibit 10.6 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended October 28, 2017 (File No. 001-12107) 10.39* Form of Performance Share Award Agreement used to evidence the grant of performance shares to associates (employees) of A&F and its subsidiaries under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates on or after March 27, 2018 and prior to March 26, 2019, incorporated herein by reference to Exhibit 10.67 to A&F’s Annual Report on Form 10-K for the fiscal year ended February 3, 2018 (File No. 001-12107). 10.40* Form of Performance Share Award Agreement used to evidence the grant of performance shares to associates (employees) of A&F and its subsidiaries under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates on or after March 26, 2019, and prior to August 28, 2020 incorporated herein by reference to Exhibit 10.1 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended May 4, 2019 (File No. 001-12107). 10.41* Offer Letter from Abercrombie & Fitch to Gregory J. Henchel, executed by Mr. Henchel on September 3, 2018, incorporated herein by reference to Exhibit 10.1 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended November 3, 2018 (File No. 001-12107). 10.42* Agreement entered into between Abercrombie & Fitch Management Co. and Gregory J. Henchel, effective as of September 13, 2018, the execution date by Abercrombie & Fitch Management Co., incorporated herein by reference to Exhibit 10.2 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended November 3, 2018 (File No. 001-12107). 10.43* Summary of Annual Compensation Structure for Non-Associate Directors of Abercrombie & Fitch Co. for Fiscal 2019, incorporated herein by reference to Exhibit 10.2 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended May 4, 2019 (File No. 001-12107). 10.44* Summary of terms of the Annual Restricted Stock Unit Grants made and to be made to the Non-Associate Directors of Abercrombie & Fitch Co. under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Directors in Fiscal 2019, incorporated herein by reference to Exhibit 10.3 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended May 4, 2019 (File No. 001-12107). 10.45* Form of Restricted Stock Unit Award Agreement used to evidence the grant of restricted stock units to associates (employees) of Abercrombie & Fitch Co. and its subsidiaries under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates on and after March 26, 2019, incorporated herein by reference to Exhibit 10.1 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended May 2, 2020 (File No. 001-12107). 10.46* Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Directors (as amended on May 20, 2020), incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed on May 21, 2020 (File No. 001-12107). 10.47* Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates (as amended on June 9, 2021), incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed on June 10, 2021 (File No. 001-12107). 10.48* Summary of Compensation Structure for Non-Associate Directors of Abercrombie & Fitch Co. for Fiscal 2020, incorporated herein by reference to Exhibit 10.4 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended May 2, 2020 (File No. 001-12107). 10.49* Summary of Terms of the Annual Restricted Stock Unit Grants made and to be made to the Non-Associate Directors of Abercrombie & Fitch Co. under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Directors in Fiscal 2020, incorporated herein by reference to Exhibit 10.5 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended May 2, 2020 (File No. 001-12107). 10.50* Form of Retention Restricted Stock Unit Award Agreement, made to be effective as of August 28, 2020, between Abercrombie & Fitch Co. and each of Scott Lipesky, Kristin Scott and Gregory J. Henchel, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed on September 2, 2020 (File No. 001-12107). 10.51* Form of Performance Share Award Agreement used to evidence the grant of performance shares to associates (employees) of A&F and its subsidiaries under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates on or after August 28, 2020 and prior to March 23, 2021, incorporated herein by reference to Exhibit 10.1 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2020 (File No. 001-12107). 10.52* Amended and Restated Abercrombie & Fitch Co. Short-Term Cash Incentive Compensation Performance Plan, effective beginning March 21, 2021, incorporated herein by reference to Exhibit 10.1 to A&F's Current Report on Form 8-K dated and filed March 24, 2021 (File No. 001-12107). 10.53* Form of Performance Share Award Agreement used to evidence the grant of performance share awards to associates (employees) of A&F and its subsidiaries under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates on or after March 23, 2021, incorporated herein by reference to Exhibit 10.2 to A&F’s Quarterly Report on Form 10 Q for the quarterly period ended May 1, 2021 (File No. 001-12107). 10.54* Summary of Compensation Structure for Non-Associate Directors of Abercrombie & Fitch Co. for Fiscal 2021, incorporated herein by reference to Exhibit 10.4 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended May 1, 2021 (File No. 001-12107). 10.55* Summary of Terms of the Annual Restricted Stock Unit Grants for the Non-Associate Directors of Abercrombie & Fitch Co. under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Directors in Fiscal 2021, incorporated herein by reference to Exhibit 10.5 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended May 1, 2021 (File No. 001-12107). 10.56* Offer Letter from A&F to Samir Desai (including as Exhibit A thereto the Agreement entered into between Abercrombie & Fitch Management Co. and Samir Desai, effective as of May 20, 2021, the execution date by Abercrombie & Fitch Management Co.), executed by Mr. Desai on May 24, 2021, incorporated herein by reference to Exhibit 10.2 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2021 (File No. 001-12107). Table of Contents 10.57* Non-Compete Amendment entered into between Abercrombie & Fitch Management Co. and Fran Horowitz, effective as of November 5, 2021 (the date of execution by Abercrombie & Fitch Management Co.), together with Schedule identifying executive officers of A&F party to substantially identical Non-Compete Agreements with Abercrombie & Fitch Management Co., incorporated herein by reference to Exhibit 10.1 to A&F’s Quarterly Report on Form 10‑Q for the quarterly period ended October 30, 2021 (File No. 001‑12107). 21.1 List of Subsidiaries of A&F. 23.1 Consent of Independent Registered Public Accounting Firm — PricewaterhouseCoopers LLP. 24.1 Powers of Attorney. 31.1 Certifications by Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certifications by Executive Vice President and Chief Financial Officer (Principal Financial Officer) pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certifications by Chief Executive Officer (Principal Executive Officer) and Executive Vice President and Chief Financial Officer (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** 101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101). *    Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(a)(3) and Item 15(b) of this Annual Report on Form 10-K. **    These certifications are furnished. † Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K . ††    Certain portions of this exhibit have been omitted based upon a request for confidential treatment filed with the Securities and Exchange Commission (the “SEC”). The non-public information has been separately filed with the SEC in connection with that request. Table of Contents Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ABERCROMBIE & FITCH CO. Date: March 28, 2022 By: /s/     Scott D. Lipesky Scott D. Lipesky Executive Vice President and Chief Financial Officer (Principal Financial Officer, Principal Accounting Officer and Authorized Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 28, 2022. * Terry L. Burman Chairperson of the Board and Director /s/     Fran Horowitz Fran Horowitz Chief Executive Officer and Director (Principal Executive Officer) * Kerrii B. Anderson Director * Felix J. Carbullido Director * Susie Coulter Director * Sarah M. Gallagher Director * James A. Goldman Director * Michael E. Greenlees Director /s/     Scott D. Lipesky Scott D. Lipesky Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) * Helen E. McCluskey Director * Kenneth B. Robinson Director * Nigel Travis Director *    The undersigned, by signing his name hereto, does hereby sign this Annual Report on Form 10-K on behalf of each of the above-named directors of the Registrant pursuant to powers of attorney executed by such directors, which powers of attorney are filed with this Annual Report on Form 10-K as Exhibit 24.1. By: /s/     Scott D. Lipesky Scott D. Lipesky Attorney-in-fact

Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Stockholders’ Equity 5 Condensed Consolidated Statements of Cash Flows 6 Index for Notes to Condensed Consolidated Financial Statements 7 Notes to Condensed Consolidated Financial Statements 8 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 33 Item 4. Controls and Procedures 34 PART II. OTHER INFORMATION Item 1. Legal Proceedings 35 Item 1A. Risk Factors 35 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35 Item 6. Exhibits 36 Signatures 37 Abercrombie & Fitch Co. 2 2022 1Q Form 10-Q Table of Contents PART I. FINANCIAL INFORMATION Item 1.     Financial Statements (Unaudited) Abercrombie & Fitch Co. Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (Thousands, except per share amounts) (Unaudited) Thirteen Weeks Ended April 30, 2022 May 1, 2021 Net sales $ 812,762 $ 781,405 Cost of sales, exclusive of depreciation and amortization 363,216 286,271 Gross profit 449,546 495,134 Stores and distribution expense 337,543 315,508 Marketing, general and administrative expense 122,149 120,947 Asset impairment 3,422 2,664 Other operating income, net ( 3,842 ) ( 1,418 ) Operating (loss) income ( 9,726 ) 57,433 Interest expense, net 7,307 8,606 (Loss) income before income taxes ( 17,033 ) 48,827 Income tax (benefit) expense ( 2,187 ) 6,121 Net (loss) income ( 14,846 ) 42,706 L Net income attributable to noncontrolling interests 1,623 938 Net (loss) income attributable to A&F $ ( 16,469 ) $ 41,768 Net (loss) income attributable to A&F per share Basic $ ( 0.32 ) $ 0.67 Diluted $ ( 0.32 ) $ 0.64 Weighted-average shares outstanding Basic 52,077 62,380 Diluted 52,077 65,305 Other comprehensive (loss) income Foreign currency translation adjustments, net of tax $ ( 10,403 ) $ ( 1,274 ) Derivative financial instruments, net of tax 1,712 2,599 Other comprehensive (loss) income ( 8,691 ) 1,325 Comprehensive (loss) income ( 23,537 ) 44,031 L Comprehensive income attributable to noncontrolling interests 1,623 938 Comprehensive (loss) income attributable to A&F $ ( 25,160 ) $ 43,093 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 3 2022 1Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Balance Sheets (Thousands, except par value amounts) (Unaudited) April 30, 2022 January 29, 2022 Assets Current assets: Cash and equivalents $ 468,378 $ 823,139 Receivables 88,807 69,102 Inventories 562,510 525,864 Other current assets 93,179 89,654 Total current assets 1,212,874 1,507,759 Property and equipment, net 497,976 508,336 Operating lease right-of-use assets 671,991 698,231 Other assets 224,462 225,165 Total assets $ 2,607,303 $ 2,939,491 Liabilities and stockholders’ equity Current liabiliti Accounts payable $ 311,352 $ 374,829 Accrued expenses 320,681 395,815 Short-term portion of operating lease liabilities 195,599 222,823 Income taxes payable 25,400 21,773 Total current liabilities 853,032 1,015,240 Long-term liabiliti Long-term portion of operating lease liabilities 662,322 697,264 Long-term borrowings, net 303,901 303,574 Other liabilities 83,243 86,089 Total long-term liabilities 1,049,466 1,086,927 Stockholders’ equity Class A Common Stoc $ 0.01 par val 150,000 shares authorized and 103,300 shares issued for all periods presented 1,033 1,033 Paid-in capital 398,412 413,190 Retained earnings 2,350,807 2,386,156 Accumulated other comprehensive loss, net of tax (“AOCL”) ( 123,397 ) ( 114,706 ) Treasury stock, at average 52,858 and 50,315 shares as of April 30, 2022 and January 29, 2022, respectively ( 1,931,494 ) ( 1,859,583 ) Total Abercrombie & Fitch Co. stockholders’ equity 695,361 826,090 Noncontrolling interests 9,444 11,234 Total stockholders’ equity 704,805 837,324 Total liabilities and stockholders’ equity $ 2,607,303 $ 2,939,491 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 4 2022 1Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Statements of Stockholders’ Equity (Thousands, except per share amounts) (Unaudited) Thirteen Weeks Ended April 30, 2022 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, January 29, 2022 52,985 $ 1,033 $ 413,190 $ 11,234 $ 2,386,156 $ ( 114,706 ) 50,315 $ ( 1,859,583 ) $ 837,324 Net loss — — — 1,623 ( 16,469 ) — — — ( 14,846 ) Purchase of Common Stock ( 3,260 ) — — — — — 3,260 ( 100,000 ) ( 100,000 ) Share-based compensation issuances and exercises 717 — ( 23,134 ) — ( 18,880 ) — ( 717 ) 28,089 ( 13,925 ) Share-based compensation expense — — 8,356 — — — — — 8,356 Derivative financial instruments, net of tax — — — — — 1,712 — — 1,712 Foreign currency translation adjustments, net of tax — — — — — ( 10,403 ) — — ( 10,403 ) Distributions to noncontrolling interests, net — — — ( 3,413 ) — — — — ( 3,413 ) Ending balance at April 30, 2022 50,442 $ 1,033 $ 398,412 $ 9,444 $ 2,350,807 $ ( 123,397 ) 52,858 $ ( 1,931,494 ) $ 704,805 Thirteen Weeks Ended May 1, 2021 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, January 30, 2021 62,399 $ 1,033 $ 401,283 $ 12,684 $ 2,149,470 $ ( 102,307 ) 40,901 $ ( 1,512,851 ) $ 949,312 Net income — — — 938 41,768 — — — 42,706 Purchase of Common Stock ( 1,077 ) — — — 1,077 ( 35,249 ) ( 35,249 ) Share-based compensation issuances and exercises 613 — ( 14,456 ) — ( 21,490 ) — ( 613 ) 24,198 ( 11,748 ) Share-based compensation expense — — 8,450 — — — — — 8,450 Derivative financial instruments, net of tax — — — — — 2,599 — — 2,599 Foreign currency translation adjustments, net of tax — — — — — ( 1,274 ) — — ( 1,274 ) Distributions to noncontrolling interests, net — — — ( 4,846 ) — — — — ( 4,846 ) Ending balance at May 1, 2021 61,935 $ 1,033 $ 395,277 $ 8,776 $ 2,169,748 $ ( 100,982 ) 41,365 $ ( 1,523,902 ) $ 949,950 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 5 2022 1Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Statements of Cash Flows (Thousands) (Unaudited) Thirteen Weeks Ended April 30, 2022 May 1, 2021 Operating activities Net (loss) income $ ( 14,846 ) $ 42,706 Adjustments to reconcile net (loss) income to net cash used for operating activiti Depreciation and amortization 33,888 37,856 Asset impairment 3,422 2,664 (Gain) loss on disposal ( 2,798 ) 189 (Benefit) provision for deferred income taxes ( 5,853 ) 4,231 Share-based compensation 8,356 8,450 Changes in assets and liabiliti Inventories ( 38,475 ) 15,186 Accounts payable and accrued expenses ( 138,774 ) ( 133,506 ) Operating lease right-of-use assets and liabilities ( 32,127 ) ( 76,379 ) Income taxes 2,664 1,751 Other assets ( 33,475 ) ( 34,162 ) Other liabilities 231 ( 336 ) Net cash used for operating activities ( 217,787 ) ( 131,350 ) Investing activities Purchases of property and equipment ( 26,292 ) ( 14,404 ) Proceeds from the sale of property and equipment 7,751 — Net cash used for investing activities ( 18,541 ) ( 14,404 ) Financing activities Payment of debt issuance or modification costs and fees — ( 1,490 ) Purchases of Common Stock ( 100,000 ) ( 35,249 ) Other financing activities ( 16,945 ) ( 16,452 ) Net cash used for financing activities ( 116,945 ) ( 53,191 ) Effect of foreign currency exchange rates on cash ( 2,617 ) ( 1,021 ) Net decrease in cash and equivalents, and restricted cash and equivalents ( 355,890 ) ( 199,966 ) Cash and equivalents, and restricted cash and equivalents, beginning of period 834,368 1,124,157 Cash and equivalents, and restricted cash and equivalents, end of period $ 478,478 $ 924,191 Supplemental information related to non-cash activities Purchases of property and equipment not yet paid at end of period $ 33,035 $ 22,597 Operating lease right-of-use assets additions, net of terminations, impairments and other reductions 35,521 4,856 Supplemental information related to cash activities Cash paid for interest — 676 Cash paid for income taxes 2,887 1,848 Cash received from income tax refunds 114 235 Cash paid for amounts included in measurement of operating lease liabilities, net of abatements 88,322 145,052 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 6 2022 1Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Index for Notes to Condensed Consolidated Financial Statements (Unaudited) Page No. Note 1. NATURE OF BUSINESS 8 Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 8 Note 3. REVENUE RECOGNITION 9 Note 4. NET (LOSS) INCOME PER SHARE 10 Note 5. FAIR VALUE 10 Note 6. PROPERTY AND EQUIPMENT, NET 11 Note 7. LEASES 11 Note 8. ASSET IMPAIRMENT 12 Note 9. INCOME TAXES 12 Note 10. BORROWINGS 12 Note 11. SHARE-BASED COMPENSATION 13 Note 12. DERIVATIVE INSTRUMENTS 15 Note 13. ACCUMULATED OTHER COMPREHENSIVE LOSS 17 Note 14. SEGMENT REPORTING 17 Abercrombie & Fitch Co. 7 2022 1Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. NATURE OF BUSINESS Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a global, digitally-led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. The Company’s two brand-based operating segments are Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These five brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company operates primarily in North America, Europe and Asia. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The accompanying Condensed Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its financial position, results of operations and cash flows. The Company has interests in an Emirati business venture and in a Kuwaiti business venture with Majid al Futtaim Fashion L.L.C. (“MAF”) and in a United States of America (the “U.S.”) business venture with Dixar L.L.C. (“Dixar”), each of which meets the definition of a variable interest entity (“VIE”). The purpose of the business ventures with MAF is to operate stores in the United Arab Emirates and Kuwait and the purpose of the business venture with Dixar is to hold the intellectual property related to the Social Tourist brand. The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the operating results, assets and liabilities of these VIEs, with the noncontrolling interests’ (“NCI”) portions of net income presented as net income attributable to NCI on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income and the NCI portion of stockholders’ equity presented as NCI on the Condensed Consolidated Balance Sheets. Fiscal year The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a fifty-two week year, but occasionally gives rise to an additional week, resulting in a fifty-three week year. Fiscal years are designated in the Condensed Consolidated Financial Statements and notes, as well as the remainder of this Quarterly Report on Form 10-Q, by the calendar year in which the fiscal year commences. All references herein to the Company’s fiscal years are as follows: Fiscal year Year ended/ ending Number of weeks Fiscal 2021 January 29, 2022 52 Fiscal 2022 January 28, 2023 52 Fiscal 2023 February 3, 2024 53 Interim financial statements The Condensed Consolidated Financial Statements as of April 30, 2022, and for the thirteen week periods ended April 30, 2022 and May 1, 2021, are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim consolidated financial statements. Accordingly, the Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in A&F’s Annual Report on Form 10-K for Fiscal 2021 filed with the SEC on March 28, 2022 (the “Fiscal 2021 Form 10-K”). The January 29, 2022 consolidated balance sheet data, included herein, were derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the U.S. (“GAAP”). In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to state fairly, in all material respects, the financial position, results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for Fiscal 2022. During the first quarter of 2022, the Company reclassified Flagship store exit benefits into Stores and distribution expense on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. There were no changes to Operating (loss) income or Net (loss) income. Prior period amounts have been reclassified to conform to current year’s presentation. Abercrombie & Fitch Co. 8 2022 1Q Form 10-Q Table of Contents Use of estimates The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved with estimates, actual results may differ. The extent to which the current outbreak of coronavirus disease (“COVID-19”) continues to impact the Company’s business and financial results will depend on numerous evolving factors including, but not limited t the duration and spread of COVID-19 and the emergence of new variants of coronavirus, the availability and acceptance of effective vaccines, boosters or medical treatments, the impact of COVID-19 on the length or frequency of store closures, and the extent to which COVID-19 impacts worldwide macroeconomic conditions including interest rates, foreign currency exchange rates, the speed of the economic recovery, and governmental, business and consumer reactions to the pandemic. The Company’s assessment of these, as well as other factors, could impact management's estimates and result in material impacts to the Company’s consolidated financial statements in future reporting periods. Recent accounting pronouncements The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements. Condensed Consolidated Statements of Cash Flows reconciliation The following table provides a reconciliation of cash and equivalents and restricted cash and equivalents to the amounts shown on the Condensed Consolidated Statements of Cash Flows: (in thousands) Location April 30, 2022 January 29, 2022 May 1, 2021 January 30, 2021 Cash and equivalents Cash and equivalents $ 468,378 $ 823,139 $ 909,008 $ 1,104,862 Long-term restricted cash and equivalents Other assets 10,100 11,229 14,712 14,814 Short-term restricted cash and equivalents Other current assets — — 471 4,481 Cash and equivalents and restricted cash and equivalents $ 478,478 $ 834,368 $ 924,191 $ 1,124,157 3. REVENUE RECOGNITION Disaggregation of revenue All revenues are recognized in net sales in the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income . For information regarding the disaggregation of revenue, refer to Note 14, “ SEGMENT REPORTING . ” Contract liabilities The following table details certain contract liabilities representing unearned revenue as of April 30, 2022, January 29, 2022 and May 1, 2021: (in thousands) April 30, 2022 January 29, 2022 May 1, 2021 Gift card liability $ 35,665 $ 36,984 $ 27,919 Loyalty programs liability 22,177 22,757 19,991 The following table details recognized revenue associated with the Company’s gift card program and loyalty programs for the thirteen weeks ended April 30, 2022 and May 1, 2021: Thirteen Weeks Ended (in thousands) April 30, 2022 May 1, 2021 Revenue associated with gift card redemptions and gift card breakage $ 23,001 $ 16,156 Revenue associated with reward redemptions and breakage related to the Company’s loyalty programs 10,181 9,553 Abercrombie & Fitch Co. 9 2022 1Q Form 10-Q Table of Contents 4. NET (LOSS) INCOME PER SHARE Net (loss) income per basic and diluted share attributable to A&F is computed based on the weighted-average number of outstanding shares of Class A Common Stock (“Common Stock”). Additional information pertaining to net (loss) income per share attributable to A&F follows: Thirteen Weeks Ended (in thousands) April 30, 2022 May 1, 2021 Shares of Common Stock issued 103,300 103,300 Weighted-average treasury shares ( 51,223 ) ( 40,920 ) Weighted-average — basic shares 52,077 62,380 Dilutive effect of share-based compensation awards — 2,925 Weighted-average — diluted shares 52,077 65,305 Anti-dilutive shares (1) 3,598 1,425 (1) Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net (loss) income per diluted share because the impact would have been anti-dilutive. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can achieve up to 200% of their target vesting amount and are reflected at the maximum vesting amount less any dilutive portion. 5. FAIR VALUE Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows: • Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets that the Company can access at the measurement date. • Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly. • Level 3—inputs to the valuation methodology are unobservable. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The three levels of the hierarchy and the distribution of the Company’s assets measured at fair value on a recurring basis, as of April 30, 2022 and January 29, 2022, were as follows: Assets at Fair Value as of April 30, 2022 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 25,314 $ 9,900 $ — $ 35,214 Derivative instruments (2) — 6,958 — 6,958 Rabbi Trust assets (3) 1 62,626 — 62,627 Restricted cash equivalents (1) 4,586 2,307 — 6,893 Total assets $ 29,901 $ 81,791 $ — $ 111,692 Assets at Fair Value as of January 29, 2022 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 49,309 $ 11,643 $ — $ 60,952 Derivative instruments (2) — 4,973 — 4,973 Rabbi Trust assets (3) 1 62,272 — 62,273 Restricted cash equivalents (1) 5,391 2,326 — 7,717 Total assets $ 54,701 $ 81,214 $ — $ 135,915 (1) Level 1 assets consisted of investments in money market funds and U.S. treasury bills. Level 2 assets consisted of time deposits. (2) Level 2 assets consisted primarily of foreign currency exchange forward contracts. (3) Level 1 assets consisted of investments in money market funds. Level 2 assets consisted of trust-owned life insurance policies. The Company’s Level 2 assets consisted o • Trust-owned life insurance policies, which were valued using the cash surrender value of the life insurance policies; • Time deposits, which were valued at cost, approximating fair value, due to the short-term nature of these investments; and • Derivative instruments, primarily foreign currency exchange forward contracts, which were valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk. Abercrombie & Fitch Co. 10 2022 1Q Form 10-Q Table of Contents Fair value of long-term borrowings The Company’s borrowings under its senior secured notes, which have a fixed 8.75% interest rate and mature on July 15, 2025 (the “Senior Secured Notes”) are carried at historical cost in the accompanying Condensed Consolidated Balance Sheets. The carrying amount and fair value of the Company’s long-term gross borrowings were as follows: (in thousands) April 30, 2022 January 29, 2022 Gross borrowings outstanding, carrying amount $ 307,730 $ 307,730 Gross borrowings outstanding, fair value 323,501 327,732 6. PROPERTY AND EQUIPMENT, NET Property and equipment, net consisted o (in thousands) April 30, 2022 January 29, 2022 Property and equipment, at cost $ 2,436,019 $ 2,453,493 L Accumulated depreciation and amortization ( 1,938,043 ) ( 1,945,157 ) Property and equipment, net $ 497,976 $ 508,336 Refer to Note 8, “ ASSET IMPAIRMENT ,” for details related to property and equipment impairment charges incurred during the thirteen weeks ended April 30, 2022 and May 1, 2021. 7. LEASES The Company is a party to leases related to its Company-operated retail stores as well as for certain of its distribution centers, office space, information technology and equipment. The following table provides a summary of the Company’s operating lease costs for the thirteen weeks ended April 30, 2022 and May 1, 2021: Thirteen Weeks Ended (in thousands) April 30, 2022 May 1, 2021 Single lease cost (1) $ 57,580 $ 69,752 Variable lease cost (2) 33,158 23,166 Operating lease right-of-use asset impairment (3) 1,915 2,464 Sublease income (4) ( 1,009 ) ( 1,093 ) Total operating lease cost $ 91,644 $ 94,289 (1) Included amortization and interest expense associated with operating lease right-of-use assets and the impact from remeasurement of operating lease liabilities. (2) Includes variable payments related to both lease and nonlease components, such as contingent rent payments made by the Company based on performance, and payments related to taxes, insurance, and maintenance costs, as well as the benefit of $ 1.7 million of rent abatements during the thirteen weeks ended April 30, 2022 related to the effects of the COVID-19 pandemic that resulted in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract. The benefit related to rent abatements recognized during the thirteen weeks ended May 1, 2021 was $ 7.7 million. (3) Refer to Note 8, “ ASSET IMPAIRMENT ,” for details related to operating lease right-of-use asset impairment charges. (4) The terms of the sublease agreement entered into by the Company with a third party during Fiscal 2020 related to one of its previous flagship store locations have not changed materially from that disclosed in Note 8, “LEASES,” of the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of the Fiscal 2021 Form 10-K. Sublease income is recognized in other operating (loss) income, net on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. The Company suspended rent payments for a number of stores that were closed as a result of COVID-19, and has been successful in obtaining certain rent abatements and landlord concessions of rent payable. The Company had minimum commitments related to operating lease contracts that have not yet commenced, primarily for its Company-operated retail stores, of approximately $ 20.5 million as of April 30, 2022. Abercrombie & Fitch Co. 11 2022 1Q Form 10-Q Table of Contents 8. ASSET IMPAIRMENT Asset impairment charges for the thirteen weeks ended April 30, 2022 and May 1, 2021 were as follows: Thirteen Weeks Ended (in thousands) April 30, 2022 May 1, 2021 Operating lease right-of-use asset impairment $ 1,915 $ 2,464 Property and equipment asset impairment 1,507 200 Total asset impairment $ 3,422 $ 2,664 Asset impairment charges for the thirteen weeks ended April 30, 2022 and May 1, 2021 related to certain of the Company’s stores across brands, geographies and store formats. The impairment charges for the thirteen weeks ended April 30, 2022 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $ 7.5 million, including $ 6.5 million related to operating lease right-of-use assets. The impairment charges for the thirteen weeks ended May 1, 2021 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $ 6.3 million, including $ 5.7 million related to operating lease right-of-use assets. 9. INCOME TAXES The quarterly provision for income taxes is based on the current estimate of the annual effective income tax rate and the tax effect of discrete items occurring during the quarter. The Company’s quarterly provision and the estimate of the annual effective tax rate are subject to significant variation due to several factors. These factors include variability in the pre-tax jurisdictional mix of earnings, changes in how the Company does business including entering into new businesses or geographies, changes in foreign currency exchange rates, changes in laws, regulations, interpretations and administrative practices, relative changes in expenses or losses for which tax benefits are not recognized and the impact of discrete items. In addition, jurisdictions where the Company anticipates an ordinary loss for the fiscal year for which the Company does not anticipate future tax benefits are excluded from the overall computation of estimated annual effective tax rate and no tax benefits are recognized in the period related to losses in such jurisdictions. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax earnings. Impact of valuation allowances and other tax charges During the thirteen weeks ended April 30, 2022, the Company did not recognize income tax benefits on $ 13.4 million of pretax losses, primarily in Switzerland, resulting in adverse tax impacts of $ 2.4 million. During the thirteen weeks ended May 1, 2021, the Company recognized $ 3.1 million of tax benefits due to the anticipated utilization of deferred tax assets against projected pre-tax income for the full fiscal year, primarily in the U.S. based on information available, on which a valuation allowance had previously been established. As of April 30, 2022, there were approximately $ 11.4 million of net deferred tax assets in China. The realization of these net deferred tax assets is dependent upon the future generation of sufficient taxable profits in China. While the Company believes that the net deferred tax assets are more-likely-than-not to be realized, it is not a certainty, as there are continued issues and related responses due to emerging situations, such as the COVID-19 pandemic. The company is closely monitoring its operations in China. Should circumstances change, the net deferred tax assets may become subject to a valuation allowance in the future. Additional valuation allowances would result in additional tax expense. Share-based compensation Refer to Note 11, “ SHARE-BASED COMPENSATION ,” for details on income tax benefits and charges related to share-based compensation awards during the thirteen weeks ended April 30, 2022 and May 1, 2021. 10. BORROWINGS Details on the Company’s long-term borrowings, net, as of April 30, 2022 and January 29, 2022 are as follows: (in thousands) April 30, 2022 January 29, 2022 Long-term portion of borrowings, gross at carrying amount $ 307,730 $ 307,730 Unamortized fees ( 3,829 ) ( 4,156 ) Long-term borrowings, net $ 303,901 $ 303,574 Abercrombie & Fitch Co. 12 2022 1Q Form 10-Q Table of Contents Senior Secured Notes The terms of the Senior Secured Notes have remained unchanged from those disclosed in Note 13, “BORROWINGS,” of the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of on the Fiscal 2021 Form 10-K. ABL Facility The terms of the Company’s senior secured revolving credit facility of up to $ 400.0 million (the “ABL Facility”) remained unchanged from those disclosed in Note 13, “BORROWINGS,” of the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of the Fiscal 2021 Form 10-K. The Company did not have any borrowings outstanding under the ABL Facility as of April 30, 2022 or as of January 29, 2022. As of April 30, 2022, availability under the ABL Facility was $ 349.4 million, net of $ 0.8 million in outstanding stand-by letters of credit. As the Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility, borrowing capacity available to the Company under the ABL Facility was $ 314.4 million as of April 30, 2022. Representations, warranties and covenants The agreements related to the Senior Secured Notes and the ABL Facility contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of the Company and its subsidiaries t grant or incur liens; incur, assume or guarantee additional indebtedness; sell or otherwise dispose of assets, including capital stock of subsidiaries; make investments in certain subsidiaries; pay dividends, make distributions or redeem or repurchase capital stock; change the nature of their business; and consolidate or merge with or into, or sell substantially all of the assets of the Company or Abercrombie & Fitch Management Co. (“A&F Management”), a wholly-owned indirect subsidiary of A&F, to another entity. The Senior Secured Notes are guaranteed on a senior secured basis, jointly and severally, by A&F and each of the existing and future wholly-owned domestic restricted subsidiaries of A&F that guarantee or will guarantee A&F Management’s Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) or certain future capital markets indebtedness. Certain of the agreements related to the Senior Secured Notes and the ABL Facility also contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances. The Company was in compliance with all debt covenants under these agreements as of April 30, 2022. 11. SHARE-BASED COMPENSATION Financial statement impact The following table details share-based compensation expense and the related income tax impacts for the thirteen weeks ended April 30, 2022 and May 1, 2021: Thirteen Weeks Ended (in thousands) April 30, 2022 May 1, 2021 Share-based compensation expense $ 8,356 $ 8,450 Income tax benefit associated with share-based compensation expense recognized 965 298 The following table details discrete income tax benefits and charges related to share-based compensation awards during the thirteen weeks ended April 30, 2022 and May 1, 2021: Thirteen Weeks Ended (in thousands) April 30, 2022 May 1, 2021 Income tax discrete benefits realized for tax deductions related to the issuance of shares $ 2,111 $ 3,190 Income tax discrete charges realized upon cancellation of stock appreciation rights ( 195 ) ( 3 ) Total income tax discrete benefits related to share-based compensation awards $ 1,916 $ 3,187 The following table details the amount of employee tax withheld by the Company upon the issuance of shares associated with restricted stock units vesting and the exercise of stock appreciation rights for the thirteen weeks ended April 30, 2022 and May 1, 2021: Abercrombie & Fitch Co. 13 2022 1Q Form 10-Q Table of Contents Thirteen Weeks Ended (in thousands) April 30, 2022 May 1, 2021 Employee tax withheld upon issuance of shares (1) $ 13,925 $ 11,748 (1) Classified within other financing activities on the Condensed Consolidated Statements of Cash Flows. Restricted stock units The following table summarizes activity for restricted stock units for the thirteen weeks ended April 30, 2022: Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Number of Underlying Shares Weighted- Average Grant Date Fair Value Number of Underlying Shares Weighted- Average Grant Date Fair Value Number of Underlying Shares Weighted- Average Grant Date Fair Value Unvested at January 29, 2022 2,532,240 $ 17.16 340,149 $ 27.08 680,184 $ 22.81 Granted 725,142 32.19 165,263 32.07 82,635 45.15 Adjustments for performance achievement — — 5,668 23.05 18,881 36.24 Vested ( 815,718 ) 16.70 ( 194,465 ) 23.05 ( 113,284 ) 36.24 Forfeited ( 28,840 ) 17.38 — — — — Unvested at April 30, 2022 (1) 2,412,824 $ 21.84 316,615 $ 32.08 668,416 $ 23.67 (1) Unvested shares related to restricted stock units with performance-based and market-based vesting conditions are reflected at 100% of their target vesting amount in the table above. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can be achieved at up to 200% of their target vesting amount. The following table details unrecognized compensation cost and the remaining weighted-average period over which these costs are expected to be recognized for restricted stock units as of April 30, 2022: (in thousands) Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Unrecognized compensation cost $ 46,317 $ — $ 20,545 Remaining weighted-average period cost is expected to be recognized (years) 1.4 0.0 1.1 Additional information pertaining to restricted stock units for the thirteen weeks ended April 30, 2022 and May 1, 2021 follows: (in thousands) April 30, 2022 May 1, 2021 Service-based restricted stock units: Total grant date fair value of awards granted $ 23,342 $ 19,445 Total grant date fair value of awards vested 13,622 10,639 Performance-based restricted stock units: Total grant date fair value of awards granted 5,300 4,658 Total grant date fair value of awards vested 4,482 — Market-based restricted stock units: Total grant date fair value of awards granted 3,731 3,651 Total grant date fair value of awards vested 4,105 3,390 Abercrombie & Fitch Co. 14 2022 1Q Form 10-Q Table of Contents The weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during the thirteen weeks ended April 30, 2022 and May 1, 2021 were as follows: April 30, 2022 May 1, 2021 Grant date market price $ 32.07 $ 31.78 Fair value 45.15 49.81 Assumptio Price volatility 66 % 66 % Expected term (years) 2.9 2.9 Risk-free interest rate 2.3 % 0.3 % Dividend yield — % — % Average volatility of peer companies 72.9 72.0 Average correlation coefficient of peer companies 0.5146 0.4694 Stock appreciation rights The following table summarizes stock appreciation rights activity for the thirteen weeks ended April 30, 2022: Number of Underlying Shares Weighted-Average Exercise Price Aggregate Intrinsic Value Weighted-Average Remaining Contractual Life (years) Outstanding at January 29, 2022 236,139 $ 32.55 Forfeited or expired ( 33,300 ) 52.75 Outstanding at April 30, 2022 202,839 $ 29.24 $ 1,523,587 2.4 Stock appreciation rights exercisable at April 30, 2022 202,839 $ 29.24 $ 1,523,587 2.4 No stock appreciation rights were exercised during the thirteen weeks ended April 30, 2022 or May 1, 2021. 12. DERIVATIVE INSTRUMENTS The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes. The Company uses derivative instruments, primarily foreign currency exchange forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign-currency-denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign-currency-denominated intercompany receivables. Fluctuations in foreign currency exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These foreign currency exchange forward contracts typically have a maximum term of twelve months. The sale of the inventory to the Company’s customers will result in the reclassification of related derivative gains and losses that are reported in AOCL into earnings. The Company also uses foreign currency exchange forward contracts to hedge certain foreign-currency-denominated net monetary assets/liabilities. Examples of monetary assets/liabilities include cash balances, receivables and payables. Fluctuations in foreign currency exchange rates result in transaction gains or losses being recorded in earnings, as U.S. GAAP requires that monetary assets/liabilities be remeasured at the spot exchange rate at quarter-end and upon settlement. The Company has chosen not to apply hedge accounting to these instruments because there are no anticipated differences in the timing of gain or loss recognition on the hedging instruments and the hedged items. As of April 30, 2022, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all, of forecasted foreign-currency-denominated intercompany inventory transactions, the resulting settlement of the foreign-currency-denominated intercompany accounts receivable, or Abercrombie & Fitch Co. 15 2022 1Q Form 10-Q Table of Contents (in thousands) Notional Amount (1) Euro $ 41,015 British pound 34,626 Canadian dollar 6,132 Japanese yen 3,978 (1) Amounts reported are the U.S. Dollar notional amounts outstanding as of April 30, 2022. The fair value of derivative instruments is valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk. The location and amounts of derivative fair values of foreign currency exchange forward contracts on the Condensed Consolidated Balance Sheets as of April 30, 2022 and January 29, 2022 were as follows: (in thousands) Location April 30, 2022 January 29, 2022 Location April 30, 2022 January 29, 2022 Derivatives designated as cash flow hedging instruments Other current assets $ 6,958 $ 4,973 Accrued expenses $ — $ — Derivatives not designated as hedging instruments Other current assets — — Accrued expenses — — Total $ 6,958 $ 4,973 $ — $ — Information pertaining to derivative gains or losses from foreign currency exchange forward contracts designated as cash flow hedging instruments for the thirteen weeks ended April 30, 2022 and May 1, 2021 follows: Thirteen Weeks Ended (in thousands) April 30, 2022 May 1, 2021 Gain recognized in AOCL (1) $ 5,363 $ 1,144 Gain (loss) reclassified from AOCL to cost of sales, exclusive of depreciation and amortization (2) 3,684 ( 1,455 ) (1) Amount represents the change in fair value of derivative instruments. (2) Amount represents gain (loss) reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) when the hedged item affects earnings, which is when merchandise is converted to cost of sales, exclusive of depreciation and amortization. Substantially all of the unrealized gain will be recognized in costs of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income over the next twelve months . Additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts not designated as hedging instruments for the thirteen weeks ended April 30, 2022 and May 1, 2021 follows: Thirteen Weeks Ended (in thousands) April 30, 2022 May 1, 2021 Gain (loss) recognized in other operating income, net $ 1,141 $ ( 468 ) Abercrombie & Fitch Co. 16 2022 1Q Form 10-Q Table of Contents 13. ACCUMULATED OTHER COMPREHENSIVE LOSS Fo r the thirteen weeks ended April 30, 2022, the activity in AOCL was as follows: Thirteen Weeks Ended April 30, 2022 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain on Derivative Financial Instruments Total Beginning balance at January 29, 2022 $ ( 120,689 ) $ 5,983 $ ( 114,706 ) Other comprehensive (loss) income before reclassifications ( 10,403 ) 5,363 ( 5,040 ) Reclassified gain from AOCL (1) — ( 3,684 ) ( 3,684 ) Tax effect — 33 33 Other comprehensive (loss) income after reclassifications ( 10,403 ) 1,712 ( 8,691 ) Ending balance at April 30, 2022 $ ( 131,092 ) $ 7,695 $ ( 123,397 ) (1) Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. For the thirteen weeks ended May 1, 2021, the activity in AOCL was as follows: Thirteen Weeks Ended May 1, 2021 (in thousands) Foreign Currency Translation Adjustment Unrealized Loss on Derivative Financial Instruments Total Beginning balance at January 30, 2021 $ ( 97,772 ) $ ( 4,535 ) $ ( 102,307 ) Other comprehensive (loss) income before reclassifications ( 1,274 ) 1,144 ( 130 ) Reclassified loss from AOCL (1) — 1,455 1,455 Other comprehensive (loss) income after reclassifications (2) ( 1,274 ) 2,599 1,325 Ending balance at May 1, 2021 $ ( 99,046 ) $ ( 1,936 ) $ ( 100,982 ) (1) Amount represents loss reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. (2) No income tax benefit was recognized during the period due to the establishment of a valuation allowance 14. SEGMENT REPORTING The Company’s two operating segments are brand-bas Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These operating segments have similar economic characteristics, classes of consumers, products, and production and distribution methods, operate in the same regulatory environments, and have been aggregated into one reportable segment. Amounts shown below include net sales from wholesale, franchise and licensing operations, which are not a significant component of total revenue, and are aggregated within their respective operating segment and geographic area. The Company’s net sales by operating segment for the thirteen weeks ended April 30, 2022 and May 1, 2021 were as follows: Thirteen Weeks Ended (in thousands) April 30, 2022 May 1, 2021 Hollister $ 428,834 $ 442,408 Abercrombie 383,928 338,997 Total $ 812,762 $ 781,405 Abercrombie & Fitch Co. 17 2022 1Q Form 10-Q Table of Contents Net sales by geographic area are presented by attributing revenues to an individual country on the basis of the country in which the merchandise was sold for in-store purchases and on the basis of the shipping location provided by customers for digital and wholesale orders. The Company’s net sales by geographic area for the thirteen weeks ended April 30, 2022 and May 1, 2021 were as follows: Thirteen Weeks Ended (in thousands) April 30, 2022 May 1, 2021 U.S. $ 585,106 $ 553,846 EMEA (1) 163,969 159,002 APAC (2) 29,897 46,046 Other 33,790 22,511 International $ 227,656 $ 227,559 Total $ 812,762 $ 781,405 (1) Europe, Middle East and Africa (“EMEA”) (2) Asia-Pacific Region (“APAC”) Abercrombie & Fitch Co. 18 2022 1Q Form 10-Q Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the Company’s Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q in “ I tem 1. F inancial S tatements (U naudited ) ,” to which all references to Notes in MD&A are made. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Quarterly Report on Form 10-Q or made by the Company, its management or spokespeople involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company’s control. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “should,” “are confident,” or the negative version of those words or other comparable words and similar expressions may identify forward-looking statements. Future economic and industry trends that could potentially impact revenue and profitability are difficult to predict. Therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. Factors that could cause results to differ from those expressed in the Company’s forward-looking statements include, but are not limited to, the risks described or referenced in Part I, Item 1A. “Risk Factors,” in the Company’s Annual Report on Fiscal 2021 Form 10-K for the fiscal year ended January 29, 2022 and otherwise in our reports and filings with the SEC, as well as the followin • risks and uncertainty related to the ongoing COVID-19 pandemic and any other adverse public health developments; • risks related to changes in global economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits; • risks related to recent inflationary pressures with respect to labor and raw materials and global supply chain constraints that have, and could continue to, affect freight, transit and other costs; • risks related to geopolitical conflict, including the on-going hostilities in Ukraine, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience; • risks related to our failure to engage our customers, anticipate customer demand and changing fashion trends, and manage our inventory; • risks related to our ability to successfully invest in customer, digital and omnichannel initiatives; • risks related to our ability to execute on our global store network optimization initiative; • risks related to our international growth strategy; • risks related to cyber security threats and privacy or data security breaches or the potential loss or disruption of our information systems; • risks associated with climate change and other corporate responsibility issues; and. • uncertainties related to future legislation, regulatory reform, policy changes, or interpretive guidance on existing legislation. In light of the significant uncertainties in the forward-looking statements included herein, including the uncertainty surrounding COVID-19, the inclusion of such information should not be regarded as a representation by the Company, or any other person, that the objectives of the Company will be achieved. The forward-looking statements included herein are based on information presently available to the management of the Company. Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. Abercrombie & Fitch Co. 19 2022 1Q Form 10-Q Table of Contents INTRODUCTION MD&A is provided as a supplement to the accompanying Condensed Consolidated Financial Statements and notes thereto to help provide an understanding of the Company’s results of operations, financial condition, and liquidity. MD&A is organized as follows: • Overview . A general description of the Company’s business and certain segment information. • Current Trends and Outlook . A discussion related to certain of the Company’s focus areas for the current fiscal year and discussion of certain risks and challenges as well as a summary of the Company’s performance for the thirteen weeks ended April 30, 2022 and May 1, 2021. • Results of Operations . An analysis of certain components of the Company’s Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the thirteen weeks ended April 30, 2022 and May 1, 2021. • Liquidity and Capital Resources . A discussion of the Company’s financial condition, changes in financial condition and liquidity as of April 30, 2022, which includes (i) an analysis of financial condition as compared to January 29, 2022; (ii) an analysis of changes in cash flows for the thirteen weeks ended April 30, 2022 as compared to the thirteen weeks ended May 1, 2021; and (iii) an analysis of liquidity, including availability under the Company’s credit facility, the Company’s share repurchase program, and outstanding debt and covenant compliance. • Recent Accounting Pronouncements . A discussion, as applicable, of the recent accounting pronouncements the Company has adopted or is currently evaluating, including the dates of adoption and/or expected dates of adoption, and anticipated effects on the Company’s Condensed Consolidated Financial Statements. • Critical Accounting E stimates . A discussion of the accounting estimates considered to be important to the Company’s results of operations and financial condition, which typically require significant judgment and estimation on the part of management in their application. • Non-GAAP Financial Measures . MD&A provides a discussion of certain financial measures that have been determined to not be presented in accordance with GAAP. This section includes certain reconciliations between GAAP and non-GAAP financial measures and additional details on non-GAAP financial measures, including information as to why the Company believes the non-GAAP financial measures provided within MD&A are useful to investors. Abercrombie & Fitch Co. 20 2022 1Q Form 10-Q Table of Contents OVERVIEW Business summary The Company is a global, digitally led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. The Company’s two brand-based operating segments are Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These five brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company operates primarily in North America, Europe and Asia. The Company’s fiscal year ends on the Saturday closest to January 31. All references herein to the Company’s fiscal years are as follows: Fiscal year Year ended/ ending Number of weeks Fiscal 2021 January 29, 2022 52 Fiscal 2022 January 28, 2023 52 Fiscal 2023 February 3, 2024 53 Seasonality Due to the seasonal nature of the retail apparel industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year and the Company could have significant fluctuations in certain asset and liability accounts. The Company historically experiences its greatest sales activity during the fall season, the third and fourth fiscal quarters, due to back-to-school and holiday sales periods, respectively. CURRENT TRENDS AND OUTLOOK Focus areas for Fiscal 2022 The Company remains committed to, and confident in, its long-term vision of being and becoming a digitally-led global omnichannel apparel retailer and continues to evaluate opportunities to make progress against initiatives that support this vision. The following focus areas for Fiscal 2022 serve as a framework for the Company’s achievement of sustainable growth and long-term operating margin expansi • Accelerate digital, data and technology investments to increase agility and improve the customer experience; • Create a more personalized customer experience through a connected omnichannel ecosystem, • Optimize our global distribution network to expand digital capacity and improve product delivery speed • Opportunistically open new, omni-enabled stores in under penetrated markets, and • Integrate environmental, social and governance practices and standards throughout the Company. Supply chain disruptions, inflation and changing prices The Company has continued to see global supply chain constraints impacting our business and operations. The inability to receive inventory in a timely manner could cause delays in responding to customer demand and adversely affect sales. During the latter half of Fiscal 2021, the Company increased its air freight usage in response to inventory delays imposed by temporary factory closures in Vietnam. This disruption and the associated increased costs adversely impacted the Company during the latter half of Fiscal 2021 and into the first quarter of Fiscal 2022. In addition, the Company has experienced and expects to continue to experience inflationary pressures affecting the Company’s freight, transit, and other costs, and such rates are likely to remain elevated throughout Fiscal 2022. In order to mitigate supply chain constraints and higher freight rates, the Company has taken and expects to continue to take actions to manage the impact, including scheduling earlier inventory receipts to allow for longer lead times, expanding its number of freight vendors, and reducing air freight usage where possible. It is possible that the Company’s responses to factory closures, transportation delays, or freight rates will not be adequate to mitigate the impact, and that these events could continue to adversely affect the Company’s business and results of operations. The Company has also experienced inflationary pressures with respect to labor, cotton and other raw materials and other costs. Inflation can have a long-term impact on the Company because increasing costs may impact the ability to maintain satisfactory margins. The Company may be unsuccessful in passing these increased costs on to the customer through higher ticket prices. Furthermore, increases in inflation may not be matched by growth in consumer income, which also could have a negative impact on discretionary spending. In periods of perceived unfavorable conditions, consumers may reallocate available discretionary Abercrombie & Fitch Co. 21 2022 1Q Form 10-Q Table of Contents spending to areas outside of our core business. In addition, as COVID-19 restrictions begin to be lifted, consumers may use any remaining discretionary spending on travel and other experiences which may adversely impact demand for our products. Global Store Network Optimization As part of its ongoing global store network optimization initiative, the Company has a stated goal of repositioning from larger format locations, such as, tourist dependent and flagship locations, to smaller, omni-enabled stores that cater to local customers. The Company continues to focus on aligning store square footage with digital penetration, and during the first quarter of Fiscal 2022, the Company opened 4 new format stores, while closing 5 legacy stores. As part of this focus, the Company plans to open 60 new stores, while closing 30 stores, during Fiscal 2022, pending negotiations with our landlord partners. Future closures could be completed through natural lease expirations, while certain other leases include early termination options that can be exercised under specific conditions. The Company may also elect to exit or modify other leases, and could incur charges related to these actions.Additional details related to store count and gross square footage fol Hollister (1) Abercrombie (2) Total Company (3) U.S. International U.S. International U.S. International Total Number of sto January 29, 2022 351 154 173 51 524 205 729 New 1 2 1 — 2 2 4 Permanently closed — — (3) (2) (3) (2) (5) April 30, 2022 352 156 171 49 523 205 728 Gross square footage (in thousands) : April 30, 2022 2,318 1,218 1,146 347 3,464 1,565 5,029 (1) Hollister includes the Company’s Hollister and Gilly Hicks brands. Locations with Gilly Hicks carveouts within Hollister stores are represented as a single store count. Excludes 8 international franchise stores as of April 30, 2022, and January 29, 2022. Excludes 13 Company-operated temporary stores as of April 30, 2022 and 14 Company-operated temporary stores as of January 29, 2022. (2) Abercrombie includes the Company's Abercrombie & Fitch and abercrombie kids brands. Locations with abercrombie kids carveouts within Abercrombie & Fitch stores are represented as a single store count. Excludes 14 international franchise stores as of April 30, 2022 and January 29, 2022. Excludes 5 Company-operated temporary stores as of each of April 30, 2022 and January 29, 2022. (3) This store count excludes one international third-party operated multi-brand outlet store as of each of April 30, 2022, and January 29, 2022. COVID-19 There continues to be uncertainty surrounding ongoing COVID-19 pandemic and its impact on the global economy, including government-mandated restrictions, supply chain disruptions, inflationary pressures, higher freight and labor costs, and labor shortages. As of April 30, 2022, all U.S. stores were fully open for in-store service; however, temporary store closures have been mandated in certain parts of the APAC region in response to COVID-19. During periods of temporary store closures, reductions in revenue have not been offset by proportional decreases in expense, as the Company continues to incur store occupancy costs such as operating lease costs, net of rent abatements agreed upon during the period, depreciation expense, and certain other costs such as compensation, net of government payroll relief, and administrative expenses resulting in a negative effect on the relationship between the Company’s costs and revenues. The Company’s digital operations across brands have continued to serve the Company’s customers during periods of temporary store closures. In response to elevated digital demand during this period, the Company leveraged its omnichannel capabilities by continuing to offer Purchase-Online-Pickup-in-Store, including curbside pickup at a majority of U.S. locations, and by utilizing ship-from-store capabilities, including same-day delivery across its entire U.S. store fleet. Despite the recent strength in digital sales, the Company has historically generated the majority of its annual net sales through stores and there can be no assurance that the current level of digital penetration will continue when stores operate at full capacity Although U.S. and global economies have begun to recover from the COVID-19 pandemic as many health and safety restrictions have been lifted and vaccine distribution has increased, certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time, including labor shortages and disruptions of global supply chains and temporary store closures. The Company plans to follow the guidance of local governments to evaluate whether future store closures will be necessary. The extent of future impacts of COVID-19 on the Company’s business, including the duration and impact on overall customer demand, are uncertain as current circumstances are dynamic and depend on future developments, including, but not limited to, the duration and spread of COVID-19, the emergence of new variants of coronavirus, and the availability and acceptance of effective vaccines, boosters or medical treatments. Abercrombie & Fitch Co. 22 2022 1Q Form 10-Q Table of Contents Impact of global events and uncertainty We are a global multi-brand omnichannel specialty retailer, with operations in North America, Europe and Asia, among other regions, management is mindful of macroeconomic risks, global challenges and the changing global geopolitical environment, including the on-going conflict in Ukraine, that could adversely impact certain areas of the business. As a result, in addition to the events listed within MD&A, management continues to monitor certain other global events. The Company continues to assess the potential impacts these events and similar events may have on the business in future periods and continues to develop and update contingency plans to assist in mitigating potential impacts. It is possible that the Company’s preparations for such events are not adequate to mitigate their impact, and that these events could further adversely affect its business and results of operations. For a discussion of material risks that have the potential to cause our actual results to differ materially from our expectations, refer to the disclosures under the heading “FORWARD-LOOKING STATEMENTS AND RISK FACTORS” in “ITEM 1A. RISK FACTORS” on the Fiscal 2021 Form 10-K. Summary of results A summary of results for the thirteen weeks ended April 30, 2022 and May 1, 2021 follows: GAAP Non-GAAP (1) (in thousands, except change in net sales, gross profit rate, operating (loss) income margin and per share amounts) April 30, 2022 May 1, 2021 April 30, 2022 May 1, 2021 Thirteen Weeks Ended Net sales $ 812,762 $ 781,405 Change in net sales 4.0 % 61.0 % Gross profit rate 55.3 % 63.4 % Operating (loss) income $ (9,726) $ 57,433 $ (6,304) $ 60,097 Operating (loss) income margin (1.2) % 7.3 % (0.8) % 7.7 % Net (loss) income attributable to A&F $ (16,469) $ 41,768 $ (13,965) $ 43,983 Net (loss) income attributable to A&F per dilutive share (0.32) 0.64 (0.27) 0.67 (1) Discussion as to why the Company believes that these non-GAAP financial measures are useful to investors and a reconciliation of the Non-GAAP measures to the most directly comparable financial measure calculated and presented in accordance with GAAP are provided below under “ NON-GAAP FINANCIAL MEASURES .” Certain components of the Company’s Condensed Consolidated Balance Sheets as of April 30, 2022 and January 29, 2022 were as follows: (in thousands) April 30, 2022 January 29, 2022 Cash and equivalents $ 468,378 $ 823,139 Gross long-term borrowings outstanding, carrying amount 307,730 307,730 Inventories 562,510 525,864 Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirteen week periods ended April 30, 2022 and May 1, 2021 were as follows: (in thousands) April 30, 2022 May 1, 2021 Net cash used for operating activities $ (217,787) $ (131,350) Net cash used for investing activities (18,541) (14,404) Net cash used for financing activities (116,945) (53,191) Abercrombie & Fitch Co. 23 2022 1Q Form 10-Q Table of Contents RESULTS OF OPERATIONS The estimated basis point (“BPS”) change disclosed throughout this Results of Operations section has been rounded based on the change in the percentage of net sales. Net sales For the first quarter of Fiscal 2022, net sales increased 4% as compared to the first quarter of Fiscal 2021, primarily due to an increase in stores sales, as well as an increase average unit retail driven by lower promotions and markdowns, partially offset by the adverse impact from changes in foreign currency exchange rates of approximately $9 million. The Company’s net sales by operating segment for the thirteen weeks ended April 30, 2022 and May 1, 2021 were as follows: Thirteen Weeks Ended (in thousands) April 30, 2022 May 1, 2021 $ Change % Change Hollister (1) $ 428,834 $ 442,408 $ (13,574) (3)% Abercrombie (2) 383,928 338,997 44,931 13% Total $ 812,762 $ 781,405 $ 31,357 4% (1) Includes Hollister, Gilly Hicks and Social Tourist brands. (2) Includes Abercrombie & Fitch and abercrombie kids brands. Net sales by geographic area are presented by attributing revenues to an individual country on the basis of the country in which the merchandise was sold for in-store purchases and the shipping location provided by customers for digital orders. The Company’s net sales by geographic area for the thirteen weeks ended April 30, 2022 and May 1, 2021 were as follows: Thirteen Weeks Ended (in thousands) April 30, 2022 May 1, 2021 $ Change % Change U.S. $ 585,106 $ 553,846 $ 31,260 6% EMEA 163,969 159,002 4,967 3% APAC 29,897 46,046 (16,149) (35)% Other 33,790 22,511 11,279 50% International $ 227,656 $ 227,559 $ 97 0% Total $ 812,762 $ 781,405 $ 31,357 4% Cost of sales, exclusive of depreciation and amortization Thirteen Weeks Ended April 30, 2022 May 1, 2021 (in thousands) % of Net sales % of Net sales BPS Change Cost of sales, exclusive of depreciation and amortization $ 363,216 44.7% $ 286,271 36.6% 810 For the first quarter of Fiscal 2022, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 810 basis points as compared to the first quarter of Fiscal 2021. The year-over-year increase was driven by approximately $80 million higher average unit cost from freight inflation partially offset by higher average unit retail on lower promotions and higher ticket prices. Abercrombie & Fitch Co. 24 2022 1Q Form 10-Q Table of Contents Gross profit, exclusive of depreciation and amortization Thirteen Weeks Ended April 30, 2022 May 1, 2021 (in thousands) % of Net sales % of Net sales BPS Change Gross profit, exclusive of depreciation and amortization $ 449,546 55.3% $ 495,134 63.4% (810) Stores and distribution expense Thirteen Weeks Ended April 30, 2022 May 1, 2021 (in thousands) % of Net sales % of Net sales BPS Change Stores and distribution expense $ 337,543 41.5% $ 315,508 40.4% 110 For the first quarter of Fiscal 2022, stores and distribution expense increased 7% as compared to the first quarter of Fiscal 2021. Approximately half of the $22 million increase was due to the lapping of COVID19-related rent abatements and payroll credits last year, with the remaining primarily due to an increase in marketing and digital fulfillment expenses. These increases were partially offset by a reduction in store occupancy expense reflecting a decrease in store count and favorable rent negotiations. Marketing, general and administrative expense Thirteen Weeks Ended April 30, 2022 May 1, 2021 (in thousands) % of Net sales % of Net sales BPS Change Marketing, general and administrative expense $ 122,149 15.0% $ 120,947 15.5% (50) For the first quarter of Fiscal 2022, marketing, general and administrative expense increased 1% as compared to the first quarter of Fiscal 2021, primarily driven by increased digital media spend, consulting and information technology expense. These increases were partially offset by a decrease in depreciation expense. Asset impairment Thirteen Weeks Ended April 30, 2022 May 1, 2021 (in thousands) % of Net sales % of Net sales BPS Change Asset impairment $ 3,422 0.4% $ 2,664 0.3% 10 Excluded items: Asset impairment charges (1) (3,422) (0.4)% (2,664) (0.3)% (10) Adjusted non-GAAP asset impairment $ — 0.0% $ — —% — (1) Refer to “ NON-GAAP FINANCIAL MEASURES , ” for further details. Refer to Note 8, “ ASSET IMPAIRMENT .” Abercrombie & Fitch Co. 25 2022 1Q Form 10-Q Table of Contents Other operating income, net Thirteen Weeks Ended April 30, 2022 May 1, 2021 (in thousands) % of Net sales % of Net sales BPS Change Other operating income, net $ 3,842 0.5% $ 1,418 0.2% (30) For the first quarter of Fiscal 2022, other operating income, net increased $2.4 million as compared to the first quarter of Fiscal 2021, primarily driven by gains on foreign currency exchange forward contracts and a gain on the sale of property and equipment. Operating (loss) income Thirteen Weeks Ended April 30, 2022 May 1, 2021 (in thousands) % of Net sales % of Net sales BPS Change Operating (loss) income $ (9,726) (1.2)% $ 57,433 7.3% (850) Excluded items: Asset impairment charges (1) 3,422 0.4% 2,664 0.3% 10 Adjusted non-GAAP operating (loss) income $ (6,304) (0.8)% $ 60,097 7.7% (850) (1) Refer to “ NON-GAAP FINANCIAL MEASURES , ” for further details. Interest expense, net Thirteen Weeks Ended April 30, 2022 May 1, 2021 (in thousands) % of Net sales % of Net sales BPS Change Interest expense $ 7,809 1.0% $ 9,143 1.2% (20) Interest income (502) (0.1)% (537) (0.1)% — Interest expense, net $ 7,307 0.9% $ 8,606 1.1% (20) For the first quarter of Fiscal 2022, interest expense, net decreased $1.3 million as compared to the first quarter of Fiscal 2021, primarily driven by lower interest expense as a result of lower borrowings in the current quarter due to the purchase of Senior Secured Notes in the second quarter of Fiscal 2021. Abercrombie & Fitch Co. 26 2022 1Q Form 10-Q Table of Contents Income tax (benefit) expense Thirteen Weeks Ended April 30, 2022 May 1, 2021 (in thousands, except ratios) Effective Tax Rate Effective Tax Rate Income tax (benefit) expense $ (2,187) 12.8% $ 6,121 12.5% Excluded items: Tax effect of pre-tax excluded items (1) 918 449 Adjusted non-GAAP income tax (benefit) expense $ (1,269) 9.3% $ 6,570 12.8% (1) The tax effect of pre-tax excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. Refer to “ Operating (loss) income ” and “ NON-GAAP FINANCIAL MEASURES ,” for details of pre-tax excluded items. Refer to Note 9, “ INCOME TAXES .” Net (loss) income attributable to A&F Thirteen Weeks Ended April 30, 2022 May 1, 2021 (in thousands) % of Net sales % of Net sales BPS Change Net (loss) income attributable to A&F $ (16,469) (2.0)% $ 41,768 5.3% (730) Excluded items, net of tax (1) 2,504 0.3% 2,215 0.3% — Adjusted non-GAAP net (loss) income attributable to A&F (2) $ (13,965) (1.7)% $ 43,983 5.6% (730) (1) Excluded items presented above under “ Operating (loss) income ,” and “ Income tax (benefit) expense ” (2) Refer to “ NON-GAAP FINANCIAL MEASURES ,” for further details. Net (loss) income per diluted share attributable to A&F Thirteen Weeks Ended April 30, 2022 May 1, 2021 $ Change Net (loss) income attributable to A&F per diluted share $ (0.32) $ 0.64 $(0.96) Excluded items, net of tax (1) 0.05 0.03 0.02 Adjusted non-GAAP net (loss) income per diluted share attributable to A&F (0.27) 0.67 (0.94) Impact from changes in foreign currency exchange rates — 0.05 (0.05) Adjusted non-GAAP net (loss) income per diluted share attributable to A&F on a constant currency basis (2) (0.27) 0.72 (0.99) (1) Excluded items presented above under “ Operating (loss) income ,” and “ Income tax (benefit) expense . ” (2) Refer to “ NON-GAAP FINANCIAL MEASURES ,” for further details. Abercrombie & Fitch Co. 27 2022 1Q Form 10-Q Table of Contents LIQUIDITY AND CAPITAL RESOURCES Overview The Company’s capital allocation strategy, priorities and investments are reviewed by A&F’s Board of Directors considering both liquidity and valuation factors. The Company believes that it will have adequate liquidity to fund operating activities over the next 12 months. The Company monitors financing market conditions and may in the future determine whether and when to amend, modify, or restructure its ABL Facility and/or the Senior Secured Notes. For a discussion of the Company’s share repurchase activity and suspended dividend program, please see below under “Share repurchases and dividends.” Primary sources and uses of cash The Company’s business has two principal selling seaso the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”). The Company generally experiences its greatest sales activity during the Fall season, due to the back-to-school and holiday sales periods. The Company relies on excess operating cash flows, which are largely generated in Fall, to fund operations throughout the year and to reinvest in the business to support future growth. The Company also has the ABL Facility available as a source of additional funding, which is described further below under “ Credit facility and Senior Secured Notes ”. Over the next twelve months, the Company expects its primary cash requirements to be directed towards prioritizing investments in the business and continuing to fund operating activities, including the acquisition of inventory, and obligations related to compensation, marketing, leases and any lease buyouts or modifications it may exercise, taxes and other operating activities. The Company evaluates opportunities for investments in the business that are in line with initiatives that position the business for sustainable long-term growth that align with its strategic pillars as described within “Item 1. Business - STRATEGY AND KEY BUSINESS PRIORITIES” included on the Fiscal 2021 Form 10-K, including being opportunistic regarding growth opportunities. Examples of potential investment opportunities include, but are not limited to, new store experiences, and investments in its digital and omnichannel initiatives. Historically, the Company has utilized free cash flow generated from operations to fund any discretionary capital expenditures, which have been prioritized towards new store experiences, as well as digital and omnichannel investments, information technology, and other projects. For the year-to-date period ended April 30, 2022, the Company used $26.3 million towards capital expenditures. Total capital expenditures for Fiscal 2022 are expected to be approximately $150 million. The Company measures liquidity using total cash and cash equivalents and incremental borrowing available under the ABL Facility. As of April 30, 2022, the Company has cash and cash equivalents of $0.5 billion and total liquidity of approximately $0.8 billion. This compares with cash and cash equivalents of $0.8 billion and total liquidity of approximately $1.1 billion at the beginning of Fiscal 2022. This allows the Company to evaluate potential opportunities to strategically deploy excess cash and/or deleverage the balance sheet, depending on various factors, such as market and business conditions, including the Company’s ability to accelerate investments in the business. Such opportunities include, but are not limited to, returning cash to shareholders through share repurchases or repurchasing outstanding Senior Secured Notes. Share repurchases and dividends In November 2021, the A&F Board of Directors approved a new $500 million share repurchase authorization, replacing the prior 2021 share repurchase authorization of 10.0 million shares, which had approximately 3.9 million shares remaining available. During the year-to-date period ended April 30, 2022, the Company repurchased approximately 3.3 million shares and returned approximately $100.0 million to shareholder through repurchases. Historically, the Company has repurchased shares of its Common Stock from time to time, dependent on market and business conditions, with the objectives of returning excess cash to shareholders and offsetting dilution from issuances of Common Stock associated with the exercise of employee stock appreciation rights and the vesting of restricted stock units. Shares may be repurchased in the open market, including pursuant to trading plans established in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), through privately negotiated transactions or other transactions or by a combination of such methods. Refer to “ I tem 2. U nregistered S ales of E quity S ecurities and U se of Proceeds ” of Part II of this Quarterly Report on Form 10-Q for the amount remaining available for purchase under the Company’s publicly announced stock repurchase authorization. In May 2020, the Company announced that it had temporarily suspended its dividend program in order to preserve liquidity and maintain financial flexibility in light of COVID-19. The Company may in the future review its dividend program to determine, in light of facts and circumstances at that time, whether and when to reinstate. Any dividends are declared at the discretion of A&F’s Board of Directors. A&F’s Board of Directors reviews and establishes a dividend amount, if at all, based on A&F’s financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors, including any restrictions under the Company’s agreements related to the Senior Secured Notes and the ABL Facility. There can be no assurance that the Company will declare and pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends. Abercrombie & Fitch Co. 28 2022 1Q Form 10-Q Table of Contents Credit facility and Senior Secured Notes As of April 30, 2022, the Company had $307.7 million of gross borrowings outstanding under the Senior Secured Notes. In addition, the Amended and Restated Credit Agreement provides for the ABL Facility, which is a senior secured asset-based revolving credit facility of up to $400 million. As of April 30, 2022, the Company did not have any borrowings outstanding under the ABL Facility. The ABL Facility matures on April 29, 2026. Details regarding the remaining borrowing capacity under the ABL Facility as of April 30, 2022 are as follows: (in thousands) April 30, 2022 Borrowing base $ 350,232 L Outstanding stand-by letters of credit (791) Borrowing capacity 349,441 L Minimum excess availability (1) (35,023) Borrowing available $ 314,418 (1) The Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility. Refer to Note 10, “ BORROWINGS .” Income taxes The Company’s earnings and profits from its foreign subsidiaries could be repatriated to the U.S. without incurring additional federal income tax. The Company determined that the balance of the Company’s undistributed earnings and profits from its foreign subsidiaries as of February 2, 2019 are considered indefinitely reinvested outside of the U.S., and if these funds were to be repatriated to the U.S., the Company would expect to incur an insignificant amount of state income taxes and foreign withholding taxes. The Company accrues for both state income taxes and foreign withholding taxes with respect to earnings and profits earned after February 2, 2019, in such a manner that these funds could be repatriated without incurring additional tax expense. As of April 30, 2022, $317.0 million of the Company’s $468.4 million of cash and equivalents were held by foreign affiliates. The Company is not dependent on dividends from its foreign affiliates to fund its U.S. operations or to fund investing and financing cash flow activities. Refer to Note 9, “ INCOME TAXES .” Analysis of cash flows The table below provides certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended April 30, 2022 and May 1, 2021: Thirteen Weeks Ended April 30, 2022 May 1, 2021 (in thousands) Cash and equivalents, and restricted cash and equivalents, beginning of period $ 834,368 $ 1,124,157 Net cash used for operating activities (217,787) (131,350) Net cash used for investing activities (18,541) (14,404) Net cash used for financing activities (116,945) (53,191) Effect of foreign currency exchange rates on cash (2,617) (1,021) Net decrease in cash and equivalents, and restricted cash and equivalents (355,890) (199,966) Cash and equivalents, and restricted cash and equivalents, end of period $ 478,478 $ 924,191 Operating activities - During the year-to-date period ended April 30, 2022, net cash used for operating activities included the acquisition of inventory and increased payments to vendors, including additional rent payments made during the period due to fiscal calendar shifting relative to monthly rent due dates, partially offset by increased cash receipts as a result of the 4% year-over-year increase in net sales. In addition, during the year-to-date period ended May 1, 2021, the Company finalized an agreement with and paid its landlord partner to settle all remaining obligations related to the SoHo Hollister flagship store in New York City, which closed during the second quarter of Fiscal 2019. Prior to this new agreement, the Company was required to make payments in aggregate of $80.1 million pursuant to the lease agreements through Fiscal 2028. The new agreement resulted in an acceleration of payments and provided for a discount resulting in an operating cash outflow of $63.8 million during the year-to-date period ended May 1, 2021. Abercrombie & Fitch Co. 29 2022 1Q Form 10-Q Table of Contents Investing activities - During the year-to-date period ended April 30, 2022, net cash used for investing activities were primarily used for capital expenditures of $26.3 million, partially offset by the proceeds from the sale of property and equipment of $7.8 million. This compared net cash used for investing activities of capital expenditures of $14.4 million for the year-to-date period ended May 1, 2021. Financing activities - During the year-to-date period ended April 30, 2022, net cash used for financing activities included the purchase of approximately 3.3 million shares of Common Stock with a market value of approximately $100.0 million. During the year-to-date period ended May 1, 2021, net cash used for financing activities primarily consisted of the purchase of approximately 1.1 million shares of Common Stock with a market value of approximately $35.2 million. Contractual obligations The Company’s contractual obligations consist primarily of operating leases, purchase orders for merchandise inventory, unrecognized tax benefits, certain retirement obligations, lease deposits and other agreements to purchase goods and services that are legally binding and that require minimum quantities to be purchased. These contractual obligations impact the Company’s short-term and long-term liquidity and capital resource needs. There have been no material changes during the thirteen weeks ended April 30, 2022 in the contractual obligations as of January 29, 2022, with the exception of those obligations which occurred in the normal course of business (primarily changes in the Company’s merchandise inventory-related purchases and lease obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company’s operations). RECENT ACCOUNTING PRONOUNCEMENTS The Company describes its significant accounting policies in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES , ” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” included on the Fiscal 2021 Form 10-K. The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements. CRITICAL ACCOUNTING ESTIMATES The Company describes its critical accounting estimates in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included on the Fiscal 2021 Form 10-K. There have been no significant changes in critical accounting policies and estimates since the end of Fiscal 2021. Abercrombie & Fitch Co. 30 2022 1Q Form 10-Q Table of Contents NON-GAAP FINANCIAL MEASURES This Quarterly Report on Form 10-Q includes discussion of certain financial measures calculated and presented on both a GAAP and a non-GAAP basis. The Company believes that each of the non-GAAP financial measures presented in this “ I tem 2. M anagement ’ s D iscussion and A nalysis of F inancial C ondition and R esults of O perations ” is useful to investors as it provides a meaningful basis to evaluate the Company’s operating performance excluding the effect of certain items that the Company believes may not reflect its future operating outlook, such as certain asset impairment charges related to the Company’s flagship stores and significant impairments primarily attributable to the COVID-19 pandemic, thereby supplementing investors’ understanding of comparability of operations across periods. Management used these non-GAAP financial measures during the periods presented to assess the Company’s performance and to develop expectations for future operating performance. These non-GAAP financial measures should be used as a supplement to, and not as an alternative to, the Company’s GAAP financial results, and may not be calculated in the same manner as similar measures presented by other companies. Comparable sales At times, the Company provides comparable sales, defined as the year-over-year percentage change in the aggregate of (1) net sales for stores that have been open as the same brand at least one year and whose square footage has not been expanded or reduced by more than 20% within the past year, with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations, and (2) digital net sales with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations. Comparable sales exclude revenue other than store and digital sales. Management uses comparable sales to understand the drivers of year-over-year changes in net sales and believes comparable sales is a useful metric as it can assist investors in distinguishing the portion of the Company’s revenue attributable to existing locations from the portion attributable to the opening or closing of stores. The most directly comparable GAAP financial measure is change in net sales. In light of store closures related to COVID-19, the Company has not disclosed comparable sales since Fiscal 2019. Excluded items The following financial measures are disclosed on a GAAP and on an adjusted non-GAAP basis excluding the following items, as applicab Financial measures (1) Excluded items Operating (loss) income Asset impairment charges Income tax (benefit) expense (2) Tax effect of pre-tax excluded items Net (loss) income and net (loss) income per share attributable to A&F (2) Pre-tax excluded items and the tax effect of pre-tax excluded items (1) Certain of these financial measures are also expressed as a percentage of net sales. (2) The tax effect of excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. Abercrombie & Fitch Co. 31 2022 1Q Form 10-Q Table of Contents Financial information on a constant currency basis The Company provides certain financial information on a constant currency basis to enhance investors’ understanding of underlying business trends and operating performance by removing the impact of foreign currency exchange rate fluctuations. Management also uses financial information on a constant currency basis to award employee performance-based compensation. The effect from foreign currency exchange rates, calculated on a constant currency basis, is determined by applying the current period’s foreign currency exchange rates to the prior year’s results and is net of the year-over-year impact from hedging. The per diluted share effect from foreign currency exchange rates is calculated using a 26% effective tax rate. A reconciliation of non-GAAP financial metrics on a constant currency basis to financial measures calculated and presented in accordance with GAAP for the thirteen weeks ended April 30, 2022 and May 1, 2021 follows: (in thousands, except change in net sales, gross profit rate, operating margin and per share data) Thirteen Weeks Ended Net sales April 30, 2022 May 1, 2021 % Change GAAP $ 812,762 $ 781,405 4% Impact from changes in foreign currency exchange rates — (8,529) 1% Non-GAAP on a constant currency basis $ 812,762 $ 772,876 5% Gross profit, exclusive of depreciation and amortization expense April 30, 2022 May 1, 2021 BPS Change (1) GAAP $ 449,546 $ 495,134 (810) Impact from changes in foreign currency exchange rates — (3,283) (20) Non-GAAP on a constant currency basis $ 449,546 $ 491,851 (830) Operating (loss) income April 30, 2022 May 1, 2021 BPS Change (1) GAAP $ (9,726) $ 57,433 (850) Excluded items (2) (3,422) (2,664) (10) Adjusted non-GAAP $ (6,304) $ 60,097 (860) Impact from changes in foreign currency exchange rates — 4,341 (50) Adjusted non-GAAP on a constant currency basis $ (6,304) $ 64,438 (910) Net (loss) income attributable to A&F per diluted share April 30, 2022 May 1, 2021 $ Change GAAP $ (0.32) $ 0.64 $(0.96) Excluded items, net of tax (2) (0.05) (0.03) (0.02) Adjusted non-GAAP $ (0.27) $ 0.67 $(0.94) Impact from changes in foreign currency exchange rates — 0.05 (0.05) Adjusted non-GAAP on a constant currency basis $ (0.27) $ 0.72 $(0.99) (1) The estimated basis point change has been rounded based on the change in the percentage of net sales. (2) Excluded items for the thirteen weeks ended April 30, 2022 and May 1, 2021 consisted of pre-tax store asset impairment charges and the tax effect of pre-tax excluded items. Abercrombie & Fitch Co. 32 2022 1Q Form 10-Q Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk INVESTMENT SECURITIES The Company maintains its cash equivalents in financial instruments, primarily time deposits and money market funds, with original maturities of three months or less. Due to the short-term nature of these instruments, changes in interest rates are not expected to materially affect the fair value of these financial instruments. The Rabbi Trust includes amounts to meet funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II and the Supplemental Executive Retirement Plan. The Rabbi Trust assets primarily consist of trust-owned life insurance policies which are recorded at cash surrender value. The change in cash surrender value of the trust-owned life insurance policies held in the Rabbi Trust resulted in realized gains of $0.4 million and $0.4 million for the thirteen weeks ended April 30, 2022 and May 1, 2021, respectively which are recorded in interest expense, net on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. The Rabbi Trust assets were included in other assets on the Condensed Consolidated Balance Sheets as of April 30, 2022 and January 29, 2022, and are restricted in their use as noted above. INTEREST RATE RISK Prior to July 2, 2020, the Company’s exposure to market risk due to changes in interest rates related primarily to the increase or decrease in the amount of interest expense from fluctuations in the LIBO rate, or an alternate base rate associated with the Company’s former term loan facility (the “Term Loan Facility”) and the ABL Facility. On July 2, 2020 the Company issued the Senior Secured Notes and repaid all outstanding borrowings under the Term Loan Facility and the ABL Facility, thereby eliminating any then existing cash flow market risk due to changes in interest rates. The Senior Secured Notes are exposed to interest rate risk that is limited to changes in fair value. This analysis for Fiscal 2022 may differ from the actual results due to potential changes in gross borrowings outstanding under the ABL Facility and potential changes in interest rate terms and limitations described within the Amended and Restated Credit Agreement. In July 2017, the Financial Conduct Authority (the authority that regulates LIBO rate) announced it intended to stop compelling banks to submit rates for the calculation of LIBO rate after 2021. Certain publications of the LIBO rate were phased out at the end of 2021 and all LIBO rate publications will cease after June 30, 2023. The transition from the LIBO rate to alternative rates is not expected to have a material impact on the Company’s interest expense. In addition, the Company has seen lower interest income earned on the Company’s investments and cash holdings, reflecting average daily balances. FOREIGN CURRENCY EXCHANGE RATE RISK A&F’s international subsidiaries generally operate with functional currencies other than the U.S. Dollar. Since the Company’s Condensed Consolidated Financial Statements are presented in U.S. Dollars, the Company must translate all components of these financial statements from functional currencies into U.S. Dollars at exchange rates in effect during or at the end of the reporting period. The fluctuation in the value of the U.S. Dollar against other currencies affects the reported amounts of revenues, expenses, assets and liabilities. The potential impact of foreign currency exchange rate fluctuations increases as international operations relative to domestic operations increase. A&F and its subsidiaries have exposure to changes in foreign currency exchange rates associated with foreign currency transactions and forecasted foreign currency transactions, including the purchase of inventory between subsidiaries and foreign-currency-denominated assets and liabilities. The Company has established a program that primarily utilizes foreign currency exchange forward contracts to partially offset the risks associated with the effects of certain foreign currency transactions and forecasted transactions. Under this program, increases or decreases in foreign currency exchange rate exposures are partially offset by gains or losses on foreign currency exchange forward contracts, to mitigate the impact of foreign currency exchange gains or losses. The Company does not use forward contracts to engage in currency speculation. Outstanding foreign currency exchange forward contracts are recorded at fair value at the end of each fiscal period. Foreign currency exchange forward contracts are sensitive to changes in foreign currency exchange rates. The Company assessed the risk of loss in fair values from the effect of a hypothetical 10% devaluation of the U.S. Dollar against the exchange rates for foreign currencies under contract. Such a hypothetical devaluation would decrease derivative contract fair values by approximately $7.8 million. As the Company’s foreign currency exchange forward contracts are primarily designated as cash flow hedges of forecasted transactions, the hypothetical change in fair values would be expected to be largely offset by the net change in fair values of the underlying hedged items. Refer to Note 12, “ DERIVATIVE INSTRUMENTS ,” for the fair value of any outstanding foreign currency exchange forward contracts included in other current assets and accrued expenses as of April 30, 2022 and January 29, 2022. Abercrombie & Fitch Co. 33 2022 1Q Form 10-Q Table of Contents Item 4. Controls and Procedures DISCLOSURE CONTROLS AND PROCEDURES A&F maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports that A&F files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to A&F’s management, including A&F’s principal executive officer and A&F’s principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met. A&F’s management, including the Chief Executive Officer of A&F (who serves as Principal Executive Officer of A&F) and the Executive Vice President and Chief Financial Officer of A&F (who serves as Principal Financial Officer and Principal Accounting Officer of A&F), evaluated the effectiveness of A&F’s design and operation of its disclosure controls and procedures as of the end of the fiscal quarter ended April 30, 2022. The Chief Executive Officer of A&F (in such individual’s capacity as the Principal Executive Officer of A&F) and the Executive Vice President and Chief Financial Officer of A&F (in such individual’s capacity as the Principal Financial Officer of A&F) concluded that A&F’s disclosure controls and procedures were effective at a reasonable level of assurance as of April 30, 2022. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in A&F’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during A&F’s fiscal quarter ended April 30, 2022 that materially affected, or are reasonably likely to materially affect, A&F’s internal control over financial reporting. Abercrombie & Fitch Co. 34 2022 1Q Form 10-Q Table of Contents PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. The Company’s legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes estimated liabilities for the outcome of litigation where losses are deemed probable and the amount of loss, or range of loss, is reasonably estimable. The Company also determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that a loss is reasonably possible and it is able to determine such estimates. The Company’s accrued charges for certain legal contingencies are classified within accrued expenses on the Condensed Consolidated Balance Sheets included in “ I tem 1. F inancial S tatements (U naudited ) ,” of Part I of this Quarterly Report on Form 10-Q. Based on currently available information, the Company cannot estimate a range of reasonably possible losses in excess of the accrued charges for legal contingencies. In addition, the Company has not established accruals for certain claims and legal proceedings pending against the Company where it is not possible to reasonably estimate the outcome or potential liability, and the Company cannot estimate a range of reasonably possible losses for these legal matters. Actual liabilities may differ from the amounts recorded, due to uncertainties regarding final settlement agreement negotiations, court approvals and the terms of any approval by the courts, and there can be no assurance that the final resolution of legal matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts. In addition, pursuant to Item 103(c)(3)(iii) of Regulation S-K under the Exchange Act, the Company is required to disclose certain information about environmental proceedings to which a governmental authority is a party if the Company reasonably believes such proceedings may result in monetary sanctions, exclusive of interest and costs, above a stated threshold. The Company has elected to apply a threshold of $1 million for purposes of determining whether disclosure of any such proceedings is required. Item 1A. Risk Factors The Company’s risk factors as of April 30, 2022 have not changed materially from those disclosed in Part I, “Item 1A. Risk Factors” included on the Fiscal 2021 Form 10-K. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no sales of equity securities during the first quarter of Fiscal 2022 that were not registered under the Securities Act of 1933, as amended. The following table provides information regarding the purchase of shares of Common Stock of A&F made by or on behalf of A&F or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, during each fiscal month of the thirteen weeks ended April 30, 2022: Period (fiscal month) Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) Maximum Number of Shares (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans or Programs (2)(3) January 30, 2022 through February 26, 2022 — $ — — $ 357,959,371 February 27, 2022 through April 2, 2022 3,692,062 30.85 3,260,022 257,959,401 April 3, 2021 through April 30, 2022 451 34.79 — 257,959,401 Total 3,692,513 30.67 3,260,022 257,959,401 (1) An aggregate of 432,491 shares of A&F’s Common Stock purchased during the thirteen weeks ended April 30, 2022 were withheld for tax payments due upon the vesting of employee restricted stock units and the exercise of employee stock appreciation rights. (2) On November 23, 2021, we announced that the A&F Board of Directors approved a new $500 million share repurchase authorization, replacing the prior 2021 share repurchase authorization of 10.0 million shares, which had approximately 3.9 million shares remaining available. (3) The number shown represents, as of the end of each period, the approximate dollar value of Common Stock that may yet be purchased under A&F’s publicly announced stock repurchase authorization described in footnote 2 above. The shares may be purchased, from time to time depending on business and market conditions. Abercrombie & Fitch Co. 35 2022 1Q Form 10-Q Table of Contents Item 6. Exhibits Exhibit Document 3.1 Amended and Restated Certificate of Incorporation of Abercrombie & Fitch Co., reflecting amendments through the date of this Quarterly Report on Form 10-Q, incorporated herein by reference to Exhibit 3.2 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2011 (File No. 001-12107). [This document represents the Amended and Restated Certificate of Incorporation of Abercrombie & Fitch Co. in compiled form incorporating all amendments. This compiled document has not been filed with the Delaware Secretary of State.] 3.2 Amended and Restated Bylaws of Abercrombie & Fitch Co. reflecting amendments through the date of this Quarterly Report on Form 10-Q, incorporated herein by reference to Exhibit 3.10 to A&F’s Annual Report on Form 10-K for the fiscal year ended February 3, 2018 (File No. 001-12107). [This document represents the Amended and Restated Bylaws of Abercrombie & Fitch Co. in compiled form incorporating all amendments.] 10.1 Form of Performance Share Award Agreement used to evidence the grant of performance shares to associates (employees) of Abercrombie & Fitch Co. and its subsidiaries under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates on or after March 24, 2022.* 31.1 Certifications by Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 31.2 Certifications by Executive Vice President and Chief Financial Officer (Principal Financial Officer) pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 32.1 Certifications by Chief Executive Officer (who serves as Principal Executive Officer) and Executive Vice President and Chief Financial Officer (who serves as Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** 101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its Inline XBRL tags are embedded within the Inline XBRL document.* 101.SCH Inline XBRL Taxonomy Extension Schema Document.* 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.* 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.* 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.* 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.* 104 Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).* *     Filed herewith. **    Furnished herewith. Abercrombie & Fitch Co. 36 2022 1Q Form 10-Q Table of Contents Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Abercrombie & Fitch Co. Date: June 8, 2022 By: /s/ Scott Lipesky Scott Lipesky Executive Vice President and Chief Financial Officer (Principal Financial Officer, Principal Accounting Officer and Authorized Officer) Abercrombie & Fitch Co. 37 2022 1Q Form 10-Q

Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Stockholders’ Equity 5 Condensed Consolidated Statements of Cash Flows 7 Index for Notes to Condensed Consolidated Financial Statements 8 Notes to Condensed Consolidated Financial Statements 9 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk 36 Item 4. Controls and Procedures 37 PART II. OTHER INFORMATION Item 1. Legal Proceedings 38 Item 1A. Risk Factors 38 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38 Item 6. Exhibits 39 Signatures 40 Abercrombie & Fitch Co. 2 2022 2Q Form 10-Q Table of Contents PART I. FINANCIAL INFORMATION Item 1.     Financial Statements (Unaudited) Abercrombie & Fitch Co. Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (Thousands, except per share amounts) (Unaudited) Thirteen Weeks Ended Twenty-Six Weeks Ended July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 Net sales $ 805,091 $ 864,850 $ 1,617,853 $ 1,646,255 Cost of sales, exclusive of depreciation and amortization 339,200 301,365 702,416 587,636 Gross profit 465,891 563,485 915,437 1,058,619 Stores and distribution expense 340,791 325,847 678,334 641,355 Marketing, general and administrative expense 124,168 123,913 246,317 244,860 Flagship store exit benefits — — — — Asset impairment 2,170 786 5,592 3,450 Other operating expense (income), net 953 ( 1,848 ) ( 2,889 ) ( 3,266 ) Operating (loss) income ( 2,191 ) 114,787 ( 11,917 ) 172,220 Interest expense, net 6,917 11,275 14,224 19,881 (Loss) income before income taxes ( 9,108 ) 103,512 ( 26,141 ) 152,339 Income tax expense (benefit) 5,634 ( 6,944 ) 3,447 ( 823 ) Net (loss) income ( 14,742 ) 110,456 ( 29,588 ) 153,162 L Net income attributable to noncontrolling interests 2,092 1,956 3,715 2,894 Net (loss) income attributable to A&F $ ( 16,834 ) $ 108,500 $ ( 33,303 ) $ 150,268 Net (loss) income attributable to A&F per share Basic $ ( 0.33 ) $ 1.77 $ ( 0.65 ) $ 2.43 Diluted $ ( 0.33 ) $ 1.69 $ ( 0.65 ) $ 2.32 Weighted-average shares outstanding Basic 50,441 61,428 51,262 61,914 Diluted 50,441 64,136 51,262 64,803 Other comprehensive (loss) income Foreign currency translation adjustments, net of tax $ ( 4,914 ) $ ( 1,986 ) $ ( 15,317 ) $ ( 3,260 ) Derivative financial instruments, net of tax ( 1,729 ) 2,703 ( 17 ) 5,302 Other comprehensive (loss) income ( 6,643 ) 717 ( 15,334 ) 2,042 Comprehensive (loss) income ( 21,385 ) 111,173 ( 44,922 ) 155,204 L Comprehensive income attributable to noncontrolling interests 2,092 1,956 3,715 2,894 Comprehensive (loss) income attributable to A&F $ ( 23,477 ) $ 109,217 $ ( 48,637 ) $ 152,310 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 3 2022 2Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Balance Sheets (Thousands, except par value amounts) (Unaudited) July 30, 2022 January 29, 2022 Assets Current assets: Cash and equivalents $ 369,957 $ 823,139 Receivables 79,820 69,102 Inventories 708,024 525,864 Other current assets 104,887 89,654 Total current assets 1,262,688 1,507,759 Property and equipment, net 511,181 508,336 Operating lease right-of-use assets 740,627 698,231 Other assets 219,598 225,165 Total assets $ 2,734,094 $ 2,939,491 Liabilities and stockholders’ equity Current liabiliti Accounts payable $ 408,297 $ 374,829 Accrued expenses 342,690 395,815 Short-term portion of operating lease liabilities 202,699 222,823 Income taxes payable 5,582 21,773 Total current liabilities 959,268 1,015,240 Long-term liabiliti Long-term portion of operating lease liabilities 714,265 697,264 Long-term borrowings, net 304,219 303,574 Other liabilities 83,415 86,089 Total long-term liabilities 1,101,899 1,086,927 Stockholders’ equity Class A Common Stoc $ 0.01 par val 150,000 shares authorized and 103,300 shares issued for all periods presented 1,033 1,033 Paid-in capital 405,127 413,190 Retained earnings 2,333,867 2,386,156 Accumulated other comprehensive loss, net of tax (“AOCL”) ( 130,040 ) ( 114,706 ) Treasury stock, at average 53,829 and 50,315 shares as of July 30, 2022 and January 29, 2022, respectively ( 1,948,199 ) ( 1,859,583 ) Total Abercrombie & Fitch Co. stockholders’ equity 661,788 826,090 Noncontrolling interests 11,139 11,234 Total stockholders’ equity 672,927 837,324 Total liabilities and stockholders’ equity $ 2,734,094 $ 2,939,491 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 4 2022 2Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Statements of Stockholders’ Equity (Thousands, except per share amounts) (Unaudited) Thirteen Weeks Ended July 30, 2022 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, April 30, 2022 50,442 $ 1,033 $ 398,412 $ 9,444 $ 2,350,807 $ ( 123,397 ) 52,858 $ ( 1,931,494 ) $ 704,805 Net loss — — — 2,092 ( 16,834 ) — — — ( 14,742 ) Purchase of Common Stock ( 1,000 ) — — — — — 1,000 ( 17,775 ) ( 17,775 ) Share-based compensation issuances and exercises 29 — ( 1,045 ) — ( 106 ) — ( 29 ) 1,070 ( 81 ) Share-based compensation expense — — 7,760 — — — — — 7,760 Derivative financial instruments, net of tax — — — — — ( 1,729 ) — — ( 1,729 ) Foreign currency translation adjustments, net of tax — — — — — ( 4,914 ) — — ( 4,914 ) Distributions to noncontrolling interests, net — — — ( 397 ) — — — — ( 397 ) Ending balance at July 30, 2022 49,471 $ 1,033 $ 405,127 $ 11,139 $ 2,333,867 $ ( 130,040 ) 53,829 $ ( 1,948,199 ) $ 672,927 Thirteen Weeks Ended July 31, 2021 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, May 1, 2021 61,935 $ 1,033 $ 395,277 $ 8,776 $ 2,169,748 $ ( 100,982 ) 41,365 $ ( 1,523,902 ) $ 949,950 Net income — — — 1,956 108,500 — — — 110,456 Purchase of Common Stock ( 2,374 ) — — — 2,374 ( 100,000 ) ( 100,000 ) Share-based compensation issuances and exercises 130 — ( 1,873 ) — ( 3,239 ) — ( 130 ) 4,800 ( 312 ) Share-based compensation expense — — 6,487 — — — — — 6,487 Derivative financial instruments, net of tax — — — — — 2,703 — — 2,703 Foreign currency translation adjustments, net of tax — — — — — ( 1,986 ) — — ( 1,986 ) Distributions to noncontrolling interests, net — — — ( 365 ) — — — — ( 365 ) Ending balance at July 31, 2021 59,691 $ 1,033 $ 399,891 $ 10,367 $ 2,275,009 $ ( 100,265 ) 43,609 $ ( 1,619,102 ) $ 966,933 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 5 2022 2Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Statements of Stockholders’ Equity (Thousands, except per share amounts) (Unaudited) Twenty-Six Weeks Ended July 30, 2022 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, January 29, 2022 52,985 $ 1,033 $ 413,190 $ 11,234 $ 2,386,156 $ ( 114,706 ) 50,315 $ ( 1,859,583 ) $ 837,324 Net loss — — — 3,715 ( 33,303 ) — — — ( 29,588 ) Purchase of Common Stock ( 4,260 ) — — — — — 4,260 ( 117,775 ) ( 117,775 ) Share-based compensation issuances and exercises 746 — ( 24,179 ) — ( 18,986 ) — ( 746 ) 29,159 ( 14,006 ) Share-based compensation expense — — 16,116 — — — — — 16,116 Derivative financial instruments, net of tax — — — — — ( 17 ) — — ( 17 ) Foreign currency translation adjustments, net of tax — — — — — ( 15,317 ) — — ( 15,317 ) Distributions to noncontrolling interests, net — — — ( 3,810 ) — — — — ( 3,810 ) Ending balance at July 30, 2022 49,471 $ 1,033 $ 405,127 $ 11,139 $ 2,333,867 $ ( 130,040 ) 53,829 $ ( 1,948,199 ) $ 672,927 Twenty-Six Weeks Ended July 31, 2021 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, January 30, 2021 62,399 $ 1,033 $ 401,283 $ 12,684 $ 2,149,470 $ ( 102,307 ) 40,901 $ ( 1,512,851 ) $ 949,312 Net income — — — 2,894 150,268 — — — 153,162 Purchase of Common Stock ( 3,451 ) — — — 3,451 ( 135,249 ) ( 135,249 ) Share-based compensation issuances and exercises 743 — ( 16,329 ) — ( 24,729 ) — ( 743 ) 28,998 ( 12,060 ) Share-based compensation expense — — 14,937 — — — — — 14,937 Derivative financial instruments, net of tax — — — — — 5,302 — — 5,302 Foreign currency translation adjustments, net of tax — — — — — ( 3,260 ) — — ( 3,260 ) Distributions to noncontrolling interests, net — — — ( 5,211 ) — — — — ( 5,211 ) Ending balance at July 31, 2021 59,691 $ 1,033 $ 399,891 $ 10,367 $ 2,275,009 $ ( 100,265 ) 43,609 $ ( 1,619,102 ) $ 966,933 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 6 2022 2Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Statements of Cash Flows (Thousands) (Unaudited) Twenty-Six Weeks Ended July 30, 2022 July 31, 2021 Operating activities Net (loss) income $ ( 29,588 ) $ 153,162 Adjustments to reconcile net (loss) income to net cash (used for) provided by operating activiti Depreciation and amortization 65,543 72,249 Asset impairment 5,592 3,450 (Gain) loss on disposal ( 1,083 ) 2,188 Benefit for deferred income taxes ( 1,629 ) ( 21,187 ) Share-based compensation 16,116 14,937 Loss on extinguishment of debt — 5,347 Changes in assets and liabiliti Inventories ( 184,657 ) ( 11,849 ) Accounts payable and accrued expenses ( 34,013 ) ( 63,562 ) Operating lease right-of-use assets and liabilities ( 41,122 ) ( 93,040 ) Income taxes ( 17,154 ) 1,379 Other assets ( 38,436 ) ( 11,575 ) Other liabilities 698 ( 1,554 ) Net cash (used for) provided by operating activities ( 259,733 ) 49,945 Investing activities Purchases of property and equipment ( 59,582 ) ( 35,269 ) Proceeds from the sale of property and equipment 7,972 — Net cash used for investing activities ( 51,610 ) ( 35,269 ) Financing activities Purchase of senior secured notes — ( 46,969 ) Payment of debt issuance or modification costs and fees — ( 1,837 ) Purchases of Common Stock ( 117,775 ) ( 135,249 ) Other financing activities ( 17,649 ) ( 16,192 ) Net cash used for financing activities ( 135,424 ) ( 200,247 ) Effect of foreign currency exchange rates on cash ( 7,567 ) ( 2,547 ) Net decrease in cash and equivalents, and restricted cash and equivalents ( 454,334 ) ( 188,118 ) Cash and equivalents, and restricted cash and equivalents, beginning of period 834,368 1,124,157 Cash and equivalents, and restricted cash and equivalents, end of period $ 380,034 $ 936,039 Supplemental information related to non-cash activities Purchases of property and equipment not yet paid at end of period $ 50,133 $ 35,789 Operating lease right-of-use assets additions, net of terminations, impairments and other reductions 139,751 17,159 Supplemental information related to cash activities Cash paid for interest 13,463 14,950 Cash paid for income taxes 24,566 24,132 Cash received from income tax refunds 139 570 Cash paid for amounts included in measurement of operating lease liabilities, net of abatements 159,423 230,836 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 7 2022 2Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Index for Notes to Condensed Consolidated Financial Statements (Unaudited) Page No. Note 1. NATURE OF BUSINESS 9 Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 9 Note 3. REVENUE RECOGNITION 10 Note 4. NET (LOSS) INCOME PER SHARE 11 Note 5. FAIR VALUE 11 Note 6. PROPERTY AND EQUIPMENT, NET 12 Note 7. LEASES 12 Note 8. ASSET IMPAIRMENT 13 Note 9. INCOME TAXES 13 Note 10. BORROWINGS 14 Note 11. SHARE-BASED COMPENSATION 15 Note 12. DERIVATIVE INSTRUMENTS 16 Note 13. ACCUMULATED OTHER COMPREHENSIVE LOSS 18 Note 14. SEGMENT REPORTING 19 Abercrombie & Fitch Co. 8 2022 2Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. NATURE OF BUSINESS Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a global, digitally-led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. The Company’s two brand-based operating segments are Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These five brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company operates primarily in North America, Europe and Asia. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The accompanying Condensed Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its financial position, results of operations and cash flows. The Company has interests in an Emirati business venture and in a Kuwaiti business venture with Majid al Futtaim Fashion L.L.C. (“MAF”) and in a United States of America (the “U.S.”) business venture with Dixar L.L.C. (“Dixar”), each of which meets the definition of a variable interest entity (“VIE”). The purpose of the business ventures with MAF is to operate stores in the United Arab Emirates and Kuwait and the purpose of the business venture with Dixar is to hold the intellectual property related to the Social Tourist brand. The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the operating results, assets and liabilities of these VIEs, with the noncontrolling interests’ (“NCI”) portions of net income presented as net income attributable to NCI on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income and the NCI portion of stockholders’ equity presented as NCI on the Condensed Consolidated Balance Sheets. Fiscal year The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a fifty-two week year, but occasionally gives rise to an additional week, resulting in a fifty-three week year. Fiscal years are designated in the Condensed Consolidated Financial Statements and notes, as well as the remainder of this Quarterly Report on Form 10-Q, by the calendar year in which the fiscal year commences. All references herein to the Company’s fiscal years are as follows: Fiscal year Year ended/ ending Number of weeks Fiscal 2021 January 29, 2022 52 Fiscal 2022 January 28, 2023 52 Fiscal 2023 February 3, 2024 53 Interim financial statements The Condensed Consolidated Financial Statements as of July 30, 2022, and for the thirteen and twenty-six week periods ended July 30, 2022 and July 31, 2021, are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim consolidated financial statements. Accordingly, the Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in A&F’s Annual Report on Form 10-K for Fiscal 2021 filed with the SEC on March 28, 2022 (the “Fiscal 2021 Form 10-K”). The January 29, 2022 consolidated balance sheet data, included herein, were derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the U.S. (“GAAP”). In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to state fairly, in all material respects, the financial position, results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for Fiscal 2022. During the first quarter of 2022, the Company reclassified Flagship store exit benefits into Stores and distribution expense on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. There were no changes to Operating (loss) income or Net (loss) income. Prior period amounts have been reclassified to conform to current year’s presentation. Abercrombie & Fitch Co. 9 2022 2Q Form 10-Q Table of Contents Use of estimates The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved with estimates, actual results may differ. The extent to which the coronavirus disease (“COVID-19”) continues to impact the Company’s business and financial results will depend on numerous evolving factors including, but not limited t the duration, spread and emergence of new variants of the virus, the availability and acceptance of effective vaccines, boosters or medical treatments, the impact of COVID-19 on the length or frequency of store closures, and the extent to which COVID-19 impacts worldwide macroeconomic conditions including interest rates, foreign currency exchange rates, and governmental, business and consumer reactions to the pandemic. The Company’s assessment of these, as well as other factors, such as the impact of a slowing economy, rising interest rates and continued inflation, could impact management's estimates and result in material impacts to the Company’s consolidated financial statements in future reporting periods. Recent accounting pronouncements The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements. Condensed Consolidated Statements of Cash Flows reconciliation The following table provides a reconciliation of cash and equivalents and restricted cash and equivalents to the amounts shown on the Condensed Consolidated Statements of Cash Flows: (in thousands) Location July 30, 2022 January 29, 2022 July 31, 2021 January 30, 2021 Cash and equivalents Cash and equivalents $ 369,957 $ 823,139 $ 921,504 $ 1,104,862 Long-term restricted cash and equivalents Other assets 10,077 11,229 14,268 14,814 Short-term restricted cash and equivalents Other current assets — — 267 4,481 Cash and equivalents and restricted cash and equivalents $ 380,034 $ 834,368 $ 936,039 $ 1,124,157 3. REVENUE RECOGNITION Disaggregation of revenue All revenues are recognized in net sales in the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income . For information regarding the disaggregation of revenue, refer to Note 14, “ SEGMENT REPORTING . ” Contract liabilities The following table details certain contract liabilities representing unearned revenue as of July 30, 2022, January 29, 2022 and July 31, 2021: (in thousands) July 30, 2022 January 29, 2022 July 31, 2021 Gift card liability $ 35,205 $ 36,984 $ 29,038 Loyalty programs liability 21,525 22,757 20,962 The following table details recognized revenue associated with the Company’s gift card program and loyalty programs for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021: Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 Revenue associated with gift card redemptions and gift card breakage $ 22,652 $ 17,353 $ 45,653 $ 33,509 Revenue associated with reward redemptions and breakage related to the Company’s loyalty programs 10,630 9,897 $ 20,811 $ 19,450 Abercrombie & Fitch Co. 10 2022 2Q Form 10-Q Table of Contents 4. NET (LOSS) INCOME PER SHARE Net (loss) income per basic and diluted share attributable to A&F is computed based on the weighted-average number of outstanding shares of Class A Common Stock (“Common Stock”). Additional information pertaining to net (loss) income per share attributable to A&F follows: Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 Shares of Common Stock issued 103,300 103,300 103,300 103,300 Weighted-average treasury shares ( 52,859 ) ( 41,872 ) ( 52,038 ) ( 41,386 ) Weighted-average — basic shares 50,441 61,428 51,262 61,914 Dilutive effect of share-based compensation awards — 2,708 — 2,889 Weighted-average — diluted shares 50,441 64,136 51,262 64,803 Anti-dilutive shares (1) 4,209 1,194 4,245 1,277 (1) Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net (loss) income per diluted share because the impact would have been anti-dilutive. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can achieve up to 200% of their target vesting amount and are reflected at the maximum vesting amount less any dilutive portion. 5. FAIR VALUE Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows: • Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets that the Company can access at the measurement date. • Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly. • Level 3—inputs to the valuation methodology are unobservable. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The three levels of the hierarchy and the distribution of the Company’s assets measured at fair value on a recurring basis, as of July 30, 2022 and January 29, 2022, were as follows: Assets and liabilities at Fair Value as of July 30, 2022 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 37,389 $ 9,900 $ — $ 47,289 Derivative instruments (2) — 5,169 — 5,169 Rabbi Trust assets (3) 1 63,001 — 63,002 Restricted cash equivalents (1) 1,584 5,256 — 6,840 Total assets $ 38,974 $ 83,326 $ — $ 122,300 Liabiliti Derivative instruments (2) $ — $ 3 $ — $ 3 Total liabilities $ — $ 3 $ — $ 3 Assets at Fair Value as of January 29, 2022 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 49,309 $ 11,643 $ — $ 60,952 Derivative instruments (2) — 4,973 — 4,973 Rabbi Trust assets (3) 1 62,272 — 62,273 Restricted cash equivalents (1) 5,391 2,326 — 7,717 Total assets $ 54,701 $ 81,214 $ — $ 135,915 (1) Level 1 assets consisted of investments in money market funds and U.S. treasury bills. Level 2 assets consisted of time deposits. (2) Level 2 assets consisted primarily of foreign currency exchange forward contracts. (3) Level 1 assets consisted of investments in money market funds. Level 2 assets consisted of trust-owned life insurance policies. Abercrombie & Fitch Co. 11 2022 2Q Form 10-Q Table of Contents The Company’s Level 2 assets consisted o • Trust-owned life insurance policies, which were valued using the cash surrender value of the life insurance policies; • Time deposits, which were valued at cost, approximating fair value, due to the short-term nature of these investments and derivative instruments, primarily foreign currency exchange forward contracts, which were valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk. Fair value of long-term borrowings The Company’s borrowings under its senior secured notes, which have a fixed 8.75% interest rate and mature on July 15, 2025 (the “Senior Secured Notes”) are carried at historical cost in the accompanying Condensed Consolidated Balance Sheets. The carrying amount and fair value of the Company’s long-term gross borrowings were as follows: (in thousands) July 30, 2022 January 29, 2022 Gross borrowings outstanding, carrying amount $ 307,730 $ 307,730 Gross borrowings outstanding, fair value 302,729 327,732 6. PROPERTY AND EQUIPMENT, NET Property and equipment, net consisted o (in thousands) July 30, 2022 January 29, 2022 Property and equipment, at cost $ 2,462,069 $ 2,453,493 L Accumulated depreciation and amortization ( 1,950,888 ) ( 1,945,157 ) Property and equipment, net $ 511,181 $ 508,336 Refer to Note 8, “ ASSET IMPAIRMENT ,” for details related to property and equipment impairment charges incurred during the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021. 7. LEASES The Company is a party to leases related to its Company-operated retail stores as well as for certain of its distribution centers, office space, information technology and equipment. The following table provides a summary of the Company’s operating lease costs for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021: Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 Single lease cost (1) $ 61,953 $ 70,325 $ 119,533 $ 140,077 Variable lease cost (2) 32,520 19,300 65,678 42,466 Operating lease right-of-use asset impairment (3) 1,573 240 3,488 2,704 Sublease income (4) ( 952 ) ( 1,095 ) ( 1,961 ) ( 2,188 ) Total operating lease cost $ 95,094 $ 88,770 $ 186,738 $ 183,059 (1) Included amortization and interest expense associated with operating lease right-of-use assets and the impact from remeasurement of operating lease liabilities. (2) Includes variable payments related to both lease and nonlease components, such as contingent rent payments made by the Company based on performance, and payments related to taxes, insurance, and maintenance costs, as well as the benefit of $ 0.9 million and $ 2.6 million of rent abatements during the thirteen and twenty-six weeks ended July 30, 2022, respectively, related to the effects of the COVID-19 pandemic that resulted in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract. The benefit related to rent abatements recognized during the thirteen and twenty-six weeks ended July 31, 2021 was $ 5.2 million and $ 13.0 million respectively. (3) Refer to Note 8, “ ASSET IMPAIRMENT ,” for details related to operating lease right-of-use asset impairment charges. (4) The terms of the sublease agreement entered into by the Company with a third party during Fiscal 2020 related to one of its previous flagship store locations have not changed materially from that disclosed in Note 8, “LEASES,” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of the Fiscal 2021 Form 10-K. Sublease income is recognized in other operating (loss) income, net on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. The Company suspended rent payments for a number of stores that were closed as a result of COVID-19, and has been successful in obtaining certain rent abatements and landlord concessions of rent payable. Abercrombie & Fitch Co. 12 2022 2Q Form 10-Q Table of Contents The Company had minimum commitments related to operating lease contracts that have not yet commenced, primarily for its Company-operated retail stores, of approximately $ 25.0 million as of July 30, 2022. 8. ASSET IMPAIRMENT Asset impairment charges for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021 were as follows: Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 Operating lease right-of-use asset impairment $ 1,573 $ 240 $ 3,488 $ 2,704 Property and equipment asset impairment 597 546 2,104 746 Total asset impairment $ 2,170 $ 786 $ 5,592 $ 3,450 Asset impairment charges for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021 related to certain of the Company’s stores across brands, geographies and store formats. The impairment charges for the twenty-six weeks ended July 30, 2022 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $ 16.9 million, including $ 16.1 million related to operating lease right-of-use assets. The impairment charges for the twenty-six weeks ended July 31, 2021 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $ 9.4 million, including $ 8.8 million related to operating lease right-of-use assets. 9. INCOME TAXES The quarterly provision for income taxes is based on the current estimate of the annual effective income tax rate and the tax effect of discrete items occurring during the quarter. The Company’s quarterly provision and the estimate of the annual effective tax rate are subject to significant variation due to several factors. These factors include variability in the pre-tax jurisdictional mix of earnings, changes in how the Company does business including entering into new businesses or geographies, changes in foreign currency exchange rates, changes in laws, regulations, interpretations and administrative practices, relative changes in expenses or losses for which tax benefits are not recognized and the impact of discrete items. In addition, jurisdictions where the Company anticipates an ordinary loss for the fiscal year for which the Company does not anticipate future tax benefits are excluded from the overall computation of estimated annual effective tax rate and no tax benefits are recognized in the period related to losses in such jurisdictions. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax earnings. On August 16, 2022, the Inflation Reduction Act was enacted into U.S. law. The Company does not currently expect that the Inflation Reduction Act will have a material impact on its income taxes. Impact of valuation allowances and other tax charges During the thirteen weeks ended July 30, 2022, the Company did not recognize income tax benefits on $ 26.4 million of pretax losses, primarily in Switzerland, resulting in adverse tax impacts of $ 4.8 million. During the twenty-six weeks ended July 30, 2022, the Company did not recognize income tax benefits on $ 39.8 million of pre-tax losses, primarily in Switzerland, resulting in adverse tax impacts of $ 7.2 million. As of July 30, 2022, there were approximately $ 12.1 million of net deferred tax assets in China. The realization of these net deferred tax assets is dependent upon the future generation of sufficient taxable profits in China. During the thirteen weeks ended July 30, 2022, the company recorded a $0.2 million valuation allowance on net operating losses currently not projected to be utilized in future years. While the Company believes that the remaining net deferred tax assets are more-likely-than-not to be realized, it is not a certainty, as the Company continues to evaluate and respond to emerging situations, such as the COVID-19 pandemic. The company is closely monitoring its operations in China. Should circumstances change, the net deferred tax assets may become subject to additional valuation allowances in the future. Additional valuation allowances would result in additional tax expense. During the thirteen weeks ended July 31, 2021, as a result of the improvement seen in business conditions, the Company recognized $ 23.5 million of discrete tax benefits due to the release of valuation allowances, primarily in the U.S. and Germany, and a discrete tax benefit of $ 3.9 million due to the impact of a statutory rate change in the U.K on the valuation of deferred tax assets. The Company also recognized $ 6.7 million of tax benefits due to the anticipated utilization of deferred tax assets against projected pre-tax income for the full fiscal year, primarily in the U.S. and Germany based on information available, on which a valuation allowance had previously been established. During the twenty-six weeks ended July 31, 2021, as a result of the improvement seen in business conditions, the Company recognized $ 23.6 million of discrete tax benefits due to the release of valuation allowances, primarily in the U.S. and Germany, Abercrombie & Fitch Co. 13 2022 2Q Form 10-Q Table of Contents and a discrete tax benefit of $ 3.9 million due to the impact of a statutory rate change in the U.K on the valuation of deferred tax assets. The Company also recognized $ 10.1 million of tax benefits related to the utilization of deferred tax assets against projected pre-tax income for the full fiscal year, primarily in the U.S. and Germany, based on information available, on which a valuation allowance had previously been established. The Company continues to maintain valuation allowances in certain jurisdictions, principally Japan and Switzerland. Share-based compensation Refer to Note 11, “ SHARE-BASED COMPENSATION ,” for details on income tax benefits and charges related to share-based compensation awards during the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021. 10. BORROWINGS Details on the Company’s long-term borrowings, net, as of July 30, 2022 and January 29, 2022 are as follows: (in thousands) July 30, 2022 January 29, 2022 Long-term portion of borrowings, gross at carrying amount $ 307,730 $ 307,730 Unamortized fees ( 3,511 ) ( 4,156 ) Long-term borrowings, net $ 304,219 $ 303,574 Senior Secured Notes The terms of the Senior Secured Notes have remained unchanged from those disclosed in Note 13, “BORROWINGS,” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of on the Fiscal 2021 Form 10-K. ABL Facility The terms of the Company’s senior secured revolving credit facility of up to $ 400.0 million (the “ABL Facility”) remained unchanged from those disclosed in Note 13, “BORROWINGS,” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Dat a ” of the Fiscal 2021 Form 10-K. The Company did not have any borrowings outstanding under the ABL Facility as of July 30, 2022 or as of January 29, 2022. As of July 30, 2022, availability under the ABL Facility was $ 399.2 million, net of $ 0.8 million in outstanding stand-by letters of credit. As the Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility, borrowing capacity available to the Company under the ABL Facility was $ 359.2 million as of July 30, 2022. Representations, warranties and covenants The agreements related to the Senior Secured Notes and the ABL Facility contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of the Company and its subsidiaries t grant or incur liens; incur, assume or guarantee additional indebtedness; sell or otherwise dispose of assets, including capital stock of subsidiaries; make investments in certain subsidiaries; pay dividends, make distributions or redeem or repurchase capital stock; change the nature of their business; and consolidate or merge with or into, or sell substantially all of the assets of the Company or Abercrombie & Fitch Management Co. (“A&F Management”), a wholly-owned indirect subsidiary of A&F, to another entity. The Senior Secured Notes are guaranteed on a senior secured basis, jointly and severally, by A&F and each of the existing and future wholly-owned domestic restricted subsidiaries of A&F that guarantee or will guarantee A&F Management’s Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) or certain future capital markets indebtedness. Certain of the agreements related to the Senior Secured Notes and the ABL Facility also contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances. The Company was in compliance with all debt covenants under these agreements as of July 30, 2022. Abercrombie & Fitch Co. 14 2022 2Q Form 10-Q Table of Contents 11. SHARE-BASED COMPENSATION Financial statement impact The following table details share-based compensation expense and the related income tax impacts for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021: Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 Share-based compensation expense $ 7,760 $ 6,487 $ 16,116 $ 14,937 Income tax benefit associated with share-based compensation expense recognized 1,015 1,388 $ 1,980 $ 1,686 The following table details discrete income tax benefits and charges related to share-based compensation awards during the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021: Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 Income tax discrete (charges) benefits realized for tax deductions related to the issuance of shares $ ( 113 ) $ 826 $ 1,998 $ 4,016 Income tax discrete (charges) benefits realized upon cancellation of stock appreciation rights ( 8 ) — ( 203 ) ( 3 ) Total income tax discrete (charges) benefits related to share-based compensation awards $ ( 121 ) $ 826 $ 1,795 $ 4,013 The following table details the amount of employee tax withheld by the Company upon the issuance of shares associated with restricted stock units vesting and the exercise of stock appreciation rights for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021: Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 Employee tax withheld upon issuance of shares (1) $ 312 $ 312 $ 14,006 $ 12,060 (1) Classified within other financing activities on the Condensed Consolidated Statements of Cash Flows. Restricted stock units The following table summarizes activity for restricted stock units for the twenty-six weeks ended July 30, 2022: Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Number of Underlying Shares Weighted- Average Grant Date Fair Value Number of Underlying Shares Weighted- Average Grant Date Fair Value Number of Underlying Shares Weighted- Average Grant Date Fair Value Unvested at January 29, 2022 2,532,240 $ 17.16 340,149 $ 27.08 680,184 $ 22.81 Granted 913,689 29.74 165,263 32.07 82,635 45.15 Adjustments for performance achievement — — 5,668 23.05 18,881 36.24 Vested ( 862,855 ) 17.84 ( 194,465 ) 23.05 ( 113,284 ) 36.24 Forfeited ( 38,522 ) 18.79 — — — — Unvested at July 30, 2022 (1) 2,544,552 $ 21.43 316,615 $ 32.08 668,416 $ 23.67 (1) Unvested shares related to restricted stock units with performance-based and market-based vesting conditions are reflected at 100% of their target vesting amount in the table above. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can be achieved at up to 200% of their target vesting amount. The following table details unrecognized compensation cost and the remaining weighted-average period over which these costs are expected to be recognized for restricted stock units as of July 30, 2022: (in thousands) Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Unrecognized compensation cost $ 44,825 $ — $ 17,907 Remaining weighted-average period cost is expected to be recognized (years) 1.3 0.0 1.0 Abercrombie & Fitch Co. 15 2022 2Q Form 10-Q Table of Contents Additional information pertaining to restricted stock units for the twenty-six weeks ended July 30, 2022 and July 31, 2021 follows: (in thousands) July 30, 2022 July 31, 2021 Service-based restricted stock units: Total grant date fair value of awards granted $ 27,173 $ 21,358 Total grant date fair value of awards vested 15,393 12,427 Performance-based restricted stock units: Total grant date fair value of awards granted 5,300 4,658 Total grant date fair value of awards vested 4,482 — Market-based restricted stock units: Total grant date fair value of awards granted 3,731 3,651 Total grant date fair value of awards vested 4,105 3,390 The weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during the twenty-six weeks ended July 30, 2022 and July 31, 2021 were as follows: July 30, 2022 July 31, 2021 Grant date market price $ 32.07 $ 31.78 Fair value 45.15 49.81 Price volatility 66 % 66 % Expected term (years) 2.9 2.9 Risk-free interest rate 2.3 % 0.3 % Dividend yield — — Average volatility of peer companies 72.9 72.0 Average correlation coefficient of peer companies 0.5146 0.4694 Stock appreciation rights The following table summarizes stock appreciation rights activity for the twenty-six weeks ended July 30, 2022: Number of Underlying Shares Weighted-Average Exercise Price Aggregate Intrinsic Value Weighted-Average Remaining Contractual Life (years) Outstanding at January 29, 2022 236,139 $ 32.55 Forfeited or expired ( 37,800 ) 48.72 Outstanding at July 30, 2022 198,339 $ 29.47 $ — 2.4 Stock appreciation rights exercisable at July 30, 2022 198,339 $ 29.47 $ — 2.4 No stock appreciation rights were exercised during the twenty-six weeks ended July 30, 2022 or July 31, 2021. 12. DERIVATIVE INSTRUMENTS The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes. The Company uses derivative instruments, primarily foreign currency exchange forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign-currency-denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign-currency-denominated intercompany receivables. Fluctuations in foreign currency exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These foreign currency exchange forward contracts typically have a maximum term Abercrombie & Fitch Co. 16 2022 2Q Form 10-Q Table of Contents of twelve months. The sale of the inventory to the Company’s customers will result in the reclassification of related derivative gains and losses that are reported in AOCL into earnings. The Company also uses foreign currency exchange forward contracts to hedge certain foreign-currency-denominated net monetary assets/liabilities. Examples of monetary assets/liabilities include cash balances, receivables and payables. Fluctuations in foreign currency exchange rates result in transaction gains or losses being recorded in earnings, as U.S. GAAP requires that monetary assets/liabilities be remeasured at the spot exchange rate at quarter-end and upon settlement. The Company has chosen not to apply hedge accounting to these instruments because there are no anticipated differences in the timing of gain or loss recognition on the hedging instruments and the hedged items. As of July 30, 2022, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all, of forecasted foreign-currency-denominated intercompany inventory transactions, the resulting settlement of the foreign-currency-denominated intercompany accounts receivable, or (in thousands) Notional Amount (1) Euro $ 35,470 British pound 18,909 Canadian dollar 5,656 Japanese yen 4,383 (1) Amounts reported are the U.S. Dollar notional amounts outstanding as of July 30, 2022. The fair value of derivative instruments is valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk. The location and amounts of derivative fair values of foreign currency exchange forward contracts on the Condensed Consolidated Balance Sheets as of July 30, 2022 and January 29, 2022 were as follows: (in thousands) Location July 30, 2022 January 29, 2022 Location July 30, 2022 January 29, 2022 Derivatives designated as cash flow hedging instruments Other current assets $ 5,169 $ 4,973 Accrued expenses $ 3 $ — Derivatives not designated as hedging instruments Other current assets — — Accrued expenses — — Total $ 5,169 $ 4,973 $ 3 $ — Information pertaining to derivative gains or losses from foreign currency exchange forward contracts designated as cash flow hedging instruments for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021 follows: Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 Gain recognized in AOCL (1) $ 2,361 $ 1,084 $ 7,724 $ 2,228 Gain (loss) reclassified from AOCL to cost of sales, exclusive of depreciation and amortization (2) 4,124 ( 1,697 ) $ 7,809 $ ( 3,152 ) (1) Amount represents the change in fair value of derivative instruments. (2) Amount represents gain (loss) reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) when the hedged item affects earnings, which is when merchandise is converted to cost of sales, exclusive of depreciation and amortization. Substantially all of the unrealized gain will be recognized in costs of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income over the next twelve months . Additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts not designated as hedging instruments for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021 follows: Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 Gain (loss) recognized in other operating income, net $ 631 $ 304 $ 1,772 $ ( 164 ) Abercrombie & Fitch Co. 17 2022 2Q Form 10-Q Table of Contents 13. ACCUMULATED OTHER COMPREHENSIVE LOSS Fo r the thirteen and twenty-six weeks ended July 30, 2022, the activity in AOCL was as follows: Thirteen Weeks Ended July 30, 2022 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at April 30, 2022 $ ( 131,092 ) $ 7,695 $ ( 123,397 ) Other comprehensive (loss) income before reclassifications ( 4,914 ) 2,361 ( 2,553 ) Reclassified gain from AOCL (1) — ( 4,124 ) ( 4,124 ) Tax effect — 34 34 Other comprehensive loss after reclassifications ( 4,914 ) ( 1,729 ) ( 6,643 ) Ending balance at July 30, 2022 $ ( 136,006 ) $ 5,966 $ ( 130,040 ) Twenty-Six Weeks Ended July 30, 2022 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at January 29, 2022 $ ( 120,689 ) $ 5,983 $ ( 114,706 ) Other comprehensive (loss) income before reclassifications ( 15,317 ) 7,724 ( 7,593 ) Reclassified gain from AOCL (1) — ( 7,809 ) ( 7,809 ) Tax effect — 68 68 Other comprehensive loss after reclassifications ( 15,317 ) ( 17 ) ( 15,334 ) Ending balance at July 30, 2022 $ ( 136,006 ) $ 5,966 $ ( 130,040 ) (1) Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. For the thirteen and twenty-six weeks ended July 31, 2021, the activity in AOCL was as follows: Thirteen Weeks Ended July 31, 2021 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at May 1, 2021 $ ( 99,046 ) $ ( 1,936 ) $ ( 100,982 ) Other comprehensive (loss) income before reclassifications ( 1,986 ) 1,084 ( 902 ) Reclassified loss from AOCL (1) — 1,697 1,697 Tax effect — ( 78 ) ( 78 ) Other comprehensive (loss) income after reclassifications ( 1,986 ) 2,703 717 Ending balance at July 31, 2021 $ ( 101,032 ) $ 767 $ ( 100,265 ) Twenty-Six Weeks Ended July 31, 2021 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at January 30, 2021 $ ( 97,772 ) $ ( 4,535 ) $ ( 102,307 ) Other comprehensive (loss) income before reclassifications ( 3,260 ) 2,228 ( 1,032 ) Reclassified loss from AOCL (1) — 3,152 3,152 Tax effect — ( 78 ) ( 78 ) Other comprehensive (loss) income after reclassifications ( 3,260 ) 5,302 2,042 Ending balance at July 31, 2021 $ ( 101,032 ) $ 767 $ ( 100,265 ) (1) Amount represents loss reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. Abercrombie & Fitch Co. 18 2022 2Q Form 10-Q Table of Contents 14. SEGMENT REPORTING The Company’s two operating segments are brand-bas Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These operating segments have similar economic characteristics, classes of consumers, products, and production and distribution methods, operate in the same regulatory environments, and have been aggregated into one reportable segment. Amounts shown below include net sales from wholesale, franchise and licensing operations, which are not a significant component of total revenue, and are aggregated within their respective operating segment and geographic area. The Company’s net sales by operating segment for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021 were as follows: Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 Hollister $ 436,934 $ 514,483 $ 865,740 $ 956,891 Abercrombie 368,157 350,367 752,113 689,364 Total $ 805,091 $ 864,850 $ 1,617,853 $ 1,646,255 Net sales by geographic area are presented by attributing revenues to an individual country on the basis of the country in which the merchandise was sold for in-store purchases and on the basis of the shipping location provided by customers for digital and wholesale orders. The Company’s net sales by geographic area for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021 were as follows: Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 U.S. $ 578,086 $ 601,767 $ 1,163,190 $ 1,155,613 EMEA (1) 166,785 190,840 330,749 349,842 APAC (2) 27,778 41,228 57,675 87,274 Other (3) 32,442 31,015 66,239 53,526 International $ 227,005 $ 263,083 $ 454,663 $ 490,642 Total $ 805,091 $ 864,850 $ 1,617,853 $ 1,646,255 (1) Europe, Middle East and Africa (“EMEA”) (2) Asia-Pacific Region (“APAC”) (3) Other includes all sales that do not fall within the United States, EMEA, or APAC regions. Abercrombie & Fitch Co. 19 2022 2Q Form 10-Q Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the Company’s Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q in “ Item 1. Financial Statements (Unaudited) ,” to which all references to Notes in MD&A are made. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Quarterly Report on Form 10-Q or made by the Company, its management or spokespeople involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company’s control. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “should,” “are confident,” “will,” “could,” “outlook,” and similar expressions may identify forward-looking statements. Future economic and industry trends that could potentially impact revenue and profitability are difficult to predict. Therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. Factors that could cause results to differ from those expressed in the Company’s forward-looking statements include, but are not limited to, the risks described or referenced in Part I, Item 1A. “Risk Factors,” in the Company’s Annual Report on Fiscal 2021 Form 10-K for the fiscal year ended January 29, 2022 and otherwise in our reports and filings with the SEC, as well as the followin • risks and uncertainty related to the ongoing COVID-19 pandemic and any other adverse public health developments; • risks related to changes in global economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits; • risks related to recent inflationary pressures with respect to labor and raw materials and global supply chain constraints that have, and could continue to, affect freight, transit and other costs; • risks related to geopolitical conflict, including the on-going hostilities in Ukraine, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience; • risks related to our failure to engage our customers, anticipate customer demand and changing fashion trends, and manage our inventory; • risks related to our ability to successfully invest in customer, digital and omnichannel initiatives; • risks related to our ability to execute on our global store network optimization initiative; • risks related to our international growth strategy; • risks related to cyber security threats and privacy or data security breaches or the potential loss or disruption of our information systems; • risks associated with climate change and other corporate responsibility issues; and. • uncertainties related to future legislation, regulatory reform, policy changes, or interpretive guidance on existing legislation. In light of the significant uncertainties in the forward-looking statements included herein, including the uncertainty surrounding COVID-19, the inclusion of such information should not be regarded as a representation by the Company, or any other person, that the objectives of the Company will be achieved. The forward-looking statements included herein are based on information presently available to the management of the Company. Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking statements including any financial targets and estimates, whether as a result of new information, future events, or otherwise. Abercrombie & Fitch Co. 20 2022 2Q Form 10-Q Table of Contents INTRODUCTION MD&A is provided as a supplement to the accompanying Condensed Consolidated Financial Statements and notes thereto to help provide an understanding of the Company’s results of operations, financial condition, and liquidity. MD&A is organized as follows: • Overview . A general description of the Company’s business and certain segment information. • Current Trends and Outlook . A discussion related to certain of the Company’s focus areas for the current fiscal year and discussion of certain risks and challenges as well as a summary of the Company’s performance for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021. • Results of Operations . An analysis of certain components of the Company’s Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021. • Liquidity and Capital Resources . A discussion of the Company’s financial condition, changes in financial condition and liquidity as of July 30, 2022, which includes (i) an analysis of financial condition as compared to January 29, 2022; (ii) an analysis of changes in cash flows for the twenty-six weeks ended July 30, 2022, as compared to the twenty-six weeks ended July 31, 2021; and (iii) an analysis of liquidity, including availability under the Company’s credit facility, the Company’s share repurchase program, and outstanding debt and covenant compliance. • Recent Accounting Pronouncements . A discussion, as applicable, of the recent accounting pronouncements the Company has adopted or is currently evaluating, including the dates of adoption and/or expected dates of adoption, and anticipated effects on the Company’s Condensed Consolidated Financial Statements. • Critical Accounting Estimates . A discussion of the accounting estimates considered to be important to the Company’s results of operations and financial condition, which typically require significant judgment and estimation on the part of management in their application. • Non-GAAP Financial Measures . MD&A provides a discussion of certain financial measures that have been determined to not be presented in accordance with GAAP. This section includes certain reconciliations between GAAP and non-GAAP financial measures and additional details on non-GAAP financial measures, including information as to why the Company believes the non-GAAP financial measures provided within MD&A are useful to investors. Abercrombie & Fitch Co. 21 2022 2Q Form 10-Q Table of Contents OVERVIEW Business summary The Company is a global, digitally-led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. The Company’s two brand-based operating segments are Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These five brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company operates primarily in North America, Europe and Asia. The Company’s fiscal year ends on the Saturday closest to January 31. All references herein to the Company’s fiscal years are as follows: Fiscal year Year ended/ ending Number of weeks Fiscal 2021 January 29, 2022 52 Fiscal 2022 January 28, 2023 52 Fiscal 2023 February 3, 2024 53 Seasonality Due to the seasonal nature of the retail apparel industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year and the Company could have significant fluctuations in certain asset and liability accounts. The Company historically experiences its greatest sales activity during the fall season and, the third and fourth fiscal quarters, due to back-to-school and holiday sales periods, respectively. CURRENT TRENDS AND OUTLOOK Focus areas for Fiscal 2022 During the second quarter, the Company announced its Always Forward Plan, which outlines the Company’s long-term strategic goals. The Always Forward Plan is anchored on three strategic growth principles, which are t • Execute focused brand growth plans; • Accelerate an enterprise-wide digital revolution; and • Operate with financial discipline. The following focus areas for fiscal 2022 serve as a framework to the company achieving sustainable growth and progressing toward the 2025 Always Forward Pl • Execute brand growth plans, primarily focused on continuing momentum at Abercrombie & Fitch and delivering standalone store experiences at Gilly Hicks; • Accelerate digital and technology investments in systems and people to increase flexibility, modernize foundational systems and improve the customer experience; • Operate with a more flexible cost structure, and seeking expense efficiencies while protecting investments in digital, technology and store growth to fund our strategic principles; • Taking a data-driven approach to store expansion in under penetrated markets • Optimize our global distribution network to increase capacity and improve delivery speed to customers; and • Integrate environmental, social and governance (“ESG”) practices and standards throughout the Company. Supply chain disruptions and impact of inflation The Company has continued to see global supply chain constraints impacting our business and operations. In order to mitigate supply chain constraints and higher freight rates, the Company has taken, and expects to continue to take, certain mitigating actions including scheduling earlier inventory receipts to allow for longer lead times, expanding its number of freight vendors, and reducing air freight usage where possible. The Company’s responses to factory closures, transportation delays, and/or freight rates may not be adequate to offset the impact of these headwinds. The inability to receive inventory in a timely manner could cause delays in responding to customer demand and adversely affect sales. During the latter half of Fiscal 2021, the Company increased its air freight usage in response to inventory delays imposed by temporary factory closures in Vietnam. This disruption and the associated increased costs adversely impacted the Company during the latter half of Fiscal 2021 and into the first half of Fiscal 2022. The Company has experienced and expects to continue to experience inflationary pressures affecting the Company’s freight, transit, and other costs, and we anticipate that these inflationary headwinds will continue through at least the balance of Fiscal 2022. Abercrombie & Fitch Co. 22 2022 2Q Form 10-Q Table of Contents The Company has also experienced historic inflationary pressures with respect to labor, cotton and other raw materials and other costs. Inflation can have a long-term impact on the Company because increasing costs may impact the ability to maintain satisfactory margins. The Company may be unsuccessful in passing these increased costs on to the customer through higher ticket prices. Furthermore, increases in inflation may not be matched by growth in consumer income, which also could have a negative impact on discretionary spending. In periods of perceived unfavorable conditions, consumers may reallocate available discretionary spending to areas outside of our core business. Consumers may use any remaining discretionary spending on travel and other experiences which may adversely impact demand for our products. Inflation Reduction Act of 2022 On August 16, 2022, the Inflation Reduction Act of 2022 was signed into law, with tax provisions primarily focused on implementing a 15% minimum tax on global adjusted financial statement income and a 1% excise tax on share repurchases. The Inflation Reduction Act of 2022 will become effective beginning in Fiscal 2024. The Company does not currently expect that the Inflation Reduction Act will have a material impact on its income taxes. Global Store Network Optimization The Company has a goal of repositioning from larger format locations, such as, tourist dependent and flagship locations, to smaller, omni-enabled stores that cater to local customers. The Company continues to use data to inform its focus on aligning store square footage with digital penetration, and during the first half of Fiscal 2022, the Company opened 12 new stores, while closing 7 stores. As part of this focus, the Company plans to open 60 new stores, while closing 30 stores, during Fiscal 2022, pending negotiations with our landlord partners. Future closures could be completed through natural lease expirations, while certain other leases include early termination options that can be exercised under specific conditions. The Company may also elect to exit or modify other leases, and could incur charges related to these actions. Additional details related to store count and gross square footage fol Hollister (1) Abercrombie (2) Total Company (3) U.S. International U.S. International U.S. International Total Number of sto January 29, 2022 351 154 173 51 524 205 729 New 7 3 2 — 9 3 12 Permanently closed — (2) (3) (2) (3) (4) (7) July 30, 2022 358 155 172 49 530 204 734 Gross square footage (in thousands) : July 30, 2022 2,353 1,207 1,149 350 3,502 1,557 5,059 (1) Hollister includes the Company’s Hollister and Gilly Hicks brands. Locations with Gilly Hicks carveouts within Hollister stores are represented as a single store count. Excludes 9 international franchise stores as of July 30, 2022 and 8 international franchise stores as of January 29, 2022. Excludes 15 Company-operated temporary stores as of July 30, 2022 and 14 Company-operated temporary stores as of January 29, 2022. (2) Abercrombie includes the Company's Abercrombie & Fitch and abercrombie kids brands. Locations with abercrombie kids carveouts within Abercrombie & Fitch stores are represented as a single store count. Excludes 16 international franchise stores as of July 30, 2022 and 14 international franchise stores as of January 29, 2022. Excludes 4 Company-operated temporary stores as of each of July 30, 2022 and 5 Company-operated temporary stores as of January 29, 2022. (3) This store count excludes one international third-party operated multi-brand outlet store as of each of July 30, 2022 and January 29, 2022. COVID-19 There continues to be uncertainty surrounding ongoing COVID-19 pandemic and its impact on the global economy, supply chain disruptions, inflationary pressures, higher freight and labor costs, and labor shortages. Despite the introduction of COVID-19 vaccines, the pandemic remains volatile and continues to evolve, with resurgences and outbreaks occurring in various parts of the world, including those resulting from variants of the virus. Certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time, including labor shortages, inflationary pressures, and disruptions of global supply chains and temporary store closures. The Company plans to follow the guidance of local governments to evaluate whether future store closures will be necessary. The extent of future impacts of COVID-19 on the Company’s business, including the duration and impact on overall customer demand, are uncertain as current circumstances are dynamic and depend on future developments, including, but not limited to, the duration and spread of COVID-19, the emergence of new variants of coronavirus, and the availability and acceptance of effective vaccines, boosters or medical treatments. The Company will continue to assess the pandemic’s impact on its operations and financial situation, and will respond as appropriate. Abercrombie & Fitch Co. 23 2022 2Q Form 10-Q Table of Contents Impact of global events and uncertainty We are a global multi-brand omnichannel specialty retailer, with operations in North America, Europe and Asia, among other regions, management is mindful of macroeconomic risks, global challenges and the changing global geopolitical environment, including the on-going conflict in Ukraine, that could adversely impact certain areas of the business. As a result, in addition to the events listed within the MD&A, management continues to monitor certain other global events. The Company continues to assess the potential impacts these events and similar events may have on the business in future periods and continues to develop and update contingency plans to assist in mitigating potential impacts. It is possible that the Company’s preparations for such events are not adequate to mitigate their impact, and that these events could further adversely affect its business and results of operations. For a discussion of material risks that have the potential to cause our actual results to differ materially from our expectations, refer to the disclosures under the heading “Forward-looking Statements and Risk Factors” in “Item 1A. Risk Factors” on the Fiscal 2021 Form 10-K. Summary of results A summary of results for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021 follows: GAAP Non-GAAP (1) (in thousands, except change in net sales, gross profit rate, operating (loss) income margin and per share amounts) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 Thirteen Weeks Ended Net sales $ 805,091 $ 864,850 Change in net sales (6.9) % 23.8 % Gross profit rate 57.9 % 65.2 % Operating (loss) income $ (2,191) $ 114,787 $ (21) $ 115,573 Operating (loss) income margin (0.3) % 13.3 % 0.0 % 13.4 % Net (loss) income attributable to A&F $ (16,834) $ 108,500 $ (15,275) $ 109,062 Net (loss) income attributable to A&F per dilutive share (0.33) 1.69 (0.30) 1.70 Twenty-Six Weeks Ended Net sales $ 1,617,853 $ 1,646,255 Change in net sales (1.7) % 39.1 % Gross profit rate 56.6 % 64.3 % Operating (loss) income $ (11,917) $ 172,220 $ (6,325) $ 175,670 Operating (loss) income margin (0.7) % 10.5 % (0.4) % 10.7 % Net (loss) income attributable to A&F $ (33,303) $ 150,268 $ (29,240) $ 153,045 Net (loss) income attributable to A&F per dilutive share (0.65) 2.32 (0.57) 2.36 (1) Discussion as to why the Company believes that these non-GAAP financial measures are useful to investors and a reconciliation of the Non-GAAP measures to the most directly comparable financial measure calculated and presented in accordance with GAAP are provided below under “ NON-GAAP FINANCIAL MEASURES .” Certain components of the Company’s Condensed Consolidated Balance Sheets as of July 30, 2022 and January 29, 2022 were as follows: (in thousands) July 30, 2022 January 29, 2022 Cash and equivalents $ 369,957 $ 823,139 Gross long-term borrowings outstanding, carrying amount 307,730 307,730 Inventories 708,024 525,864 Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the twenty-six week periods ended July 30, 2022 and July 31, 2021 were as follows: (in thousands) July 30, 2022 July 31, 2021 Net cash (used for) provided by operating activities $ (259,733) $ 49,945 Net cash used for investing activities (51,610) (35,269) Net cash used for financing activities (135,424) (200,247) Abercrombie & Fitch Co. 24 2022 2Q Form 10-Q Table of Contents RESULTS OF OPERATIONS The estimated basis point (“BPS”) change disclosed throughout this Results of Operations section has been rounded based on the change in the percentage of net sales. Net sales The Company’s net sales by operating segment for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021 were as follows: Thirteen Weeks Ended (in thousands) July 30, 2022 July 31, 2021 $ Change % Change Hollister (1) $ 436,934 $ 514,483 $ (77,549) (15)% Abercrombie (2) 368,157 350,367 17,790 5% Total $ 805,091 $ 864,850 $ (59,759) (7)% Twenty-Six Weeks Ended (in thousands) July 30, 2022 July 31, 2021 $ Change % Change Hollister (1) $ 865,740 $ 956,891 $ (91,151) (10)% Abercrombie (2) 752,113 689,364 62,749 9% Total $ 1,617,853 $ 1,646,255 $ (28,402) (2)% (1) Includes Hollister, Gilly Hicks and Social Tourist brands. (2) Includes Abercrombie & Fitch and abercrombie kids brands. Net sales by geographic area are presented by attributing revenues to an individual country on the basis of the country in which the merchandise was sold for in-store purchases and the shipping location provided by customers for digital orders. The Company’s net sales by geographic area for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021 were as follows: Thirteen Weeks Ended (in thousands) July 30, 2022 July 31, 2021 $ Change % Change U.S. $ 578,086 $ 601,767 $ (23,681) (4)% EMEA 166,785 190,840 (24,055) (13)% APAC 27,778 41,228 (13,450) (33)% Other 32,442 31,015 1,427 5% International $ 227,005 $ 263,083 $ (36,078) (14)% Total $ 805,091 $ 864,850 $ (59,759) (7)% Twenty-Six Weeks Ended (in thousands) July 30, 2022 July 31, 2021 $ Change % Change U.S. $ 1,163,190 $ 1,155,613 $ 7,577 1% EMEA 330,749 349,842 (19,093) (5)% APAC 57,675 87,274 (29,599) (34)% Other 66,239 53,526 12,713 24% International $ 454,663 $ 490,642 $ (35,979) (7)% Total 1,617,853 1,646,255 (28,402) (2)% For the second quarter of Fiscal 2022, net sales decreased 7%, as compared to the second quarter of Fiscal 2021, primarily due to a decrease in store sales as well as the adverse impact from changes in foreign currency exchange rates of approximately $23 million, partially offset by an increase in average unit retail. For the year-to-date period of Fiscal 2022, net sales decreased 2%, as compared to the year-to-date period of Fiscal 2021, primarily due to a decrease in basket size, as a result of decreased store traffic relative to last year, as well as the adverse impact from changes in foreign currency exchange rates of approximately $32 million, partially offset by higher average unit retail year-over-year, driven by less promotions and lower clearance levels. Abercrombie & Fitch Co. 25 2022 2Q Form 10-Q Table of Contents Cost of sales, exclusive of depreciation and amortization Thirteen Weeks Ended July 30, 2022 July 31, 2021 (in thousands) % of Net sales % of Net sales BPS Change Cost of sales, exclusive of depreciation and amortization $ 339,200 42.1% $ 301,365 34.8% 730 Twenty-Six Weeks Ended July 30, 2022 July 31, 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Cost of sales, exclusive of depreciation and amortization $ 702,416 43.4% $ 587,636 35.7% 770 For the second quarter of Fiscal 2022, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 730 basis points as compared to the second quarter of Fiscal 2021. The year-over-year increase was primarily driven by higher product costs, which contributed 750 basis points to the increase, as well as the adverse impact from changes in foreign currency exchange rates which accounted for 30 basis points. These impacts were partially offset by higher average unit retail at Abercrombie. For the year-to-date period of Fiscal 2022, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 770 basis points, as compared to the year-to-date period of Fiscal 2021. The year-over-year increase was primarily attributable to increased freight and average unit costs, as well as the adverse impact from changes in foreign currency exchange rates. Gross profit, exclusive of depreciation and amortization Thirteen Weeks Ended July 30, 2022 July 31, 2021 (in thousands) % of Net sales % of Net sales BPS Change Gross profit, exclusive of depreciation and amortization $ 465,891 57.9% $ 563,485 65.2% (730) Twenty-Six Weeks Ended July 30, 2022 July 31, 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Gross profit, exclusive of depreciation and amortization $ 915,437 56.6% $ 1,058,619 64.3% (770) Stores and distribution expense Thirteen Weeks Ended July 30, 2022 July 31, 2021 (in thousands) % of Net sales % of Net sales BPS Change Stores and distribution expense $ 340,791 42.3% $ 325,847 37.7% 460 Twenty-Six Weeks Ended July 30, 2022 July 31, 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Stores and distribution expense $ 678,334 41.9% $ 641,355 39.0% 290 For the second quarter of Fiscal 2022, stores and distribution expense increased 5%. as compared to the second quarter of Fiscal 2021. The $15 million increase was related to $8.5 million in higher digital shipping and handling costs, as well as $6.5 million in DC fulfillment, compared to the second quarter of Fiscal 2021. For the year-to-date period of Fiscal 2022, stores and distribution expense increased 6%, as compared to the year-to-date period of Fiscal 2021, approximately half of the increase was related to higher shipping and DC fulfillment, as well as higher payroll expense. Abercrombie & Fitch Co. 26 2022 2Q Form 10-Q Table of Contents Marketing, general and administrative expense Thirteen Weeks Ended July 30, 2022 July 31, 2021 (in thousands) % of Net sales % of Net sales BPS Change Marketing, general and administrative expense $ 124,168 15.4% $ 123,913 14.3% 110 Twenty-Six Weeks Ended July 30, 2022 July 31, 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Marketing, general and administrative expense $ 246,317 15.2% $ 244,860 14.9% 30 For the second quarter of Fiscal 2022, marketing, general and administrative expense, as a percent of net sales increased 110 basis points as compared to the second quarter of Fiscal 2021, primarily driven by increased compensation costs, due to higher average salaries, which was partially offset by decrease in marketing expense as compared to the second quarter of Fiscal 2021. For the year-to-date period of Fiscal 2022, marketing, general and administration expense, as a percent of net sales increased 30 basis points as compared to the year-to-date period of Fiscal 2021, primarily driven by increased payroll, consulting, and information technology expense. These increases were partially offset by a decrease in legal and incentive compensation expenses. Asset impairment Thirteen Weeks Ended July 30, 2022 July 31, 2021 (in thousands) % of Net sales % of Net sales BPS Change Asset impairment $ 2,170 0.3% $ 786 0.1% 20 Excluded items: Asset impairment charges (1) (2,170) (0.3)% (786) (0.1)% (20) Adjusted non-GAAP asset impairment $ — 0.0% $ — —% — Twenty-Six Weeks Ended July 30, 2022 July 31, 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Asset impairment $ 5,592 0.3% $ 3,450 0.2% 10 Excluded items: Asset impairment charges (1) (5,592) (0.3)% (3,450) (0.2)% (10) Adjusted non-GAAP asset impairment $ — 0.0% $ — —% — (1) Refer to “ NON-GAAP FINANCIAL MEASURES , ” for further details. Refer to Note 8, “ ASSET IMPAIRMENT .” Abercrombie & Fitch Co. 27 2022 2Q Form 10-Q Table of Contents Other operating income, net Thirteen Weeks Ended July 30, 2022 July 31, 2021 (in thousands) % of Net sales % of Net sales BPS Change Other operating expense (income), net $ (953) (0.1)% $ 1,848 0.2% 30 Twenty-Six Weeks Ended July 30, 2022 July 31, 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Other operating income, net $ 2,889 0.2% $ 3,266 0.2% — For the second quarter of Fiscal 2022, other operating expense, net decreased $2.8 million, as compared to the second quarter of Fiscal 2021, primarily driven by losses on foreign currency exchange forward contracts. Operating (loss) income Thirteen Weeks Ended July 30, 2022 July 31, 2021 (in thousands) % of Net sales % of Net sales BPS Change Operating (loss) income $ (2,191) (0.3)% $ 114,787 13.3% (1,360) Excluded items: Asset impairment charges (1) 2,170 0.3% 786 0.1% 20 Adjusted non-GAAP operating (loss) income $ (21) 0.0% $ 115,573 13.4% (1,340) Twenty-Six Weeks Ended July 30, 2022 July 31, 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Operating income (loss) $ (11,917) (0.7)% $ 172,220 10.5% (1,120) Excluded items: Asset impairment charges (1) 5,592 0.3% 3,450 0.2% 10 Adjusted non-GAAP operating income (loss) $ (6,325) (0.4)% $ 175,670 10.7% (1,110) (1) Refer to “ NON-GAAP FINANCIAL MEASURES , ” for further details. Interest expense, net Thirteen Weeks Ended July 30, 2022 July 31, 2021 (in thousands) % of Net sales % of Net sales BPS Change Interest expense $ 7,660 1.0% $ 13,560 1.6% (60) Interest income (743) (0.1)% (2,285) (0.3) 20 Interest expense, net $ 6,917 0.9% $ 11,275 1.3 (40) Twenty-Six Weeks Ended July 30, 2022 July 31, 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Interest expense $ 15,469 1.0% $ 22,703 1.4% (40) Interest income (1,245) (0.1)% (2,822) (0.2) 10 Interest expense, net $ 14,224 0.9% $ 19,881 1.2 (30) For the second quarter of Fiscal 2022, interest expense, net decreased $4.4 million, as compared to the second quarter of Fiscal 2021, primarily driven by lower interest expense as a result of lower borrowings and the one-time $5.3 million loss on the extinguishment of debt related to the purchase of Senior Secured Notes recognized in second quarter of 2021. Abercrombie & Fitch Co. 28 2022 2Q Form 10-Q Table of Contents For the year-to-date period of Fiscal 2022, interest expense, net decreased $5.7 million as compared to the year-to-date period of Fiscal 2021. primarily driven by lower interest expense as a result of lower borrowings and the one-time loss on the extinguishment of debt related to the purchase of Senior Secured Notes recognized in second quarter of 2021. Income tax expense (benefit) Thirteen Weeks Ended July 30, 2022 July 31, 2021 (in thousands, except ratios) Effective Tax Rate Effective Tax Rate Income tax expense (benefit) $ 5,634 (61.9)% $ (6,944) (6.7)% Excluded items: Tax effect of pre-tax excluded items (1) 611 224 Adjusted non-GAAP income tax expense (benefit) $ 6,245 (90.0)% $ (6,720) (6.4)% Twenty-Six Weeks Ended July 30, 2022 July 31, 2021 (in thousands, except ratios) Effective Tax Rate Effective Tax Rate Income tax expense (benefit) $ 3,447 (13.2)% $ (823) (0.5)% Excluded items: Tax effect of pre-tax excluded items (1) 1,529 673 Adjusted non-GAAP income tax expense $ 4,976 (24.2)% $ (150) (0.1)% (1) The tax effect of pre-tax excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. Refer to “ Operating (loss) income ” and “ NON-GAAP FINANCIAL MEASURES ,” for details of pre-tax excluded items. Refer to Note 9, “ INCOME TAXES .” Net (loss) income attributable to A&F Thirteen Weeks Ended July 30, 2022 July 31, 2021 (in thousands) % of Net sales % of Net sales BPS Change Net (loss) income attributable to A&F $ (16,834) (2.1)% $ 108,500 12.5% (1,460) Excluded items, net of tax (1) 1,559 0.2% 562 0.1% 10 Adjusted non-GAAP net (loss) income attributable to A&F (2) $ (15,275) (1.9)% $ 109,062 12.6% (1,450) Twenty-Six Weeks Ended July 30, 2022 July 31, 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Net income (loss) attributable to A&F $ (33,303) (2.1)% $ 150,268 9.1% (1,120) Excluded items, net of tax (1) 4,063 0.3% 2,777 0.2% 10 Adjusted non-GAAP net income (loss) attributable to A&F (2) $ (29,240) (1.8)% $ 153,045 9.3% (1,110) (1) Excluded items presented above under “ Operating (loss) income ,” and “ Income tax expense (benefit) ” (2) Refer to “ NON-GAAP FINANCIAL MEASURES ,” for further details. Abercrombie & Fitch Co. 29 2022 2Q Form 10-Q Table of Contents Net (loss) income per diluted share attributable to A&F Thirteen Weeks Ended July 30, 2022 July 31, 2021 $ Change Net (loss) income attributable to A&F per diluted share $ (0.33) $ 1.69 $(2.02) Excluded items, net of tax (1) 0.03 0.01 0.02 Adjusted non-GAAP net (loss) income per diluted share attributable to A&F (0.30) 1.70 (2.00) Impact from changes in foreign currency exchange rates — (0.09) 0.09 Adjusted non-GAAP net (loss) income per diluted share attributable to A&F on a constant currency basis (2) (0.30) 1.61 (1.91) Twenty-Six Weeks Ended July 30, 2022 July 31, 2021 $ Change Net income (loss) per diluted share attributable to A&F $ (0.65) $ 2.32 $(2.97) Excluded items, net of tax (1) 0.08 0.04 $0.04 Adjusted non-GAAP net income (loss) per diluted share attributable to A&F (0.57) 2.36 $(2.93) Impact from changes in foreign currency exchange rates — (0.04) $0.04 Adjusted non-GAAP net income (loss) per diluted share attributable to A&F on a constant currency basis (2) (0.57) 2.32 $(2.89) (1) Excluded items presented above under “ Operating (loss) income ,” and “ Income tax expense (benefit) . ” (2) Refer to “ NON-GAAP FINANCIAL MEASURES ,” for further details. Abercrombie & Fitch Co. 30 2022 2Q Form 10-Q Table of Contents LIQUIDITY AND CAPITAL RESOURCES Overview The Company’s capital allocation strategy, priorities and investments are reviewed by A&F’s Board of Directors considering both liquidity and valuation factors. The Company believes that it will have adequate liquidity to fund operating activities for the next 12 months. The Company monitors financing market conditions and may in the future determine whether and when to amend, modify, or restructure its ABL Facility and/or the Senior Secured Notes. For a discussion of the Company’s share repurchase activity and suspended dividend program, please see below under “Share repurchases and dividends.” Primary sources and uses of cash The Company’s business has two principal selling seaso the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”). The Company generally experiences its greatest sales activity during the Fall season, due to the back-to-school and holiday sales periods. The Company relies on excess operating cash flows, which are largely generated in Fall, to fund operations throughout the year and to reinvest in the business to support future growth. The Company also has the ABL Facility available as a source of additional funding, which is described further below under “ Credit facility and Senior Secured Notes ”. Over the next twelve months, the Company expects its primary cash requirements to be directed towards prioritizing investments in the business and continuing to fund operating activities, including the acquisition of inventory, and obligations related to compensation, marketing, leases and any lease buyouts or modifications it may exercise, taxes and other operating activities. The Company evaluates opportunities for investments in the business that are in line with initiatives that position the business for sustainable long-term growth that align with its strategic pillars as described within “Item 1. Business - STRATEGY AND KEY BUSINESS PRIORITIES” included on the Fiscal 2021 Form 10-K, including being opportunistic regarding growth opportunities. Examples of potential investment opportunities include, but are not limited to, new store experiences, and investments in its digital and omnichannel initiatives. Historically, the Company has utilized free cash flow generated from operations to fund any discretionary capital expenditures, which have been prioritized towards new store experiences, as well as digital and omnichannel investments, information technology, and other projects. For the year-to-date period ended July 30, 2022, the Company used $59.6 million towards capital expenditures. Total capital expenditures for Fiscal 2022 are expected to be approximately $150 million. The Company measures liquidity using total cash and cash equivalents and incremental borrowing available under the ABL Facility. As of July 30, 2022, the Company had cash and cash equivalents of $370.0 million and total liquidity of approximately $729.2 million, compared with cash and cash equivalents of $823.1 million and total liquidity of approximately $1.1 billion at the beginning of Fiscal 2022. This allows the Company to evaluate potential opportunities to strategically deploy excess cash and/or deleverage the balance sheet, depending on various factors, such as market and business conditions, including the Company’s ability to accelerate investments in the business. Such opportunities include, but are not limited to, returning cash to shareholders through share repurchases or repurchasing outstanding Senior Secured Notes. Share repurchases and dividends In November 2021, the A&F Board of Directors approved a new $500 million share repurchase authorization, replacing the prior 2021 share repurchase authorization of 10.0 million shares, which had approximately 3.9 million shares remaining available. During the year-to-date period ended July 30, 2022, the Company repurchased approximately 4.3 million shares for approximately $117.8 million . Historically, the Company has repurchased shares of its Common Stock from time to time, dependent on excess liquidity, market conditions, and business conditions, with the objectives of returning excess cash to shareholders and offsetting dilution from issuances of Common Stock associated with the exercise of employee stock appreciation rights and the vesting of restricted stock units. Shares may be repurchased in the open market, including pursuant to trading plans established in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), through privately negotiated transactions or other transactions or by a combination of such methods. Refer to “ Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ” of Part II of this Quarterly Report on Form 10-Q for the amount remaining available for purchase under the Company’s publicly announced stock repurchase authorization. In May 2020, the Company announced that it had temporarily suspended its dividend program in order to preserve liquidity and maintain financial flexibility in light of COVID-19. The Company may in the future review its dividend program to determine, in light of facts and circumstances at that time, whether and when to reinstate. Any dividends are declared at the discretion of A&F’s Board of Directors. A&F’s Board of Directors reviews and establishes a dividend amount, if at all, based on A&F’s financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors, including any restrictions under the Company’s agreements related to the Senior Secured Notes and the ABL Facility. There can be no assurance that the Company will declare and pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends. Abercrombie & Fitch Co. 31 2022 2Q Form 10-Q Table of Contents Credit facility and Senior Secured Notes As of July 30, 2022, the Company had $307.7 million of gross borrowings outstanding under the Senior Secured Notes. In addition, the Amended and Restated Credit Agreement provides for the ABL Facility, which is a senior secured asset-based revolving credit facility of up to $400 million. As of July 30, 2022, the Company did not have any borrowings outstanding under the ABL Facility. The ABL Facility matures on April 29, 2026. Details regarding the remaining borrowing capacity under the ABL Facility as of July 30, 2022 are as follows: (in thousands) July 30, 2022 Borrowing base $ 400,000 L Outstanding stand-by letters of credit (751) Borrowing capacity 399,249 L Minimum excess availability (1) (40,000) Borrowing available $ 359,249 (1) The Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility. Refer to Note 10, “ BORROWINGS .” Income taxes The Company’s earnings and profits from its foreign subsidiaries could be repatriated to the U.S. without incurring additional federal income tax. The Company determined that the balance of the Company’s undistributed earnings and profits from its foreign subsidiaries as of February 2, 2019 are considered indefinitely reinvested outside of the U.S., and if these funds were to be repatriated to the U.S., the Company would expect to incur an insignificant amount of state income taxes and foreign withholding taxes. The Company accrues for both state income taxes and foreign withholding taxes with respect to earnings and profits earned after February 2, 2019, in such a manner that these funds could be repatriated without incurring additional tax expense. As of July 30, 2022, $254.2 million of the Company’s $370.0 million of cash and equivalents were held by foreign affiliates. The Company is not dependent on dividends from its foreign affiliates to fund its U.S. operations or to fund investing and financing cash flow activities. Refer to Note 9, “ INCOME TAXES .” Analysis of cash flows The table below provides certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the twenty-six weeks ended July 30, 2022 and July 31, 2021: Twenty-Six Weeks Ended July 30, 2022 July 31, 2021 (in thousands) Cash and equivalents, and restricted cash and equivalents, beginning of period $ 834,368 $ 1,124,157 Net cash (used for) provided by operating activities (259,733) 49,945 Net cash used for investing activities (51,610) (35,269) Net cash used for financing activities (135,424) (200,247) Effect of foreign currency exchange rates on cash (7,567) (2,547) Net decrease in cash and equivalents, and restricted cash and equivalents (454,334) (188,118) Cash and equivalents, and restricted cash and equivalents, end of period $ 380,034 $ 936,039 Operating activities - During the year-to-date period ended July 30, 2022, net cash used for operating activities included the acquisition of inventory and increased payments to vendors, including additional rent payments made during the period due to fiscal calendar shifting relative to monthly rent due dates as well as decreased cash receipts as a result of the 2% year-over-year decrease in net sales. In addition, during the year-to-date period ended July 31, 2021, the Company finalized an agreement with and paid its landlord partner to settle all remaining obligations related to the SoHo Hollister flagship store in New York City, which closed during the second quarter of Fiscal 2019. Prior to this new agreement, the Company was required to make payments in aggregate of $80.1 million pursuant to the lease agreements through Fiscal 2028. The new agreement resulted in an acceleration of payments and provided for a discount resulting in an operating cash outflow of $63.8 million during the year-to-date period ended July 31, 2021. Abercrombie & Fitch Co. 32 2022 2Q Form 10-Q Table of Contents Investing activities - During the year-to-date period ended July 30, 2022, net cash used for investing activities was primarily used for capital expenditures of $59.6 million, partially offset by the proceeds from the sale of property and equipment of $8.0 million, as compared to net cash used for investing activities of capital expenditures of $35.3 million for the year-to-date period ended July 31, 2021. Financing activities - During the year-to-date period ended July 30, 2022, net cash used for financing activities included the purchase of approximately 4.3 million shares of Common Stock with a market value of approximately $117.8 million. During the year-to-date period ended July 31, 2021, net cash used by financing activities included the purchase of $42.3 million of outstanding Senior Secured Notes at a premium of $4.7 million. In addition, the Company purchased approximately 3.5 million shares of Common Stock with a market value of approximately $135.2 million. Contractual obligations The Company’s contractual obligations consist primarily of operating leases, purchase orders for merchandise inventory, unrecognized tax benefits, certain retirement obligations, lease deposits and other agreements to purchase goods and services that are legally binding and that require minimum quantities to be purchased. These contractual obligations impact the Company’s short-term and long-term liquidity and capital resource needs. There have been no material changes in the Company’s contractual obligations since January 29, 2022, with the exception of those obligations which occurred in the normal course of business (primarily changes in the Company’s merchandise inventory-related purchases and lease obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company’s operations). RECENT ACCOUNTING PRONOUNCEMENTS The Company describes its significant accounting policies in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES , ” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” included on the Fiscal 2021 Form 10-K. The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements. CRITICAL ACCOUNTING ESTIMATES The Company describes its critical accounting estimates in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included on the Fiscal 2021 Form 10-K. There have been no significant changes in critical accounting policies and estimates since the end of Fiscal 2021. Abercrombie & Fitch Co. 33 2022 2Q Form 10-Q Table of Contents NON-GAAP FINANCIAL MEASURES This Quarterly Report on Form 10-Q includes discussion of certain financial measures calculated and presented on both a GAAP and a non-GAAP basis. The Company believes that each of the non-GAAP financial measures presented in this “ Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations ” is useful to investors as it provides a meaningful basis to evaluate the Company’s operating performance excluding the effect of certain items that the Company believes may not reflect its future operating outlook, such as certain asset impairment charges related to the Company’s flagship stores and significant impairments primarily attributable to the COVID-19 pandemic, thereby supplementing investors’ understanding of comparability of operations across periods. Management used these non-GAAP financial measures during the periods presented to assess the Company’s performance and to develop expectations for future operating performance. These non-GAAP financial measures should be used as a supplement to, and not as an alternative to, the Company’s GAAP financial results, and may not be calculated in the same manner as similar measures presented by other companies. Comparable sales At times, the Company provides comparable sales, defined as the year-over-year percentage change in the aggregate of (1) net sales for stores that have been open as the same brand at least one year and square footage has not been expanded or reduced by more than 20% within the past year, with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations, and (2) digital net sales with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations. Comparable sales exclude revenue other than store and digital sales. Management uses comparable sales to understand the drivers of year-over-year changes in net sales and believes comparable sales is a useful metric as it can assist investors in distinguishing the portion of the Company’s revenue attributable to existing locations from the portion attributable to the opening or closing of stores. The most directly comparable GAAP financial measure is change in net sales. In light of store closures related to COVID-19, the Company has not disclosed comparable sales since Fiscal 2019. Excluded items The following financial measures are disclosed on a GAAP and on an adjusted non-GAAP basis excluding the following items, as applicab Financial measures (1) Excluded items Operating (loss) income Asset impairment charges Income tax expense (benefit) (2) Tax effect of pre-tax excluded items Net (loss) income and net (loss) income per share attributable to A&F (2) Pre-tax excluded items and the tax effect of pre-tax excluded items (1) Certain of these financial measures are also expressed as a percentage of net sales. (2) The tax effect of excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. Abercrombie & Fitch Co. 34 2022 2Q Form 10-Q Table of Contents Financial information on a constant currency basis The Company provides certain financial information on a constant currency basis to enhance investors’ understanding of underlying business trends and operating performance by removing the impact of foreign currency exchange rate fluctuations. Management also uses financial information on a constant currency basis to award employee performance-based compensation. The effect from foreign currency exchange rates, calculated on a constant currency basis, is determined by applying the current period’s foreign currency exchange rates to the prior year’s results and is net of the year-over-year impact from hedging. The per diluted share effect from foreign currency exchange rates is calculated using a 26% effective tax rate. A reconciliation of non-GAAP financial metrics on a constant currency basis to financial measures calculated and presented in accordance with GAAP for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021 follows: (in thousands, except change in net sales, gross profit rate, operating margin and per share data) Thirteen Weeks Ended Twenty-Six Weeks Ended Net sales July 30, 2022 July 31, 2021 % Change July 30, 2022 July 31, 2021 % Change GAAP $ 805,091 $ 864,850 (7)% $ 1,617,853 $ 1,646,255 (2)% Impact from changes in foreign currency exchange rates — (23,124) 3% — (32,052) 2% Non-GAAP on a constant currency basis $ 805,091 $ 841,726 (4)% $ 1,617,853 $ 1,614,203 —% Gross profit, exclusive of depreciation and amortization expense July 30, 2022 July 31, 2021 BPS Change (1) July 30, 2022 July 31, 2021 BPS Change (1) GAAP $ 465,891 $ 563,485 (730) $ 915,437 $ 1,058,619 (770) Impact from changes in foreign currency exchange rates — (16,117) 20 — (19,400) (10) Non-GAAP on a constant currency basis $ 465,891 $ 547,368 (710) $ 915,437 $ 1,039,219 (780) Operating (loss) income July 30, 2022 July 31, 2021 BPS Change (1) July 30, 2022 July 31, 2021 BPS Change (1) GAAP $ (2,191) $ 114,787 (1,360) $ (11,917) $ 172,220 (1,120) Excluded items (2) (2,170) (786) (20) (5,592) (3,450) (10) Adjusted non-GAAP $ (21) $ 115,573 (1,380) $ (6,325) $ 175,670 (1,110) Impact from changes in foreign currency exchange rates — (7,984) 100 — (3,643) — Adjusted non-GAAP on a constant currency basis $ (21) $ 107,589 (1,280) $ (6,325) $ 172,027 (1,110) Net (loss) income attributable to A&F per diluted share July 30, 2022 July 31, 2021 $ Change July 30, 2022 July 31, 2021 $ Change GAAP $ (0.33) $ 1.69 $(2.02) $ (0.65) $ 2.32 $(2.97) Excluded items, net of tax (2) (0.03) (0.01) (0.02) (0.08) (0.04) (0.04) Adjusted non-GAAP $ (0.30) $ 1.70 $(2.00) $ (0.57) $ 2.36 $(2.93) Impact from changes in foreign currency exchange rates — (0.09) 0.09 — (0.04) 0.04 Adjusted non-GAAP on a constant currency basis $ (0.30) $ 1.61 $(1.91) $ (0.57) $ 2.32 $(2.89) (1) The estimated basis point change has been rounded based on the change in the percentage of net sales. (2) Excluded items for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021 consisted of pre-tax store asset impairment charges and the tax effect of pre-tax excluded items. Abercrombie & Fitch Co. 35 2022 2Q Form 10-Q Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk INVESTMENT SECURITIES The Company maintains its cash equivalents in financial instruments, primarily time deposits and money market funds, with original maturities of three months or less. Due to the short-term nature of these instruments, changes in interest rates are not expected to materially affect the fair value of these financial instruments. The Rabbi Trust includes amounts to meet funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II and the Supplemental Executive Retirement Plan. The Rabbi Trust assets primarily consist of trust-owned life insurance policies, which are recorded at cash surrender value. The change in cash surrender value of the trust-owned life insurance policies held in the Rabbi Trust resulted in realized gains of $0.4 million for each of the thirteen weeks ended July 30, 2022 and July 31, 2021, respectively and $0.7 million for each of the twenty-six weeks ended July 30, 2022 and July 31, 2021, which are recorded in interest expense, net on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. The Rabbi Trust assets were included in other assets on the Condensed Consolidated Balance Sheets as of July 30, 2022 and January 29, 2022 and are restricted in their use as noted above. INTEREST RATE RISK Prior to July 2, 2020, the Company’s exposure to market risk due to changes in interest rates related primarily to the increase or decrease in the amount of interest expense from fluctuations in the LIBO rate, or an alternate base rate associated with the Company’s former term loan facility (the “Term Loan Facility”) and the ABL Facility. On July 2, 2020 the Company issued the Senior Secured Notes and repaid all outstanding borrowings under the Term Loan Facility and the ABL Facility, thereby eliminating any then existing cash flow market risk due to changes in interest rates. The Senior Secured Notes are exposed to interest rate risk that is limited to changes in fair value. This analysis for Fiscal 2022 may differ from the actual results due to potential changes in gross borrowings outstanding under the ABL Facility and potential changes in interest rate terms and limitations described within the Amended and Restated Credit Agreement. In July 2017, the Financial Conduct Authority (the authority that regulates LIBO rate) announced it intended to stop compelling banks to submit rates for the calculation of LIBO rate after 2021. Certain publications of the LIBO rate were phased out at the end of 2021 and all LIBO rate publications will cease after June 30, 2023. The transition from the LIBO rate to alternative rates is not expected to have a material impact on the Company’s interest expense. In addition, the Company has seen lower interest income earned on the Company’s investments and cash holdings, reflecting average daily balances. FOREIGN CURRENCY EXCHANGE RATE RISK A&F’s international subsidiaries generally operate with functional currencies other than the U.S. Dollar. Since the Company’s Condensed Consolidated Financial Statements are presented in U.S. Dollars, the Company must translate all components of these financial statements from functional currencies into U.S. Dollars at exchange rates in effect during or at the end of the reporting period. The fluctuation in the value of the U.S. Dollar against other currencies affects the reported amounts of revenues, expenses, assets and liabilities. The potential impact of foreign currency exchange rate fluctuations increases as international operations relative to domestic operations increase. A&F and its subsidiaries have exposure to changes in foreign currency exchange rates associated with foreign currency transactions and forecasted foreign currency transactions, including the purchase of inventory between subsidiaries and foreign-currency-denominated assets and liabilities. The Company has established a program that primarily utilizes foreign currency exchange forward contracts to partially offset the risks associated with the effects of certain foreign currency transactions and forecasted transactions. Under this program, increases or decreases in foreign currency exchange rate exposures are partially offset by gains or losses on foreign currency exchange forward contracts, to mitigate the impact of foreign currency exchange gains or losses. The Company does not use forward contracts to engage in currency speculation. Outstanding foreign currency exchange forward contracts are recorded at fair value at the end of each fiscal period. Foreign currency exchange forward contracts are sensitive to changes in foreign currency exchange rates. The Company assessed the risk of loss in fair values from the effect of a hypothetical 10% devaluation of the U.S. Dollar against the exchange rates for foreign currencies under contract. Such a hypothetical devaluation would decrease derivative contract fair values by approximately $5.9 million. As the Company’s foreign currency exchange forward contracts are primarily designated as cash flow hedges of forecasted transactions, the hypothetical change in fair values would be expected to be largely offset by the net change in fair values of the underlying hedged items. Refer to Note 12, “ DERIVATIVE INSTRUMENTS ,” for the fair value of any outstanding foreign currency exchange forward contracts included in other current assets and accrued expenses as of July 30, 2022 and January 29, 2022. Abercrombie & Fitch Co. 36 2022 2Q Form 10-Q Table of Contents Item 4. Controls and Procedures DISCLOSURE CONTROLS AND PROCEDURES A&F maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports that A&F files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to A&F’s management, including A&F’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met. A&F’s management, including the Chief Executive Officer of A&F (who serves as Principal Executive Officer of A&F) and the Executive Vice President and Chief Financial Officer of A&F (who serves as Principal Financial Officer and Principal Accounting Officer of A&F), evaluated the effectiveness of A&F’s design and operation of its disclosure controls and procedures as of the end of the fiscal quarter ended July 30, 2022. The Chief Executive Officer of A&F (in such individual’s capacity as the Principal Executive Officer of A&F) and the Executive Vice President and Chief Financial Officer of A&F (in such individual’s capacity as the Principal Financial Officer of A&F) concluded that A&F’s disclosure controls and procedures were effective at a reasonable level of assurance as of July 30, 2022. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in A&F’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended July 30, 2022 that materially affected, or are reasonably likely to materially affect, A&F’s internal control over financial reporting. Abercrombie & Fitch Co. 37 2022 2Q Form 10-Q Table of Contents PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. The Company’s legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes estimated liabilities for the outcome of litigation where losses are deemed probable and the amount of loss, or range of loss, is reasonably estimable. The Company also determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that a loss is reasonably possible and it is able to determine such estimates. The Company’s accrued charges for certain legal contingencies are classified within accrued expenses on the Condensed Consolidated Balance Sheets included in “ Item 1. Financial Statements (Unaudited) ,” of Part I of this Quarterly Report on Form 10-Q. Based on currently available information, the Company cannot estimate a range of reasonably possible losses in excess of the accrued charges for legal contingencies. In addition, the Company has not established accruals for certain claims and legal proceedings pending against the Company where it is not possible to reasonably estimate the outcome or potential liability, and the Company cannot estimate a range of reasonably possible losses for these legal matters. Actual liabilities may differ from the amounts recorded, due to uncertainties regarding final settlement agreement negotiations, court approvals and the terms of any approval by the courts, and there can be no assurance that the final resolution of legal matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts. In addition, pursuant to Item 103(c)(3)(iii) of Regulation S-K under the Exchange Act, the Company is required to disclose certain information about environmental proceedings to which a governmental authority is a party if the Company reasonably believes such proceedings may result in monetary sanctions, exclusive of interest and costs, above a stated threshold. The Company has elected to apply a threshold of $1 million for purposes of determining whether disclosure of any such proceedings is required. Item 1A. Risk Factors The Company’s risk factors as of July 30, 2022 have not changed materially from those disclosed in Part I, “Item 1A. Risk Factors” of the Fiscal 2021 Form 10-K. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no sales of equity securities during the second quarter of Fiscal 2022 that were not registered under the Securities Act of 1933, as amended. The following table provides information regarding the purchase of shares of Common Stock made by or on behalf of A&F or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Exchange Act during each fiscal month of the thirteen weeks ended July 30, 2022: Period (fiscal month) Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) Maximum Number of Shares (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans or Programs (2)(3) May 1, 2022 through May 28, 2022 1,968 $ 32.94 — $ 257,959,401 May 29, 2022 through July 2, 2022 400,195 18.85 400,000 250,418,381 July 3, 2021 through July 30, 2022 600,663 17.06 600,000 240,184,764 Total 1,002,826 17.77 1,000,000 240,184,764 (1) An aggregate of 2,826 shares of Common Stock purchased during the thirteen weeks ended July 30, 2022 were withheld for tax payments due upon the vesting of employee restricted stock units and the exercise of employee stock appreciation rights. (2) On November 23, 2021, we announced that the A&F Board of Directors approved a new $500 million share repurchase authorization, replacing the prior 2021 share repurchase authorization of 10.0 million shares, which had approximately 3.9 million shares remaining available. (3) The number shown represents, as of the end of each period, the approximate dollar value of Common Stock that may yet be purchased under A&F’s publicly announced stock repurchase authorization described in footnote 2 above. The shares may be purchased, from time to time depending on business and market conditions. Abercrombie & Fitch Co. 38 2022 2Q Form 10-Q Table of Contents Item 6. Exhibits Exhibit Document 3.1 Amended and Restated Certificate of Incorporation of Abercrombie & Fitch Co., reflecting amendments through the date of this Quarterly Report on Form 10-Q, incorporated herein by reference to Exhibit 3.2 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2011 (File No. 001-12107). [This document represents the Amended and Restated Certificate of Incorporation of Abercrombie & Fitch Co. in compiled form incorporating all amendments. This compiled document has not been filed with the Delaware Secretary of State.] 3.2 Amended and Restated Bylaws of Abercrombie & Fitch Co. reflecting amendments through the date of this Quarterly Report on Form 10-Q, incorporated herein by reference to Exhibit 3.10 to A&F’s Annual Report on Form 10-K for the fiscal year ended February 3, 2018 (File No. 001-12107). [This document represents the Amended and Restated Bylaws of Abercrombie & Fitch Co. in compiled form incorporating all amendments.] 10.1 Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates (as amended on June 8, 2022) , incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K filed on June 9, 2022 (File No. 001-12107) 31.1 Certifications by Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 31.2 Certifications by Executive Vice President and Chief Financial Officer (Principal Financial Officer) pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 32.1 Certifications by Chief Executive Officer (who serves as Principal Executive Officer) and Executive Vice President and Chief Financial Officer (who serves as Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** 101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its Inline XBRL tags are embedded within the Inline XBRL document.* 101.SCH Inline XBRL Taxonomy Extension Schema Document.* 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.* 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.* 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.* 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.* 104 Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).* *     Filed herewith. **    Furnished herewith. Abercrombie & Fitch Co. 39 2022 2Q Form 10-Q Table of Contents Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Abercrombie & Fitch Co. Date: September 7, 2022 By: /s/ Scott D. Lipesky Scott D. Lipesky Executive Vice President and Chief Financial Officer (Principal Financial Officer, Principal Accounting Officer and Authorized Officer) Abercrombie & Fitch Co. 40 2022 2Q Form 10-Q

Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Stockholders’ Equity 5 Condensed Consolidated Statements of Cash Flows 7 Index for Notes to Condensed Consolidated Financial Statements 8 Notes to Condensed Consolidated Financial Statements 9 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk 36 Item 4. Controls and Procedures 37 PART II. OTHER INFORMATION Item 1. Legal Proceedings 38 Item 1A. Risk Factors 38 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38 Item 6. Exhibits 39 Signatures 40 Abercrombie & Fitch Co. 2 2022 3Q Form 10-Q Table of Contents PART I. FINANCIAL INFORMATION Item 1.     Financial Statements (Unaudited) Abercrombie & Fitch Co. Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (Thousands, except per share amounts) (Unaudited) Thirteen Weeks Ended Thirty-Nine Weeks Ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Net sales $ 880,084 $ 905,160 $ 2,497,937 $ 2,551,415 Cost of sales, exclusive of depreciation and amortization 359,268 328,916 1,061,684 916,552 Gross profit 520,816 576,244 1,436,253 1,634,863 Stores and distribution expense 367,333 351,815 1,045,667 993,170 Marketing, general and administrative expense 133,201 146,269 379,518 391,129 Asset impairment 3,744 6,749 9,336 10,199 Other operating income, net ( 1,005 ) ( 1,320 ) ( 3,894 ) ( 4,586 ) Operating income 17,543 72,731 5,626 244,951 Interest expense, net 7,295 7,270 21,519 27,151 Income (loss) before income taxes 10,248 65,461 ( 15,893 ) 217,800 Income tax expense 10,966 16,383 14,413 15,560 Net (loss) income ( 718 ) 49,078 ( 30,306 ) 202,240 L Net income attributable to noncontrolling interests 1,496 1,845 5,211 4,739 Net (loss) income attributable to A&F $ ( 2,214 ) $ 47,233 $ ( 35,517 ) $ 197,501 Net (loss) income per share attributable to A&F Basic $ ( 0.04 ) $ 0.80 $ ( 0.70 ) $ 3.24 Diluted $ ( 0.04 ) $ 0.77 $ ( 0.70 ) $ 3.10 Weighted-average shares outstanding Basic 49,486 58,796 50,673 60,879 Diluted 49,486 61,465 50,673 63,770 Other comprehensive (loss) income Foreign currency translation adjustments, net of tax $ ( 11,021 ) $ ( 5,629 ) $ ( 26,338 ) $ ( 8,889 ) Derivative financial instruments, net of tax ( 1,206 ) 4,416 ( 1,223 ) 9,718 Other comprehensive (loss) income ( 12,227 ) ( 1,213 ) ( 27,561 ) 829 Comprehensive (loss) income ( 12,945 ) 47,865 ( 57,867 ) 203,069 L Comprehensive income attributable to noncontrolling interests 1,496 1,845 5,211 4,739 Comprehensive (loss) income attributable to A&F $ ( 14,441 ) $ 46,020 $ ( 63,078 ) $ 198,330 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 3 2022 3Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Balance Sheets (Thousands, except par value amounts) (Unaudited) October 29, 2022 January 29, 2022 Assets Current assets: Cash and equivalents $ 257,332 $ 823,139 Receivables 108,468 69,102 Inventories 741,963 525,864 Other current assets 112,602 89,654 Total current assets 1,220,365 1,507,759 Property and equipment, net 542,138 508,336 Operating lease right-of-use assets 713,166 698,231 Other assets 218,325 225,165 Total assets $ 2,693,994 $ 2,939,491 Liabilities and stockholders’ equity Current liabiliti Accounts payable $ 322,128 $ 374,829 Accrued expenses 378,366 395,815 Short-term portion of operating lease liabilities 211,304 222,823 Income taxes payable 23,694 21,773 Total current liabilities 935,492 1,015,240 Long-term liabiliti Long-term portion of operating lease liabilities 708,512 697,264 Long-term borrowings, net 296,532 303,574 Other liabilities 97,393 86,089 Total long-term liabilities 1,102,437 1,086,927 Stockholders’ equity Class A Common Stoc $ 0.01 par val 150,000 shares authorized and 103,300 shares issued for all periods presented 1,033 1,033 Paid-in capital 411,041 413,190 Retained earnings 2,330,730 2,386,156 Accumulated other comprehensive loss, net of tax (“AOCL”) ( 142,267 ) ( 114,706 ) Treasury stock, at average 54,300 and 50,315 shares as of October 29, 2022 and January 29, 2022, respectively ( 1,954,306 ) ( 1,859,583 ) Total Abercrombie & Fitch Co. stockholders’ equity 646,231 826,090 Noncontrolling interests 9,834 11,234 Total stockholders’ equity 656,065 837,324 Total liabilities and stockholders’ equity $ 2,693,994 $ 2,939,491 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 4 2022 3Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Statements of Stockholders’ Equity (Thousands, except per share amounts) (Unaudited) Thirteen Weeks Ended October 29, 2022 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, July 30, 2022 49,471 $ 1,033 $ 405,127 $ 11,139 $ 2,333,867 $ ( 130,040 ) 53,829 $ ( 1,948,199 ) $ 672,927 Net income (loss) — — — 1,496 ( 2,214 ) — — — ( 718 ) Purchase of Common Stock ( 510 ) — — — — — 510 ( 8,000 ) ( 8,000 ) Share-based compensation issuances and exercises 39 — ( 1,396 ) — ( 923 ) — ( 39 ) 1,893 ( 426 ) Share-based compensation expense — — 7,310 — — — — — 7,310 Derivative financial instruments, net of tax — — — — — ( 1,206 ) — — ( 1,206 ) Foreign currency translation adjustments, net of tax — — — — — ( 11,021 ) — — ( 11,021 ) Distributions to noncontrolling interests, net — — — ( 2,801 ) — — — — ( 2,801 ) Ending balance at October 29, 2022 49,000 $ 1,033 $ 411,041 $ 9,834 $ 2,330,730 $ ( 142,267 ) 54,300 $ ( 1,954,306 ) $ 656,065 Thirteen Weeks Ended October 30, 2021 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, July 31, 2021 59,691 $ 1,033 $ 399,891 $ 10,367 $ 2,275,009 $ ( 100,265 ) 43,609 $ ( 1,619,102 ) $ 966,933 Net income — — — 1,845 47,233 — — — 49,078 Purchase of Common Stock ( 2,692 ) — — — 2,692 ( 100,000 ) ( 100,000 ) Share-based compensation issuances and exercises 38 — ( 918 ) — ( 1,442 ) — ( 38 ) 1,376 ( 984 ) Share-based compensation expense — — 7,332 — — — — — 7,332 Derivative financial instruments, net of tax — — — — — 4,416 — — 4,416 Foreign currency translation adjustments, net of tax — — — — — ( 5,629 ) — — ( 5,629 ) Distributions to noncontrolling interests, net — — — ( 2,817 ) — — — — ( 2,817 ) Ending balance at October 30, 2021 57,037 $ 1,033 $ 406,305 $ 9,395 $ 2,320,800 $ ( 101,478 ) 46,263 $ ( 1,717,726 ) $ 918,329 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 5 2022 3Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Statements of Stockholders’ Equity (Thousands, except per share amounts) (Unaudited) Thirty-Nine Weeks Ended October 29, 2022 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, January 29, 2022 52,985 $ 1,033 $ 413,190 $ 11,234 $ 2,386,156 $ ( 114,706 ) 50,315 $ ( 1,859,583 ) $ 837,324 Net income (loss) — — — 5,211 ( 35,517 ) — — — ( 30,306 ) Purchase of Common Stock ( 4,770 ) — — — — — 4,770 ( 125,775 ) ( 125,775 ) Share-based compensation issuances and exercises 785 — ( 25,575 ) — ( 19,909 ) — ( 785 ) 31,052 ( 14,432 ) Share-based compensation expense — — 23,426 — — — — — 23,426 Derivative financial instruments, net of tax — — — — — ( 1,223 ) — — ( 1,223 ) Foreign currency translation adjustments, net of tax — — — — — ( 26,338 ) — — ( 26,338 ) Distributions to noncontrolling interests, net — — — ( 6,611 ) — — — — ( 6,611 ) Ending balance at October 29, 2022 49,000 $ 1,033 $ 411,041 $ 9,834 $ 2,330,730 $ ( 142,267 ) 54,300 $ ( 1,954,306 ) $ 656,065 Thirty-Nine Weeks Ended October 30, 2021 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, January 30, 2021 62,399 $ 1,033 $ 401,283 $ 12,684 $ 2,149,470 $ ( 102,307 ) 40,901 $ ( 1,512,851 ) $ 949,312 Net income — — — 4,739 197,501 — — — 202,240 Purchase of Common Stock ( 6,143 ) — — — 6,143 ( 235,249 ) ( 235,249 ) Share-based compensation issuances and exercises 781 — ( 17,247 ) — ( 26,171 ) — ( 781 ) 30,374 ( 13,044 ) Share-based compensation expense — — 22,269 — — — — — 22,269 Derivative financial instruments, net of tax — — — — — 9,718 — — 9,718 Foreign currency translation adjustments, net of tax — — — — — ( 8,889 ) — — ( 8,889 ) Distributions to noncontrolling interests, net — — — ( 8,028 ) — — — — ( 8,028 ) Ending balance at October 30, 2021 57,037 $ 1,033 $ 406,305 $ 9,395 $ 2,320,800 $ ( 101,478 ) 46,263 $ ( 1,717,726 ) $ 918,329 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 6 2022 3Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Statements of Cash Flows (Thousands) (Unaudited) Thirty-Nine Weeks Ended October 29, 2022 October 30, 2021 Operating activities Net (loss) income $ ( 30,306 ) $ 202,240 Adjustments to reconcile net (loss) income to net cash (used for) provided by operating activiti Depreciation and amortization 98,393 107,787 Asset impairment 9,336 10,199 (Gain) loss on disposal ( 198 ) 3,500 Benefit for deferred income taxes ( 9,585 ) ( 32,931 ) Share-based compensation 23,426 22,269 (Gain) loss on extinguishment of debt ( 52 ) 5,347 Changes in assets and liabiliti Inventories ( 221,414 ) ( 140,393 ) Accounts payable and accrued expenses ( 87,463 ) 81,793 Operating lease right-of-use assets and liabilities ( 8,364 ) ( 105,046 ) Income taxes 281 15,061 Other assets ( 91,432 ) ( 34,884 ) Other liabilities 16,184 ( 3,655 ) Net cash (used for) provided by operating activities ( 301,194 ) 131,287 Investing activities Purchases of property and equipment ( 120,282 ) ( 62,223 ) Proceeds from the sale of property and equipment 11,891 — Withdrawal of funds from Rabbi Trust assets 12,000 — Net cash used for investing activities ( 96,391 ) ( 62,223 ) Financing activities Purchase of senior secured notes ( 7,862 ) ( 46,969 ) Payment of debt issuance or modification costs and fees ( 181 ) ( 2,016 ) Purchases of Common Stock ( 125,775 ) ( 235,249 ) Other financing activities ( 21,088 ) ( 20,124 ) Net cash used for financing activities ( 154,906 ) ( 304,358 ) Effect of foreign currency exchange rates on cash ( 14,871 ) ( 8,560 ) Net decrease in cash and equivalents, and restricted cash and equivalents ( 567,362 ) ( 243,854 ) Cash and equivalents, and restricted cash and equivalents, beginning of period 834,368 1,124,157 Cash and equivalents, and restricted cash and equivalents, end of period $ 267,006 $ 880,303 Supplemental information related to non-cash activities Purchases of property and equipment not yet paid at end of period $ 64,477 $ 31,561 Operating lease right-of-use assets additions, net of terminations, impairments and other reductions 196,003 26,473 Supplemental information related to cash activities Cash paid for interest 13,574 14,950 Cash paid for income taxes 26,213 39,081 Cash received from income tax refunds 249 1,240 Cash paid for amounts included in measurement of operating lease liabilities, net of abatements 210,394 312,854 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 7 2022 3Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Index for Notes to Condensed Consolidated Financial Statements (Unaudited) Page No. Note 1. NATURE OF BUSINESS 9 Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 9 Note 3. REVENUE RECOGNITION 10 Note 4. NET (LOSS) INCOME PER SHARE 11 Note 5. FAIR VALUE 11 Note 6. PROPERTY AND EQUIPMENT, NET 12 Note 7. LEASES 12 Note 8. ASSET IMPAIRMENT 13 Note 9. INCOME TAXES 13 Note 10. BORROWINGS 14 Note 11. SHARE-BASED COMPENSATION 15 Note 12. DERIVATIVE INSTRUMENTS 16 Note 13. ACCUMULATED OTHER COMPREHENSIVE LOSS 18 Note 14. SEGMENT REPORTING 19 Abercrombie & Fitch Co. 8 2022 3Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. NATURE OF BUSINESS Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a global, digitally-led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. The Company’s two brand-based operating segments are Hollister, which includes the Company’s Hollister, Gilly Hicks, and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These five brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company operates primarily in North America, Europe, and Asia. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The accompanying Condensed Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its financial position, results of operations and cash flows. The Company has interests in an Emirati business venture and in a Kuwaiti business venture with Majid al Futtaim Fashion L.L.C. (“MAF”) and in a United States of America (the “U.S.”) business venture with Dixar L.L.C. (“Dixar”), each of which meets the definition of a variable interest entity (“VIE”). The purpose of the business ventures with MAF is to operate stores in the United Arab Emirates and Kuwait and the purpose of the business venture with Dixar is to hold the intellectual property related to the Social Tourist brand. The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the operating results, assets and liabilities of these VIEs, with the noncontrolling interests’ (“NCI”) portions of net (loss) income presented as net income attributable to NCI on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income and the NCI portion of stockholders’ equity presented as NCI on the Condensed Consolidated Balance Sheets. Fiscal year The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a fifty-two week year, but occasionally gives rise to an additional week, resulting in a fifty-three week year. Fiscal years are designated in the Condensed Consolidated Financial Statements and notes, as well as the remainder of this Quarterly Report on Form 10-Q, by the calendar year in which the fiscal year commences. All references herein to the Company’s fiscal years are as follows: Fiscal year Year ended/ ending Number of weeks Fiscal 2021 January 29, 2022 52 Fiscal 2022 January 28, 2023 52 Fiscal 2023 February 3, 2024 53 Interim financial statements The Condensed Consolidated Financial Statements as of October 29, 2022, and for the thirteen and thirty-nine week periods ended October 29, 2022 and October 30, 2021, are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim consolidated financial statements. Accordingly, the Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in A&F’s Annual Report on Form 10-K for Fiscal 2021 filed with the SEC on March 28, 2022 (the “Fiscal 2021 Form 10-K”). The January 29, 2022 consolidated balance sheet data, included herein, were derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the U.S. (“GAAP”). In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to state fairly, in all material respects, the financial position, results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for Fiscal 2022. During the first quarter of 2022, the Company reclassified flagship store exit benefits into stores and distribution expense on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. There were no changes to operating (loss) income or net (loss) income. Prior period amounts have been reclassified to conform to current year’s presentation. Abercrombie & Fitch Co. 9 2022 3Q Form 10-Q Table of Contents Use of estimates The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved with estimates, actual results may differ. Additionally, these estimates and assumptions may change as a result of the impact of global economic conditions such as the uncertainty regarding a slowing economy, rising interest rates, continued inflation, fluctuation in foreign exchange rates, the coronavirus ("COVID-19") pandemic, and the ongoing conflict in Ukraine and result in material impacts to the Company’s consolidated financial statements in future reporting periods. Recent accounting pronouncements The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements. Condensed Consolidated Statements of Cash Flows reconciliation The following table provides a reconciliation of cash and equivalents and restricted cash and equivalents to the amounts shown on the Condensed Consolidated Statements of Cash Flows: (in thousands) Location October 29, 2022 January 29, 2022 October 30, 2021 January 30, 2021 Cash and equivalents Cash and equivalents $ 257,332 $ 823,139 $ 865,622 $ 1,104,862 Long-term restricted cash and equivalents Other assets 9,674 11,229 11,401 14,814 Short-term restricted cash and equivalents Other current assets — — 3,280 4,481 Cash and equivalents and restricted cash and equivalents $ 267,006 $ 834,368 $ 880,303 $ 1,124,157 3. REVENUE RECOGNITION Disaggregation of revenue All revenues are recognized in net sales in the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. For information regarding the disaggregation of revenue, refer to Note 14, “ SEGMENT REPORTING . ” Contract liabilities The following table details certain contract liabilities representing unearned revenue as of October 29, 2022, January 29, 2022 and October 30, 2021: (in thousands) October 29, 2022 January 29, 2022 October 30, 2021 Gift card liability $ 35,016 $ 36,984 $ 30,815 Loyalty programs liability 22,930 22,757 21,964 The following table details recognized revenue associated with the Company’s gift card program and loyalty programs for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Revenue associated with gift card redemptions and gift card breakage $ 21,194 $ 17,801 $ 66,847 $ 51,310 Revenue associated with reward redemptions and breakage related to the Company’s loyalty programs 11,767 12,075 32,578 31,525 Abercrombie & Fitch Co. 10 2022 3Q Form 10-Q Table of Contents 4. NET (LOSS) INCOME PER SHARE Net (loss) income per basic and diluted share attributable to A&F is computed based on the weighted-average number of outstanding shares of Class A Common Stock (“Common Stock”). Additional information pertaining to net (loss) income per share attributable to A&F follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Shares of Common Stock issued 103,300 103,300 103,300 103,300 Weighted-average treasury shares ( 53,814 ) ( 44,504 ) ( 52,627 ) ( 42,421 ) Weighted-average — basic shares 49,486 58,796 50,673 60,879 Dilutive effect of share-based compensation awards — 2,669 — 2,891 Weighted-average — diluted shares 49,486 61,465 50,673 63,770 Anti-dilutive shares (1) 4,199 1,228 4,285 1,212 (1) Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net (loss) income per diluted share because the impact would have been anti-dilutive. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can achieve up to 200% of their target vesting amount and are reflected at the maximum vesting amount less any dilutive portion. 5. FAIR VALUE Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows: • Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets that the Company can access at the measurement date. • Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly. • Level 3—inputs to the valuation methodology are unobservable. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The three levels of the hierarchy and the distribution of the Company’s assets measured at fair value on a recurring basis, as of October 29, 2022 and January 29, 2022, were as follows: Assets and Liabilities at Fair Value as of October 29, 2022 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 51,722 $ — $ — $ 51,722 Derivative instruments (2) — 3,802 — 3,802 Rabbi Trust assets (3) 1 51,347 — 51,348 Restricted cash equivalents (1) 1,544 5,150 — 6,694 Total assets $ 53,267 $ 60,299 $ — $ 113,566 Liabiliti Derivative instruments (2) $ — $ 10 $ — $ 10 Total liabilities $ — $ 10 $ — $ 10 Assets at Fair Value as of January 29, 2022 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 49,309 $ 11,643 $ — $ 60,952 Derivative instruments (2) — 4,973 — 4,973 Rabbi Trust assets (3) 1 62,272 — 62,273 Restricted cash equivalents (1) 5,391 2,326 — 7,717 Total assets $ 54,701 $ 81,214 $ — $ 135,915 (1) Level 1 assets consisted of investments in money market funds and U.S. treasury bills. Level 2 assets consisted of time deposits. (2) Level 2 assets consisted primarily of foreign currency exchange forward contracts. (3) Level 1 assets consisted of investments in money market funds. Level 2 assets consisted of trust-owned life insurance policies. Abercrombie & Fitch Co. 11 2022 3Q Form 10-Q Table of Contents The Company’s Level 2 assets consisted o • Trust-owned life insurance policies, which were valued using the cash surrender value of the life insurance policies; • Time deposits, which were valued at cost, approximating fair value, due to the short-term nature of these investments; and • Derivative instruments, primarily foreign currency exchange forward contracts, which were valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk. Fair value of long-term borrowings The Company’s borrowings under its senior secured notes, which have a fixed 8.75 % interest rate and mature on July 15, 2025 (the “Senior Secured Notes”) are carried at historical cost in the accompanying Condensed Consolidated Balance Sheets. The carrying amount and fair value of the Company’s long-term gross borrowings were as follows: (in thousands) October 29, 2022 January 29, 2022 Gross borrowings outstanding, carrying amount $ 299,730 $ 307,730 Gross borrowings outstanding, fair value 283,245 327,732 6. PROPERTY AND EQUIPMENT, NET Property and equipment, net consisted o (in thousands) October 29, 2022 January 29, 2022 Property and equipment, at cost $ 2,502,008 $ 2,453,493 L Accumulated depreciation and amortization ( 1,959,870 ) ( 1,945,157 ) Property and equipment, net $ 542,138 $ 508,336 R efer to Note 8, “ ASSET IMPAIRMENT ,” for details related to property and equipment impairment charges incurred during the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021. 7. LEASES The Company is a party to leases related to its Company-operated retail stores as well as for certain of its distribution centers, office space, information technology and equipment. The following table provides a summary of the Company’s operating lease costs for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Single lease cost (1) $ 63,263 $ 66,969 $ 182,796 $ 207,046 Variable lease cost (2) 40,681 26,409 106,359 68,875 Operating lease right-of-use asset impairment (3) 1,205 5,512 4,693 8,216 Sublease income (4) ( 908 ) ( 1,068 ) ( 2,869 ) ( 3,256 ) Total operating lease cost $ 104,241 $ 97,822 $ 290,979 $ 280,881 (1) Included amortization and interest expense associated with operating lease right-of-use assets and the impact from remeasurement of operating lease liabilities. (2) Includes variable payments related to both lease and nonlease components, such as contingent rent payments made by the Company based on performance, and payments related to taxes, insurance, and maintenance costs, as well as the benefit of $ 0.8 million and $ 3.3 million of rent abatements during the thirteen and thirty-nine weeks ended October 29, 2022, respectively, related to the effects of the COVID-19 pandemic that resulted in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract. The benefit related to rent abatements recognized during the thirteen and thirty-nine weeks ended October 30, 2021 was $ 1.7 million and $ 14.6 million respectively. (3) Refer to Note 8, “ ASSET IMPAIRMENT ,” for details related to operating lease right-of-use asset impairment charges. (4) The terms of the sublease agreement entered into by the Company with a third party during Fiscal 2020 related to one of its previous flagship store locations have not changed materially from that disclosed in Note 8, “LEASES,” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of the Fiscal 2021 Form 10-K. Sublease income is recognized in other operating income, net on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. The Company had minimum commitments related to operating lease contracts that have not yet commenced, primarily for its Company-operated retail stores, of approximately $ 31.5 million as of October 29, 2022. Abercrombie & Fitch Co. 12 2022 3Q Form 10-Q Table of Contents 8. ASSET IMPAIRMENT Asset impairment charges for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021 were as follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Operating lease right-of-use asset impairment $ 1,205 $ 5,512 $ 4,693 $ 8,216 Property and equipment asset impairment (1) 2,539 1,237 4,643 1,983 Total asset impairment $ 3,744 $ 6,749 $ 9,336 $ 10,199 (1) Amounts include $ 0.6 million of store asset impairment and $ 1.9 million other asset impairment for the thirteen weeks ended October 29, 2022 and $ 2.7 million of store asset impairment and $ 1.9 million other asset impairment for the thirty-nine weeks ended October 29, 2022. Amounts for the thirteen and thirty-nine weeks ended October 30, 2021 only include store asset impairment. Asset impairment charges for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021 related to certain of the Company’s assets including stores across brands, geographies and store formats and other assets. The store impairment charges for the thirty-nine weeks ended October 29, 2022 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $ 38.7 million, including $ 37.8 million related to operating lease right-of-use assets. The impairment charges for the thirty-nine weeks ended October 30, 2021 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $ 19.5 million, including $ 17.0 million related to operating lease right-of-use assets. 9. INCOME TAXES The quarterly provision for income taxes is based on the current estimate of the annual effective income tax rate and the tax effect of discrete items occurring during the quarter. The Company’s quarterly provision and the estimate of the annual effective tax rate are subject to significant variation due to several factors. These factors include variability in the pre-tax jurisdictional mix of earnings, changes in how the Company does business including entering into new businesses or geographies, changes in foreign currency exchange rates, changes in laws, regulations, interpretations and administrative practices, relative changes in expenses or losses for which tax benefits are not recognized and the impact of discrete items. In addition, jurisdictions where the Company anticipates an ordinary loss for the fiscal year for which the Company does not anticipate future tax benefits are excluded from the overall computation of estimated annual effective tax rate and no tax benefits are recognized in the period related to losses in such jurisdictions. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax earnings. On August 16, 2022, the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”) was enacted into law. The Company does not currently expect that the Inflation Reduction Act will have a material impact on its income taxes. Impact of valuation allowances and other tax charges During the thirteen and thirty-nine weeks ended October 29, 2022, the Company did not recognize income tax benefits on $ 30.0 million and $ 69.7 million, respectively, of pretax losses, primarily in Switzerland, resulting in adverse tax impacts of $ 5.6 million and $ 12.8 million, respectively. As of October 29, 2022, there were approximately $ 11.2 million of net deferred tax assets in China. The realization of these net deferred tax assets is dependent upon the future generation of sufficient taxable profits in China. During the thirty-nine weeks ended October 29, 2022, the company recorded a $ 0.2 million valuation allowance on net operating losses currently not projected to be utilized in future years. While the Company believes that the remaining net deferred tax assets are more-likely-than-not to be realized, it is not a certainty, as the Company continues to evaluate and respond to certain situations, such as the COVID-19 pandemic. The Company is closely monitoring its operations in China. Should circumstances change, the net deferred tax assets may become subject to additional valuation allowances in the future. Additional valuation allowances would result in additional tax expense. During the thirteen weeks ended October 30, 2021, the Company recognized $ 3.5 million of tax benefits due to the expected utilization of deferred tax assets against projected pre-tax income for the full fiscal year, primarily in the U.S. and Germany, based on information available, on which a valuation allowance had previously been established. During the thirty-nine weeks ended October 30, 2021, the Company recognized $ 23.4 million of discrete tax benefits due to the release of valuation allowances, primarily in the U.S. and Germany, and a discrete tax benefit of $ 3.9 million due to a rate change in the U.K. The Company also recognized $ 13.6 million of tax benefits due to the expected utilization of deferred tax assets against projected pre-tax income for the full fiscal year, primarily in the U.S. and Germany, based on information available, on which a valuation allowance had previously been established. The Company continues to maintain valuation allowances in certain jurisdictions, principally Switzerland and Japan. Abercrombie & Fitch Co. 13 2022 3Q Form 10-Q Table of Contents Share-based compensation Refer to Note 11, “ SHARE-BASED COMPENSATION ,” for details on income tax benefits and charges related to share-based compensation awards during the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021. 10. BORROWINGS Details on the Company’s long-term borrowings, net, as of October 29, 2022 and January 29, 2022 are as follows: (in thousands) October 29, 2022 January 29, 2022 Long-term portion of borrowings, gross at carrying amount $ 299,730 $ 307,730 Unamortized fees ( 3,198 ) ( 4,156 ) Long-term borrowings, net $ 296,532 $ 303,574 Senior Secured Notes During the thirteen weeks ended October 29, 2022, Abercrombie & Fitch Management Co.(“A&F Management”), a wholly-owned indirect subsidiary of A&F, purchased $ 8.0 million of outstanding Senior Secured Notes and incurred a $ 0.1 million gain on extinguishment of debt, recognized in interest expense, net on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. The terms of the Senior Secured Notes have remained unchanged from those disclosed in Note 13, “BORROWINGS,” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of on the Fiscal 2021 Form 10-K. ABL Facility The terms of the Company’s senior secured revolving credit facility of up to $ 400.0 million (the “ABL Facility”) have remained unchanged from those disclosed in Note 13, “BORROWINGS,” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Dat a ” of the Fiscal 2021 Form 10-K. The Company did not have any borrowings outstanding under the ABL Facility as of October 29, 2022 or as of January 29, 2022. As of October 29, 2022, availability under the ABL Facility was $ 399.4 million, net of $ 0.6 million in outstanding stand-by letters of credit. As the Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility, borrowing capacity available to the Company under the ABL Facility was $ 359.4 million as of October 29, 2022. Representations, warranties and covenants The agreements related to the Senior Secured Notes and the ABL Facility contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of the Company and its subsidiaries t grant or incur liens; incur, assume or guarantee additional indebtedness; sell or otherwise dispose of assets, including capital stock of subsidiaries; make investments in certain subsidiaries; pay dividends, make distributions or redeem or repurchase capital stock; change the nature of their business; and consolidate or merge with or into, or sell substantially all of the assets of the Company or A&F Management to another entity. The Senior Secured Notes are guaranteed on a senior secured basis, jointly and severally, by A&F and each of the existing and future wholly-owned domestic restricted subsidiaries of A&F that guarantee or will guarantee A&F Management’s Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) or certain future capital markets indebtedness. Certain of the agreements related to the Senior Secured Notes and the ABL Facility also contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances. The Company was in compliance with all debt covenants under these agreements as of October 29, 2022. Abercrombie & Fitch Co. 14 2022 3Q Form 10-Q Table of Contents 11. SHARE-BASED COMPENSATION Financial statement impact The following table details share-based compensation expense and the related income tax impacts for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Share-based compensation expense $ 7,310 $ 7,332 $ 23,426 $ 22,269 Income tax benefit associated with share-based compensation expense recognized 635 806 2,615 2,492 The following table details discrete income tax benefits and charges related to share-based compensation awards during the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Income tax discrete (charges) benefits realized for tax deductions related to the issuance of shares $ ( 29 ) $ 150 $ 1,970 $ 4,166 Income tax discrete (charges) benefits realized upon cancellation of stock appreciation rights ( 10 ) — ( 213 ) ( 3 ) Total income tax discrete (charges) benefits related to share-based compensation awards $ ( 39 ) $ 150 $ 1,757 $ 4,163 The following table details the amount of employee tax withheld by the Company upon the issuance of shares associated with restricted stock units vesting and the exercise of stock appreciation rights for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Employee tax withheld upon issuance of shares (1) $ 426 $ 984 $ 14,432 $ 13,044 (1) Classified within other financing activities on the Condensed Consolidated Statements of Cash Flows. Restricted stock units The following table summarizes activity for restricted stock units for the thirty-nine weeks ended October 29, 2022: Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Number of Underlying Shares Weighted- Average Grant Date Fair Value Number of Underlying Shares Weighted- Average Grant Date Fair Value Number of Underlying Shares Weighted- Average Grant Date Fair Value Unvested at January 29, 2022 2,532,240 $ 17.16 340,149 $ 27.08 680,184 $ 22.81 Granted 983,139 28.73 185,197 30.24 92,603 41.60 Adjustments for performance achievement — — 5,668 23.05 18,881 36.24 Vested ( 927,346 ) 18.01 ( 194,465 ) 23.05 ( 113,284 ) 36.24 Forfeited ( 136,982 ) 20.37 — — ( 16,247 ) 16.24 Unvested at October 29, 2022 (1) 2,451,051 $ 21.30 336,549 $ 31.08 662,137 $ 23.68 (1) Unvested shares related to restricted stock units with performance-based and market-based vesting conditions are reflected at 100% of their target vesting amount in the table above. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can be achieved at up to 200% of their target vesting amount. The following table details unrecognized compensation cost and the remaining weighted-average period over which these costs are expected to be recognized for restricted stock units as of October 29, 2022: (in thousands) Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Unrecognized compensation cost $ 39,040 $ — $ 15,602 Remaining weighted-average period cost is expected to be recognized (years) 1.3 0.0 0.9 Abercrombie & Fitch Co. 15 2022 3Q Form 10-Q Table of Contents Additional information pertaining to restricted stock units for the thirty-nine weeks ended October 29, 2022 and October 30, 2021 follows: (in thousands) October 29, 2022 October 30, 2021 Service-based restricted stock units: Total grant date fair value of awards granted $ 28,246 $ 23,760 Total grant date fair value of awards vested 16,702 13,232 Performance-based restricted stock units: Total grant date fair value of awards granted 5,600 5,059 Total grant date fair value of awards vested 4,482 — Market-based restricted stock units: Total grant date fair value of awards granted 3,852 4,492 Total grant date fair value of awards vested 4,105 3,390 The weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during the thirty-nine weeks ended October 29, 2022 and October 30, 2021 were as follows: October 29, 2022 October 30, 2021 Grant date market price $ 30.24 $ 36.15 Fair value 41.60 56.99 Price volatility 66 % 65 % Expected term (years) 2.8 2.5 Risk-free interest rate 2.5 % 0.3 % Dividend yield — — Average volatility of peer companies 72.3 76.0 Average correlation coefficient of peer companies 0.5150 0.5130 Stock appreciation rights The following table summarizes stock appreciation rights activity for the thirty-nine weeks ended October 29, 2022: Number of Underlying Shares Weighted-Average Exercise Price Aggregate Intrinsic Value Weighted-Average Remaining Contractual Life (years) Outstanding at January 29, 2022 236,139 $ 32.55 Forfeited or expired ( 37,800 ) 48.72 Outstanding at October 29, 2022 198,339 $ 29.47 $ — 1.9 Stock appreciation rights exercisable at October 29, 2022 198,339 $ 29.47 $ — 1.9 No stock appreciation rights were exercised during the thirty-nine weeks ended October 29, 2022 or October 30, 2021. 12. DERIVATIVE INSTRUMENTS The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes. The Company uses derivative instruments, primarily foreign currency exchange forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign-currency-denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign-currency-denominated intercompany receivables. Fluctuations in foreign currency exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These foreign currency exchange forward contracts typically have a maximum term Abercrombie & Fitch Co. 16 2022 3Q Form 10-Q Table of Contents of twelve months. The sale of the inventory to the Company’s customers will result in the reclassification of related derivative gains and losses that are reported in AOCL into earnings. The Company also uses foreign currency exchange forward contracts to hedge certain foreign-currency-denominated net monetary assets/liabilities. Examples of monetary assets/liabilities include cash balances, receivables and payables. Fluctuations in foreign currency exchange rates result in transaction gains or losses being recorded in earnings, as GAAP requires that monetary assets/liabilities be remeasured at the spot exchange rate at quarter-end and upon settlement. The Company has chosen not to apply hedge accounting to these instruments because there are no anticipated differences in the timing of gain or loss recognition on the hedging instruments and the hedged items. As of October 29, 2022, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all, of forecasted foreign-currency-denominated intercompany inventory transactions, the resulting settlement of the foreign-currency-denominated intercompany accounts receivable, or (in thousands) Notional Amount (1) Euro $ 50,728 British pound 58,382 Canadian dollar 2,232 Japanese yen 2,254 (1) Amounts reported are the U.S. Dollar notional amounts outstanding as of October 29, 2022. The fair value of derivative instruments is valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk. The location and amounts of derivative fair values of foreign currency exchange forward contracts on the Condensed Consolidated Balance Sheets as of October 29, 2022 and January 29, 2022 were as follows: (in thousands) Location October 29, 2022 January 29, 2022 Location October 29, 2022 January 29, 2022 Derivatives designated as cash flow hedging instruments Other current assets $ 3,802 $ 4,973 Accrued expenses $ 10 $ — Derivatives not designated as hedging instruments Other current assets — — Accrued expenses — — Total $ 3,802 $ 4,973 $ 10 $ — Information pertaining to derivative gains or losses from foreign currency exchange forward contracts designated as cash flow hedging instruments for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021 follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Gain recognized in AOCL (1) $ 2,723 $ 4,589 $ 10,447 $ 6,818 Gain (loss) reclassified from AOCL to cost of sales, exclusive of depreciation and amortization (2) 3,909 141 $ 11,718 $ ( 3,010 ) (1) Amount represents the change in fair value of derivative instruments. (2) Amount represents gain (loss) reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) when the hedged item affects earnings, which is when merchandise is converted to cost of sales, exclusive of depreciation and amortization. Substantially all of the unrealized gain will be recognized in costs of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income over the next twelve months . Additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts not designated as hedging instruments for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021 follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Gain recognized in other operating income, net $ 504 $ 487 $ 2,276 $ 324 Abercrombie & Fitch Co. 17 2022 3Q Form 10-Q Table of Contents 13. ACCUMULATED OTHER COMPREHENSIVE LOSS Fo r the thirteen and thirty-nine weeks ended October 29, 2022, the activity in AOCL was as follows: Thirteen Weeks Ended October 29, 2022 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at July 30, 2022 $ ( 136,006 ) $ 5,966 $ ( 130,040 ) Other comprehensive (loss) income before reclassifications ( 11,021 ) 2,723 ( 8,298 ) Reclassified gain from AOCL (1) — ( 3,909 ) ( 3,909 ) Tax effect — ( 20 ) ( 20 ) Other comprehensive loss after reclassifications ( 11,021 ) ( 1,206 ) ( 12,227 ) Ending balance at October 29, 2022 $ ( 147,027 ) $ 4,760 $ ( 142,267 ) Thirty-Nine Weeks Ended October 29, 2022 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at January 29, 2022 $ ( 120,689 ) $ 5,983 $ ( 114,706 ) Other comprehensive (loss) income before reclassifications ( 26,338 ) 10,447 ( 15,891 ) Reclassified gain from AOCL (1) — ( 11,718 ) ( 11,718 ) Tax effect — 48 48 Other comprehensive loss after reclassifications ( 26,338 ) ( 1,223 ) ( 27,561 ) Ending balance at October 29, 2022 $ ( 147,027 ) $ 4,760 $ ( 142,267 ) (1) Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. For the thirteen and thirty-nine weeks ended October 30, 2021, the activity in AOCL was as follows: Thirteen Weeks Ended October 30, 2021 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at July 31, 2021 $ ( 101,032 ) $ 767 $ ( 100,265 ) Other comprehensive (loss) income before reclassifications ( 5,629 ) 4,589 ( 1,040 ) Reclassified gain from AOCL (1) — ( 141 ) ( 141 ) Tax effect — ( 32 ) ( 32 ) Other comprehensive (loss) income after reclassifications ( 5,629 ) 4,416 ( 1,213 ) Ending balance at October 30, 2021 $ ( 106,661 ) $ 5,183 $ ( 101,478 ) Thirty-Nine Weeks Ended October 30, 2021 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at January 30, 2021 $ ( 97,772 ) $ ( 4,535 ) $ ( 102,307 ) Other comprehensive (loss) income before reclassifications ( 8,889 ) 6,818 ( 2,071 ) Reclassified loss from AOCL (1) — 3,010 3,010 Tax effect — ( 110 ) ( 110 ) Other comprehensive (loss) income after reclassifications ( 8,889 ) 9,718 829 Ending balance at October 30, 2021 $ ( 106,661 ) $ 5,183 $ ( 101,478 ) (1) Amount represents loss reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. Abercrombie & Fitch Co. 18 2022 3Q Form 10-Q Table of Contents 14. SEGMENT REPORTING The Company’s two operating segments are brand-bas Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These operating segments have similar economic characteristics, classes of consumers, products, and production and distribution methods, operate in the same regulatory environments, and have been aggregated into one reportable segment. Amounts shown below include net sales from wholesale, franchise and licensing operations, which are not a significant component of total revenue, and are aggregated within their respective operating segment and geographic area. The Company’s net sales by operating segment for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021 were as follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Hollister $ 457,752 $ 522,311 $ 1,323,492 $ 1,479,202 Abercrombie 422,332 382,849 1,174,445 1,072,213 Total $ 880,084 $ 905,160 $ 2,497,937 $ 2,551,415 Net sales by geographic area are presented by attributing revenues to an individual country on the basis of the country in which the merchandise was sold for in-store purchases and on the basis of the shipping location provided by customers for digital and wholesale orders. The Company’s net sales by geographic area for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021 were as follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 U.S. $ 674,555 $ 654,858 $ 1,837,760 $ 1,810,471 EMEA (1) 139,826 179,156 470,575 528,998 APAC (2) 28,293 38,215 85,968 125,489 Other (3) 37,410 32,931 103,634 86,457 International $ 205,529 $ 250,302 $ 660,177 $ 740,944 Total $ 880,084 $ 905,160 $ 2,497,937 $ 2,551,415 (1) Europe, Middle East and Africa (“EMEA”). (2) Asia-Pacific Region (“APAC”). (3) Other includes all sales that do not fall within the United States, EMEA, or APAC regions, which are derived primarily in Canada. Abercrombie & Fitch Co. 19 2022 3Q Form 10-Q Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the Company’s Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q in “ Item 1. Financial Statements (Unaudited) ,” to which all references to Notes in MD&A are made. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Quarterly Report on Form 10-Q or made by the Company, its management or spokespeople involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company’s control. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “should,” “are confident,” “will,” “could,” “outlook,” and similar expressions may identify forward-looking statements. Future economic and industry trends that could potentially impact revenue and profitability are difficult to predict. Therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. Factors that could cause results to differ from those expressed in the Company’s forward-looking statements include, but are not limited to, the risks described or referenced in Part I, Item 1A. “Risk Factors,” in the Company’s Fiscal 2021 Form 10-K and otherwise in our reports and filings with the SEC, as well as the followin • risks related to changes in global economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits; • risks related to recent inflationary pressures with respect to labor and raw materials and global supply chain constraints that have, and could continue to, affect freight, transit and other costs; • risks and uncertainty related to the ongoing COVID-19 pandemic, including lockdowns in China, and any other adverse public health developments; • risks related to geopolitical conflict, including the on-going hostilities in Ukraine, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience; • risks related to our failure to engage our customers, anticipate customer demand and changing fashion trends, and manage our inventory; • risks related to our ability to successfully invest in customer, digital and omnichannel initiatives; • risks related to our ability to execute on our global store network optimization initiative, and the strategic goals outlined in our Always Forward Plan; • risks related to our international growth strategy; • risks related to cyber security threats and privacy or data security breaches or the potential loss or disruption of our information systems; • risks associated with climate change and other corporate responsibility issues; and • uncertainties related to future legislation, regulatory reform, policy changes, or interpretive guidance on existing legislation. In light of the significant uncertainties in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company, or any other person, that the objectives of the Company will be achieved. The forward-looking statements included herein are based on information presently available to the management of the Company. Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking statements including any financial targets and estimates, whether as a result of new information, future events, or otherwise. Abercrombie & Fitch Co. 20 2022 3Q Form 10-Q Table of Contents INTRODUCTION MD&A is provided as a supplement to the accompanying Condensed Consolidated Financial Statements and notes thereto to help provide an understanding of the Company’s results of operations, financial condition, and liquidity. MD&A is organized as follows: • Overview . A general description of the Company’s business and certain segment information. • Current Trends and Outlook . A discussion related to certain of the Company’s focus areas for the current fiscal year and discussion of certain risks and challenges as well as a summary of the Company’s performance for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021. • Results of Operations . An analysis of certain components of the Company’s Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021. • Liquidity and Capital Resources . A discussion of the Company’s financial condition, changes in financial condition and liquidity as of October 29, 2022, which includes (i) an analysis of financial condition as compared to January 29, 2022; (ii) an analysis of changes in cash flows for the thirty-nine weeks ended October 29, 2022, as compared to the thirty-nine weeks ended October 30, 2021; and (iii) an analysis of liquidity, including availability under the Company’s credit facility, the Company’s share repurchase program, and outstanding debt and covenant compliance. • Recent Accounting Pronouncements . A discussion, as applicable, of the recent accounting pronouncements the Company has adopted or is currently evaluating, including the dates of adoption and/or expected dates of adoption, and anticipated effects on the Company’s Condensed Consolidated Financial Statements. • Critical Accounting Estimates . A discussion of the accounting estimates considered to be important to the Company’s results of operations and financial condition, which typically require significant judgment and estimation on the part of management in their application. • Non-GAAP Financial Measures . MD&A provides a discussion of certain financial measures that have been determined to not be presented in accordance with GAAP. This section includes certain reconciliations between GAAP and non-GAAP financial measures and additional details on non-GAAP financial measures, including information as to why the Company believes the non-GAAP financial measures provided within MD&A are useful to investors. Abercrombie & Fitch Co. 21 2022 3Q Form 10-Q Table of Contents OVERVIEW Business summary The Company is a global, digitally-led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. The Company’s two brand-based operating segments are Hollister, which includes the Company’s Hollister, Gilly Hicks, and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These five brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company operates primarily in North America, Europe, and Asia. The Company’s fiscal year ends on the Saturday closest to January 31. All references herein to the Company’s fiscal years are as follows: Fiscal year Year ended/ ending Number of weeks Fiscal 2021 January 29, 2022 52 Fiscal 2022 January 28, 2023 52 Fiscal 2023 February 3, 2024 53 Seasonality Due to the seasonal nature of the retail apparel industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year and the Company could have significant fluctuations in certain asset and liability accounts. The Company historically experiences its greatest sales activity during the fall season and the third and fourth fiscal quarters, due to back-to-school and holiday sales periods, respectively. CURRENT TRENDS AND OUTLOOK Focus areas for Fiscal 2022 During the second quarter of Fiscal 2022, the Company announced its Always Forward Plan, which outlines the Company’s long-term strategic goals. The Always Forward Plan is anchored on three strategic growth principles, which are t • Execute focused brand growth plans; • Accelerate an enterprise-wide digital revolution; and • Operate with financial discipline. The following focus areas for Fiscal 2022 serve as a framework for the Company achieving sustainable growth and progressing toward the Always Forward Pl • Execute brand growth plans, primarily focused on continuing momentum at Abercrombie & Fitch and delivering standalone store experiences at Gilly Hicks; • Accelerate digital and technology investments in systems and people to increase flexibility, modernize foundational systems and improve the customer experience; • Operate with a more flexible cost structure, and seek expense efficiencies while protecting investments in digital, technology and store growth to fund our strategic principles; • Take a data-driven approach to store expansion in under penetrated markets • Optimize our global distribution network to increase capacity and improve delivery speed to customers; and • Integrate environmental, social and governance (“ESG”) practices and standards throughout the Company. Supply chain disruptions, impact of inflation and COVID-19 During the latter half of Fiscal 2021, the Company increased its air freight usage in response to inventory delays imposed by temporary factory closures in Vietnam. This disruption and the associated increased costs adversely impacted the Company during the latter half of Fiscal 2021 and through year-to-date Fiscal 2022. The Company expects freight costs to stabilize compared with the elevated air freight rates and usage in 2021. However, the Company may continue to experience inflationary pressures affecting the Company’s transit and other costs through at least the balance of Fiscal 2022. In order to mitigate supply chain constraints and higher freight rates, the Company took certain mitigating actions in early Fiscal 2022 that included scheduling earlier inventory receipts to allow for longer lead times, expanding its number of freight vendors, and reducing air freight usage where appropriate. The Company continues to take certain mitigating actions however, responses to supply chain constraints, and/or transportation delays may not be adequate to offset the impact of these headwinds. The Company has also experienced historic inflationary pressures with respect to labor, cotton and other raw materials and other costs. Inflation can have a long-term impact on the Company because increasing costs may impact the ability to maintain Abercrombie & Fitch Co. 22 2022 3Q Form 10-Q Table of Contents satisfactory margins. The Company may be unsuccessful in passing these increased costs on to the customer through higher ticket prices. Furthermore, increases in inflation may not be matched by growth in consumer income, which also could have a negative impact on discretionary spending. In periods of perceived unfavorable conditions, consumers may reallocate available discretionary spending, which may adversely impact demand for our products. The ongoing COVID-19 pandemic remains volatile with continued uncertainty regarding its impact on the global economy. The Company has experienced various adverse impacts of the pandemic, including supply chain disruptions, inflationary pressures including higher freight and labor costs, labor shortages, weak store traffic and temporary store closures. Despite the introduction of COVID-19 vaccines, the pandemic continues to evolve, with resurgences and outbreaks occurring in various parts of the world, including those resulting from variants of the virus. While trends in the severity of new cases of COVID-19 in the U.S. have improved throughout Fiscal 2022 to date, increased caseloads in certain global regions have resulted in factory re-closures, most notably, in the APAC region in conjunction with strict lockdowns and zero-tolerance policy shutdowns in China. The adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time. The Company will continue to assess the pandemic’s impact on its operations and financial condition, and will respond as appropriate. Inflation Reduction Act of 2022 On August 16, 2022, the Inflation Reduction Act was signed into law, with tax provisions primarily focused on implementing a 15% corporate minimum tax on global adjusted financial statement income, expected to become applicable to the Company beginning in Fiscal 2023, and a 1% excise tax on share repurchases in tax years beginning after December 31, 2022. The Company does not currently expect that the Inflation Reduction Act will have a material impact on its income taxes. Global Store Network Optimization The Company has a goal of repositioning from larger format locations, such as, tourist dependent and flagship locations, to smaller, omni-enabled stores that cater to local customers. The Company continues to use data to inform its focus on aligning store square footage with digital penetration, and during the year-to-date period of Fiscal 2022, the Company opened 31 new stores, while closing 9 stores. As part of this focus, the Company plans to open 60 new stores, while closing 30 stores, during Fiscal 2022, pending negotiations with our landlord partners. Future closures could be completed through natural lease expirations, while certain other leases include early termination options that can be exercised under specific conditions. The Company may also elect to exit or modify other leases, and could incur charges related to these actions. Additional details related to store count and gross square footage fol Hollister (1) Abercrombie (2) Total Company (3) U.S. International U.S. International U.S. International Total Number of sto January 29, 2022 351 154 173 51 524 205 729 New 16 5 5 5 21 10 31 Permanently closed — (3) (4) (2) (4) (5) (9) October 29, 2022 367 156 174 54 541 210 751 Gross square footage (in thousands) : October 29, 2022 2,387 1,210 1,133 370 3,520 1,580 5,100 (1) Hollister includes the Company’s Hollister and Gilly Hicks brands. Locations with Gilly Hicks carveouts within Hollister stores are represented as a single store count. Excludes 10 international franchise stores as of October 29, 2022 and 9 international franchise stores as of January 29, 2022. Excludes 14 Company-operated temporary stores as of October 29, 2022 and 14 Company-operated temporary stores as of January 29, 2022. (2) Abercrombie includes the Company's Abercrombie & Fitch and abercrombie kids brands. Locations with abercrombie kids carveouts within Abercrombie & Fitch stores are represented as a single store count. Excludes 19 international franchise stores as of October 29, 2022 and 14 international franchise stores as of January 29, 2022. Excludes 4 Company-operated temporary stores as of each of October 29, 2022 and 5 Company-operated temporary stores as of January 29, 2022. (3) This store count excludes one international third-party operated multi-brand outlet store as of each of October 29, 2022 and January 29, 2022. Impact of global events and uncertainty As we are a global multi-brand omnichannel specialty retailer, with operations in North America, Europe and Asia, among other regions, management is mindful of macroeconomic risks, global challenges and the changing global geopolitical environment, including the on-going conflict in Ukraine, that could adversely impact certain areas of the business. As a result, management continues to monitor global events. The Company continues to assess the potential impacts these events and similar events may have on the business in future periods and continues to develop and update contingency plans to assist in mitigating potential impacts. It is possible that the Company’s preparations for such events are not adequate to mitigate their impact, and that these events could further adversely affect its business and results of operations. Abercrombie & Fitch Co. 23 2022 3Q Form 10-Q Table of Contents For a discussion of material risks that have the potential to cause our actual results to differ materially from our expectations, refer to the disclosures under the heading “Forward-looking Statements and Risk Factors” in “Item 1A. Risk Factors” on the Fiscal 2021 Form 10-K. Summary of results A summary of results for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021 follows: GAAP Non-GAAP (1) (in thousands, except change in net sales, gross profit rate, operating income margin and per share amounts) October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Thirteen Weeks Ended Net sales $ 880,084 $ 905,160 Change in net sales (2.8) % 10.4 % Gross profit rate 59.2 63.7 Operating income $ 17,543 $ 72,731 $ 21,287 $ 79,480 Operating income margin 2.0 % 8.0 % 2.4 % 8.8 % Net (loss) income attributable to A&F $ (2,214) $ 47,233 $ 554 $ 52,607 Net (loss) income per share attributable to A&F (0.04) 0.77 0.01 0.86 Thirty-Nine Weeks Ended Net sales $ 2,497,937 $ 2,551,415 Change in net sales (2.1) % 27.4 % Gross profit rate 57.5 64.1 Operating income $ 5,626 $ 244,951 $ 14,962 $ 255,150 Operating income margin 0.2 % 9.6 % 0.6 % 10.0 % Net (loss) income attributable to A&F $ (35,517) $ 197,501 $ (28,686) $ 205,652 Net (loss) income per share attributable to A&F (0.70) 3.10 (0.57) 3.22 (1) Discussion as to why the Company believes that these non-GAAP financial measures are useful to investors and a reconciliation of the non-GAAP measures to the most directly comparable financial measure calculated and presented in accordance with GAAP are provided below under “ NON-GAAP FINANCIAL MEASURES .” Certain components of the Company’s Condensed Consolidated Balance Sheets as of October 29, 2022 and January 29, 2022 were as follows: (in thousands) October 29, 2022 January 29, 2022 Cash and equivalents $ 257,332 $ 823,139 Gross long-term borrowings outstanding, carrying amount 299,730 307,730 Inventories 741,963 525,864 Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirty-nine week periods ended October 29, 2022 and October 30, 2021 were as follows: (in thousands) October 29, 2022 October 30, 2021 Net cash (used for) provided by operating activities $ (301,194) $ 131,287 Net cash used for investing activities (96,391) (62,223) Net cash used for financing activities (154,906) (304,358) Abercrombie & Fitch Co. 24 2022 3Q Form 10-Q Table of Contents RESULTS OF OPERATIONS The estimated basis point (“BPS”) change disclosed throughout this Results of Operations section has been rounded based on the change in the percentage of net sales. Net sales The Company’s net sales by operating segment for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021 were as follows: Thirteen Weeks Ended (in thousands) October 29, 2022 October 30, 2021 $ Change % Change Hollister (1) $ 457,752 $ 522,311 $ (64,559) (12)% Abercrombie (2) 422,332 382,849 39,483 10 Total $ 880,084 $ 905,160 $ (25,076) (3) Thirty-Nine Weeks Ended (in thousands) October 29, 2022 October 30, 2021 $ Change % Change Hollister (1) $ 1,323,492 $ 1,479,202 $ (155,710) (11)% Abercrombie (2) 1,174,445 1,072,213 102,232 10 Total $ 2,497,937 $ 2,551,415 $ (53,478) (2) (1) Includes Hollister, Gilly Hicks, and Social Tourist brands. (2) Includes Abercrombie & Fitch and abercrombie kids brands. Net sales by geographic area are presented by attributing revenues to an individual country on the basis of the country in which the merchandise was sold for in-store purchases and the shipping location provided by customers for digital orders. The Company’s net sales by geographic area for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021 were as follows: Thirteen Weeks Ended (in thousands) October 29, 2022 October 30, 2021 $ Change % Change U.S. $ 674,555 $ 654,858 $ 19,697 3% EMEA 139,826 179,156 (39,330) (22) APAC 28,293 38,215 (9,922) (26) Other (1) 37,410 32,931 4,479 14 International $ 205,529 $ 250,302 $ (44,773) (18) Total $ 880,084 $ 905,160 $ (25,076) (3) Thirty-Nine Weeks Ended (in thousands) October 29, 2022 October 30, 2021 $ Change % Change U.S. $ 1,837,760 $ 1,810,471 $ 27,289 2% EMEA 470,575 528,998 (58,423) (11) APAC 85,968 125,489 (39,521) (31) Other (1) 103,634 86,457 17,177 20 International $ 660,177 $ 740,944 $ (80,767) (11) Total 2,497,937 2,551,415 (53,478) (2) (1) Other includes all sales that do not fall within the United States, EMEA, or APAC regions, which are derived primarily in Canada For the third quarter of Fiscal 2022, net sales decreased 3%, as compared to the third quarter of Fiscal 2021, primarily due to the adverse impact from changes in foreign currency exchange rates of approximately $27 million. For the year-to-date period of Fiscal 2022, net sales decreased 2%, as compared to the year-to-date period of Fiscal 2021, primarily due to the adverse impact from changes in foreign currency exchange rates of approximately $59 million. Abercrombie & Fitch Co. 25 2022 3Q Form 10-Q Table of Contents Cost of sales, exclusive of depreciation and amortization Thirteen Weeks Ended October 29, 2022 October 30, 2021 (in thousands) % of Net sales % of Net sales BPS Change Cost of sales, exclusive of depreciation and amortization $ 359,268 40.8% $ 328,916 36.3% 450 Thirty-Nine Weeks Ended October 29, 2022 October 30, 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Cost of sales, exclusive of depreciation and amortization $ 1,061,684 42.5% $ 916,552 35.9% 660 For the third quarter of Fiscal 2022, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 450 basis points, as compared to the third quarter of Fiscal 2021. The year-over-year increase was primarily driven by higher freight and raw material costs, which contributed 370 basis points to the increase, as well as 60 basis points from the adverse impact from changes in foreign currency exchange rates. For the year-to-date period of Fiscal 2022, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased by approximately 660 basis points, as compared to the year-to-date period of Fiscal 2021. The year-over-year increase was primarily attributable to elevated freight and raw material costs, as well as the adverse impact from changes in foreign currency exchange rates. Gross profit, exclusive of depreciation and amortization Thirteen Weeks Ended October 29, 2022 October 30, 2021 (in thousands) % of Net sales % of Net sales BPS Change Gross profit, exclusive of depreciation and amortization $ 520,816 59.2% $ 576,244 63.7% (450) Thirty-Nine Weeks Ended October 29, 2022 October 30, 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Gross profit, exclusive of depreciation and amortization $ 1,436,253 57.5% $ 1,634,863 64.1% (660) Stores and distribution expense Thirteen Weeks Ended October 29, 2022 October 30, 2021 (in thousands) % of Net sales % of Net sales BPS Change Stores and distribution expense $ 367,333 41.7% $ 351,815 38.9% 280 Thirty-Nine Weeks Ended October 29, 2022 October 30, 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Stores and distribution expense $ 1,045,667 41.9% $ 993,170 38.9% 300 For the third quarter of Fiscal 2022, stores and distribution expense increased 4%, as compared to the third quarter of Fiscal 2021. The $16 million increase was driven by increased digital shipping and handling costs as compared to the third quarter of Fiscal 2021. For the year-to-date period of Fiscal 2022, stores and distribution expense increased 5%, the increase can primarily be attributed to increased digital shipping and handling costs as compared to the year-to-date period of Fiscal 2021. Abercrombie & Fitch Co. 26 2022 3Q Form 10-Q Table of Contents Marketing, general and administrative expense Thirteen Weeks Ended October 29, 2022 October 30, 2021 (in thousands) % of Net sales % of Net sales BPS Change Marketing, general and administrative expense $ 133,201 15.1% $ 146,269 16.2% (110) Thirty-Nine Weeks Ended October 29, 2022 October 30, 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Marketing, general and administrative expense $ 379,518 15.2% $ 391,129 15.3% (10) For the third quarter of Fiscal 2022, marketing, general and administrative expense, as a percentage of net sales, decreased 110 basis points as compared to the third quarter of Fiscal 2021, primarily driven by a reduction in marketing and advertising expenses, as well as lower incentive-based compensation as compared to the third quarter of Fiscal 2021. For the year-to-date period of Fiscal 2022, marketing, general and administration expense, as a percentage of net sales, decreased 10 basis points as compared to the year-to-date period of Fiscal 2021, primarily due to a reduction in marketing and advertising expenses, as well as lower incentive-based compensation. Asset impairment Thirteen Weeks Ended October 29, 2022 October 30, 2021 (in thousands) % of Net sales % of Net sales BPS Change Asset impairment $ 3,744 0.4% $ 6,749 0.7% (30) Excluded items: Asset impairment charges (1) (3,744) (0.4) (6,749) (0.7) 30 Adjusted non-GAAP asset impairment $ — — $ — — — Thirty-Nine Weeks Ended October 29, 2022 October 30, 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Asset impairment $ 9,336 0.4% $ 10,199 0.4% — Excluded items: Asset impairment charges (1) (9,336) (0.4) (10,199) (0.4) — Adjusted non-GAAP asset impairment $ — — $ — — — (1) Refer to “ NON-GAAP FINANCIAL MEASURES ” for further details. Refer to Note 8, “ ASSET IMPAIRMENT .” Abercrombie & Fitch Co. 27 2022 3Q Form 10-Q Table of Contents Other operating income, net Thirteen Weeks Ended October 29, 2022 October 30, 2021 (in thousands) % of Net sales % of Net sales BPS Change Other operating income, net $ 1,005 0.1% $ 1,320 0.1% — Thirty-Nine Weeks Ended October 29, 2022 October 30, 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Other operating income, net $ 3,894 0.2% $ 4,586 0.2% — Operating income Thirteen Weeks Ended October 29, 2022 October 30, 2021 (in thousands) % of Net sales % of Net sales BPS Change Operating income $ 17,543 2.0% $ 72,731 8.0% (600) Excluded items: Asset impairment charges (1) 3,744 0.4 6,749 0.7 (30) Adjusted non-GAAP operating income $ 21,287 2.4 $ 79,480 8.8 (640) Thirty-Nine Weeks Ended October 29, 2022 October 30, 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Operating income $ 5,626 0.2% $ 244,951 9.6% (940) Excluded items: Asset impairment charges (1) 9,336 0.4 10,199 0.4 — Adjusted non-GAAP operating income $ 14,962 0.6 $ 255,150 10.0 (940) (1) Refer to “ NON-GAAP FINANCIAL MEASURES ” for further details. Interest expense, net Thirteen Weeks Ended October 29, 2022 October 30, 2021 (in thousands) % of Net sales % of Net sales BPS Change Interest expense $ 7,586 0.9% $ 7,802 0.9% — Interest income (291) (0.1) (532) (0.1) — Interest expense, net $ 7,295 0.8 $ 7,270 0.8 — Thirty-Nine Weeks Ended October 29, 2022 October 30, 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Interest expense $ 23,055 0.9% $ 30,505 1.2% (30) Interest income (1,536) — (3,354) (0.1) 10 Interest expense, net $ 21,519 0.9 $ 27,151 1.1 (20) For the third quarter of Fiscal 2022, interest expense, net was flat, as compared to the third quarter of Fiscal 2021. For the year-to-date period of Fiscal 2022, interest expense, net decreased $5.6 million, as compared to the year-to-date period of Fiscal 2021. The decrease was primarily driven by lower premiums paid related to debt repurchases during Fiscal 2022, as compared to Fiscal 2021. Abercrombie & Fitch Co. 28 2022 3Q Form 10-Q Table of Contents Income tax expense Thirteen Weeks Ended October 29, 2022 October 30, 2021 (in thousands, except ratios) Effective Tax Rate Effective Tax Rate Income tax expense $ 10,966 107.0% $ 16,383 25.0% Excluded items: Tax effect of pre-tax excluded items (1) 976 1,375 Adjusted non-GAAP income tax expense $ 11,942 85.4 $ 17,758 24.6 Thirty-Nine Weeks Ended October 29, 2022 October 30, 2021 (in thousands, except ratios) Effective Tax Rate Effective Tax Rate Income tax expense $ 14,413 (90.7)% $ 15,560 7.1% Excluded items: Tax effect of pre-tax excluded items (1) 2,505 2,048 Adjusted non-GAAP income tax expense $ 16,918 (258.3) $ 17,608 7.7 (1) The tax effect of pre-tax excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. Refer to “ Operating income ” and “ NON-GAAP FINANCIAL MEASURES ” for details of pre-tax excluded items. Refer to Note 9, “ INCOME TAXES .” Net (loss) income attributable to A&F Thirteen Weeks Ended October 29, 2022 October 30, 2021 (in thousands) % of Net sales % of Net sales BPS Change Net (loss) income attributable to A&F $ (2,214) (0.3)% $ 47,233 5.2% (550) Excluded items, net of tax (1) 2,768 0.4 5,374 0.6 (20) Adjusted non-GAAP net income attributable to A&F (2) $ 554 0.1 $ 52,607 5.8 (570) Thirty-Nine Weeks Ended October 29, 2022 October 30, 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Net (loss) income attributable to A&F $ (35,517) (1.4)% $ 197,501 7.7% (910) Excluded items, net of tax (1) 6,831 0.3 8,151 0.3 — Adjusted non-GAAP net (loss) income attributable to A&F (2) $ (28,686) (1.1) $ 205,652 8.1 (920) (1) Excluded items presented above under “ Operating income ,” and “ Income tax expense ” (2) Refer to “ NON-GAAP FINANCIAL MEASURES ” for further details. Abercrombie & Fitch Co. 29 2022 3Q Form 10-Q Table of Contents Net (loss) income per share attributable to A&F Thirteen Weeks Ended October 29, 2022 October 30, 2021 $ Change Net (loss) income per dilutive share attributable to A&F $ (0.04) $ 0.77 $(0.81) Excluded items, net of tax (1) 0.05 0.09 (0.04) Adjusted non-GAAP net income per diluted share attributable to A&F 0.01 0.86 (0.85) Impact from changes in foreign currency exchange rates — (0.10) 0.10 Adjusted non-GAAP net income per diluted share attributable to A&F on a constant currency basis (2) 0.01 0.76 (0.75) Thirty-Nine Weeks Ended October 29, 2022 October 30, 2021 $ Change Net (loss) income per dilutive share attributable to A&F $ (0.70) $ 3.10 $(3.80) Excluded items, net of tax (1) 0.13 0.13 — Adjusted non-GAAP net (loss) income per diluted share attributable to A&F (0.57) 3.22 (3.79) Impact from changes in foreign currency exchange rates — (0.14) 0.14 Adjusted non-GAAP net (loss) income per diluted share attributable to A&F on a constant currency basis (2) (0.57) 3.08 (3.65) (1) Excluded items presented above under “ Operating income ,” and “ Income tax expense . ” (2) Refer to “ NON-GAAP FINANCIAL MEASURES ” for further details. Abercrombie & Fitch Co. 30 2022 3Q Form 10-Q Table of Contents LIQUIDITY AND CAPITAL RESOURCES Overview The Company’s capital allocation strategy, priorities and investments are reviewed by A&F’s Board of Directors considering both liquidity and valuation factors. The Company believes that it will have adequate liquidity to fund operating activities for the next 12 months. The Company monitors financing market conditions and may in the future determine whether and when to amend, modify, or restructure its ABL Facility and/or the Senior Secured Notes. For a discussion of the Company’s share repurchase activity and suspended dividend program, please see below under “Share repurchases and dividends.” Primary sources and uses of cash The Company’s business has two principal selling seaso the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”). The Company generally experiences its greatest sales activity during the Fall season, due to the back-to-school and holiday sales periods. The Company relies on excess operating cash flows, which are largely generated in Fall, to fund operations throughout the year and to reinvest in the business to support future growth. The Company also has the ABL Facility available as a source of additional funding, which is described further below under “ Credit facility and Senior Secured Notes ”. Over the next twelve months, the Company expects its primary cash requirements to be directed towards prioritizing investments in the business and continuing to fund operating activities, including the acquisition of inventory, and obligations related to compensation, marketing, leases and any lease buyouts or modifications it may exercise, taxes and other operating activities. The Company evaluates opportunities for investments in the business that are in line with initiatives that position the business for sustainable long-term growth that align with its strategic pillars as described within “Item 1. Business - STRATEGY AND KEY BUSINESS PRIORITIES” included on the Fiscal 2021 Form 10-K, including being opportunistic regarding growth opportunities. Examples of potential investment opportunities include, but are not limited to, new store experiences, and investments in its digital and omnichannel initiatives. Historically, the Company has utilized free cash flow generated from operations to fund any discretionary capital expenditures, which have been prioritized towards new store experiences, as well as digital and omnichannel investments, information technology, and other projects. For the year-to-date period ended October 29, 2022, the Company used $120.3 million towards capital expenditures. Total capital expenditures for Fiscal 2022 are expected to be approximately $170 million. The Company measures liquidity using total cash and cash equivalents and incremental borrowing available under the ABL Facility. As of October 29, 2022, the Company had cash and cash equivalents of $257.3 million and total liquidity of approximately $616.8 million, compared with cash and cash equivalents of $823.1 million and total liquidity of approximately $1.1 billion at the beginning of Fiscal 2022. This allows the Company to evaluate potential opportunities to strategically deploy excess cash and/or deleverage the balance sheet, depending on various factors, such as market and business conditions, including the Company’s ability to accelerate investments in the business. Such opportunities include, but are not limited to, returning cash to shareholders through share repurchases or repurchasing outstanding Senior Secured Notes. Share repurchases and dividends In November 2021, A&F’s Board of Directors approved a new $500 million share repurchase authorization, replacing the prior 2021 share repurchase authorization of 10.0 million shares, which had approximately 3.9 million shares remaining available. During the year-to-date period ended October 29, 2022, the Company repurchased approximately 4.8 million shares for approximately $125.8 million. Historically, the Company has repurchased shares of its Common Stock from time to time, dependent on excess liquidity, market conditions, and business conditions, with the objectives of returning excess cash to shareholders and offsetting dilution from issuances of Common Stock associated with the exercise of employee stock appreciation rights and the vesting of restricted stock units. Shares may be repurchased in the open market, including pursuant to trading plans established in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), through privately negotiated transactions or other transactions or by a combination of such methods. Refer to “ Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ” of Part II of this Quarterly Report on Form 10-Q for the amount remaining available for purchase under the Company’s publicly announced stock repurchase authorization. In May 2020, the Company announced that it had temporarily suspended its dividend program in order to preserve liquidity and maintain financial flexibility in light of COVID-19. The Company may in the future review its dividend program to determine, in light of facts and circumstances at that time, whether and when to reinstate. Any dividends are declared at the discretion of A&F’s Board of Directors. A&F’s Board of Directors reviews and establishes a dividend amount, if at all, based on A&F’s financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors, including any restrictions under the Company’s agreements related to the Senior Secured Notes and the ABL Facility. There can be no assurance that the Company will declare and pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends. Abercrombie & Fitch Co. 31 2022 3Q Form 10-Q Table of Contents Credit facility and Senior Secured Notes As of October 29, 2022, the Company had $299.7 million of gross borrowings outstanding under the Senior Secured Notes. During the thirteen weeks ended October 29, 2022, A&F Management purchased $8.0 million of outstanding Senior Secured Notes and incurred a $0.1 million gain on extinguishment of debt, recognized in interest expense, net on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. In addition, the Amended and Restated Credit Agreement provides for the ABL Facility, which is a senior secured asset-based revolving credit facility of up to $400 million. As of October 29, 2022, the Company did not have any borrowings outstanding under the ABL Facility. The ABL Facility matures on April 29, 2026. Details regarding the remaining borrowing capacity under the ABL Facility as of October 29, 2022 are as follows: (in thousands) October 29, 2022 Loan cap $ 400,000 L Outstanding stand-by letters of credit (554) Borrowing capacity 399,446 L Minimum excess availability (1) (40,000) Borrowing capacity available $ 359,446 (1) The Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility. Refer to Note 10, “ BORROWINGS .” Income taxes The Company’s earnings and profits from its foreign subsidiaries could be repatriated to the U.S. without incurring additional federal income tax. The Company determined that the balance of the Company’s undistributed earnings and profits from its foreign subsidiaries as of February 2, 2019 are considered indefinitely reinvested outside of the U.S., and if these funds were to be repatriated to the U.S., the Company would expect to incur an insignificant amount of state income taxes and foreign withholding taxes. The Company accrues for both state income taxes and foreign withholding taxes with respect to earnings and profits earned after February 2, 2019, in such a manner that these funds could be repatriated without incurring additional tax expense. As of October 29, 2022, $179.6 million of the Company’s $257.3 million of cash and equivalents were held by foreign affiliates. Refer to Note 9, “ INCOME TAXES .” Analysis of cash flows The table below provides certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 29, 2022 and October 30, 2021: Thirty-Nine Weeks Ended October 29, 2022 October 30, 2021 (in thousands) Cash and equivalents, and restricted cash and equivalents, beginning of period $ 834,368 $ 1,124,157 Net cash (used for) provided by operating activities (301,194) 131,287 Net cash used for investing activities (96,391) (62,223) Net cash used for financing activities (154,906) (304,358) Effect of foreign currency exchange rates on cash (14,871) (8,560) Net decrease in cash and equivalents, and restricted cash and equivalents (567,362) (243,854) Cash and equivalents, and restricted cash and equivalents, end of period $ 267,006 $ 880,303 Operating activities - During the year-to-date period ended October 29, 2022, net cash used for operating activities included the acquisition of inventory and increased payments to vendors, including additional rent payments made during the period due to fiscal calendar shifting relative to monthly rent due dates as well as decreased cash receipts as a result of the 2% year-over-year decrease in net sales. In addition, during the year-to-date period ended October 30, 2021, the Company finalized an agreement with and paid its landlord partner to settle all remaining obligations related to the SoHo Hollister flagship store in New York City, which closed during the second quarter of Fiscal 2019. Prior to this new agreement, the Company was required to make payments in aggregate of $80.1 million pursuant to the lease agreements through Fiscal 2028. The new agreement resulted in an Abercrombie & Fitch Co. 32 2022 3Q Form 10-Q Table of Contents acceleration of payments and provided for a discount resulting in an operating cash outflow of $63.8 million during the year-to-date period ended October 30, 2021. Investing activities - During the year-to-date period ended October 29, 2022, net cash used for investing activities was primarily used for capital expenditures of $120.3 million, partially offset by the proceeds from the withdrawal of $12.0 million of excess funds from rabbi trust assets and the sale of property and equipment of $11.9 million, as compared to net cash used for investing activities of $62.2 million for the year-to-date period ended October 30, 2021, primarily used for capital expenditures. Financing activities - During the year-to-date period ended October 29, 2022, net cash used for financing activities included the purchase of approximately 4.8 million shares of Common Stock with a market value of approximately $125.8 million, as well as the purchase of $8 million of outstanding Senior Secured Notes. During the year-to-date period ended October 30, 2021, net cash used by financing activities included the purchase of $42.3 million of outstanding Senior Secured Notes at a premium of $4.7 million. In addition, the Company purchased approximately 6.1 million shares of Common Stock with a market value of approximately $235.2 million. Contractual obligations The Company’s contractual obligations consist primarily of operating leases, purchase orders for merchandise inventory, unrecognized tax benefits, certain retirement obligations, lease deposits, and other agreements to purchase goods and services that are legally binding and that require minimum quantities to be purchased. These contractual obligations impact the Company’s short-term and long-term liquidity and capital resource needs. There have been no material changes in the Company’s contractual obligations since January 29, 2022, with the exception of those obligations which occurred in the normal course of business (primarily changes in the Company’s merchandise inventory-related purchases and lease obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company’s operations). RECENT ACCOUNTING PRONOUNCEMENTS The Company describes its significant accounting policies in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES , ” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” included on the Fiscal 2021 Form 10-K. The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements. CRITICAL ACCOUNTING ESTIMATES The Company describes its critical accounting estimates in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included on the Fiscal 2021 Form 10-K. There have been no significant changes in critical accounting policies and estimates since the end of Fiscal 2021. Abercrombie & Fitch Co. 33 2022 3Q Form 10-Q Table of Contents NON-GAAP FINANCIAL MEASURES This Quarterly Report on Form 10-Q includes discussion of certain financial measures calculated and presented on both a GAAP and a non-GAAP basis. The Company believes that each of the non-GAAP financial measures presented in this “ Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations ” is useful to investors as it provides a meaningful basis to evaluate the Company’s operating performance excluding the effect of certain items that the Company believes may not reflect its future operating outlook, such as certain asset impairment charges, thereby supplementing investors’ understanding of comparability of operations across periods. Management used these non-GAAP financial measures during the periods presented to assess the Company’s performance and to develop expectations for future operating performance. These non-GAAP financial measures should be used as a supplement to, and not as an alternative to, the Company’s GAAP financial results, and may not be calculated in the same manner as similar measures presented by other companies. Comparable sales At times, the Company provides comparable sales, defined as the year-over-year percentage change in the aggregate of (1) net sales for stores that have been open as the same brand at least one year and square footage has not been expanded or reduced by more than 20% within the past year, with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations, and (2) digital net sales with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations. Comparable sales exclude revenue other than store and digital sales. Management uses comparable sales to understand the drivers of year-over-year changes in net sales and believes comparable sales is a useful metric as it can assist investors in distinguishing the portion of the Company’s revenue attributable to existing locations from the portion attributable to the opening or closing of stores. The most directly comparable GAAP financial measure is change in net sales. In light of store closures related to COVID-19, the Company has not disclosed comparable sales since Fiscal 2019. Excluded items The following financial measures are disclosed on a GAAP and on an adjusted non-GAAP basis excluding the following items, as applicab Financial measures (1) Excluded items Operating income Asset impairment charges Income tax expense (2) Tax effect of pre-tax excluded items Net (loss) income and net (loss) income per share attributable to A&F (2) Pre-tax excluded items and the tax effect of pre-tax excluded items (1) Certain of these financial measures are also expressed as a percentage of net sales. (2) The tax effect of excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. Abercrombie & Fitch Co. 34 2022 3Q Form 10-Q Table of Contents Financial information on a constant currency basis The Company provides certain financial information on a constant currency basis to enhance investors’ understanding of underlying business trends and operating performance by removing the impact of foreign currency exchange rate fluctuations. Management also uses financial information on a constant currency basis to award employee performance-based compensation. The effect from foreign currency exchange rates, calculated on a constant currency basis, is determined by applying the current period’s foreign currency exchange rates to the prior year’s results and is net of the year-over-year impact from hedging. The per diluted share effect from foreign currency exchange rates is calculated using a 26% effective tax rate. A reconciliation of non-GAAP financial metrics on a constant currency basis to financial measures calculated and presented in accordance with GAAP for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021 follows: (in thousands, except change in net sales, gross profit rate, operating margin and per share data) Thirteen Weeks Ended Thirty-Nine Weeks Ended Net sales October 29, 2022 October 30, 2021 % Change October 29, 2022 October 30, 2021 % Change GAAP $ 880,084 $ 905,160 (3)% $ 2,497,937 $ 2,551,415 (2)% Impact from changes in foreign currency exchange rates — (26,860) 3 — (58,513) 2 Non-GAAP on a constant currency basis $ 880,084 $ 878,300 0 $ 2,497,937 $ 2,492,902 — Gross profit, exclusive of depreciation and amortization expense October 29, 2022 October 30, 2021 BPS Change (1) October 29, 2022 October 30, 2021 BPS Change (1) GAAP $ 520,816 $ 576,244 (450) $ 1,436,253 $ 1,634,863 (660) Impact from changes in foreign currency exchange rates — (22,419) 60 — (41,819) 20 Non-GAAP on a constant currency basis $ 520,816 $ 553,825 (390) $ 1,436,253 $ 1,593,044 (640) Operating income October 29, 2022 October 30, 2021 BPS Change (1) October 29, 2022 October 30, 2021 BPS Change (1) GAAP $ 17,543 $ 72,731 (600) $ 5,626 $ 244,951 (940) Excluded items (2) (3,744) (6,749) 30 (9,336) (10,199) 0 Adjusted non-GAAP $ 21,287 $ 79,480 (640) $ 14,962 $ 255,150 (940) Impact from changes in foreign currency exchange rates — (8,341) 70 — (11,985) 20 Adjusted non-GAAP on a constant currency basis $ 21,287 $ 71,139 (570) $ 14,962 $ 243,165 (920) Net (loss) income per share attributable to A&F October 29, 2022 October 30, 2021 $ Change October 29, 2022 October 30, 2021 $ Change GAAP $ (0.04) $ 0.77 $(0.81) $ (0.70) $ 3.10 $(3.80) Excluded items, net of tax (2) (0.05) (0.09) 0.04 (0.13) (0.13) — Adjusted non-GAAP $ 0.01 $ 0.86 $(0.85) $ (0.57) $ 3.22 $(3.79) Impact from changes in foreign currency exchange rates — (0.10) 0.10 — (0.14) 0.14 Adjusted non-GAAP on a constant currency basis $ 0.01 $ 0.76 $(0.75) $ (0.57) $ 3.08 $(3.65) (1) The estimated basis point change has been rounded based on the change in the percentage of net sales. (2) Excluded items for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021 consisted of pre-tax store asset impairment charges and the tax effect of pre-tax excluded items. Abercrombie & Fitch Co. 35 2022 3Q Form 10-Q Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk INVESTMENT SECURITIES The Company maintains its cash equivalents in financial instruments, primarily time deposits and money market funds, with original maturities of three months or less. Due to the short-term nature of these instruments, changes in interest rates are not expected to materially affect the fair value of these financial instruments. The Rabbi Trust includes amounts to meet funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II, and the Supplemental Executive Retirement Plan. The Rabbi Trust assets primarily consist of trust-owned life insurance policies, which are recorded at cash surrender value. The change in cash surrender value of the trust-owned life insurance policies held in the Rabbi Trust resulted in realized gains of $0.3 million and $0.4 million for each of the thirteen weeks ended October 29, 2022 and October 30, 2021, respectively, and $1.1 million and $1.1 million for each of the thirty-nine weeks ended October 29, 2022 and October 30, 2021, respectively, which are recorded in interest expense, net on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. The Rabbi Trust assets were included in other assets on the Condensed Consolidated Balance Sheets as of October 29, 2022 and January 29, 2022 and are restricted in their use as noted above. INTEREST RATE RISK Prior to July 2, 2020, the Company’s exposure to market risk due to changes in interest rates related primarily to the increase or decrease in the amount of interest expense from fluctuations in the LIBO rate, or an alternate base rate associated with the Company’s former term loan facility (the “Term Loan Facility”) and the ABL Facility. On July 2, 2020, the Company issued the Senior Secured Notes and repaid all outstanding borrowings under the Term Loan Facility and the ABL Facility, thereby eliminating any then-existing cash flow market risk due to changes in interest rates. The Senior Secured Notes are exposed to interest rate risk that is limited to changes in fair value. This analysis for Fiscal 2022 may differ from the actual results due to potential changes in gross borrowings outstanding under the ABL Facility and potential changes in interest rate terms and limitations described within the Amended and Restated Credit Agreement. In July 2017, the Financial Conduct Authority (the authority that regulates LIBO rate) announced it intended to stop compelling banks to submit rates for the calculation of LIBO rate after 2021. Certain publications of the LIBO rate were phased out at the end of 2021 and all LIBO rate publications will cease after June 30, 2023. The transition from the LIBO rate to alternative rates is not expected to have a material impact on the Company’s interest expense. In addition, the Company has seen lower interest income earned on the Company’s investments and cash holdings, reflecting average daily balances. FOREIGN CURRENCY EXCHANGE RATE RISK A&F’s international subsidiaries generally operate with functional currencies other than the U.S. Dollar. Since the Company’s Condensed Consolidated Financial Statements are presented in U.S. Dollars, the Company must translate all components of these financial statements from functional currencies into U.S. Dollars at exchange rates in effect during or at the end of the reporting period. The fluctuation in the value of the U.S. Dollar against other currencies affects the reported amounts of revenues, expenses, assets, and liabilities. The potential impact of foreign currency exchange rate fluctuations increases as international operations relative to domestic operations increase. A&F and its subsidiaries have exposure to changes in foreign currency exchange rates associated with foreign currency transactions and forecasted foreign currency transactions, including the purchase of inventory between subsidiaries and foreign-currency-denominated assets and liabilities. The Company has established a program that primarily utilizes foreign currency exchange forward contracts to partially offset the risks associated with the effects of certain foreign currency transactions and forecasted transactions. Under this program, increases or decreases in foreign currency exchange rate exposures are partially offset by gains or losses on foreign currency exchange forward contracts, to mitigate the impact of foreign currency exchange gains or losses. The Company does not use forward contracts to engage in currency speculation. Outstanding foreign currency exchange forward contracts are recorded at fair value at the end of each fiscal period. Foreign currency exchange forward contracts are sensitive to changes in foreign currency exchange rates. As of October 29, 2022, the Company assessed the risk of loss in fair values from the effect of a hypothetical 10% devaluation of the U.S. Dollar against the exchange rates for foreign currencies under contract. Such a hypothetical devaluation would decrease derivative contract fair values by approximately $10.9 million. As the Company’s foreign currency exchange forward contracts are primarily designated as cash flow hedges of forecasted transactions, the hypothetical change in fair values would be expected to be largely offset by the net change in fair values of the underlying hedged items. Refer to Note 12, “ DERIVATIVE INSTRUMENTS ,” for the fair value of any outstanding foreign currency exchange forward contracts included in other current assets and accrued expenses as of October 29, 2022 and January 29, 2022. Abercrombie & Fitch Co. 36 2022 3Q Form 10-Q Table of Contents Item 4. Controls and Procedures DISCLOSURE CONTROLS AND PROCEDURES A&F maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports that A&F files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to A&F’s management, including A&F’s Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met. A&F’s management, including the Chief Executive Officer of A&F (who serves as Principal Executive Officer of A&F) and the Executive Vice President and Chief Financial Officer of A&F (who serves as Principal Financial Officer and Principal Accounting Officer of A&F), evaluated the effectiveness of A&F’s design and operation of its disclosure controls and procedures as of the end of the fiscal quarter ended October 29, 2022. The Chief Executive Officer of A&F (in such individual’s capacity as the Principal Executive Officer of A&F) and the Executive Vice President and Chief Financial Officer of A&F (in such individual’s capacity as the Principal Financial Officer of A&F) concluded that A&F’s disclosure controls and procedures were effective at a reasonable level of assurance as of October 29, 2022. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in A&F’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended October 29, 2022 that materially affected, or are reasonably likely to materially affect, A&F’s internal control over financial reporting. Abercrombie & Fitch Co. 37 2022 3Q Form 10-Q Table of Contents PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. The Company’s legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes estimated liabilities for the outcome of litigation where losses are deemed probable and the amount of loss, or range of loss, is reasonably estimable. The Company also determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that a loss is reasonably possible and it is able to determine such estimates. The Company’s accrued charges for certain legal contingencies are classified within accrued expenses on the Condensed Consolidated Balance Sheets included in “ Item 1. Financial Statements (Unaudited) ,” of Part I of this Quarterly Report on Form 10-Q. Based on currently available information, the Company cannot estimate a range of reasonably possible losses in excess of the accrued charges for legal contingencies. In addition, the Company has not established accruals for certain claims and legal proceedings pending against the Company where it is not possible to reasonably estimate the outcome or potential liability, and the Company cannot estimate a range of reasonably possible losses for these legal matters. Actual liabilities may differ from the amounts recorded, due to uncertainties regarding final settlement agreement negotiations, court approvals and the terms of any approval by the courts, and there can be no assurance that the final resolution of legal matters will not have a material adverse effect on the Company’s financial condition, results of operations, or cash flows. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts. In addition, pursuant to Item 103(c)(3)(iii) of Regulation S-K under the Exchange Act, the Company is required to disclose certain information about environmental proceedings to which a governmental authority is a party if the Company reasonably believes such proceedings may result in monetary sanctions, exclusive of interest and costs, above a stated threshold. The Company has elected to apply a threshold of $1 million for purposes of determining whether disclosure of any such proceedings is required. Item 1A. Risk Factors The Company’s risk factors as of October 29, 2022 have not changed materially from those disclosed in Part I, “Item 1A. Risk Factors” of the Fiscal 2021 Form 10-K. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no sales of equity securities during the third quarter of Fiscal 2022 that were not registered under the Securities Act of 1933, as amended. The following table provides information regarding the purchase of shares of Common Stock made by or on behalf of A&F or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Exchange Act during each fiscal month of the thirteen weeks ended October 29, 2022: Period (fiscal month) Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)(3) July 31, 2022 through August 28, 2022 23,321 $ 16.58 — $ 240,184,764 August 29, 2022 through October 1, 2022 512,238 15.68 510,153 232,184,768 October 2, 2022 through October 29, 2022 629 17.06 — 232,184,768 Total 536,188 15.72 510,153 232,184,768 (1) An aggregate of 26,035 shares of Common Stock purchased during the thirteen weeks ended October 29, 2022 were withheld for tax payments due upon the vesting of employee restricted stock units and the exercise of employee stock appreciation rights. (2) On November 23, 2021, we announced that A&F’s Board of Directors approved a new $500 million share repurchase authorization, replacing the prior 2021 share repurchase authorization of 10.0 million shares, which had approximately 3.9 million shares remaining available for repurchase. (3) The number shown represents, as of the end of each period, the approximate dollar value of Common Stock that may yet be purchased under A&F’s publicly announced stock repurchase authorization described in footnote 2 above. The shares may be purchased, from time to time depending on business and market conditions. Abercrombie & Fitch Co. 38 2022 3Q Form 10-Q Table of Contents Item 6. Exhibits Exhibit Document 3.1 Amended and Restated Certificate of Incorporation of Abercrombie & Fitch Co., reflecting amendments through the date of this Quarterly Report on Form 10-Q, incorporated herein by reference to Exhibit 3.2 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2011 (File No. 001-12107). [This document represents the Amended and Restated Certificate of Incorporation of Abercrombie & Fitch Co. in compiled form incorporating all amendments. This compiled document has not been filed with the Delaware Secretary of State.] 3.2 Amended and Restated Bylaws of Abercrombie & Fitch Co. reflecting amendments through the date of this Quarterly Report on Form 10-Q, incorporated herein by reference to Exhibit 3.1 to to A&F’s Current Report on Form 8-K dated and filed November 22 , 20 22 (File No. 001-12107) [This document represents the Amended and Restated Bylaws of Abercrombie & Fitch Co. in compiled form incorporating all amendments.] 31.1 Certifications by Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 31.2 Certifications by Executive Vice President and Chief Financial Officer (Principal Financial Officer) pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 32.1 Certifications by Chief Executive Officer (who serves as Principal Executive Officer) and Executive Vice President and Chief Financial Officer (who serves as Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** 101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its Inline XBRL tags are embedded within the Inline XBRL document.* 101.SCH Inline XBRL Taxonomy Extension Schema Document.* 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.* 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.* 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.* 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.* 104 Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).* *     Filed herewith. **    Furnished herewith. Abercrombie & Fitch Co. 39 2022 3Q Form 10-Q Table of Contents Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Abercrombie & Fitch Co. Date: December 6, 2022 By: /s/ Scott D. Lipesky Scott D. Lipesky Executive Vice President and Chief Financial Officer (Principal Financial Officer, Principal Accounting Officer and Authorized Officer) Abercrombie & Fitch Co. 40 2022 3Q Form 10-Q

Table of Contents PART I Item 1. Business 4 Item 1A. Risk Factors 12 Item 1B. Unresolved Staff Comments 24 Item 2. Properties 24 Item 3. Legal Proceedings 24 Item 4. Mine Safety Disclosures 24 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 25 Item 6. [Reserved] 26 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 41 Item 8. Financial Statements and Supplementary Data 42 Consolidated Statements of Operations and Comprehensive (loss) Income 42 Consolidated Balance Sheets 43 Consolidated Statements of Stockholders’ Equity 44 Consolidated Statements of Cash Flows 45 Index for Notes to Consolidated Financial Statements 46 Notes to Consolidated Financial Statements 47 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 76 Item 9A. Controls and Procedures 76 Item 9B. Other Information 76 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 77 PART III Item 10. Directors, Executive Officers and Corporate Governance 78 Item 11. Executive Compensation 79 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 79 Item 13. Certain Relationships and Related Transactions, and Director Independence 79 Item 14. Principal Accountant Fees and Services 79 PART IV Item 15. Exhibits and Financial Statement Schedules 80 Item 16. Form 10-K Summary 80 Index to Exhibits 81 Signatures 84 Abercrombie & Fitch Co. 2 2022 Form 10-K Table of Contents SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Annual Report on Form 10-K may constitute forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond our control. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “should,” “are confident,” “will,” “could”, “outlook,” or the negative versions of those words or other comparable words and similar expressions may identify forward-looking statements. Future economic and industry trends that could potentially impact revenue and profitability are difficult to predict. Therefore, there can be no assurance that the forward-looking statements included in this Annual Report on Form 10-K will prove to be accurate. Factors that could cause results to differ from those expressed in the forward-looking statements include, but are not limited to, the risks described or referenced in “ ITEM 1A. RISK FACTORS ,” of this Annual Report on Form 10-K and otherwise in our reports and filings with the SEC, as well as the followin • risks related to changes in global economic and financial conditions, including volatility in the financial markets as a result of the failure, or rumored failure, of financial institutions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits; • risks related to recent inflationary pressures with respect to labor and raw materials and global supply chain constraints that have, and could continue to, affect freight, transit and other costs; • risks and uncertainty related to the ongoing COVID-19 pandemic and any other adverse public health developments; • risks related to geopolitical conflict, including the on-going hostilities in Ukraine, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience; • risks related to natural disasters and other unforeseen catastrophic events; • risks related to our failure to engage our customers, anticipate customer demand and changing fashion trends, and manage our inventory; • risks related to our ability to successfully invest in and execute on our customer, digital and omnichannel initiatives; • risks related to the effects of seasonal fluctuations on our sales and our performance during the back-to-school and holiday selling seasons; • risks related to fluctuations in foreign currency exchange rates; • risks related to fluctuations in our tax obligations and effective tax rate, including as a result of earnings and losses generated from our international operations; • risks related to our ability to execute on our strategic initiatives, including those outlined in our Always Forward Plan • risks related to international operations, including changes in the economic or political conditions where we sell or source our products or changes in import tariffs or trade restrictions; • risks related to cybersecurity threats and privacy or data security breaches; • risks related to the potential loss or disruption of our information systems; • risks related to the continued validity of our trademarks and our ability to protect our intellectual property; • risks associated with climate change and other corporate responsibility issues; and • uncertainties related to future legislation, regulatory reform, policy changes, or interpretive guidance on existing legislation. In light of the significant uncertainties in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us, or any other person, that our objectives will be achieved. The forward-looking statements included herein are based on information presently available to our management and speak only as of the date on which such statements are made. Except as may be required by applicable law, we assume no obligation to publicly update or revise our forward-looking statements, including any financial targets and estimates, whether as a result of new information, future events, or otherwise. As used herein, “Abercrombie & Fitch Co.,” “the Company,” “we,” “us,” “our,” and similar terms include Abercrombie & Fitch Co. and its subsidiaries, unless the context indicates otherwise. Abercrombie & Fitch Co. 3 2022 Form 10-K Table of Contents PART I Item 1.    Business GENERAL Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as the “Company,” “we,” “us,” and “our”), is a global, digitally-led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. The Company’s two brand-based operating segments are Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These five brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company operates primarily in North America, Europe, Middle East and Asia. The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a fifty-two-week year, but occasionally gives rise to an additional week, resulting in a fifty-three-week year. Fiscal years are designated in the Consolidated Financial Statements and Notes thereto, as well as the remainder of this Annual Report on Form 10-K, by the calendar year in which the fiscal year commenced. All references herein to the Company’s fiscal years are as follows: Fiscal year Year ended / ending Number of weeks Fiscal 2020 January 30, 2021 52 Fiscal 2021 January 29, 2022 52 Fiscal 2022 January 28, 2023 52 Fiscal 2023 February 3, 2024 53 For additional information about the Company’s business, see “ ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS , ” as well as “ ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ,” of this Annual Report on Form 10-K. Current Economic Environment The current economic environment remained challenging in Fiscal 2022. The COVID-19 pandemic and its effects on the global economy continued to impact the Company’s operations in Fiscal 2022, including through temporary store closures. While trends in the severity of new cases of COVID-19 in the U.S. improved throughout Fiscal 2022, caseloads have periodically increased in certain global regions, most notably, in the Asia-Pacific Region (“APAC”) in conjunction with the easing of strict lockdowns and zero-tolerance policy shutdowns in China. In addition, while the direct impacts of the COVID-19 pandemic have shown signs of abatement, the Company has experienced various other adverse impacts in the current economic environment, including supply chain disruptions, inflationary pressures including higher freight and labor costs, labor shortages, and weak store traffic. The adverse consequences of the pandemic and of the current economic environment continue to impact the Company and may persist for some time. The Company will continue to assess impacts on its operations and financial condition, and will respond as it deems appropriate. For further information about COVID-19, refer to  “ ITEM 1A. RISK FACTORS ,” and “ ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ," of this Annual Report on Form 10-K. Abercrombie & Fitch Co. 4 2022 Form 10-K Table of Contents BRANDS AND SEGMENT INFORMATION The Company’s brands are as follows: Brand Description Hollister The quintessential apparel brand of the global teen consumer, Hollister Co. believes in liberating the spirit of an endless summer inside everyone. At Hollister, summer isn’t just a season, it’s a state of mind. Hollister creates carefree style designed to make all teens feel celebrated and comfortable in their own skin, so they can live in a summer mindset all year long, whatever the season. Gilly Hicks At Gilly Hicks, we know that 10 minutes of activity a day can lead to a happier life. That's why we offer active lifestyle products to help Gen Z customers create happiness through movement. Social Tourist Social Tourist is the creative vision of Hollister and social media personalities Dixie and Charli D’Amelio. The lifestyle brand creates trend-forward apparel that allows brand lovers to experiment with their style, while exploring the duality of who they are both on social media and in real life. Abercrombie & Fitch Abercrombie & Fitch believes that every day should feel as exceptional as the start of the long weekend. Since 1892, the brand has been a specialty retailer of quality apparel, outerwear and fragrance - designed to inspire our global customers to feel confident, be comfortable and face their Fierce. abercrombie kids A global specialty retailer of quality, comfortable, made-to-play favorites, abercrombie kids sees the world through kids’ eyes, where play is life and every day is an opportunity to be anything and better everything. The Company determines its segments after taking into consideration a variety of factors, including its organizational structure and the basis that it uses to allocate resources and assess performance. The Company’s two operating segments as of January 28, 2023 are brand-bas Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These operating segments have similar economic characteristics, classes of consumers, products, and production and distribution methods, operate in the same regulatory environments, and have been aggregated into one reportable segment. Additional information concerning the Company’s segment and geographic information is contained in Note 17, “ SEGMENT REPORTING ” of the Notes to Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K. STRATEGY AND KEY BUSINESS PRIORITIES The Company remains committed to, and confident in, its long-term vision of being a leading digitally-led omnichannel global apparel retailer. The Company continues to evaluate opportunities to make progress toward initiatives that support this vision, while balancing the near-term challenges and the continued global uncertainty presented by the changing macroeconomic and geopolitical environment. Always Forward Plan During the second quarter of Fiscal 2022, the Company announced its 2025 Always Forward Plan, which outlines the Company’s long-term strategy and goals, including growing shareholder value. The Always Forward Plan is anchored on three strategic growth principles, which are t • Execute focused brand growth plans; • Accelerate an enterprise-wide digital revolution; and • Operate with financial discipline. The following focus areas for Fiscal 2023 serve as a framework for the Company’s goal of achieving sustainable long-term growth and progressing toward the Always Forward Pl • Execute brand growth plans • Drive Abercrombie brands through marketing and store investment; • Optimize the Hollister product and brand voice to enable second half growth; and • Support Gilly Hicks growth with an evolved assortment mix • Execute an enterprise-wide digital revolution • Complete the current phase of our modernization efforts around key data platforms; • Continue to progress on our multi-year ERP transformation and cloud migration journey; and • Improve our digital and app experience across key parts of the customer journey • Operate with financial discipline • Maintain appropriately lean inventory levels that put Abercrombie and Hollister in a position to chase inventory throughout the year; and • Properly balance investments, inflation and efficiency efforts to improve profitability Abercrombie & Fitch Co. 5 2022 Form 10-K Table of Contents OVERVIEW OF OPERATIONS Omnichannel Initiatives As customer shopping preferences continue to shift and customers increasingly shop across multiple channels, the Company aims to create best-in-class customer experiences and grow total company profitability by delivering improvements through a continuous test-and-learn approach. With the impact of the COVID-19 pandemic in Fiscal 2020, the Company experienced an acceleration in sales fulfilled through digital channels. Despite, this acceleration in the shift towards digital channels, stores continue to be an important part of the customers’ omnichannel experience and the Company believes that the customers’ experience is improved by its offering of omnichannel capabilities, which inclu • Purchase-Online-Pickup-in-Store, allowing customers to purchase merchandise through one of the Company’s websites or mobile apps and pick-up the merchandise in store, which often drives incremental in-store sales; • Curbside pickup at a majority of U.S. locations; • Same-day delivery service across its entire U.S. store fleet. Each brand’s website features a “Get It Fast” filter to easily find products that are available, or shoppers can choose the same-day delivery option for available items at checkout; • Order-in-Store, allowing customers to shop the brands’ in-store and online offerings while in-store; • Reserve-in-Store, allowing customers to reserve merchandise online and try it on in-store before purchasing; • Ship-from-Store, which allows the Company to ship in-store merchandise to customers and increases inventory productivity; and • Cross-channel returns, allowing customers to return merchandise purchased through one channel to a different channel. The Company also believes that its loyalty programs, Hollister House Rewards ® and Abercrombie’s myAbercrombie ® , are important enablers of its omnichannel strategy as the Company aims to seamlessly interact and connect with customers across all touchpoints through members-only offers, items and experiences. Under these programs, customers accumulate points primarily based on purchase activity and earn rewards as points are converted at certain thresholds. These rewards can be redeemed for merchandise discounts either in-store or online. The loyalty programs continue to provide timely customer insights, and the Company believes these programs contribute to higher average transaction value. Digital Operations In order to create a more seamless shopping experience for its customers, the Company continues to invest in its digital infrastructure. The Company has the capability to ship merchandise to customers in more than 110 countries and process transactions in 26 currencies and through 25 forms of payment globally. The Company operates desktop and mobile websites for its brands globally, which are available in various local languages, and four mobile apps. In the third quarter of Fiscal 2022 the Company launched Share2Pay TM , a new payment feature in the Company’s mobile apps that allows customers to easily share their digital shopping bags with a purchaser to complete the purchase. Initially available exclusively in the Hollister mobile app, as of the first quarter of Fiscal 2023, Share2Pay TM is available across each of the Company’s mobile apps. The Company continues to develop its mobile capabilities as mobile engagement continues to grow, with over 83% of the Company’s digital traffic generated from mobile devices in Fiscal 2022. In addition, in its efforts to expand its international brand reach, the Company also partners with certain third-party e-commerce platforms. Store Operations The Company continues to thoughtfully open new stores and invest in smaller omni-enabled store experiences that align with local customer shopping preferences. New store formats are designed to provide the opportunity for higher productivity through a smaller footprint. During Fiscal 2022, the Company opened 59 new store locations, remodeled one store location and right-sized an additional eight store locations. These stores are designed to be open and inviting, and include accommodating features such as innovative fitting rooms and omnichannel capabilities. Also included in our new store openings for Fiscal 2022 are 14 Gilly Hicks stand-alone locations. These stores are tailored to reflect the personality of each brand, with unique furniture, fixtures, music and scent adding to a rich brand experience. The Company’s stores continue to play an essential role in creating brand awareness and serving as physical gateways to the brands. Stores also serve as local hubs for online engagement as the Company continues to grow its omnichannel capabilities to create seamless shopping experiences. The Company continues to evaluate and manage its store fleet through its ongoing global store network optimization initiative and has taken actions to optimize store productivity by remodeling, right-sizing or relocating stores to smaller square footage locations, and closing legacy stores. As part of this initiative, the Company closed 26 stores during Fiscal 2022. The actions taken in Fiscal 2022 continued to transform the Company's operating model and reposition the Company for the future as the Company continues to focus on aligning store square footage with digital penetration. Abercrombie & Fitch Co. 6 2022 Form 10-K Table of Contents As of January 28, 2023, all of the retail stores operated by the Company are located in leased facilities, primarily in shopping centers. These leases generally have initial terms of between five and ten years. Certain leases also include early termination options, which can be exercised under specific conditions. The leases expire at various dates between Fiscal 2023 and Fiscal 2033. As of January 28, 2023, the Company operated 762 retail stores as detailed in the table be Hollister (1) Abercrombie (2) Total (3) Europe 107 20 127 Asia 28 20 48 Canada 9 4 13 Middle East 5 9 14 International 149 53 202 United States 380 180 560 Total 529 233 762 (1) Includes the Hollister and Gilly Hicks brands. Locations with Gilly Hicks carveouts within Hollister stores are represented as a single store count. Excludes 12 international franchise stores and 16 U.S. Company-operated temporary stores as of January 28, 2023. (2) Includes Abercrombie & Fitch and abercrombie kids brands. Locations with abercrombie kids carveouts within Abercrombie & Fitch stores are represented as a single store count. Excludes 23 international franchise stores and three U.S. Company-operated temporary stores as of January 28, 2023. (3) This store count excludes one international third-party operated multi-brand outlet store as of January 28, 2023. For store count and gross square footage by brand and geographic region as of January 28, 2023 and January 29, 2022, refer to “ ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .” Third-Party Operations The Company seeks to expand its international brand reach, create brand awareness and develop local presence through various wholesale, franchise, and licensing arrangements. As of January 28, 2023, the Company had ten wholesale partnerships, primarily internationally. As of January 28, 2023, the Company’s franchisees operated 35 international franchise stores across the Company’s brands located in Mexico, Qatar and Saudi Arabia. SOURCING OF MERCHANDISE INVENTORY The Company works with its network of third-party vendors to supply compelling, high-quality product assortments to its customers. These vendors are expected to operate in compliance with the laws of their respective countries and all other applicable laws, rules, and regulations and have committed to follow the standards set forth in the Company’s Vendor Code of Conduct, regarding human rights, labor rights, environmental responsibility and workplace safety. The Company sourced merchandise through approximately 119 vendors located in 16 countries, including the U.S., during Fiscal 2022. The Company’s largest vendor accounted for approximately 12% of merchandise sourced in Fiscal 2022, based on the cost of sourced merchandise. The Company believes its product sourcing is appropriately distributed among vendors. Refer to Note 5, “ INVENTORIES ,” of the Notes to Consolidated Financial Statements included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K for a summary of inventory sourced based on vendor location and dollar cost of merchandise receipts during Fiscal 2022. DISTRIBUTION OF MERCHANDISE INVENTORY The Company’s distribution network is built to deliver inventory to Company-operated and international franchise stores and fulfill digital and wholesale orders with speed and efficiency. Generally, merchandise is shipped directly from vendors to the Company’s distribution centers, where it is received and inspected before being shipped to the Company’s stores or its digital or wholesale customers. Abercrombie & Fitch Co. 7 2022 Form 10-K Table of Contents The Company relies on both Company-owned and third-party distribution centers to manage the receipt, storage, sorting, packing and distribution of its merchandise. Additional information pertaining to certain of the Company’s distribution centers as of January 28, 2023 follows: Location Company-owned or third-party New Albany, Ohio (Primarily serves store and digital operations) Company-owned New Albany, Ohio (Serves only digital operations) Company-owned Bergen op Zoom, Netherlands Third-party Shanghai, China Third-party Goodyear, Arizona (Serves only digital operations) Third-party The Company primarily used seven contract carriers to ship merchandise and related materials to its North American customers, and several contract carriers for its international customers during Fiscal 2022. COMPETITION The Company operates in a rapidly evolving and highly competitive retail business environment. Competitors inclu individual and chain specialty apparel retailers; local, regional, national and international department stores; discount stores; and digitally-native brands and online-exclusive businesses. Additionally, the Company competes for consumers’ discretionary spend with businesses in other product and experiential categories such as technology, restaurants, travel and media content. The Company competes primarily on the basis of differentiating its brands from those of its competition through product, providing higher quality and increased newness; brand voice, amplifying and consolidating brand messaging; and experience, investing in immersive, participatory omnichannel shopping environments. Operating in a highly competitive industry environment can cause the Company to engage in greater than expected promotional activity, which would result in pressure on average unit retail and gross profit. Refer to “ ITEM 1A. RISK FACTORS - Our failure to operate in a highly competitive and constantly evolving industry could have a material adverse impact on our business ” of this Annual Report on Form 10-K for further discussion of the potential impacts competition may have on the Company. SEASONAL BUSINESS Historically, the Company’s operations have been seasonal in nature and consist of two principal selling seaso the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”). The Company experiences its greatest sales activity during Fall, due to back-to-school and holiday sales periods. Refer to “ ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ” of this Annual Report on Form 10-K for further discussion. TRADEMARKS The trademarks Abercrombie & Fitch ® , abercrombie ® , Hollister ® , Gilly Hicks ® , Social Tourist ® and the “Moose” and “Seagull” logos are registered with the U.S. Patent and Trademark Office and registered, or the Company has applications for registration pending, with the registries of countries in key markets within the Company’s sales and distribution channels. In addition, these trademarks are either registered, or the Company has applications for registration pending, with the registries of many of the foreign countries in which the manufacturers of the Company’s products are located. The Company has also registered, or has applied to register, certain other trademarks in the U.S. and around the world. The Company believes its products are identified by its trademarks and, therefore, its trademarks are of significant value. Each registered trademark has a duration of 10 to 20 years, depending on the date it was registered, and the country in which it is registered, and is subject to an indefinite number of renewals for a like period upon continued use and appropriate application. The Company intends to continue using its core trademarks and to timely renew each of its registered trademarks that remain in use. INFORMATION TECHNOLOGY SYSTEMS The Company’s owned and third-party-operated management information technology systems consist of a full range of retail, merchandising, human resource and financial systems. These systems include applications related to point-of-sale, digital operations, inventory management, supply chain, planning, sourcing, merchandising, payroll, scheduling and financial reporting. The Company continues to invest in technology to upgrade its core systems to enhance reporting and analytics, create efficiencies and to support its digital operations, omnichannel capabilities, customer relationship management tools and loyalty programs. Abercrombie & Fitch Co. 8 2022 Form 10-K Table of Contents WORKING CAPITAL Refer to “ ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ” of this Annual Report on Form 10-K for a discussion of the Company’s cash requirements and sources of cash available for working capital needs and investment opportunities. HUMAN CAPITAL MANAGEMENT The Company strives to create a culture that not only drives strategic and key business priorities forward, but is welcoming, inclusive, diverse and encourages associates to create a positive impact in their global communities. The Company believes that the strength of its unique culture is a competitive advantage, and intends to continue building upon that culture to improve performance across its business. Therefore, the Company believes that the attraction, retention, and management of qualified talent representing diverse backgrounds, experiences, and skill sets - and fostering a diverse, equitable and inclusive work environment - are integral to its success.   Highlights of our key human capital management programs and efforts include the followin • Living a corporate purpose of “Being here for you on the journey to being and becoming who you are.” The Company’s corporate purpose was developed after conducting listening sessions with its associates and its customers, and by weaving in key themes from each of the brand purposes. • Offering competitive compensation and benefits , to help the Company attract, motivate, and retain the key talent necessary to achieve outstanding business and financial results. The Company’s compensation offerings includes cash-based and equity-based incentive awards in order to align the interests of associates and stockholders, and in the second half of Fiscal 2021, the Company expanded the pool of associates eligible to receive cash-based incentive awards by extending eligibility to additional associates across various job levels. In addition, the Company continues to evolve its approach to work flexibility, including supporting remote work arrangements for key roles and “work from anywhere days and weeks” for our corporate home office associates where feasible. We also support our associates and their families beyond our competitive compensation and comprehensive benefits offerings, providing eligible associates with paid parental leave in the United States and internationally based on local law, and in 2022 we started offering adoption and fertility support benefits for eligible associates globally. • Improving associate engagement through open communication channels with a focus on development. The Company regularly holds all-company meetings to communicate with its associates. The Company also collects feedback through various engagement surveys to better understand associate experience and drive improvements, with the most recent organization-wide survey conducted in August 2022. • Fostering associate development by providing a wide variety of growth and development opportunities throughout associates’ careers.  This includes stretch assignments, internal career pathing, self-awareness exercises, and active coaching. The Company also uses leadership standards to help associates identify the core behaviors essential for their career growth, as well as personal growth, on their journey at the Company. In Fiscal 2022, the Company launched the internal job board, which empowers associates to apply for open roles and/or to seek advancement opportunities within the Company. • Embracing inclusion and diversity in all forms, including gender, race, ethnicity, disability, nationality, religion, age, veteran status, LGBTQIA+ status, and other factors. The Company continuously reviews metrics including representation, retention, pay, and promotion among associates from diverse backgrounds, including those in leadership positions. The Company also encourages associates to enhance their understanding of inclusion and diversity through participating in the Company’s various associate resource groups, which allow associates from different business functions around the world to have discussions, attend activities, and receive materials focused on allyship, community, celebration, and education. Additionally, the Company invests in inclusion and diversity learning and development opportunities for associates on topics including bias, allyship, and advocacy, conducting roundtable discussions, trainings and workshops. • Encouraging community involvement of its associates by promoting various charitable, philanthropic, and social awareness programs, which the Company believes fosters a collaborative and rewarding work environment. The Company provides support to global organizations in the form of cash donations, volunteerism and in-kind support. In partnership with its vendor partners, customers and associates, the Company is proud to support community partners serving youth, teens, and young adults with a focus on mental health and wellness, empowerment, and inclusion and diversity. The Company offers its associates a paid volunteer day each year for eligible volunteer work. • Focusing on the health and safety of its associates by investing in various wellness programs that are designed to enhance the physical, financial, and mental well-being of its associates globally. The Company provides benefits-eligible associates and their families with access to free and confidential counseling through our Employee Assistance Program, as well as free access to Headspace, a mediation and mindfulness app. The Company also provides regular programming on financial planning and mental health. Abercrombie & Fitch Co. 9 2022 Form 10-K Table of Contents Associates The Company employed approximately 29,600 associates globally as of January 28, 2023, of whom approximately 22,400 were part-time associates. As of January 28, 2023, the Company employed approximately 22,400 associates in the U.S., and employed approximately 7,200 associates outside of the U.S. The Company employs temporary, seasonal associates at times, particularly during Fall, when it experiences its greatest sales activity due to back-to-school and holiday sales periods. The proportion of associates represented by works councils and unions is not significant and is generally limited to associates in the Company’s European stores. Board Oversight A&F’s Board of Directors (the “Board of Directors”) and its committees oversee human capital issues. The Compensation and Human Capital Committee of the Board of Directors oversees the Company’s overall compensation structure, policies and programs, as well as administration of our cash-based and equity-based performance award programs. Members of the Board of Directors also review succession plans for the Company’s executive officers and discuss with senior leadership the Company’s human capital management strategies, programs, policies and practices, including those relating to organizational structure and key reporting relationships, along with development of strategies and practices relating to recruitment, retention and development of the Company’s associates as needed. Additionally, the Environmental, Social and Governance Committee of the Board of Directors oversees the Company’s strategies, policies and practices regarding social issues and trends, including inclusion and diversity initiatives, health and safety, and philanthropy and community investment matters. INFORMATION ABOUT OUR EXECUTIVE OFFICERS The Company’s executive officers serve at the pleasure of the Board of Directors. Set forth below is certain information regarding the executive officers of the Company as of March 24, 2023: Fran Horowitz, Chief Executive Officer and Director A 59 Executive Rol • Chief Executive Officer, Principal Executive Officer and Director (February 2017 to present) • Former President and Chief Merchandising Officer for all brands of the Company (December 2015 to February 2017), former member of the Office of the Chairman of the Company (December 2014 to February 2017) and former Brand President of Hollister (October 2014 to December 2015) • Former President of Ann Taylor Loft, a division of Ascena Retail Group, Inc., the parent company of specialty retail fashion brands in North America (October 2013 to October 2014) • Formerly held various roles at Express, Inc., a specialty apparel and accessories retailer of women’s and men’s merchandise (February 2005 to November 2012), including Executive Vice President of Women’s Merchandising and Design (May 2010 to November 2012) • Formerly held various merchandising roles at Bloomingdale’s and various positions at Bergdorf Goodman, Bonwit Teller and Saks Fifth Avenue Other Leadership Rol • Member of the Board of Directors of Conagra Brands, Inc. (NYSE: CAG), one of North America’s leading branded food companies (July 2021 to present) • Member of the Board of Directors of SeriousFun Children’s Network, Inc., a non-profit corporation that provides specially-adapted camp experiences for children with serious illnesses and their families, free of charge (since March 2017) • Member of the Board of Directors of Chief Executives for Corporate Purpose (CECP), a CEO-led coalition that helps companies transform their social strategy by providing customized resources (October 2019 to present) Scott D. Lipesky, Executive Vice President and Chief Financial Officer A 48 Executive Rol • Executive Vice President and Chief Financial Officer of the Company, as well as Principal Financial Officer and Principal Accounting Officer of the Company (April 2021 to present) • Senior Vice President and Chief Financial Officer of the Company, as well as Principal Financial Officer and Principal Accounting Officer of the Company (October 2017 to April 2021) • Prior to rejoining the Company, formerly served as Chief Financial Officer of American Signature, Inc., a privately-held home furnishings company (October 2016 to October 2017) • Formerly held various leadership roles and finance positions with the Company (November 2007 to October 2016) includin Chief Financial Officer, Hollister Brand (September 2014 to October 2016); Vice President, Merchandise Finance (March 2013 to September 2014); Vice President, Financial Planning and Analysis (November 2012 to March 2013); and Senior Director, Financial Planning and Analysis (November 2010 to November 2012) • Former Corporate Finance Director with FTI Consulting Inc., a global financial services advisory firm • Former Director of Corporate Business Development with The Goodyear Tire & Rubber Company • Formerly held position as a Certified Public Accountant with PricewaterhouseCoopers LLP Abercrombie & Fitch Co. 10 2022 Form 10-K Table of Contents Kristin Scott, President, Global Brands A 55 Executive Rol • President, Global Brands of the Company (November 2018 to present) • Former Brand President of Hollister (August 2016 to November 2018) • Formerly held senior positions at Victoria’s Secret, a specialty retailer of women’s intimate and other apparel which sells products at Victoria’s Secret stores and online (December 2007 to April 2016), includin Executive Vice President, General Merchandise Manager (March 2013 to April 2016); Senior Vice President, General Merchandise Manager (March 2009 to March 2013); and Senior Vice President, General Merchandise Manager - Stores (December 2007 to March 2009) • Formerly held various planning and merchandising positions at Gap Inc., Target, and Marshall Fields Samir Desai, Executive Vice President, Chief Digital Technology Officer A 42 Executive Rol • Executive Vice President and Chief Digital and Technology Officer of the Company (July 2021 to present) • Formerly held various leadership and technology positions at Equinox Group, a luxury fitness company that operates several lifestyle brands (October 2005 to June 2021), includin Chief Technology Officer (April 2016 to June 2021), Vice President, Technology (April 2013 to April 2016), Senior Director Technology (April 2011 to April 2013), Director Technology (October 2005 to April 2011) • Formerly held technology roles at Intertex Apparel Group, a manufacturer and importer of branded and private label apparel (July 2002 to October 2005), including Director, Information Technology Gregory J. Henchel, Executive Vice President, General Counsel and Corporate Secretary A 55 Executive Rol • Executive Vice President, General Counsel and Corporate Secretary of the Company (October 2021 to present) • Senior Vice President, General Counsel and Corporate Secretary of the Company (October 2018 to October 2021) • Former Executive Vice President, Chief Legal Officer and Secretary of HSN, Inc., a $3+ billion multi-channel retailer (February 2010 to December 2017) • Former Senior Vice President and General Counsel of Tween Brands, Inc., a specialty retailer (October 2005 to February 2010) and Secretary (August 2008 to February 2010) • Formerly held various roles at Cardinal Health, Inc., a global medical device, pharmaceutical and healthcare technology company, including Assistant General Counsel (2001 to October 2005), and Senior Litigation Counsel (May 1998 to 2001) • Formerly held position as a litigation associate with the law firm of Jones Day (September 1993 to May 1998) GOVERNMENT REGULATIONS As a global organization, the Company is subject to the laws and regulations of the U.S. and multiple foreign jurisdictions in which it operates. These laws and regulations include, but are not limited t trade, transportation and logistic laws, including tariffs and import and export regulations; tax laws and regulations; product and consumer safety laws; anti-bribery and corruption laws; employment and labor laws; antitrust or competition laws; data privacy laws; and environmental regulations. Inflation Reduction Act of 2022 On August 16, 2022, the Inflation Reduction Act was signed into law, with tax provisions primarily focused on implementing a 15% corporate minimum tax on global adjusted financial statement income, expected to become applicable to the Company beginning in Fiscal 2023, and a 1% excise tax on share repurchases in tax years beginning after December 31, 2022. The Company does not currently expect that the Inflation Reduction Act will have a material impact on its income taxes. Laws and regulations have had, and may continue to have, a material impact on the Company’s operations as described further within “ ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS " of this Annual Report on Form 10-K. Refer to “ ITEM 1A. RISK FACTORS , ” of this Annual Report on Form 10-K for a discussion of the potential impacts regulatory matters may have on the Company in the future, including those related to environmental matters. Compliance with government laws and regulations has not had a material effect on the Company’s capital expenditures, earnings or competitive position. Abercrombie & Fitch Co. 11 2022 Form 10-K Table of Contents OTHER INFORMATION A&F makes available free of charge on its website, corporate.abercrombie.com, under the “Investors – Financials/SEC Filings” section, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after A&F electronically files such material with, or furnishes it to, the Securities and Exchange Commission (the “SEC”). A&F also makes available free of charge in the same section of its website its definitive proxy materials filed pursuant to Section 14 of the Exchange Act, as soon as reasonably practicable after A&F electronically files such proxy materials with the SEC. The SEC maintains a website that contains electronic filings by A&F and other issuers at www.sec.gov. A&F has included certain of its website addresses throughout this filing as textual references only. Information on the A&F websites shall not be deemed incorporated by reference into, and do not form any part of, this Annual report on Form 10-K or any other report or document that A&F files with or furnishes to the SEC. Item 1A. Risk Factors Investing in our securities involves risk. The following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements contained in this Annual Report on Form 10-K. Any of these risk factors could lead to material adverse effects on our business, operating results and financial condition. Additional risks and uncertainties not currently known to us or that we currently do not view as material may also become materially adverse our business in future periods or if circumstances change. MACROECONOMIC AND INDUSTRY RISKS. Changes in global economic and financial conditions could have a material adverse impact on our business. Uncertainty as to the state of the global economy and global financial condition could have an adverse effect on our operating results and business. Our business is subject to factors that affect worldwide economic conditions, including rising inflation (which has occurred and is occurring), unemployment levels, consumer credit availability, consumer debt levels, reductions in consumer net worth based on declines in the financial, residential real estate and mortgage markets, recent bank failures, sales and personal income tax rates, fuel and energy prices, global food supplies, interest rates, consumer confidence in future economic and political conditions, consumer perceptions of personal well-being and security, the value of the U.S. dollar versus foreign currencies, geopolitical conflicts, and other macroeconomic factors. Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds, have in the past and may in the future lead to market-wide liquidity problems and volatility, such as the events in March 2023 wherein certain financial institutions were placed into receivership. Changes in global economic and financial conditions could impact our ability to fund growth and our ability to access external financing in the credit and capital markets. The economic conditions and factors described above could adversely impact our results of operations, liquidity and capital resources, and may exacerbate other risks within this section of “ITEM 1A. RISK FACTORS”. Consumer confidence and spending could be materially impacted by economic conditions, which could adversely impact our results of operations. Our business depends on consumer demand for our merchandise. Consumer confidence and discretionary spending habits, including purchases of our merchandise, can be adversely impacted by recessionary periods, inflation and other macroeconomic conditions adversely impacting levels of disposable income. We may not be able to accurately anticipate or predict consumer demand and behavior, such as taste and purchasing trends, in response to adverse economic conditions, which could result in lower sales, excess inventories and increased mark-downs, all of which could negatively impact our ability to achieve or maintain profitability. In the event that the U.S. and global economy worsens, or if there is a decline in consumer spending levels or other unfavorable conditions, we could experience lower than expected revenues, which could force us to delay or slow the implementation of our growth strategies and adversely impact our results of operations. Failure to engage our customers, anticipate customer demand and changing fashion trends, and manage our inventory commensurately could have a material adverse impact on our business. Our success largely depends on our ability to anticipate and gauge the fashion preferences of our customers and provide merchandise that satisfies constantly shifting demands in a timely manner. Because we may enter into agreements for the manufacture and purchase of merchandise well in advance of the applicable selling season, we are vulnerable to changes in consumer preferences and demand, pricing shifts, and the sub-optimal selection and timing of merchandise purchases. Abercrombie & Fitch Co. 12 2022 Form 10-K Table of Contents Moreover, there can be no assurance that we will continue to anticipate consumer demands and accurately plan inventory successfully in the future. Changing consumer preferences and fashion trends, and our ability to anticipate, identify and respond to them, could adversely impact our sales. Inventory levels for certain merchandise styles no longer considered to be “on trend” may increase, leading to higher markdowns to sell through excess inventory and, therefore, lower than planned margins. Conversely, if we underestimate consumer demand for our merchandise, or if our manufacturers fail to supply quality products in a timely manner, we may experience inventory shortages, which may negatively impact customer relationships, diminish brand loyalty and result in lost sales. We could also be at a competitive disadvantage if we are unable to leverage data analytics to retrieve timely, customer insights to appropriately respond to customer demands and improve customer engagement. Any of these events could significantly harm our operating results and financial condition. We are also vulnerable to factors affecting inventory flow that are outside our control, such as natural disasters or other unforeseen events that may significantly impact anticipated customer demand. If we are not able to adjust appropriately to such factors, our inventory management may be negatively affected, which could adversely impact our performance and our reputation. Our failure to operate effectively in a highly competitive and constantly evolving industry could have a material adverse impact on our business. The sale of apparel, personal care products and accessories for men, women and kids is a highly competitive business with numerous participants, including individual and chain specialty apparel retailers, local, regional, national and international department stores, discount stores and online-exclusive businesses. Proliferation of the digital channel within the last few years has encouraged the entry of many new competitors and an increase in competition from established companies. These increases in competition could reduce our ability to retain and grow sales, resulting in an adverse impact to our operating results and business. We face a variety of challenges in the highly competitive and constantly evolving retail industry, includin • Anticipating and quickly responding to changing consumer shopping preferences better than our competitors; • Maintaining favorable brand recognition; • Effectively marketing our products to consumers across diverse demographic markets, including through social media platforms which have become increasingly important in order to stay connected to our customers, as our digital sales penetration has increased. • Retaining customers, including our loyalty club members, and the resulting increased marketing costs to acquire new customers; • Developing innovative, high-quality merchandise in styles that appeal to consumers and in ways that favorably distinguish us from our competitors; • Countering the aggressive pricing and promotional activities of many of our competitors without diminishing the aspirational nature of our brands and brand equity; and • Identifying and assessing disruptive innovation, by existing or new competitors, that could alter the competitive landscape improving the customer experience and heightening customer expectations; transforming supply chain and corporate operations through digital technologies and artificial intelligence; and enhancing management decision-making through use of data analytics to develop new, consumer insights. In addition, in order to compete in this highly competitive and constantly evolving industry, at times, we may launch and/or acquire new brands to expand our portfolio. This could result in significant financial and operational investments that do not provide the anticipated benefits or desired rates of return and there can be no guarantee that pursuing these investments will result in improved operating results. In light of the competitive challenges we face, we may not be able to compete successfully in the future. The impact of war, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience could have a material adverse impact on our busines s In the past, the impact of war, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience and the associated heightened security measures taken in response to these events have disrupted commerce. Further events of this nature, domestic or abroad, including international and domestic unrest and the ongoing conflict in Ukraine, may disrupt commerce and undermine consumer confidence and consumer spending by causing a decline in traffic, store closures and a decrease in digital demand adversely affecting our operating results. Furthermore, the existence or threat of any other unforeseen interruption of commerce, could negatively impact our business by interfering with the availability of raw materials or our ability to obtain merchandise from foreign manufacturers. With a substantial portion of our merchandise being imported from foreign countries, failure to obtain merchandise from our foreign manufacturers or substitute other manufacturers, at similar costs and in a timely manner, could adversely affect our operating results and financial condition. Abercrombie & Fitch Co. 13 2022 Form 10-K Table of Contents Fluctuations in foreign currency exchange rates and our ability to mitigate the effects of such volatility and our ability to mitigate the effects of such volatility could have a material adverse impact on our business. Due to our international operations, we are exposed to foreign currency exchange rate risk with respect to our sales, profits, assets and liabilities denominated in currencies other than the U.S. dollar. In addition, certain of our subsidiaries transact in currencies other than their functional currency, including intercompany transactions, which results in foreign currency transaction gains or losses. Furthermore, we purchase substantially all of our inventory in U.S. dollars. As a result, our sales, gross profit and gross profit rate from international operations will be negatively impacted during periods of a strengthened U.S. dollar relative to the functional currencies of our foreign subsidiaries. Additionally, changes in the effectiveness of our hedging instruments may negatively impact our ability to mitigate the risks associated with fluctuations in foreign currency exchange rates. For example, changes in inventory purchase assumptions have resulted in changes in the effectiveness to certain of our hedging instruments, and we could see similar impacts in future periods. Fluctuations in foreign currency exchange rates could adversely impact consumer spending, delay or prevent successful penetration into new markets or adversely affect the profitability of our international operations. Certain events, such as the on-going conflict in Ukraine, the ongoing impact of the COVID-19 pandemic, and uncertainty with respect to trade policies, tariffs and government regulations and actions affecting trade between the U.S. and other countries, have increased global economic and political uncertainty in recent years and could result in volatility of foreign currency exchange rates as these events develop. Pandemics, epidemics, or other public health crises such as the COVID‐19 pandemic may continue to materially adversely impact and cause disruption to our business . The COVID-19 pandemic has had a material adverse effect on our business, including our financial performance and condition, operating results and cash flows, and may continue to materially adversely impact and cause disruption to our business in the future. Adverse impacts of the COVID-19 pandemic experienced by the Company to date include supply chain disruptions, inflationary pressures including higher freight and labor costs, labor shortages, weak store traffic, temporary store closures and reclosures of factories in certain regions. Despite the availability of COVID-19 vaccines, the pandemic continues to evolve, with resurgences and outbreaks occurring in various parts of the world, including those resulting from variants of the virus. A pandemic or other public health crisis, including the emergence of new COVID-19 variants, poses the risk that we or our employees, customers, vendors and manufacturers may be prevented from conducting business activities for an indefinite period of time, including due to the spread of the disease or shutdowns requested or mandated by governmental authorities. The impact of regulations imposed in the future in response to the COVID-19 pandemic or other public health crises, could, among other things, require that we close our stores or distribution centers or otherwise make it difficult or impossible to operate our business. Other factors that would negatively impact our ability to successfully operate during the ongoing COVID-19 pandemic include, but are not limited t • Our ability to keep our stores open if there is a re-emergence or increase in infection rate; • Our ability to attract customers to our stores, given the risks, or perceived risks, of gathering in public places; • Supply chain delays due to closed factories, reduced workforces, scarcity of raw materials and scrutiny, as well as carrier constraints due to an increase in digital sales; • Delays in, or our ability to complete, planned store openings on the expected terms or timing, or at all based on shortages in labor and materials and delays in the production and delivery of materials; • Associates, whether our own or those of our third-party vendors, working offsite through work from home arrangements may rely on residential communication networks and internet providers and may be more susceptible to service interruptions and cyberattacks, and, this could result in an increase in phishing and other scams, fraud, money laundering, theft and other criminal activity; • Our ability to preserve liquidity to be able to take advantage of market conditions during periods of temporary store closures; and • Difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deterioration in credit and financing conditions may affect our access to capital necessary to fund business operations or address maturing liabilities. The factors described above may exacerbate other risks within this section of “ ITEM 1A. RISK FACTORS ”. Any future outbreak of any other highly infectious or contagious disease could also have a material adverse impact on our business. Our ability to attract customers to our stores depends, in part, on the success of the shopping malls or area attractions that our stores are located in or around. Abercrombie & Fitch Co. 14 2022 Form 10-K Table of Contents Our stores are primarily located in shopping malls and other shopping centers. Our sales at these stores, as well as sales at our flagship locations, are partially dependent upon the volume of traffic in those shopping centers and the surrounding area which, for some centers, has been in decline. Our stores may benefit from the ability of a shopping center’s other tenants and area attractions to generate consumer traffic in the vicinity of our stores and the continuing popularity of the shopping center. We cannot control the loss of a significant tenant in a shopping mall or area attraction, the development of new shopping malls in the U.S. or around the world, the availability or cost of appropriate locations or the success of individual shopping malls and there is competition with other retailers for prominent locations. Prior to the onset of the COVID-19 pandemic, the retail industry generally was facing declines in shopping mall traffic, and if the popularity of shopping malls declines among our customers, our sales may decline, and it may be appropriate to exit leases earlier than originally anticipated. While U.S. Company-operated stores have been fully reopened for in-store service following widespread temporary store closures due to the COVID-19 pandemic, we may see additional temporary closures in certain geographic areas as outbreaks of COVID-19 cases could continue to occur and localized responses remain unpredictable. Furthermore, declines in store traffic beyond our current expectations could result in additional impairment charges. While we were successful in obtaining certain rent abatements and landlord concessions of rent payable as a result of COVID-19 store closures, we may be limited in our ability to obtain rent abatements or landlord concessions of rent otherwise payable going forward. All of these factors may impact our ability to meet our productivity or our growth objectives for our stores and could have a material adverse impact on our financial condition or results of operations. Part of our future growth is dependent on our ability to operate stores in desirable locations, with capital investment and lease costs providing the opportunity to earn a reasonable return. We cannot be sure when or whether such desirable locations will become available at reasonable costs. The impact of natural disasters, negative climate patterns, public health crises, political crises and other unexpected and catastrophic events could result in interruptions to our operations, as well as to the operations of our third-party partners, and have a material adverse impact on our business. Our retail stores, corporate offices, distribution centers, infrastructure projects and digital operations, as well as the operations of our vendors and manufacturers, are vulnerable to disruption from natural disasters, such as hurricanes, tornadoes, floods, earthquakes, extreme cold events and other adverse weather events; negative climate patterns, such as those in domestic and global water-stressed regions; public health crises, such as pandemics and epidemics (including the ongoing COVID-19 pandemic); political crises, such as terrorists attacks, war, labor, unrest and other political instability; significant power interruptions or outages; and other unexpected, catastrophic events. These events could disrupt the operations of our corporate offices, global stores and supply chain and those of our third-party partners, including our vendors and manufacturers. In addition to immediate impacts on global operations, these events could result in a reduction in the availability and quality of raw materials used to manufacture our merchandise, delays in merchandise fulfillment and deliveries, loss of customers and revenues due to store closures and inability to respond to customer demand, increased costs to meet consumer demand (which we may not be able to pass on to customers), reduced consumer confidence or changes in consumers’ discretionary spending habits. Historically, our operations have been seasonal, and natural disasters or unseasonable weather conditions, may diminish demand for our seasonal merchandise and could also influence consumer preferences and fashion trends, consumer traffic and shopping habits. In addition, to the extent natural disasters cause physical losses to our stores, distribution centers or offices, we may incur costs that exceed our applicable insurance coverage for any necessary repairs to damages or business disruption. STRATEGIC RISKS. Our failure to successfully execute on our Always Forward Plan. In 2022 we introduced our Always Forward Plan as our long-term strategic plan, as described in “ ITEM 1. BUSINESS .” Our ability to successfully execute on our Always Forward Plan is subject to various risks and uncertainties as described herein. We believe that our Always Forward Plan will lead to long-term revenue growth and increased profitability, however, there is no assurance regarding the extent to which we will realize the anticipated objectives, if at all, or regarding the timing of such anticipated benefits. Our failure to realize the anticipated objectives, which may be due to our inability to execute on the various elements of our Always Forward Plan, changes in consumer demand, competition, macroeconomic conditions (including inflation), retention of key talent, and other risks described herein, could have a material adverse effect on our business. If the execution of our Always Forward Plan is not successful, or we do not realize the objectives to the extent or in the timeline that we anticipate, our financial condition and reputation could be adversely affected. Failure to continue to successfully manage the complexities of our customers’ omnichannel shopping experience, or failure to continue to successfully invest in customer, digital and omnichannel initiatives could have a material adverse impact on our business. Abercrombie & Fitch Co. 15 2022 Form 10-K Table of Contents As omnichannel retailing continues to evolve, our customers increasingly interact with our brands through a variety of media and expect seamless integration across all touchpoints. As our success depends on our ability to effectively manage the complexities of our customers’ omnichannel shopping experience, including our ability to respond to shifting consumer traffic patterns and engage our customers, we have made significant investments and operational changes to develop our digital and omnichannel capabilities globally, including the development of localized fulfillment, shipping and customer service operations, investments in digital media to attract new customers and the rollout of omnichannel capabilities listed in “ ITEM 1. BUSINESS .” While we must keep up to date with technology trends in the retail environment in order to manage our successful omnichannel shopping experience, it is possible these initiatives may not provide the anticipated benefits or desired rates of return. For example, we could be at a competitive disadvantage if we are unable to leverage data analytics to retrieve timely, customer insights to appropriately respond to customer demands and improve customer engagement across channels or if innovative digital products and features we develop are not utilized or received by customers as anticipated. In addition, digital operations are subject to numerous risks, including reliance on third-party computer hardware/software and service providers, data breaches, the increased rate of merchandise returns, violations of evolving laws and regulations, including those relating to online privacy, credit card fraud, telecommunication failures, electronic break-ins and similar compromises, and disruption of internet service. Changes in foreign governmental regulations may also negatively impact our ability to deliver product to our customers. Failure to successfully respond to these risks may adversely affect sales as well as damage the reputation of our brands. Our failure to optimize our global store network could have a material adverse impact on our business. With the evolution of digital and omnichannel capabilities, customer expectations have shifted and there has been greater pressure for a seamless omnichannel experience across all channels. As a result, global store network optimization is an important part of our business and failure to optimize our global store network could have an adverse impact on our results of operations. The ability to open new stores experiences and modify existing leases requires partnership with our landlords. If our partnerships with our landlords were to deteriorate, this could adversely affect the pace of opening new store experiences and/or lead to an increase in store closures. In addition, if there is an increase in events such as landlord bankruptcies, or mall foreclosures, competition between retailers could increase for remaining suitable store locations. Pursuing the wrong opportunities and any delays, cost increases, disruptions or other uncertainties related to those opportunities could adversely affect our results of operations. If our investments in new stores or remodeling and right-sizing existing stores do not achieve appropriate returns, our financial condition and results of operations could be adversely affected. Although we attempt to open new stores in prominent locations, it is possible that locations which were prominent when we opened our stores may lose favor over time. Our inability to effectively conduct business in international markets, including as a result of legal, tax, regulatory, political and economic risks could have a material adverse impact on our business. We operate on a global basis and are subject to risks associated with international operations that could have a material adverse effect on our reputation, business and results of operations if we fail to address them. Such risks include, but are not limited to, the followin • addressing the different operational requirements present in each country in which we operate, including those related to employment and labor, transportation, logistics, real estate, lease provisions and local reporting or legal requirements; • supporting global growth by successfully implementing local customer and product-facing teams and certain corporate support functions at our regional headquarters located in Shanghai, China and London, United Kingdom; • hiring, training and retaining qualified personnel; • maintaining good labor relations with individual associates and groups of associates; • avoiding work stoppages or other labor-related issues in our European stores, where some associates are represented by workers’ councils and unions; • retaining acceptance from foreign customers; • managing inventory effectively to meet the needs of existing stores on a timely basis; • political, civil and social unrest, such as the ongoing conflict in Ukraine and escalating China-Taiwan tensions; • government regulations affecting trade between the U.S. and other countries, including tariffs and customs laws; • tax rate volatility and our ability to realize tax benefits resulting from non-U.S. operations; • managing foreign currency exchange rate risks effectively; • substantial investments of time and resources in our global operations may not result in achievement of acceptable levels of returns; for example, we recently have experienced year-over-year declines in revenues from our international operations; and • continued and sustained declines in our international revenues could lead to store closures, restructuring costs, and impairment losses, all of which could adversely impact our business, profitability, and results of operations. Abercrombie & Fitch Co. 16 2022 Form 10-K Table of Contents We are subject to domestic laws related to international operations, including the Foreign Corrupt Practices Act, in addition to the laws of the foreign countries in which we operate. If any of our overseas operations, or our associates or agents, violate such laws, we could become subject to sanctions or other penalties that could negatively affect our reputation, business and operating results. Our failure to appropriately address Environmental, Social, and Governance (ESG) matters could have a material adverse impact on our reputation and, as a result, our business. There is an increased focus from certain government regulators, investors, customers, associates, business partners and other stakeholders concerning ESG matters. The expectations related to ESG matters are rapidly evolving, and, from time to time, we announce certain initiatives and goals, related to ESG matters, such as those through our participation in the United Nations Global Compact. We could fail, or be perceived to fail to act responsibly, in our ESG efforts, or we could fail in accurately reporting our progress on such initiatives and goals. In addition, we could be criticized for the speed of adoption of such initiatives or goals, or the scope of such initiatives or goals. As a result, we could suffer negative publicity and our reputation could be adversely impacted, which in turn could have a negative impact on investor perception and our products' acceptance by consumers. This may also impact our ability to attract and retain talent to compete in the marketplace. There is also uncertainty regarding potential laws, regulations, and policies related to ESG and global environmental sustainability matters, including disclosure obligations and reporting on such matters. Changes in the legal or regulatory environment affecting ESG disclosure, responsible sourcing, supply chain transparency, or environmental protection, among others, including regulations to limit carbon dioxide and other greenhouse gas emissions, to discourage the use of plastic or to limit or to impose additional costs on commercial water use may result in increased costs for us and our business partners, all of which may negatively impact our results of operations, financial condition and cash flows. OPERATIONAL RISKS. Failure to protect our reputation could have a material adverse impact on our business. Our ability to maintain our reputation is critical and public perception about our products or operations, whether justified or not, could impair our reputation, involve us in litigation, damage our brands and have a material adverse impact on our business. Events that could jeopardize our reputation, include, but are not limited to, the followin • We fail to maintain high standards for merchandise quality and integrity; • We fall victim to a cyber-attack, resulting in customer data being compromised; • We fail to comply with ethical, social, product, labor, health and safety, legal, accounting or environmental standards, or related political considerations; • Our associates’ actions don’t align with our values and fail to comply with our Code of Business Conduct and Ethics; • Third parties with which we have a business relationship, including our brand representatives and influencer network, fail to represent our brands in a manner consistent with our brand image or act in a way that harms their reputation; • Third-party vendors fail to comply with our Vendor Code of Conduct or any third parties with which we have a business relationship with fail to represent our brands in a manner consistent with our brand image; • Unfavorable media publicity and consumer perception of our products, operations, brand or experience; and • Our position or perceived lack of position on ESG, public policy or other similar issues and any perceived lack of transparency about those matters. In addition, in recent years there has been an increase in media platforms, particularly, social media and our use of social media platforms is an important element of our omnichannel marketing efforts. For example, we maintain various social media accounts for our brands, including Instagram, TikTok, Facebook, Twitter and Pinterest accounts. Negative publicity or actions taken by individuals that we partner with, such as brand representatives, influencers or our associates, that fail to represent our brands in a manner consistent with our brand image or act in a way that harms their reputation, whether through our social media accounts or their own, could harm our brand reputation and materially impact our business. Social media also allows for anyone to provide public feedback, which could influence perceptions of our brands and reduce demand for our merchandise. Damage to our reputation and loss of consumer confidence for these or any other reasons could lead to adverse consumer actions, including boycotts, have negative impacts on investor perception and could impact our ability to attract and retain the talent necessary to compete in the marketplace, all of which could have a material adverse impact on our business, as well as require additional resources to rebuild our reputation. If our information technology systems are disrupted or cease to operate effectively, it could have a material adverse impact on our business. Abercrombie & Fitch Co. 17 2022 Form 10-K Table of Contents We rely heavily on our information technology systems in both our customer-facing and corporate operations t operate our websites and mobile apps; record and process transactions; respond to customer inquiries; manage inventory; purchase, sell and ship merchandise on a timely basis; maintain cost-efficient operations; create a customer relationship management database through our loyalty programs; and complete other customer-facing and business objectives. Given the significant number of transactions that are completed annually, it is vital to maintain constant operation of our computer hardware, telecommunication systems and software systems, and maintain data security. Despite efforts to prevent such an occurrence, our information technology systems may be vulnerable, from time to time, to damage or interruption from computer viruses, power interruptions or outages or other system failures, third-party intrusions, inadvertent or intentional breaches by our associates or third-party service providers, and other technical malfunctions. If our systems are damaged, fail to function properly, or are obsolete in comparison to those of our competition, we may have to make monetary investments to repairs or replace the systems and we could endure delays in our operations. We have made and expect to continue to make significant monetary investments and devote significant attention to modernizing our core systems, and the effectiveness of these investments can be less predictable than others and may fail to provide the expected benefits. We regularly evaluate our information technology systems and requirements to ensure appropriate functionality and use in response to business demands. For example, we have started a multi-year process of upgrading our merchandising enterprise resource planning ("ERP") system. We are aware of the inherent risks associated with replacing and modifying these systems, including inaccurate system information, system disruptions and user acceptance and understanding. Any material disruption or slowdown of our systems, including a disruption or slowdown caused by our failure to successfully upgrade or replace our systems could impact our ability to effectively manage and maintain our inventory, to ship products to customers on a timely basis, and may cause information to be lost or delayed, including data related to customer orders. Such a loss or delay, especially if the disruption or slowdown occurred during our peak selling seasons, could have a material adverse effect on our results of operations. In addition the upgrading of our ERP system requires significant financial and operational investments, and such investments may not provide the anticipated benefits or desired rates of returns. We may be exposed to risks and costs associated with cyber-attacks, data protection, credit card fraud and identity theft that could have a material adverse impact on our business. In the standard course of business, we receive and maintain confidential information about customers, associates and other third parties. In addition, third parties also receive and maintain certain confidential information. The protection of this information is critical to our business and subjects us to numerous laws, rules and regulations domestically and in foreign jurisdictions. The retail industry in particular has been the target of many cyber-attacks and it is possible that an individual or group could defeat our security measures, or those of a third-party service provider, and access confidential information about our business, customers and associates. Further, like other companies in the retail industry, during the ordinary course of business, we and our vendors have in the past experienced, and we expect to continue to experience, cyber-attacks of varying degrees and types, including phishing, and other attempts to breach, or gain unauthorized access to, our systems. To date, cyber attacks have not had a material impact on our operations, but we cannot provide assurance that cyber attacks will not have a material impact in the future. We have experienced, and expect to continue to experience increased costs associated with protecting confidential information through the implementation of security technologies, processes and procedures, including training programs for associates to raise awareness about phishing, malware and other cyber risks, especially as we implement new technologies, such as new payment capabilities or updates to our mobile apps and websites. Additionally, the techniques and sophistication used to conduct cyber-attacks and breaches of information technology systems change frequently and increase in complexity and are often not recognized until such attacks are launched or have been in place for a period of time. We may not have the resources or technical sophistication to anticipate, prevent, or immediately identify and remediate cyber-attacks. Furthermore, the global regulatory environment is increasingly complex and demanding with frequent new and changing requirements surrounding information security and privacy, including new regulations applicable to public companies in the United States, China’s Cybersecurity Law, the California Consumer Privacy Act, and the European Union’s General Data Protection Regulation. We may incur significant costs related to compliance with these laws and failure to comply with these regulatory standards, and others, could have a material adverse impact on our business. We have also implemented a flexible work policy allowing most of our corporate associates to work remotely, from time to time, as have certain of our third-party vendors. Offsite working by associates, which requires increased use of public internet connection, and use of office equipment off premises may make our business more vulnerable to cybersecurity breach attempts, phishing and other scams, fraud, money laundering, theft and other criminal activity. If we, or a third-party partner, were to fall victim to a successful cyber-attack or suffer intentional or unintentional data and security breaches by associates or third-parties, it could have a material adverse impact on our business, especially an event that compromises customer data or results in the unauthorized release of confidential business or customer information. In addition, if we are unable to avert a denial of service attack that renders our website inoperable, it could result in negative consequences, such as lost sales and customer dissatisfaction. Additional negative consequences that could result from these and similar events may include, but are not limited t Abercrombie & Fitch Co. 18 2022 Form 10-K Table of Contents • remediation costs, such as liability for stolen assets or information, potential legal settlements to affected parties, repairs of system damage, and incentives to customers or business partners in an effort to maintain relationships after an attack; • increased cybersecurity protection costs, which may include the costs of making organizational changes, deploying additional personnel and protection technologies, training associates, and engaging third party experts and consultants; • lost revenues resulting from the unauthorized use of proprietary information or the failure to retain or attract customers following an attack; • litigation and legal risks, including costs of litigation and regulatory, fines, penalties or actions by domestic or international governmental authorities; • increased insurance premiums, or the ability to obtain insurance on commercially reasonable terms; • reputational damage that adversely affects customer or investor confidence; and • damage to the Company’s competitiveness, stock price, and long-term shareholder value. Although we maintain cybersecurity insurance, there can be no assurance that it will be sufficient for a specific cyber incident, or that insurance proceeds will be paid to us in a timely fashion. Our reliance on our distribution centers makes us susceptible to disruptions or adverse conditions affecting our supply chain. Our distribution center operations are susceptible to local and regional factors, such as system failures, accidents, labor disputes, economic and weather conditions, natural disasters, significant power interruptions or outages, demographic and population changes, and other unforeseen events and circumstances. We rely on our distribution centers to manage the receipt, storage, sorting, packing and distribution of our merchandise. If our distribution centers are not adequate to support our operations, including as a result of capacity constraints in response to an increase in digital sales, the increased rate of merchandise returns, we could experience adverse impacts such as shipping delays and or customer dissatisfaction. In addition, if our distribution operations were disrupted due to, for example, labor shortages, natural disasters or power interruptions or outages, and we were unable to relocate operations or find other property adequate for conducting business, our ability to replace inventory in our stores and process digital and third-party orders could be interrupted, potentially resulting in adverse impacts to sales or increased costs. Refer to “ ITEM 1. BUSINESS ,” for a listing of certain distribution centers on which we rely. Changes in the cost, availability and quality of raw materials, transportation and labor, including changes due to trade relations could have a material adverse impact on our business. Changes in the cost, availability and quality of the fabrics or other raw materials used to manufacture our merchandise could have a material adverse effect on our cost of sales, or our ability to meet customer demand. The prices for such fabrics depend largely on the market prices for the raw materials used to produce them, particularly cotton. The price and availability of such raw materials may fluctuate significantly, depending on many factors, including crop yields, weather patterns and other unforeseen events. For example, significant inflationary pressures have and may continue to impact the cost of labor, cotton and other raw materials. Increased global uncertainty has also impacted and may in the future impact the cost, availability and quality of the fabrics or other raw materials used to manufacture our merchandise, and compliance with sanctions, customs trade orders and sourcing laws, such as those issued by the U.S. government related to the ongoing conflict in Ukraine and entities and individuals connected to China’s Xinjiang Uyghur Autonomous Region, could impact the price of cotton in the marketplace and the global supply chain. Fluctuations in the cost of transportation could also have a material adverse effect on our cost of sales and ability to meet customer demand. We primarily use seven contract carriers to ship merchandise and related materials to our North American customers, and several contract carriers for our international customers. If the shipping operations of these third parties were disrupted, and we are unable to respond in a quick and efficient manner, our ability to replace inventory in our stores and process digital and third-party orders could be interrupted, potentially resulting in adverse impacts to sales or increased costs. Furthermore, we are susceptible to increases in fuel costs which may increase the cost of distribution. If we are not able to pass this cost on to our customers, our financial condition and results of operations could be adversely affected. In addition, we have experienced increasing wage pressures in recent years related to the cost of labor at our third-party manufacturers, at our distribution centers and at our stores. For example, recent government initiatives in the U.S. or changes to existing laws, such as the adoption and implementation of national, state, or local government proposals relating to increases in minimum wage rates, may increase our costs of doing business and adversely affect our results of operations. We may not be able to pass all or a portion of higher labor costs on to our customers, which could adversely affect our gross margin and results of operations. Abercrombie & Fitch Co. 19 2022 Form 10-K Table of Contents We depend upon independent third parties for the manufacture and delivery of all our merchandise, and a disruption of the manufacture or delivery of our merchandise could have a material adverse impact on our business. We do not own or operate any manufacturing facilities. As a result, the continued success of our operations is tied to our timely receipt of quality merchandise from third-party manufacturers. We source the majority of our merchandise outside of the U.S. through arrangements with approximately 119 vendors, primarily located in southeast Asia. Political, social or economic instability in the regions in which our manufacturers are located could cause disruptions in trade, including exports to the U.S. In addition, the inability of vendors to access liquidity, or the insolvency of vendors, could lead to their failure to deliver merchandise to us. A manufacturer’s inability to ship orders in a timely manner or meet our quality standards could cause delays in responding to consumer demand and negatively affect consumer confidence or negatively impact our competitive position, any of which could have a material adverse effect on our financial condition and results of operations. All factories that we partner with are contractually required to adhere to the Company’s Vendor Code of Conduct, go through social audits which include on-site walk-throughs to appraise the physical working conditions and health and safety practices, and review payroll and age documentation. If these factories are unwilling or not able to meet the standards set forth within the Company’s Vendor Code of Conduct, it could limit the options available to us and could result in an increase of costs of manufacturing, which we may not be able to pass on to our customers. Other events that could disrupt the timely delivery of our merchandise include new trade law provisions or regulations, reliance on a limited number of shipping carriers and associated alliances, weather events, significant labor disputes, port congestion and other unexpected events, such as COVID-19. We rely on the experience and skills of our executive officers and associates, and the failure to attract or retain this talent, effectively manage succession, and establish a diverse workforce could have a material adverse impact on our business. Our ability to succeed may be adversely impacted if we are not able to attract, retain and develop talent and future leaders, including our executive officers. We believe that the attraction, retention and management of qualified talent is integral to our success in advancing our strategies and key business priorities and avoiding disruptions in our business. We rely on our associates across the organization, including those at our corporate offices, stores and distribution centers, as well as their experience and expertise in the retail business. Our executive officers closely supervise all aspects of our operations, have substantial experience and expertise in the retail business and have an integral role in the growth and success of our brands. If we were to lose the benefit of the involvement of our executive officers or other personnel, without adequate succession plans, our business could be adversely affected. In addition, if we are unable to attract and retain talent at the associate level, our business could be adversely impacted. Competition for such qualified talent is intense, and we cannot be sure that we will be able to attract, retain and develop a sufficient number of qualified individuals in future periods. In addition, we cannot guarantee that we will be able to find adequate temporary or seasonal personnel to staff our operations when needed. For example, as automation, artificial intelligence and similar technological advancements continue to evolve, we may need to compete for talent that is familiar with these advancements in technologies in order to compete effectively with our industry peers. If we are not successful in these efforts, our business may be adversely affected. If we are not successful in these efforts or fail to successfully execute against the key human capital management initiatives discussed in “ ITEM 1. BUSINESS ,” our business could be adversely impacted. I f we identify a material weakness in our internal control over financial reporting, fail to remediate a material weakness, or fail to establish and maintain effective internal control over financial reporting, our ability to accurately and timely report our financial results could be adversely affected. The effectiveness of any controls or procedures is subject to certain inherent limitations, and as a result, there can be no assurance that our controls and procedures will prevent or detect misstatements. Even an effective system of internal control over financial reporting will provide only reasonable, not absolute, assurance with respect to financial statement preparation. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. If we fail to remediate a material weakness, or are otherwise unable to maintain effective internal control over financial reporting, management could be required to expend significant resources. Additionally, we could fail to meet our public reporting requirements on a timely basis, and be subject to fines, penalties, investigations or judgements, all of which could negatively affect investor confidence and adversely impact our stock price. Abercrombie & Fitch Co. 20 2022 Form 10-K Table of Contents LEGAL, TAX, REGULATORY AND COMPLIANCE RISKS. Fluctuations in our tax obligations and effective tax rate may result in volatility in our results of operations could have a material adverse impact on our business. We are subject to income taxes in many U.S. and foreign jurisdictions. In addition, our products are subject to import and excise duties and/or sales, consumption or value-added taxes (“VAT”) in many jurisdictions. We record tax expense based on our estimates of future payments, which include reserves for estimates of probable settlements of foreign and domestic tax audits. At any time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. As a result, we expect that throughout the year, there could be ongoing variability in our quarterly tax rates as taxable events occur and exposures are evaluated. In addition, our effective tax rate in any given financial reporting period may be materially impacted by changes in the mix and level of earnings or losses by taxing jurisdictions or by changes to existing accounting rules or regulations. Fluctuations in duties could also have a material impact on our financial condition, results of operations or cash flows. In some international markets, we are required to hold and submit VAT to the appropriate local tax authorities. Failure to correctly calculate or submit the appropriate amounts could subject us to substantial fines and penalties that could have an adverse effect on our financial condition, results of operations or cash flows. The Organization for Economic Co-operation and Development, along with members of its inclusive framework, have through the Base Erosion and Profit Shifting project, proposed changes to numerous long-standing tax principles. These proposals, if finalized and adopted by the associated countries, will likely increase tax complexity, and may both create uncertainty and adversely affect our provision for income taxes. In the past, tax law has been enacted, domestically and abroad, impacting our current or future tax structure and effective tax rate, such as the Inflation Reduction Act in the U.S. Tax law may be enacted in the future, domestically or abroad, that impacts our current or future tax structure and effective tax rate. Litigation and any future stockholder activism, could have a material adverse impact on our business. We, along with third parties we do business with, are involved, from time to time, in litigation arising in the ordinary course of business. Litigation matters may include, but are not limited to, contract disputes, employment-related actions, labor relations, commercial litigation, intellectual property rights, product safety, environmental matters and shareholder actions. Litigation, in general, may be expensive and disruptive. We cannot predict with certainty the outcomes of these legal proceedings and other contingencies, and the costs incurred in litigation can be substantial, regardless of the outcome. Substantial unanticipated verdicts, fines and rulings do sometimes occur. As a result, we could, from time to time, incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations in the period in which the amounts are accrued and/or our cash flows in the period in which the amounts are paid. The outcome of some of these legal proceedings and other contingencies could require us to take, or refrain from taking, actions which could negatively affect our operations and, depending on the nature of the allegations, could negatively impact our reputation. Additionally, defending against these legal proceedings may involve significant expense and diversion of management’s attention and resources. Stockholder activism, which could take many forms or arise in a variety of situations, remains popular with many public investors. Due to the potential volatility of our stock price and for a variety of other reasons, we may become the target of securities litigation or stockholder activism. Responding to stockholder activists campaigns may involve significant expense and diversion of management’s attention and resources without yielding any improvement in our results of operations or financial condition. Failure to adequately protect our trademarks or otherwise defend intellectual property could have a negative impact on our brand image and limit our ability to penetrate new markets which could have a material adverse impact on our business. We believe our core trademarks, Abercrombie & Fitch ® , abercrombie ® , Hollister ® , Gilly Hicks ® , Social Tourist ® and the “Moose” and “Seagull” logos, are essential to the effective implementation of our strategy. We have obtained or applied for federal registration of these trademarks with the U.S. Patent and Trademark Office and the registries of countries in key markets within the Company’s sales and distribution channels. In addition, these trademarks are either registered, or the Company has applications for registration pending, with the registries of many of the foreign countries in which the manufacturers of the Company’s products are located. There can be no assurance that we will obtain registrations that have been applied for or that the registrations we obtain will prevent the imitation of our products or infringement of our intellectual property rights by others. Although brand security initiatives are in place, we cannot guarantee that our efforts against the counterfeiting of our brands will be successful. If a third party copies our products in a manner that projects lesser quality or carries a negative connotation, our brand image could be materially adversely affected. Abercrombie & Fitch Co. 21 2022 Form 10-K Table of Contents Because we have not yet registered all of our trademarks in all categories, or in all foreign countries in which we source or offer our merchandise now, or may in the future, our international expansion and our merchandising of products using these marks could be limited. The pending applications for international registration of various trademarks could be challenged or rejected in those countries because third parties of whom we are not currently aware have already registered similar marks in those countries. Accordingly, it may be possible, in those foreign countries where the status of various applications is pending or unclear, for a third-party owner of the national trademark registration for a similar mark to prohibit the manufacture, sale or exportation of branded goods in or from that country. Failure to register our trademarks or purchase or license the right to use our trademarks or logos in these jurisdictions could limit our ability to obtain supplies from, or manufacture in, less costly markets or penetrate new markets should our business plan include selling our merchandise in those non-U.S. jurisdictions. Additionally, if a third party claims to have licensing rights with respect to merchandise we have produced or purchased from a vendor, we may be obligated to remove this merchandise from our inventory offering and incur related costs, and could be subject to liability under various civil and criminal causes of action, including actions to recover unpaid royalties and other damages. Changes in the regulatory or compliance landscape could have a material adverse impact on our business. We are subject to numerous domestic and foreign laws and regulations, including those related to customs, truth-in-advertising, securities, consumer protection, general privacy, health information privacy, identity theft, online privacy, general employment, employee health and safety, minimum wages, unsolicited commercial communication and zoning and occupancy laws, as well as ordinances that regulate retailers generally and/or govern the importation, intellectual property, promotion and sale of merchandise and the operation of retail stores, digital operations and distribution centers. If these laws and regulations were to change, or were violated by our management, associates, suppliers, vendors or other parties with whom we do business, the costs of certain merchandise could increase, or we could experience delays in shipments of our merchandise, be subject to fines or penalties, temporary or permanent store closures, or increased regulatory scrutiny or suffer reputational harm, which could reduce demand for our merchandise and adversely affect our business and results of operations. Any changes in regulations, the imposition of additional regulations, or the enactment of any new or more stringent legislation including the areas referenced above, could adversely affect our business and results of operations. Laws and regulations at the local, state, federal and various international levels frequently change, and the ultimate cost of compliance cannot be precisely estimated. Changes in the legal or regulatory environment affecting responsible sourcing, supply chain transparency, or environmental protection, among others, may result in increased compliance costs for us and our business partners. Additionally, we may face regulatory challenges in complying with applicable global sanctions and trade regulations and reputational challenges with our consumers and other stakeholders if we are unable to sufficiently verify the origins of material sourced for the manufacture of our products. In addition, we are subject to a variety of regulatory and reporting requirements, including, but not limited to, those related to corporate governance and public disclosure. Stockholder activism, the current political environment, financial reform legislation, government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations. New requirements or changes in current regulatory reporting requirements may introduce additional complexities, lead to additional compliance costs, divert management’s time and attention from strategic business activities, and could have a significant effect on our reported results for the affected periods. Failure to comply with such regulations could result in fines, penalties, or lawsuits and could have a material adverse impact on our business. The agreements related to A&F Management’s senior secured asset-based revolving credit facility and senior secured notes include restrictive covenants that limit our flexibility in operating our business and our inability to obtain additional credit on reasonable terms in the future could have an adverse impact on our business. The Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) of Abercrombie & Fitch Management Co. (“A&F Management”), a wholly-owned indirect subsidiary of A&F, provides for a senior secured asset-based revolving credit facility of up to $400 million (the “ABL Facility”), which matures on April 29, 2026. A&F Management’s senior secured notes (the “Senior Secured Notes””) have a fixed 8.75% interest rate and mature on July 15, 2025. The agreements related to the ABL Facility and the Senior Secured Notes contain restrictive covenants that, subject to specified exemptions, restrict, among other things, the ability of the Company and its subsidiaries t incur, assume or guarantee additional indebtedness; grant or incur liens; sell or otherwise dispose of assets, including capital stock of subsidiaries; make investments in certain subsidiaries; pay dividends or make distributions on our capital stock; redeem or repurchase capital stock; change the nature of our business; and consolidate or merge with or into, or sell substantially all of the assets of the Company or A&F Management to another entity. Abercrombie & Fitch Co. 22 2022 Form 10-K Table of Contents If an event of default under either related agreement occurs, any outstanding obligations under the Senior Secured Notes and the ABL Facility could be declared immediately due and payable or the lenders or noteholders could foreclose on or exercise other remedies with respect to the assets securing the indebtedness under the Senior Secured Notes and the ABL Facility. In addition, there is no assurance that we would have the cash resources available to repay such accelerated obligations. Moreover, the Senior Secured Notes and ABL Facility are secured by certain of our real property, inventory, intellectual property, general intangibles and receivables, among other things, and lenders may exercise remedies against the collateral in an event of default. We have, and expect to continue to have, a level of indebtedness. In addition, we may, from time to time, incur additional indebtedness. We may need to refinance all or a portion of our existing indebtedness before maturity, including the Senior Secured Notes, and any indebtedness under the ABL Facility. There can be no assurance that we would be able to obtain sufficient funds to enable us to repay or refinance our debt obligations on commercially reasonable terms, or at all. Changes in market conditions could potentially impact the size and terms of a replacement facility or facilities in the future. The inability to obtain credit on commercially reasonable terms in the future could adversely impact our liquidity and results of operations as well as limit our ability to take advantage of business opportunities that may arise. Abercrombie & Fitch Co. 23 2022 Form 10-K Table of Contents Item 1B. Unresolved Staff Comments None. Item 2. Properties The Company’s global headquarters are located on a campus-like setting in New Albany, Ohio, which is owned by the Company. The Company’s global headquarters also include company-owned distribution centers that support distribution to all domestic stores and the majority of domestic digital orders. The Company also leases property for its regional headquarters located in London, United Kingdom and Shanghai, China. In addition, the Company owns or leases facilities both domestically and internationally to support the Company’s operations, such as its distribution centers and various support centers. The Company does not believe any individual regional headquarters, third-party distribution center or support center lease is material as, if necessary or desirable to relocate an operation, other suitable property could be found. These properties are utilized by both of the Company’s operating segments and are currently suitable and adequate for conducting the Company’s business. As of January 28, 2023, the Company operated 762 retail stores across its brands. The Company does not believe that any individual store lease is material; however, certain geographic areas may have a higher concentration of store locations. Item 3. Legal Proceedings For information regarding legal proceedings, see Note 18 “ CONTINGENCIES ” to the Consolidated Financial Statements included in this Annual report on Form 10-K. The Company’s accrued charges for certain legal contingencies are classified within accrued expenses on the Consolidated Balance Sheets included in “ ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ,” of this Annual Report on Form 10-K. In addition, pursuant to Item 103(c)(3)(iii) of Regulation S-K under the Exchange Act, the Company is required to disclose certain information about environmental proceedings to which a governmental authority is a party if the Company reasonably believes such proceedings may result in monetary sanctions, exclusive of interest and costs, above a stated threshold. The Company has elected to apply a threshold of $1 million for purposes of determining whether disclosure of any such proceedings is required. Item 4. Mine Safety Disclosures Not applicable. Abercrombie & Fitch Co. 24 2022 Form 10-K Table of Contents PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information and Holders A&F’s Class A Common Stock, $0.01 par value (“Common Stock”) is traded on the New York Stock Exchange under the symbol “ANF.” As of March 24, 2023, there were approximately 2,600 stockholders of record. However, when including investors holding shares of Common Stock in broker accounts under street name, A&F estimates that there were approximately 38,000 stockholders. Performance Graph The following graph shows the changes, over the five-year period ended January 28, 2023 (the last day of A&F’s Fiscal 2022) in the value of $100 invested in (i) shares of Common Stock; (ii) Standard & Poor’s 500 Stock Index (the “S&P 500”); and (iii) Standard & Poor’s Apparel Retail Composite Index (the “S&P Apparel Retail”), including reinvestment of dividends. The plotted points represent the closing price on the last trading day of the fiscal year indicated. PERFORMANCE GRAPH (1) COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among A&F, the S&P 500 Index and the S&P Apparel Retail Index 02/03/18 02/02/19 02/01/20 01/30/21 01/29/22 01/28/23 A&F $ 100.00 $ 107.93 $ 86.44 $ 123.98 $ 196.10 $ 146.77 S&P 500 100.00 99.93 121.46 142.39 172.28 160.83 S&P Apparel Retail 100.00 113.06 131.73 143.75 159.17 190.20 *    $100 invested on February 03, 2018, including reinvestment of dividends. Copyright© 2023 Standard & Poor’s, a division of S&P Global. All rights reserved. (1) This performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or to the liabilities of Section 18 of the Exchange Act, except to the extent that A&F specifically requests that the performance graph be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act. Abercrombie & Fitch Co. 25 2022 Form 10-K Table of Contents Equity Securities The following table provides information regarding the purchase of shares of Common Stock made by or on behalf of A&F or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Exchange Act during each fiscal month of the thirteen weeks ended January 28, 2023: Period (fiscal month) Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) Maximum Number of Shares (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans or Programs (3) October 30, 2022 through November 26, 2022 — $ — — $ 232,184,768 November 27, 2022 through December 31, 2022 1,444 18.86 — 232,184,768 January 1, 2023 through January 28, 2023 — — — 232,184,768 Total 1,444 — — 232,184,768 (1) An aggregate of 1,444 shares of A&F’s Common Stock purchased during the thirteen weeks ended January 28, 2023 were withheld for tax payments due upon the vesting of employee restricted stock units and exercise of employee stock appreciation rights. (2) On November 23, 2021, we announced that the Board of Directors approved a new $500 million share repurchase authorization, replacing the prior 2021 share repurchase authorization of 10.0 million shares, which had approximately 3.9 million shares remaining available (3) The number shown represents, as of the end of each period, the approximate dollar value of Common Stock that may yet be purchased under A&F’s publicly announced stock repurchase authorization described in footnote 2 above. The shares may be purchased, from time to time, depending on business and market conditions. Dividends In May 2020, the Company announced that it had suspended its dividend program in order to preserve liquidity and maintain financial flexibility in light of the COVID-19 pandemic. The Company’s dividend program remains suspended. The Company may in the future review its dividend program to determine, in light of facts and circumstances at that time, whether and when to reinstate. Any dividends are declared at the discretion of the Board of Directors. The Board of Directors reviews and establishes a dividend amount, if at all, based on A&F’s financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors and any restrictions under the Company’s agreements related to the Senior Secured Notes and the ABL Facility. There can be no assurance that the Company will pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends. Item 6. [Reserved] Abercrombie & Fitch Co. 26 2022 Form 10-K Table of Contents Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) generally discusses our results of operations for Fiscal 2022 and Fiscal 2021 and provides comparisons between such fiscal years. For discussion and comparison of Fiscal 2021 and Fiscal 2020, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for Fiscal 2021, filed with the SEC on March 28, 2022. This MD&A should be read together with the Company’s audited Consolidated Financial Statements and notes thereto included in this Annual Report on Form 10-K in “ ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA , ” to which all references to Notes in MD&A are made. INTRODUCTION MD&A is provided as a supplement to the accompanying Consolidated Financial Statements and notes thereto to help provide an understanding of the Company’s results of operations, financial condition, and liquidity. MD&A is organized as follows: • Overview . A general description of the Company’s business and certain segment information, and an overview of key performance indicators reviewed by management in assessing the Company’s results. • Current Trends and Outlook . A discussion of the Company’s long-term plans for growth and a summary of the Company’s performance over recent years, primarily Fiscal 2022 and Fiscal 2021. • Results of Operations . An analysis of certain components of the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income for Fiscal 2022 as compared to Fiscal 2021. • Liquidity and Capital Resources . A discussion of the Company’s financial condition, changes in financial condition and liquidity as of January 28, 2023, which includes (i) an analysis of changes in cash flows for Fiscal 2022 as compared to Fiscal 2021, (ii) an analysis of liquidity, including availability under the Company’s credit facility, and outstanding debt and covenant compliance and (iii) a summary of contractual and other obligations as of January 28, 2023. • Recent Accounting Pronouncements . The recent accounting pronouncements the Company has adopted or is currently evaluating, including the dates of adoption or expected dates of adoption, as applicable, and anticipated effects on the Company’s audited Consolidated Financial Statements, are included in Note 2 “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES .” • Critical Accounting Estimates . A discussion of the accounting estimates considered to be important to the Company’s results of operations and financial condition, which typically require significant judgment and estimation on the part of the Company’s management in their application. • Non-GAAP Financial Measures . MD&A provides a discussion of certain financial measures that have been determined to not be presented in accordance with accounting principles generally accepted in the U.S. (“GAAP”). This section includes certain reconciliations between GAAP and non-GAAP financial measures and additional details on non-GAAP financial measures, including information as to why the Company believes the non-GAAP financial measures provided within MD&A are useful to investors. Abercrombie & Fitch Co. 27 2022 Form 10-K Table of Contents OVERVIEW Business Summary The Company is a global, digitally-led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. The Company’s two brand-based operating segments are Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These five brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company operates primarily in North America, Europe, Middle East and Asia. The Company’s fiscal year ends on the Saturday closest to January 31. All references herein to the Company’s fiscal years are as follows: Fiscal year Year ended/ ending Number of weeks Fiscal 2020 January 30, 2021 52 Fiscal 2021 January 29, 2022 52 Fiscal 2022 January 28, 2023 52 Fiscal 2023 February 3, 2024 53 Seasonality Due to the seasonal nature of the retail apparel industry, the results of operations for any interim period are not necessarily indicative of the results expected for the full fiscal year and the Company could experience significant fluctuations in certain asset and liability accounts. The Company experiences its greatest sales activity during Fall, due to back-to-school and holiday sales periods, respectively. Key Performance Indicators The following measurements are among the key performance indicators reviewed by the Company’s management in assessing the Company’s results: • Changes in net sales and comparable sales; • Gross profit and gross profit rate; • Cost of sales, exclusive of depreciation and amortization, as a percentage of net sales; • Stores and distribution expense as a percentage of net sales; • Marketing, general and administrative expense as a percentage of net sales; • Operating income and operating income as a percentage of net sales (“operating margin”); • Net income and net income attributable to A&F; • Cash flow and liquidity measures, such as the Company’s working capital, operating cash flow, and free cash flow; • Inventory metrics, such as inventory turnover; • Return on invested capital and return on equity; • Store metrics, such as net sales per gross square foot, and store four-wall operating margins; • Digital and omnichannel metrics, such as total shipping expense as a percentage of digital sales, and certain metrics related to our purchase-online-pickup-in-store and order-in-store programs; • Transactional metrics, such as traffic and conversion, performance across key product categories, average unit retail (“AUR’), average unit cost (“AUC”), average units per transaction and average transaction values, return rates; and • Customer-centric metrics such as customer satisfaction, customer retention and acquisition, and certain metrics related to the loyalty programs. While not all of these metrics are disclosed publicly by the Company due to the proprietary nature of the information, the Company discusses many of these metrics within this MD&A. Abercrombie & Fitch Co. 28 2022 Form 10-K Table of Contents CURRENT TRENDS AND OUTLOOK Focus Areas for Fiscal 2023 The Company remains committed to, and confident in, its long-term vision of being a digitally-led global omnichannel apparel retailer and continues to evaluate opportunities to make progress toward initiatives that support this vision. During the second quarter of Fiscal 2022, the Company announced its Always Forward Plan, which outlines the Company’s long-term strategy and goals, including growing shareholder value. The Always Forward Plan is anchored on three strategic growth principles, which are t • Execute focused brand growth plans; • Accelerate an enterprise-wide digital revolution; and • Operate with financial discipline. The following focus areas for Fiscal 2023 serve as a framework for the Company achieving sustainable growth and progressing toward the Always Forward Pl • Execute brand growth plans • Drive Abercrombie brands through marketing and store investment; • Optimize the Hollister product and brand voice to enable second half growth; and • Support Gilly Hicks growth with an evolved assortment mix • Accelerate an enterprise-wide digital revolution • Complete current phase of our modernization efforts around key data platforms; • Continue to progress on our multi-year ERP transformation and cloud migration journey; and • Improve our digital and app experience across key parts of the customer journey • Operate with financial discipline • Maintain appropriately lean inventory levels that put Abercrombie and Hollister in a position to chase inventory throughout the year; and • Properly balance investments, inflation and efficiency efforts to improve profitability Supply Chain Disruptions, Impact of Inflation and COVID-19 The current economic environment remained challenging in Fiscal 2022. The COVID-19 pandemic and its effects on the global economy continued to impact the Company’s operations in Fiscal 2022, including through temporary store closures. While trends in the severity of new cases of COVID-19 in the U.S. improved throughout Fiscal 2022, caseloads have periodically increased in certain global regions, most notably, in the APAC region in conjunction with the easing of strict lockdowns and zero-tolerance policy shutdowns in China. In addition, while the direct impacts of the COVID-19 pandemic have shown signs of abatement, the Company has experienced various other adverse impacts in the current economic environment, including supply chain disruptions, inflationary pressures including higher freight and labor costs, labor shortages, and weak store traffic. During the latter half of Fiscal 2021, the Company increased its air freight usage in response to inventory delays imposed by temporary factory closures in Vietnam. This disruption and the associated increased costs adversely impacted the Company through Fiscal 2022. To mitigate supply chain constraints and higher freight rates, the Company took certain mitigating actions in early Fiscal 2022 that included scheduling earlier inventory receipts to allow for longer lead times, expanding its number of freight vendors, and reducing air freight usage where appropriate. Freight costs began to stabilize in the latter half of Fiscal 2022 compared with the elevated air freight rates and usage in 2021. While freight costs are stabilizing and supply chain constraints are waning, further mitigating actions may be needed in Fiscal 2023, particularly if supply chain constraints and/or transportation delays begin to reappear. The Company has also experienced significant inflationary pressures with respect to labor, cotton and other raw materials and other costs. Inflation can have a long-term impact on the Company because increasing costs may impact its ability to maintain satisfactory margins. The Company may be unsuccessful in passing these increased costs on to the customer through higher AUR. Furthermore, increases in inflation may not be matched by growth in consumer income, which also could have a negative impact on discretionary spending. In periods of perceived or actual unfavorable economic conditions, consumers may reallocate available discretionary spending, which may adversely impact demand for our products. The adverse consequences of the pandemic and of the current economic environment continue to impact the Company and may persist for some time. The Company will continue to assess impacts on its operations and financial condition, and will respond as it deems appropriate. For further information about how changes in global economic and financial conditions as well as continued impacts from COVID-19 could impact our operations, refer to  “ ITEM 1A. RISK FACTORS ,” of this Annual Report on Form 10-K. Abercrombie & Fitch Co. 29 2022 Form 10-K Table of Contents Inflation Reduction Act of 2022 On August 16, 2022, the Inflation Reduction Act was signed into law, with tax provisions primarily focused on implementing a 15% corporate minimum tax on global adjusted financial statement income, expected to become applicable to the Company beginning in Fiscal 2023, and a 1% excise tax on share repurchases in tax years beginning after December 31, 2022. The Company does not currently expect that the Inflation Reduction Act will have a material impact on its income taxes. Global Store Network Optimization The Company has a goal of opening smaller, omni-enabled stores that cater to local customers. The Company continues to use data to inform its focus on aligning store square footage with digital penetration and the Company delivered new store experiences across brands during Fiscal 2022 and Fiscal 2021. Details related to these new store experiences fol Type of new store experience Fiscal 2022 Fiscal 2021 New stores 59 38 Remodels 1 2 Right-sizes 8 5 Total 68 45 For the first time in more than a decade, the Company was a net store opener for the year. During Fiscal 2022, the Company opened 59 new stores, while closing 26 stores. Future closures could be completed through natural lease expirations, while certain other leases include early termination options that can be exercised under specific conditions. The Company may also elect to exit or modify other leases, and could incur charges related to these actions. The actions taken in Fiscal 2022, combined with ongoing digital sales growth, are expected to continue to transform the Company's operating model and position the Company for the future. Additional details related to store count and gross square footage fol Hollister (1) Abercrombie (2) Total Company (3) United States International United States International United States International Total Number of sto January 29, 2022 351 154 173 51 524 205 729 New 33 5 13 8 46 13 59 Closed (4) (10) (6) (6) (10) (16) (26) January 28, 2023 380 149 180 53 560 202 762 Gross square footage (in thousands) : January 29, 2022 2,312 1,212 1,161 367 3,473 1,579 5,052 January 28, 2023 2,425 1,154 1,152 337 3,577 1,491 5,068 (1) Hollister includes the Company’s Hollister and Gilly Hicks brands. Locations with Gilly Hicks carveouts within Hollister stores are represented as a single store count. Excludes 12 and 9 international franchise stores as of January 28, 2023 and January 29, 2022, respectively. Excludes 16 Company-operated temporary stores as of January 28, 2023 and 14 Company-operated temporary stores as of January 29, 2022. (2) Abercrombie includes the Company’s Abercrombie & Fitch and abercrombie kids brands. Locations with abercrombie kids carveouts within Abercrombie & Fitch stores are represented as a single store count. Excludes 23 international franchise stores as of January 28, 2023 and 14 international franchise stores as of January 29, 2022. Excludes three Company-operated temporary stores as of January 28, 2023 and five Company-operated temporary stores as of January 29, 2022. (3) This store count excludes one international third-party operated multi-brand outlet store as of January 28, 2023. Impact of Global Events and Uncertainty As a global multi-brand omnichannel specialty retailer, with operations in North America, Europe and Asia, among other regions management is mindful of macroeconomic risks, global challenges and the changing global geopolitical environment, including the ongoing conflict in Ukraine, which could adversely impact certain areas of the business. As a result management continues to monitor global events. The Company continues to assess the potential impacts that these events and similar events may have on the business in future periods and continues to develop and update contingency plans to assist in mitigating potential impacts. It is possible that the Company’s preparations for such events are not adequate to mitigate their impact, and that these events could further adversely affect its business and results of operations. For a discussion of material risks that have the potential to cause actual results to differ materially from expectations, refer to “ ITEM 1A. RISK FACTORS ,” included in this Annual Report on Form 10-K. Abercrombie & Fitch Co. 30 2022 Form 10-K Table of Contents Summary of Results A summary of results for Fiscal 2022 and Fiscal 2021 follows: GAAP Non-GAAP (1) (in thousands, except change in net sales, gross profit rate, operating income margin and per share amounts) Fiscal 2022 Fiscal 2021 Fiscal 2022 Fiscal 2021 Net sales $ 3,697,751 $ 3,712,768 Change in net sales from the prior fiscal year — % 19 % Gross profit rate (2) 56.9 % 62.3 % Operating income $ 92,648 $ 343,084 $ 106,679 $ 355,184 Operating income margin 2.5 % 9.2 % 2.9 % 9.6 % Net income attributable to A&F (3) $ 2,816 $ 263,010 $ 13,045 $ 272,689 Net income per diluted share attributable to A&F (3) $ 0.05 $ 4.20 $ 0.25 $ 4.35 (1) Refer to “ RESULTS OF OPERATIONS ” for details on excluded items. A reconciliation of each non-GAAP financial measure presented in this Annual Report on Form 10-K to the most directly comparable financial measure calculated in accordance with GAAP, as well as a discussion as to why the Company believes that these non-GAAP financial measures are useful to investors, is provided below under “ NON-GAAP FINANCIAL MEASURES .” (2) Gross profit is derived from cost of sales, exclusive of depreciation and amortization. (3) Fiscal 2021 results include $42.5 million of tax benefits due to the release of valuation allowances as a result of the improvement seen in business conditions. Refer to Note 11, “ INCOME TAXES .” Certain components of the Company’s Consolidated Balance Sheets as of January 28, 2023 and January 29, 2022 and Consolidated Statements of Cash Flows for Fiscal 2022 and Fiscal 2021 were as follows: (in thousands) Balance Sheets data January 28, 2023 January 29, 2022 Cash and equivalents $ 517,602 $ 823,139 Gross borrowings outstanding, carrying amount 299,730 307,730 Inventories 505,621 525,864 Statements of Cash Flows data Fiscal 2022 Fiscal 2021 Net cash (used for) provided by operating activities $ (2,343) $ 277,782 Net cash used for investing activities (140,675) (96,979) Net cash used for financing activities (155,329) (446,898) Abercrombie & Fitch Co. 31 2022 Form 10-K Table of Contents RESULTS OF OPERATIONS The estimated basis point (“BPS”) changes disclosed throughout this Results of Operations have been rounded based on the change in the percentage of net sales. Net Sales The Company’s net sales by operating segment for Fiscal 2022 and Fiscal 2021 were as follows: (in thousands) Fiscal 2022 Fiscal 2021 $ Change % Change Hollister $ 1,962,885 $ 2,147,979 $ (185,094) (9)% Abercrombie 1,734,866 1,564,789 170,077 11% Total Company $ 3,697,751 $ 3,712,768 $ (15,017) 0% Net sales by geographic area are presented by attributing revenues on the basis of the country in which the merchandise was sold for in-store purchases and the shipping location provided by customers for digital orders. The Company’s net sales by geographic area for Fiscal 2022 and Fiscal 2021 were as follows: (in thousands) Fiscal 2022 Fiscal 2021 $ Change % Change United States $ 2,758,294 $ 2,652,158 $ 106,136 4% EMEA 665,828 755,072 (89,244) (12)% APAC 122,367 171,701 (49,334) (29)% Other (1) 151,262 133,837 17,425 13% International $ 939,457 $ 1,060,610 $ (121,153) (11)% Total Company $ 3,697,751 $ 3,712,768 $ (15,017) 0% (1) Other includes all sales that do not fall within the United States, EMEA, or APAC regions, which are derived primarily in Canada. For Fiscal 2022, net sales were essentially flat as compared to Fiscal 2021, with a year-over year increase in AUR, offset by the adverse impact of foreign currency exchange rates. While sales in the United States grew 4% compared to Fiscal 2021, this was more than offset by an 11% decline in International, with continued softness in the APAC and EMEA regions. Cost of Sales, Exclusive of Depreciation and Amortization Fiscal 2022 Fiscal 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Cost of sales, exclusive of depreciation and amortization $ 1,593,213 43.1% $ 1,400,773 37.7% 540 For Fiscal 2022, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales increased approximately 540 basis points as compared to Fiscal 2021. The year-over-year increase was primarily driven by 520 basis points of higher freight and raw material costs and 40 basis points from the adverse impact of exchange rates, partially offset by higher average unit retail. Gross Profit, Exclusive of Depreciation and Amortization Fiscal 2022 Fiscal 2021 % of Net Sales % of Net Sales BPS Change Gross profit, exclusive of depreciation and amortization $ 2,104,538 56.9% $ 2,311,995 62.3% (540) Abercrombie & Fitch Co. 32 2022 Form 10-K Table of Contents Stores and Distribution Expense Fiscal 2022 Fiscal 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Stores and distribution expense $ 1,482,931 40.1% $ 1,428,323 38.5% 160 For Fiscal 2022, stores and distribution expense increased 4% as compared to Fiscal 2021, primarily driven by a $40 million increase in digital fulfillment expense, reflecting higher shipping and handling and other fulfillment expenses, including costs associated with a new third-party fulfillment facility in the United States. Marketing, General and Administrative Expense Fiscal 2022 Fiscal 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Marketing, general and administrative expense $ 517,602 14.0% $ 536,815 14.5% (50) For Fiscal 2022, marketing, general and administrative expense decreased 4% as compared to Fiscal 2021, primarily driven by a $26 million reduction in marketing and advertising expenses, as well as $26 million in lower incentive-based compensation. These amounts were partially offset by $23 million in higher payroll and $6 million in higher consulting and information technology expense. Asset Impairment Fiscal 2022 Fiscal 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Asset impairment $ 14,031 0.4% $ 12,100 0.3% 10 Excluded items: Asset impairment charges (1) (14,031) (0.4)% (12,100) (0.3)% (10) Adjusted non-GAAP asset impairment, exclusive of flagship store exit charges $ — 0.0% $ — 0.0% — (1) Refer to “ NON-GAAP FINANCIAL MEASURES ,” for further details. Refer to Note 8, “ ASSET IMPAIRMENT ,” for further discussion. Other Operating Income, Net Fiscal 2022 Fiscal 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Other operating income, net $ 2,674 0.1% $ 8,327 0.2% (10) For Fiscal 2022, other operating income, net, decreased as compared to Fiscal 2021, primarily due to $5.9 million foreign currency losses recognized in Fiscal 2022. Operating Income Fiscal 2022 Fiscal 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Operating income $ 92,648 2.5% $ 343,084 9.2% (670) Excluded items: Asset impairment charges (1) 14,031 0.4% 12,100 0.3% 10 Adjusted non-GAAP operating income $ 106,679 2.9% $ 355,184 9.6% (670) (1) Refer to “ NON-GAAP FINANCIAL MEASURES ,” for further details. Abercrombie & Fitch Co. 33 2022 Form 10-K Table of Contents Interest Expense, Net Fiscal 2022 Fiscal 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Interest expense $ 30,236 0.8% $ 37,958 1.0% (20) Interest income (4,604) (0.1)% (3,848) (0.1)% — Interest expense, net $ 25,632 0.7% $ 34,110 0.9% (20) For Fiscal 2022, interest expense, net, decreased 25% primarily driven by lower interest paid on a lower average outstanding balance in Fiscal 2022 resulting from current year and prior year debt repurchases, as compared to Fiscal 2021. Income Tax Expense Fiscal 2022 Fiscal 2021 (in thousands, except ratios) Effective Tax Rate Effective Tax Rate Income tax expense $ 56,631 84.5% $ 38,908 12.6% Excluded items: Tax effect of pre-tax excluded items (1) 3,802 2,421 Adjusted non-GAAP income tax expense $ 60,433 74.6% $ 41,329 12.9% (1) Refer to “ Operating Income ” for details of pre-tax excluded items. The tax effect of pre-tax excluded items is the difference between the tax provision calculation on a GAAP basis and an adjusted non-GAAP basis. Refer to “NON-GAAP FINANCIAL MEASURES” for further details. During Fiscal 2022, the Company did not recognize income tax benefits on $136.5 million of pre-tax losses, primarily in Switzerland, resulting in adverse tax impacts of $20.0 million. The primary driver relates to lower sales volume, higher AUC and overall expense deleverage within the APAC and EMEA regions. During Fiscal 2021, as a result of the improvement seen in business conditions, the Company recognized $42.5 million of tax benefits due to the release of valuation allowances, primarily in the U.S. and Germany, and a discrete tax benefit of $3.9 million due to a rate change in the U.K. The Company did not recognize income tax benefits on $25.3 million of pre-tax losses generated in Fiscal 2021, primarily in Switzerland, resulting in adverse tax impacts of $4.6 million Refer to Note 11, “ INCOME TAXES ,” for further discussion on factors that impacted the effective tax rate in Fiscal 2022 and Fiscal 2021. Net Income Attributable to A&F Fiscal 2022 Fiscal 2021 (in thousands) % of Net Sales % of Net Sales BPS Change Net income attributable to A&F $ 2,816 0.1% $ 263,010 7.1% (700) Excluded items, net of tax (1) 10,229 0.3% 9,679 0.3% — Adjusted non-GAAP net income attributable to A&F (2) $ 13,045 0.4% $ 272,689 7.3% (690) (1) Excludes items presented above under “ Operating Income , ” and “ Income Tax Expense . ” Net Income Per Diluted Share Attributable to A&F Fiscal 2022 Fiscal 2021 $ Change Net income per diluted share attributable to A&F $ 0.05 $ 4.20 $(4.15) Excluded items, net of tax (1) 0.20 0.15 0.05 Adjusted non-GAAP net income per diluted share attributable to A&F $ 0.25 $ 4.35 $(4.10) Impact from changes in foreign currency exchange rates — (0.36) 0.36 Adjusted non-GAAP net income per diluted share attributable to A&F on a constant currency basis (2) $ 0.25 $ 3.99 $(3.74) (1) Excludes items presented above under “ Operating Income , ” and “ Income Tax Expense . ” (2) Refer to “ NON-GAAP FINANCIAL MEASURES ,” for further details. Abercrombie & Fitch Co. 34 2022 Form 10-K Table of Contents LIQUIDITY AND CAPITAL RESOURCES Overview The Company’s capital allocation strategy, priorities and investments are reviewed by the Board of Directors considering both liquidity and valuation factors. The Company believes that it will have adequate liquidity to fund operating activities over the next twelve months. The Company monitors financing market conditions and may in the future determine whether and when to amend, modify, or restructure its ABL Facility and/or Senior Secured Notes. For a discussion of the Company’s share repurchase activity and suspended dividend program, please see below under “Share repurchases and dividends.” Primary Sources and Uses of Cash The Company’s business has two principal selling seaso Spring and Fall. The Company experiences its greatest sales activity during Fall, due to back-to-school and holiday sales periods. The Company relies on excess operating cash flows, which are largely generated in Fall, to fund operations throughout the year and to reinvest in the business to support future growth. The Company also has the ABL Facility available as a source of additional funding, which is described further below under “ Credit Facility and Senior Secured Notes” . Over the next twelve months, the Company expects its primary cash requirements to be directed towards prioritizing investments in the business, including the modernization of our retail merchandising systems, and continuing to fund operating activities, including the acquisition of inventory, and obligations related to compensation, marketing, leases and any lease buyouts or modifications it may exercise, taxes and other operating activities. The Company evaluates opportunities for investments in the business that are in line with initiatives that position the business for sustainable long-term growth that align with its strategic pillars as described within “ ITEM 1. BUSINESS - STRATEGY AND KEY BUSINESS PRIORITIES ”. Examples of potential investment opportunities include, but are not limited to, new store experiences , and continued investments in its digital and omnichannel initiatives. Historically, the Company has utilized cash flow generated from operations to fund any discretionary capital expenditures, which have been prioritized towards new store experiences, as well as digital and omnichannel investments, information technology, and other projects. For Fiscal 2022, the Company used $164.6 million towards capital expenditures, up from $97.0 million of capital expenditures in Fiscal 2021. Total capital expenditures for Fiscal 2023 are expected to be approximately $160 million. Share Repurchases and Dividends In November 2021, the Board of Directors approved a $500 million share repurchase authorization, replacing the prior 2021 share repurchase authorization of 10.0 million shares, which had approximately 3.9 million shares remaining available. During Fiscal 2022, the Company repurchased 4.8 million shares for approximately $126 million. Historically, the Company has repurchased shares of its Common Stock, from time to time, dependent on market and business conditions, with the objectives of returning excess cash to shareholders and offsetting dilution from issuances of Common Stock associated with the exercise of employee stock appreciation rights and the vesting of restricted stock units. Shares may be repurchased in the open market, including pursuant to any trading plans established in accordance with Rule 10b5-1 of the Exchange Act, through privately negotiated transactions or other transactions or by a combination of such methods. Refer to “ ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ” of this Annual Report on Form 10-K for the amount remaining available for repurchase under the Company’s publicly announced stock repurchase authorization. In May 2020, the Company announced that it had suspended its dividend program in order to preserve liquidity and maintain financial flexibility in light of the COVID-19 pandemic. The Company may in the future review its dividend program to determine, in light of facts and circumstances at that time, whether and when to reinstate. Any dividends are declared at the discretion of the Board of Directors. The Board of Directors reviews and establishes a dividend amount, if at all, based on A&F’s financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors, including any restrictions under the Company’s agreements related to the Senior Secured Notes and the ABL Facility. There can be no assurance that the Company will declare and pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends. Abercrombie & Fitch Co. 35 2022 Form 10-K Table of Contents Credit Facility and Senior Secured Notes During Fiscal 2022, A&F Management purchased $8.0 million of outstanding Senior Secured Notes and incurred a $0.1 million gain on extinguishment of debt, recognized in interest expense, net on the Consolidated Statements of Operations and Comprehensive (Loss) Income . As of January 28, 2023, the Company had $299.7 million of gross indebtedness outstanding under the Senior Secured Notes. In addition, the Amended and Restated Credit Agreement continues to provide for the ABL Facility, which is a senior secured asset-based revolving credit facility of up to $400 million. On March 15, 2023, the Company entered into the First Amendment to the Amended and Restated Credit Agreement to eliminate LIBO rate based loans and to use the current market definitions with respect to the Secured Overnight Financing Rate (“SOFR”)”, as well as to make other conforming changes. The Company did not have any borrowings outstanding under the ABL Facility as of January 28, 2023 or as of January 29, 2022. Details regarding the remaining borrowing capacity under the ABL Facility as of January 28, 2023 fol (in thousands) January 28, 2023 Loan cap $ 387,425 L Outstanding stand-by letters of credit (602) Borrowing capacity 386,823 L Minimum excess availability (1) (38,743) Borrowing capacity available $ 348,080 (1) The Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility. Refer to Note 12, “ BORROWINGS ,” for additional information. Income Taxes The Company’s earnings and profits from its foreign subsidiaries could be repatriated to the U.S., without incurring additional U.S. federal income tax. The Company determined that the balance of the Company’s undistributed earnings and profits from its foreign subsidiaries as of February 2, 2019 are considered indefinitely reinvested outside of the U.S., and if these funds were to be repatriated to the U.S., the Company would expect to incur an insignificant amount of state income taxes and foreign withholding taxes. The Company accrues for both state income taxes and foreign withholding taxes with respect to earnings and profits earned after February 2, 2019, in such a manner that these funds may be repatriated without incurring additional tax expense. As of January 28, 2023, $226.5 million of the Company’s $517.6 million of cash and equivalents were held by foreign affiliates. Refer to Note 11, “ INCOME TAXES ,” for additional details regarding the impact certain events related to the Company’s income taxes had on the Company’s Consolidated Financial Statements. Analysis of Cash Flows The table below provides certain components of the Company’s Consolidated Statements of Cash Flows for Fiscal 2022 and Fiscal 2021: (in thousands) Fiscal 2022 Fiscal 2021 Cash and equivalents, and restricted cash and equivalents, beginning of period $ 834,368 $ 1,124,157 Net cash (used for) provided by operating activities (2,343) 277,782 Net cash used for investing activities (140,675) (96,979) Net cash used for financing activities (155,329) (446,898) Effects of foreign currency exchange rate changes on cash (8,452) (23,694) Net decrease in cash and equivalents, and restricted cash and equivalents $ (306,799) $ (289,789) Cash and equivalents, and restricted cash and equivalents, end of period $ 527,569 $ 834,368 Operating activities - For Fiscal 2022 net cash used for operating activities included the acquisition of inventory and increased payments to vendors, including additional rent payments made during the period due to fiscal calendar shifting relative to monthly rent due dates. Investing activities - For Fiscal 2022, net cash used for investing activities was primarily attributable to capital expenditures of $164.6 million, partially offset by the proceeds from the withdrawal of $12.0 million of excess funds from Rabbi Trust assets and the sale of property and equipment of $11.9 million, as compared to net cash used for investing activities of $97.0 million in Fiscal 2021, primarily attributable to capital expenditures. Abercrombie & Fitch Co. 36 2022 Form 10-K Table of Contents Financing activities - For Fiscal 2022, net cash used for financing activities primarily consisted of the repurchase of approximately 4.8 million shares of Common Stock in the open market with a market value of approximately $126 million, as well as the purchase of $8.0 million of outstanding Senior Secured Notes at a slight discount to par. For Fiscal 2021, net cash used for financing activities primarily consisted of the repurchase of approximately 10.2 million shares of Common Stock in the open market with a market value of approximately $377 million. In addition, the Company purchased $42.3 million of its outstanding Senior Secured Notes at a premium of $4.7 million. Contractual Obligations As of January 28, 2023, the Company’s contractual obligations were as follows: Payments due by period (in thousands) Total Less than 1 year 1-3 years 3-5 years More than 5 years Operating lease obligations (1) $ 1,084,674 $ 263,666 $ 379,625 $ 270,251 $ 171,132 Purchase obligations (2) 233,623 194,248 26,353 4,222 8,800 Long-term debt obligations (3) 299,730 — 299,730 — — Other obligations (4) 158,992 50,053 61,320 20,745 26,874 Total $ 1,777,019 $ 507,967 $ 767,028 $ 295,218 $ 206,806 (1) Operating lease obligations consist of the Company’s future undiscounted operating lease payments, including future fixed lease payments associated with closed flagship stores. Operating lease obligations do not include variable payments related to both lease and nonlease components, such as contingent rent payments made by the Company based on performance, and payments related to taxes, insurance, and maintenance costs. Total variable lease cost was $150.9 million in Fiscal 2022. Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Leases , ” and Note 7, “ LEASES ,” for further discussion. (2) Purchase obligations primarily consist of non-cancelable purchase orders for merchandise to be delivered during Fiscal 2023 and commitments for fabric expected to be used during upcoming seasons. In addition, purchase obligations include agreements to purchase goods or services, including, but not limited to, information technology, digital and marketing contracts, as well as estimated obligations related to the Company’s 13-year, 100% renewable energy supply agreement for its global home office and Company-owned distribution centers. (3) Long-term debt obligations consist of principal payments under the Senior Secured Notes. Refer to Note 12, “ BORROWINGS ,” for further discussion. (4) Other obligations consists o interest payments related to the Senior Secured Notes assuming normally scheduled principal payments; estimated asset retirement obligations; known and scheduled payments related to the Company’s deferred compensation and supplemental retirement plans; tax payments associated with the provisional, mandatory one-time deemed repatriation tax on accumulated foreign earnings, net payable over eight years pursuant to the The Tax Cuts and Jobs Act; and minimum contractual obligations related to leases signed but not yet commenced, primarily related to the Company’s stores. Refer to Note 7, “ LEASES ,” Note 11, “ INCOME TAXES ,” Note 12, “ BORROWINGS ,” and Note 16, “ SAVINGS AND RETIREMENT PLANS ,” for further discussion. Due to uncertainty as to the amounts and timing of future payments, tax related to uncertain tax positions, including accrued interest and penalties, of $2.5 million as of January 28, 2023 is excluded from the contractual obligations table. Deferred taxes are also excluded in the contractual obligations table. For further discussion, refer to Note 11, “ INCOME TAXES .” As of January 28, 2023, the Company had recorded $3.8 million and $41.3 million of obligations related to its deferred compensation and supplemental retirement plans in accrued expenses and other liabilities on the Consolidated Balance Sheet, respectively. Amounts payable with known payment dates of $15.4 million have been classified in the contractual obligations table based on those scheduled payment dates. However, it is not reasonably practicable to estimate the timing and amounts for the remainder of these obligations, therefore, those amounts have been excluded in the contractual obligations table. A&F had historically paid quarterly dividends on Common Stock prior to the suspension of the dividend program in May 2020. Because the dividend program remains suspended and the payment of future dividends is subject to determination and approval by the Board of Directors, there are no amounts included in the contractual obligations table related to dividends. RECENT ACCOUNTING PRONOUNCEMENTS The Company describes its significant accounting policies in Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Recent accounting pronouncements .” The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements. Abercrombie & Fitch Co. 37 2022 Form 10-K Table of Contents CRITICAL ACCOUNTING ESTIMATES The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts. Since actual results may differ from those estimates, the Company revises its estimates and assumptions as new information becomes available. Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ,” describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. The estimates and assumptions discussed below include those that the Company believes are the most critical to the portrayal of the Company’s financial condition and results of operations. Policy Effect if Actual Results Differ from Assumptions Inventory Valuation The Company reviews inventories on a quarterly basis. The Company reduces the inventory valuation when the carrying cost of specific inventory items on hand exceeds the amount expected to be realized from the ultimate sale or disposal of the goods, through a lower of cost and net realizable value (“LCNRV”) adjustment. The LCNRV adjustment reduces inventory to its net realizable value based on the Company’s consideration of multiple factors and assumptions, expected sell-off activity, composition and aging of inventory, historical recoverability experience and risk of obsolescence from changes in economic conditions or customer preferences. The Company does not expect material changes to the underlying assumptions used to measure the LCNRV estimate as of January 28, 2023. However, actual results could vary from estimates and could significantly impact the ending inventory valuation at cost, as well as gross profit. An increase or decrease in the LCNRV adjustment of 10% would have affected pre-tax loss by approximately $3.6 million for Fiscal 2022. Income Taxes The provision for income taxes is determined using the asset and liability approach. Tax laws often require items to be included in tax filings at different times than the items are being reflected in the financial statements. A current liability is recognized for the estimated taxes payable for the current year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. Deferred taxes are adjusted for enacted changes in tax rates and tax laws. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The Company does not expect material changes in the judgments, assumptions or interpretations used to calculate the tax provision for Fiscal 2023. However, changes in these judgments, assumptions or interpretations may occur and should those changes be significant, they could have a material impact on the Company’s income tax provision. As of the end of Fiscal 2022 , the Company had recorded valuation allowances of $130.6 million Long-lived Assets Long-lived assets, primarily operating lease right-of-use assets, leasehold improvements, furniture, fixtures and equipment, are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset group might not be recoverable. These include, but are not limited to, material declines in operational performance, a history of losses, an expectation of future losses, adverse market conditions and store closure or relocation decisions. On at least a quarterly basis, the Company reviews for indicators of impairment at the individual store level, the lowest level for which cash flows are identifiable. Stores that display an indicator of impairment are subjected to an impairment assessment. The Company’s impairment assessment requires management to make assumptions and judgments related, but not limited, to management’s expectations for future operations and projected cash flows. The key assumption used in the Company’s undiscounted future store cash flow models is estimated sales growth rate. An impairment loss may be recognized when these undiscounted future cash flows are less than the carrying amount of the asset group. In the circumstance of impairment, any loss would be measured as the excess of the carrying amount of the asset group over its fair value. Fair value of the Company’s store-related assets is determined at the individual store level based on the highest and best use of the asset group. The key assumptions used in the Company’s fair value analysis are estimated sales growth and comparable market rents. Store assets that were tested for impairment as of January 28, 2023 and not impaired, had long-lived assets with a net book value of $69.2 million, which included $54.5 million of operating lease right-of-use assets as of January 28, 2023. Store assets that were previously impaired as of January 28, 2023, had a remaining net book value of $68.4 million, which included $62.3 million of operating lease right-of-use assets, as of January 28, 2023. If actual results are not consistent with the estimates and assumptions used in assessing impairment or measuring impairment losses, there may be a material impact on the Company’s financial condition or results of operation. Abercrombie & Fitch Co. 38 2022 Form 10-K Table of Contents NON-GAAP FINANCIAL MEASURES This Annual Report on Form 10-K includes discussion of certain financial measures on both a GAAP and a non-GAAP basis. The Company believes that each of the non-GAAP financial measures presented in this “ ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ” is useful to investors as it provides a meaningful basis to evaluate the Company’s operating performance excluding the effect of certain items that the Company believes do not reflect its future operating outlook, such as certain asset impairment charges, therefore supplementing investors’ understanding of comparability of operations across periods. Management used these non-GAAP financial measures during the periods presented to assess the Company’s performance and to develop expectations for future operating performance. These non-GAAP financial measures should be used as a supplement to, and not as an alternative to, the Company’s GAAP financial results, and may not be calculated in the same manner as similar measures presented by other companies. Excluded Items The following financial measures are disclosed on a GAAP basis and on an adjusted non-GAAP basis excluding the following items, as applicab Financial measures (1) Excluded items Asset impairment Certain asset impairment charges Operating income (loss) Certain asset impairment charges Income tax expense (2) Tax effect of pre-tax excluded items Net income (loss) and net income (loss) per share attributable to A&F (2) Pre-tax excluded items and the tax effect of pre-tax excluded items (1) Certain of these financial measures are also expressed as a percentage of net sales. (2) The tax effect of excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. Abercrombie & Fitch Co. 39 2022 Form 10-K Table of Contents Financial Information on a Constant Currency Basis The Company provides certain financial information on a constant currency basis to enhance investors’ understanding of underlying business trends and operating performance by removing the impact of foreign currency exchange rate fluctuations. Management also uses financial information on a constant currency basis to award employee performance-based compensation. The effect from foreign currency exchange rates, calculated on a constant currency basis, is determined by applying the current period’s foreign currency exchange rates to the prior year’s results and is net of the year-over-year impact from hedging. The per diluted share effect from foreign currency exchange rates is calculated using a 26% effective tax rate. A reconciliation of financial metrics on a constant currency basis to GAAP for Fiscal 2022 and Fiscal 2021 is as follows: (in thousands, except change in net sales, gross profit rate, operating margin and per share data) Net sales Fiscal 2022 Fiscal 2021 % Change GAAP $ 3,697,751 $ 3,712,768 0% Impact from changes in foreign currency exchange rates — (81,803) 2% Net sales on a constant currency basis $ 3,697,751 $ 3,630,965 2% Gross profit Fiscal 2022 Fiscal 2021 BPS Change (1) GAAP $ 2,104,538 $ 2,311,995 (540) Impact from changes in foreign currency exchange rates — (66,846) 40 Gross profit on a constant currency basis $ 2,104,538 $ 2,245,149 (490) Operating income Fiscal 2022 Fiscal 2021 BPS Change (1) GAAP $ 92,648 $ 343,084 (670) Excluded items (2) (14,031) (12,100) 0 Adjusted non-GAAP $ 106,679 $ 355,184 (670) Impact from changes in foreign currency exchange rates — (30,130) 60 Adjusted non-GAAP on a constant currency basis $ 106,679 $ 325,054 (610) Net income per diluted share attributable to A&F Fiscal 2022 Fiscal 2021 $ Change GAAP $ 0.05 $ 4.20 $(4.15) Excluded items, net of tax (2) (0.20) (0.15) (0.05) Adjusted non-GAAP $ 0.25 $ 4.35 $(4.10) Impact from changes in foreign currency exchange rates — (0.36) 0.36 Adjusted non-GAAP on a constant currency basis $ 0.25 $ 3.99 $(3.74) (1) The estimated basis point change has been rounded based on the percentage of net sales change. (2) Refer to “ RESULTS OF OPERATIONS ,” for details on excluded items. The tax effect of excluded items is calculated as the difference between the tax provision on a GAAP basis and an adjusted non-GAAP basis. Abercrombie & Fitch Co. 40 2022 Form 10-K Table of Contents Item 7A. Quantitative and Qualitative Disclosures About Market Risk INVESTMENT SECURITIES The Company maintains its cash equivalents in financial instruments, primarily money market funds and time deposits, with original maturities of three months or less. Due to the short-term nature of these instruments, changes in interest rates are not expected to materially affect the fair value of these financial instruments. Refer to Note 9, “ RABBI TRUST ASSETS ,” of the Notes to Consolidated Financial Statements included in “ ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ” of this Annual Report on Form 10-K for a discussion of the Company’s Rabbi Trust assets. INTEREST RATE RISK Prior to July 2, 2020, our exposure to market risk due to changes in interest rates related primarily to the increase or decrease in the amount of interest expense from fluctuations in the LIBO rate, or an alternate base rate associated with the ABL Facility and the Company’s prior term loan facility. On July 2, 2020, the Company issued the Senior Secured Notes due in 2025 with a 8.75% fixed interest rate per annum and repaid all outstanding borrowings under the ABL Facility and its prior term loan facility, thereby eliminating any then existing cash flow market risk due to changes in interest rates. The Senior Secured Notes are exposed to interest rate risk that is limited to changes in fair value. This analysis for Fiscal 2023 may differ from actual results due to potential changes in gross borrowings outstanding under the ABL Facility and potential changes in interest rate terms and limitations described within the associated credit agreement. In July 2017, the Financial Conduct Authority (the authority that regulates LIBO rate) announced it intended to stop compelling banks to submit rates for the calculation of LIBO rate after 2021. Certain publications of the LIBO rate were phased out at the end of 2021 and all LIBO rate publications will cease after June 30, 2023. The transition from the LIBO rate to alternative rates is not expected to have a material impact on the Company’s interest expense. On March 15, 2023, the Company entered into the First Amendment to the Amended and Restated Credit Agreement to eliminate LIBO rate based loans and to use the current market definitions with respect to the Secured Overnight Financing Rate (“SOFR”), as well as to make other conforming changes. FOREIGN CURRENCY EXCHANGE RATE RISK A&F’s international subsidiaries generally operate with functional currencies other than the U.S. Dollar. Since the Company’s Consolidated Financial Statements are presented in U.S. dollars, the Company must translate all components of these financial statements from functional currencies into U.S. dollars at exchange rates in effect during or at the end of the reporting period. The fluctuation in the value of the U.S. dollar against other currencies affects the reported amounts of revenues, expenses, assets and liabilities. The potential impact of foreign currency exchange rate fluctuations increases as international operations relative to domestic operations increase. A&F and its subsidiaries have exposure to changes in foreign currency exchange rates associated with foreign currency transactions and forecasted foreign currency transactions, including the purchase of inventory between subsidiaries and foreign-currency-denominated assets and liabilities. The Company has established a program that primarily utilizes foreign currency exchange forward contracts to partially offset the risks associated with the effects of certain foreign currency transactions and forecasted transactions. Under this program, increases or decreases in foreign currency exchange rate exposures are partially offset by gains or losses on foreign currency exchange forward contracts, to mitigate the impact of foreign currency exchange gains or losses. The Company does not use forward contracts to engage in currency speculation. Outstanding foreign currency exchange forward contracts are recorded at fair value at the end of each fiscal period. Foreign currency exchange forward contracts are sensitive to changes in foreign currency exchange rates. The Company assessed the risk of loss in fair values from the effect of a hypothetical 10% devaluation of the U.S. dollar against the exchange rates for foreign currencies under forward contracts. Such a hypothetical devaluation would decrease derivative instrument fair values by approximately $15.3 million. As the Company’s foreign currency exchange forward contracts are primarily designated as cash flow hedges of forecasted transactions, the hypothetical change in fair values would be expected to be largely offset by the net change in fair values of the underlying hedged items. Refer to Note 14, “ DERIVATIVE INSTRUMENTS ,” included in “ ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ” of this Annual Report on Form 10-K for the fair value of outstanding foreign currency exchange forward contracts included in other current assets and accrued expenses as of January 28, 2023 and January 29, 2022. For a detailed discussion of material risk factors that have the potential to cause our actual results to differ materially from our expectations, refer to “ ITEM 1A. RISK FACTORS ,” included in this Annual Report on Form 10-K. Abercrombie & Fitch Co. 41 2022 Form 10-K Table of Contents Item 8. Financial Statements and Supplementary Data Abercrombie & Fitch Co. Consolidated Statements of Operations and Comprehensive (Loss) Income (Thousands, except per share amounts) Fiscal 2022 Fiscal 2021 Fiscal 2020 Net sales $ 3,697,751 $ 3,712,768 $ 3,125,384 Cost of sales, exclusive of depreciation and amortization 1,593,213 1,400,773 1,234,179 Gross profit 2,104,538 2,311,995 1,891,205 Stores and distribution expense 1,482,931 1,428,323 1,379,948 Marketing, general and administrative expense 517,602 536,815 463,843 Asset impairment 14,031 12,100 72,937 Other operating Income, net ( 2,674 ) ( 8,327 ) ( 5,054 ) Operating income (loss) 92,648 343,084 ( 20,469 ) Interest expense, net 25,632 34,110 28,274 Income (loss) before income taxes 67,016 308,974 ( 48,743 ) Income tax expense 56,631 38,908 60,211 Net income (loss) 10,385 270,066 ( 108,954 ) L Net income attributable to noncontrolling interests 7,569 7,056 5,067 Net income (loss) attributable to A&F $ 2,816 $ 263,010 $ ( 114,021 ) Net income (loss) per share attributable to A&F Basic $ 0.06 $ 4.41 $ ( 1.82 ) Diluted $ 0.05 $ 4.20 $ ( 1.82 ) Weighted-average shares outstanding Basic 50,307 59,597 62,551 Diluted 52,327 62,636 62,551 Other comprehensive (loss) income Foreign currency translation, net of tax $ ( 11,964 ) $ ( 22,917 ) $ 12,195 Derivative financial instruments, net of tax ( 10,857 ) 10,518 ( 5,616 ) Other comprehensive (loss) income ( 22,821 ) ( 12,399 ) 6,579 Comprehensive (loss) income ( 12,436 ) 257,667 ( 102,375 ) L Comprehensive income attributable to noncontrolling interests 7,569 7,056 5,067 Comprehensive (loss) income attributable to A&F $ ( 20,005 ) $ 250,611 $ ( 107,442 ) The accompanying Notes are an integral part of these Consolidated Financial Statements. Abercrombie & Fitch Co. 42 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. Consolidated Balance Sheets (Thousands, except par value amounts) January 28, 2023 January 29, 2022 Assets Current assets: Cash and equivalents $ 517,602 $ 823,139 Receivables 104,506 69,102 Inventories 505,621 525,864 Other current assets 100,289 89,654 Total current assets 1,228,018 1,507,759 Property and equipment, net 551,585 508,336 Operating lease right-of-use assets 723,550 698,231 Other assets 209,947 225,165 Total assets $ 2,713,100 $ 2,939,491 Liabilities and stockholders’ equity Current liabiliti Accounts payable $ 258,895 $ 374,829 Accrued expenses 413,303 395,815 Short-term portion of operating lease liabilities 213,979 222,823 Income taxes payable 16,023 21,773 Total current liabilities 902,200 1,015,240 Long-term liabiliti Long-term portion of operating lease liabilities 713,361 697,264 Long-term portion of borrowings, net 296,852 303,574 Other liabilities 94,118 86,089 Total long-term liabilities 1,104,331 1,086,927 Stockholders’ equity Class A Common Stock - $ 0.01 par val 150,000 shares authorized and 103,300 shares issued for all periods presented 1,033 1,033 Paid-in capital 416,255 413,190 Retained earnings 2,368,815 2,386,156 Accumulated other comprehensive loss, net of tax (“AOCL”) ( 137,527 ) ( 114,706 ) Treasury stock, at average 54,298 and 50,315 shares at January 28, 2023 and January 29, 2022, respectively ( 1,953,735 ) ( 1,859,583 ) Total A&F stockholders’ equity 694,841 826,090 Noncontrolling interests 11,728 11,234 Total stockholders’ equity 706,569 837,324 Total liabilities and stockholders’ equity $ 2,713,100 $ 2,939,491 The accompanying Notes are an integral part of these Consolidated Financial Statements. Abercrombie & Fitch Co. 43 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. Consolidated Statements of Stockholders’ Equity (Thousands, except per share amounts) Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, February 1, 2020 62,786 $ 1,033 $ 404,983 $ 12,368 $ 2,313,745 $ ( 108,886 ) 40,514 $ ( 1,552,065 ) $ 1,071,178 Net income (loss) — — — 5,067 ( 114,021 ) — — — ( 108,954 ) Purchase of common stock ( 1,397 ) — — — — — 1,397 ( 15,172 ) ( 15,172 ) Dividends ($ 0.28 per share) — — — — ( 12,556 ) — — — ( 12,556 ) Share-based compensation issuances and exercises 1,010 — ( 22,382 ) — ( 37,698 ) — ( 1,010 ) 54,386 ( 5,694 ) Share-based compensation expense — — 18,682 — — — — — 18,682 Derivative financial instruments, net of tax — — — — — ( 5,616 ) — — ( 5,616 ) Foreign currency translation adjustments, net of tax — — — — — 12,195 — — 12,195 Distributions to noncontrolling interests, net — — — ( 4,751 ) — — — — ( 4,751 ) Balance, January 30, 2021 62,399 $ 1,033 $ 401,283 $ 12,684 $ 2,149,470 $ ( 102,307 ) 40,901 $ ( 1,512,851 ) $ 949,312 Net income — — — 7,056 263,010 — — — 270,066 Purchase of common stock ( 10,200 ) — — — — — 10,200 ( 377,290 ) ( 377,290 ) Share-based compensation issuances and exercises 786 — ( 17,397 ) — ( 26,324 ) — ( 786 ) 30,558 ( 13,163 ) Share-based compensation expense — — 29,304 — — — — — 29,304 Derivative financial instruments, net of tax — — — — — 10,518 — — 10,518 Foreign currency translation adjustments, net of tax — — — — — ( 22,917 ) — — ( 22,917 ) Distributions to noncontrolling interests, net — — — ( 8,506 ) — — — — ( 8,506 ) Balance, January 29, 2022 52,985 $ 1,033 $ 413,190 $ 11,234 $ 2,386,156 $ ( 114,706 ) 50,315 $ ( 1,859,583 ) $ 837,324 Net income — — — 7,569 2,816 — — — 10,385 Purchase of common stock ( 4,770 ) — — — — — 4,770 ( 125,775 ) ( 125,775 ) Share-based compensation issuances and exercises 787 — ( 25,930 ) — ( 20,157 ) — ( 787 ) 31,623 ( 14,464 ) Share-based compensation expense — — 28,995 — — — — — 28,995 Derivative financial instruments, net of tax — — — — — ( 10,857 ) — — ( 10,857 ) Foreign currency translation adjustments, net of tax — — — — — ( 11,964 ) — — ( 11,964 ) Distributions to noncontrolling interests, net — — — ( 7,075 ) — — — — ( 7,075 ) Balance, January 28, 2023 49,002 $ 1,033 $ 416,255 $ 11,728 $ 2,368,815 $ ( 137,527 ) 54,298 $ ( 1,953,735 ) $ 706,569 The accompanying Notes are an integral part of these Consolidated Financial Statements. Abercrombie & Fitch Co. 44 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. Consolidated Statements of Cash Flows (Thousands) Fiscal 2022 Fiscal 2021 Fiscal 2020 Operating activities Net income (loss) $ 10,385 $ 270,066 $ ( 108,954 ) Adjustments to reconcile net income (loss) to net cash (used for) provided by operating activiti Depreciation and amortization 132,243 144,035 166,281 Asset impairment 14,031 12,100 72,937 Loss on disposal 552 5,020 16,353 Provision (benefit) for deferred income taxes 11,500 ( 31,922 ) 23,986 Share-based compensation 28,995 29,304 18,682 (Gain) loss on extinguishment of debt ( 52 ) 5,347 — Changes in assets and liabilities Inventories 18,505 ( 123,221 ) 33,312 Accounts payable and accrued expenses ( 115,152 ) 77,910 186,747 Operating lease right-of use assets and liabilities ( 18,495 ) ( 93,827 ) ( 55,700 ) Income taxes ( 7,390 ) ( 3,086 ) 10,753 Other assets ( 86,923 ) 396 38,632 Other liabilities 9,458 ( 14,340 ) 1,889 Net cash (used for) provided by operating activities ( 2,343 ) 277,782 404,918 Investing activities Purchases of property and equipment ( 164,566 ) ( 96,979 ) ( 101,910 ) Proceeds from the sale of property and equipment 11,891 — — Withdrawal of funds from Rabbi Trust assets 12,000 — 50,000 Net cash used for investing activities ( 140,675 ) ( 96,979 ) ( 51,910 ) Financing activities Proceeds from issuance of senior secured notes — — 350,000 Proceeds from borrowings under the senior secured asset-based revolving credit facility — — 210,000 Repayment of borrowings under the term loan facility — — ( 233,250 ) Repayment of borrowings under the senior secured asset-based revolving credit facility — — ( 210,000 ) Purchase of senior secured notes ( 7,862 ) ( 46,969 ) — Payment of debt issuance costs and fees ( 181 ) ( 2,016 ) ( 7,318 ) Purchases of common stock ( 125,775 ) ( 377,290 ) ( 15,172 ) Dividends paid — — ( 12,556 ) Other financing activities ( 21,511 ) ( 20,623 ) ( 11,987 ) Net cash (used for) provided by financing activities ( 155,329 ) ( 446,898 ) 69,717 Effect of foreign currency exchange rates on cash ( 8,452 ) ( 23,694 ) 9,168 Net (decrease) increase in cash and equivalents, and restricted cash and equivalents ( 306,799 ) ( 289,789 ) 431,893 Cash and equivalents, and restricted cash and equivalents, beginning of period 834,368 1,124,157 692,264 Cash and equivalents, and restricted cash and equivalents, end of period $ 527,569 $ 834,368 $ 1,124,157 Supplemental information related to non-cash activities Purchases of property and equipment not yet paid at end of period $ 57,313 $ 29,932 $ 16,250 Operating lease right-of-use assets additions, net of terminations, impairments and other reductions $ 269,430 $ 29,241 $ ( 38,279 ) Supplemental information related to cash activities Cash paid for interest $ 26,687 $ 28,413 $ 26,629 Cash paid for income taxes $ 53,011 $ 74,709 $ 15,210 Cash received from income tax refunds $ 3,701 $ 2,292 $ 4,650 Cash paid for amounts included in measurement of operating lease liabilities, net of abatements received of $ 3.9 million and $ 17.9 million in Fiscal 2022 and 2021, respectively $ 263,269 $ 364,842 $ 316,992 The accompanying Notes are an integral part of these Consolidated Financial Statements. Abercrombie & Fitch Co. 45 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. Index for Notes to Consolidated Financial Statements Page No. Note 1. NATURE OF BUSINESS 47 Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 47 Note 3. REVENUE RECOGNITION 56 Note 4. FAIR VALUE 57 Note 5. INVENTORIES 58 Note 6. PROPERTY AND EQUIPMENT, NET 59 Note 7. LEASES 59 Note 8. ASSET IMPAIRMENT 60 Note 9. RABBI TRUST ASSETS 61 Note 10. ACCRUED EXPENSES 61 Note 11. INCOME TAXES 61 Note 12. BORROWINGS 65 Note 13. SHARE-BASED COMPENSATION 67 Note 14. DERIVATIVE INSTRUMENTS 70 Note 15. ACCUMULATED OTHER COMPREHENSIVE LOSS 71 Note 16. SAVINGS AND RETIREMENT PLANS 72 Note 17. SEGMENT REPORTING 72 Note 18. CONTINGENCIES 73 Abercrombie & Fitch Co. 46 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. Notes to Consolidated Financial Statements 1. NATURE OF BUSINESS Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a global, digitally-led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. The Company’s two brand-based operating segments are Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These five brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company operates primarily in North America, Europe, Middle East and Asia. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its financial position, results of operations and cash flows. The Company has interests in an Emirati business venture and in a Kuwaiti business venture with Majid al Futtaim Fashion L.L.C. (“MAF”) and a “U.S.” business venture with Dixar L.L.C. (“Dixar”), each of which meets the definition of a variable interest entity (“VIE”). The purpose of the business ventures with MAF is to operate stores in the United Arab Emirates and Kuwait and the purpose of the business venture with Dixar is to hold the intellectual property related to the Social Tourist brand. The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the operating results, assets and liabilities of these VIEs, with the noncontrolling interests’ (“NCI”) portions of net income presented as net income attributable to NCI on the Consolidated Statements of Operations and Comprehensive (Loss) Income and the NCI portion of stockholders equity presented as NCI on the Consolidated Balance Sheets. Fiscal Year The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a fifty-two week year, but occasionally gives rise to an additional week, resulting in a fifty-three week year. Fiscal years are designated in the Consolidated Financial Statements and notes by the calendar year in which the fiscal year commences. All references herein to the Company’s fiscal years are as follows: Fiscal year Year ended/ ending Number of weeks Fiscal 2019 February 1, 2020 52 Fiscal 2020 January 30, 2021 52 Fiscal 2021 January 29, 2022 52 Fiscal 2022 January 28, 2023 52 Fiscal 2023 February 3, 2024 53 Use of Estimates The preparation of financial statements, in conformity with U.S. generally accepted accounting principles (“GAAP”), requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved with estimates, actual results may differ. Additionally, these estimates and assumptions may change as a result of the impact of global economic conditions such as the uncertainty regarding a slowing economy, rising interest rates, continued inflation, fluctuation in foreign exchange rates, the ongoing conflict in Ukraine which could result in material impacts to the Company’s consolidated financial statements in future reporting periods. Abercrombie & Fitch Co. 47 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. Reclassifications The Company reclassified flagship store exit (benefits) charges into stores and distribution expense on the Consolidated Statements of Operations and Comprehensive (Loss) Income. There were no changes to operating income (loss) or net income (loss). Prior period amounts have been reclassified to conform to current year’s presentation. Cash and Equivalents A summary of cash and equivalents on the Consolidated Balance Sheets follows: (in thousands) January 28, 2023 January 29, 2022 Cash (1) $ 467,238 $ 762,187 Cash equivalents: (2) Time deposits — 11,643 Money market funds 50,364 49,309 Cash and equivalents $ 517,602 $ 823,139 (1) Primarily consists of amounts on deposit with financial institutions. (2) Investments with original maturities of less than three months. Consolidated Statements of Cash Flows Reconciliation The following table provides a reconciliation of cash and equivalents and restricted cash and equivalents to the amounts shown on the Consolidated Statements of Cash Flows: (in thousands) Location January 28, 2023 January 29, 2022 January 30, 2021 Cash and equivalents Cash and equivalents $ 517,602 $ 823,139 $ 1,104,862 Long-term restricted cash and equivalents Other assets 9,967 11,229 14,814 Short-term restricted cash and equivalents Other current assets — — 4,481 Restricted cash and equivalents (1) $ 9,967 $ 11,229 $ 19,295 Cash and equivalents and restricted cash and equivalents $ 527,569 $ 834,368 $ 1,124,157 (1) Restricted cash and equivalents primarily consists of amounts on deposit with banks that are used as collateral for customary non-debt banking commitments and deposits into trust accounts to conform to standard insurance security requirements. Receivables Receivables on the Consolidated Balance Sheets primarily include credit card receivables, lessor construction allowance and lease incentive receivables, value added tax (“VAT”) receivables, trade receivables, income tax receivables and other tax credits or refunds. As part of the normal course of business, the Company has approximately three to four days of proceeds from sales transactions outstanding with its third-party credit card vendors at any point. The Company classifies these outstanding balances as credit card receivables. Lessor construction allowances are recorded for certain store lease agreements for improvements completed by the Company. VAT receivables are payments the Company has made on purchases of goods that will be recovered as those goods are sold. Trade receivables are amounts billed by the Company to wholesale, franchise and licensing partners in the ordinary course of business. Income tax receivables represent refunds of certain tax payments along with net operating loss and credit carryback claims for which the Company expects to receive refunds within the next 12 months. Inventories Inventories on the Consolidated Balance Sheets are valued at the lower of cost and net realizable value on a weighted-average cost basis. The Company reduces the carrying value of inventory through a lower of cost and net realizable value adjustment, the impact of which is reflected in cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive (Loss) Income. The lower of cost and net realizable value adjustment is based on the Company’s consideration of multiple factors and assumptions including demand forecasts, current sales volumes, expected sell-off activity, composition and aging of inventory, historical recoverability experience and risk of obsolescence from changes in economic conditions or customer preferences. Additionally, as part of inventory valuation, inventory shrinkage estimates based on historical trends from actual physical inventories are made each quarter that reduce the inventory value for lost or stolen items. The Company performs physical inventories on a periodic basis and adjusts the shrink estimate accordingly. Refer to Note 5, “ INVENTORIES .” The Company’s global sourcing of merchandise is generally negotiated, contracted, and settled in U.S. Dollars. Abercrombie & Fitch Co. 48 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. Other Current Assets Other current assets on the Consolidated Balance Sheets consist o prepaid expenses including those related to rent, information technology maintenance and taxes; current store supplies; derivative contracts; short-term restricted cash and other. Property and Equipment, Net Depreciation of property and equipment is computed for financial reporting purposes on a straight-line basis using the following service liv Category of property and equipment Service lives Information technology 3 - 7 years Furniture, fixtures and equipment 3 - 15 years Leasehold improvements 3 - 15 years Other property and equipment 3 - 20 years Buildings 30 years Leasehold improvements are amortized over either their respective lease terms or their service lives, whichever is shorter. The cost of assets sold or retired and the related accumulated depreciation are removed from the accounts with any resulting gain or loss included in net income on the Consolidated Statements of Operations and Comprehensive (Loss) Income. Maintenance and repairs are charged to expense as incurred. Major remodels and improvements that extend the service lives of the related assets are capitalized. The Company capitalizes certain direct costs associated with the development and purchase of internal-use software within property and equipment and other assets. Capitalized costs are amortized on a straight-line basis over the estimated useful lives of the software, generally not exceeding seven years. Refer to Note 6, “ PROPERTY AND EQUIPMENT, NET .” Leases The Company determines if an arrangement is an operating lease at inception. For new operating leases, the Company recognizes an asset for the right to use a leased asset and a liability based on the present value of remaining lease payments over the lease term on the lease commencement date. The commencement date for new leases is when the lessor makes the leased asset available for use by the Company, typically the possession date. As the rates implicit in the Company’s leases are not readily determinable, the Company uses its incremental borrowing rate based on the transactional currency of the operating lease and the lease term for the initial measurement of the operating lease right-of-use asset and liability. The measurement of operating lease right-of-use assets and liabilities includes amounts related t • Lease payments made prior to the lease commencement date; • Incentives from landlords received by the Company for signing a lease, including construction allowances or deferred lease credits paid to the Company by landlords towards construction and tenant improvement costs, which are presented as a reduction to the right-of-use asset recorded; • Fixed payments related to operating lease components, such as rent escalation payments scheduled at the lease commencement date; • Fixed payments related to nonlease components, such as taxes, insurance, and maintenance costs; and • Unamortized initial direct costs incurred in conjunction with securing a lease, including key money, which are amounts paid directly to a landlord in exchange for securing the lease, and leasehold acquisition costs, which are amounts paid to parties other than the landlord, such as an existing tenant, to secure the desired lease. The measurement of operating lease right-of-use assets and liabilities excludes amounts related t • Costs expected to be incurred to return a leased asset to its original condition, also referred to as asset retirement obligations, which are classified within other liabilities on the Consolidated Balance Sheets; • Variable payments related to operating lease components, such as contingent rent payments made by the Company based on performance, the expense of which is recognized in the period incurred on the Consolidated Statements of Operations and Comprehensive (Loss) Income; • Variable payments related to nonlease components, such as taxes, insurance, and maintenance costs, the expense of which is recognized in the period incurred in the Consolidated Statements of Operations and Comprehensive (Loss) Income; and Abercrombie & Fitch Co. 49 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. • Leases not related to Company-operated retail stores with an initial term of 12 months or less, the expense of which is recognized in the period incurred in the Consolidated Statements of Operations and Comprehensive (Loss) Income. Certain of the Company’s operating leases include options to extend the lease or to terminate the lease. The Company assesses these operating leases and, depending on the facts and circumstances, may or may not include these options in the measurement of the Company’s operating lease right-of-use assets and liabilities. Generally, the Company’s options to extend its operating leases are at the Company’s sole discretion and at the time of lease commencement are not reasonably certain of being exercised. There may be instances in which a lease is being renewed on a month-to-month basis and, in these instances, the Company will recognize lease expense in the period incurred in the Consolidated Statements of Operations and Comprehensive (Loss) Income until a new agreement has been executed. Upon the signing of the renewal agreement, the Company recognizes an asset for the right to use the leased asset and a liability based on the present value of remaining lease payments over the lease term. Amortization and interest expense related to operating lease right-of-use assets and liabilities are generally calculated on a straight-line basis over the lease term. Amortization and interest expense related to previously impaired operating lease right-of-use assets are calculated on a front-loaded pattern. Depending on the nature of the operating lease, amortization and interest expense are primarily recorded within stores and distribution expense, marketing, or general and administrative expense, on the Consolidated Statements of Operations and Comprehensive (Loss) Income. The Company’s operating lease agreements do not contain any material residual value guarantees or material restrictive covenants. In addition, the Company does not have any sublease arrangements with any related party. Refer to Note 7, “ LEASES .” Long-lived Asset Impairment For the purposes of asset impairment, the Company’s long-lived assets, primarily operating lease right-of-use assets, leasehold improvements, furniture, fixtures and equipment, are grouped with other assets and liabilities at the store level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. On at least a quarterly basis, management reviews the Company’s asset groups for indicators of impairment, which include, but are not limited to, material declines in operational performance, a history of losses, an expectation of future losses, adverse market conditions, store closure or relocation decisions, and any other events or changes in circumstances that would indicate the carrying amount of an asset group might not be recoverable. If an asset group displays an indicator of impairment, it is tested for recoverability by comparing the sum of the estimated future undiscounted cash flows attributable to the asset group to the carrying amount of the asset group. This recoverability test requires management to make assumptions and judgments related, but not limited, to management’s expectations for future cash flows from operating the store. The key assumption used in developing these projected cash flows used in the recoverability test is estimated sales growth rate. If the sum of the estimated future undiscounted cash flows attributable to an asset group is less than its carrying amount, and it is determined that the carrying amount of the asset group is not recoverable, management determines if there is an impairment loss by comparing the carrying amount of the asset group to its fair value. Fair value of an asset group is based on the highest and best use of the asset group, often using a discounted cash flow model that utilizes Level 3 fair value inputs. The key assumptions used in the Company’s fair value analyses are estimated sales growth rate and comparable market rents. An impairment loss is recognized based on the excess of the carrying amount of the asset group over its fair value. Refer to Note 8, “ ASSET IMPAIRMENT .” Other Assets Other assets on the Consolidated Balance Sheets consist primarily of the Company’s trust-owned life insurance policies held in the irrevocable rabbi trust (the “Rabbi Trust”), deferred tax assets, long-term deposits, intellectual property, long-term restricted cash and equivalents, long-term supplies and various other assets. Abercrombie & Fitch Co. 50 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. Rabbi Trust Assets The Rabbi Trust includes amounts, restricted in their use, to meet funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II and the Supplemental Executive Retirement Plan. The Rabbi Trust assets primarily consist of trust-owned life insurance policies which are recorded at cash surrender value and are included in other assets on the Consolidated Balance Sheets. The change in cash surrender value of the life insurance policies in the Rabbi Trust is recorded in interest expense, net on the Consolidated Statements of Operations and Comprehensive (Loss) Income. Refer to Note 9, “ RABBI TRUST ASSETS .” Intellectual Property Intellectual property primarily includes trademark assets associated with the Company’s international operations, consisting of finite-lived and indefinite-lived intangible assets. The Company’s finite-lived intangible assets are amortized over a useful life of 10 to 20 years. Income Taxes Income taxes are calculated using the asset and liability method. Deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using current enacted tax rates in effect for the years in which those temporary differences are expected to reverse. Inherent in the determination of the Company’s income tax liability and related deferred income tax balances are certain judgments and interpretations of enacted tax law and published guidance with respect to applicability to the Company’s operations. The Company is subject to audit by taxing authorities, usually several years after tax returns have been filed, and the taxing authorities may have differing interpretations of tax laws. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company records tax expense or benefit that does not relate to ordinary income in the current fiscal year discretely in the period in which it occurs. Examples of such types of discrete items include, but are not limited t changes in estimates of the outcome of tax matters related to prior years, assessments of valuation allowances, return-to-provision adjustments, tax-exempt income, the settlement of tax audits and changes in tax legislation and/or regulations. Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The amount recognized is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement. The Company’s effective tax rate includes the impact of reserve provisions and changes to reserves on uncertain tax positions that are not more likely than not to be sustained upon examination as well as related interest and penalties. A number of years may elapse before a particular matter, for which the Company has established a reserve, is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes that its reserves reflect the probable outcome of known tax contingencies. Unfavorable settlement of any particular issue may require use of the Company’s cash. Favorable resolution would be recognized as a reduction to the Company’s effective tax rate in the period of resolution. The Company recognizes accrued interest and penalties related to uncertain tax positions as a component of income tax expense on the Consolidated Statements of Operations and Comprehensive (Loss) Income. Refer to Note 11, “ INCOME TAXES .” Foreign Currency Translation and Transactions The functional currencies of the Company’s foreign subsidiaries are generally the currencies of the environments in which each subsidiary primarily generates and expends cash, which is often the local currency of the country in which each subsidiary operates. The financial statements of the Company’s foreign subsidiaries with functional currencies other than the U.S. Dollar are translated into U.S. Dollars (the Company’s reporting currency), as follows: assets and liabilities are translated at the exchange rate prevailing at the balance sheet date, equity accounts are translated at historical exchange rates, and revenues and expenses are translated at the monthly average exchange rate for the period. Abercrombie & Fitch Co. 51 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. Foreign currency transactions, which are transactions denominated in a currency other than the entity’s functional currency, are initially measured in the functional currency of the recording entity using the exchange rate in effect at that date. Subsequently, assets and liabilities associated with foreign currency transactions are remeasured into the entity’s functional currency using historical exchange rates when remeasuring nonmonetary assets and liabilities and current exchange rates when remeasuring monetary assets and liabilities. Gains and losses resulting from the remeasurement of monetary assets and liabilities are included in other operating income, net; whereas, translation adjustments and gains and losses associated with measuring inter-company loans of a long-term investment nature are reported as an element of other comprehensive income (loss). Derivative Instruments The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes. In order to qualify for hedge accounting treatment, a derivative instrument must be considered highly effective at offsetting changes in either the hedged item’s cash flows or fair value. Additionally, the hedge relationship must be documented to include the risk management objective and strategy, the hedging instrument, the hedged item, the risk exposure, and how hedge effectiveness will be assessed prospectively and retrospectively. The extent to which a hedging instrument has been, and is expected to continue to be, effective at offsetting changes in fair value or cash flows is assessed and documented at least quarterly. If the underlying hedged item is no longer probable of occurring, hedge accounting is discontinued. For derivative instruments that either do not qualify for hedge accounting or are not designated as hedges, all changes in the fair value of the derivative instrument are recognized in earnings. For qualifying cash flow hedges, the change in the fair value of the derivative instrument is recorded as a component of other comprehensive income (loss) (“OCI”) and recognized in earnings when the hedged cash flows affect earnings. If the cash flow hedge relationship is terminated, the derivative instrument gains or losses that are deferred in OCI will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, or a two-month period thereafter, the derivative instrument gains or losses are immediately recognized in earnings. The Company uses derivative instruments, primarily forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign-currency-denominated intercompany inventory transactions with foreign subsidiaries before inventory is sold to third parties. Fluctuations in exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These forward contracts typically have a maximum term of twelve months. The conversion of the inventory to cost of sales, exclusive of depreciation and amortization, will result in the reclassification of related derivative gains and losses that are reported in AOCL on the Consolidated Balance Sheets into earnings. The Company also uses foreign currency exchange forward contracts to hedge certain foreign-currency-denominated net monetary assets and liabilities, such as cash balances, receivables and payables. Fluctuations in foreign currency exchange rates result in transaction gains and losses being recorded in earnings as monetary assets and liabilities are remeasured at the spot exchange rate at the Company’s fiscal month-end or upon settlement. The Company has chosen not to apply hedge accounting to these foreign currency exchange forward contracts because there are no differences in the timing of gain or loss recognition on the hedging instruments and the hedged items. The Company presents its derivative assets and derivative liabilities at their gross fair values within other current assets and accrued liabilities, respectively, on the Consolidated Balance Sheets. However, the Company’s derivative instruments allow net settlements under certain conditions. Refer to Note 14, “ DERIVATIVE INSTRUMENTS . ” Abercrombie & Fitch Co. 52 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. Stockholders’ Equity A summary of the Company’s Class A Common Stock, $ 0.01 par value, and Class B Common Stock, $ 0.01 par value, follows: (in thousands) January 28, 2023 January 29, 2022 Class A Common Stock Shares authorized 150,000 150,000 Shares issued 103,300 103,300 Shares outstanding 49,002 52,985 Class B Common Stock (1) Shares authorized 106,400 106,400 (1) No shares were issued or outstanding as of each of January 28, 2023 and January 29, 2022 . Holders of Class A Common Stock generally have identical rights to holders of Class B Common Stock, except holders of Class A Common Stock are entitled to one vote per share while holders of Class B Common Stock are entitled to three votes per share on all matters submitted to a vote of stockholders. Revenue Recognition The Company recognizes revenue from product sales when control of the good is transferred to the customer, generally upon pick up at, or shipment from, a Company location. The Company provides shipping and handling services to customers in certain transactions under its digital operations. Revenue associated with the related shipping and handling obligations is deferred until the obligation is fulfilled, typically upon the customer’s receipt of the merchandise. The related shipping and handling costs are classified in stores and distribution expense on the Consolidated Statements of Operations and Comprehensive (Loss) Income. Revenue is recorded net of estimated returns, associate discounts, promotions and other similar customer incentives. The Company estimates reserves for sales returns based on historical experience among other factors. The sales return reserve is classified in accrued expenses with a corresponding asset related to the projected returned merchandise recorded in inventory on the Consolidated Balance Sheets. The Company accounts for gift cards sold to customers by recognizing an unearned revenue liability at the time of sale, which is recognized as net sales when redeemed by the customer or when the Company has determined the likelihood of redemption to be remote, referred to as gift card breakage. Gift card breakage is recognized proportionally with gift card redemptions in net sales. Gift cards sold to customers do not expire or lose value over periods of inactivity and the Company is not required by law to escheat the value of unredeemed gift cards to the jurisdictions in which it operates. The Company also maintains loyalty programs, which primarily provide customers with the opportunity to earn points toward future merchandise discount rewards with qualifying purchases. The Company accounts for expected future reward redemptions by recognizing an unearned revenue liability as customers accumulate points, which remains until revenue is recognized at the earlier of redemption or expiration. Unearned revenue liabilities related to the Company’s gift card program and loyalty programs are classified in accrued expenses on the Consolidated Balance Sheets and are typically recognized as revenue within a 12-month period. For additional details on the Company’s unearned revenue liabilities related to the Company’s gift card and loyalty programs, refer to Note 3, “ REVENUE RECOGNITION .” The Company also recognizes revenue under wholesale arrangements when control passes to the wholesale partner, which is generally upon shipment. Revenue from the Company’s franchise and license arrangements, primarily royalties earned upon the sale of merchandise, is generally recognized at the time merchandise is sold to the franchisees’ retail customers or to the licensees’ wholesale customers. The Company does not include tax amounts collected from customers on behalf of third parties, including sales and indirect taxes, in net sales. All revenues are recognized in net sales in the Consolidated Statements of Operations and Comprehensive (Loss) Income. For a discussion of the disaggregation of revenue, refer to Note 17, “ SEGMENT REPORTING . ” Abercrombie & Fitch Co. 53 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. Cost of Sales, Exclusive of Depreciation and Amortization Cost of sales, exclusive of depreciation and amortization on the Consolidated Statements of Operations and Comprehensive (Loss) Income, primarily consists of cost incurred to ready inventory for sale, including product costs, freight, and import costs, as well as provisions for reserves for shrink and lower of cost and net realizable value. Gains and losses associated with the effective portion of designated foreign currency exchange forward contracts related to the hedging of intercompany inventory transactions are also recognized in cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive (Loss) Income. The Company’s cost of sales, exclusive of depreciation and amortization, and consequently gross profit, may not be comparable to those of other retailers, as inclusion of certain costs vary across the industry. Some retailers include all costs related to buying, design and distribution operations in cost of sales, while others may include either all or a portion of these costs in selling, general and administrative expenses. Stores and Distribution Expense Stores and distribution expense on the Consolidated Statements of Operations and Comprehensive (Loss) Income primarily consists o store payroll; store management; operating lease costs; utilities and other landlord expenses; depreciation and amortization, except for those amounts included in marketing, general and administrative expense; repairs and maintenance and other store support functions; marketing and other costs related to the Company’s digital operations; shipping and handling costs; and distribution center (“DC”) expense. A summary of shipping and handling costs, which includes costs incurred to store, move and prepare product for shipment and costs incurred to physically move product to our customers across channels, follows: (in thousands) Fiscal 2022 Fiscal 2021 Fiscal 2020 Shipping and handling costs $ 356,280 $ 306,220 $ 291,534 Marketing, General and Administrative Expense Marketing, general and administrative expense on the Consolidated Statements of Operations and Comprehensive (Loss) Income primarily consists o home office compensation and marketing, except for those departments included in stores and distribution expense; information technology; outside services, such as legal and consulting; depreciation, primarily related to IT and other home office assets; amortization related to trademark assets; costs to design and develop the Company’s merchandise; relocation; recruiting; and travel expenses. Other Operating Income, Net Other operating income, net on the Consolidated Statements of Operations and Comprehensive (Loss) Income primarily consists of gains and losses resulting from foreign-currency-denominated transactions. A summary of foreign-currency-denominated transaction (losses) gains, including those related to derivative instruments, follows: (in thousands) Fiscal 2022 Fiscal 2021 Fiscal 2020 Foreign-currency-denominated transaction (losses) gains $ ( 1,626 ) $ 4,232 $ 3,933 Interest Expense, Net Interest expense primarily consists of interest expense on the Company’s long-term borrowings outstanding. Interest income primarily consists of interest income earned on the Company’s investments and cash holdings and realized gains from the Rabbi Trust assets. A summary of interest expense, net follows: (in thousands) Fiscal 2022 Fiscal 2021 Fiscal 2020 Interest expense $ 30,236 $ 37,958 $ 31,726 Interest income ( 4,604 ) ( 3,848 ) ( 3,452 ) Interest expense, net $ 25,632 $ 34,110 $ 28,274 Abercrombie & Fitch Co. 54 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. Advertising Costs Advertising costs consist primarily of paid media advertising, direct digital advertising, including e-mail distribution, digital content and in-store photography and signage. Advertising costs related specifically to digital operations are expensed as incurred and the production of in-store photography and signage is expensed when the marketing campaign commences as components of stores and distribution expense. All other advertising costs are expensed as incurred as components of marketing, general and administrative expense. A summary of advertising costs follows: (in thousands) Fiscal 2022 Fiscal 2021 Fiscal 2020 Advertising costs $ 189,347 $ 204,575 $ 118,537 Share-based Compensation The Company issues shares of Class A Common Stock, $ 0.01 par value (the “Common Stock”) from treasury stock upon exercise of stock appreciation rights and vesting of restricted stock units, including those converted from performance share awards. As of January 28, 2023, the Company had sufficient treasury stock available to settle restricted stock units and stock appreciation rights outstanding. Settlement of stock awards in Common Stock also requires that the Company have sufficient shares available in stockholder-approved plans at the applicable time. In the event there are not sufficient shares of Common Stock available to be issued under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Directors (as amended effective May 20, 2020, the “2016 Directors LTIP”) and the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates (as amended effective June 8, 2022, the “2016 Associates LTIP”), or under a successor or replacement plan at each reporting date as of which share-based compensation awards remain outstanding, the Company may be required to designate some portion of the outstanding awards to be settled in cash, which would result in liability classification of such awards. The fair value of liability-classified awards would be re-measured each reporting date until such awards no longer remain outstanding or until sufficient shares of Common Stock become available to be issued under the existing plans or under a successor or replacement plan. As long as the awards are required to be classified as a liability, the change in fair value would be recognized in current period expense based on the requisite service period rendered. Fair value of both service-based and performance-based restricted stock units is calculated using the market price of the underlying Common Stock on the date of grant reduced for anticipated dividend payments on unvested shares. In determining fair value, the Company does not take into account performance-based vesting requirements. Performance-based vesting requirements are taken into account in determining the number of awards expected to vest. For market-based restricted stock units, fair value is calculated using a Monte Carlo simulation with the number of shares that ultimately vest dependent on the Company’s total stockholder return measured against the total stockholder return of a select group of peer companies over a three-year period. For awards with performance-based or market-based vesting requirements, the number of shares that ultimately vest can vary from 0% to 200% of target depending on the level of achievement of performance criteria. The Company estimates the fair value of stock appreciation rights using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the stock appreciation rights and expected future stock price volatility over the expected term. Estimates of expected terms, which represent the expected periods of time the Company believes stock appreciation rights will be outstanding, are based on historical experience. Estimates of expected future stock price volatility are based on the volatility of the Common Stock price for the most recent historical period equal to the expected term of the stock appreciation rights, as appropriate. The Company calculates the volatility as the annualized standard deviation of the differences in the natural logarithms of the weekly closing price of the Common Stock, adjusted for stock splits and dividends. Service-based restricted stock units are expensed on a straight-line basis over the award’s requisite service period. Performance-based restricted stock units subject to graded vesting are expensed on an accelerated attribution basis. Performance share award expense is primarily recognized in the performance period of the award’s requisite service period. Market-based restricted stock units without graded vesting features are expensed on a straight-line basis over the award’s requisite service period. Compensation expense for stock appreciation rights is recognized on a straight-line basis over the award’s requisite service period. The Company adjusts share-based compensation expense on a quarterly basis for actual forfeitures. For awards that are expected to result in a tax deduction, a deferred tax asset is recorded in the period in which share-based compensation expense is recognized. A current tax deduction arises upon the issuance of restricted stock units and performance share awards or the exercise of stock options and stock appreciation rights and is principally measured at the award’s intrinsic value. If the tax deduction differs from the recorded deferred tax asset, the excess tax benefit or deficit associated with the tax deduction is recognized within income tax expense. Refer to Note 13, “ SHARE-BASED COMPENSATION .” Abercrombie & Fitch Co. 55 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. Net Income (Loss) per Share Attributable to A&F Net income (loss) per basic and diluted share attributable to A&F is computed based on the weighted-average number of outstanding shares of Common Stock. Additional information pertaining to net income (loss) per share attributable to A&F follows: (in thousands) Fiscal 2022 Fiscal 2021 Fiscal 2020 Shares of Common Stock issued 103,300 103,300 103,300 Weighted-average treasury shares ( 52,993 ) ( 43,703 ) ( 40,749 ) Weighted-average — basic shares 50,307 59,597 62,551 Dilutive effect of share-based compensation awards 2,020 3,039 — Weighted-average — diluted shares 52,327 62,636 62,551 Anti-dilutive shares (1) 2,233 1,002 3,270 (1) Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net income (loss) per diluted share because the impact would have been anti-dilutive. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can achieve up to 200% of their target vesting amount and are reflected at the maximum vesting amount less any dilutive portion. Recent Accounting Pronouncements The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those not expected to have a material impact on the Company’s consolidated financial statements. The following table provides a brief description of certain recent accounting pronouncements that the Company has adopted or that could affect the Company’s financial statements. Accounting Standards Update (ASU) Description Effect on the financial statements or other significant matters Standards not yet adopted ASU 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations The update related to disclosure requirements for buyers in supplier finance programs. The amendments in the update require that a buyer disclose qualitative and quantitative information about their supplier finance programs. Interim and annual requirements include disclosure of outstanding amounts under the obligations as of the end of the reporting period, and annual requirements include a rollforward of those obligations for the annual reporting period, as well as a description of payment and other key terms of the programs. This update is effective for annual periods beginning after December 15, 2022, and interim periods within those fiscal years, except for the requirement to disclose rollforward information, which is effective for fiscal years beginning after December 15, 2023. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements and accompanying notes 3. REVENUE RECOGNITION Disaggregation of revenue All revenues are recognized in net sales in the Consolidated Statements of Operations and Comprehensive (Loss) Income. For information regarding the disaggregation of revenue, refer to Note 17, “ SEGMENT REPORTING . ” Contract liabilities The following table details certain contract liabilities representing unearned revenue as of January 28, 2023 and January 29, 2022: (in thousands) January 28, 2023 January 29, 2022 Gift card liability $ 39,235 $ 36,984 Loyalty programs liability 25,640 22,757 Abercrombie & Fitch Co. 56 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. The following table details recognized revenue associated with the Company’s gift card program and loyalty programs for Fiscal 2022 and Fiscal 2021: (in thousands) Fiscal 2022 Fiscal 2021 Revenue associated with gift card redemptions and gift card breakage $ 98,488 $ 80,088 Revenue associated with reward redemptions and breakage related to the Company’s loyalty programs 48,624 45,417 Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Revenue recognition ,” for discussion regarding significant accounting policies related to the Company’s revenue recognition. 4. FAIR VALUE Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows: • Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets that the Company can access at the measurement date. • Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly. • Level 3—inputs to the valuation methodology are unobservable. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The three levels of the hierarchy and the distribution of the Company’s assets and liabilities that are measured at fair value on a recurring basis, were as follows: Assets and Liabilities at Fair Value as of January 28, 2023 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 50,364 $ — $ — $ 50,364 Derivative instruments (2) — 32 — 32 Rabbi Trust assets (3) 1 51,681 — 51,682 Restricted cash equivalents (1) 1,690 5,174 — 6,864 Total assets $ 52,055 $ 56,887 $ — $ 108,942 Liabiliti Derivative instruments (2) $ — $ 4,986 $ — $ 4,986 Total liabilities $ — $ 4,986 $ — $ 4,986 Assets and Liabilities at Fair Value as of January 29, 2022 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 49,309 $ 11,643 $ — $ 60,952 Derivative instruments (2) — 4,973 — 4,973 Rabbi Trust assets (3) 1 62,272 — 62,273 Restricted cash equivalents (1) 5,391 2,326 — 7,717 Total assets $ 54,701 $ 81,214 $ — $ 135,915 (1) Level 1 assets consisted of investments in money market funds and U.S. treasury bills. Level 2 assets consisted of time deposits. (2) Level 2 assets and liabilities consisted primarily of foreign currency exchange forward contracts. (3) Level 1 assets consisted of investments in money market funds. Level 2 assets consisted of trust-owned life insurance policies. The Company’s Level 2 assets and liabilities consisted o • Trust-owned life insurance policies, which were valued using the cash surrender value of the life insurance policies; • Time deposits, which were valued at cost, approximating fair value, due to the short-term nature of these investments; and Abercrombie & Fitch Co. 57 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. • Derivative instruments, primarily foreign currency exchange forward contracts, which were valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk. Fair Value of Long-term Borrowings The Company’s borrowings under the Senior Secured Notes are carried at historical cost in the Consolidated Balance Sheets. The carrying amount and fair value of the Company’s long-term gross borrowings were as follows: (in thousands) January 28, 2023 January 29, 2022 Gross borrowings outstanding, carrying amount $ 299,730 $ 307,730 Gross borrowings outstanding, fair value 304,975 327,732 5. INVENTORIES Inventories consisted o (in thousands) January 28, 2023 January 29, 2022 Inventories at original cost $ 541,299 $ 543,060 L Lower of cost and net realizable value adjustment ( 35,678 ) ( 17,196 ) Inventories (1) $ 505,621 $ 525,864 (1) Included $ 93.7 million and $ 142.7 million of inventory in transit, merchandise owned by the Company that has not yet been received at a Company DC, as of January 28, 2023 and January 29, 2022, respectively. A summary of the Company’s vendors based on location and the percentage of dollar cost of merchandise receipts during Fiscal 2022, and Fiscal 2021 follows: % of Total Company Merchandise Receipts (1) Location Fiscal 2022 Fiscal 2021 Vietnam 33 % 36 % Cambodia 17 16 China (2) 13 14 Other (3) 37 34 Total 100 % 100 % (1) Calculated as the cost of merchandise receipts from all vendors within a country during the respective fiscal year divided by cost of total merchandise receipts during the respective fiscal year . (2) Only a portion of the Company’s total merchandise sourced from China is subject to the additional U.S. tariffs on imported consumer goods that were effective beginning in Fiscal 2019. The Company estimates approximately 9 %, 9 % and 7 % of total merchandise receipts were directly imported to the United States from China in Fiscal 2022, Fiscal 2021 and Fiscal 2020, respectively. (3) No country included within this category sourced more than 10% of total merchandise receipts during any fiscal year presented above . Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Inventories ,” for discussion regarding significant accounting policies related to the Company’s inventories. Abercrombie & Fitch Co. 58 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. 6. PROPERTY AND EQUIPMENT, NET Property and equipment, net consisted o (in thousands) January 28, 2023 January 29, 2022 Land $ 28,599 $ 28,599 Buildings 232,996 233,523 Furniture, fixtures and equipment 611,277 622,912 Information technology 685,539 643,244 Leasehold improvements 888,464 913,729 Construction in progress 68,984 9,483 Other 2,003 2,003 Total 2,517,862 2,453,493 L Accumulated depreciation ( 1,966,277 ) ( 1,945,157 ) Property and equipment, net $ 551,585 $ 508,336 Depreciation expense for Fiscal 2022, Fiscal 2021 and Fiscal 2020 was $ 129.7 million, $ 141.4 million and $ 167.2 million, respectively. Refer to Note 8, “ ASSET IMPAIRMENT ,” for details related to property and equipment impairment charges incurred during Fiscal 2022, Fiscal 2021 and Fiscal 2020. Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Property and equipment, net ,” for discussion regarding significant accounting policies related to the Company’s property and equipment, net. 7. LEASES The Company is a party to leases related to its Company-operated retail stores as well as for certain of its DCs, office space, information technology and equipment. The following table provides a summary of the Company’s operating lease costs for Fiscal 2022, Fiscal 2021 and Fiscal 2020 : (in thousands) Fiscal 2022 Fiscal 2021 Fiscal 2020 Single lease cost (1) $ 246,824 $ 272,246 $ 346,178 Variable lease cost (2) 150,909 110,889 65,310 Operating lease right-of-use asset impairment (3) 6,248 9,509 57,026 Sublease income ( 3,826 ) ( 4,292 ) — Total operating lease cost $ 400,155 $ 388,352 $ 468,514 (1) Includes amortization and interest expense associated with operating lease right-of-use assets and the impact from remeasurement of operating lease liabilities. (2) Includes variable payments related to both lease and nonlease components, such as contingent rent payments made by the Company based on performance, and payments related to taxes, insurance, and maintenance costs, as well as $ 3.9 million, $ 14.1 million and $ 30.1 million of rent abatements in Fiscal 2022, Fiscal 2021 and Fiscal 2020, respectively, related to the effects of the COVID-19 pandemic that resulted in lease concessions with total payments required by the modified contract being substantially the same as or less than total payments required by the original contract. The total benefit related to rent abatements recognized during Fiscal 2022, Fiscal 2021 and Fiscal 2020 was $ 3.9 million, $ 17.9 million and $ 30.7 million, respectively. (3) Refer to Note 8, “ ASSET IMPAIRMENT ,” for details related to operating lease right-of-use asset impairment charges. The following table provides the weighted-average remaining lease term of the Company’s operating leases and the weighted-average discount rate used to calculate the Company’s operating lease liabilities as of January 28, 2023 and January 29, 2022: January 28, 2023 January 29, 2022 Weighted-average remaining lease term (years) 5.3 5.3 Weighted-average discount rate 6.3 % 5.6 % Abercrombie & Fitch Co. 59 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. The following table provides a maturity analysis of the Company’s operating lease liabilities, based on undiscounted cash flows, as of January 28, 2023: (in thousands) January 28, 2023 Fiscal 2023 $ 263,666 Fiscal 2024 200,487 Fiscal 2025 179,138 Fiscal 2026 149,074 Fiscal 2027 121,177 Fiscal 2028 and thereafter 171,132 Total undiscounted operating lease payments 1,084,674 L Imputed interest ( 157,334 ) Present value of operating lease liabilities $ 927,340 The Company had temporarily suspended rent payments for a number of stores that were closed as a result of COVID-19, and has had success in obtaining certain rent abatements and landlord concessions of rent payable. During Fiscal 2020, the Company entered into a sublease agreement with a third party for the remaining lease term of one of its European Abercrombie & Fitch flagship store locations upon its closure. As of January 28, 2023, the Company's subleased property had a remaining lease term of 4.8 years with the sublease term from February 1, 2021 through November 30, 2027. Future minimum tenant operating lease payments remaining under this sublease as of January 28, 2023 were $ 19.5 million. The Company had minimum commitments related to operating lease contracts that have not yet commenced, primarily for its Company-operated retail stores, of approximately $ 28.3 million as of January 28, 2023. 8. ASSET IMPAIRMENT The following table provides additional details related to long-lived asset impairment char (in thousands) Fiscal 2022 Fiscal 2021 Fiscal 2020 Operating lease right-of-use asset impairment $ 6,248 $ 9,509 $ 57,026 Property and equipment asset impairment (1) 7,783 2,591 15,911 Total asset impairment $ 14,031 $ 12,100 $ 72,937 (1) Amounts for Fiscal 2022 include store asset impairment of $ 4.8 million and other asset impairment of $ 3.0 million. Amounts for Fiscal 2021 and Fiscal 2020 only include store asset impairment. Asset impairment charges for Fiscal 2022 were related to certain of the Company’s assets including stores across brands, geographies and store formats and other assets. The impairment charges for Fiscal 2022 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $ 39.7 million, including $ 37.0 million related to operating lease right-of-use assets. Asset impairment charges for Fiscal 2021 were related to certain of the Company’s stores across brands, geographies and store formats. The impairment charges for Fiscal 2021 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $ 18.1 million, including $ 15.6 million related to operating lease right-of-use assets. Asset impairment charges for Fiscal 2020 were principally the result of the impact of COVID-19 and were related to certain of the Company’s stores across brands, geographies and store formats. The impairment charges for Fiscal 2020 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $ 95.0 million, including $ 87.2 million related to operating lease right-of-use assets. Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Long-lived Asset Impairment ,” for discussion regarding significant accounting policies related to impairment of the Company’s long-lived assets. Abercrombie & Fitch Co. 60 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. 9. RABBI TRUST ASSETS Investments of Rabbi Trust assets consisted of the following as of January 28, 2023 and January 29, 2022: (in thousands) January 28, 2023 January 29, 2022 Trust-owned life insurance policies (at cash surrender value) $ 51,681 $ 62,272 Money market funds 1 1 Rabbi Trust assets $ 51,682 $ 62,273 Realized gains resulting from the change in cash surrender value of the Rabbi Trust assets for Fiscal 2022, Fiscal 2021 and Fiscal 2020 were as follows: (in thousands) Fiscal 2022 Fiscal 2021 Fiscal 2020 Realized gains related to Rabbi Trust assets $ 1,409 $ 1,483 $ 1,740 Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Rabbi Trust Assets ,” for further discussion related to the Company’s Rabbi Trust assets. 10. ACCRUED EXPENSES Accrued expenses consisted o (in thousands) January 28, 2023 January 29, 2022 Accrued payroll and related costs (1) $ 70,815 $ 90,906 Accrued costs related to the Company’s DCs and digital operations 38,729 48,395 Other (2) 303,759 256,514 Accrued expenses $ 413,303 $ 395,815 (1) Accrued payroll and related costs include salaries, incentive compensation, benefits, withholdings and other payroll-related costs. (2) Other primarily includes the Company’s gift card and loyalty programs liabilities, accrued taxes, accrued rent and expenses incurred but not yet paid primarily related to outside services associated with store and home office operations and construction in progress. Refer to Note 3, “ REVENUE RECOGNITION .” 11. INCOME TAXES Impact of valuation allowances and other tax benefits during Fiscal 2022 During Fiscal 2022, the Company did not recognize income tax benefits on $ 136.5 million of pre-tax losses, primarily in Switzerland, resulting in adverse tax impacts of $ 20.0 million. As of January 28, 2023, the Company had net deferred tax assets of approximately $ 8.0 million, $ 9.1 million, and $ 15.6 million in China, Japan, and the United Kingdom, respectively. In China, while the Company believes these net deferred tax assets are more-likely-than-not to be realized, it is not a certainty, as the Company continues to evaluate and respond to emerging situations, such as the COVID-19 pandemic. The company is closely monitoring its operations on China. Should circumstances change, the net deferred tax assets may become subject to valuation allowances in the future, which would result in additional tax expense. Impact of valuation allowances and other tax benefits during Fiscal 2021 During Fiscal 2021, as a result of the improvement seen in business conditions, the Company recognized $ 42.5 million of tax benefits due to the release of valuation allowances, primarily in the U.S. and Germany, and a discrete tax benefit of $ 3.9 million due to a rate change in the United Kingdom. The Company did not recognize income tax benefits on $ 25.3 million of pre-tax losses generated in Fiscal 2021, primarily in Switzerland, resulting in adverse tax impacts of $ 4.6 million. As of January 29, 2022, the Company had net deferred tax assets of approximately $ 9.7 million, $ 12.2 million, and $ 20.1 million in China, Japan, and the United Kingdom, respectively. Abercrombie & Fitch Co. 61 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. Impact of valuation allowances and other tax charges during Fiscal 2020 The Company’s effective tax rate for Fiscal 2020 was impacted by $ 101.4 million of adverse tax impacts, ultimately giving rise to income tax expense on a consolidated pre-tax loss. During Fiscal 2020, due to the significant adverse impacts of COVID-19, the Company did not recognize income tax benefits on $ 203.4 million of pre-tax losses, resulting in an adverse tax impact of $ 39.5 million. The Company recognized charges of $ 61.9 million related to the establishment of valuation allowances and other tax charges in certain jurisdictions during Fiscal 2020, including, but not limited to, the U.S., Switzerland, Germany and Japan, principally as a result of the significant adverse impacts of COVID-19. Components of Income Taxes Income (loss) before income taxes consisted o (in thousands) Fiscal 2022 Fiscal 2021 Fiscal 2020 Domestic (1) $ 152,608 $ 283,793 $ ( 33,417 ) Foreign ( 85,592 ) 25,181 ( 15,326 ) Income (loss) before income taxes $ 67,016 $ 308,974 $ ( 48,743 ) (1) Includes intercompany charges to foreign affiliates for management fees, cost-sharing, royalties and interest and excludes a portion of foreign income that is currently includable on the U.S. federal income tax return. Income tax expense (benefit) consisted o (in thousands) Fiscal 2022 Fiscal 2021 Fiscal 2020 Curren Federal $ 25,577 $ 51,321 $ 9,434 State 10,371 14,061 3,750 Foreign 9,183 5,448 23,041 Total current $ 45,131 $ 70,830 $ 36,225 Deferr Federal (1) $ 4,586 $ ( 15,401 ) $ ( 73,104 ) State 122 ( 8,995 ) 8,829 Foreign (1) 6,792 ( 7,526 ) 88,261 Total deferred 11,500 ( 31,922 ) 23,986 Income tax expense $ 56,631 $ 38,908 $ 60,211 (1) Fiscal 2020 includes federal deferred tax benefit of $79.0 million and foreign deferred tax expense of $88.6 million due to the establishment of an additional valuation allowance in Switzerland. The Company’s earnings and profits from its foreign subsidiaries could be repatriated to the U.S., without incurring additional U.S. federal income tax. The Company determined that the balance of the Company’s undistributed earnings and profits from its foreign subsidiaries as of February 2, 2019 are considered indefinitely reinvested outside of the U.S., and if these funds were to be repatriated to the U.S., the Company would expect to incur an insignificant amount of state income taxes and foreign withholding taxes. The Company accrues for both state income taxes and foreign withholding taxes with respect to earnings and profits earned after February 2, 2019, in such a manner that these funds may be repatriated without incurring additional tax expense. Abercrombie & Fitch Co. 62 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. Reconciliation between the statutory federal income tax rate and the effective tax rate is as follows: Fiscal 2022 Fiscal 2021 Fiscal 2020 U.S. Federal income tax rate 21.0 % 21.0 % 21.0 % Net change in valuation allowances 30.7 ( 19.7 ) ( 177.2 ) Foreign taxation of non-U.S. operations (1) 16.2 3.5 32.7 State income tax, net of U.S. federal income tax effect 12.4 4.4 2.6 Audit and other adjustments to prior years' accruals, net 5.9 4.7 2.6 Internal Revenue Code Section 162(m) 4.6 1.6 ( 5.5 ) Additional U.S. taxation of non-U.S.operations 1.3 0.6 ( 0.2 ) Tax expense (benefit) recognized on share-based compensation expense (2) ( 2.6 ) ( 1.3 ) ( 7.5 ) Credit for increasing research activities ( 2.5 ) ( 0.6 ) 2.6 Net income attributable to noncontrolling interests ( 2.4 ) ( 0.5 ) 2.2 Other items, net ( 0.1 ) 0.1 0.9 Other statutory tax rate and law changes — ( 1.2 ) 2.3 Total 84.5 % 12.6 % ( 123.5 ) % (1) U.S. branch operations in Puerto Rico were subject to tax at the full U.S. tax rates. As a result, income from these operations do not create reconciling items.. (2) Refer to Note 13, “ SHARE-BASED COMPENSATION ,” for details on discrete income tax benefits and charges related to share-based compensation awards during Fiscal 2022, Fiscal 2021, and Fiscal 2020. The impact of various tax items on the Company's effective tax rate were amplified on a percentage basis at lower levels of consolidated pre-tax income (loss) in absolute dollars. The effective tax rate remains dependent on jurisdictional mix. The taxation of non-U.S. operations line items in the table above excludes items related to the Company's non-U.S. operations reported separately in the appropriate corresponding line items. For Fiscal 2022, Fiscal 2021 and Fiscal 2020, the impact of taxation of non-U.S. operations on the Company's effective income tax rate was related to the Company's jurisdictional mix driven primarily by the Company’s operations within Switzerland. Abercrombie & Fitch Co. 63 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. Components of Deferred Income Tax Assets and Deferred Income Tax Liabilities The effect of temporary differences which gives rise to deferred income tax assets (liabilities) were as follows: (in thousands) January 28, 2023 January 29, 2022 Deferred income tax assets: Operating lease liabilities $ 237,699 $ 242,290 Intangibles, foreign step-up in basis (1) 61,030 64,281 Net operating losses (NOL), tax credit and other carryforwards 68,874 52,970 Accrued expenses and reserves 27,435 30,026 Deferred compensation 16,023 16,050 Inventory 5,475 3,578 Rent 1,502 — Other 946 45 Valuation allowances ( 130,622 ) ( 110,057 ) Total deferred income tax assets $ 288,362 $ 299,183 Deferred income tax liabiliti Operating lease right-of-use assets $ ( 205,827 ) $ ( 202,916 ) Property and equipment and intangibles ( 14,273 ) ( 10,150 ) Prepaid expenses ( 1,634 ) ( 2,451 ) Store supplies ( 1,933 ) ( 1,811 ) Undistributed profits of non-U.S. subsidiaries ( 1,111 ) ( 1,082 ) Rent — ( 360 ) U.S. offset to foreign deferred tax assets, excluding intangibles, foreign step-up in basis (2) ( 175 ) — Other ( 428 ) ( 30 ) Total deferred income tax liabilities $ ( 225,381 ) $ ( 218,800 ) Net deferred income tax assets (2) $ 62,981 $ 80,383 (1) During Fiscal 2021 an agreement was reached with the Swiss taxing authorities to decrease the basis step up to be amortized in the future thus decreasing the deferred asset by $14.8 million. Because of the valuation allowance, there is no impact on consolidated tax expense from this agreement. (2) This table does not reflect deferred taxes classified within AOCL. As of January 28, 2023 and January 29, 2022, AOCL included deferred tax assets of $0.9 million and deferred tax liabilities of $1.1 million, respectively. As of January 28, 2023, the Company had deferred tax assets related to foreign and state NOL and credit carryforwards of $ 68.6 million and $ 0.3 million, respectively, that could be utilized to reduce future years’ tax liabilities. If not utilized, a portion of the foreign NOL carryforwards will begin to expire in 2025 and a portion of state NOL carryforwards will begin to expire in 2025. Some foreign NOLs have an indefinite carryforward period. As of January 28, 2023, the Company did not have any deferred tax assets related to federal NOL and credit carryforwards that could be utilized to reduce future years’ tax liabilities. The valuation allowances for Fiscal 2022, 2021, 2020 and 2019 was $ 130.6 million, $ 110.1 million, $ 174.3 million and $ 8.9 million, respectively. The valuation allowances as of Fiscal 2022 have been established against deferred tax assets, primarily in Japan and Switzerland. All valuation allowances have been reflected through the Consolidated Statements of Operations and Comprehensive (Loss) Income. The valuation allowances will remain until there is sufficient positive evidence to release them, such positive evidence would include having positive income within the jurisdiction. In such case, the Company will record an adjustment in the period in which a determination is made. The Company continues to review the need for valuation allowances on a quarterly basis. Abercrombie & Fitch Co. 64 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. Share-based Compensation Refer to Note 13, “ SHARE-BASED COMPENSATION ,” for details on income tax benefits and charges related to share-based compensation awards during Fiscal 2022, Fiscal 2021 and Fiscal 2020. Other The amount of uncertain tax positions as of January 28, 2023, January 29, 2022 and January 30, 2021, which would impact the Company’s effective tax rate if recognized and a reconciliation of the beginning and ending amounts of uncertain tax positions, excluding accrued interest and penalties, are as follows: (in thousands) Fiscal 2022 Fiscal 2021 Fiscal 2020 Uncertain tax positions, beginning of the year $ 1,114 $ 995 $ 1,794 Gross addition for tax positions of the current year 339 490 235 Gross addition (reduction) for tax positions of prior years 907 ( 136 ) 395 Reductions of tax positions of prior years Lapses of applicable statutes of limitations ( 66 ) ( 81 ) ( 48 ) Settlements during the period ( 1 ) ( 154 ) ( 1,381 ) Uncertain tax positions, end of year $ 2,293 $ 1,114 $ 995 The IRS is currently conducting an examination of the Company’s U.S. federal income tax returns for Fiscal 2022 and Fiscal 2021 as part of the IRS’ Compliance Assurance Process program. The IRS examinations for Fiscal 2020 and prior years have been completed. State and foreign returns are generally subject to examination for a period of three to five years after the filing of the respective return. The Company typically has various state and foreign income tax returns in the process of examination, administrative appeals or litigation. The outcome of the examinations is not expected to have a material impact on the Company’s financial statements. The Company believes that some of these audits and negotiations will conclude within the next 12 months and that it is reasonably possible the amount of uncertain income tax positions, including interest, may change by an immaterial amount due to settlement of audits and expiration of statues of limitations. The Company does not expect material adjustments to the total amount of uncertain tax positions within the next 12 months, but the outcome of tax matters is uncertain and unforeseen results can occur. Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Income Taxes ,” for discussion regarding significant accounting policies related to the Company’s income taxes. 12. BORROWINGS Details on the Company’s long-term borrowings, net, as of January 28, 2023 and January 29, 2022 are as follows: (in thousands) January 28, 2023 January 29, 2022 Long-term portion of borrowings, gross at carrying amount $ 299,730 $ 307,730 Unamortized fees ( 2,878 ) ( 4,156 ) Long-term portion of borrowings, net $ 296,852 $ 303,574 Senior Secured Notes On July 2, 2020, Abercrombie & Fitch Management Co. (“A&F Management”), a wholly-owned indirect subsidiary of A&F, completed the private offering of $ 350 million aggregate principal amount of senior secured notes (the “Senior Secured Notes”), at an offering price of 100% of the principal amount thereof. The Senior Secured Notes will mature on July 15, 2025 and bear interest at a rate of 8.75 % per annum, with semi-annual interest payments, which began in January 2021. The Senior Secured Notes were issued pursuant to an indenture, dated as of July 2, 2020, by and among A&F Management, A&F and certain of A&F’s wholly-owned subsidiaries, as guarantors, and U.S. Bank National Association (now known as U.S. Bank Trust National Association), as trustee, and as collateral agent. During Fiscal 2022 and 2021, A&F Management purchased $ 8.0 million and $ 42.3 million, respectively, of outstanding Senior Secured Notes and incurred $ 0.1 million of gain and $ 5.3 million of loss, respectively, on extinguishment of debt, recognized in interest expense, net on the Consolidated Statements of Operations and Comprehensive (Loss) Income. The Company used the net proceeds from the offering of the Senior Secured Notes to repay outstanding borrowings and Abercrombie & Fitch Co. 65 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. accrued interest of $ 223.6 million and $ 110.8 million under its prior term loan facility and the ABL Facility (defined below), respectively, with the remaining net proceeds used towards fees and expenses in connection with such repayments and the offering of the Senior Secured Notes. The Company recorded deferred financing fees associated with the issuance of the Senior Secured Notes, which are being amortized to interest expense over the contractual term of the Senior Secured Notes. ABL Facility On April 29, 2021, A&F Management, in A&F Management’s capacity as the lead borrower, and the other borrowers and guarantors party thereto, amended and restated in its entirety the Credit Agreement, dated as of August 7, 2014, as amended on September 10, 2015, and on October 19, 2017 (as amended and restated, the “Amended and Restated Credit Agreement”), among A&F Management, the other borrowers and guarantors party thereto, the lenders party thereto, Wells Fargo Bank, National Association, as administrative agent for the lenders, and the other parties thereto. The Amended and Restated Credit Agreement continues to provide for a senior secured revolving credit facility of up to $ 400.0 million (the “ABL Facility”), and (i) extended the maturity date of the ABL Facility to April 29, 2026 ; and (ii) modified the required fee on undrawn commitments under the ABL Facility from 0.25 % per annum to either 0.25 % or 0.375 % per annum (with the ultimate amount dependent on the conditions detailed in the Amended and Restated Credit Agreement). On March 15, 2023, the Company entered into the First Amendment to the Amended and Restated Credit Agreement to eliminate LIBO rate based loans and to use the current market definitions with respect to the Secured Overnight Financing Rate (“SOFR”), as well as to reflect other conforming changes. The Company did not have any borrowings outstanding under the ABL Facility as of January 28, 2023 or as of January 29, 2022. The ABL Facility is subject to a borrowing base, consisting primarily of U.S. inventory, with a letter of credit sub-limit of $50 million and an accordion feature allowing A&F to increase the revolving commitment by up to $100 million subject to specified conditions. The ABL Facility is available for working capital, capital expenditures and other general corporate purposes. As of January 28, 2023, the Company had availability under the ABL Facility of $ 386.8 million, net of $ 0.6 million in outstanding stand-by letters of credit. As the Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility, borrowing capacity available to the Company under the ABL Facility was $ 348.1 million as of January 28, 2023. Obligations under the ABL Facility are unconditionally guaranteed by A&F and certain of A&F’s subsidiaries. The ABL Facility is secured by a first-priority security interest in certain working capital of the borrowers and guarantors consisting of inventory, accounts receivable and certain other assets. The ABL Facility is also secured by a second-priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets, intellectual property, stock of subsidiaries and certain after-acquired material real property. At the Company’s option, borrowings under the ABL Facility will bear interest at either (a) an adjusted LIBO rate plus a margin of 1.25 % to 1.50 % per annum, or (b) an alternate base rate plus a margin of 0.25 % to 0.50 % per annum. As of January 28, 2023, the applicable margins with respect to LIBO rate loans and base rate loans, including swing line loans, under the ABL Facility were 1.25 % and 0.25 % per annum, respectively, and are subject to adjustment each fiscal quarter based on average historical availability during the preceding quarter. Following the March 15, 2023 amendment, borrowings under the ABL will bear interest using the current market SOFR rate. Customary agency fees and letter of credit fees are also payable in respect of the ABL Facility. Representations, Warranties and Covenants The agreements related to the Senior Secured Notes and the ABL Facility contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of the Company and its subsidiaries t grant or incur liens; incur, assume or guarantee additional indebtedness; sell or otherwise dispose of assets, including capital stock of subsidiaries; make investments in certain subsidiaries; pay dividends, make distributions or redeem or repurchase capital stock; change the nature of their business; and consolidate or merge with or into, or sell substantially all of the assets of the Company or A&F Management to, another entity. The Senior Secured Notes are guaranteed on a senior secured basis, jointly and severally, by A&F and each of the existing and future wholly-owned domestic restricted subsidiaries of A&F that guarantee or will guarantee A&F Management’s ABL Facility or certain future capital markets indebtedness. Abercrombie & Fitch Co. 66 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. The Company was in compliance with all debt covenants under the agreements related to the Senior Secured Notes and the ABL Facility as of January 28, 2023. 13. SHARE-BASED COMPENSATION Plans As of January 28, 2023, the Company had two primary share-based compensation pla (i) the 2016 Directors LTIP, with 900,000 shares of Common Stock authorized for issuance, under which the Company is authorized to grant restricted stock, restricted stock units, stock appreciation rights, stock options and deferred stock awards to non-associate members of the Board of Directors; and (ii) the 2016 Associates LTIP, with 10,665,000 shares of Common Stock authorized for issuance, under which the Company is authorized to grant restricted stock, restricted stock units, performance share awards, stock appreciation rights and stock options to associates of the Company. The Company also has outstanding shares from two other share-based compensation plans under which the Company granted restricted stock units, performance share awards, stock appreciation rights and stock options to associates of the Company and restricted stock units, stock options and deferred stock awards to non-associate members of the Board of Directors in prior years. No new shares may be granted under these previously-authorized plans and any outstanding awards continue in effect in accordance with their respective terms. The 2016 Directors LTIP, a stockholder-approved plan, permits the Company to annually grant awards to non-associate directors, subject to the following limits: • For non-associate directo awards with an aggregate fair market value on the date of the grant of no more than $ 300,000 ; • For the non-associate director occupying the role of Non-Executive Chairperson of the Board (if any): additional awards with an aggregate fair market value on the date of grant of no more than $ 500,000 ; and • For the non-associate director occupying the role of Executive Chairperson of the Board (if any): additional awards with an aggregate fair market value on the date of grant of no more than $ 2,500,000 . Under the 2016 Directors LTIP, restricted stock units are subject to a minimum vesting period ending no sooner than the earlier of (i) the first anniversary of the grant date or (ii) the date of the next regularly scheduled annual meeting of stockholders held after the grant date. Any stock appreciation rights or stock options granted under this plan have the same minimum vesting period requirements as restricted stock units and, in addition, must have a term that does not exceed a period of ten years from the grant date, subject to forfeiture under the terms of the 2016 Directors LTIP. The 2016 Associates LTIP, a stockholder-approved plan, permits the Company to annually grant one or more types of awards covering up to an aggregate for all awards of 1.0 million underlying shares of the Common Stock to any associate of the Company. Under the 2016 Associates LTIP, for restricted stock units that have performance-based vesting, performance must be measured over a period of at least one year and for restricted stock units that do not have performance-based vesting, vesting in full may not occur more quickly than in pro-rata installments over a period of three years from the date of the grant, with the first installment vesting no sooner than the first anniversary of the date of the grant. In addition, any stock options or stock appreciation rights granted under this plan must have a minimum vesting period of one year and a term that does not exceed a period of ten years from the grant date, subject to forfeiture under the terms of the 2016 Associates LTIP. Each of the 2016 Directors LTIP and the 2016 Associates LTIP provides for accelerated vesting of awards if there is a change of control and certain other conditions specified in each plan are met. Financial Statement Impact The following table details share-based compensation expense and the related income tax benefit for Fiscal 2022, Fiscal 2021 and Fiscal 2020: (in thousands) Fiscal 2022 Fiscal 2021 Fiscal 2020 Share-based compensation expense $ 28,995 $ 29,304 $ 18,682 Income tax benefit associated with share-based compensation expense recognized during the period (1) 3,515 3,338 — (1) No income tax benefit was recognized during Fiscal 2020 due to the establishment of a valuation allowance. The following table details discrete income tax benefits and charges related to share-based compensation awards during Fiscal 2022, Fiscal 2021 and Fiscal 2020: Abercrombie & Fitch Co. 67 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. (in thousands) Fiscal 2022 Fiscal 2021 Fiscal 2020 Income tax discrete benefits (charges) realized for tax deductions related to the issuance of shares during the period $ 1,956 $ 4,198 $ ( 1,719 ) Income tax discrete charges realized upon cancellation of stock appreciation rights during the period ( 226 ) ( 204 ) ( 1,943 ) Total income tax discrete benefits (charges) related to share-based compensation awards $ 1,730 $ 3,994 $ ( 3,662 ) The following table details the amount of employee tax withheld by the Company upon the issuance of shares associated with restricted stock units vesting and the exercise of stock appreciation rights for the Fiscal 2022, Fiscal 2021 and Fiscal 2020: (in thousands) Fiscal 2022 Fiscal 2021 Fiscal 2020 Employee tax withheld upon issuance of shares (1) $ 14,464 $ 13,163 $ 5,694 (1) Classified within other financing activities on the Consolidated Statements of Cash Flows. Restricted Stock Units The following table summarizes activity for restricted stock units for Fiscal 2022: Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Number of Underlying Shares Weighted- Average Grant Date Fair Value Number of Underlying Shares (1) Weighted- Average Grant Date Fair Value Number of Underlying Shares (1) Weighted- Average Grant Date Fair Value Unvested at January 29, 2022 2,532,240 $ 17.16 340,149 $ 27.08 680,184 $ 22.81 Granted 1,012,916 28.51 185,197 30.24 92,603 41.60 Change due to performance criteria achievement — — 5,668 23.05 18,881 36.24 Vested ( 930,944 ) 18.04 ( 194,465 ) 23.05 ( 113,284 ) 36.24 Forfeited ( 152,817 ) 20.42 — — ( 16,247 ) 16.24 Unvested at January 28, 2023 (1) 2,461,395 $ 21.30 336,549 $ 31.08 662,137 $ 23.68 (1) Unvested shares related to restricted stock units with performance-based and market-based vesting conditions are reflected at 100 % of their target vesting amount in the table above. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can be achieved at up to 200% of their target vesting amount. The following table details unrecognized compensation cost and the remaining weighted-average period over which these costs are expected to be recognized for restricted stock units as of January 28, 2023: (in thousands) Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Unrecognized compensation cost $ 34,026 $ 3,267 $ 4,907 Remaining weighted-average period cost is expected to be recognized (years) 1.2 1.2 0.9 Abercrombie & Fitch Co. 68 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. Additional information pertaining to restricted stock units for Fiscal 2022, Fiscal 2021 and Fiscal 2020 follows: (in thousands) Fiscal 2022 Fiscal 2021 Fiscal 2020 Service-based restricted stock units: Total grant date fair value of awards granted $ 28,878 $ 23,959 $ 19,843 Total grant date fair value of awards vested 16,794 13,360 14,083 Total intrinsic value of awards vested 28,037 36,507 8,147 Performance-based restricted stock units: Total grant date fair value of awards granted 5,600 5,059 — Total grant date fair value of awards vested 4,482 — 4,635 Market-based restricted stock units: Total grant date fair value of awards granted 3,852 3,966 8,443 Total grant date fair value of awards vested 4,105 3,390 4,132 Total intrinsic value of awards vested 3,768 3,335 3,263 The weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during Fiscal 2022, Fiscal 2021 and Fiscal 2020 were as follows: Fiscal 2022 Fiscal 2021 Fiscal 2020 Grant date market price $ 30.24 $ 31.78 $ 12.31 Fair value 41.6 49.81 16.24 Assumptio Price volatility 66 % 66 % 67 % Expected term (years) 2.8 2.9 2.4 Risk-free interest rate 2.5 % 0.3 % 0.2 % Dividend yield — — — Average volatility of peer companies 72.3 % 72.0 % 66.0 % Average correlation coefficient of peer companies 0.515 0.4694 0.4967 Stock Appreciation Rights The following table summarizes stock appreciation rights activity for Fiscal 2022: Number of Underlying Shares Weighted-Average Exercise Price Aggregate Intrinsic Value Weighted-Average Remaining Contractual Life (years) Outstanding at January 29, 2022 236,139 $ 32.55 Granted — — Exercised ( 4,350 ) 22.46 Forfeited or expired ( 41,200 ) 48.06 Outstanding at January 28, 2023 190,589 $ 29.43 $ 1,262 1.7 Stock appreciation rights exercisable at January 28, 2023 190,589 $ 29.43 $ 1,262 1.7 No stock appreciation rights were exercised during Fiscal 2022 or Fiscal 2020. The grant date fair value of awards exercised during Fiscal 2021 follows: (in thousands) Fiscal 2021 Total grant date fair value of awards exercised $ 1,069 Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Share-Based Compensation ,” for discussion regarding significant accounting policies related to share-based compensation. Abercrombie & Fitch Co. 69 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. 14. DERIVATIVE INSTRUMENTS As of January 28, 2023, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all, of forecasted foreign-currency-denominated intercompany inventory transactions, the resulting settlement of the foreign-currency-denominated intercompany accounts receivable, or (in thousands) Notional  Amount (1) Euro $ 88,401 British pound 59,514 Canadian dollar 432 Japanese yen 273 (1) Amounts reported are the U.S. Dollar notional amounts outstanding as of January 28, 2023. The fair value of derivative instruments is determined using quoted market prices of the same or similar instruments, adjusted for counterparty risk. The location and amounts of derivative fair values of foreign currency exchange forward contracts on the Consolidated Balance Sheets as of January 28, 2023 and January 29, 2022 were as follows: (in thousands) Location January 28, 2023 January 29, 2022 Location January 28, 2023 January 29, 2022 Derivatives designated as cash flow hedging instruments Other current assets $ 32 $ 4,973 Accrued expenses $ 4,986 $ — Refer to Note 4, “ FAIR VALUE , ” for further discussion of the determination of the fair value of derivative instruments. Additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts designated as cash flow hedging instruments for Fiscal 2022, Fiscal 2021 and Fiscal 2020 follows: (in thousands) Fiscal 2022 Fiscal 2021 Fiscal 2020 Gain recognized in AOCL (1) $ 2,844 $ 11,987 $ 7,619 Gain reclassified from AOCL into cost of sales, exclusive of depreciation and amortization (2) 13,781 1,263 13,235 (1) Amount represents the change in fair value of derivative instruments. (2) Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive (Loss) Income when the hedged item affected earnings, which was when merchandise was converted to cost of sales, exclusive of depreciation and amortization. Substantially all of the unrealized gains or losses related to foreign currency exchange forward contracts designated as cash flow hedging instruments as of January 28, 2023 will be recognized within the Consolidated Statements of Operations and Comprehensive (Loss) Income over the next 12 months. Additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts not designated as hedging instruments for Fiscal 2022, Fiscal 2021 and Fiscal 2020 follows: (in thousands) Fiscal 2022 Fiscal 2021 Fiscal 2020 Gain recognized in other operating income, net $ 1,226 $ 1,205 $ 742 Refer to Note 2, “ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Derivative Instruments ,” for discussion regarding significant accounting policies related to the Company’s derivative instruments. Abercrombie & Fitch Co. 70 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. 15. ACCUMULATED OTHER COMPREHENSIVE LOSS For Fiscal 2022, the activity in AOCL was as follows: Fiscal 2022 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at January 29, 2022 $ ( 120,689 ) $ 5,983 $ ( 114,706 ) Other comprehensive (loss) income before reclassifications ( 11,964 ) 2,844 ( 9,120 ) Reclassified gain from AOCL (1) — ( 13,781 ) ( 13,781 ) Tax effect — 80 80 Other comprehensive loss after reclassifications ( 11,964 ) ( 10,857 ) ( 22,821 ) Ending balance at January 28, 2023 $ ( 132,653 ) $ ( 4,874 ) $ ( 137,527 ) (1) Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive (Loss) Income. For Fiscal 2021, the activity in AOCL was as follows: Fiscal 2021 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at January 30, 2021 $ ( 97,772 ) $ ( 4,535 ) $ ( 102,307 ) Other comprehensive (loss) income before reclassifications ( 22,917 ) 11,987 ( 10,930 ) Reclassified gain from AOCL (1) — ( 1,263 ) ( 1,263 ) Tax effect — ( 206 ) ( 206 ) Other comprehensive (loss) income after reclassifications ( 22,917 ) 10,518 ( 12,399 ) Ending balance at January 29, 2022 $ ( 120,689 ) $ 5,983 $ ( 114,706 ) (1) Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive (Loss) Income. Fo r Fiscal 2020, the activity in AOCL was as follows: Fiscal 2020 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at February 1, 2020 $ ( 109,967 ) $ 1,081 $ ( 108,886 ) Other comprehensive income before reclassifications 12,195 7,619 19,814 Reclassified gain from AOCL (1) — ( 13,235 ) ( 13,235 ) Tax effect (2) — — — Other comprehensive income (loss) after reclassifications 12,195 ( 5,616 ) 6,579 Ending balance at January 30, 2021 $ ( 97,772 ) $ ( 4,535 ) $ ( 102,307 ) (1) Amount represents gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive (Loss) Income. (2) No income tax benefit was recognized during Fiscal 2020 due to the establishment of a valuation allowance. Abercrombie & Fitch Co. 71 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. 16. SAVINGS AND RETIREMENT PLANS The Company maintains the Abercrombie & Fitch Co. Savings and Retirement Plan, a qualified plan. All U.S. associates are eligible to participate in this plan if they are at least 21 years of age. In addition, the Company maintains the Abercrombie & Fitch Nonqualified Savings and Supplemental Retirement Plan, comprised of two sub-plans (Plan I and Plan II). Plan I contains contributions made through December 31, 2004, while Plan II contains contributions made on and after January 1, 2005. Participation in these plans is based on service and compensation. The Company’s contributions to these plans are based on a percentage of associates’ eligible annual compensation. The cost of the Company’s contributions to these plans was $ 14.7 million, $ 15.4 million and $ 14.1 million for Fiscal 2022, Fiscal 2021 and Fiscal 2020, respectively. In addition, the Company maintains the Supplemental Executive Retirement Plan which provides retirement income to its former Chief Executive Officer for life, based on averaged compensation before retirement, including base salary and cash incentive compensation. As of January 28, 2023 and January 29, 2022, the Company has recorded $ 7.2 million and $ 8.4 million, respectively, in other liabilities on the Consolidated Balance Sheets related to future Supplemental Executive Retirement Plan distributions. 17. SEGMENT REPORTING The Company’s two operating segments are brand-bas Hollister, which includes the Company’s Hollister, Gilly Hicks and Social Tourist brands, and Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These operating segments have similar economic characteristics, classes of consumers, products, and production and distribution methods, operate in the same regulatory environments, and have been aggregated into one reportable segment. Amounts shown below include net sales from wholesale, franchise and licensing operations, which are not a significant component of total revenue, and are aggregated within their respective operating segment and geographic area. The Company’s net sales by operating segment for Fiscal 2022, Fiscal 2021 and Fiscal 2020 were as follows: (in thousands) Fiscal 2022 Fiscal 2021 Fiscal 2020 Hollister $ 1,962,885 $ 2,147,979 $ 1,834,349 Abercrombie 1,734,866 1,564,789 1,291,035 Total $ 3,697,751 $ 3,712,768 $ 3,125,384 Net sales by geographic area are presented by attributing revenues to an individual country on the basis of the country in which the merchandise was sold for in-store purchases and on the basis of the shipping location provided by customers for digital orders. The Company’s net sales by geographic area for Fiscal 2022, Fiscal 2021 and Fiscal 2020 were as follows: (in thousands) Fiscal 2022 Fiscal 2021 Fiscal 2020 U.S. $ 2,758,294 $ 2,652,158 $ 2,127,403 EMEA 665,828 755,072 709,451 APAC 122,367 171,701 176,636 Other (1) 151,262 133,837 111,894 Total international $ 939,457 $ 1,060,610 $ 997,981 Total $ 3,697,751 $ 3,712,768 $ 3,125,384 (1) Other includes all sales that do not fall within the United States, EMEA, or APAC regions, which are derived primarily in Canada. The Company’s long-lived assets and intellectual property, which primarily relates to trademark assets associated with the Company’s international operations, by geographic area as of January 28, 2023 and January 29, 2022 were as follows: (in thousands) January 28, 2023 January 29, 2022 U.S. $ 910,696 $ 849,298 EMEA 317,712 272,348 APAC 49,771 83,830 Other (1) 18,685 23,599 Total international $ 386,168 $ 379,777 Total $ 1,296,864 $ 1,229,075 (1) Other includes amounts that do not fall within the United States, EMEA, or APAC regions, which are derived primarily in Canada. Abercrombie & Fitch Co. 72 2022 Form 10-K Table of Contents Abercrombie & Fitch Co. 18. CONTINGENCIES The Company is a defendant in lawsuits and other adversarial proceedings arising in the ordinary course of business. The Company’s legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes estimated liabilities for the outcome of litigation where losses are deemed probable and the amount of loss, or range of loss, is reasonably estimable. The Company also determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that a loss is reasonably possible and it is able to determine such estimates. Based on currently available information, the Company cannot estimate a range of reasonably possible losses in excess of the accrued charges for legal contingencies. In addition, the Company has not established accruals for certain claims and legal proceedings pending against the Company where it is not possible to reasonably estimate the outcome or potential liability, and the Company cannot estimate a range of reasonably possible losses for these legal matters. Actual liabilities may differ from the amounts recorded, due to uncertainties regarding final settlement agreement negotiations, court approvals and the terms of any approval by the courts, and there can be no assurance that final resolution of legal matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts. Abercrombie & Fitch Co. 73 2022 Form 10-K Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Abercrombie & Fitch Co. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Abercrombie & Fitch Co. and its subsidiaries (the “Company”) as of January 28, 2023 and January 29, 2022, and the related consolidated statements of operations and comprehensive (loss) income, of stockholders’ equity and of cash flows for each of the three years in the period ended January 28, 2023, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of January 28, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 28, 2023 and January 29, 2022, and the results of its operations and its cash flows for each of the three years in the period ended January 28, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Abercrombie & Fitch Co. 74 2022 Form 10-K Table of Contents Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Impairment of Long-Lived Assets – Stores As described in Notes 2, 6 and 8 to the consolidated financial statements, the Company’s consolidated property and equipment, net balance was $551.6 million and consolidated operating lease right-of-use assets balance was $723.6 million as of January 28, 2023. During the year ended January 28, 2023, the Company recognized long-lived asset store impairment charges of $11.0 million. The Company’s long-lived assets, primarily operating lease right-of-use assets, leasehold improvements, furniture, fixtures and equipment, are grouped with other assets and liabilities at the store level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. On at least a quarterly basis, management reviews the Company’s asset groups for indicators of impairment, which include, but are not limited to, material declines in operational performance, a history of losses, an expectation of future losses, adverse market conditions, store closure or relocation decisions, and any other events or changes in circumstances that would indicate the carrying amount of an asset group might not be recoverable. If an asset group displays an indicator of impairment, it is tested for recoverability by comparing the sum of the estimated future undiscounted cash flows attributable to the asset group to the carrying amount of the asset group. This recoverability test requires management to make assumptions and judgments related, but not limited, to management’s expectations for future cash flows from operating the store. The key assumption used in developing these projected cash flows used in the recoverability test is estimated sales growth rate. If the sum of the estimated future undiscounted cash flows attributable to an asset group is less than its carrying amount, and it is determined that the carrying amount of the asset group is not recoverable, management determines if there is an impairment loss by comparing the carrying amount of the asset group to its fair value. Fair value of an asset group is based on the highest and best use of the asset group, often using a discounted cash flow model that utilizes Level 3 fair value inputs. The key assumptions used in the Company’s fair value analysis are estimated sales growth rate and comparable market rents. An impairment loss is recognized based on the excess of the carrying amount of the asset group over its fair value. The principal considerations for our determination that performing procedures relating to the impairment of long-lived assets - stores is a critical audit matter are (i) the significant judgment by management when developing the future undiscounted cash flows attributable to an asset group when testing for recoverability and when determining the fair value of the asset groups to measure for impairment; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to estimated sales growth rate when developing the future undiscounted cash flows, and comparable market rents when estimating the fair value; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s long-lived assets - stores recoverability test and determination of the fair value of the asset groups. These procedures also included, among others (i) testing management’s process for developing the future undiscounted cash flows attributable to an asset group when testing for recoverability and when determining the fair value of the asset groups to measure for impairment; (ii) evaluating the appropriateness of the models used by management in determining the fair value of the asset groups; (iii) testing the completeness and accuracy of underlying data used in the models; and (iv) evaluating the reasonableness of the significant assumptions related to estimated sales growth rate when developing the future undiscounted cash flows and comparable market rents when estimating the fair value. Evaluating management’s assumptions related to estimated sales growth rate and comparable market rents involved evaluating whether the assumptions used by management were reasonable considering the current and past performance of the asset groups, the consistency with evidence obtained in other areas of the audit as it relates to estimated sales growth rate, and consistency with external market data as it relates to estimated sales growth rate and comparable market rents. Professionals with specialized skill and knowledge were used to assist in evaluating of the reasonableness of the comparable market rents significant assumption. /s/ PricewaterhouseCoopers LLP Columbus, Ohio March 27, 2023 We have served as the Company’s auditor since 1996. Abercrombie & Fitch Co. 75 2022 Form 10-K Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A.    Controls and Procedures DISCLOSURE CONTROLS AND PROCEDURES A&F maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in the reports that A&F files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to A&F’s management, including A&F’s Principal Executive Officer and A&F’s Principal Financial Officer and Principal Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met. A&F’s management, including the Chief Executive Officer of A&F (who serves as Principal Executive Officer of A&F) and the Executive Vice President and Chief Financial Officer of A&F (who serves as Principal Financial Officer and Principal Accounting Officer of A&F), evaluated the effectiveness of A&F’s disclosure controls and procedures as of January 28, 2023. The Chief Executive Officer of A&F (in such individual’s capacity as the Principal Executive Officer of A&F) and the Executive Vice President and Chief Financial Officer of A&F (in such individual’s capacity as the Principal Financial Officer of A&F) concluded that A&F’s disclosure controls and procedures were effective at a reasonable level of assurance as of January 28, 2023, the end of the period covered by this Annual Report on Form 10-K. MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of A&F is responsible for establishing and maintaining adequate internal control over financial reporting. A&F’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. With the participation of the Chief Executive Officer of A&F and the Executive Vice President and Chief Financial Officer of A&F, management evaluated the effectiveness of A&F’s internal control over financial reporting as of January 28, 2023 using criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the assessment of A&F’s internal control over financial reporting, under the criteria described in the preceding sentence, management has concluded that, as of January 28, 2023, A&F’s internal control over financial reporting was effective. The effectiveness of A&F’s internal control over financial reporting as of January 28, 2023 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this Annual Report on Form 10-K. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in A&F’s internal control over financial reporting during the quarter ended January 28, 2023 that have materially affected, or are reasonably likely to materially affect, A&F’s internal control over financial reporting. Item 9B.    Other Information None. Abercrombie & Fitch Co. 76 2022 Form 10-K Table of Contents Item 9C.    Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. Abercrombie & Fitch Co. 77 2022 Form 10-K Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance DIRECTORS, EXECUTIVE OFFICERS AND PERSONS NOMINATED OR CHOSEN TO BECOME DIRECTORS OR EXECUTIVE OFFICERS Information concerning directors will be included under the caption “Proposal 1 — Election of Directors” in A&F’s definitive Proxy Statement for the 2023 Annual Meeting of Stockholders (the “2023 Proxy Statement”) and is incorporated by reference herein. Information concerning executive officers is included under the caption “INFORMATION ABOUT OUR EXECUTIVE OFFICERS” within “ ITEM 1. BUSINESS ” in this Annual Report on Form 10-K and is incorporated by reference herein. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Information concerning beneficial ownership reporting compliance under Section 16(a) of the Exchange Act will be included under the caption “Ownership of our Shares — Delinquent Section 16(a) Reports” in the 2023 Proxy Statement and is incorporated by reference herein. CODE OF BUSINESS CONDUCT AND ETHICS The Board of Directors has adopted the Abercrombie & Fitch Co. Code of Business Conduct and Ethics, which applies to all associates and directors worldwide and incorporates an additional Code of Ethics applicable to our Chief Executive Officer, our Chief Financial Officer, and other designated financial associates. The Code of Business Conduct and Ethics is available on the “Corporate Governance” page of the Company’s corporate website at corporate.abercrombie.com. AUDIT AND FINANCE COMMITTEE Information concerning the Audit and Finance Committee of the Board of Directors (the “Audit and Finance Committee”) will be included under the captions “Corporate Governance — Committees of the Board and Meeting Attendance — Committees of the Board” and “Audit and Finance Committee Matters” in the 2023 Proxy Statement and is incorporated by reference herein. PROCEDURES BY WHICH STOCKHOLDERS MAY RECOMMEND NOMINEES TO THE BOARD OF DIRECTORS Information concerning changes in the procedures by which stockholders of A&F may recommend nominees to the Board of Directors will be included under the captions “Corporate Governance — Director Nominations — Stockholder Recommendations for Director Candidates,” “Corporate Governance — Director Qualifications and Consideration of Director Candidates,” “Stockholder Proposals for 2023 Annual Meeting” and “Additional Information About Our Annual Meeting and Voting — How do I nominate a director using the ‘Proxy Access’ provisions under the Company’s Bylaws?” in the 2023 Proxy Statement and is incorporated by reference herein. Abercrombie & Fitch Co. 78 2022 Form 10-K Table of Contents Item 11. Executive Compensation Information regarding executive compensation will be included under the captions “Corporate Governance — Board Role in Risk Oversight,” “Compensation of Directors,” “Compensation Discussion and Analysis,” “Report of the Compensation and Human Capital Committee on Executive Compensation,” and “Executive Compensation Tables” in the 2023 Proxy Statement and is incorporated by reference herein. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information concerning the security ownership of certain beneficial owners and management will be included under the caption “Ownership of Our Shares” in the 2023 Proxy Statement and is incorporated by reference herein. Information regarding Common Stock authorized for issuance under A&F’s equity compensation plans will be included under the caption “Equity Compensation Plans” in the 2023 Proxy Statement and is incorporated by reference herein. Item 13. Certain Relationships and Related Transactions, and Director Independence Information concerning relationships and transactions with related persons will be included under the caption “Corporate Governance — Director Independence and Related Person Transactions” in the 2023 Proxy Statement and is incorporated by reference herein. Information concerning director independence will be included under the captions “Corporate Governance — Board Leadership Structure,” “Corporate Governance — Committees of the Board and Meeting Attendance,” and “Corporate Governance — Director Independence and Related Person Transactions” in the 2023 Proxy Statement and is incorporated by reference herein. Item 14. Principal Accountant Fees and Services Information concerning pre-approval policies and procedures of the Audit and Finance Committee and fees for services rendered by the Company’s principal independent registered public accounting firm will be included under the caption “Audit and Finance Committee Matters — Audit Fees” in the 2023 Proxy Statement and ins incorporated by reference herein. Abercrombie & Fitch Co. 79 2022 Form 10-K Table of Contents PART IV Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as a part of this Annual Report on Form 10-K: (1) Consolidated Financial Statements: Consolidated Statements of Operations and Comprehensive (Loss) Income for the fiscal years ended January 28, 2023, January 29, 2022 and January 30, 2021. Consolidated Balance Sheets at January 28, 2023 and January 29, 2022. Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 28, 2023, January 29, 2022 and January 30, 2021. Consolidated Statements of Cash Flows for the fiscal years ended January 28, 2023, January 29, 2022 and January 30, 2021. Notes to Consolidated Financial Statements. Report of Independent Registered Public Accounting Firm — PricewaterhouseCoopers LLP. (PCAOB ID 238 ) (2) Consolidated Financial Statement Schedul All financial statement schedules for which provision is made in the applicable accounting regulations of the SEC are omitted because the required information is either not applicable or not material. (3) Exhibits: The documents listed in the Index to Exhibits that immediately precedes the Signatures page of this Annual Report on Form 10-K are filed or furnished with this Annual Report on Form 10-K as exhibits or incorporated into this Annual Report on Form 10-K by reference as noted. Each management contract or compensatory plan or arrangement is identified as such in the Index to Exhibits. (b) The documents listed in the Index to Exhibits that immediately precedes the Signatures page of this Annual Report on Form 10-K are filed or furnished with this Annual Report on Form 10-K as exhibits or incorporated into this Annual Report on Form 10-K by reference. (c) Financial Statement Schedules None Item 16. Form 10-K Summary None. Abercrombie & Fitch Co. 80 2022 Form 10-K Table of Contents Index to Exhibits Exhibit Document 3.1 Amended and Restated Certificate of Incorporation of A&F, reflecting amendments through the date of this Annual Report on Form 10-K, incorporated herein by reference to Exhibit 3.2 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2011 (File No. 001-12107). [This document represents the Amended and Restated Certificate of Incorporation of Abercrombie & Fitch Co. in compiled form incorporating all amendments .] 3.2 Amended and Restated Bylaws of Abercrombie & Fitch Co. reflecting amendments through the date of this Annual Report on Form 10-K, incorporated herein by reference to Exhibit 3.1 to A&F's Current Report on Form 8 -K dated and filed November 22, 2022 (File No. 001-12107). [This document represents the Amended and Restated Bylaws of Abercrombie & Fitch Co. in compiled form incorporating all amendments.] 4.1 Agreement to furnish instruments and agreements defining rights of holders of long-term debt. 4.2 Description of Abercrombie & Fitch Co.’s Securities Registered under Section 12 of the Securities Exchange Act of 1934. 4.3 Indenture, dated as of July 2, 2020, by and among Abercrombie & Fitch Management Co., Abercrombie & Fitch Co., as Parent, the other Guarantors party thereto and U.S. Bank National Association, as Trustee, Registrar, Paying Agent, and Notes Collateral Agent, incorporated herein by reference to Exhibit 4.1 to A&F’s Current Report on Form 8-K dated and filed on July 9, 2020 (File No. 001-12107). 4.4 Form of 8.75% Senior Secured Notes due 2025 (included in Exhibit 4.3), incorporated herein by reference to Exhibit 4.2 (which is in turn included in Exhibit 4.1) to A&F’s Current Report on Form 8-K dated and filed on July 9, 2020 (File No. 001-12107). 4.5 Intercreditor Agreement, dated as of July 2, 2020, among Wells Fargo Bank, National Association, as ABL Agent, U.S. Bank National Association , as First Lien Notes Collateral Agent, and each other A dditional Notes Agent from time to time party thereto , incorporated herein by reference to Exhibit 4.5 to A&F’s Annual Report on Form 10-K for the fiscal year ended January 30, 2021 (File No. 001-12107). 10.1* 1998 Restatement of the Abercrombie & Fitch Co. 1996 Stock Plan for Non-Associate Directors , incorporated herein by reference to Exhibit 10.3 to A&F’s Annual Report on Form 10-K for the fiscal year ended February 1, 2003 (File No. 001-12107). 10.2* Amended and Restated Employment Agreement, entered into as of August 15, 2005, by and between A&F and Michael S. Jeffries, including ( as Exhibit A thereto ) the Abercrombie & Fitch Co. Supplemental Executive Retirement Plan (Michael S. Jeffries) , effective February 2, 2003, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed August 26, 2005 (File No. 001-12107). [NOTE: Only the Abercrombie & Fitch Co. Supplemental Executive Retirement Plan (Michael S. Jeffries) is still in effect.] 10.3* Abercrombie & Fitch Co. Directors’ Deferred Compensation Plan (Plan I) (prior to January 1, 2005, known as the Abercrombie & Fitch Co. Directors’ Deferred Compensation Plan), as amended and restated May 22, 2003, incorporated herein by reference to Exhibit 10.7 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended May 3, 2003 (File No. 001-12107). 10.4* Abercrombie & Fitch Co. Directors’ Deferred Compensation Plan (Plan II), effective January 1, 2005, incorporated herein by reference to Exhibit 10.50 to A&F’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009 (File No. 001-12107). 10.5* Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I (prior to January 1, 2009, known as the Abercrombie & Fitch Nonqualified Savings and Supplemental Retirement Plan), as amended and restated effective January 1, 2001, incorporated herein by reference to Exhibit 10.9 to A&F’s Annual Report on Form 10-K for the fiscal year ended February 1, 2003 (File No. 001-12107). 10.6* First Amendment to the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan (Plan I) (January 1, 2001 Restatement), effe ctive as of Jan u a ry 1, 2009, incorporated herein by reference to Exhibit 10.13 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended August 2, 2008 (File No. 001-12107). 10.7* Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan ( Plan II), as amended and restated effective as of January 1, 2014 , incorporated herein by reference to Exhibit 10.3 to A&F’s Current Report on Form 8-K dated and filed October 19, 2015 (File No. 001-12107). 10.8* First Amendment to the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan (Plan II), dated as of October 14, 2015, incorporated herein by reference to Exhibit 10.4 to A&F’s Current Report on Form 8-K dated and filed October 19, 2015 (File No. 001-12107). 10.9* Second Amendment to the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan (Plan II), dated as of December 16, 2019, incorporated herein by reference to Exhibit 10.33 to A&F's Annual Report on Form 10-K for the fiscal year ended February 1, 2020 (File No. 001-12107). 10.10* Trust Agreement, made as of October 16, 2006, between A&F and Wilmington Trust Company, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed October 17, 2006 (File No. 001-12107). 10.11 Amended and Restated Credit Agreement, dated as of April 29, 2021, among Abercrombie & Fitch Management Co., as Lead Borrower; the other Borrowers and Guarantors party thereto; Wells Fargo Bank, National Association, as administrative agent for the lenders, a L/C Issuer and Swing Line Lender; the other lenders party thereto; Citizens Business Capital, as a L/C Issuer; Citizens Bank, N.A., as Syndication Agent; JPMorgan Chase Bank, N.A., as Documentation Agent and a L/C Issuer; and Wells Fargo Bank, National Association, Citizens Bank, N.A. and JPMorgan Chase Bank, N.A., as Joint Lead Arrangers and Joint Bookrunners, incorporated herein by reference to Exhibit 10.3 to A&F’s Quarterly Report on Form 10 Q for the quarterly period ended May 1, 2021 (File No. 001 12107).† 10.12 First Amendment to Amended and Restated Credit Agreement and First Amendment to Security Agreement, dated as of March 15, 2023, among Abercrombie & Fitch Management Co., as Lead Borrower; the other Borrowers and Guarantors party thereto , and Wells Fargo Bank, National Association, as administrative agent for the Lenders 10.13 Guaranty, dated as of August 7, 2014, made by Abercrombie & Fitch Co., as guarantor, and certain of its wholly-owned subsidiaries, each as a guarantor, in favor of Wells Fargo Bank, National Association, as administrative agent and collateral agent for its own benefit and the benefit of the other Credit Parties , and the Credit Parties, incorporated herein by reference to Exhibit 10.5 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended August 2, 2014 (File No. 001-12107). 10.14 Security Agreement, dated as of August 7, 2014, made by Abercrombie & Fitch Management Co., as lead borrower for itself and the other Borrowers, Abercrombie & Fitch Co. and certain of its wholly-owned subsidiaries, in their respective capacities as a guarantor, and the other borrowers and guarantors from time to time party thereto, in favor of Wells Fargo Bank, National Association, as administrative agent and collateral agent for the Credit Parties, incorporated herein by reference to Exhibit 10.7 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended August 2, 2014 (File No. 001-12107).†† Abercrombie & Fitch Co. 81 2022 Form 10-K Table of Contents 10.15* Confirmation, Ratification and Amendment of Ancillary Loan Documents, made as of April 29, 2021, among Abercrombie & Fitch Co., for itself and as Lead Borrower; the other Borrowers from time to time party thereto; the Guarantors from time to time party thereto; and Wells Fargo Bank, National Association, as Administrative Agent and Collateral Agent , incorporated herein by reference to Exhibit 10.19 to A&F’s Annual Report on 10-K for the fiscal year ended January 29, 2022 (File No. 001-12107) . † 10.16* Retirement Agreement, dated December 8, 2014, between Michael S. Jeffries and A&F, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed December 9, 2014 (File No. 001-12107). 10.17* Employment Offer, dated October 8, 2014, between Fran Horowitz and A&F, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed October 15, 2014 (File No. 001-12107). 10.18* Letter, dated December 16, 2015, between A&F M anagement and Fran Horowitz setting forth terms of employment as President and Chief Merchandising Officer, i ncorporated herein by reference to Exhibit 10.74 to A&F’s Annual Report on Form 10-K for the fiscal year ended January 30, 2016 (File No. 001-12107). 10.19* Form of Agreement entered into between A&F Management and Fran Horowitz as of May 10, 2017, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed May 12, 2017 (File No. 001-12107). 10.20* Non-Compete Amendment entered into between A&F Management and Fran Horowitz as of November 5, 2021 (including a schedule identifying executive officers of A&F party to substantially identical Non-Compete Agreements with A&F Management, incorporated herein by reference to Exhibit 10.1 to A&F’s Quarterly Report on Form 10‑Q for the quarterly period ended October 30, 2021 (File No. 001‑12107). 10.21* Employment Offer , dated May 6, 2016, betwee n Kristin Scott and A&F , incorporated herein by reference to Exhibit 10.3 to A&F’s Current Report on Form 8-K dated and filed May 23, 2016 (File No. 001-12107). 10.22* Form of Agreement entered into between A&F Management and Kristin Scott as of May 10, 2017, incorporated herein by reference to Exhibit 10.2 to A&F’s Current Report on Form 8-K dated and filed May 12, 2017 (File No. 001-12107). 10.23* Employment Offer, dated August 17, 2017, between Scott Lipesky and A&F, incorporated herein by reference to Exhibit 10.1 to A&F's Current Report on Form 8-K dated and filed September 6, 2017 (File No. 001-12107). 10.24* Form of Agreement entered into between A&F Management and Scott Lipesky as of September 7, 2017, incorporated herein by reference to Exhibit 10.2 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended October 28, 2017 (File No. 001-12107). 10.25* Employment Offer, dated August 24, 2018, between Gregory J. Henchel and A&F, incorporated herein by reference to Exhibit 10.1 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended November 3, 2018 (File No. 001-12107). 10.26* Agreement entered into between A&F Management and Gregory J. Henchel as of September 13, 2018, incorporated herein by reference to Exhibit 10.2 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended November 3, 2018 (File No. 001-12107). 10.27* Form of Retention Restricted Stock Unit Award Agreement, effective as of August 28, 2020, between A&F and each of Scott Lipesky, Kristin Scott and Gregory J. Henchel, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed on September 2, 2020 (File No. 001-12107). 10.28* Employment Offer, dated May 20, 2021, between Samir Desai and A&F (including, as Exhibit A, the Agreement entered into between A&F Management and Samir Desai as of May 20, 2021), incorporated herein by reference to Exhibit 10.2 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2021 (File No. 001-12107). 10.29* Form of Director and Officer Indemnification Agreement, incorporated herein by reference to Exhibit 10.3 to A&F's Quarterly Report on Form 10-Q/A for the quarterly period ended April 29, 2017 (File No. 001-12107). 10.30* Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed June 17, 2005 (File No. 001-12107). 10.31* Certificate regarding Approval of Amendment of Section 3(b) of the Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan by Board of Directors of Abercrombie & Fitch Co. on August 20, 2014, incorporated herein by reference to Exhibit 10.11 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2016 (File No. 001-12107). 10.32* Amended and Restated Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan, incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed June 17, 2011 (File No. 001-12107). 10.33* Certificate regarding Approval of Amendment of Section 3(b) of the Abercrombie & Fitch Co. Amended and Restated 2007 Long-Term Incentive Plan by Board of Directors of Abercrombie & Fitch Co. on August 20, 2014, incorporated herein by reference to Exhibit 10.12 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2016 (File No. 001-12107). 10.34* Form of Stock Appreciation Right Agreement used for grants of awards after March 26, 2013 and prior to August 20, 2013 under the Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan, incorporated herein by reference to Exhibit 10.2 to A&F’s Current Report on Form 8-K dated and filed April 29, 2013 (File No. 001-12107). 10.35* Form of Stock Appreciation Right Award Agreement used for grants of awards after August 20, 2013 and prior to June 16, 2016 under the Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan, incorporated herein by reference to Exhibit 10.9 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended November 2, 2013 (File No. 001-12107). 10.36* Form of Stock Appreciation Right Award Agreement used for grants of awards after August 20, 2013 and prior to June 16, 2016 under the Amended and Restated Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan, incorporated herein by reference to Exhibit 10.2 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended November 2, 2013 (File No. 001-12107). 10.37* Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates (as amended on June 8, 2022), incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K dated and filed on June 9, 2022 (File No. 001-12107). 10.38* Form of Restricted Stock Unit Award Agreement used to evidence the grant of restricted stock units to associates (employees) of Abercrombie & Fitch Co. and its subsidiaries under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates on and after March 26, 2019 and prior to March 7, 2023, incorporated herein by reference to Exhibit 10.1 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended May 2, 2020 (File No. 001-12107). 10.39* Form of Restricted Stock Unit Award Agreement used to evidence the grant of restricted stock units to associates (employees) of Abercrombie & Fitch Co. and its subsidiaries under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates on and after March 7, 2023. 10.40* Form of Restricted Stock Unit Award Agreement used to evidence the grant of restricted stock units to non-associate directors of A&F under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Directors on and after June 16, 2016 , incorporated herein by reference to Exhibit 10.10 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2016 (File No. 001-12107). 10.41* Form of Restricted Stock Unit Award Agreement used to evidence the grant of restricted stock units to non-associate chairperson of the board of A&F under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Directors on and after June 16, 2016 . Abercrombie & Fitch Co. 82 2022 Form 10-K Table of Contents 10.42* Form of Performance Share Award Agreement used to evidence the grant of performance shares to associates (employees) of A&F and its subsidiaries under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates on or after August 28, 2020 and prior to March 23, 2021, incorporated herein by reference to Exhibit 10.1 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2020 (File No. 001-12107). 10.43* Form of Performance Share Award Agreement used to evidence the grant of performance share awards to associates (employees) of A&F and its subsidiaries under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates on or after March 23, 2021 and prior to March 24 , 202 2 , incorporated herein by reference to Exhibit 10.2 to A&F’s Quarterly Report on Form 10 Q for the quarterly period ended May 1, 2021 (File No. 001-12107). 10.44* Form of Performance Share Award Agreement used to evidence the grant of performance share awards to associates (employees) of A&F and its subsidiaries under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates on or after March 24, 2022 and prior to March 7, 2023, incorporated herein by reference to Exhibit 10.1 to A&F’s Quarterly Report on Form 10 Q for the quarterly period ended April 30, 2022 (File No. 001-12107) . 10.45* Form of Performance Share Award Agreement used to evidence the grant of performance share awards to associates (employees) of A&F and its subsidiaries under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates on or after March 7, 2023. 10.46* Amended and Restated Abercrombie & Fitch Co. Short-Term Cash Incentive Compensation Performance Plan, incorporated herein by reference to Exhibit 10.1 to A&F's Current Report on Form 8-K dated and filed March 24, 2021 (File No. 001-12107). 10.47* Abercrombie & Fitch Co. Long-Term Cash Incentive Compensation Performance Plan, incorporated herein by reference to Exhibit 10.2 to A&F's Current Report on Form 8-K dated and filed June 15, 2017 (File No. 001-12107). 10.48 Abercrombie & Fitch Co. Associate Stock Purchase Plan (October 1, 2007 Restatement, incorporated herein by reference to Exhibit 10.6 to A&F's Quarterly Report on Form 10-Q for the quarterly period ended October 28, 2017 (File No. 001-12107) 21.1 List of Subsidiaries of A&F. 23.1 Consent of Independent Registered Public Accounting Firm — PricewaterhouseCoopers LLP. 24.1 Powers of Attorney. 31.1 Certifications by Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certifications by Executive Vice President and Chief Financial Officer (Principal Financial Officer) pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certifications by Chief Executive Officer (Principal Executive Officer) and Executive Vice President and Chief Financial Officer (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** 101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101). *    Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(a)(3) and Item 15(b) of this Annual Report on Form 10-K. **    These certifications are furnished. † Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K . ††    Certain portions of this exhibit have been omitted based upon a request for confidential treatment filed with the SEC. The non-public information has been separately filed with the SEC in connection with that request. Abercrombie & Fitch Co. 83 2022 Form 10-K Table of Contents Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ABERCROMBIE & FITCH CO. Date: March 27, 2023 By: /s/     Scott D. Lipesky Scott D. Lipesky Executive Vice President and Chief Financial Officer (Principal Financial Officer, Principal Accounting Officer and Authorized Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 27, 2023. * Nigel Travis Chairperson of the Board and Director /s/     Fran Horowitz Fran Horowitz Chief Executive Officer and Director (Principal Executive Officer) * Kerrii B. Anderson Director * Terry L. Burman Director * Susie Coulter Director * Sarah M. Gallagher Director * James A. Goldman Director * Michael E. Greenlees Director /s/     Scott D. Lipesky Scott D. Lipesky Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) * Helen E. McCluskey Director * Kenneth B. Robinson Director * Helen Vaid Director * *    The undersigned, by signing his name hereto, does hereby sign this Annual Report on Form 10-K on behalf of each of the above-named directors of the Registrant pursuant to powers of attorney executed by such directors, which powers of attorney are filed with this Annual Report on Form 10-K as Exhibit 24.1. By: /s/     Scott D. Lipesky Scott D. Lipesky Attorney-in-fact Abercrombie & Fitch Co. 84 2022 Form 10-K

Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Stockholders’ Equity 5 Condensed Consolidated Statements of Cash Flows 6 Index for Notes to Condensed Consolidated Financial Statements 7 Notes to Condensed Consolidated Financial Statements 8 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 31 Item 4. Controls and Procedures 32 PART II. OTHER INFORMATION Item 1. Legal Proceedings 33 Item 1A. Risk Factors 33 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33 Item 6. Exhibits 34 Signatures 35 Abercrombie & Fitch Co. 2 2023 1Q Form 10-Q Table of Contents PART I. FINANCIAL INFORMATION Item 1.     Financial Statements (Unaudited) Abercrombie & Fitch Co. Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Thousands, except per share amounts) (Unaudited) Thirteen Weeks Ended April 29, 2023 April 30, 2022 Net sales $ 835,994 $ 812,762 Cost of sales, exclusive of depreciation and amortization 326,200 363,216 Gross profit 509,794 449,546 Stores and distribution expense 331,613 337,543 Marketing, general and administrative expense 142,631 122,149 Asset impairment 4,436 3,422 Other operating income, net ( 2,894 ) ( 3,842 ) Operating income (loss) 34,008 ( 9,726 ) Interest expense, net 3,443 7,307 Income (loss) before income taxes 30,565 ( 17,033 ) Income tax expense (benefit) 12,718 ( 2,187 ) Net income (loss) 17,847 ( 14,846 ) L Net income attributable to noncontrolling interests 1,276 1,623 Net income (loss) attributable to A&F $ 16,571 $ ( 16,469 ) Net income (loss) per share attributable to A&F Basic $ 0.33 $ ( 0.32 ) Diluted $ 0.32 $ ( 0.32 ) Weighted-average shares outstanding Basic 49,574 52,077 Diluted 51,467 52,077 Other comprehensive income (loss) Foreign currency translation adjustments, net of tax $ 311 $ ( 10,403 ) Derivative financial instruments, net of tax 405 1,712 Other comprehensive income (loss) 716 ( 8,691 ) Comprehensive income (loss) 18,563 ( 23,537 ) L Comprehensive income attributable to noncontrolling interests 1,276 1,623 Comprehensive income (loss) attributable to A&F $ 17,287 $ ( 25,160 ) The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 3 2023 1Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Balance Sheets (Thousands, except par value amounts) (Unaudited) April 29, 2023 January 28, 2023 Assets Current assets: Cash and equivalents $ 446,952 $ 517,602 Receivables 106,149 104,506 Inventories 447,806 505,621 Other current assets 107,684 100,289 Total current assets 1,108,591 1,228,018 Property and equipment, net 550,810 551,585 Operating lease right-of-use assets 692,699 723,550 Other assets 205,978 209,947 Total assets $ 2,558,078 $ 2,713,100 Liabilities and stockholders’ equity Current liabiliti Accounts payable $ 221,587 $ 258,895 Accrued expenses 340,331 413,303 Short-term portion of operating lease liabilities 188,520 213,979 Income taxes payable 19,023 16,023 Total current liabilities 769,461 902,200 Long-term liabiliti Long-term portion of operating lease liabilities 682,996 713,361 Long-term borrowings, net 297,172 296,852 Other liabilities 97,476 94,118 Total long-term liabilities 1,077,644 1,104,331 Stockholders’ equity Class A Common Stoc $ 0.01 par val 150,000 shares authorized and 103,300 shares issued for all periods presented 1,033 1,033 Paid-in capital 400,699 416,255 Retained earnings 2,344,522 2,368,815 Accumulated other comprehensive loss, net of tax (“AOCL”) ( 136,811 ) ( 137,527 ) Treasury stock, at average 53,238 and 54,298 shares as of April 29, 2023 and January 28, 2023, respectively ( 1,907,586 ) ( 1,953,735 ) Total Abercrombie & Fitch Co. stockholders’ equity 701,857 694,841 Noncontrolling interests 9,116 11,728 Total stockholders’ equity 710,973 706,569 Total liabilities and stockholders’ equity $ 2,558,078 $ 2,713,100 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 4 2023 1Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Statements of Stockholders’ Equity (Thousands, except per share amounts) (Unaudited) Thirteen Weeks Ended April 29, 2023 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, January 28, 2023 49,002 $ 1,033 $ 416,255 $ 11,728 $ 2,368,815 $ ( 137,527 ) 54,298 $ ( 1,953,735 ) $ 706,569 Net income — — — 1,276 16,571 — — — 17,847 Share-based compensation issuances and exercises 1,060 — ( 23,644 ) — ( 40,864 ) — ( 1,060 ) 46,149 ( 18,359 ) Share-based compensation expense — — 8,088 — — — — — 8,088 Derivative financial instruments, net of tax — — — — — 405 — — 405 Foreign currency translation adjustments, net of tax — — — — — 311 — — 311 Distributions to noncontrolling interests, net — — — ( 3,888 ) — — — — ( 3,888 ) Ending balance at April 29, 2023 50,062 $ 1,033 $ 400,699 $ 9,116 $ 2,344,522 $ ( 136,811 ) 53,238 $ ( 1,907,586 ) $ 710,973 Thirteen Weeks Ended April 30, 2022 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, January 29, 2022 52,985 $ 1,033 $ 413,190 $ 11,234 $ 2,386,156 $ ( 114,706 ) 50,315 $ ( 1,859,583 ) $ 837,324 Net income (loss) — — — 1,623 ( 16,469 ) — — — ( 14,846 ) Purchase of Common Stock ( 3,260 ) — — — 3,260 ( 100,000 ) ( 100,000 ) Share-based compensation issuances and exercises 717 — ( 23,134 ) — ( 18,880 ) — ( 717 ) 28,089 ( 13,925 ) Share-based compensation expense — — 8,356 — — — — — 8,356 Derivative financial instruments, net of tax — — — — — 1,712 — — 1,712 Foreign currency translation adjustments, net of tax — — — — — ( 10,403 ) — — ( 10,403 ) Distributions to noncontrolling interests, net — — — ( 3,413 ) — — — — ( 3,413 ) Ending balance at April 30, 2022 50,442 $ 1,033 $ 398,412 $ 9,444 $ 2,350,807 $ ( 123,397 ) 52,858 $ ( 1,931,494 ) $ 704,805 Abercrombie & Fitch Co. 5 2023 1Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Statements of Cash Flows (Thousands) (Unaudited) Thirteen Weeks Ended April 29, 2023 April 30, 2022 Operating activities Net income (loss) $ 17,847 $ ( 14,846 ) Adjustments to reconcile net income (loss) to net cash used for operating activiti Depreciation and amortization 36,028 33,888 Asset impairment 4,436 3,422 Loss (gain) on disposal 489 ( 2,798 ) Provision for (benefit from) deferred income taxes 9,689 ( 5,853 ) Share-based compensation 8,088 8,356 Changes in assets and liabiliti Inventories 57,662 ( 38,475 ) Accounts payable and accrued expenses ( 100,802 ) ( 138,774 ) Operating lease right-of-use assets and liabilities ( 26,152 ) ( 32,127 ) Income taxes 3,000 2,664 Other assets ( 10,957 ) ( 33,475 ) Other liabilities 112 231 Net cash used for operating activities ( 560 ) ( 217,787 ) Investing activities Purchases of property and equipment ( 46,391 ) ( 26,292 ) Proceeds from the sale of property and equipment — 7,751 Net cash used for investing activities ( 46,391 ) ( 18,541 ) Financing activities Purchases of Common Stock — ( 100,000 ) Other financing activities ( 21,956 ) ( 16,945 ) Net cash used for financing activities ( 21,956 ) ( 116,945 ) Effect of foreign currency exchange rates on cash ( 1,998 ) ( 2,617 ) Net decrease in cash and equivalents, and restricted cash and equivalents ( 70,905 ) ( 355,890 ) Cash and equivalents, and restricted cash and equivalents, beginning of period 527,569 834,368 Cash and equivalents, and restricted cash and equivalents, end of period $ 456,664 $ 478,478 Supplemental information related to non-cash activities Purchases of property and equipment not yet paid at end of period $ 48,006 $ 33,035 Operating lease right-of-use assets additions, net of terminations, impairments and other reductions 17,857 35,521 Supplemental information related to cash activities Cash paid for income taxes 3,007 2,887 Cash received from income tax refunds 411 114 Cash paid for amounts included in measurement of operating lease liabilities, net of abatements 85,156 88,322 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 6 2023 1Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Index for Notes to Condensed Consolidated Financial Statements (Unaudited) Page No. Note 1. NATURE OF BUSINESS 8 Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 8 Note 3. REVENUE RECOGNITION 10 Note 4. NET INCOME (L OSS) PER SHARE 10 Note 5. FAIR VALUE 11 Note 6. PROPERTY AND EQUIPMENT, NET 12 Note 7. LEASES 12 Note 8. ASSET IMPAIRMENT 12 Note 9. INCOME TAXES 13 Note 10. BORROWINGS 13 Note 11. SHARE-BASED COMPENSATION 14 Note 12. DERIVATIVE INSTRUMENTS 16 Note 13. ACCUMULATED OTHER COMPREHENSIVE LOSS 17 Note 14. SEGMENT REPORTING 18 Note 15. SUBSEQUENT EVENTS 18 Abercrombie & Fitch Co. 7 2023 1Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. NATURE OF BUSINESS Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a global, digitally-led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. The Company’s two brand-based operating segments are Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands, and Hollister, which includes the Company’s Hollister, Gilly Hicks, and Social Tourist brands. These brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company operates primarily in North America, Europe, Middle East, and Asia. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The accompanying Condensed Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its financial position, results of operations and cash flows. The Company has interests in an Emirati business venture, in a Kuwaiti business venture with Majid al Futtaim Fashion L.L.C. (“MAF”) and in a United States of America (the “U.S.”) business venture with Dixar L.L.C. (“Dixar”), each of which meets the definition of a variable interest entity (“VIE”). The purpose of the business ventures with MAF is to operate stores in the United Arab Emirates and Kuwait and the purpose of the business venture with Dixar is to hold the intellectual property related to the Social Tourist brand. The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the operating results, assets and liabilities of these VIEs, with the noncontrolling interests’ (“NCI”) portions of net income (loss) presented as net income attributable to NCI on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and the NCI portion of stockholders’ equity presented as NCI on the Condensed Consolidated Balance Sheets. Fiscal year The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a fifty-two week year, but occasionally gives rise to an additional week, resulting in a fifty-three week year. Fiscal years are designated in the Condensed Consolidated Financial Statements and notes, as well as the remainder of this Quarterly Report on Form 10-Q, by the calendar year in which the fiscal year commences. All references herein to the Company’s fiscal years are as follows: Fiscal year Year ended/ ending Number of weeks Fiscal 2022 January 28, 2023 52 Fiscal 2023 February 3, 2024 53 Fiscal 2024 February 1, 2025 52 Interim financial statements The Condensed Consolidated Financial Statements as of April 29, 2023, and for the thirteen week periods ended April 29, 2023 and April 30, 2022, are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim consolidated financial statements. Accordingly, the Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in A&F’s Annual Report on Form 10-K for Fiscal 2022 filed with the SEC on March 27, 2023 (the “Fiscal 2022 Form 10-K”). The January 28, 2023 consolidated balance sheet data, included herein, were derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the U.S. (“GAAP”). In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to state fairly, in all material respects, the financial position, results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for Fiscal 2023. Abercrombie & Fitch Co. 8 2023 1Q Form 10-Q Table of Contents Use of estimates The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved with estimates, actual results may differ. Additionally, these estimates and assumptions may change as a result of the impact of global economic conditions, such as the uncertainty regarding a slowing economy, rising interest rates, continued inflation, fluctuation in foreign exchange rates, and the ongoing conflict in Ukraine, and result in material impacts to the Company’s consolidated financial statements in future reporting periods. Recent accounting pronouncements The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements. The following table provides a brief description of certain accounting pronouncements that the company has adopted. Accounting Standards Update (ASU) Description Date of adoption Effect on the financial statements or other significant matters ASU 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations The update relates to disclosure requirements for buyers in supplier finance programs. The amendments in the update require that a buyer disclose qualitative and quantitative information about their supplier finance programs. Interim and annual requirements include disclosure of outstanding amounts under the obligations as of the end of the reporting period, and annual requirements include a roll-forward of those obligations for the annual reporting period, as well as a description of payment and other key terms of the programs. This update is effective for annual periods beginning after December 15, 2022, and interim periods within those fiscal years, except for the requirement to disclose roll-forward information, which is effective for fiscal years beginning after December 15, 2023. January 29, 2023 The Company adopted the changes to the standard under the retrospective method in the first quarter of Fiscal 2023, except for roll-forward information, which is effective for fiscal years beginning after December 15, 2023. The adoption of this guidance did not have a significant impact on the Company's condensed consolidated financial statements. Supply Chain Finance Program On January 29, 2023, the Company adopted the changes to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) described in Accounting Standards Update (“ASU”) No. ASU 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, which enhances the transparency of supplier finance programs and requires certain disclosures for a buyer in a supplier finance program. Under the supply chain finance (“SCF”) program, which is administered by a third party, the Company’s vendors, at their sole discretion, are given the opportunity to sell receivables from the Company to a participating financial institution at a discount that leverages the Company’s credit profile. The commercial terms negotiated by the Company with its vendors are consistent, irrespective of whether a vendor participates in the SCF program. A participating vendor has the option to be paid by the financial institution earlier than the original invoice due date. The Company’s responsibility is limited to making payment on the terms originally negotiated by the Company with each vendor, regardless of whether the vendor sells its receivable to a financial institution. If a vendor chooses to participate in the SCF program, the Company pays the financial institution the stated amount of confirmed merchandise invoices on the stated maturity date, which is 75 days from the invoice date. The agreement with the financial institution does not require the Company to provide assets pledged as security or other forms of guarantees for the SCF program. As of April 29, 2023 and January 28, 2023, $ 58.1 million and $ 68.4 million of SCF program liabilities were recorded in “Accounts payable” in the Condensed Consolidated Balance Sheet, respectively, and reflected as a cash flow from operating activities in the Condensed Consolidated Statements of Cash Flows when settled. Abercrombie & Fitch Co. 9 2023 1Q Form 10-Q Table of Contents Condensed Consolidated Statements of Cash Flows reconciliation The following table provides a reconciliation of cash and equivalents and restricted cash and equivalents to the amounts shown on the Condensed Consolidated Statements of Cash Flows: (in thousands) Location April 29, 2023 January 28, 2023 April 30, 2022 January 29, 2022 Cash and equivalents Cash and equivalents $ 446,952 $ 517,602 $ 468,378 $ 823,139 Long-term restricted cash and equivalents Other assets 9,712 9,967 10,100 11,229 Cash and equivalents and restricted cash and equivalents $ 456,664 $ 527,569 $ 478,478 $ 834,368 3. REVENUE RECOGNITION Disaggregation of revenue All revenues are recognized in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Income. For information regarding the disaggregation of revenue, refer to Note 14, “ SEGMENT REPORTING . ” Contract liabilities The following table details certain contract liabilities representing unearned revenue as of April 29, 2023, January 28, 2023, April 30, 2022 and January 29, 2022: (in thousands) April 29, 2023 January 28, 2023 ⁽¹⁾ April 30, 2022 January 29, 2022 ⁽¹⁾ Gift card liability (1) $ 37,630 $ 39,235 $ 35,665 $ 36,984 Loyalty programs liability 23,552 25,640 22,177 22,757 (1) Includes $ 13.4 million and $ 12.1 million of revenue recognized during the thirteen weeks ended April 29, 2023 and April 30, 2022, respectively, that was included in the gift card liability at the beginning of January 28, 2023 and January 29, 2022, respectively . The following table details recognized revenue associated with the Company’s gift card program and loyalty programs for the thirteen weeks ended April 29, 2023 and April 30, 2022: Thirteen Weeks Ended (in thousands) April 29, 2023 April 30, 2022 Revenue associated with gift card redemptions and gift card breakage $ 24,224 $ 23,001 Revenue associated with reward redemptions and breakage related to the Company’s loyalty programs 12,282 10,181 4. NET INCOME (LOSS) PER SHARE Net income (loss) per basic and diluted share attributable to A&F is computed based on the weighted-average number of outstanding shares of Class A Common Stock (“Common Stock”). Additional information pertaining to net income (loss) per share attributable to A&F follows: Thirteen Weeks Ended (in thousands) April 29, 2023 April 30, 2022 Shares of Common Stock issued 103,300 103,300 Weighted-average treasury shares ( 53,726 ) ( 51,223 ) Weighted-average — basic shares 49,574 52,077 Dilutive effect of share-based compensation awards 1,893 — Weighted-average — diluted shares 51,467 52,077 Anti-dilutive shares (1) 2,834 3,598 (1) Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net income (loss) per diluted share because the impact would have been anti-dilutive. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can achieve up to 200% of their target vesting amount and are reflected at the maximum vesting amount less any dilutive portion. Abercrombie & Fitch Co. 10 2023 1Q Form 10-Q Table of Contents 5. FAIR VALUE Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows: • Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets that the Company can access at the measurement date. • Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly. • Level 3—inputs to the valuation methodology are unobservable. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The three levels of the hierarchy and the distribution of the Company’s assets measured at fair value on a recurring basis, as of April 29, 2023 and January 28, 2023, were as follows: Assets and Liabilities at Fair Value as of April 29, 2023 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 52,383 $ 9,900 $ — $ 62,283 Derivative instruments (2) — 7 — 7 Rabbi Trust assets (3) 1 52,014 — 52,015 Restricted cash equivalents (1) 1,373 5,191 — 6,564 Total assets $ 53,757 $ 67,112 $ — $ 120,869 Liabiliti Derivative instruments (2) $ — $ 4,139 $ — $ 4,139 Total liabilities $ — $ 4,139 $ — $ 4,139 Assets and Liabilities at Fair Value as of January 28, 2023 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 50,364 $ — $ — $ 50,364 Derivative instruments (2) — 32 — 32 Rabbi Trust assets (3) 1 51,681 — 51,682 Restricted cash equivalents (1) 1,690 5,174 — 6,864 Total assets $ 52,055 $ 56,887 $ — $ 108,942 Liabiliti Derivative instruments (2) $ — $ 4,986 $ — $ 4,986 Total liabilities $ — $ 4,986 $ — $ 4,986 (1) Level 1 assets consisted of investments in money market funds and U.S. treasury bills. Level 2 assets consisted of time deposits. (2) Level 2 assets consisted primarily of foreign currency exchange forward contracts. (3) Level 1 assets consisted of investments in money market funds. Level 2 assets consisted of trust-owned life insurance policies. The Company’s Level 2 assets consisted o • Trust-owned life insurance policies, which were valued using the cash surrender value of the life insurance policies; • Time deposits, which were valued at cost, approximating fair value, due to the short-term nature of these investments; and • Derivative instruments, primarily foreign currency exchange forward contracts, which were valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk. Fair value of long-term borrowings The Company’s borrowings under its senior secured notes, which have a fixed 8.75 % interest rate and mature on July 15, 2025 (the “Senior Secured Notes”) are carried at historical cost in the accompanying Condensed Consolidated Balance Sheets. The carrying amount and fair value of the Company’s long-term gross borrowings were as follows: (in thousands) April 29, 2023 January 28, 2023 Gross borrowings outstanding, carrying amount $ 299,730 $ 299,730 Gross borrowings outstanding, fair value 304,975 304,975 Abercrombie & Fitch Co. 11 2023 1Q Form 10-Q Table of Contents 6. PROPERTY AND EQUIPMENT, NET Property and equipment, net consisted o (in thousands) April 29, 2023 January 28, 2023 Property and equipment, at cost $ 2,532,642 $ 2,517,862 L Accumulated depreciation and amortization ( 1,981,832 ) ( 1,966,277 ) Property and equipment, net $ 550,810 $ 551,585 R efer to Note 8, “ ASSET IMPAIRMENT ,” for details related to property and equipment impairment charges incurred during the thirteen weeks ended April 29, 2023 and April 30, 2022. 7. LEASES The Company is a party to leases related to its Company-operated retail stores as well as for certain of its distribution centers, office space, information technology and equipment. The following table provides a summary of the Company’s operating lease costs for the thirteen weeks ended April 29, 2023 and April 30, 2022: Thirteen Weeks Ended (in thousands) April 29, 2023 April 30, 2022 Single lease cost (1) $ 58,340 $ 57,580 Variable lease cost (2) 35,695 33,158 Operating lease right-of-use asset impairment (3) 1,414 1,915 Sublease income (4) ( 984 ) ( 1,009 ) Total operating lease cost $ 94,465 $ 91,644 (1) Included amortization and interest expense associated with operating lease right-of-use assets and the impact from remeasurement of operating lease liabilities. (2) Includes variable payments related to both lease and nonlease components, such as contingent rent payments made by the Company based on performance, and payments related to taxes, insurance, and maintenance costs, as well as the benefit of $ 0.1 million of rent abatements during the thirteen weeks ended April 29, 2023, respectively, related to the effects of the COVID-19 pandemic that resulted in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract. The benefit related to rent abatements recognized during the thirteen weeks ended April 30, 2022 was $ 1.7 million. (3) Refer to Note 8, “ ASSET IMPAIRMENT ,” for details related to operating lease right-of-use asset impairment charges. (4) The terms of the sublease agreement entered into by the Company with a third party during Fiscal 2020 related to one of its previous flagship store locations have not changed materially from that disclosed in Note 8, “LEASES,” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of the Fiscal 2022 Form 10-K. Sublease income is recognized in other operating income, net on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The Company had minimum commitments related to operating lease contracts that have not yet commenced, primarily for certain Company-operated retail stores, of approximately $ 11.5 million as of April 29, 2023. 8. ASSET IMPAIRMENT Asset impairment charges for the thirteen weeks ended April 29, 2023 and April 30, 2022 were as follows: Thirteen Weeks Ended (in thousands) April 29, 2023 April 30, 2022 Operating lease right-of-use asset impairment $ 1,414 $ 1,915 Property and equipment asset impairment 3,022 1,507 Total asset impairment $ 4,436 $ 3,422 Asset impairment charges for the thirteen weeks ended April 29, 2023 and April 30, 2022 related to certain of the Company’s assets including stores across brands, geographies and store formats. The store impairment charges for the thirteen weeks ended April 29, 2023 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $ 12.4 million, including $ 8.8 million related to operating lease right-of-use assets. Abercrombie & Fitch Co. 12 2023 1Q Form 10-Q Table of Contents 9. INCOME TAXES The quarterly provision for income taxes is based on the current estimate of the annual effective income tax rate and the tax effect of discrete items occurring during the quarter. The Company’s quarterly provision and the estimate of the annual effective tax rate are subject to significant variation due to several factors. These factors include variability in the pre-tax jurisdictional mix of earnings, changes in how the Company does business including entering into new businesses or geographies, changes in foreign currency exchange rates, changes in laws, regulations, interpretations and administrative practices, relative changes in expenses or losses for which tax benefits are not recognized and the impact of discrete items. In addition, jurisdictions where the Company anticipates an ordinary loss for the fiscal year for which the Company does not anticipate future tax benefits are excluded from the overall computation of estimated annual effective tax rate and no tax benefits are recognized in the period related to losses in such jurisdictions. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax earnings. Impact of valuation allowances and other tax charges During the thirteen weeks ended April 29, 2023, the Company did not recognize income tax benefits on $ 20.3 million of pretax losses, primarily in Switzerland, resulting in adverse tax impacts of $ 3.1 million. As of April 29, 2023, the Company had net deferred tax assets of approximately $ 9.8 million, $ 8.5 million, and $ 15.4 million in China, Japan and United Kingdom, respectively. While the Company believes that these net deferred tax assets are more-likely-than-not to be realized, it is not a certainty, as the Company continues to evaluate and respond to emerging situations. Should circumstances change, the net deferred tax assets may become subject to additional valuation allowances in the future. Additional valuation allowances would result in additional tax expense. During the thirteen weeks ended April 30, 2022, the Company did not recognize income tax benefits on $ 13.4 million of pretax losses, primarily in Switzerland, resulting in adverse tax impacts of $ 2.4 million. As of April 30, 2022, there were approximately $ 11.4 million, $ 10.4 million, and $ 17.9 million of net deferred tax assets in China, Japan, and the United Kingdom, respectively. Share-based compensation Refer to Note 11, “ SHARE-BASED COMPENSATION ,” for details on income tax benefits and charges related to share-based compensation awards during the thirteen weeks ended April 29, 2023 and April 30, 2022. 10. BORROWINGS Details on the Company’s long-term borrowings, net, as of April 29, 2023 and January 28, 2023 are as follows: (in thousands) April 29, 2023 January 28, 2023 Long-term portion of borrowings, gross at carrying amount $ 299,730 $ 299,730 Unamortized fees ( 2,558 ) ( 2,878 ) Long-term borrowings, net $ 297,172 $ 296,852 Senior Secured Notes The terms of the Senior Secured Notes have remained unchanged from those disclosed in Note 13, “BORROWINGS,” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of on the Fiscal 2022 Form 10-K. ABL Facility The terms of the Company’s senior secured revolving credit facility of up to $ 400.0 million (the “ABL Facility”) have remained unchanged from those disclosed in Note 13, “BORROWINGS,” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Dat a ” of the Fiscal 2022 Form 10-K. The Company did not have any borrowings outstanding under the ABL Facility as of April 29, 2023 or as of January 28, 2023. As of April 29, 2023, availability under the ABL Facility was $ 345.4 million, net of $ 0.6 million in outstanding stand-by letters of credit. As the Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility, borrowing capacity available to the Company under the ABL Facility was $ 310.8 million as of April 29, 2023. Abercrombie & Fitch Co. 13 2023 1Q Form 10-Q Table of Contents Representations, warranties and covenants The agreements related to the Senior Secured Notes and the ABL Facility contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of the Company and its subsidiaries t grant or incur liens; incur, assume or guarantee additional indebtedness; sell or otherwise dispose of assets, including capital stock of subsidiaries; make investments in certain subsidiaries; pay dividends, make distributions or redeem or repurchase capital stock; change the nature of their business; and consolidate or merge with or into, or sell substantially all of the assets of the Company or A&F Management to another entity. The Senior Secured Notes are guaranteed on a senior secured basis, jointly and severally, by A&F and each of the existing and future wholly-owned domestic restricted subsidiaries of A&F that guarantee or will guarantee A&F Management’s Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) or certain future capital markets indebtedness. Certain of the agreements related to the Senior Secured Notes and the ABL Facility also contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances. The Company was in compliance with all debt covenants under these agreements as of April 29, 2023. 11. SHARE-BASED COMPENSATION Financial statement impact The following table details share-based compensation expense and the related income tax impacts for the thirteen weeks ended April 29, 2023 and April 30, 2022: Thirteen Weeks Ended (in thousands) April 29, 2023 April 30, 2022 Share-based compensation expense $ 8,088 $ 8,356 Income tax benefit associated with share-based compensation expense recognized 1,005 965 The following table details discrete income tax benefits and charges related to share-based compensation awards during the thirteen weeks ended April 29, 2023 and April 30, 2022: Thirteen Weeks Ended (in thousands) April 29, 2023 April 30, 2022 Income tax discrete benefits realized for tax deductions related to the issuance of shares $ 1,117 $ 2,111 Income tax discrete charges realized upon cancellation of stock appreciation rights ( 101 ) ( 195 ) Total income tax discrete benefits related to share-based compensation awards $ 1,016 $ 1,916 The following table details the amount of employee tax withheld by the Company upon the issuance of shares associated with restricted stock units vesting and the exercise of stock appreciation rights for the thirteen weeks ended April 29, 2023 and April 30, 2022: Thirteen Weeks Ended (in thousands) April 29, 2023 April 30, 2022 Employee tax withheld upon issuance of shares (1) $ 18,359 $ 13,925 (1) Classified within other financing activities on the Condensed Consolidated Statements of Cash Flows. Abercrombie & Fitch Co. 14 2023 1Q Form 10-Q Table of Contents Restricted stock units The following table summarizes activity for restricted stock units for the thirteen weeks ended April 29, 2023: Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Number of Underlying Shares Weighted- Average Grant Date Fair Value Number of Underlying Shares Weighted- Average Grant Date Fair Value Number of Underlying Shares Weighted- Average Grant Date Fair Value Unvested at January 28, 2023 2,461,395 $ 21.30 336,549 $ 31.08 662,137 $ 23.68 Granted 840,987 28.35 222,144 28.36 111,077 41.20 Adjustments for performance achievement — — — — 493,854 16.24 Vested ( 803,312 ) 19.37 — — ( 987,708 ) 16.24 Forfeited ( 35,766 ) 26.65 — — — — Unvested at April 29, 2023 (1) 2,463,304 $ 24.29 558,693 $ 30.00 279,360 $ 43.81 (1) Unvested shares related to restricted stock units with performance-based and market-based vesting conditions are reflected at 100% of their target vesting amount in the table above. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can be achieved at up to 200% of their target vesting amount. The following table details unrecognized compensation cost and the remaining weighted-average period over which these costs are expected to be recognized for restricted stock units as of April 29, 2023: (in thousands) Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Unrecognized compensation cost $ 51,262 $ 8,601 $ 8,085 Remaining weighted-average period cost is expected to be recognized (years) 1.4 1.3 1.2 Additional information pertaining to restricted stock units for the thirteen weeks ended April 29, 2023 and April 30, 2022 follows: (in thousands) April 29, 2023 April 30, 2022 Service-based restricted stock units: Total grant date fair value of awards granted $ 23,842 $ 23,342 Total grant date fair value of awards vested 15,560 13,622 Performance-based restricted stock units: Total grant date fair value of awards granted 6,300 5,300 Total grant date fair value of awards vested — 4,482 Market-based restricted stock units: Total grant date fair value of awards granted 4,576 3,731 Total grant date fair value of awards vested 16,040 4,105 The weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during the thirteen weeks ended April 29, 2023 and April 30, 2022 were as follows: April 29, 2023 April 30, 2022 Grant date market price $ 28.36 $ 32.07 Fair value 41.20 45.15 Price volatility 63 % 66 % Expected term (years) 2.9 2.9 Risk-free interest rate 4.6 % 2.3 % Dividend yield — — Average volatility of peer companies 66.0 72.9 Average correlation coefficient of peer companies 0.5295 0.5146 Abercrombie & Fitch Co. 15 2023 1Q Form 10-Q Table of Contents Stock appreciation rights The following table summarizes stock appreciation rights activity for the thirteen weeks ended April 29, 2023: Number of Underlying Shares Weighted-Average Exercise Price Aggregate Intrinsic Value Weighted-Average Remaining Contractual Life (years) Outstanding at January 28, 2023 190,589 $ 29.43 Exercised ( 7,700 ) 24.05 Forfeited or expired ( 23,700 ) 45.69 Outstanding at April 29, 2023 159,189 $ 27.27 $ 106,556 1.6 Stock appreciation rights exercisable at April 29, 2023 159,189 $ 27.27 $ 106,556 1.6 No stock appreciation rights were exercised during the thirteen weeks ended April 30, 2022. 12. DERIVATIVE INSTRUMENTS The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes. The Company uses derivative instruments, primarily foreign currency exchange forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign-currency-denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign-currency-denominated intercompany receivables. Fluctuations in foreign currency exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These foreign currency exchange forward contracts typically have a maximum term of twelve months. The sale of the inventory to the Company’s customers will result in the reclassification of related derivative gains and losses that are reported in AOCL into earnings. The Company also uses foreign currency exchange forward contracts to hedge certain foreign-currency-denominated net monetary assets/liabilities. Examples of monetary assets/liabilities include cash balances, receivables and payables. Fluctuations in foreign currency exchange rates result in transaction gains or losses being recorded in earnings, as GAAP requires that monetary assets/liabilities be remeasured at the spot exchange rate at quarter-end and upon settlement. The Company has chosen not to apply hedge accounting to these instruments because there are no anticipated differences in the timing of gain or loss recognition on the hedging instruments and the hedged items. As of April 29, 2023, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all, of forecasted foreign-currency-denominated intercompany inventory transactions, the resulting settlement of the foreign-currency-denominated intercompany accounts receivable, or (in thousands) Notional Amount (1) Euro $ 83,749 British pound 61,030 Canadian dollar — Japanese yen — (1) Amounts reported are the U.S. Dollar notional amounts outstanding as of April 29, 2023. The fair value of derivative instruments is determined using quoted market prices of the same or similar instruments, adjusted for counterparty risk. The location and amounts of derivative fair values of foreign currency exchange forward contracts on the Condensed Consolidated Balance Sheets as of April 29, 2023 and January 28, 2023 were as follows: (in thousands) Location April 29, 2023 January 28, 2023 Location April 29, 2023 January 28, 2023 Derivatives designated as cash flow hedging instruments Other current assets $ 7 $ 32 Accrued expenses $ 4,139 $ 4,986 Abercrombie & Fitch Co. 16 2023 1Q Form 10-Q Table of Contents Information pertaining to derivative gains or losses from foreign currency exchange forward contracts designated as cash flow hedging instruments for the thirteen weeks ended April 29, 2023 and April 30, 2022 follows: Thirteen Weeks Ended (in thousands) April 29, 2023 April 30, 2022 (Loss) gain recognized in AOCL (1) $ ( 507 ) $ 5,363 (Loss) gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization (2) ( 906 ) 3,684 (1) Amount represents the change in fair value of derivative instruments. (2) Amount represents gain (loss) reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) when the hedged item affects earnings, which is when merchandise is converted to cost of sales, exclusive of depreciation and amortization. Substantially all of the unrealized gain will be recognized in costs of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) over the next twelve months . Additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts not designated as hedging instruments for the thirteen weeks ended April 29, 2023 and April 30, 2022 follows: Thirteen Weeks Ended (in thousands) April 29, 2023 April 30, 2022 (Gain) loss, net recognized in other operating income, net $ ( 547 ) $ 1,141 13. ACCUMULATED OTHER COMPREHENSIVE LOSS Fo r the thirteen weeks ended April 29, 2023, the activity in AOCL was as follows: Thirteen Weeks Ended April 29, 2023 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at January 28, 2023 $ ( 132,653 ) $ ( 4,874 ) $ ( 137,527 ) Other comprehensive income (loss) before reclassifications 311 ( 507 ) ( 196 ) Reclassified loss from AOCL (1) — 906 906 Tax effect — 6 6 Other comprehensive income after reclassifications 311 405 716 Ending balance at April 29, 2023 $ ( 132,342 ) $ ( 4,469 ) $ ( 136,811 ) (1) Amount represents loss reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). For the thirteen weeks ended April 30, 2022, the activity in AOCL was as follows: Thirteen Weeks Ended April 30, 2022 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at January 29, 2022 $ ( 120,689 ) $ 5,983 $ ( 114,706 ) Other comprehensive (loss) income before reclassifications ( 10,403 ) 5,363 ( 5,040 ) Reclassified gain from AOCL (1) — ( 3,684 ) ( 3,684 ) Tax effect — 33 33 Other comprehensive (loss) income after reclassifications ( 10,403 ) 1,712 ( 8,691 ) Ending balance at April 30, 2022 $ ( 131,092 ) $ 7,695 $ ( 123,397 ) (1) Amount represents loss reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Abercrombie & Fitch Co. 17 2023 1Q Form 10-Q Table of Contents 14. SEGMENT REPORTING The Company’s two operating segments are brand-bas Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands, and Hollister, which includes the Company’s Hollister, Gilly Hicks, and Social Tourist brands. These operating segments have similar economic characteristics, classes of consumers, products, and production and distribution methods, operate in the same regulatory environments, and have been aggregated into one reportable segment. Amounts shown below include net sales from wholesale, franchise and licensing operations, which are not a significant component of total revenue, and are aggregated within their respective operating segment and geographic area. The Company’s net sales by operating segment for the thirteen weeks ended April 29, 2023 and April 30, 2022 were as follows: Thirteen Weeks Ended (in thousands) April 29, 2023 April 30, 2022 Abercrombie 436,044 383,928 Hollister $ 399,950 $ 428,834 Total $ 835,994 $ 812,762 Net sales by geographic area are presented by attributing revenues to an individual country on the basis of the country in which the merchandise was sold for in-store purchases and on the basis of the shipping location provided by customers for digital and wholesale orders. The Company’s net sales by geographic area for the thirteen weeks ended April 29, 2023 and April 30, 2022 were as follows: Thirteen Weeks Ended (in thousands) April 29, 2023 April 30, 2022 U.S. $ 636,117 $ 585,106 EMEA (1) 139,258 163,969 APAC (2) 33,333 29,897 Other (3) 27,286 33,790 International $ 199,877 $ 227,656 Total $ 835,994 $ 812,762 (1) Europe, Middle East and Africa region (“EMEA”). (2) Asia-Pacific region (“APAC”). (3) Other includes all sales that do not fall within the United States, EMEA, or APAC regions, which are derived primarily in Canada. 15. SUBSEQUENT EVENT During the second quarter of Fiscal 2023, operating segments were reorganized into three geographic operating segments: Americas, Asia-Pacific (APAC), and Europe, the Middle East and Africa (EMEA).  Beginning with the second quarter of Fiscal 2023, all periods presented will be recast to conform to this classification. Abercrombie & Fitch Co. 18 2023 1Q Form 10-Q Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the Company’s Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q in “ Item 1. Financial Statements (Unaudited) ,” to which all references to Notes in MD&A are made. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Quarterly Report on Form 10-Q or made by the Company, its management or spokespeople involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company’s control. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “should,” “are confident,” “will,” “could,” “outlook,” or the negative versions of these words or other comparable words, and similar expressions may identify forward-looking statements. Future economic and industry trends that could potentially impact revenue and profitability are difficult to predict. Therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. Factors that could cause results to differ from those expressed in the Company’s forward-looking statements include, but are not limited to, the risks described or referenced in Part I, Item 1A. “Risk Factors,” in the Company’s Fiscal 2022 Form 10-K and otherwise in our reports and filings with the SEC, as well as the followin • risks related to changes in global economic and financial conditions, including volatility in the financial markets as a result of the failure, or rumored failure, of financial institutions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits; • risks related to recent inflationary pressures with respect to labor and raw materials and global supply chain constraints that have, and could continue to, affect freight, transit and other costs; • risks related to geopolitical conflict, including the on-going hostilities in Ukraine, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience; • risks related to natural disasters and other unforeseen catastrophic events; • risks related to our failure to engage our customers, anticipate customer demand and changing fashion trends, and manage our inventory; • risks related to our ability to successfully invest in and execute on our customer, digital and omnichannel initiatives; • risks related to the effects of seasonal fluctuations on our sales and our performance during the back-to-school and holiday selling seasons; • risks related to fluctuations in foreign currency exchange rates; • risks related to fluctuations in our tax obligations and effective tax rate, including as a result of earnings and losses generated from our international operations; • risks related to our ability to execute on our strategic and growth initiatives, including those outlined in our Always Forward Plan; • risks related to international operations, including changes in the economic or political conditions where we sell or source our products or changes in import tariffs or trade restrictions; • risks and uncertainty related to the COVID-19 pandemic and any other adverse public health developments: • risks related to cybersecurity threats and privacy or data security breaches; • risks related to the potential loss or disruption of our information systems; • risks related to the continued validity of our trademarks and our ability to protect our intellectual property; • risks associated with climate change and other corporate responsibility issues; and • uncertainties related to future legislation, regulatory reform, policy changes, or interpretive guidance on existing legislation. In light of the significant uncertainties in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company, or any other person, that the objectives of the Company will be achieved. The forward-looking statements included herein are based on information presently available to the management of the Company. Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking statements including any financial targets and estimates, whether as a result of new information, future events, or otherwise. Abercrombie & Fitch Co. 19 2023 1Q Form 10-Q Table of Contents INTRODUCTION MD&A is provided as a supplement to the accompanying Condensed Consolidated Financial Statements and notes thereto to help provide an understanding of the Company’s results of operations, financial condition, and liquidity. MD&A is organized as follows: • Overview . A general description of the Company’s business and certain segment information. • Current Trends and Outlook . A discussion related to certain of the Company’s focus areas for the current fiscal year and discussion of certain risks and challenges, as well as a summary of the Company’s performance for the thirteen weeks ended April 29, 2023 and April 30, 2022. • Results of Operations . An analysis of certain components of the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the thirteen weeks ended April 29, 2023 and April 30, 2022. • Liquidity and Capital Resources . A discussion of the Company’s financial condition, changes in financial condition and liquidity as of April 29, 2023, which includes (i) an analysis of financial condition as compared to January 28, 2023; (ii) an analysis of changes in cash flows for the thirteen weeks ended April 29, 2023, as compared to the thirteen weeks ended April 30, 2022; and (iii) an analysis of liquidity, including availability under the Company’s ABL Facility, the Company’s share repurchase program, and outstanding debt and covenant compliance. • Recent Accounting Pronouncements . A discussion, as applicable, of the recent accounting pronouncements the Company has adopted or is currently evaluating, including the dates of adoption and/or expected dates of adoption, and anticipated effects on the Company’s Condensed Consolidated Financial Statements. • Critical Accounting Estimates . A discussion of the accounting estimates considered to be important to the Company’s results of operations and financial condition, which typically require significant judgment and estimation on the part of management in their application. • Non-GAAP Financial Measures . MD&A provides a discussion of certain financial measures that have been determined to not be presented in accordance with GAAP. This section includes certain reconciliations between GAAP and non-GAAP financial measures and additional details on non-GAAP financial measures, including information as to why the Company believes the non-GAAP financial measures provided within MD&A are useful to investors. Abercrombie & Fitch Co. 20 2023 1Q Form 10-Q Table of Contents OVERVIEW Business summary The Company is a global, digitally-led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. The Company’s two brand-based operating segments are Abercrombie, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands, and Hollister, which includes the Company’s Hollister, Gilly Hicks, and Social Tourist brands. These brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company operates primarily in North America, Europe, Middle East, and Asia. The Company’s fiscal year ends on the Saturday closest to January 31. All references herein to the Company’s fiscal years are as follows: Fiscal year Year ended/ ending Number of weeks Fiscal 2022 January 28, 2023 52 Fiscal 2023 February 3, 2024 53 Fiscal 2024 February 1, 2025 52 Seasonality Historically, the Company’s operations have been seasonal in nature and consist of two principal selling seaso the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”). Due to the seasonal nature of the retail apparel industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year and the Company could have significant fluctuations in certain asset and liability accounts. The Company historically experiences its greatest sales activity during the Fall season due to back-to-school and holiday sales periods, respectively. CURRENT TRENDS AND OUTLOOK Focus areas for Fiscal 2023 The Company remains committed to, and confident in, its long-term vision of being a digitally-led global omnichannel apparel retailer and continues to evaluate opportunities to make progress toward initiatives that support this vision as outlined in its Always Forward Plan. The Always Forward Plan, which outlines the Company’s long-term strategic goals, including growing shareholder value is anchored on three strategic growth principles, which are t • Execute focused brand growth plans; • Accelerate an enterprise-wide digital revolution; and • Operate with financial discipline. The following focus areas for Fiscal 2023 serve as a framework for the Company achieving sustainable growth and progressing toward the Always Forward Pl • Execute brand growth plans • Drive Abercrombie brands through marketing and store investment; • Optimize the Hollister product and brand voice to enable second half growth; and • Support Gilly Hicks growth with an evolved assortment mix • Accelerate an enterprise-wide digital revolution • Complete current phase of our modernization efforts around key data platforms; • Continue to progress on our multi-year enterprise resource planning (“ERP”) transformation and cloud migration journey; and • Improve our digital and app experience across key parts of the customer journey • Operate with financial discipline • Maintain appropriately lean inventory levels that put Abercrombie and Hollister in a position to chase inventory throughout the year; and • Properly balance investments, inflation and efficiency efforts to improve profitability Abercrombie & Fitch Co. 21 2023 1Q Form 10-Q Table of Contents Supply chain and impact of inflation Previously, the Company experienced inflationary pressures with respect to labor, cotton, freight and other raw materials and other costs, which has negatively impacted expenses and margins. While freight costs have stabilized and supply chain constraints are waning, there continues to be inflationary pressures with respect to cotton and other raw materials, as well as other operating costs. Continued inflationary pressures could further impact expenses and have a long-term impact on the Company because increasing costs may impact its ability to maintain satisfactory margins. The Company may be unsuccessful in passing these increased costs on to its customers through higher AUR. Furthermore, increases in inflation may not be matched by growth in consumer income, which also could have a negative impact on discretionary spending. In periods of perceived or actual unfavorable economic conditions, consumers may reallocate available discretionary spending, which may adversely impact demand for our products. The adverse consequences of the current economic environment continue to impact the Company and may persist for some time. The Company will continue to assess impacts on its operations and financial condition, and will respond as it deems appropriate. Global Store Network Optimization The Company has a goal of opening smaller, omni-enabled stores that cater to local customers. The Company continues to use data to inform its focus on aligning store square footage with digital penetration, and during the year-to-date period of Fiscal 2023, the Company opened six new stores, while closing 10 stores. As part of this focus, the Company plans to be a net store opener again this year with approximately 35-40 new stores, while closing approximately 20-25 stores, during Fiscal 2023, pending negotiations with our landlord partners. Future closures could be completed through natural lease expirations, while certain other leases include early termination options that can be exercised under specific conditions. The Company may also elect to exit or modify other leases, and could incur charges related to these actions. Additional details related to store count and gross square footage fol Abercrombie (1) Hollister (2) Total Company (3) U.S. International U.S. International U.S. International Total Number of sto January 28, 2023 180 53 380 149 560 202 762 New 1 2 1 2 2 4 6 Permanently closed (2) (1) (4) (3) (6) (4) (10) April 29, 2023 179 54 377 148 556 202 758 Gross square footage (in thousands) : April 29, 2023 1,146 350 2,407 1,120 3,553 1,470 5,023 (1) Abercrombie includes the Company's Abercrombie & Fitch and abercrombie kids brands. Locations with abercrombie kids carveouts within Abercrombie & Fitch stores are represented as a single store count. Excludes 22 international franchise stores as of April 29, 2023 and 23 international franchise stores as of January 28, 2023. Excludes three Company-operated temporary stores as of each of April 29, 2023 and January 28, 2023. (2) Hollister includes the Company’s Hollister and Gilly Hicks brands. Locations with Gilly Hicks carveouts within Hollister stores are represented as a single store count. Excludes 13 international franchise stores as of April 29, 2023 and 12 international franchise stores as of January 28, 2023. Excludes 20 Company-operated temporary stores as of April 29, 2023 and 16 Company-operated temporary stores as of January 28, 2023. (3) This store count excludes one international third-party operated multi-brand outlet store as of each of April 29, 2023 and January 28, 2023. Impact of global events and uncertainty As we are a global multi-brand omnichannel specialty retailer, with operations in North America, Europe, Middle East and Asia, among other regions, management is mindful of macroeconomic risks, global challenges and the changing global geopolitical environment, including the on-going conflict in Ukraine, that could adversely impact certain areas of the business. As a result, management continues to monitor global events. The Company continues to assess the potential impacts these events and similar events may have on the business in future periods and continues to develop and update contingency plans to assist in mitigating potential impacts. It is possible that the Company’s preparations for such events are not adequate to mitigate their impact, and that these events could further adversely affect its business and results of operations. For a discussion of material risks that have the potential to cause our actual results to differ materially from our expectations, refer to the disclosures under the heading “Forward-looking Statements and Risk Factors” in “Item 1A. Risk Factors” on the Fiscal 2022 Form 10-K. Abercrombie & Fitch Co. 22 2023 1Q Form 10-Q Table of Contents Summary of results A summary of results for the thirteen weeks ended April 29, 2023 and April 30, 2022 follows: GAAP Non-GAAP (1) (in thousands, except change in net sales, gross profit rate, operating income (loss) margin and per share amounts) April 29, 2023 April 30, 2022 April 29, 2023 April 30, 2022 Thirteen Weeks Ended Net sales $ 835,994 $ 812,762 Change in net sales 2.9 % 4.0 % Gross profit rate 61.0 % 55.3 % Operating income (loss) $ 34,008 $ (9,726) $ 38,444 $ (6,304) Operating income (loss) margin 4.1 % (1.2) % 4.6 % (0.8) % Net income (loss) attributable to A&F $ 16,571 $ (16,469) $ 19,820 $ (13,965) Net income (loss) per share attributable to A&F 0.32 (0.32) 0.39 (0.27) (1) Discussion as to why the Company believes that these non-GAAP financial measures are useful to investors and a reconciliation of the non-GAAP measures to the most directly comparable financial measure calculated and presented in accordance with GAAP are provided below under “ NON-GAAP FINANCIAL MEASURES .” Certain components of the Company’s Condensed Consolidated Balance Sheets as of April 29, 2023 and January 28, 2023 were as follows: (in thousands) April 29, 2023 January 28, 2023 Cash and equivalents $ 446,952 $ 517,602 Gross long-term borrowings outstanding, carrying amount 299,730 299,730 Inventories 447,806 505,621 Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirteen week periods ended April 29, 2023 and April 30, 2022 were as follows: (in thousands) April 29, 2023 April 30, 2022 Net cash used for operating activities $ (560) $ (217,787) Net cash used for investing activities (46,391) (18,541) Net cash used for financing activities (21,956) (116,945) RESULTS OF OPERATIONS The estimated basis point (“BPS”) change disclosed throughout this Results of Operations section has been rounded based on the change in the percentage of net sales. Net sales The Company’s net sales by operating segment for the thirteen weeks ended April 29, 2023 and April 30, 2022 were as follows: Thirteen Weeks Ended (in thousands) April 29, 2023 April 30, 2022 $ Change % Change Comparable Sales (1) Abercrombie (2) $ 436,044 $ 383,928 $ 52,116 14 % 14 % Hollister (3) 399,950 428,834 (28,884) (7) (6) Total $ 835,994 $ 812,762 $ 23,232 3 3 (1) Comparable sales are calculated on a constant currency basis. Refer to “ NON-GAAP FINANCIAL MEASURES, ” for further details on the comparable sales calculation. (2) Includes Abercrombie & Fitch and abercrombie kids brands. (3) Includes Hollister, Gilly Hicks, and Social Tourist brands. Abercrombie & Fitch Co. 23 2023 1Q Form 10-Q Table of Contents Net sales by geographic area are presented by attributing revenues to an individual country on the basis of the country in which the merchandise was sold for in-store purchases and the shipping location provided by customers for digital orders. The Company’s net sales by geographic area for the thirteen weeks ended April 29, 2023 and April 30, 2022 were as follows: Thirteen Weeks Ended (in thousands) April 29, 2023 April 30, 2022 $ Change % Change Comparable Sales (1 ) U.S. $ 636,117 $ 585,106 $ 51,011 9 % 4 % EMEA 139,258 163,969 (24,711) (15) (4) APAC 33,333 29,897 3,436 11 22 Other (2) 27,286 33,790 (6,504) (19) (2) International $ 199,877 $ 227,656 $ (27,779) (12) 0 Total $ 835,994 $ 812,762 $ 23,232 3 3 (1) Comparable sales are calculated on a constant currency basis. Refer to “ NON-GAAP FINANCIAL MEASURES, ” for further details on the comparable sales calculation. (2) Other includes all sales that do not fall within the United States, EMEA, or APAC regions, which are derived primarily in Canada. For the first quarter of Fiscal 2023, net sales increased 3% primarily due to an increase in AUR. The year-over-year increase in net sales reflects a positive comparable sales of 3%, as compared to the first quarter of Fiscal 2022, with growth in the U.S. partially offset by a decline in International. This was partially offset by the adverse impact from changes in foreign currency exchange rates of approximately 1% or $9 million. Cost of sales, exclusive of depreciation and amortization Thirteen Weeks Ended April 29, 2023 April 30, 2022 (in thousands) % of Net sales % of Net sales BPS Change Cost of sales, exclusive of depreciation and amortization $ 326,200 39.0 % $ 363,216 44.7 % (570) For the first quarter of Fiscal 2023, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 570 basis points, as compared to the first quarter of Fiscal 2022. The year-over-year decrease was primarily driven by a benefit of 760 basis points from lower freight costs and 230 basis points from year-over-year AUR growth partially offset by 320 basis points from higher cotton costs and 100 basis points from the adverse impact from changes in foreign currency exchange rates. Gross profit, exclusive of depreciation and amortization Thirteen Weeks Ended April 29, 2023 April 30, 2022 (in thousands) % of Net sales % of Net sales BPS Change Gross profit, exclusive of depreciation and amortization $ 509,794 61.0 % $ 449,546 55.3 % 570 Stores and distribution expense Thirteen Weeks Ended April 29, 2023 April 30, 2022 (in thousands) % of Net sales % of Net sales BPS Change Stores and distribution expense $ 331,613 39.7 % $ 337,543 41.5 % (180) For the first quarter of Fiscal 2023, stores and distribution expense decreased 180 basis points, as compared to the first quarter of Fiscal 2022. The $6 million decrease was primarily driven by a decrease in digital marketing and fulfillment costs as compared to the first quarter of Fiscal 2022. Abercrombie & Fitch Co. 24 2023 1Q Form 10-Q Table of Contents Marketing, general and administrative expense Thirteen Weeks Ended April 29, 2023 April 30, 2022 (in thousands) % of Net sales % of Net sales BPS Change Marketing, general and administrative expense $ 142,631 17.1 % $ 122,149 15.0 % 210 For the first quarter of Fiscal 2023, marketing, general and administrative expense, as a percentage of net sales, increased 210 basis points, as compared to the first quarter of Fiscal 2022, primarily driven by an increase in technology expenses and incentive-based compensation. Asset impairment Thirteen Weeks Ended April 29, 2023 April 30, 2022 (in thousands) % of Net sales % of Net sales BPS Change Asset impairment $ 4,436 0.5% $ 3,422 0.4% 10 Excluded items: Asset impairment charges (1) (4,436) (0.5) (3,422) (0.4) (10) Adjusted non-GAAP asset impairment $ — — $ — — — (1) Refer to “ NON-GAAP FINANCIAL MEASURES ” for further details. Refer to Note 8, “ ASSET IMPAIRMENT .” Other operating income, net Thirteen Weeks Ended April 29, 2023 April 30, 2022 (in thousands) % of Net sales % of Net sales BPS Change Other operating income, net $ 2,894 0.3 % $ 3,842 0.5 % 20 Operating income (loss) Thirteen Weeks Ended April 29, 2023 April 30, 2022 (in thousands) % of Net sales % of Net sales BPS Change Operating income (loss) $ 34,008 4.1 % $ (9,726) (1.2) % 530 Excluded items: Asset impairment charges (1) 4,436 0.5 3,422 0.4 10 Adjusted non-GAAP operating income (loss) ⁽¹⁾ $ 38,444 4.6 $ (6,304) (0.8) 540 (1) Refer to “ NON-GAAP FINANCIAL MEASURES ” for further details. Abercrombie & Fitch Co. 25 2023 1Q Form 10-Q Table of Contents Interest expense, net Thirteen Weeks Ended April 29, 2023 April 30, 2022 (in thousands) % of Net sales % of Net sales BPS Change Interest expense $ 7,458 0.9 % $ 7,809 1.0 % (10) Interest income (4,015) (0.5) (502) (0.1) (40) Interest expense, net $ 3,443 0.4 $ 7,307 0.9 (50) For the first quarter of Fiscal 2023, interest expense, net was lower, as a result of higher interest income due to the increase in rates received on deposits and money market accounts, compared to the first quarter of Fiscal 2022. Income tax expense (benefit) Thirteen Weeks Ended April 29, 2023 April 30, 2022 (in thousands, except ratios) Effective Tax Rate Effective Tax Rate Income tax expense (benefit) $ 12,718 41.6 % $ (2,187) 12.8 % Excluded items: Tax effect of pre-tax excluded items (1) 1,187 918 Adjusted non-GAAP income tax expense (benefit) ⁽¹⁾ $ 13,905 39.7 % $ (1,269) 9.3 % (1) The tax effect of pre-tax excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. Refer to “ Operating income (loss) ” and “ NON-GAAP FINANCIAL MEASURES ” for details of pre-tax excluded items. Refer to Note 9, “ INCOME TAXES .” Net income (loss) attributable to A&F Thirteen Weeks Ended April 29, 2023 April 30, 2022 (in thousands) % of Net sales % of Net sales BPS Change Net income (loss) attributable to A&F $ 16,571 2.0 % $ (16,469) (2.0) % 400 Excluded items, net of tax (1) 3,249 0.4 2,504 0.3 10 Adjusted non-GAAP net income (loss) attributable to A&F (2) $ 19,820 2.4 $ (13,965) (1.7) 410 (1) Excluded items presented above under “ Operating income (loss) ,” and “ Income tax expense (benefit) ” (2) Refer to “ NON-GAAP FINANCIAL MEASURES ” for further details. Net income (loss) per share attributable to A&F Thirteen Weeks Ended April 29, 2023 April 30, 2022 $ Change Net income (loss) per diluted share attributable to A&F $ 0.32 $ (0.32) $ 0.64 Excluded items, net of tax (1) 0.06 0.05 0.01 Adjusted non-GAAP net income (loss) per diluted share attributable to A&F 0.39 (0.27) 0.66 Impact from changes in foreign currency exchange rates — (0.12) 0.12 Adjusted non-GAAP net income (loss) per diluted share attributable to A&F on a constant currency basis (2) 0.39 (0.39) 0.78 (1) Excluded items presented above under “ Operating income (loss) ,” and “ Income tax expense (benefit) . ” (2) Refer to “ NON-GAAP FINANCIAL MEASURES ” for further details. Abercrombie & Fitch Co. 26 2023 1Q Form 10-Q Table of Contents LIQUIDITY AND CAPITAL RESOURCES Overview The Company’s capital allocation strategy, priorities and investments are reviewed by A&F’s Board of Directors considering both liquidity and valuation factors. The Company believes that it will have adequate liquidity to fund operating activities for the next 12 months. The Company monitors financing market conditions and may in the future determine whether and when to amend, modify, or restructure its ABL Facility and/or the Senior Secured Notes. For a discussion of the Company’s share repurchase activity and suspended dividend program, please see below under “Share repurchases and dividends.” Primary sources and uses of cash The Company’s business has two principal selling seaso the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”). The Company generally experiences its greatest sales activity during the Fall season, due to the back-to-school and holiday sales periods. The Company relies on excess operating cash flows, which are largely generated in Fall, to fund operations throughout the year and to reinvest in the business to support future growth. The Company also has the ABL Facility available as a source of additional funding, which is described further below under “ Credit facility and Senior Secured Notes ”. Over the next twelve months, the Company expects its primary cash requirements to be directed towards prioritizing investments in the business and continuing to fund operating activities, including the acquisition of inventory, and obligations related to compensation, marketing, leases and any lease buyouts or modifications it may exercise, taxes and other operating activities. The Company evaluates opportunities for investments in the business that are in line with initiatives that position the business for sustainable long-term growth that align with its strategic pillars as described within “Item 1. Business - STRATEGY AND KEY BUSINESS PRIORITIES” included on the Fiscal 2022 Form 10-K, including being opportunistic regarding growth opportunities. Examples of potential investment opportunities include, but are not limited to, new store experiences, and investments in its digital and omnichannel initiatives. Historically, the Company has utilized free cash flow generated from operations to fund any discretionary capital expenditures, which have been prioritized towards new store experiences, as well as digital and omnichannel investments, information technology, and other projects. For the year-to-date period ended April 29, 2023, the Company used $46.4 million towards capital expenditures. Total capital expenditures for Fiscal 2023 are expected to be approximately $160 million. The Company measures liquidity using total cash and cash equivalents and incremental borrowing available under the ABL Facility. As of April 29, 2023, the Company had cash and cash equivalents of $447.0 million and total liquidity of approximately $757.7 million, compared with cash and cash equivalents of $517.6 million and total liquidity of approximately $865.7 million at the beginning of Fiscal 2023. This allows the Company to evaluate potential opportunities to strategically deploy excess cash and/or deleverage the balance sheet, depending on various factors, such as market and business conditions, including the Company’s ability to accelerate investments in the business. Such opportunities include, but are not limited to, returning cash to shareholders through share repurchases or purchasing outstanding Senior Secured Notes. Share repurchases and dividends In November 2021, A&F’s Board of Directors approved a $500 million share repurchase authorization, replacing the prior 2021 share repurchase authorization of 10.0 million shares, which had approximately 3.9 million shares remaining available. During the year-to-date period ended April 29, 2023, the Company did not repurchase any shares of its common stock. Historically, the Company has repurchased shares of its Common Stock from time to time, dependent on excess liquidity, market conditions, and business conditions, with the objectives of returning excess cash to shareholders and offsetting dilution from issuances of Common Stock associated with the exercise of employee stock appreciation rights and the vesting of restricted stock units. Shares may be repurchased in the open market, including pursuant to trading plans established in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), through privately negotiated transactions or other transactions or by a combination of such methods. Refer to “ Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ” of Part II of this Quarterly Report on Form 10-Q for the amount remaining available for purchase under the Company’s publicly announced stock repurchase authorization. In May 2020, the Company announced that it had suspended its dividend program in order to preserve liquidity and maintain financial flexibility in light of COVID-19. The Company may in the future review its dividend program to determine, in light of facts and circumstances at that time, whether and when to reinstate. Any dividends are declared at the discretion of A&F’s Board of Directors. A&F’s Board of Directors reviews and establishes a dividend amount, if at all, based on A&F’s financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors, including any restrictions under the Company’s agreements related to the Senior Secured Notes and the ABL Facility. There can be no assurance that the Company will declare and pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends. Abercrombie & Fitch Co. 27 2023 1Q Form 10-Q Table of Contents Credit facility and Senior Secured Notes As of April 29, 2023, the Company had $299.7 million of gross borrowings outstanding under the Senior Secured Notes. In addition, the Amended and Restated Credit Agreement, as amended by the First Amendment (as defined below) provides for the ABL Facility, which is a senior secured asset-based revolving credit facility of up to $400 million. As of April 29, 2023, the Company did not have any borrowings outstanding under the ABL Facility. The ABL Facility matures on April 29, 2026. Details regarding the remaining borrowing capacity under the ABL Facility as of April 29, 2023 are as follows: (in thousands) April 29, 2023 Loan cap $ 345,995 L Outstanding stand-by letters of credit (610) Borrowing capacity 345,385 L Minimum excess availability (1) (34,600) Borrowing capacity available $ 310,785 (1) The Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility. Refer to Note 10, “ BORROWINGS .” Income taxes The Company’s earnings and profits from its foreign subsidiaries could be repatriated to the U.S. without incurring additional federal income tax. The Company determined that the balance of the Company’s undistributed earnings and profits from its foreign subsidiaries as of February 2, 2019 are considered indefinitely reinvested outside of the U.S., and if these funds were to be repatriated to the U.S., the Company would expect to incur an insignificant amount of state income taxes and foreign withholding taxes. The Company accrues for both state income taxes and foreign withholding taxes with respect to earnings and profits earned after February 2, 2019, in such a manner that these funds could be repatriated without incurring additional tax expense. As of April 29, 2023, $184.3 million of the Company’s $447.0 million of cash and equivalents were held by foreign affiliates. Refer to Note 9, “ INCOME TAXES .” Analysis of cash flows The table below provides certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended April 29, 2023 and April 30, 2022: Thirteen Weeks Ended April 29, 2023 April 30, 2022 (in thousands) Cash and equivalents, and restricted cash and equivalents, beginning of period $ 527,569 $ 834,368 Net cash used for operating activities (560) (217,787) Net cash used for investing activities (46,391) (18,541) Net cash used for financing activities (21,956) (116,945) Effect of foreign currency exchange rates on cash (1,998) (2,617) Net decrease in cash and equivalents, and restricted cash and equivalents (70,905) (355,890) Cash and equivalents, and restricted cash and equivalents, end of period $ 456,664 $ 478,478 Operating activities - During the year-to-date period ended April 29, 2023, net cash used for operating activities included increased cash receipts as a result of the 3% year-over-year increase in net sales as well as increased payments to vendors in the fourth quarter of Fiscal 2022 which resulted in lower cash payments in the first quarter of Fiscal 2023. Investing activities - During the year-to-date period ended April 29, 2023, net cash used for investing activities was primarily used for capital expenditures of $46.4 million. This compared to net cash used for investing activities of $26.3 million for the year-to-date period ended April 30, 2022, which was primarily used for capital expenditures, partially offset by the proceeds from the sale of property and equipment of $7.8 million. Financing activities - During the year-to-date period ended April 29, 2023, net cash used for financing activities included amounts related to shares of common stock withheld (repurchased) to cover tax withholdings upon vesting of share-based compensation awards. During the year-to-date period ended April 30, 2022, net cash used by financing activities included the purchase of approximately 3.3 million shares of Common Stock with a market value of approximately $100.0 million. Abercrombie & Fitch Co. 28 2023 1Q Form 10-Q Table of Contents Contractual obligations The Company’s contractual obligations consist primarily of operating leases, purchase orders for merchandise inventory, unrecognized tax benefits, certain retirement obligations, lease deposits, and other agreements to purchase goods and services that are legally binding and that require minimum quantities to be purchased. These contractual obligations impact the Company’s short-term and long-term liquidity and capital resource needs. There have been no material changes in the Company’s contractual obligations since January 28, 2023, with the exception of those obligations which occurred in the normal course of business (primarily changes in the Company’s merchandise inventory-related purchases and lease obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company’s operations). RECENT ACCOUNTING PRONOUNCEMENTS The Company describes its significant accounting policies in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES , ” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” included on the Fiscal 2022 Form 10-K. The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements. CRITICAL ACCOUNTING ESTIMATES The Company describes its critical accounting estimates in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included on the Fiscal 2022 Form 10-K. There have been no significant changes in critical accounting policies and estimates since the end of Fiscal 2022. NON-GAAP FINANCIAL MEASURES This Quarterly Report on Form 10-Q includes discussion of certain financial measures calculated and presented on both a GAAP and a non-GAAP basis. The Company believes that each of the non-GAAP financial measures presented in this “ Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations ” is useful to investors as it provides a meaningful basis to evaluate the Company’s operating performance excluding the effect of certain items that the Company believes may not reflect its future operating outlook, such as certain asset impairment charges, thereby supplementing investors’ understanding of comparability of operations across periods. Management used these non-GAAP financial measures during the periods presented to assess the Company’s performance and to develop expectations for future operating performance. These non-GAAP financial measures should be used as a supplement to, and not as an alternative to, the Company’s GAAP financial results, and may not be calculated in the same manner as similar measures presented by other companies. Comparable sales At times, the Company provides comparable sales, defined as the year-over-year percentage change in the aggregate of (1) net sales for stores that have been open as the same brand at least one year and square footage has not been expanded or reduced by more than 20% within the past year, with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations, and (2) digital net sales with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations. Comparable sales exclude revenue other than store and digital sales. Management uses comparable sales to understand the drivers of year-over-year changes in net sales and believes comparable sales is a useful metric as it can assist investors in distinguishing the portion of the Company’s revenue attributable to existing locations from the portion attributable to the opening or closing of stores. The most directly comparable GAAP financial measure is change in net sales. Excluded items The following financial measures are disclosed on a GAAP and on an adjusted non-GAAP basis excluding the following items, as applicab Financial measures (1) Excluded items Operating income (loss) Asset impairment charges Income tax expense (benefit) (2) Tax effect of pre-tax excluded items Net income (loss) and net income (loss) per share attributable to A&F (2) Pre-tax excluded items and the tax effect of pre-tax excluded items (1) Certain of these financial measures are also expressed as a percentage of net sales. (2) The tax effect of excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. Abercrombie & Fitch Co. 29 2023 1Q Form 10-Q Table of Contents Financial information on a constant currency basis The Company provides certain financial information on a constant currency basis to enhance investors’ understanding of underlying business trends and operating performance by removing the impact of foreign currency exchange rate fluctuations. Management also uses financial information on a constant currency basis to award employee performance-based compensation. The effect from foreign currency exchange rates, calculated on a constant currency basis, is determined by applying the current period’s foreign currency exchange rates to the prior year’s results and is net of the year-over-year impact from hedging. The per diluted share effect from foreign currency exchange rates is calculated using a 26% effective tax rate. A reconciliation of non-GAAP financial metrics on a constant currency basis to financial measures calculated and presented in accordance with GAAP for the thirteen weeks ended April 29, 2023 and April 30, 2022 follows: (in thousands, except change in net sales, gross profit rate, operating margin and per share data) Thirteen Weeks Ended Net sales April 29, 2023 April 30, 2022 % Change GAAP $ 835,994 $ 812,762 3 % Impact from changes in foreign currency exchange rates — (8,597) 1 Non-GAAP on a constant currency basis $ 835,994 $ 804,165 4 Gross profit, exclusive of depreciation and amortization expense April 29, 2023 April 30, 2022 BPS Change (1) GAAP $ 509,794 $ 449,546 570 Impact from changes in foreign currency exchange rates — (12,601) 100 Non-GAAP on a constant currency basis $ 509,794 $ 436,945 670 Operating income (loss) April 29, 2023 April 30, 2022 BPS Change (1) GAAP $ 34,008 $ (9,726) 530 Excluded items (2) (4,436) (3,422) (10) Adjusted non-GAAP $ 38,444 $ (6,304) 540 Impact from changes in foreign currency exchange rates — (8,639) 110 Adjusted non-GAAP on a constant currency basis $ 38,444 $ (14,943) 650 Net income (loss) per share attributable to A&F April 29, 2023 April 30, 2022 $ Change GAAP $ 0.32 $ (0.32) $ 0.64 Excluded items, net of tax (2) (0.06) (0.05) (0.01) Adjusted non-GAAP $ 0.39 $ (0.27) $ 0.66 Impact from changes in foreign currency exchange rates — (0.12) 0.12 Adjusted non-GAAP on a constant currency basis $ 0.39 $ (0.39) $ 0.78 (1) The estimated basis point change has been rounded based on the change in the percentage of net sales. (2) Excluded items for the thirteen weeks ended April 29, 2023 and April 30, 2022 consisted of pre-tax store asset impairment charges and the tax effect of pre-tax excluded items. Abercrombie & Fitch Co. 30 2023 1Q Form 10-Q Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk INVESTMENT SECURITIES The Company maintains its cash equivalents in financial instruments, primarily time deposits and money market funds, with original maturities of three months or less. Due to the short-term nature of these instruments, changes in interest rates are not expected to materially affect the fair value of these financial instruments. The Rabbi Trust includes amounts to meet funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II, and the Supplemental Executive Retirement Plan. The Rabbi Trust assets primarily consist of trust-owned life insurance policies, which are recorded at cash surrender value. The change in cash surrender value of the trust-owned life insurance policies held in the Rabbi Trust resulted in realized gains of $0.3 million and $0.4 million for each of the thirteen weeks ended April 29, 2023 and April 30, 2022, respectively which are recorded in interest expense, net on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The Rabbi Trust assets were included in other assets on the Condensed Consolidated Balance Sheets as of April 29, 2023 and January 28, 2023 and are restricted in their use as noted above. INTEREST RATE RISK Prior to July 2, 2020, the Company’s exposure to market risk due to changes in interest rates related primarily to the increase or decrease in the amount of interest expense from fluctuations in the LIBO rate, or an alternate base rate associated with the Company’s former term loan facility (the “Term Loan Facility”) and the ABL Facility. On July 2, 2020, the Company issued the Senior Secured Notes and repaid all outstanding borrowings under the Term Loan Facility and the ABL Facility, thereby eliminating any then-existing cash flow market risk due to changes in interest rates. The Senior Secured Notes are exposed to interest rate risk that is limited to changes in fair value. This analysis for Fiscal 2023 may differ from the actual results due to potential changes in gross borrowings outstanding under the ABL Facility and potential changes in interest rate terms and limitations described within the Amended and Restated Credit Agreement. In July 2017, the Financial Conduct Authority (the authority that regulates LIBO rate) announced it intended to stop compelling banks to submit rates for the calculation of LIBO rate after 2021. Certain publications of the LIBO rate were phased out at the end of 2021 and all LIBO rate publications will cease after June 30, 2023. On March 15, 2023, the Company entered into the First Amendment to the Amended and Restated Credit Agreement (the “First Amendment”) to eliminate LIBO rate based loans and to use the current market definitions with respect to the Secured Overnight Financing Rate, as well as to make other conforming changes. FOREIGN CURRENCY EXCHANGE RATE RISK A&F’s international subsidiaries generally operate with functional currencies other than the U.S. Dollar. Since the Company’s Condensed Consolidated Financial Statements are presented in U.S. Dollars, the Company must translate all components of these financial statements from functional currencies into U.S. Dollars at exchange rates in effect during or at the end of the reporting period. The fluctuation in the value of the U.S. Dollar against other currencies affects the reported amounts of revenues, expenses, assets, and liabilities. The potential impact of foreign currency exchange rate fluctuations increases as international operations relative to domestic operations increase. A&F and its subsidiaries have exposure to changes in foreign currency exchange rates associated with foreign currency transactions and forecasted foreign currency transactions, including the purchase of inventory between subsidiaries and foreign-currency-denominated assets and liabilities. The Company has established a program that primarily utilizes foreign currency exchange forward contracts to partially offset the risks associated with the effects of certain foreign currency transactions and forecasted transactions. Under this program, increases or decreases in foreign currency exchange rate exposures are partially offset by gains or losses on foreign currency exchange forward contracts, to mitigate the impact of foreign currency exchange gains or losses. The Company does not use forward contracts to engage in currency speculation. Outstanding foreign currency exchange forward contracts are recorded at fair value at the end of each fiscal period. Foreign currency exchange forward contracts are sensitive to changes in foreign currency exchange rates. As of April 29, 2023, the Company assessed the risk of loss in fair values from the effect of a hypothetical 10% devaluation of the U.S. Dollar against the exchange rates for foreign currencies under contract. Such a hypothetical devaluation would decrease derivative contract fair values by approximately $14.8 million. As the Company’s foreign currency exchange forward contracts are primarily designated as cash flow hedges of forecasted transactions, the hypothetical change in fair values would be expected to be largely offset by the net change in fair values of the underlying hedged items. Refer to Note 12, “ DERIVATIVE INSTRUMENTS ,” for the fair value of any outstanding foreign currency exchange forward contracts included in other current assets and accrued expenses as of April 29, 2023 and January 28, 2023. Abercrombie & Fitch Co. 31 2023 1Q Form 10-Q Table of Contents Item 4. Controls and Procedures DISCLOSURE CONTROLS AND PROCEDURES A&F maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports that A&F files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to A&F’s management, including A&F’s Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met. A&F’s management, including the Chief Executive Officer of A&F (who serves as Principal Executive Officer of A&F) and the Executive Vice President and Chief Financial Officer and Chief Operating Officer of A&F (who serves as Principal Financial Officer and Principal Accounting Officer of A&F), evaluated the effectiveness of A&F’s design and operation of its disclosure controls and procedures as of the end of the fiscal quarter ended April 29, 2023. The Chief Executive Officer of A&F (in such individual’s capacity as the Principal Executive Officer of A&F) and the Executive Vice President and Chief Financial Officer of A&F (in such individual’s capacity as the Principal Financial Officer of A&F) concluded that A&F’s disclosure controls and procedures were effective at a reasonable level of assurance as of April 29, 2023. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in A&F’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended April 29, 2023 that materially affected, or are reasonably likely to materially affect, A&F’s internal control over financial reporting. Abercrombie & Fitch Co. 32 2023 1Q Form 10-Q Table of Contents PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. The Company’s legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes estimated liabilities for the outcome of litigation where losses are deemed probable and the amount of loss, or range of loss, is reasonably estimable. The Company also determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that a loss is reasonably possible, and it is able to determine such estimates. The Company’s accrued charges for certain legal contingencies are classified within accrued expenses on the Condensed Consolidated Balance Sheets included in “ Item 1. Financial Statements (Unaudited) ,” of Part I of this Quarterly Report on Form 10-Q. Based on currently available information, the Company cannot estimate a range of reasonably possible losses in excess of the accrued charges for legal contingencies. In addition, the Company has not established accruals for certain claims and legal proceedings pending against the Company where it is not possible to reasonably estimate the outcome or potential liability, and the Company cannot estimate a range of reasonably possible losses for these legal matters. Actual liabilities may differ from the amounts recorded, due to uncertainties regarding final settlement agreement negotiations, court approvals and the terms of any approval by the courts, and there can be no assurance that the final resolution of legal matters will not have a material adverse effect on the Company’s financial condition, results of operations, or cash flows. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts. In addition, pursuant to Item 103(c)(3)(iii) of Regulation S-K under the Exchange Act, the Company is required to disclose certain information about environmental proceedings to which a governmental authority is a party if the Company reasonably believes such proceedings may result in monetary sanctions, exclusive of interest and costs, above a stated threshold. The Company has elected to apply a threshold of $1 million for purposes of determining whether disclosure of any such proceedings is required. Item 1A. Risk Factors The Company’s risk factors as of April 29, 2023 have not changed materially from those disclosed in Part I, “Item 1A. Risk Factors” of the Fiscal 2022 Form 10-K. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no sales of equity securities during the first quarter of Fiscal 2023 that were not registered under the Securities Act of 1933, as amended. The following table provides information regarding the purchase of shares of Common Stock made by or on behalf of A&F or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Exchange Act during each fiscal month of the thirteen weeks ended April 29, 2023: Period (fiscal month) Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)(3) January 29, 2023 through February 25, 2023 631 $ 31.35 — $ 232,184,768 February 26, 2023 through April 1, 2023 729,177 24.96 — 232,184,768 April 2, 2023 through April 29, 2023 2,697 25.14 — 232,184,768 Total 732,505 27.15 — 232,184,768 (1) An aggregate of 732,505 shares of Common Stock purchased during the thirteen weeks ended April 29, 2023 were withheld for tax payments due upon the vesting of employee restricted stock units and the exercise of employee stock appreciation rights. (2) On November 23, 2021, we announced that A&F’s Board of Directors approved a new $500 million share repurchase authorization, replacing the prior 2021 share repurchase authorization of 10.0 million shares, which had approximately 3.9 million shares remaining available for repurchase. (3) The number shown represents, as of the end of each period, the approximate dollar value of Common Stock that may yet be purchased under A&F’s publicly announced stock repurchase authorization described in footnote 2 above. The shares may be purchased, from time to time depending on business and market conditions. Abercrombie & Fitch Co. 33 2023 1Q Form 10-Q Table of Contents Item 6. Exhibits Exhibit Document 3.1 Amended and Restated Certificate of Incorporation of Abercrombie & Fitch Co., reflecting amendments through the date of this Quarterly Report on Form 10-Q, incorporated herein by reference to Exhibit 3.2 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2011 (File No. 001-12107). [This document represents the Amended and Restated Certificate of Incorporation of Abercrombie & Fitch Co. in compiled form incorporating all amendments. This compiled document has not been filed with the Delaware Secretary of State.] 3.2 Amended and Restated Bylaws of Abercrombie & Fitch Co. reflecting amendments through the date of this Quarterly Report on Form 10-Q, incorporated herein by reference to Exhibit 3.1 to to A&F’s Current Report on Form 8-K dated and filed November 22, 2022 (File No. 001-12107) [This document represents the Amended and Restated Bylaws of Abercrombie & Fitch Co. in compiled form incorporating all amendments.] 10.1 First Amendment to Amended and Restated Credit Agreement and First Amendment to Security Agreement, dated as of March 15, 2023, among Abercrombie & Fitch Management Co., as Lead Borrower; the other Borrowers and Guarantors party thereto, and Wells Fargo Bank, National Association, as administrative agent for the Lenders, incorporated herein by reference to Exhibit 10.12 to A&F’s Annual Report on Form 10-K dated and filed March 27, 2023 (File No. 001-12107). 31.1 Certifications by Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 31.2 Certifications by Executive Vice President and Chief Financial Officer (Principal Financial Officer) pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 32.1 Certifications by Chief Executive Officer (who serves as Principal Executive Officer) and Executive Vice President and Chief Financial Officer (who serves as Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** 101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its Inline XBRL tags are embedded within the Inline XBRL document.* 101.SCH Inline XBRL Taxonomy Extension Schema Document.* 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.* 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.* 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.* 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.* 104 Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).* *     Filed herewith. **    Furnished herewith. Abercrombie & Fitch Co. 34 2023 1Q Form 10-Q Table of Contents Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Abercrombie & Fitch Co. Date: June 6, 2023 By: /s/ Scott D. Lipesky Scott D. Lipesky Executive Vice President, Chief Financial Officer and Chief Operating Officer (Principal Financial Officer, Principal Accounting Officer and Authorized Officer) Abercrombie & Fitch Co. 35 2023 1Q Form 10-Q

Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Stockholders’ Equity 5 Condensed Consolidated Statements of Cash Flows 7 Index for Notes to Condensed Consolidated Financial Statements 8 Notes to Condensed Consolidated Financial Statements 9 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22 Item 3. Quantitative and Qualitative Disclosures About Market Risk 37 Item 4. Controls and Procedures 39 PART II. OTHER INFORMATION Item 1. Legal Proceedings 40 Item 1A. Risk Factors 40 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 40 Item 5. Other Information 40 Item 6. Exhibits 41 Signatures 42 Abercrombie & Fitch Co. 2 2023 2Q Form 10-Q Table of Contents PART I. FINANCIAL INFORMATION Item 1.     Financial Statements (Unaudited) Abercrombie & Fitch Co. Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Thousands, except per share amounts) (Unaudited) Thirteen Weeks Ended Twenty-Six Weeks Ended July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022 Net sales $ 935,345 $ 805,091 $ 1,771,339 $ 1,617,853 Cost of sales, exclusive of depreciation and amortization 350,965 339,200 677,165 702,416 Gross profit 584,380 465,891 1,094,174 915,437 Stores and distribution expense 352,730 340,791 684,343 678,334 Marketing, general and administrative expense 144,502 124,168 287,133 246,317 Asset impairment — 2,170 4,436 5,592 Other operating (income) loss, net ( 2,694 ) 953 ( 5,588 ) ( 2,889 ) Operating income (loss) 89,842 ( 2,191 ) 123,850 ( 11,917 ) Interest expense, net 1,097 6,917 4,540 14,224 Income (loss) before income taxes 88,745 ( 9,108 ) 119,310 ( 26,141 ) Income tax expense 30,014 5,634 42,732 3,447 Net income (loss) 58,731 ( 14,742 ) 76,578 ( 29,588 ) L Net income attributable to noncontrolling interests 1,837 2,092 3,113 3,715 Net income (loss) attributable to A&F $ 56,894 $ ( 16,834 ) $ 73,465 $ ( 33,303 ) Net income (loss) per share attributable to A&F Basic $ 1.13 $ ( 0.33 ) $ 1.47 $ ( 0.65 ) Diluted $ 1.10 $ ( 0.33 ) $ 1.43 $ ( 0.65 ) Weighted-average shares outstanding Basic 50,322 50,441 49,952 51,262 Diluted 51,548 50,441 51,535 51,262 Other comprehensive loss Foreign currency translation adjustments, net of tax $ ( 3,836 ) $ ( 4,914 ) $ ( 3,525 ) $ ( 15,317 ) Derivative financial instruments, net of tax 2,242 ( 1,729 ) 2,647 ( 17 ) Other comprehensive loss ( 1,594 ) ( 6,643 ) ( 878 ) ( 15,334 ) Comprehensive income (loss) 57,137 ( 21,385 ) 75,700 ( 44,922 ) L Comprehensive income attributable to noncontrolling interests 1,837 2,092 3,113 3,715 Comprehensive income (loss) attributable to A&F $ 55,300 $ ( 23,477 ) $ 72,587 $ ( 48,637 ) The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 3 2023 2Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Balance Sheets (Thousands, except par value amounts) (Unaudited) July 29, 2023 January 28, 2023 Assets Current assets: Cash and equivalents $ 617,339 $ 517,602 Receivables 112,597 104,506 Inventories 493,479 505,621 Other current assets 87,850 100,289 Total current assets 1,311,265 1,228,018 Property and equipment, net 553,680 551,585 Operating lease right-of-use assets 714,977 723,550 Other assets 216,792 209,947 Total assets $ 2,796,714 $ 2,713,100 Liabilities and stockholders’ equity Current liabiliti Accounts payable $ 323,197 $ 258,895 Accrued expenses 375,544 413,303 Short-term portion of operating lease liabilities 191,700 213,979 Income taxes payable 46,039 16,023 Total current liabilities 936,480 902,200 Long-term liabiliti Long-term portion of operating lease liabilities 692,046 713,361 Long-term borrowings, net 297,385 296,852 Other liabilities 92,019 94,118 Total long-term liabilities 1,081,450 1,104,331 Stockholders’ equity Class A Common Stoc $ 0.01 par val 150,000 shares authorized and 103,300 shares issued for all periods presented 1,033 1,033 Paid-in capital 410,398 416,255 Retained earnings 2,400,032 2,368,815 Accumulated other comprehensive loss, net of tax (“AOCL”) ( 138,405 ) ( 137,527 ) Treasury stock, at average 53,159 and 54,298 shares as of July 29, 2023 and January 28, 2023, respectively ( 1,904,752 ) ( 1,953,735 ) Total Abercrombie & Fitch Co. stockholders’ equity 768,306 694,841 Noncontrolling interests 10,478 11,728 Total stockholders’ equity 778,784 706,569 Total liabilities and stockholders’ equity $ 2,796,714 $ 2,713,100 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 4 2023 2Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Statements of Stockholders’ Equity (Thousands, except per share amounts) (Unaudited) Thirteen Weeks Ended July 29, 2023 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, April 29, 2023 50,062 $ 1,033 $ 400,699 $ 9,116 $ 2,344,522 $ ( 136,811 ) 53,238 $ ( 1,907,586 ) $ 710,973 Net income — — — 1,837 56,894 — — — 58,731 Share-based compensation issuances and exercises 79 — ( 1,860 ) — ( 1,384 ) — ( 79 ) 2,834 ( 410 ) Share-based compensation expense — — 11,559 — — — — — 11,559 Derivative financial instruments, net of tax — — — — — 2,242 — — 2,242 Foreign currency translation adjustments, net of tax — — — — — ( 3,836 ) — — ( 3,836 ) Distributions to noncontrolling interests, net — — — ( 475 ) — — — — ( 475 ) Ending balance at July 29, 2023 50,141 $ 1,033 $ 410,398 $ 10,478 $ 2,400,032 $ ( 138,405 ) 53,159 $ ( 1,904,752 ) $ 778,784 Thirteen Weeks Ended July 30, 2022 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, April 30, 2022 50,442 $ 1,033 $ 398,412 $ 9,444 $ 2,350,807 $ ( 123,397 ) 52,858 $ ( 1,931,494 ) $ 704,805 Net income (loss) — — — 2,092 ( 16,834 ) — — — ( 14,742 ) Purchase of Common Stock ( 1,000 ) — — — 1,000 ( 17,775 ) ( 17,775 ) Share-based compensation issuances and exercises 29 — ( 1,045 ) — ( 106 ) — ( 29 ) 1,070 ( 81 ) Share-based compensation expense — — 7,760 — — — — — 7,760 Derivative financial instruments, net of tax — — — — — ( 1,729 ) — — ( 1,729 ) Foreign currency translation adjustments, net of tax — — — — — ( 4,914 ) — — ( 4,914 ) Distributions to noncontrolling interests, net — — — ( 397 ) — — — — ( 397 ) Ending balance at July 30, 2022 49,471 $ 1,033 $ 405,127 $ 11,139 $ 2,333,867 $ ( 130,040 ) 53,829 $ ( 1,948,199 ) $ 672,927 Abercrombie & Fitch Co. 5 2023 2Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Statements of Stockholders’ Equity (Thousands, except per share amounts) (Unaudited) Twenty-Six Weeks Ended July 29, 2023 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, January 28, 2023 49,002 $ 1,033 $ 416,255 $ 11,728 $ 2,368,815 $ ( 137,527 ) 54,298 $ ( 1,953,735 ) $ 706,569 Net income — — — 3,113 73,465 — — — 76,578 Share-based compensation issuances and exercises 1,139 — ( 25,504 ) — ( 42,248 ) — ( 1,139 ) 48,983 ( 18,769 ) Share-based compensation expense — — 19,647 — — — — — 19,647 Derivative financial instruments, net of tax — — — — — 2,647 — — 2,647 Foreign currency translation adjustments, net of tax — — — — — ( 3,525 ) — — ( 3,525 ) Distributions to noncontrolling interests, net — — — ( 4,363 ) — — — — ( 4,363 ) Ending balance at July 29, 2023 50,141 $ 1,033 $ 410,398 $ 10,478 $ 2,400,032 $ ( 138,405 ) 53,159 $ ( 1,904,752 ) $ 778,784 Twenty-Six Weeks Ended July 30, 2022 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, January 29, 2022 52,985 $ 1,033 $ 413,190 $ 11,234 $ 2,386,156 $ ( 114,706 ) 50,315 $ ( 1,859,583 ) $ 837,324 Net income (loss) — — — 3,715 ( 33,303 ) — — — ( 29,588 ) Purchase of Common Stock ( 4,260 ) — — — 4,260 ( 117,775 ) ( 117,775 ) Share-based compensation issuances and exercises 746 — ( 24,179 ) — ( 18,986 ) — ( 746 ) 29,159 ( 14,006 ) Share-based compensation expense — — 16,116 — — — — — 16,116 Derivative financial instruments, net of tax — — — — — ( 17 ) — — ( 17 ) Foreign currency translation adjustments, net of tax — — — — — ( 15,317 ) — — ( 15,317 ) Distributions to noncontrolling interests, net — — — ( 3,810 ) — — — — ( 3,810 ) Ending balance at July 30, 2022 49,471 $ 1,033 $ 405,127 $ 11,139 $ 2,333,867 $ ( 130,040 ) 53,829 $ ( 1,948,199 ) $ 672,927 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 6 2023 2Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Statements of Cash Flows (Thousands) (Unaudited) Twenty-Six Weeks Ended July 29, 2023 July 30, 2022 Operating activities Net income (loss) $ 76,578 $ ( 29,588 ) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activiti Depreciation and amortization 72,411 65,543 Asset impairment 4,436 5,592 Loss (gain) on disposal 1,622 ( 1,083 ) Benefit from deferred income taxes ( 822 ) ( 1,629 ) Share-based compensation 19,647 16,116 Changes in assets and liabiliti Inventories 11,909 ( 184,657 ) Accounts payable and accrued expenses 40,954 ( 34,013 ) Operating lease right-of-use assets and liabilities ( 36,289 ) ( 41,122 ) Income taxes 28,281 ( 17,154 ) Other assets 1,115 ( 38,436 ) Other liabilities ( 3,514 ) 698 Net cash provided by (used for) operating activities 216,328 ( 259,733 ) Investing activities Purchases of property and equipment ( 89,780 ) ( 59,582 ) Proceeds from the sale of property and equipment — 7,972 Net cash used for investing activities ( 89,780 ) ( 51,610 ) Financing activities Payment of debt modification costs and fees ( 17 ) — Purchases of Common Stock — ( 117,775 ) Other financing activities ( 23,325 ) ( 17,649 ) Net cash used for financing activities ( 23,342 ) ( 135,424 ) Effect of foreign currency exchange rates on cash ( 3,672 ) ( 7,567 ) Net increase (decrease) in cash and equivalents, and restricted cash and equivalents 99,534 ( 454,334 ) Cash and equivalents, and restricted cash and equivalents, beginning of period 527,569 834,368 Cash and equivalents, and restricted cash and equivalents, end of period $ 627,103 $ 380,034 Supplemental information related to non-cash activities Purchases of property and equipment not yet paid at end of period $ 45,506 $ 50,133 Operating lease right-of-use assets additions, net of terminations, impairments and other reductions 91,007 139,751 Supplemental information related to cash activities Cash paid for interest 13,108 13,463 Cash paid for income taxes 16,565 24,566 Cash received from income tax refunds 442 139 Cash paid for amounts included in measurement of operating lease liabilities, net of abatements 156,486 159,423 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 7 2023 2Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Index for Notes to Condensed Consolidated Financial Statements (Unaudited) Page No. Note 1. NATURE OF BUSINESS 9 Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 9 Note 3. REVENUE RECOGNITION 11 Note 4. NET INCOME (LOSS) PER SHARE 11 Note 5. FAIR VALUE 12 Note 6. PROPERTY AND EQUIPMENT, NET 13 Note 7. LEASES 13 Note 8. ASSET IMPAIRMENT 14 Note 9. INCOME TAXES 14 Note 10. BORROWINGS 14 Note 11. SHARE-BASED COMPENSATION 16 Note 12. DERIVATIVE INSTRUMENTS 18 Note 13. ACCUMULATED OTHER COMPREHENSIVE LOSS 19 Note 14. SEGMENT REPORTING 20 Abercrombie & Fitch Co. 8 2023 2Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. NATURE OF BUSINESS Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a global, digitally-led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. During the second quarter of Fiscal 2023, to leverage the knowledge and experience of our regional teams to better drive brand growth, the Company reorganized its structure and now manages its business on a geographic basis, consisting of three reportable segments: Americas; Europe, the Middle East and Africa (EMEA); and Asia-Pacific (APAC). Corporate functions and other income and expenses are evaluated on a consolidated basis and are not allocated to the Company’s segments, and therefore are included as a reconciling item between segment and total operating income (loss). There was no impact on consolidated net sales, operating income (loss) or net income (loss) per share as a result of these changes. All prior periods presented are recast to conform to the new segment presentation. The Company’s brands include Abercrombie brands, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands, and Hollister brands, which includes the Company’s Hollister, Gilly Hicks, and Social Tourist brands. These brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The accompanying Condensed Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its financial position, results of operations and cash flows. The Company has interests in Emirati and Kuwaiti business ventures with Majid al Futtaim Fashion L.L.C. (“MAF”) and in a United States of America (the “U.S.”) business venture with Dixar L.L.C. (“Dixar”), each of which meets the definition of a variable interest entity (“VIE”). The purpose of the business ventures with MAF is to operate stores in the United Arab Emirates and Kuwait and the purpose of the business venture with Dixar is to hold the intellectual property related to the Social Tourist brand. The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the operating results, assets and liabilities of these VIEs, with the noncontrolling interests’ (“NCI”) portions of net income (loss) presented as net income attributable to NCI on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and the NCI portion of stockholders’ equity presented as NCI on the Condensed Consolidated Balance Sheets. Fiscal year The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a fifty-two week year, but occasionally gives rise to an additional week, resulting in a fifty-three week year, as will be the case in Fiscal 2023. Fiscal years are designated in the Condensed Consolidated Financial Statements and notes, as well as the remainder of this Quarterly Report on Form 10-Q, by the calendar year in which the fiscal year commences. All references herein to the Company’s fiscal years are as follows: Fiscal year Year ended/ending Number of weeks Fiscal 2022 January 28, 2023 52 Fiscal 2023 February 3, 2024 53 Fiscal 2024 February 1, 2025 52 Interim financial statements The Condensed Consolidated Financial Statements as of July 29, 2023, and for the thirteen and twenty-six week periods ended July 29, 2023 and July 30, 2022, are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim consolidated financial statements. Accordingly, the Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in A&F’s Annual Report on Form 10-K for Fiscal 2022 filed with the SEC on March 27, 2023 (the “Fiscal 2022 Form 10-K”). The January 28, 2023 consolidated balance sheet data, included herein, were derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the U.S. (“GAAP”). Abercrombie & Fitch Co. 9 2023 2Q Form 10-Q Table of Contents In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to state fairly, in all material respects, the financial position, results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for Fiscal 2023. Use of estimates The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved with estimates, actual results may differ. Additionally, these estimates and assumptions may change as a result of the impact of conditions affecting the global economy, such as the uncertainty regarding the economy, rising interest rates, continued inflation, fluctuation in foreign exchange rates, and the ongoing conflict in Ukraine, and result in material impacts to the Company’s consolidated financial statements in future reporting periods. Recent accounting pronouncements The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements. The following table provides a brief description of certain accounting pronouncements that the company has adopted. Accounting Standards Update (ASU) Description Date of adoption Effect on the financial statements or other significant matters ASU 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations The update relates to disclosure requirements for buyers in supplier finance programs. The amendments in the update require that a buyer disclose qualitative and quantitative information about their supplier finance programs. Interim and annual requirements include disclosure of outstanding amounts under the obligations as of the end of the reporting period, and annual requirements include a roll-forward of those obligations for the annual reporting period, as well as a description of payment and other key terms of the programs. This update is effective for annual periods beginning after December 15, 2022, and interim periods within those fiscal years, except for the requirement to disclose roll-forward information, which is effective for fiscal years beginning after December 15, 2023. January 29, 2023 The Company adopted the changes to the standard under the retrospective method in the first quarter of Fiscal 2023, except for roll-forward information, which is effective for fiscal years beginning after December 15, 2023. The adoption of this guidance did not have a significant impact on the Company's condensed consolidated financial statements. Supply Chain Finance Program Under the supply chain finance (“SCF”) program, which is administered by a third party, the Company’s vendors, at their sole discretion, are given the opportunity to sell receivables from the Company to a participating financial institution at a discount that leverages the Company’s credit profile. The commercial terms negotiated by the Company with its vendors are consistent, irrespective of whether a vendor participates in the SCF program. A participating vendor has the option to be paid by the financial institution earlier than the original invoice due date. The Company’s responsibility is limited to making payment on the terms originally negotiated by the Company with each vendor, regardless of whether the vendor sells its receivable to a financial institution. If a vendor chooses to participate in the SCF program, the Company pays the financial institution the stated amount of confirmed merchandise invoices on the stated maturity date, which are primarily 75 days from the invoice date. The agreement with the financial institution does not require the Company to provide assets pledged as security or other forms of guarantees for the SCF program. As of July 29, 2023 and January 28, 2023, $ 79.8 million and $ 68.4 million of SCF program liabilities were recorded in accounts payable in the Condensed Consolidated Balance Sheet, respectively, and reflected as a cash flow from operating activities in the Condensed Consolidated Statements of Cash Flows when settled. Abercrombie & Fitch Co. 10 2023 2Q Form 10-Q Table of Contents Condensed Consolidated Statements of Cash Flows reconciliation The following table provides a reconciliation of cash and equivalents and restricted cash and equivalents to the amounts shown on the Condensed Consolidated Statements of Cash Flows: (in thousands) Location July 29, 2023 January 28, 2023 July 30, 2022 January 29, 2022 Cash and equivalents Cash and equivalents $ 617,339 $ 517,602 $ 369,957 $ 823,139 Long-term restricted cash and equivalents Other assets 9,764 9,967 10,077 11,229 Cash and equivalents and restricted cash and equivalents $ 627,103 $ 527,569 $ 380,034 $ 834,368 3. REVENUE RECOGNITION Disaggregation of revenue All revenues are recognized in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Income. For information regarding the disaggregation of revenue, refer to Note 14, “ SEGMENT REPORTING . ” Contract liabilities The following table details certain contract liabilities representing unearned revenue as of July 29, 2023, January 28, 2023, July 30, 2022 and January 29, 2022: (in thousands) July 29, 2023 January 28, 2023 ⁽¹⁾ July 30, 2022 January 29, 2022 ⁽¹⁾ Gift card liability (1) $ 36,967 $ 39,235 $ 35,205 $ 36,984 Loyalty programs liability 23,969 25,640 21,525 22,757 (1) Includes $ 26.4 million and $ 23.9 million of revenue recognized during the twenty-six weeks ended July 29, 2023 and July 30, 2022, respectively, that was included in the gift card liability at the beginning of January 28, 2023 and January 29, 2022, respectively. The following table details recognized revenue associated with the Company’s gift card program and loyalty programs for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022: Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022 Revenue associated with gift card redemptions and gift card breakage $ 24,426 $ 22,652 $ 48,650 $ 45,653 Revenue associated with reward redemptions and breakage related to the Company’s loyalty programs 11,636 10,630 23,918 20,811 4. NET INCOME (LOSS) PER SHARE Net income (loss) per basic and diluted share attributable to A&F is computed based on the weighted-average number of outstanding shares of A&F’s Class A Common Stock, $0.01 par value (“Common Stock”). The following table provides additional information pertaining to net income (loss) per share attributable to A&F for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022: Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022 Shares of Common Stock issued 103,300 103,300 103,300 103,300 Weighted-average treasury shares ( 52,978 ) ( 52,859 ) ( 53,348 ) ( 52,038 ) Weighted-average — basic shares 50,322 50,441 49,952 51,262 Dilutive effect of share-based compensation awards 1,226 — 1,583 — Weighted-average — diluted shares 51,548 50,441 51,535 51,262 Anti-dilutive shares (1) 1,453 4,209 1,779 4,245 (1) Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net income (loss) per diluted share because the impact would have been anti-dilutive. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can achieve up to 200% of their target vesting amount and are reflected at the maximum vesting amount less any dilutive portion. Abercrombie & Fitch Co. 11 2023 2Q Form 10-Q Table of Contents 5. FAIR VALUE Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows: • Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets that the Company can access at the measurement date. • Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly. • Level 3—inputs to the valuation methodology are unobservable. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The following table provides the three levels of the hierarchy and the distribution of the Company’s assets measured at fair value on a recurring basis, as of July 29, 2023 and January 28, 2023: Assets and Liabilities at Fair Value as of July 29, 2023 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 116,607 $ 26,700 $ — $ 143,307 Derivative instruments (2) — 536 — 536 Rabbi Trust assets (3) 1,161 51,813 — 52,974 Restricted cash equivalents (1) 1,383 5,226 — 6,609 Total assets $ 119,151 $ 84,275 $ — $ 203,426 Liabiliti Derivative instruments (2) $ — $ 2,312 $ — $ 2,312 Total liabilities $ — $ 2,312 $ — $ 2,312 Assets and Liabilities at Fair Value as of January 28, 2023 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 50,364 $ — $ — $ 50,364 Derivative instruments (2) — 32 — 32 Rabbi Trust assets (3) 1 51,681 — 51,682 Restricted cash equivalents (1) 1,690 5,174 — 6,864 Total assets $ 52,055 $ 56,887 $ — $ 108,942 Liabiliti Derivative instruments (2) $ — $ 4,986 $ — $ 4,986 Total liabilities $ — $ 4,986 $ — $ 4,986 (1) Level 1 assets consisted of investments in money market funds and U.S. treasury bills. Level 2 assets consisted of time deposits. (2) Level 2 assets and liabilities consisted primarily of foreign currency exchange forward contracts. (3) Level 1 assets consisted of investments in money market funds. Level 2 assets consisted of trust-owned life insurance policies. The Company’s Level 2 assets consisted o • Trust-owned life insurance policies, which were valued using the cash surrender value of the life insurance policies; • Time deposits, which were valued at cost, approximating fair value, due to the short-term nature of these investments; and • Derivative instruments, primarily foreign currency exchange forward contracts, which were valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk. Fair value of long-term borrowings The Company’s borrowings under its senior secured notes, which have a fixed 8.75 % interest rate and mature on July 15, 2025 (the “Senior Secured Notes”), are carried at historical cost in the accompanying Condensed Consolidated Balance Sheets. The following table provides the carrying amount and fair value of the Company’s long-term gross borrowings as of July 29, 2023 and January 28, 2023: (in thousands) July 29, 2023 January 28, 2023 Gross borrowings outstanding, carrying amount $ 299,730 $ 299,730 Gross borrowings outstanding, fair value (1) 304,226 304,975 (1) Classified as Level 2 measurements within the fair value hierarchy. Abercrombie & Fitch Co. 12 2023 2Q Form 10-Q Table of Contents 6. PROPERTY AND EQUIPMENT, NET The following table provides property and equipment, net as of July 29, 2023 and January 28, 2023: (in thousands) July 29, 2023 January 28, 2023 Property and equipment, at cost $ 2,497,947 $ 2,517,862 L Accumulated depreciation and amortization ( 1,944,267 ) ( 1,966,277 ) Property and equipment, net $ 553,680 $ 551,585 R efer to Note 8, “ ASSET IMPAIRMENT ,” for details related to property and equipment impairment charges incurred during the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022. 7. LEASES The Company is a party to leases related to its Company-operated retail stores as well as for certain of its distribution centers, office space, information technology and equipment. The following table provides a summary of the Company’s operating lease costs for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022: Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022 Single lease cost (1) $ 62,655 $ 61,953 $ 120,995 $ 119,533 Variable lease cost (2) 51,782 32,520 87,477 65,678 Operating lease right-of-use asset impairment (3) — 1,573 1,414 3,488 Sublease income (4) ( 996 ) ( 952 ) ( 1,980 ) ( 1,961 ) Total operating lease cost $ 113,441 $ 95,094 $ 207,906 $ 186,738 (1) Included amortization and interest expense associated with operating lease right-of-use assets and the impact from remeasurement of operating lease liabilities. (2) Includes variable payments related to both lease and nonlease components, such as contingent rent payments made by the Company based on performance, and payments related to taxes, insurance, and maintenance costs, as well as the benefit of $ 1.0 million and $ 1.1 million of rent abatements during the thirteen and twenty-six weeks ended July 29, 2023, respectively, related to the effects of the COVID-19 pandemic that resulted in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract. The benefit related to rent abatements recognized during the thirteen and twenty-six weeks ended July 30, 2022 was $ 0.9 million and $ 2.6 million, respectively. (3) Refer to Note 8, “ ASSET IMPAIRMENT ,” for details related to operating lease right-of-use asset impairment charges. (4) The terms of the sublease agreement entered into by the Company with a third party during Fiscal 2020 related to one of its previous flagship store locations have not changed materially from that disclosed in Note 7, “LEASES,” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of the Fiscal 2022 Form 10-K. Sublease income is recognized in other operating (income) loss, net on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The Company had minimum commitments related to operating lease contracts that have not yet commenced, primarily for certain Company-operated retail stores, of approximately $ 21.8 million as of July 29, 2023. Abercrombie & Fitch Co. 13 2023 2Q Form 10-Q Table of Contents 8. ASSET IMPAIRMENT The following table provides asset impairment charges for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022: Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022 Operating lease right-of-use asset impairment $ — $ 1,573 $ 1,414 $ 3,488 Property and equipment asset impairment — 597 3,022 2,104 Total asset impairment $ — $ 2,170 $ 4,436 $ 5,592 Asset impairment charges for the thirteen weeks ended July 30, 2022 and twenty-six weeks ended July 29, 2023 and July 30, 2022 related to certain of the Company’s assets including stores across certain brands, geographies and store formats. The store impairment charges for the twenty-six weeks ended July 29, 2023 reduced the then carrying amount of the impaired stores’ assets to their fair value of approximately $ 6.1 million, including $ 3.2 million related to operating lease right-of-use assets. 9. INCOME TAXES The quarterly provision for income taxes is based on the current estimate of the annual effective income tax rate and the tax effect of discrete items occurring during the quarter. The Company’s quarterly provision and the estimate of the annual effective tax rate are subject to significant variation due to several factors. These factors include variability in the pre-tax jurisdictional mix of earnings, changes in how the Company does business including entering into new businesses or geographies, changes in foreign currency exchange rates, changes in laws, regulations, interpretations and administrative practices, relative changes in expenses or losses for which tax benefits are not recognized and the impact of discrete items. In addition, jurisdictions where the Company anticipates an ordinary loss for the fiscal year for which the Company does not anticipate future tax benefits are excluded from the overall computation of estimated annual effective tax rate and no tax benefits are recognized in the period related to losses in such jurisdictions. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax earnings. Impact of valuation allowances During the thirteen and twenty-six weeks ended July 29, 2023, the Company did not recognize income tax benefits on $ 22.7 million and $ 43.0 million, respectively, of pretax losses, primarily in Switzerland, resulting in adverse tax impacts of $ 3.4 million and $6.5 million, respectively. As of July 29, 2023, the Company had net deferred tax assets of approximately $ 11.2 million, $ 8.3 million, and $ 16.6 million in China, Japan and the United Kingdom, respectively. While the Company believes that these net deferred tax assets are more-likely-than-not to be realized, it is not a certainty, as the Company continues to evaluate and respond to emerging situations. Should circumstances change, the net deferred tax assets may become subject to additional valuation allowances in the future. Additional valuation allowances would result in additional tax expense. During the thirteen and twenty-six weeks ended July 30, 2022, the Company did not recognize income tax benefits on $ 26.4 million and $ 39.8 million, respectively, of pretax losses, primarily in Switzerland, resulting in adverse tax impacts of $ 4.8 million and $ 7.2 million, respectively. As of January 28, 2023, there were approximately $ 8.0 million, $ 9.1 million, and $ 15.6 million of net deferred tax assets in China, Japan, and the United Kingdom, respectively. Share-based compensation Refer to Note 11, “ SHARE-BASED COMPENSATION ,” for details on income tax benefits and charges related to share-based compensation awards during the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022. Abercrombie & Fitch Co. 14 2023 2Q Form 10-Q Table of Contents 10. BORROWINGS The following table provides details on the Company’s long-term borrowings, net, as of July 29, 2023 and January 28, 2023 : (in thousands) July 29, 2023 January 28, 2023 Long-term portion of borrowings, gross at carrying amount $ 299,730 $ 299,730 Unamortized fees ( 2,345 ) ( 2,878 ) Long-term borrowings, net $ 297,385 $ 296,852 Senior Secured Notes The terms of the Senior Secured Notes have remained unchanged from those disclosed in Note 12, “BORROWINGS,” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of the Fiscal 2022 Form 10-K. ABL Facility The terms of the Company’s senior secured revolving credit facility of up to $ 400.0 million (the “ABL Facility”) have remained unchanged from those disclosed in Note 12, “ BORROWINGS ,” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of the Fiscal 2022 Form 10-K. The Company did not have any borrowings outstanding under the ABL Facility as of July 29, 2023 or as of January 28, 2023. As of July 29, 2023, availability under the ABL Facility was $ 396.7 million, net of $ 0.4 million in outstanding stand-by letters of credit. As the Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility, borrowing capacity available to the Company under the ABL Facility was $ 356.9 million as of July 29, 2023. Representations, warranties and covenants The agreements related to the Senior Secured Notes and the ABL Facility contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of the Company and its subsidiaries t grant or incur liens; incur, assume or guarantee additional indebtedness; sell or otherwise dispose of assets, including capital stock of subsidiaries; make investments in certain subsidiaries; pay dividends, make distributions or redeem or repurchase capital stock; change the nature of their business; and consolidate or merge with or into, or sell substantially all of the assets of the Company or Abercrombie & Fitch Management Co. (“A&F Management”) to another entity. The Senior Secured Notes are guaranteed on a senior secured basis, jointly and severally, by A&F and each of the existing and future wholly-owned domestic restricted subsidiaries of A&F that guarantee or will guarantee A&F Management’s Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) or certain future capital markets indebtedness. Certain of the agreements related to the Senior Secured Notes and the ABL Facility also contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances. The Company was in compliance with all debt covenants under these agreements as of July 29, 2023. Abercrombie & Fitch Co. 15 2023 2Q Form 10-Q Table of Contents 11. SHARE-BASED COMPENSATION Financial statement impact The following table provides share-based compensation expense and the related income tax impacts for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022: Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022 Share-based compensation expense $ 11,559 $ 7,760 $ 19,647 $ 16,116 Income tax benefit associated with share-based compensation expense recognized 1,079 1,015 2,083 1,980 The following table provides discrete income tax benefits and charges related to share-based compensation awards during the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022: Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022 Income tax discrete benefits (charges) realized for tax deductions related to the issuance of shares $ 325 $ ( 113 ) $ 1,442 $ 1,998 Income tax discrete charges realized upon cancellation of stock appreciation rights — ( 8 ) ( 101 ) ( 203 ) Total income tax discrete benefits (charges) related to share-based compensation awards $ 325 $ ( 121 ) $ 1,341 $ 1,795 The following table provides the amount of employee tax withheld by the Company upon the issuance of shares associated with restricted stock units vesting and the exercise of stock appreciation rights for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022: Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022 Employee tax withheld upon issuance of shares (1) $ 410 $ 312 $ 18,769 $ 14,006 (1) Classified within other financing activities on the Condensed Consolidated Statements of Cash Flows. Restricted stock units The following table provides the summarized activity for restricted stock units for the twenty-six weeks ended July 29, 2023: Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Number of Underlying Shares Weighted- Average Grant Date Fair Value Number of Underlying Shares Weighted- Average Grant Date Fair Value Number of Underlying Shares Weighted- Average Grant Date Fair Value Unvested at January 28, 2023 2,461,395 $ 21.30 336,549 $ 31.08 662,137 $ 23.68 Granted 883,296 28.66 222,144 28.36 111,077 41.20 Adjustments for performance achievement — — — — 493,854 16.24 Vested ( 906,730 ) 19.48 — — ( 987,708 ) 16.24 Forfeited ( 74,456 ) 25.02 ( 7,123 ) — ( 3,562 ) 43.46 Unvested at July 29, 2023 (1) 2,363,505 $ 24.65 551,570 $ 30.00 275,798 $ 43.81 (1) Unvested shares related to restricted stock units with performance-based and market-based vesting conditions are reflected at 100% of their target vesting amount in the table above. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can be achieved at up to 200% of their target vesting amount. The following table provides the unrecognized compensation cost and the remaining weighted-average period over which these costs are expected to be recognized for restricted stock units as of July 29, 2023: Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Unrecognized compensation cost (in thousands) $ 46,071 $ 14,810 $ 6,969 Remaining weighted-average period cost is expected to be recognized (years) 1.3 1.7 1.7 Abercrombie & Fitch Co. 16 2023 2Q Form 10-Q Table of Contents The following table provides additional information pertaining to restricted stock units for the twenty-six weeks ended July 29, 2023 and July 30, 2022: Twenty-Six Weeks Ended (in thousands) July 29, 2023 July 30, 2022 Service-based restricted stock units: Total grant date fair value of awards granted $ 25,315 $ 27,173 Total grant date fair value of awards vested 17,663 15,393 Performance-based restricted stock units: Total grant date fair value of awards granted 6,300 5,300 Total grant date fair value of awards vested — 4,482 Market-based restricted stock units: Total grant date fair value of awards granted 4,576 3,731 Total grant date fair value of awards vested 16,040 4,105 The following table provides the weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during the twenty-six weeks ended July 29, 2023 and July 30, 2022: Twenty-Six Weeks Ended July 29, 2023 July 30, 2022 Grant date market price $ 28.36 $ 32.07 Fair value 41.20 45.15 Price volatility 63 % 66 % Expected term (years) 2.9 2.9 Risk-free interest rate 4.6 % 2.3 % Dividend yield — — Average volatility of peer companies 66.0 72.9 Average correlation coefficient of peer companies 0.5295 0.5146 Stock appreciation rights The following table provides the summarized stock appreciation rights activity for the twenty-six weeks ended July 29, 2023: Number of Underlying Shares Weighted-Average Exercise Price Aggregate Intrinsic Value (in thousands) Weighted-Average Remaining Contractual Life (years) Outstanding at January 28, 2023 190,589 $ 29.43 Exercised ( 13,788 ) 23.19 Forfeited or expired ( 23,700 ) 45.69 Outstanding at July 29, 2023 153,101 $ 27.47 $ 1,914 1.3 Stock appreciation rights exercisable at July 29, 2023 153,101 $ 27.47 $ 1,914 1.3 The following table provides additional information pertaining to stock appreciation rights exercised during the twenty-six weeks ended July 29, 2023: (in thousands) July 29, 2023 Total grant date fair value of awards exercised $ 115 No stock appreciation rights were exercised during the twenty-six weeks ended July 30, 2022. Abercrombie & Fitch Co. 17 2023 2Q Form 10-Q Table of Contents 12. DERIVATIVE INSTRUMENTS The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes. The Company uses derivative instruments, primarily foreign currency exchange forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign-currency-denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign-currency-denominated intercompany receivables. Fluctuations in foreign currency exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These foreign currency exchange forward contracts typically have a maximum term of twelve months. The sale of the inventory to the Company’s customers will result in the reclassification of related derivative gains and losses that are reported in AOCL into earnings. The Company also uses foreign currency exchange forward contracts to hedge certain foreign-currency-denominated net monetary assets/liabilities. Examples of monetary assets/liabilities include cash balances, receivables and payables. Fluctuations in foreign currency exchange rates result in transaction gains or losses being recorded in earnings, as GAAP requires that monetary assets/liabilities be remeasured at the spot exchange rate at quarter-end and upon settlement. The Company has chosen not to apply hedge accounting to these instruments because there are no anticipated differences in the timing of gain or loss recognition on the hedging instruments and the hedged items. As of July 29, 2023, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all, of forecasted foreign-currency-denominated intercompany transactio (in thousands) Notional Amount (1) Euro $ 80,554 British pound 67,170 Canadian dollar 27,760 (1) Amounts reported are the U.S. Dollar notional amounts outstanding as of July 29, 2023. The fair value of derivative instruments is determined using quoted market prices of the same or similar instruments, adjusted for counterparty risk. The following table provides the location and amounts of derivative fair values of foreign currency exchange forward contracts on the Condensed Consolidated Balance Sheets as of July 29, 2023 and January 28, 2023: (in thousands) Location July 29, 2023 January 28, 2023 Location July 29, 2023 January 28, 2023 Derivatives designated as cash flow hedging instruments other current assets $ 536 $ 32 accrued expenses $ 2,312 $ 4,986 The following table provides information pertaining to derivative gains or losses from foreign currency exchange forward contracts designated as cash flow hedging instruments for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022: Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022 Gain recognized in AOCL (1) $ 558 $ 2,361 $ 51 $ 7,724 (Loss) gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization (2) ( 1,708 ) 4,124 $ ( 2,614 ) $ 7,809 (1) Amount represents the change in fair value of derivative instruments. (2) Amount represents (loss) gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) when the hedged item affects earnings, which is when merchandise is converted to cost of sales, exclusive of depreciation and amortization. Substantially all of the unrealized gain will be recognized in costs of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) over the next twelve months . The following table provides additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts not designated as hedging instruments for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022: Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022 (Loss) gain, net recognized in other operating (income) loss, net $ ( 540 ) $ 631 $ ( 1,087 ) $ 1,772 Abercrombie & Fitch Co. 18 2023 2Q Form 10-Q Table of Contents 13. ACCUMULATED OTHER COMPREHENSIVE LOSS The following tables provide activity in AOCL fo r the thirteen and twenty-six weeks ended July 29, 2023: Thirteen Weeks Ended July 29, 2023 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at April 29, 2023 $ ( 132,342 ) $ ( 4,469 ) $ ( 136,811 ) Other comprehensive (loss) income before reclassifications ( 3,836 ) 558 ( 3,278 ) Reclassified loss from AOCL (1) — 1,708 1,708 Tax effect — ( 24 ) ( 24 ) Other comprehensive (loss) income after reclassifications ( 3,836 ) 2,242 ( 1,594 ) Ending balance at July 29, 2023 $ ( 136,178 ) $ ( 2,227 ) $ ( 138,405 ) Twenty-Six Weeks Ended July 29, 2023 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at January 28, 2023 $ ( 132,653 ) $ ( 4,874 ) $ ( 137,527 ) Other comprehensive (loss) income before reclassifications ( 3,525 ) 51 ( 3,474 ) Reclassified loss from AOCL (1) — 2,614 2,614 Tax effect — ( 18 ) ( 18 ) Other comprehensive (loss) income after reclassifications ( 3,525 ) 2,647 ( 878 ) Ending balance at July 29, 2023 $ ( 136,178 ) $ ( 2,227 ) $ ( 138,405 ) (1) Amount represents loss reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The following tables provide activity in AOCL for the thirteen and twenty-six weeks ended July 30, 2022: Thirteen Weeks Ended July 30, 2022 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at April 30, 2022 $ ( 131,092 ) $ 7,695 $ ( 123,397 ) Other comprehensive (loss) income before reclassifications ( 4,914 ) 2,361 ( 2,553 ) Reclassified gain from AOCL (1) — ( 4,124 ) ( 4,124 ) Tax effect — 34 34 Other comprehensive loss after reclassifications ( 4,914 ) ( 1,729 ) ( 6,643 ) Ending balance at July 30, 2022 $ ( 136,006 ) $ 5,966 $ ( 130,040 ) Twenty-Six Weeks Ended July 30, 2022 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at January 29, 2022 $ ( 120,689 ) $ 5,983 $ ( 114,706 ) Other comprehensive (loss) income before reclassifications ( 15,317 ) 7,724 ( 7,593 ) Reclassified gain from AOCL (1) — ( 7,809 ) ( 7,809 ) Tax effect — 68 68 Other comprehensive loss after reclassifications ( 15,317 ) ( 17 ) ( 15,334 ) Ending balance at July 30, 2022 $ ( 136,006 ) $ 5,966 $ ( 130,040 ) (1) Amount represents loss reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Abercrombie & Fitch Co. 19 2023 2Q Form 10-Q Table of Contents 14. SEGMENT REPORTING The Company's reportable segments are based on the financial information the chief operating decision maker (“CODM”) uses to allocate resources and assess performance of its business. During the second quarter of Fiscal 2023, to leverage the knowledge and experience of our regional teams to better drive brand growth, the Company reorganized its structure and now manages its business on a geographic basis, consisting of three reportable segments: Americas; Europe, the Middle East and Africa (EMEA); and Asia-Pacific (APAC). Corporate functions and other income and expenses are evaluated on a consolidated basis and are not allocated to the Company’s segments, and therefore are included as a reconciling item between segment and total operating income (loss). The Americas reportable segment includes the results of operations in North America and South America. The EMEA reportable segment includes the results of operations in Europe, the Middle East and Africa. The APAC reportable segment includes the results of operations in the Asia-Pacific region, including Asia and Oceania. Intersegment sales and transfers are recorded at cost and are treated as a transfer of inventory. All intercompany revenues are eliminated in consolidation and are not reviewed when evaluating segment performance. All prior periods presented are recast to conform to the new segment presentation. The group comprised of the Company’s (i) Chief Executive Officer and (ii) Chief Financial Officer and Chief Operating Officer functions as the Company’s CODM. The Company’s CODM manages business operations and evaluates the performance of each segment based on the net sales and operating income (loss) of the segment. Net sales by segment are presented by attributing revenues on the basis of the segment that fulfills the order. Operating income (loss) for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributed to the segment. Corporate/other expenses include expenses incurred that are not directly attributed to a reportable segment and primarily relate to corporate or global functions such as design, sourcing, brand management, corporate strategy, information technology, finance, treasury, legal, human resources, and other corporate support services, as well as certain globally managed components of the planning, merchandising, and marketing functions. The Company reports inventories by segment as that information is used by the CODM in determining allocation of resources to the segments. The Company does not report its other assets by segment as that information is not used by the CODM in assessing segment performance or allocating resources. The following tables provide the Company’s segment information as of July 29, 2023 and January 28, 2023, and for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022: Net Sales Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022 Americas $ 731,427 $ 613,244 $ 1,396,850 $ 1,235,205 EMEA 171,962 164,827 310,068 326,554 APAC 31,956 27,020 64,421 56,094 Segment total $ 935,345 $ 805,091 $ 1,771,339 $ 1,617,853 Operating Income (loss) Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022 Americas $ 177,063 $ 85,836 $ 333,508 $ 172,100 EMEA 29,860 17,545 28,375 26,652 APAC ( 464 ) ( 6,380 ) ( 3,011 ) ( 15,485 ) Segment total $ 206,459 $ 97,001 $ 358,872 $ 183,267 Operating Income (loss) not attributed to Segments: Stores and distribution expense ( 3,114 ) ( 2,825 ) ( 5,003 ) ( 4,718 ) Marketing, general and administrative expense ( 116,198 ) ( 95,388 ) ( 235,603 ) ( 193,361 ) Other operating loss (income), net 2,695 ( 979 ) 5,584 2,895 Total operating income (loss) $ 89,842 $ ( 2,191 ) $ 123,850 $ ( 11,917 ) Abercrombie & Fitch Co. 20 2023 2Q Form 10-Q Table of Contents Assets (in thousands) July 29, 2023 January 28, 2023 Inventories Americas $ 403,469 $ 404,040 EMEA 72,827 80,447 APAC 17,183 21,134 Total inventories $ 493,479 $ 505,621 Assets not attributed to Segments 2,303,235 2,207,479 Total assets $ 2,796,714 $ 2,713,100 Brand Information The following table provides additional disaggregated revenue information, which is categorized by brand, for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022: Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands) July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022 Abercrombie 462,711 368,157 $ 898,755 $ 752,113 Hollister $ 472,634 $ 436,934 $ 872,584 $ 865,740 Total $ 935,345 $ 805,091 $ 1,771,339 $ 1,617,853 Abercrombie & Fitch Co. 21 2023 2Q Form 10-Q Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the Company’s Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q in “ Item 1. Financial Statements (Unaudited) ,” to which all references to Notes in MD&A are made. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Quarterly Report on Form 10-Q or made by the Company or, its management and spokespeople involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company’s control. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “should,” “are confident,” “will,” “could,” “outlook,” or the negative versions of these words or other comparable words, and similar expressions may identify forward-looking statements. Future economic and industry trends that could potentially impact revenue and profitability are difficult to predict. Therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. Factors that could cause results to differ from those expressed in the Company’s forward-looking statements include, but are not limited to, the risks described or referenced in Part I, Item 1A. “Risk Factors,” in the Company’s Fiscal 2022 Form 10-K and otherwise in our reports and filings with the SEC, as well as the followin • risks related to changes in global economic and financial conditions, including volatility in the financial markets as a result of the failure, or rumored failure, of financial institutions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits; • risks related to continued inflationary pressures with respect to labor and raw materials and global supply chain constraints that have, and could continue to, affect freight, transit and other costs; • risks related to geopolitical conflict, including ongoing geopolitical challenges between the United States and China, the on-going hostilities in Ukraine, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience; • risks related to natural disasters and other unforeseen catastrophic events; • risks related to our failure to engage our customers, anticipate customer demand and changing fashion trends, and manage our inventory; • risks related to our ability to successfully invest in and execute on our customer, digital and omnichannel initiatives; • risks related to the effects of seasonal fluctuations on our sales and our performance during the back-to-school and holiday selling seasons; • risks related to fluctuations in foreign currency exchange rates; • risks related to fluctuations in our tax obligations and effective tax rate, including as a result of earnings and losses generated from our international operations; • risks related to our ability to execute on our strategic and growth initiatives, including those outlined in our Always Forward Plan; • risks related to international operations, including changes in the economic or political conditions where we sell or source our products or changes in import tariffs or trade restrictions; • risks and uncertainty related to adverse public health developments, such as the COVID-19 pandemic; • risks related to cybersecurity threats and privacy or data security breaches; • risks related to the potential loss or disruption of our information systems; • risks related to the continued validity of our trademarks and our ability to protect our intellectual property; • risks associated with climate change and other corporate responsibility issues; and • uncertainties related to future legislation, regulatory reform, policy changes, or interpretive guidance on existing legislation. In light of the significant uncertainties in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company, or any other person, that the objectives of the Company will be achieved. The forward-looking statements included herein are based on information presently available to the management of the Company. Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking statements, including any financial targets and estimates, whether as a result of new information, future events, or otherwise. Abercrombie & Fitch Co. 22 2023 2Q Form 10-Q Table of Contents INTRODUCTION MD&A is provided as a supplement to the accompanying Condensed Consolidated Financial Statements and notes thereto to help provide an understanding of the Company’s results of operations, financial condition, and liquidity. MD&A is organized as follows: • Overview . A general description of the Company’s business and certain segment information. • Current Trends and Outlook . A discussion related to certain of the Company’s focus areas for the current fiscal year and discussion of certain risks and challenges, as well as a summary of the Company’s performance for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022. • Results of Operations . An analysis of certain components of the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022. • Liquidity and Capital Resources . A discussion of the Company’s financial condition, changes in financial condition and liquidity as of July 29, 2023, which includes (i) an analysis of financial condition as compared to January 28, 2023; (ii) an analysis of changes in cash flows for the twenty-six weeks ended July 29, 2023, as compared to the twenty-six weeks ended July 30, 2022; and (iii) an analysis of liquidity, including availability under the Company’s ABL Facility, the Company’s share repurchase program, and outstanding debt and covenant compliance. • Recent Accounting Pronouncements . A discussion, as applicable, of the recent accounting pronouncements the Company has adopted or is currently evaluating, including the dates of adoption and/or expected dates of adoption, and anticipated effects on the Company’s Condensed Consolidated Financial Statements. • Critical Accounting Estimates . A discussion of the accounting estimates considered to be important to the Company’s results of operations and financial condition, which typically require significant judgment and estimation on the part of management in their application. • Non-GAAP Financial Measures . MD&A provides a discussion of certain financial measures that have been determined to not be presented in accordance with GAAP. This section includes certain reconciliations between GAAP and non-GAAP financial measures and additional details on non-GAAP financial measures, including information as to why the Company believes the non-GAAP financial measures provided within MD&A are useful to investors. Abercrombie & Fitch Co. 23 2023 2Q Form 10-Q Table of Contents OVERVIEW Business summary The Company is a global, digitally-led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. During the second quarter of Fiscal 2023, to leverage the knowledge and experience of our regional teams to better drive brand growth, as indicated in our Always Forward Plan, the Company reorganized its structure and now manages its business on a geographic basis, consisting of three reportable segments: Americas; Europe, the Middle East and Africa (EMEA); and Asia-Pacific (APAC). Corporate functions and other income and expenses are evaluated on a consolidated basis and are not allocated to the Company’s segments, and therefore are included as a reconciling item between segment and total operating income (loss). There was no impact on consolidated net sales, operating income (loss) or net income (loss) per share as a result of these changes. All prior periods presented are recast to conform to the new segment presentation. The Company’s brands include Abercrombie brands, which includes the Company’s Abercrombie & Fitch and abercrombie kids brands, and Hollister brands, which includes the Company’s Hollister, Gilly Hicks, and Social Tourist brands. These brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company’s fiscal year ends on the Saturday closest to January 31. All references herein to the Company’s fiscal years are as follows: Fiscal year Year ended/ending Number of weeks Fiscal 2022 January 28, 2023 52 Fiscal 2023 February 3, 2024 53 Fiscal 2024 February 1, 2025 52 Seasonality Historically, the Company’s operations have been seasonal in nature and consist of two principal selling seaso the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”). Due to the seasonal nature of the retail apparel industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year and the Company could have significant fluctuations in certain asset and liability accounts. The Company historically experiences its greatest sales activity during the Fall season due to back-to-school and holiday sales periods, respectively. CURRENT TRENDS AND OUTLOOK Focus areas for Fiscal 2023 The Company remains committed to, and confident in, its long-term vision of being a digitally-led global omnichannel apparel retailer and continues to evaluate opportunities to make progress toward initiatives that support this vision as outlined in its Always Forward Plan. The Always Forward Plan, which outlines the Company’s long-term strategic goals, including growing shareholder value, is anchored on three strategic growth principles, which are t • Execute focused brand growth plans; • Accelerate an enterprise-wide digital revolution; and • Operate with financial discipline. The following focus areas for Fiscal 2023 serve as a framework for the Company achieving sustainable growth and progressing toward the Always Forward Pl • Execute focused brand growth plans • Drive Abercrombie brands through marketing and store investment; • Optimize the Hollister product and brand voice to enable growth in the second half of Fiscal 2023; and • Support Gilly Hicks growth with an evolved assortment mix • Accelerate an enterprise-wide digital revolution • Progress on current phase of our modernization efforts around key data platforms; • Continue to progress on our multi-year enterprise resource planning (“ERP”) transformation and cloud migration journey; and • Improve our digital and app experience across key parts of the customer journey • Operate with financial discipline Abercrombie & Fitch Co. 24 2023 2Q Form 10-Q Table of Contents • Maintain appropriately lean inventory levels that put Abercrombie and Hollister in a position to chase inventory throughout the year; and • Properly balance investments, inflation and efficiency efforts to improve profitability Supply chain and impact of inflation Previously, the Company experienced inflationary pressures with respect to labor, cotton, freight and other raw materials and other costs, which has negatively impacted expenses and margins. While freight costs have decreased and supply chain constraints are waning, there continues to be inflationary pressures with respect to cotton and other raw materials, as well as other operating costs. Continued inflationary pressures could further impact expenses and have a long-term impact on the Company because increasing costs may impact its ability to maintain satisfactory margins. The Company may be unsuccessful in passing these increased costs on to its customers through higher average unit retail (“AUR”). Furthermore, increases in inflation may not be matched by growth in consumer income, which also could have a negative impact on discretionary spending. In periods of perceived or actual unfavorable economic conditions, consumers may reallocate available discretionary spending, which may adversely impact demand for our products. Global Store Network Optimization The Company has a goal of opening smaller, omni-enabled stores that cater to local customers. The Company continues to use data to inform its focus on aligning store square footage with digital penetration, and during the year-to-date period of Fiscal 2023, the Company opened 15 new stores, while closing 18 stores. As part of this focus, the Company plans to be a net store opener again this year with approximately 35 new stores, while closing approximately 30 stores, during Fiscal 2023, pending negotiations with our landlord partners. Future closures could be completed through natural lease expirations, while certain other leases include early termination options that can be exercised under specific conditions. The Company may also elect to exit or modify other leases, and could incur charges related to these actions. Impact of global events and uncertainty As we are a global multi-brand omnichannel specialty retailer, with operations in North America, Europe, the Middle East and Asia, among other regions, management is mindful of macroeconomic risks, global challenges and the changing global geopolitical environment, including ongoing geopolitical challenges between the United States and China and the ongoing hostilities in Ukraine, that could adversely impact certain areas of the business. As a result, management continues to monitor global events. The Company continues to assess the potential impacts these events and similar events may have on the business in future periods and continues to develop and update contingency plans to assist in mitigating potential impacts. It is possible that the Company’s preparations for such events are not adequate to mitigate their impact, and that these events could further adversely affect its business and results of operations. For a discussion of material risks that have the potential to cause our actual results to differ materially from our expectations, refer to Part I, “Item 1A. Risk Factors” on the Fiscal 2022 Form 10-K. Abercrombie & Fitch Co. 25 2023 2Q Form 10-Q Table of Contents Summary of results A summary of results for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022 was as follows: GAAP Non-GAAP (1) (in thousands, except change in net sales, comparable sales, gross profit rate, operating income (loss) margin and per share amounts) July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022 Thirteen Weeks Ended Net sales $ 935,345 $ 805,091 Change in net sales 16.2 % (6.9) % Comparable sales (2) 13 % — % Gross profit rate 62.5 % 57.9 % Operating income (loss) $ 89,842 $ (2,191) $ (21) Operating income (loss) margin 9.6 % (0.3) % — % Net income (loss) attributable to A&F $ 56,894 $ (16,834) $ (15,275) Net income (loss) per share attributable to A&F 1.10 (0.33) (0.30) Twenty-Six Weeks Ended Net sales $ 1,771,339 $ 1,617,853 Change in net sales 9.5 % (1.7) % Comparable sales (2) 8 % — % Gross profit rate 61.8 56.6 Operating income (loss) $ 123,850 $ (11,917) $ 128,286 $ (6,325) Operating income (loss) margin 7.0 % (0.7) % 7.2 % (0.4) % Net income (loss) attributable to A&F. $ 73,465 $ (33,303) $ 76,694 $ (29,240) Net income (loss) per share attributable to A&F 1.43 (0.65) 1.49 (0.57) (1) Discussion as to why the Company believes that these non-GAAP financial measures are useful to investors and a reconciliation of the non-GAAP measures to the most directly comparable financial measure calculated and presented in accordance with GAAP are provided below under “ NON-GAAP FINANCIAL MEASURES .” (2) Comparable sales are calculated on a constant currency basis and exclude revenue other than store and digital sales. Refer to the discussion below in “ NON-GAAP FINANCIAL MEASURES ,” for further details on the comparable sales calculation. In light of store closures related to COVID-19, comparable sales for periods prior to Fiscal 2023 included in the Company’s Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q are not disclosed. Certain components of the Company’s Condensed Consolidated Balance Sheets as of July 29, 2023 and January 28, 2023 were as follows: (in thousands) July 29, 2023 January 28, 2023 Cash and equivalents $ 617,339 $ 517,602 Gross long-term borrowings outstanding, carrying amount 299,730 299,730 Inventories 493,479 505,621 Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the twenty-six week periods ended July 29, 2023 and July 30, 2022 were as follows: (in thousands) July 29, 2023 July 30, 2022 Net cash provided by (used for) operating activities $ 216,328 $ (259,733) Net cash used for investing activities (89,780) (51,610) Net cash used for financing activities (23,342) (135,424) Abercrombie & Fitch Co. 26 2023 2Q Form 10-Q Table of Contents RESULTS OF OPERATIONS The estimated basis point (“BPS”) change disclosed throughout this Results of Operations section has been rounded based on the change in the percentage of net sales. Net sales The Company’s net sales by reportable segment for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022 were as follows: Thirteen Weeks Ended (in thousands, except ratios) July 29, 2023 July 30, 2022 $ Change % Change Comparable Sales (1 ) By segmen Americas $ 731,427 $ 613,244 $ 118,183 19 % 14 % EMEA 171,962 164,827 7,135 4 6 APAC 31,956 27,020 4,936 18 26 Total $ 935,345 $ 805,091 $ 130,254 16 13 Twenty-Six Weeks Ended (in thousands, except ratios) July 29, 2023 July 30, 2022 $ Change % Change Comparable Sales (1) Americas $ 1,396,850 $ 1,235,205 $ 161,645 13 % 9 % EMEA 310,068 326,554 (16,486) (5) 2 APAC 64,421 56,094 8,327 15 25 Total $ 1,771,339 $ 1,617,853 $ 153,486 9 8 (1) Comparable sales are calculated on a constant currency basis. Refer to “ NON-GAAP FINANCIAL MEASURES, ” for further details on the comparable sales calculation. For the second quarter of Fiscal 2023, net sales increased 16%, as compared to the second quarter of Fiscal 2022, primarily due to an increase in higher unit selling and AUR. The year-over-year increase in net sales reflects a positive comparable sales of 13%, as compared to the second quarter of Fiscal 2022, with growth in the Americas, EMEA and APAC segments. For the year-to-date period of Fiscal 2023, net sales increased 9%, as compared to the year-to-date period of Fiscal 2022, primarily due to an increase in AUR. The year-over-year increase in net sales reflects positive comparable sales of 8%, as compared to the year-to-date period of Fiscal 2022, with comparable sales growth in the Americas, EMEA and APAC segments. The Company’s net sales by brand for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022 were as follows: Thirteen Weeks Ended (in thousands, except ratios) July 29, 2023 July 30, 2022 $ Change % Change Comparable Sales (1) Abercrombie (2) $ 462,711 $ 368,157 $ 94,554 26 % 23 % Hollister (3) 472,634 436,934 35,700 8 5 Total $ 935,345 $ 805,091 $ 130,254 16 13 Twenty-Six Weeks Ended (in thousands, except ratios) July 29, 2023 July 30, 2022 $ Change % Change Comparable Sales (1) Abercrombie (2) $ 898,755 $ 752,113 $ 146,642 19 % 19 % Hollister (3) 872,584 865,740 6,844 1 (1) Total $ 1,771,339 $ 1,617,853 $ 153,486 9 8 (1) Comparable sales are calculated on a constant currency basis. Refer to “ NON-GAAP FINANCIAL MEASURES, ” for further details on the comparable sales calculation. (2) Includes Abercrombie & Fitch and abercrombie kids brands. (3) Includes Hollister, Gilly Hicks, and Social Tourist brands. Abercrombie & Fitch Co. 27 2023 2Q Form 10-Q Table of Contents Cost of sales, exclusive of depreciation and amortization Thirteen Weeks Ended July 29, 2023 July 30, 2022 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Cost of sales, exclusive of depreciation and amortization $ 350,965 37.5 % $ 339,200 42.1 % (460) Twenty-Six Weeks Ended July 29, 2023 July 30, 2022 (in thousands, except ratios) % of Net Sales % of Net Sales BPS Change Cost of sales, exclusive of depreciation and amortization $ 677,165 38.2% $ 702,416 43.4% (520) For the second quarter of Fiscal 2023, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 460 basis points, as compared to the second quarter of Fiscal 2022. The year-over-year decrease was primarily driven by a benefit of 400 basis points from year-over-year AUR growth and 340 basis points from lower freight costs, partially offset by 180 basis points from higher cotton costs and 60 basis points from the adverse impact from changes in foreign currency exchange rates. For the year-to-date period of Fiscal 2023, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 520 basis points, as compared to the year-to-date period of Fiscal 2022. The year-over-year decrease was primarily attributable to a benefit from lower freight costs of approximately 540 basis points and 350 basis points from year-over-year AUR growth. These benefits were partially offset by approximately 220 basis points from higher cotton costs and 80 basis points due to the adverse impact from changes in foreign currency exchange rates. Gross profit, exclusive of depreciation and amortization Thirteen Weeks Ended July 29, 2023 July 30, 2022 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Gross profit, exclusive of depreciation and amortization $ 584,380 62.5 % $ 465,891 57.9 % 460 Twenty-Six Weeks Ended July 29, 2023 July 30, 2022 (in thousands, except ratios) % of Net Sales % of Net Sales BPS Change Gross profit, exclusive of depreciation and amortization $ 1,094,174 61.8 % $ 915,437 56.6 % 520 Stores and distribution expense Thirteen Weeks Ended July 29, 2023 July 30, 2022 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Stores and distribution expense $ 352,730 37.7 % $ 340,791 42.3 % (460) Twenty-Six Weeks Ended July 29, 2023 July 30, 2022 (in thousands, except ratios) % of Net Sales % of Net Sales BPS Change Stores and distribution expense $ 684,343 38.6 % $ 678,334 41.9 % (330) For the second quarter of Fiscal 2023, stores and distribution expense increased 460 basis points, as compared to the second quarter of Fiscal 2022. The increase was primarily driven by an increase in store occupancy expense, partially offset by a decrease in fulfillment costs as compared to the second quarter of Fiscal 2022. For the year-to-date period of Fiscal 2023, stores and distribution expense increased 330 basis points, as compared to the year-to-date period of Fiscal 2022. The increase was primarily driven by an increase in store occupancy expense compared to the year-to-date period of Fiscal 2022. Abercrombie & Fitch Co. 28 2023 2Q Form 10-Q Table of Contents Marketing, general and administrative expense Thirteen Weeks Ended July 29, 2023 July 30, 2022 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Marketing, general and administrative expense $ 144,502 15.4 % $ 124,168 15.4 % — Twenty-Six Weeks Ended July 29, 2023 July 30, 2022 (in thousands, except ratios) % of Net Sales % of Net Sales BPS Change Marketing, general and administrative expense $ 287,133 16.2 % $ 246,317 15.2 % 100 For the second quarter of Fiscal 2023, marketing, general and administrative expense, as a percentage of net sales, was essentially flat, as compared to the second quarter of Fiscal 2022, primarily driven by an increase in technology expenses and incentive-based compensation, fully offset by decreases in payroll and marketing. For the year-to-date period of Fiscal 2023, marketing, general and administration expense, as a percentage of net sales, increased 100 basis points as compared to the year-to-date period of Fiscal 2022, primarily due to an increase in technology expenses and incentive-based compensation. Asset impairment Thirteen Weeks Ended July 29, 2023 July 30, 2022 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Asset impairment $ — —% $ 2,170 0.3% (30) Excluded items: Asset impairment charges (1) — — (2,170) (0.3) 30 Adjusted non-GAAP asset impairment (1) $ — — $ — — — Twenty-Six Weeks Ended July 29, 2023 July 30, 2022 (in thousands, except ratios) % of Net Sales % of Net Sales BPS Change Asset impairment $ 4,436 0.3% $ 5,592 0.3% — Excluded items: Asset impairment charges (1) (4,436) (0.3) (5,592) (0.3) — Adjusted non-GAAP asset impairment (1) $ — — $ — — — (1) Refer to “ NON-GAAP FINANCIAL MEASURES ” for further details. Refer to Note 8, “ ASSET IMPAIRMENT .” Other operating income (loss), net Thirteen Weeks Ended July 29, 2023 July 30, 2022 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Other operating income (loss), net $ 2,694 0.3 % $ (953) (0.1) % 40 Twenty-Six Weeks Ended July 29, 2023 July 30, 2022 (in thousands, except ratios) % of Net Sales % of Net Sales BPS Change Other operating income, net $ 5,588 0.3 % $ 2,889 0.2 % 10 Abercrombie & Fitch Co. 29 2023 2Q Form 10-Q Table of Contents Operating income (loss) Thirteen Weeks Ended July 29, 2023 July 30, 2022 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Operating income (loss) $ 89,842 9.6 % $ (2,191) (0.3) % 990 Excluded items: Asset impairment charges (1) — — 2,170 0.3 (30) Adjusted non-GAAP operating income (loss) ⁽¹⁾ $ 89,842 9.6 $ (21) 0.0 960 Twenty-Six Weeks Ended July 29, 2023 July 30, 2022 (in thousands, except ratios) % of Net Sales % of Net Sales BPS Change Operating income (loss) $ 123,850 7.0 % $ (11,917) (0.7) % 770 Excluded items: Asset impairment charges (1) 4,436 0.3 5,592 0.3 — Adjusted non-GAAP operating income (loss) $ 128,286 7.2 $ (6,325) (0.4) 760 (1) Refer to “ NON-GAAP FINANCIAL MEASURES ” for further details. Interest expense, net Thirteen Weeks Ended July 29, 2023 July 30, 2022 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Interest expense $ 7,635 0.8 % $ 7,660 1.0 % (20) Interest income (6,538) (0.7) (743) (0.1) (60) Interest expense, net $ 1,097 0.1 $ 6,917 0.9 (80) Twenty-Six Weeks Ended July 29, 2023 July 30, 2022 (in thousands, except ratios) % of Net Sales % of Net Sales BPS Change Interest expense $ 15,093 0.9 % $ 15,469 1.0 % (10) Interest income (10,553) (0.6) (1,245) (0.1) (50) Interest expense, net $ 4,540 0.3 $ 14,224 0.9 (60) For the second quarter of Fiscal 2023, interest expense, net decreased $5.8 million, as compared to the second quarter of Fiscal 2022, as a result of higher interest income due to the increase in balance and rates received on deposits and money market accounts. For the year-to-date period of Fiscal 2023, interest expense, net decreased $9.7 million, as compared to the year-to-date period of Fiscal 2022, as a result of higher interest income due to the increase in balance and rates received on deposits and money market accounts. Abercrombie & Fitch Co. 30 2023 2Q Form 10-Q Table of Contents Income tax expense Thirteen Weeks Ended July 29, 2023 July 30, 2022 (in thousands, except ratios) Effective Tax Rate Effective Tax Rate Income tax expense $ 30,014 33.8 % $ 5,634 (61.9) % Excluded items: Tax effect of pre-tax excluded items (1) — 611 Adjusted non-GAAP income tax expense ⁽¹⁾ $ 30,014 33.8 $ 6,245 (90.0) Twenty-Six Weeks Ended July 29, 2023 July 30, 2022 (in thousands, except ratios) Effective Tax Rate Effective Tax Rate Income tax expense $ 42,732 35.8 % $ 3,447 (13.2) % Excluded items: Tax effect of pre-tax excluded items (1) 1,207 1,529 Adjusted non-GAAP income tax expense $ 43,939 35.5 $ 4,976 (24.2) (1) The tax effect of pre-tax excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. Refer to “ Operating income (loss) ” and “ NON-GAAP FINANCIAL MEASURES ” for details of pre-tax excluded items. The change in the effective tax rates during the second quarter and year-to-date period of Fiscal 2023 is due to higher levels of income offsetting tax losses for which no benefit is recognized incurred outside of the U.S. Refer to Note 9, “ INCOME TAXES .” Net income (loss) attributable to A&F Thirteen Weeks Ended July 29, 2023 July 30, 2022 (in thousands) % of Net sales % of Net sales BPS Change Net income (loss) attributable to A&F $ 56,894 6.1 % $ (16,834) (2.1) % 820 Excluded items, net of tax (1) — — 1,559 0.2 (20) Adjusted non-GAAP net income (loss) attributable to A&F (2) $ 56,894 6.1 $ (15,275) (1.9) 800 Twenty-Six Weeks Ended July 29, 2023 July 30, 2022 (in thousands) % of Net Sales % of Net Sales BPS Change Net income (loss) attributable to A&F. $ 73,465 4.1 % $ (33,303) (2.1) % 620 Excluded items, net of tax (1) 3,229 0.2 4,063 0.3 (10) Adjusted non-GAAP net income (loss) attributable to A&F (2) $ 76,694 4.3 $ (29,240) (1.8) 610 (1) Excluded items presented above under “ Operating income (loss) ,” and “ Income tax expense ” (2) Refer to “ NON-GAAP FINANCIAL MEASURES ” for further details. Abercrombie & Fitch Co. 31 2023 2Q Form 10-Q Table of Contents Net income (loss) per share attributable to A&F Thirteen Weeks Ended July 29, 2023 July 30, 2022 $ Change Net income (loss) per diluted share attributable to A&F $ 1.10 $ (0.33) $ 1.43 Excluded items, net of tax (1) — 0.03 (0.03) Adjusted non-GAAP net income (loss) per diluted share attributable to A&F 1.10 (0.30) 1.40 Impact from changes in foreign currency exchange rates — (0.02) 0.02 Adjusted non-GAAP net income (loss) per diluted share attributable to A&F on a constant currency basis (2) 1.10 (0.32) 1.42 Twenty-Six Weeks Ended July 29, 2023 July 30, 2022 $ Change Net income (loss) per diluted share attributable to A&F $ 1.43 $ (0.65) $2.08 Excluded items, net of tax (1) 0.06 0.08 (0.02) Adjusted non-GAAP net income (loss) per diluted share attributable to A&F 1.49 (0.57) 2.06 Impact from changes in foreign currency exchange rates — (0.14) 0.14 Adjusted non-GAAP net income (loss) per diluted share attributable to A&F on a constant currency basis (2) 1.49 (0.71) 2.20 (1) Excluded items presented above under “ Operating income (loss) ,” and “ Income tax expense . ” (2) Refer to “ NON-GAAP FINANCIAL MEASURES ” for further details. Abercrombie & Fitch Co. 32 2023 2Q Form 10-Q Table of Contents LIQUIDITY AND CAPITAL RESOURCES Overview The Company’s capital allocation strategy, priorities and investments are reviewed by A&F’s Board of Directors considering both liquidity and valuation factors. The Company believes that it will have adequate liquidity to fund operating activities for the next 12 months. The Company monitors financing market conditions and may in the future determine whether and when to amend, modify, repurchase, or restructure its ABL Facility and/or the Senior Secured Notes. For a discussion of the Company’s share repurchase activity and suspended dividend program, please see below under “ Share repurchases and dividends .” Primary sources and uses of cash The Company’s business has two principal selling seaso the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”). The Company generally experiences its greatest sales activity during the Fall season, due to the back-to-school and holiday sales periods. The Company relies on excess operating cash flows, which are largely generated in Fall, to fund operations throughout the year and to reinvest in the business to support future growth. The Company also has the ABL Facility available as a source of additional funding, which is described further below under “ Credit facility and Senior Secured Notes ”. Over the next twelve months, the Company expects its primary cash requirements to be directed towards prioritizing investments in the business and continuing to fund operating activities, including the acquisition of inventory, and obligations related to compensation, marketing, leases and any lease buyouts or modifications it may exercise, taxes and other operating activities. The Company evaluates opportunities for investments in the business that are in line with initiatives that position the business for sustainable long-term growth that align with its strategic pillars as described within Part I, “Item 1. Business - STRATEGY AND KEY BUSINESS PRIORITIES” included on the Fiscal 2022 Form 10-K, including being opportunistic regarding growth opportunities. Examples of potential investment opportunities include, but are not limited to, new store experiences, and investments in the Company’s digital and omnichannel initiatives. Historically, the Company has utilized free cash flow generated from operations to fund any discretionary capital expenditures, which have been prioritized towards new store experiences, as well as digital and omnichannel investments, information technology, and other projects. For the year-to-date period ended July 29, 2023, the Company used $89.8 million towards capital expenditures. Total capital expenditures for Fiscal 2023 are expected to be approximately $160 million. The Company measures liquidity using total cash and cash equivalents and incremental borrowing available under the ABL Facility. As of July 29, 2023, the Company had cash and cash equivalents of $617.3 million and total liquidity of approximately $974.3 million, compared with cash and cash equivalents of $517.6 million and total liquidity of approximately $865.7 million at the beginning of Fiscal 2023. This allows the Company to evaluate potential opportunities to strategically deploy excess cash and/or deleverage the balance sheet, depending on various factors, such as market and business conditions, including the Company’s ability to accelerate investments in the business. Such opportunities include, but are not limited to, returning cash to shareholders through share repurchases or purchasing outstanding Senior Secured Notes. Share repurchases and dividends In November 2021, A&F’s Board of Directors approved a $500 million share repurchase authorization, replacing the prior 2021 share repurchase authorization of 10.0 million shares, which had approximately 3.9 million shares remaining available. During the year-to-date period ended July 29, 2023, the Company did not repurchase any shares of its common stock pursuant to this share repurchase authorization. The Company has $232 million in share repurchase authorization remaining under the authorization approved in November 2021. Historically, the Company has repurchased shares of its Common Stock from time to time, dependent on excess liquidity, market conditions, and business conditions, with the objectives of returning excess cash to shareholders and offsetting dilution from issuances of Common Stock associated with the exercise of employee stock appreciation rights and the vesting of restricted stock units. Shares may be repurchased in the open market, including pursuant to trading plans established in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), through privately negotiated transactions or other transactions or by a combination of such methods. Refer to “ Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ” of Part II of this Quarterly Report on Form 10-Q for the amount remaining available for purchase under the Company’s publicly announced share repurchase authorization. In May 2020, the Company announced that it had suspended its dividend program in order to preserve liquidity and maintain financial flexibility in light of COVID-19. The Company may in the future review its dividend program to determine, in light of facts and circumstances at that time, whether and when to reinstate. Any dividends are declared at the discretion of A&F’s Board of Directors. A&F’s Board of Directors reviews and establishes a dividend amount, if at all, based on A&F’s financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors, including any restrictions under the Company’s agreements related to the Senior Secured Notes and the ABL Facility. There can be no Abercrombie & Fitch Co. 33 2023 2Q Form 10-Q Table of Contents assurance that the Company will declare and pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends. Credit facility and Senior Secured Notes As of July 29, 2023, the Company had $299.7 million of gross borrowings outstanding under the Senior Secured Notes. In addition, the Amended and Restated Credit Agreement, as amended by the First Amendment (as defined below), provides for the ABL Facility, which is a senior secured asset-based revolving credit facility of up to $400 million. As of July 29, 2023, the Company did not have any borrowings outstanding under the ABL Facility. The ABL Facility matures on April 29, 2026. Details regarding the remaining borrowing capacity under the ABL Facility as of July 29, 2023 are as follows: (in thousands) July 29, 2023 Loan cap $ 397,087 L Outstanding stand-by letters of credit (435) Borrowing capacity 396,652 L Minimum excess availability (1) (39,709) Borrowing capacity available $ 356,943 (1) The Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility. Refer to Note 10, “ BORROWINGS .” Income taxes The Company’s earnings and profits from its foreign subsidiaries could be repatriated to the U.S. without incurring additional federal income tax. The Company determined that the balance of the Company’s undistributed earnings and profits from its foreign subsidiaries as of February 2, 2019 are considered indefinitely reinvested outside of the U.S., and if these funds were to be repatriated to the U.S., the Company would expect to incur an insignificant amount of state income taxes and foreign withholding taxes. The Company accrues for both state income taxes and foreign withholding taxes with respect to earnings and profits earned after February 2, 2019, in such a manner that these funds could be repatriated without incurring additional tax expense. As of July 29, 2023, $205.9 million of the Company’s $617.3 million of cash and equivalents were held by foreign affiliates. Refer to Note 9, “ INCOME TAXES .” Analysis of cash flows The table below provides certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the twenty-six weeks ended July 29, 2023 and July 30, 2022: Twenty-Six Weeks Ended July 29, 2023 July 30, 2022 (in thousands) Cash and equivalents, and restricted cash and equivalents, beginning of period $ 527,569 $ 834,368 Net cash provided by (used for) operating activities 216,328 (259,733) Net cash used for investing activities (89,780) (51,610) Net cash used for financing activities (23,342) (135,424) Effect of foreign currency exchange rates on cash (3,672) (7,567) Net increase (decrease) in cash and equivalents, and restricted cash and equivalents 99,534 (454,334) Cash and equivalents, and restricted cash and equivalents, end of period $ 627,103 $ 380,034 Operating activities - During the year-to-date period ended July 29, 2023, net cash provided by operating activities included increased cash receipts as a result of the 9% year-over-year increase in net sales as well as increased payments to vendors in the fourth quarter of Fiscal 2022 which resulted in lower cash payments in the first quarter of Fiscal 2023. Investing activities - During the year-to-date period ended July 29, 2023, net cash used for investing activities was primarily used for capital expenditures of $89.8 million. Net cash used for investing activities for the year-to-date period ended July 30, 2022 was primarily used for capital expenditures of $59.6 million, partially offset by the proceeds from the sale of property and equipment of $8.0 million. Abercrombie & Fitch Co. 34 2023 2Q Form 10-Q Table of Contents Financing activities - During the year-to-date period ended July 29, 2023, net cash used for financing activities included amounts related to shares of Common Stock withheld (repurchased) to cover tax withholdings upon vesting of share-based compensation awards. During the year-to-date period ended July 30, 2022, net cash used for financing activities included the repurchase of approximately 4.3 million shares of Common Stock with a market value of approximately $117.8 million. Contractual obligations The Company’s contractual obligations consist primarily of operating leases, purchase orders for merchandise inventory, unrecognized tax benefits, certain retirement obligations, lease deposits, and other agreements to purchase goods and services that are legally binding and that require minimum quantities to be purchased. These contractual obligations impact the Company’s short-term and long-term liquidity and capital resource needs. There have been no material changes in the Company’s contractual obligations since January 28, 2023, with the exception of those obligations which occurred in the normal course of business (primarily changes in the Company’s merchandise inventory-related purchases and lease obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company’s operations). RECENT ACCOUNTING PRONOUNCEMENTS The Company describes its significant accounting policies in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES , ” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” included on the Fiscal 2022 Form 10-K. The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements. CRITICAL ACCOUNTING ESTIMATES The Company describes its critical accounting estimates in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included on the Fiscal 2022 Form 10-K. There have been no significant changes in critical accounting policies and estimates since the end of Fiscal 2022. NON-GAAP FINANCIAL MEASURES This Quarterly Report on Form 10-Q includes discussion of certain financial measures calculated and presented on both a GAAP and a non-GAAP basis. The Company believes that each of the non-GAAP financial measures presented in this “ Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations ” is useful to investors as it provides a meaningful basis to evaluate the Company’s operating performance excluding the effect of certain items that the Company believes may not reflect its future operating outlook, such as certain asset impairment charges, thereby supplementing investors’ understanding of comparability of operations across periods. Management used these non-GAAP financial measures during the periods presented to assess the Company’s performance and to develop expectations for future operating performance. These non-GAAP financial measures should be used as a supplement to, and not as an alternative to, the Company’s GAAP financial results, and may not be calculated in the same manner as similar measures presented by other companies. Comparable sales At times, the Company provides comparable sales, defined as the year-over-year percentage change in the aggregate of (1) net sales for stores that have been open as the same brand at least one year and square footage has not been expanded or reduced by more than 20% within the past year, with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations, and (2) digital net sales with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations. Comparable sales excludes revenue other than store and digital sales. Management uses comparable sales to understand the drivers of year-over-year changes in net sales and believes comparable sales is a useful metric as it can assist investors in distinguishing the portion of the Company’s revenue attributable to existing locations from the portion attributable to the opening or closing of stores. The most directly comparable GAAP financial measure is change in net sales. In light of store closures related to COVID-19, comparable sales for periods prior to Fiscal 2023 included in the Company’s Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q are not disclosed. Abercrombie & Fitch Co. 35 2023 2Q Form 10-Q Table of Contents Excluded items The following financial measures are disclosed on a GAAP and on an adjusted non-GAAP basis excluding the following items, as applicab Financial measures (1) Excluded items Operating income (loss) Asset impairment charges Income tax expense (2) Tax effect of pre-tax excluded items Net income (loss) and net income (loss) per share attributable to A&F (2) Pre-tax excluded items and the tax effect of pre-tax excluded items (1) Certain of these financial measures are also expressed as a percentage of net sales. (2) The tax effect of excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. Financial information on a constant currency basis The Company provides certain financial information on a constant currency basis to enhance investors’ understanding of underlying business trends and operating performance by removing the impact of foreign currency exchange rate fluctuations. Management also uses financial information on a constant currency basis to award employee performance-based compensation. The effect from foreign currency exchange rates, calculated on a constant currency basis, is determined by applying the current period’s foreign currency exchange rates to the prior year’s results and is net of the year-over-year impact from hedging. The per diluted share effect from foreign currency exchange rates is calculated using a 26% effective tax rate. Reconciliations of non-GAAP financial metrics on a constant currency basis to financial measures calculated and presented in accordance with GAAP for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022 were as follows: (in thousands, except change in net sales, gross profit rate, operating margin and per share data) Thirteen Weeks Ended Twenty-Six Weeks Ended Net sales July 29, 2023 July 30, 2022 % Change July 29, 2023 July 30, 2022 % Change GAAP $ 935,345 $ 805,091 16 % $ 1,771,339 $ 1,617,853 9% Impact from changes in foreign currency exchange rates — 2,873 — — (5,724) — Non-GAAP on a constant currency basis $ 935,345 $ 807,964 16 $ 1,771,339 $ 1,612,129 10 Gross profit, exclusive of depreciation and amortization expense July 29, 2023 July 30, 2022 BPS Change (1) July 29, 2023 July 30, 2022 BPS Change (1) GAAP $ 584,380 $ 465,891 460 $ 1,094,174 $ 915,437 520 Impact from changes in foreign currency exchange rates — (2,977) 60 — (15,577) 80 Non-GAAP on a constant currency basis $ 584,380 $ 462,914 520 $ 1,094,174 $ 899,860 600 Operating income (loss) July 29, 2023 July 30, 2022 BPS Change (1) July 29, 2023 July 30, 2022 BPS Change (1) GAAP $ 89,842 $ (2,191) 990 $ 123,850 $ (11,917) 770 Excluded items (2) — (2,170) 30 (4,436) (5,592) 10 Adjusted non-GAAP $ 89,842 $ (21) 960 $ 128,286 $ (6,325) 760 Impact from changes in foreign currency exchange rates — (971) 10 — (9,610) 60 Adjusted non-GAAP on a constant currency basis $ 89,842 $ (992) 970 $ 128,286 $ (15,935) 820 Net income (loss) per share attributable to A&F July 29, 2023 July 30, 2022 $ Change July 29, 2023 July 30, 2022 $ Change GAAP $ 1.10 $ (0.33) $ 1.43 $ 1.43 $ (0.65) $2.08 Excluded items, net of tax (2) — (0.03) 0.03 (0.06) (0.08) 0.02 Adjusted non-GAAP $ 1.10 $ (0.30) $ 1.40 $ 1.49 $ (0.57) $2.06 Impact from changes in foreign currency exchange rates — (0.01) 0.01 — (0.14) 0.14 Adjusted non-GAAP on a constant currency basis $ 1.10 $ (0.32) $ 1.42 $ 1.49 $ (0.71) $2.20 (1) The estimated basis point change has been rounded based on the change in the percentage of net sales. (2) Excluded items for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022 consisted of pre-tax store asset impairment charges and the tax effect of pre-tax excluded items. Abercrombie & Fitch Co. 36 2023 2Q Form 10-Q Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk INVESTMENT SECURITIES The Company maintains its cash equivalents in financial instruments, primarily time deposits and money market funds, with original maturities of three months or less. Due to the short-term nature of these instruments, changes in interest rates are not expected to materially affect the fair value of these financial instruments. The Rabbi Trust includes amounts to meet funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II, and the Supplemental Executive Retirement Plan. The Rabbi Trust assets primarily consist of trust-owned life insurance policies, which are recorded at cash surrender value. The change in cash surrender value and benefits paid pursuant to the trust-owned life insurance policies held in the Rabbi Trust resulted in realized gains of $0.9 million and $0.4 million for the thirteen weeks ended July 29, 2023 and July 30, 2022, respectively, and $1.3 million and $0.7 million for the twenty-six weeks ended July 29, 2023 and July 30, 2022, respectively, which are recorded in interest expense, net on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The Rabbi Trust assets were included in other assets on the Condensed Consolidated Balance Sheets as of July 29, 2023 and January 28, 2023 and are restricted in their use as noted above. INTEREST RATE RISK Prior to July 2, 2020, the Company’s exposure to market risk due to changes in interest rates related primarily to the increase or decrease in the amount of interest expense from fluctuations in the LIBO rate, or an alternate base rate associated with the Company’s former term loan facility (the “Term Loan Facility”) and the ABL Facility. On July 2, 2020, the Company issued the Senior Secured Notes and repaid all outstanding borrowings under the Term Loan Facility and the ABL Facility, thereby eliminating any then-existing cash flow market risk due to changes in interest rates. The Senior Secured Notes are exposed to interest rate risk that is limited to changes in fair value. This analysis for Fiscal 2023 may differ from the actual results due to potential changes in gross borrowings outstanding under the ABL Facility and potential changes in interest rate terms and limitations described within the Amended and Restated Credit Agreement. In July 2017, the Financial Conduct Authority (the authority that regulates LIBO rate) announced it intended to stop compelling banks to submit rates for the calculation of LIBO rate after 2021. Certain publications of the LIBO rate were phased out at the end of 2021 and all LIBO rate publications ceased after June 30, 2023. On March 15, 2023, the Company entered into the First Amendment to the Amended and Restated Credit Agreement (the “First Amendment”) to eliminate LIBO rate based loans and to use the current market definitions with respect to the Secured Overnight Financing Rate, as well as to make other conforming changes. FOREIGN CURRENCY EXCHANGE RATE RISK A&F’s international subsidiaries generally operate with functional currencies other than the U.S. Dollar. Since the Company’s Condensed Consolidated Financial Statements are presented in U.S. Dollars, the Company must translate all components of these financial statements from functional currencies into U.S. Dollars at exchange rates in effect during or at the end of the reporting period. The fluctuation in the value of the U.S. Dollar against other currencies affects the reported amounts of revenues, expenses, assets, and liabilities. The potential impact of foreign currency exchange rate fluctuations increases as international operations relative to domestic operations increase. A&F and its subsidiaries have exposure to changes in foreign currency exchange rates associated with foreign currency transactions and forecasted foreign currency transactions, including the purchase of inventory between subsidiaries and foreign-currency-denominated assets and liabilities. The Company has established a program that primarily utilizes foreign currency exchange forward contracts to partially offset the risks associated with the effects of certain foreign currency transactions and forecasted transactions. Under this program, increases or decreases in foreign currency exchange rate exposures are partially offset by gains or losses on foreign currency exchange forward contracts, to mitigate the impact of foreign currency exchange gains or losses. The Company does not use forward contracts to engage in currency speculation. Outstanding foreign currency exchange forward contracts are recorded at fair value at the end of each fiscal period. Abercrombie & Fitch Co. 37 2023 2Q Form 10-Q Table of Contents Foreign currency exchange forward contracts are sensitive to changes in foreign currency exchange rates. As of July 29, 2023, the Company assessed the risk of loss in fair values from the effect of a hypothetical 10% devaluation of the U.S. Dollar against the exchange rates for foreign currencies under contract. Such a hypothetical devaluation would decrease derivative contract fair values by approximately $17.7 million. As the Company’s foreign currency exchange forward contracts are primarily designated as cash flow hedges of forecasted transactions, the hypothetical change in fair values would be expected to be largely offset by the net change in fair values of the underlying hedged items. Refer to Note 12, “ DERIVATIVE INSTRUMENTS ,” for the fair value of any outstanding foreign currency exchange forward contracts included in other current assets and accrued expenses as of July 29, 2023 and January 28, 2023. Abercrombie & Fitch Co. 38 2023 2Q Form 10-Q Table of Contents Item 4. Controls and Procedures DISCLOSURE CONTROLS AND PROCEDURES A&F maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports that A&F files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to A&F’s management, including A&F’s Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met. A&F’s management, including the Chief Executive Officer of A&F (who serves as Principal Executive Officer of A&F) and the Executive Vice President, Chief Financial Officer and Chief Operating Officer of A&F (who serves as Principal Financial Officer and Principal Accounting Officer of A&F), evaluated the effectiveness of A&F’s design and operation of its disclosure controls and procedures as of the end of the fiscal quarter ended July 29, 2023. The Chief Executive Officer of A&F (in such individual’s capacity as the Principal Executive Officer of A&F) and the Executive Vice President, Chief Financial Officer and Chief Operating Officer of A&F (in such individual’s capacity as the Principal Financial Officer of A&F) concluded that A&F’s disclosure controls and procedures were effective at a reasonable level of assurance as of July 29, 2023. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in A&F’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended July 29, 2023 that materially affected, or are reasonably likely to materially affect, A&F’s internal control over financial reporting. Abercrombie & Fitch Co. 39 2023 2Q Form 10-Q Table of Contents PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. The Company’s legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes estimated liabilities for the outcome of litigation where losses are deemed probable and the amount of loss, or range of loss, is reasonably estimable. The Company also determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that a loss is reasonably possible, and it is able to determine such estimates. The Company’s accrued charges for certain legal contingencies are classified within accrued expenses on the Condensed Consolidated Balance Sheets included in “ Item 1. Financial Statements (Unaudited) ,” of Part I of this Quarterly Report on Form 10-Q. Based on currently available information, the Company cannot estimate a range of reasonably possible losses in excess of the accrued charges for legal contingencies. In addition, the Company has not established accruals for certain claims and legal proceedings pending against the Company where it is not possible to reasonably estimate the outcome or potential liability, and the Company cannot estimate a range of reasonably possible losses for these legal matters. Actual liabilities may differ from the amounts recorded, due to uncertainties regarding final settlement agreement negotiations and the terms of any approval by the courts, and there can be no assurance that the final resolution of legal matters will not have a material adverse effect on the Company’s financial condition, results of operations, or cash flows. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts. In addition, pursuant to Item 103(c)(3)(iii) of Regulation S-K under the Exchange Act, the Company is required to disclose certain information about environmental proceedings to which a governmental authority is a party if the Company reasonably believes such proceedings may result in monetary sanctions, exclusive of interest and costs, above a stated threshold. The Company has elected to apply a threshold of $1 million for purposes of determining whether disclosure of any such proceedings is required. Item 1A. Risk Factors The Company’s risk factors as of July 29, 2023 have not changed materially from those disclosed in Part I, “Item 1A. Risk Factors” of the Fiscal 2022 Form 10-K. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no sales of equity securities during the second quarter of Fiscal 2023 that were not registered under the Securities Act of 1933, as amended. The following table provides information regarding the purchase of shares of Common Stock made by or on behalf of A&F or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Exchange Act during each fiscal month of the thirteen weeks ended July 29, 2023: Period (fiscal month) Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)(3) April 30, 2023 through May 27, 2023 1,490 $ 23.42 — $ 232,184,768 May 28, 2023 through July 1, 2023 8,412 36.23 — 232,184,768 July 2, 2023 through July 29, 2023 1,231 37.01 — 232,184,768 Total 11,133 34.60 — 232,184,768 (1) An aggregate of 11,133 shares of Common Stock purchased during the thirteen weeks ended July 29, 2023 were withheld for tax payments due upon the vesting of employee restricted stock units and the exercise of employee stock appreciation rights. (2) On November 23, 2021, we announced that A&F’s Board of Directors approved a new $500 million share repurchase authorization, replacing the prior 2021 share repurchase authorization of 10.0 million shares, which had approximately 3.9 million shares remaining available for repurchase. (3) The number shown represents, as of the end of each period, the approximate dollar value of Common Stock that may yet be purchased under A&F’s publicly announced share repurchase authorization described in footnote 2 above. The shares may be purchased, from time to time depending on business and market conditions. Item 5. Other Information During the thirteen weeks ended July 29, 2023, no director or officer of the Company adopted a new “Rule 10b5-1 trading arrangement ” or “non-Rule 10b5-1 trading arrangement,” and no director or officer of the Company modified or terminated an existing “Rule 10b5-1 trading arrangement ” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K under the Exchange Act. Abercrombie & Fitch Co. 40 2023 2Q Form 10-Q Table of Contents Item 6. Exhibits Exhibit Document 3.1 Amended and Restated Certificate of Incorporation of Abercrombie & Fitch Co., reflecting amendments through the date of this Quarterly Report on Form 10-Q, incorporated herein by reference to Exhibit 3.2 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2011 (File No. 001-12107). [This document represents the Amended and Restated Certificate of Incorporation of Abercrombie & Fitch Co. in compiled form incorporating all amendments. This compiled document has not been filed with the Delaware Secretary of State.] 3.2 Amended and Restated Bylaws of Abercrombie & Fitch Co. reflecting amendments through the date of this Quarterly Report on Form 10-Q, incorporated herein by reference to Exhibit 3.1 to to A&F’s Current Report on Form 8-K dated and filed November 22, 2022 (File No. 001-12107) [This document represents the Amended and Restated Bylaws of Abercrombie & Fitch Co. in compiled form incorporating all amendments.] 10.1 Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates (as amended on June 8, 2023), incorporated herein by reference to Exhibit 10.1 to A&F’s Current Report on Form 8-K filed on June 14, 2023 (File No. 001-12107) 10.2 Agreement entered into between A&F Management and Jay Rust as of May 9, 2023, the execution date by A & F Management and Mr. Rust* 31.1 Certifications by Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 31.2 Certifications by Executive Vice President, Chief Financial Officer and Chief Operating Officer (Principal Financial Officer) pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 32.1 Certifications by Chief Executive Officer (who serves as Principal Executive Officer) and Executive Vice President , Chief Financial Officer and Chief Operating Officer (who serves as Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** 101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its Inline XBRL tags are embedded within the Inline XBRL document.* 101.SCH Inline XBRL Taxonomy Extension Schema Document.* 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.* 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.* 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.* 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.* 104 Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).* *     Filed herewith. **    Furnished herewith. Abercrombie & Fitch Co. 41 2023 2Q Form 10-Q Table of Contents Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Abercrombie & Fitch Co. Date: September 1, 2023 By: /s/ Scott D. Lipesky Scott D. Lipesky Executive Vice President, Chief Financial Officer and Chief Operating Officer (Principal Financial Officer, Principal Accounting Officer and Authorized Officer) Abercrombie & Fitch Co. 42 2023 2Q Form 10-Q

Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Stockholders’ Equity 5 Condensed Consolidated Statements of Cash Flows 7 Index for Notes to Condensed Consolidated Financial Statements 8 Notes to Condensed Consolidated Financial Statements 9 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22 Item 3. Quantitative and Qualitative Disclosures About Market Risk 37 Item 4. Controls and Procedures 39 PART II. OTHER INFORMATION Item 1. Legal Proceedings 40 Item 1A. Risk Factors 40 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 40 Item 5. Other Information 41 Item 6. Exhibits 41 Signatures 42 Abercrombie & Fitch Co. 2 2023 3Q Form 10-Q Table of Contents PART I. FINANCIAL INFORMATION Item 1.     Financial Statements (Unaudited) Abercrombie & Fitch Co. Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Thousands, except per share amounts) (Unaudited) Thirteen Weeks Ended Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Net sales $ 1,056,431 $ 880,084 $ 2,827,770 $ 2,497,937 Cost of sales, exclusive of depreciation and amortization 370,762 359,268 1,047,927 1,061,684 Gross profit 685,669 520,816 1,779,843 1,436,253 Stores and distribution expense 383,883 367,333 1,068,226 1,045,667 Marketing, general and administrative expense 162,510 133,201 449,643 379,518 Asset impairment — 3,744 4,436 9,336 Other operating loss (income), net 1,256 ( 1,005 ) ( 4,332 ) ( 3,894 ) Operating income 138,020 17,543 261,870 5,626 Interest expense, net 671 7,295 5,211 21,519 Income (loss) before income taxes 137,349 10,248 256,659 ( 15,893 ) Income tax expense 39,617 10,966 82,349 14,413 Net income (loss) 97,732 ( 718 ) 174,310 ( 30,306 ) L Net income attributable to noncontrolling interests 1,521 1,496 4,634 5,211 Net income (loss) attributable to A&F $ 96,211 $ ( 2,214 ) $ 169,676 $ ( 35,517 ) Net income (loss) per share attributable to A&F Basic $ 1.91 $ ( 0.04 ) $ 3.38 $ ( 0.70 ) Diluted $ 1.83 $ ( 0.04 ) $ 3.25 $ ( 0.70 ) Weighted-average shares outstanding Basic 50,504 49,486 50,138 50,673 Diluted 52,624 49,486 52,154 50,673 Other comprehensive income (loss) Foreign currency translation adjustments, net of tax $ ( 5,042 ) $ ( 11,021 ) $ ( 8,567 ) $ ( 26,338 ) Derivative financial instruments, net of tax 7,259 ( 1,206 ) 9,906 ( 1,223 ) Other comprehensive income (loss) 2,217 ( 12,227 ) 1,339 ( 27,561 ) Comprehensive income (loss) 99,949 ( 12,945 ) 175,649 ( 57,867 ) L Comprehensive income attributable to noncontrolling interests 1,521 1,496 4,634 5,211 Comprehensive income (loss) attributable to A&F $ 98,428 $ ( 14,441 ) $ 171,015 $ ( 63,078 ) The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 3 2023 3Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Balance Sheets (Thousands, except par value amounts) (Unaudited) October 28, 2023 January 28, 2023 Assets Current assets: Cash and equivalents $ 649,489 $ 517,602 Receivables 96,762 104,506 Inventories 595,067 505,621 Other current assets 100,085 100,289 Total current assets 1,441,403 1,228,018 Property and equipment, net 546,935 551,585 Operating lease right-of-use assets 682,559 723,550 Other assets 226,749 209,947 Total assets $ 2,897,646 $ 2,713,100 Liabilities and stockholders’ equity Current liabiliti Accounts payable $ 373,930 $ 258,895 Accrued expenses 402,572 413,303 Short-term portion of operating lease liabilities 195,025 213,979 Income taxes payable 55,615 16,023 Total current liabilities 1,027,142 902,200 Long-term liabiliti Long-term portion of operating lease liabilities 658,923 713,361 Long-term borrowings, net 248,033 296,852 Other liabilities 87,435 94,118 Total long-term liabilities 994,391 1,104,331 Stockholders’ equity Class A Common Stoc $ 0.01 par val 150,000 shares authorized and 103,300 shares issued for all periods presented 1,033 1,033 Paid-in capital 413,515 416,255 Retained earnings 2,486,221 2,368,815 Accumulated other comprehensive loss, net of tax (“AOCL”) ( 136,188 ) ( 137,527 ) Treasury stock, at average 52,899 and 54,298 shares as of October 28, 2023 and January 28, 2023, respectively ( 1,898,473 ) ( 1,953,735 ) Total Abercrombie & Fitch Co. stockholders’ equity 866,108 694,841 Noncontrolling interests 10,005 11,728 Total stockholders’ equity 876,113 706,569 Total liabilities and stockholders’ equity $ 2,897,646 $ 2,713,100 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 4 2023 3Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Statements of Stockholders’ Equity (Thousands, except per share amounts) (Unaudited) Thirteen Weeks Ended October 28, 2023 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, July 29, 2023 50,141 $ 1,033 $ 410,398 $ 10,478 $ 2,400,032 $ ( 138,405 ) 53,159 $ ( 1,904,752 ) $ 778,784 Net income — — — 1,521 96,211 — — — 97,732 Share-based compensation issuances and exercises 260 — ( 6,567 ) — ( 10,022 ) — ( 260 ) 6,279 ( 10,310 ) Share-based compensation expense — — 9,684 — — — — — 9,684 Derivative financial instruments, net of tax — — — — — 7,259 — — 7,259 Foreign currency translation adjustments, net of tax — — — — — ( 5,042 ) — — ( 5,042 ) Distributions to noncontrolling interests, net — — — ( 1,994 ) — — — — ( 1,994 ) Ending balance at October 28, 2023 50,401 $ 1,033 $ 413,515 $ 10,005 $ 2,486,221 $ ( 136,188 ) 52,899 $ ( 1,898,473 ) $ 876,113 Thirteen Weeks Ended October 29, 2022 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, July 30, 2022 49,471 $ 1,033 $ 405,127 $ 11,139 $ 2,333,867 $ ( 130,040 ) 53,829 $ ( 1,948,199 ) $ 672,927 Net income (loss) — — — 1,496 ( 2,214 ) — — — ( 718 ) Purchase of Common Stock ( 510 ) — — — — 510 ( 8,000 ) ( 8,000 ) Share-based compensation issuances and exercises 39 — ( 1,396 ) — ( 923 ) — ( 39 ) 1,893 ( 426 ) Share-based compensation expense — — 7,310 — — — — — 7,310 Derivative financial instruments, net of tax — — — — — ( 1,206 ) — — ( 1,206 ) Foreign currency translation adjustments, net of tax — — — — — ( 11,021 ) — — ( 11,021 ) Distributions to noncontrolling interests, net — — — ( 2,801 ) — — — — ( 2,801 ) Ending balance at October 29, 2022 49,000 $ 1,033 $ 411,041 $ 9,834 $ 2,330,730 $ ( 142,267 ) 54,300 $ ( 1,954,306 ) $ 656,065 Abercrombie & Fitch Co. 5 2023 3Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Statements of Stockholders’ Equity (Thousands, except per share amounts) (Unaudited) Thirty-Nine Weeks Ended October 28, 2023 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, January 28, 2023 49,002 $ 1,033 $ 416,255 $ 11,728 $ 2,368,815 $ ( 137,527 ) 54,298 $ ( 1,953,735 ) $ 706,569 Net income — — — 4,634 169,676 — — — 174,310 Share-based compensation issuances and exercises 1,399 — ( 32,071 ) — ( 52,270 ) — ( 1,399 ) 55,262 ( 29,079 ) Share-based compensation expense — — 29,331 — — — — — 29,331 Derivative financial instruments, net of tax — — — — — 9,906 — — 9,906 Foreign currency translation adjustments, net of tax — — — — — ( 8,567 ) — — ( 8,567 ) Distributions to noncontrolling interests, net — — — ( 6,357 ) — — — — ( 6,357 ) Ending balance at October 28, 2023 50,401 $ 1,033 $ 413,515 $ 10,005 $ 2,486,221 $ ( 136,188 ) 52,899 $ ( 1,898,473 ) $ 876,113 Thirty-Nine Weeks Ended October 29, 2022 Common Stock Paid-in capital Non-controlling interests Retained earnings AOCL Treasury stock Total stockholders’ equity Shares outstanding Par value Shares At average cost Balance, January 29, 2022 52,985 $ 1,033 $ 413,190 $ 11,234 $ 2,386,156 $ ( 114,706 ) 50,315 $ ( 1,859,583 ) $ 837,324 Net income (loss) — — — 5,211 ( 35,517 ) — — — ( 30,306 ) Purchase of Common Stock ( 4,770 ) — — — 4,770 ( 125,775 ) ( 125,775 ) Share-based compensation issuances and exercises 785 — ( 25,575 ) — ( 19,909 ) — ( 785 ) 31,052 ( 14,432 ) Share-based compensation expense — — 23,426 — — — — — 23,426 Derivative financial instruments, net of tax — — — — — ( 1,223 ) — — ( 1,223 ) Foreign currency translation adjustments, net of tax — — — — — ( 26,338 ) — — ( 26,338 ) Distributions to noncontrolling interests, net — — — ( 6,611 ) — — — — ( 6,611 ) Ending balance at October 29, 2022 49,000 $ 1,033 $ 411,041 $ 9,834 $ 2,330,730 $ ( 142,267 ) 54,300 $ ( 1,954,306 ) $ 656,065 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 6 2023 3Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Condensed Consolidated Statements of Cash Flows (Thousands) (Unaudited) Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 Operating activities Net income (loss) $ 174,310 $ ( 30,306 ) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activiti Depreciation and amortization 105,547 98,393 Asset impairment 4,436 9,336 Loss (gain) on disposal 5,164 ( 198 ) Benefit from deferred income taxes ( 13,620 ) ( 9,585 ) Share-based compensation 29,331 23,426 Loss (gain) on extinguishment of debt 1,276 ( 52 ) Changes in assets and liabiliti Inventories ( 91,817 ) ( 221,414 ) Accounts payable and accrued expenses 126,842 ( 87,463 ) Operating lease right-of-use assets and liabilities ( 30,956 ) ( 8,364 ) Income taxes 37,857 281 Other assets 8,519 ( 91,432 ) Other liabilities ( 6,747 ) 16,184 Net cash provided by (used for) operating activities 350,142 ( 301,194 ) Investing activities Purchases of property and equipment ( 128,601 ) ( 120,282 ) Proceeds from the sale of property and equipment 615 11,891 Withdrawal of funds from Rabbi Trust assets — 12,000 Net cash used for investing activities ( 127,986 ) ( 96,391 ) Financing activities Purchase of senior secured notes ( 50,933 ) ( 7,862 ) Payment of debt modification costs and fees ( 180 ) ( 181 ) Purchases of Common Stock — ( 125,775 ) Other financing activities ( 35,993 ) ( 21,088 ) Net cash used for financing activities ( 87,106 ) ( 154,906 ) Effect of foreign currency exchange rates on cash ( 4,491 ) ( 14,871 ) Net increase (decrease) in cash and equivalents, and restricted cash and equivalents 130,559 ( 567,362 ) Cash and equivalents, and restricted cash and equivalents, beginning of period 527,569 834,368 Cash and equivalents, and restricted cash and equivalents, end of period $ 658,128 $ 267,006 Supplemental information related to non-cash activities Purchases of property and equipment not yet paid at end of period $ 38,787 $ 64,477 Operating lease right-of-use assets additions, net of terminations, impairments and other reductions 117,959 196,003 Supplemental information related to cash activities Cash paid for interest 14,165 13,574 Cash paid for income taxes 60,215 26,213 Cash received from income tax refunds 916 249 Cash paid for amounts included in measurement of operating lease liabilities, net of abatements 210,971 210,394 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements. Abercrombie & Fitch Co. 7 2023 3Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Index for Notes to Condensed Consolidated Financial Statements (Unaudited) Page No. Note 1. NATURE OF BUSINESS 9 Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 9 Note 3. REVENUE RECOGNITION 11 Note 4. NET INCOME (LOSS) PER SHARE 12 Note 5. FAIR VALUE 12 Note 6. PROPERTY AND EQUIPMENT, NET 13 Note 7. LEASES 13 Note 8. ASSET IMPAIRMENT 14 Note 9. INCOME TAXES 14 Note 10. BORROWINGS 14 Note 11. SHARE-BASED COMPENSATION 16 Note 12. DERIVATIVE INSTRUMENTS 18 Note 13. ACCUMULATED OTHER COMPREHENSIVE LOSS 19 Note 14. SEGMENT REPORTING 20 Abercrombie & Fitch Co. 8 2023 3Q Form 10-Q Table of Contents Abercrombie & Fitch Co. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. NATURE OF BUSINESS Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a global, digitally-led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. During the second quarter of Fiscal 2023, to leverage the knowledge and experience of our regional teams to better drive brand growth, the Company reorganized its structure and now manages its business on a geographic basis, consisting of three reportable segments: Americas; Europe, the Middle East and Africa (EMEA); and Asia-Pacific (APAC). Corporate functions and other income and expenses are evaluated on a consolidated basis and are not allocated to the Company’s segments, and therefore are included as a reconciling item between segment and total operating income (loss). There was no impact on consolidated net sales, operating income (loss) or net income (loss) as a result of these changes. All prior periods presented are recast to conform to the new segment presentation. The Company’s brands include Abercrombie brands, which includes Abercrombie & Fitch and abercrombie kids, and Hollister brands, which includes Hollister, Gilly Hicks, and Social Tourist. These brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The accompanying Condensed Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its financial position, results of operations and cash flows. The Company has interests in Emirati and Kuwaiti business ventures with Majid al Futtaim Fashion L.L.C. (“MAF”) and in a United States of America (the “U.S.”) business venture with Dixar L.L.C. (“Dixar”), each of which meets the definition of a variable interest entity (“VIE”). The purpose of the business ventures with MAF is to operate stores in the United Arab Emirates and Kuwait and the purpose of the business venture with Dixar is to hold the intellectual property related to Social Tourist. The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the operating results, assets and liabilities of these VIEs, with the noncontrolling interests’ (“NCI”) portions of net income (loss) presented as net income attributable to NCI on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and the NCI portion of stockholders’ equity presented as NCI on the Condensed Consolidated Balance Sheets. Fiscal year The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a fifty-two week year, but occasionally gives rise to an additional week, resulting in a fifty-three week year, as will be the case in Fiscal 2023. Fiscal years are designated in the Condensed Consolidated Financial Statements and notes, as well as the remainder of this Quarterly Report on Form 10-Q, by the calendar year in which the fiscal year commences. All references herein to the Company’s fiscal years are as follows: Fiscal year Year ended/ending Number of weeks Fiscal 2022 January 28, 2023 52 Fiscal 2023 February 3, 2024 53 Fiscal 2024 February 1, 2025 52 Interim financial statements The Condensed Consolidated Financial Statements as of October 28, 2023, and for the thirteen and thirty-nine week periods ended October 28, 2023 and October 29, 2022, are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim consolidated financial statements. Accordingly, the Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in A&F’s Annual Report on Form 10-K for Fiscal 2022 filed with the SEC on March 27, 2023 (the “Fiscal 2022 Form 10-K”). The January 28, 2023 consolidated balance sheet data, included herein, were derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the U.S. (“GAAP”). Abercrombie & Fitch Co. 9 2023 3Q Form 10-Q Table of Contents In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to state fairly, in all material respects, the financial position, results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for Fiscal 2023. Use of estimates The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved with estimates, actual results may differ. Additionally, these estimates and assumptions may change as a result of the impact of conditions affecting the global economy, such as the uncertainty regarding the economy, rising interest rates, continued inflation, fluctuation in foreign exchange rates, and geopolitical conflict, armed conflict, the conflicts between Russia and Ukraine or Israel and Hamas, and result in material impacts to the Company’s consolidated financial statements in future reporting periods. Recent accounting pronouncements The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements. The following table provides a brief description of certain accounting pronouncements that the company has adopted. Accounting Standards Update (ASU) Description Date of adoption Effect on the financial statements or other significant matters Standards adopted ASU 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations The update relates to disclosure requirements for buyers in supplier finance programs. The amendments in the update require that a buyer disclose qualitative and quantitative information about their supplier finance programs. Interim and annual requirements include disclosure of outstanding amounts under the obligations as of the end of the reporting period, and annual requirements include a roll-forward of those obligations for the annual reporting period, as well as a description of payment and other key terms of the programs. This update is effective for annual periods beginning after December 15, 2022, and interim periods within those fiscal years, except for the requirement to disclose roll-forward information, which is effective for fiscal years beginning after December 15, 2023. January 29, 2023 The Company adopted the changes to the standard under the retrospective method in the first quarter of Fiscal 2023, except for roll-forward information, which is effective for fiscal years beginning after December 15, 2023. The adoption of this guidance did not have a significant impact on the Company's condensed consolidated financial statements. Standards not yet adopted ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures The update modifies the disclosure/presentation requirements of reportable segments. The amendments in the update require the disclosure of significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit and loss, The amendments also require disclosure of all other segment items by reportable segment and a description of its composition. Additionally, the amendments require disclosure of the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources.This update is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements and accompanying notes Supply Chain Finance Program Under the supply chain finance (“SCF”) program, which is administered by a third party, the Company’s vendors, at their sole discretion, are given the opportunity to sell receivables from the Company to a participating financial institution at a discount that leverages the Company’s credit profile. The commercial terms negotiated by the Company with its vendors are consistent, irrespective of whether a vendor participates in the SCF program. A participating vendor has the option to be paid by the financial institution earlier than the original invoice due date. The Company’s responsibility is limited to making payment on the terms originally negotiated by the Company with each vendor, regardless of whether the vendor sells its receivable to a financial institution. If a vendor chooses to participate in the SCF program, the Company pays the financial institution the stated amount of confirmed merchandise invoices on the stated maturity date, which is typically 75 days from the invoice date. The agreement Abercrombie & Fitch Co. 10 2023 3Q Form 10-Q Table of Contents with the financial institution does not require the Company to provide assets pledged as security or other forms of guarantees for the SCF program. As of October 28, 2023 and January 28, 2023, $ 117.3 million and $ 68.4 million of SCF program liabilities were recorded in accounts payable in the Condensed Consolidated Balance Sheets, respectively, and reflected as a cash flow from operating activities in the Condensed Consolidated Statements of Cash Flows when settled. Condensed Consolidated Statements of Cash Flows reconciliation The following table provides a reconciliation of cash and equivalents and restricted cash and equivalents to the amounts shown on the Condensed Consolidated Statements of Cash Flows: (in thousands) Location October 28, 2023 January 28, 2023 October 29, 2022 January 29, 2022 Cash and equivalents Cash and equivalents $ 649,489 $ 517,602 $ 257,332 $ 823,139 Long-term restricted cash and equivalents Other assets 8,639 9,967 9,674 11,229 Cash and equivalents and restricted cash and equivalents $ 658,128 $ 527,569 $ 267,006 $ 834,368 3. REVENUE RECOGNITION Disaggregation of revenue All revenues are recognized in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). For information regarding the disaggregation of revenue, refer to Note 14, “ SEGMENT REPORTING . ” Contract liabilities The following table details certain contract liabilities representing unearned revenue as of October 28, 2023, January 28, 2023, October 29, 2022 and January 29, 2022: (in thousands) October 28, 2023 January 28, 2023 October 29, 2022 January 29, 2022 Gift card liability (1) $ 36,506 $ 39,235 $ 35,016 $ 36,984 Loyalty programs liability 24,521 25,640 22,930 22,757 (1) Includes $ 15.5 million and $ 14.2 million of revenue recognized during the thirty-nine weeks ended October 28, 2023 and October 29, 2022, respectively, that was included in the gift card liability at the beginning of January 28, 2023 and January 29, 2022, respectively. The following table details recognized revenue associated with the Company’s gift card program and loyalty programs for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Revenue associated with gift card redemptions and gift card breakage $ 24,741 $ 21,194 $ 73,391 $ 66,847 Revenue associated with reward redemptions and breakage related to the Company’s loyalty programs 13,710 11,767 37,628 32,578 Abercrombie & Fitch Co. 11 2023 3Q Form 10-Q Table of Contents 4. NET INCOME (LOSS) PER SHARE Net income (loss) per basic and diluted share attributable to A&F is computed based on the weighted-average number of outstanding shares of A&F’s Class A Common Stock, $0.01 par value (“Common Stock”). The following table provides additional information pertaining to net income (loss) per share attributable to A&F for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Shares of Common Stock issued 103,300 103,300 103,300 103,300 Weighted-average treasury shares ( 52,796 ) ( 53,814 ) ( 53,162 ) ( 52,627 ) Weighted-average — basic shares 50,504 49,486 50,138 50,673 Dilutive effect of share-based compensation awards 2,120 — 2,016 — Weighted-average — diluted shares 52,624 49,486 52,154 50,673 Anti-dilutive shares (1) 445 4,199 609 4,285 (1) Reflects the total number of shares related to outstanding share-based compensation awards that have been excluded from the computation of net income (loss) per diluted share because the impact would have been anti-dilutive. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can achieved from zero up to 200% of their target vesting amount and are reflected at the maximum vesting amount less any dilutive portion. 5. FAIR VALUE Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized based on a three-level hierarchy. The three levels of inputs to measure fair value are as follows: • Level 1—inputs are unadjusted quoted prices for identical assets or liabilities that are available in active markets that the Company can access at the measurement date. • Level 2—inputs are other than quoted market prices included within Level 1 that are observable for assets or liabilities, directly or indirectly. • Level 3—inputs to the valuation methodology are unobservable. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The following table provides the three levels of the hierarchy and the distribution of the Company’s assets measured at fair value on a recurring basis, as of October 28, 2023 and January 28, 2023: Assets and Liabilities at Fair Value as of October 28, 2023 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 155,433 $ 24,265 $ — $ 179,698 Derivative instruments (2) — 5,132 — 5,132 Rabbi Trust assets (3) 1,164 52,151 — 53,315 Restricted cash equivalents (1) 1,338 4,268 — 5,606 Total assets $ 157,935 $ 85,816 $ — $ 243,751 Liabiliti Derivative instruments (2) $ — $ 10 $ — $ 10 Total liabilities $ — $ 10 $ — $ 10 Assets and Liabilities at Fair Value as of January 28, 2023 (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (1) $ 50,364 $ — $ — $ 50,364 Derivative instruments (2) — 32 — 32 Rabbi Trust assets (3) 1 51,681 — 51,682 Restricted cash equivalents (1) 1,690 5,174 — 6,864 Total assets $ 52,055 $ 56,887 $ — $ 108,942 Liabiliti Derivative instruments (2) $ — $ 4,986 $ — $ 4,986 Total liabilities $ — $ 4,986 $ — $ 4,986 (1) Level 1 assets consisted of investments in money market funds and U.S. treasury bills. Level 2 assets consisted of time deposits. Abercrombie & Fitch Co. 12 2023 3Q Form 10-Q Table of Contents (2) Level 2 assets and liabilities consisted primarily of foreign currency exchange forward contracts. (3) Level 1 assets consisted of investments in money market funds. Level 2 assets consisted of trust-owned life insurance policies. The Company’s Level 2 assets consisted o • Trust-owned life insurance policies, which were valued using the cash surrender value of the life insurance policies; • Time deposits, which were valued at cost, approximating fair value, due to the short-term nature of these investments; and • Derivative instruments, primarily foreign currency exchange forward contracts, which were valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk. Fair value of long-term borrowings The Company’s borrowings under its senior secured notes, which have a fixed 8.75 % interest rate and mature on July 15, 2025 (the “Senior Secured Notes”), are carried at historical cost in the accompanying Condensed Consolidated Balance Sheets. The following table provides the carrying amount and fair value of the Company’s long-term gross borrowings as of October 28, 2023 and January 28, 2023: (in thousands) October 28, 2023 January 28, 2023 Gross borrowings outstanding, carrying amount $ 249,730 $ 299,730 Gross borrowings outstanding, fair value (1) 254,100 304,975 (1) Classified as Level 2 measurements within the fair value hierarchy. 6. PROPERTY AND EQUIPMENT, NET The following table provides property and equipment, net as of October 28, 2023 and January 28, 2023: (in thousands) October 28, 2023 January 28, 2023 Property and equipment, at cost $ 2,499,779 $ 2,517,862 L Accumulated depreciation and amortization ( 1,952,844 ) ( 1,966,277 ) Property and equipment, net $ 546,935 $ 551,585 R efer to Note 8, “ ASSET IMPAIRMENT ,” for details related to property and equipment impairment charges incurred during the thirty-nine weeks ended October 28, 2023 and thirteen and thirty-nine weeks ended October 29, 2022. 7. LEASES The Company is a party to leases related to its Company-operated retail stores as well as for certain of its distribution centers, office space, information technology and equipment. The following table provides a summary of the Company’s operating lease costs for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Single lease cost (1) $ 63,177 $ 63,263 $ 184,172 $ 182,796 Variable lease cost (2) 32,332 40,681 119,809 106,359 Operating lease right-of-use asset impairment (3) — 1,205 1,414 4,693 Sublease income (4) ( 979 ) ( 908 ) ( 2,959 ) ( 2,869 ) Total operating lease cost $ 94,530 $ 104,241 $ 302,436 $ 290,979 (1) Included amortization and interest expense associated with operating lease right-of-use assets and the impact from remeasurement of operating lease liabilities. (2) Includes variable payments related to both lease and nonlease components, such as contingent rent payments made by the Company based on performance, and payments related to taxes, insurance, and maintenance costs. (3) Refer to Note 8, “ ASSET IMPAIRMENT ,” for details related to operating lease right-of-use asset impairment charges. (4) The terms of the sublease agreement entered into by the Company with a third party during Fiscal 2020 related to one of its previous flagship store locations have not changed materially from that disclosed in Note 7, “LEASES,” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of the Fiscal 2022 Form 10-K. Sublease income is recognized in other operating loss (income), net on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The Company had minimum commitments related to operating lease contracts that have not yet commenced, primarily for certain Company-operated retail stores, of approximately $ 8.3 million as of October 28, 2023. Abercrombie & Fitch Co. 13 2023 3Q Form 10-Q Table of Contents 8. ASSET IMPAIRMENT The following table provides asset impairment charges for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Operating lease right-of-use asset impairment $ — $ 1,205 $ 1,414 $ 4,693 Property and equipment asset impairment — 2,539 3,022 4,643 Total asset impairment $ — $ 3,744 $ 4,436 $ 9,336 Asset impairment charges for the thirteen weeks ended October 29, 2022 and thirty-nine weeks ended October 28, 2023 and October 29, 2022 related to certain of the Company’s assets including stores across certain brands, geographies and store formats and other assets. 9. INCOME TAXES The quarterly provision for income taxes is based on the current estimate of the annual effective income tax rate and the tax effect of discrete items occurring during the quarter. The Company’s quarterly provision and the estimate of the annual effective tax rate are subject to significant variation due to several factors. These factors include variability in the pre-tax jurisdictional mix of earnings, changes in how the Company does business including entering into new businesses or geographies, changes in foreign currency exchange rates, changes in laws, regulations, interpretations and administrative practices, relative changes in expenses or losses for which tax benefits are not recognized and the impact of discrete items. In addition, jurisdictions where the Company anticipates an ordinary loss for the fiscal year for which the Company does not anticipate future tax benefits are excluded from the overall computation of estimated annual effective tax rate and no tax benefits are recognized in the period related to losses in such jurisdictions. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax earnings. Impact of valuation allowances During the thirteen and thirty-nine weeks ended October 28, 2023, the Company did not recognize income tax benefits on $ 20.0 million and $ 63.0 million, respectively, of pretax losses, primarily in Switzerland, resulting in adverse tax impacts of $ 3.0 million and $ 9.6 million, respectively. As of October 28, 2023, the Company had foreign net deferred tax assets of approximately $ 47.2 million, including $ 11.3 million, $ 7.8 million, and $ 14.8 million in China, Japan and the United Kingdom, respectively. While the Company believes that these net deferred tax assets are more-likely-than-not to be realized, it is not a certainty, as the Company continues to evaluate and respond to emerging situations. Should circumstances change, the net deferred tax assets may become subject to additional valuation allowances in the future. Additional valuation allowances would result in additional tax expense. During the thirteen and thirty-nine weeks ended October 29, 2022, the Company did not recognize income tax benefits on $ 30.0 million and $ 69.7 million, respectively, of pretax losses, primarily in Switzerland, resulting in adverse tax impacts of $ 5.6 million and $ 12.8 million, respectively. As of January 28, 2023, there were approximately $ 8.0 million, $ 9.1 million, and $ 15.6 million of net deferred tax assets in China, Japan, and the United Kingdom, respectively. Share-based compensation Refer to Note 11, “ SHARE-BASED COMPENSATION ,” for details on income tax benefits and charges related to share-based compensation awards during the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022. Abercrombie & Fitch Co. 14 2023 3Q Form 10-Q Table of Contents 10. BORROWINGS The following table provides details on the Company’s long-term borrowings, net, as of October 28, 2023 and January 28, 2023 : (in thousands) October 28, 2023 January 28, 2023 Long-term portion of borrowings, gross at carrying amount $ 249,730 $ 299,730 Unamortized fees ( 1,697 ) ( 2,878 ) Long-term borrowings, net $ 248,033 $ 296,852 Senior Secured Notes During the thirteen weeks ended October 28, 2023, A&F Management purchased $ 50.0 million of outstanding Senior Secured Notes in the open market and incurred a $ 1.3 million loss on extinguishment of debt, comprised of a premium of $ 0.9 million and the write-off of unamortized fees of $ 0.4 million, recognized in interest expense, net on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The terms of the Senior Secured Notes have remained unchanged from those disclosed in Note 12, “BORROWINGS,” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of the Fiscal 2022 Form 10-K. ABL Facility The terms of the Company’s senior secured revolving credit facility of up to $ 400.0 million (the “ABL Facility”) have remained unchanged from those disclosed in Note 12, “ BORROWINGS ,” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of the Fiscal 2022 Form 10-K. The Company did not have any borrowings outstanding under the ABL Facility as of October 28, 2023 or as of January 28, 2023. As of October 28, 2023, availability under the ABL Facility was $ 399.6 million, net of $ 0.4 million in outstanding stand-by letters of credit. As the Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility, borrowing capacity available to the Company under the ABL Facility was $ 359.6 million as of October 28, 2023. Representations, warranties and covenants The agreements related to the Senior Secured Notes and the ABL Facility contain various representations, warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of the Company and its subsidiaries t grant or incur liens; incur, assume or guarantee additional indebtedness; sell or otherwise dispose of assets, including capital stock of subsidiaries; make investments in certain subsidiaries; pay dividends, make distributions or redeem or repurchase capital stock; change the nature of their business; and consolidate or merge with or into, or sell substantially all of the assets of the Company or Abercrombie & Fitch Management Co. (“A&F Management”) to another entity. The Senior Secured Notes are guaranteed on a senior secured basis, jointly and severally, by A&F and each of the existing and future wholly-owned domestic restricted subsidiaries of A&F that guarantee or will guarantee A&F Management’s Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) or certain future capital markets indebtedness. Certain of the agreements related to the Senior Secured Notes and the ABL Facility also contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances. The Company was in compliance with all debt covenants under these agreements as of October 28, 2023. Abercrombie & Fitch Co. 15 2023 3Q Form 10-Q Table of Contents 11. SHARE-BASED COMPENSATION Financial statement impact The following table provides share-based compensation expense and the related income tax impacts for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Share-based compensation expense $ 9,684 $ 7,310 $ 29,331 $ 23,426 Income tax benefits associated with share-based compensation expense recognized 1,080 635 3,163 2,615 The following table provides discrete income tax benefits and charges related to share-based compensation awards during the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Income tax discrete benefits (charges) realized for tax deductions related to the issuance of shares $ 861 $ ( 29 ) $ 2,303 $ 1,970 Income tax discrete charges realized upon cancellation of stock appreciation rights — ( 10 ) ( 101 ) ( 213 ) Total income tax discrete benefits (charges) related to share-based compensation awards $ 861 $ ( 39 ) $ 2,202 $ 1,757 The following table provides the amount of employee tax withheld by the Company upon the issuance of shares associated with restricted stock units vesting and the exercise of stock appreciation rights for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Employee tax withheld upon issuance of shares (1) $ 10,310 $ 426 $ 29,079 $ 14,432 (1) Classified within other financing activities on the Condensed Consolidated Statements of Cash Flows. Restricted stock units The following table provides the summarized activity for restricted stock units for the thirty-nine weeks ended October 28, 2023: Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Number of Underlying Shares Weighted- Average Grant Date Fair Value Number of Underlying Shares Weighted- Average Grant Date Fair Value Number of Underlying Shares Weighted- Average Grant Date Fair Value Unvested at January 28, 2023 2,461,395 $ 21.30 336,549 $ 31.08 662,137 $ 23.68 Granted 901,293 29.11 222,144 28.36 111,077 41.20 Adjustments for performance achievement — — — — 493,854 16.24 Vested ( 1,304,530 ) 17.67 — — ( 987,708 ) 16.24 Forfeited ( 98,726 ) 24.97 ( 7,123 ) 29.89 ( 3,562 ) 43.46 Unvested at October 28, 2023 (1) 1,959,432 $ 27.15 551,570 $ 30.00 275,798 $ 43.81 (1) Unvested shares related to restricted stock units with performance-based and market-based vesting conditions are reflected at 100% of their target vesting amount in the table above. Unvested shares related to restricted stock units with performance-based and market-based vesting conditions can be achieved from zero up to 200% of their target vesting amount. The following table provides the unrecognized compensation cost and the remaining weighted-average period over which these costs are expected to be recognized for restricted stock units as of October 28, 2023: Service-based Restricted Stock Units Performance-based Restricted Stock Units Market-based Restricted Stock Units Unrecognized compensation cost (in thousands) $ 40,774 $ 14,154 $ 5,989 Remaining weighted-average period cost is expected to be recognized (years) 1.3 1.5 1.5 Abercrombie & Fitch Co. 16 2023 3Q Form 10-Q Table of Contents The following table provides additional information pertaining to restricted stock units for the thirty-nine weeks ended October 28, 2023 and October 29, 2022: Thirty-Nine Weeks Ended (in thousands) October 28, 2023 October 29, 2022 Service-based restricted stock units: Total grant date fair value of awards granted $ 26,237 $ 28,246 Total grant date fair value of awards vested 23,051 16,702 Performance-based restricted stock units: Total grant date fair value of awards granted 6,300 5,600 Total grant date fair value of awards vested — 4,482 Market-based restricted stock units: Total grant date fair value of awards granted 4,576 3,852 Total grant date fair value of awards vested 16,040 4,105 The following table provides the weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during the thirty-nine weeks ended October 28, 2023 and October 29, 2022: Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 Grant date market price $ 28.36 $ 30.24 Fair value 41.20 41.60 Price volatility 63 % 66 % Expected term (years) 2.9 2.8 Risk-free interest rate 4.6 % 2.5 % Dividend yield — — Average volatility of peer companies 66.0 72.3 Average correlation coefficient of peer companies 0.5295 0.5150 Stock appreciation rights The following table provides the summarized stock appreciation rights activity for the thirty-nine weeks ended October 28, 2023: Number of Underlying Shares Weighted-Average Exercise Price Aggregate Intrinsic Value (in thousands) Weighted-Average Remaining Contractual Life (years) Outstanding at January 28, 2023 190,589 $ 29.43 Exercised ( 132,689 ) 25.95 Forfeited or expired ( 23,700 ) 45.69 Outstanding at October 28, 2023 34,200 $ 31.65 $ 926 0.8 Stock appreciation rights exercisable at October 28, 2023 34,200 $ 31.65 $ 926 0.8 The following table provides additional information pertaining to stock appreciation rights exercised during the thirty-nine weeks ended October 28, 2023: (in thousands) October 28, 2023 Total grant date fair value of awards exercised $ 1,292 No stock appreciation rights were exercised during the thirty-nine weeks ended October 29, 2022. Abercrombie & Fitch Co. 17 2023 3Q Form 10-Q Table of Contents 12. DERIVATIVE INSTRUMENTS The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes. The Company uses derivative instruments, primarily foreign currency exchange forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign-currency-denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign-currency-denominated intercompany receivables. Fluctuations in foreign currency exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These foreign currency exchange forward contracts typically have a maximum term of twelve months. The sale of the inventory to the Company’s customers will result in the reclassification of related derivative gains and losses that are reported in AOCL into earnings. The Company also uses foreign currency exchange forward contracts to hedge certain foreign-currency-denominated net monetary assets/liabilities. Examples of monetary assets/liabilities include cash balances, receivables and payables. Fluctuations in foreign currency exchange rates result in transaction gains or losses being recorded in earnings, as GAAP requires that monetary assets/liabilities be remeasured at the spot exchange rate at quarter-end and upon settlement. The Company has chosen not to apply hedge accounting to these instruments because there are no anticipated differences in the timing of gain or loss recognition on the hedging instruments and the hedged items. As of October 28, 2023, the Company had outstanding the following foreign currency exchange forward contracts that were entered into to hedge either a portion, or all, of forecasted foreign-currency-denominated intercompany transactio (in thousands) Notional Amount (1) Euro $ 51,476 British pound 44,599 Canadian dollar 19,122 (1) Amounts reported are the U.S. Dollar notional amounts outstanding as of October 28, 2023. As of October 28, 2023, foreign currency exchange forward contracts that were entered into to hedge foreign-currency-denominated net monetary assets and liabilities were as follows: (in thousands) Notional Amount (1) United Arab Emirates dirham $ 22,058 (1) Amounts reported are the U.S. Dollar notional amounts outstanding as of October 28, 2023 . The fair value of derivative instruments is determined using quoted market prices of the same or similar instruments, adjusted for counterparty risk. The following table provides the location and amounts of derivative fair values of foreign currency exchange forward contracts on the Condensed Consolidated Balance Sheets as of October 28, 2023 and January 28, 2023: (in thousands) Location October 28, 2023 January 28, 2023 Location October 28, 2023 January 28, 2023 Derivatives designated as cash flow hedging instruments Other current assets $ 5,114 $ 32 Accrued expenses $ — $ 4,986 Derivatives not designated as hedging instruments Other current assets 18 — Accrued expenses 10 — Total $ 5,132 $ 32 $ 10 $ 4,986 The following table provides information pertaining to derivative gains or losses from foreign currency exchange forward contracts designated as cash flow hedging instruments for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Gain recognized in AOCL (1) $ 7,151 $ 2,723 $ 7,202 $ 10,447 (Loss) gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization (2) ( 326 ) 3,909 $ ( 2,940 ) $ 11,718 (1) Amount represents the change in fair value of derivative instruments. (2) Amount represents (loss) gain reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) when the hedged item affects earnings, which is when merchandise is converted to cost of sales, exclusive of depreciation and amortization. Substantially all of the unrealized gain will be recognized in costs of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) over the next twelve months . Abercrombie & Fitch Co. 18 2023 3Q Form 10-Q Table of Contents The following table provides additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts not designated as hedging instruments for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Gain (loss) recognized in other operating loss (income), net $ 2,193 $ 504 $ ( 239 ) $ 2,276 13. ACCUMULATED OTHER COMPREHENSIVE LOSS The following tables provide activity in AOCL fo r the thirteen and thirty-nine weeks ended October 28, 2023: Thirteen Weeks Ended October 28, 2023 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at July 29, 2023 $ ( 136,178 ) $ ( 2,227 ) $ ( 138,405 ) Other comprehensive (loss) income before reclassifications ( 5,042 ) 7,151 2,109 Reclassified loss from AOCL (1) — 326 326 Tax effect — ( 218 ) ( 218 ) Other comprehensive (loss) income after reclassifications ( 5,042 ) 7,259 2,217 Ending balance at October 28, 2023 $ ( 141,220 ) $ 5,032 $ ( 136,188 ) Thirty-Nine Weeks Ended October 28, 2023 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at January 28, 2023 $ ( 132,653 ) $ ( 4,874 ) $ ( 137,527 ) Other comprehensive (loss) income before reclassifications ( 8,567 ) 7,202 ( 1,365 ) Reclassified loss from AOCL (1) — 2,940 2,940 Tax effect — ( 236 ) ( 236 ) Other comprehensive (loss) income after reclassifications ( 8,567 ) 9,906 1,339 Ending balance at October 28, 2023 $ ( 141,220 ) $ 5,032 $ ( 136,188 ) (1) Amount represents loss reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The following tables provide activity in AOCL for the thirteen and thirty-nine weeks ended October 29, 2022: Thirteen Weeks Ended October 29, 2022 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at July 30, 2022 $ ( 136,006 ) $ 5,966 $ ( 130,040 ) Other comprehensive (loss) income before reclassifications ( 11,021 ) 2,723 ( 8,298 ) Reclassified gain from AOCL (1) — ( 3,909 ) ( 3,909 ) Tax effect — ( 20 ) ( 20 ) Other comprehensive loss after reclassifications ( 11,021 ) ( 1,206 ) ( 12,227 ) Ending balance at October 29, 2022 $ ( 147,027 ) $ 4,760 $ ( 142,267 ) Thirty-Nine Weeks Ended October 29, 2022 (in thousands) Foreign Currency Translation Adjustment Unrealized Gain (Loss) on Derivative Financial Instruments Total Beginning balance at January 29, 2022 $ ( 120,689 ) $ 5,983 $ ( 114,706 ) Other comprehensive (loss) income before reclassifications ( 26,338 ) 10,447 ( 15,891 ) Reclassified gain from AOCL (1) — ( 11,718 ) ( 11,718 ) Tax effect — 48 48 Other comprehensive loss after reclassifications ( 26,338 ) ( 1,223 ) ( 27,561 ) Ending balance at October 29, 2022 $ ( 147,027 ) $ 4,760 $ ( 142,267 ) (1) Amount represents loss reclassified from AOCL to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Abercrombie & Fitch Co. 19 2023 3Q Form 10-Q Table of Contents 14. SEGMENT REPORTING The Company’s reportable segments are based on the financial information the chief operating decision maker (“CODM”) uses to allocate resources and assess performance of its business. During the second quarter of Fiscal 2023, to leverage the knowledge and experience of our regional teams to better drive brand growth, the Company reorganized its structure and now manages its business on a geographic basis, consisting of three reportable segments: Americas; Europe, the Middle East and Africa (EMEA); and Asia-Pacific (APAC). Corporate functions and other income and expenses are evaluated on a consolidated basis and are not allocated to the Company’s segments, and therefore are included as a reconciling item between segment and total operating income (loss). The Americas reportable segment includes the results of operations in North America and South America. The EMEA reportable segment includes the results of operations in Europe, the Middle East and Africa. The APAC reportable segment includes the results of operations in the Asia-Pacific region, including Asia and Oceania. Intersegment sales and transfers are recorded at cost and are treated as a transfer of inventory. All intercompany revenues are eliminated in consolidation and are not reviewed when evaluating segment performance. All prior periods presented are recast to conform to the new segment presentation. The group comprised of the Company’s (i) Chief Executive Officer and (ii) Chief Financial Officer and Chief Operating Officer functions as the Company’s CODM. The Company’s CODM manages business operations and evaluates the performance of each segment based on the net sales and operating income (loss) of the segment. Net sales by segment are presented by attributing revenues on the basis of the segment that fulfills the order. Operating income (loss) for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributed to the segment. Corporate/other expenses include expenses incurred that are not directly attributed to a reportable segment and primarily relate to corporate or global functions such as design, sourcing, brand management, corporate strategy, information technology, finance, treasury, legal, human resources, and other corporate support services, as well as certain globally managed components of the planning, merchandising, and marketing functions. The Company reports inventories by segment as that information is used by the CODM in determining allocation of resources to the segments. The Company does not report its other assets by segment as that information is not used by the CODM in assessing segment performance or allocating resources. The following tables provide the Company’s segment information as of October 28, 2023 and January 28, 2023, and for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022: Net Sales Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Americas $ 867,566 $ 713,860 $ 2,264,415 $ 1,949,066 EMEA 157,976 138,840 468,045 465,394 APAC 30,889 27,384 95,310 83,477 Segment total $ 1,056,431 $ 880,084 $ 2,827,770 $ 2,497,937 Operating Income (loss) Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Americas $ 257,440 $ 125,726 $ 590,948 $ 297,826 EMEA 20,795 3,455 49,170 30,107 APAC ( 3,261 ) ( 5,643 ) ( 6,272 ) ( 21,128 ) Segment total $ 274,974 $ 123,538 $ 633,846 $ 306,805 Operating (loss) income not attributed to Segments: Stores and distribution expense ( 3,202 ) ( 1,254 ) ( 8,205 ) ( 5,972 ) Marketing, general and administrative expense ( 132,496 ) ( 105,747 ) ( 368,099 ) ( 299,108 ) Other operating (loss) income, net ( 1,256 ) 1,006 4,328 3,901 Total operating income $ 138,020 $ 17,543 $ 261,870 $ 5,626 Abercrombie & Fitch Co. 20 2023 3Q Form 10-Q Table of Contents Assets (in thousands) October 28, 2023 January 28, 2023 Inventories Americas $ 481,288 $ 404,040 EMEA 91,129 80,447 APAC 22,650 21,134 Total inventories $ 595,067 $ 505,621 Assets not attributed to Segments 2,302,579 2,207,479 Total assets $ 2,897,646 $ 2,713,100 Brand Information The following table provides additional disaggregated revenue information, which is categorized by brand, for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in thousands) October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Abercrombie $ 547,728 $ 422,332 $ 1,446,483 $ 1,174,445 Hollister 508,703 457,752 1,381,287 1,323,492 Total $ 1,056,431 $ 880,084 $ 2,827,770 $ 2,497,937 Abercrombie & Fitch Co. 21 2023 3Q Form 10-Q Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the Company’s Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q in “ Item 1. Financial Statements (Unaudited) ,” to which all references to Notes in MD&A are made. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Quarterly Report on Form 10-Q or made by the Company or, its management and spokespeople involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company’s control. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “should,” “are confident,” “will,” “could,” “outlook,” or the negative versions of these words or other comparable words, and similar expressions may identify forward-looking statements. Future economic and industry trends that could potentially impact revenue and profitability are difficult to predict. Therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. Factors that could cause results to differ from those expressed in the Company’s forward-looking statements include, but are not limited to, the risks described or referenced in Part I, Item 1A. “Risk Factors,” in the Company’s Fiscal 2022 Form 10-K and otherwise in our reports and filings with the SEC, as well as the followin • risks related to changes in global economic and financial conditions, including inflation, and the resulting impact on consumer spending generally and on our operating results, financial condition, and expense management, and our ability to adequately mitigate the impact; • risks related to geopolitical conflict, armed conflict, the conflicts between Russia and Ukraine or Israel and Hamas and the possible expansion of conflict in the surrounding areas , acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience; • risks related to natural disasters and other unforeseen catastrophic events; • risks related to our failure to engage our customers, anticipate customer demand and changing fashion trends, and manage our inventory; • risks related to our ability to successfully invest in and execute on our customer, digital and omnichannel initiatives; • risks related to the effects of seasonal fluctuations on our sales and our performance during the back-to-school and holiday selling seasons; • risks related to fluctuations in foreign currency exchange rates; • risks related to fluctuations in our tax obligations and effective tax rate, including as a result of earnings and losses generated from our international operations; • risks related to our ability to execute on our strategic and growth initiatives, including those outlined in our Always Forward Plan; • risks related to international operations, including changes in the economic or political conditions where we sell or source our products or changes in import tariffs or trade restrictions; • risks and uncertainty related to adverse public health developments, such as the COVID-19 pandemic; • risks related to cybersecurity threats and privacy or data security breaches; • risks related to the potential loss or disruption of our information systems; • risks related to the continued validity of our trademarks and our ability to protect our intellectual property; • risks associated with climate change and other corporate responsibility issues; • risks related to reputational harm to the Company, its officers, and directors; • risks related to actual or threatened litigation; and • uncertainties related to future legislation, regulatory reform, policy changes, or interpretive guidance on existing legislation. In light of the significant uncertainties in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company, or any other person, that the objectives of the Company will be achieved. The forward-looking statements included herein are based on information presently available to the management of the Company. Except as may be required by applicable law, the Company assumes no obligation to publicly update or revise its forward-looking statements, including any financial targets and estimates, whether as a result of new information, future events, or otherwise. Abercrombie & Fitch Co. 22 2023 3Q Form 10-Q Table of Contents INTRODUCTION MD&A is provided as a supplement to the accompanying Condensed Consolidated Financial Statements and notes thereto to help provide an understanding of the Company’s results of operations, financial condition, and liquidity. MD&A is organized as follows: • Overview . A general description of the Company’s business and certain segment information. • Current Trends and Outlook . A discussion related to certain of the Company’s focus areas for the current fiscal year and discussion of certain risks and challenges, as well as a summary of the Company’s performance for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022. • Results of Operations . An analysis of certain components of the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022. • Liquidity and Capital Resources . A discussion of the Company’s financial condition, changes in financial condition and liquidity as of October 28, 2023, which includes (i) an analysis of financial condition as compared to January 28, 2023; (ii) an analysis of changes in cash flows for the thirty-nine weeks ended October 28, 2023, as compared to the thirty-nine weeks ended October 29, 2022; and (iii) an analysis of liquidity, including availability under the Company’s ABL Facility, the Company’s share repurchase program, and outstanding debt and covenant compliance. • Recent Accounting Pronouncements . A discussion, as applicable, of the recent accounting pronouncements the Company has adopted or is currently evaluating, including the dates of adoption and/or expected dates of adoption, and anticipated effects on the Company’s Condensed Consolidated Financial Statements. • Critical Accounting Estimates . A discussion of the accounting estimates considered to be important to the Company’s results of operations and financial condition, which typically require significant judgment and estimation on the part of management in their application. • Non-GAAP Financial Measures . MD&A provides a discussion of certain financial measures that have been determined to not be presented in accordance with GAAP. This section includes certain reconciliations between GAAP and non-GAAP financial measures and additional details on non-GAAP financial measures, including information as to why the Company believes the non-GAAP financial measures provided within MD&A are useful to investors. Abercrombie & Fitch Co. 23 2023 3Q Form 10-Q Table of Contents OVERVIEW Business summary The Company is a global, digitally-led omnichannel retailer. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids, which are sold primarily through its digital channels and Company-owned stores, as well as through various third-party arrangements. During the second quarter of Fiscal 2023, to leverage the knowledge and experience of our regional teams to better drive brand growth, as indicated in our Always Forward Plan, the Company reorganized its structure and now manages its business on a geographic basis, consisting of three reportable segments: Americas; Europe, the Middle East and Africa (EMEA); and Asia-Pacific (APAC). Corporate functions and other income and expenses are evaluated on a consolidated basis and are not allocated to the Company’s segments, and therefore are included as a reconciling item between segment and total operating income (loss). There was no impact on consolidated net sales, operating income (loss) or net income (loss) as a result of these changes. All prior periods presented are recast to conform to the new segment presentation. The Company’s brands include Abercrombie brands, which includes Abercrombie & Fitch and abercrombie kids, and Hollister brands, which includes Hollister, Gilly Hicks, and Social Tourist. These brands share a commitment to offering unique products of enduring quality and exceptional comfort that allow customers around the world to express their own individuality and style. The Company’s fiscal year ends on the Saturday closest to January 31. All references herein to the Company’s fiscal years are as follows: Fiscal year Year ended/ending Number of weeks Fiscal 2022 January 28, 2023 52 Fiscal 2023 February 3, 2024 53 Fiscal 2024 February 1, 2025 52 Seasonality Historically, the Company’s operations have been seasonal in nature and consist of two principal selling seaso the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”). Due to the seasonal nature of the retail apparel industry, the results of operations for any current period are not necessarily indicative of the results expected for the full fiscal year and the Company could have significant fluctuations in certain asset and liability accounts. The Company historically experiences its greatest sales activity during the Fall season due to back-to-school and holiday sales periods, respectively. CURRENT TRENDS AND OUTLOOK Focus areas for Fiscal 2023 The Company remains committed to, and confident in, its long-term vision of being a digitally-led global omnichannel apparel retailer and continues to evaluate opportunities to make progress toward initiatives that support this vision as outlined in its Always Forward Plan. The Always Forward Plan, which outlines the Company’s long-term strategic goals, including growing shareholder value, is anchored on three strategic growth principles, which are t • Execute focused brand growth plans; • Accelerate an enterprise-wide digital revolution; and • Operate with financial discipline. The following focus areas for Fiscal 2023 serve as a framework for the Company achieving sustainable growth and progressing toward the Always Forward Pl • Execute focused brand growth plans for Abercrombie brands and Hollister brands • Using our playbooks globally to align the brands’ products, voices, and experiences with customers, both digitally and in-store • Accelerate an enterprise-wide digital revolution • Progress on current phase of our modernization efforts around key data platforms; • Continue to progress on our multi-year enterprise resource planning (“ERP”) transformation and cloud migration journey; and • Improve our digital and app experience across key parts of the customer journey Abercrombie & Fitch Co. 24 2023 3Q Form 10-Q Table of Contents • Operate with financial discipline • Maintain appropriately lean inventory levels that put Abercrombie and Hollister in a position to chase inventory throughout the year; and • Properly balance investments, inflation and efficiency efforts to improve profitability Current macroeconomic conditions and impact of inflation Macroeconomic conditions, including inflation, higher interest rates, foreign exchange rate fluctuations, and declines in consumer discretionary spending continue to negatively impact our business. In periods of perceived or actual unfavorable economic conditions, consumers may reallocate available discretionary spending, which may adversely impact demand for our products. Supply chain disruptions Previously, the Company experienced inflationary pressures with respect to labor, cotton, freight and other raw materials and other costs, which has negatively impacted expenses and margins. While freight costs have decreased and supply chain constraints are waning, there continues to be inflationary pressures with respect to cotton and other raw materials, as well as other operating costs. The Company may be unsuccessful in passing these increased costs on to its customers through higher average unit retail (“AUR”). Continued inflationary pressures could further impact expenses and have a long-term impact on the Company because increasing costs may impact its ability to maintain satisfactory margins. Global Store Network Optimization The Company has a goal of finding the right size, right location and right economics for omni-enabled stores that cater to local customers. The Company continues to use data to inform its focus on aligning store square footage with digital penetration, and during the year-to-date period of Fiscal 2023, the Company opened 24 new stores, while closing 21 stores. As part of this focus, the Company expects store count to remain steady with approximately 35 new stores, while closing approximately 35 stores, during Fiscal 2023, pending negotiations with our landlord partners. Future closures could be completed through natural lease expirations, while certain other leases include early termination options that can be exercised under specific conditions. The Company may also elect to exit or modify other leases, and could incur charges related to these actions. Impact of global events and uncertainty As we are a global multi-brand omnichannel specialty retailer, with operations in the Americas, EMEA, and APAC, among other regions, management is mindful of macroeconomic risks, global challenges and the changing global geopolitical environment, including t he ongoing conflicts between Russia and Ukraine, the conflict between Israel and Hamas and the possible expansion of conflict in the surrounding areas that could adversely impact certain areas of the business. As a result, management continues to monitor global events. The Company continues to assess the potential impacts these events and similar events may have on the business in future periods and continues to develop and update contingency plans to assist in mitigating potential impacts. It is possible that the Company’s preparations for such events are not adequate to mitigate their impact, and that these events could further adversely affect its business and results of operations. For a discussion of material risks that have the potential to cause our actual results to differ materially from our expectations, refer to Part I, “Item 1A. Risk Factors” on the Fiscal 2022 Form 10-K. Abercrombie & Fitch Co. 25 2023 3Q Form 10-Q Table of Contents Summary of results A summary of results for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022 was as follows: GAAP Non-GAAP (1) (in thousands, except change in net sales, comparable sales, gross profit rate, operating income margin and per share amounts) October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022 Thirteen Weeks Ended Net sales $ 1,056,431 $ 880,084 Change in net sales 20.0 % (2.8) % Comparable sales (2) 16 % — % Gross profit rate 64.9 % 59.2 % Operating income $ 138,020 $ 17,543 $ 138,020 $ 21,287 Operating income margin 13.1 % 2.0 % 13.1 % 2.4 % Net income (loss) attributable to A&F $ 96,211 $ (2,214) $ 96,211 $ 554 Net income (loss) per share attributable to A&F 1.83 (0.04) 1.83 0.01 Thirty-Nine Weeks Ended Net sales $ 2,827,770 $ 2,497,937 Change in net sales 13.2 % (2.1) % Comparable sales (2) 11 % — % Gross profit rate 62.9 57.5 Operating income $ 261,870 $ 5,626 $ 266,306 $ 14,962 Operating income margin 9.3 % 0.2 % 9.4 % 0.6 % Net income (loss) attributable to A&F. $ 169,676 $ (35,517) $ 172,905 $ (28,686) Net income (loss) per share attributable to A&F 3.25 (0.70) 3.32 (0.57) (1) Discussion as to why the Company believes that these non-GAAP financial measures are useful to investors and a reconciliation of the non-GAAP measures to the most directly comparable financial measure calculated and presented in accordance with GAAP are provided below under “ NON-GAAP FINANCIAL MEASURES .” (2) Comparable sales are calculated on a constant currency basis and exclude revenue other than store and digital sales. Refer to the discussion below in “ NON-GAAP FINANCIAL MEASURES ,” for further details on the comparable sales calculation. In light of store closures related to COVID-19, comparable sales for periods prior to Fiscal 2023 included in the Company’s Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q are not disclosed. Certain components of the Company’s Condensed Consolidated Balance Sheets as of October 28, 2023 and January 28, 2023 were as follows: (in thousands) October 28, 2023 January 28, 2023 Cash and equivalents $ 649,489 $ 517,602 Gross long-term borrowings outstanding, carrying amount 249,730 299,730 Inventories 595,067 505,621 Certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirty-nine week periods ended October 28, 2023 and October 29, 2022 were as follows: (in thousands) October 28, 2023 October 29, 2022 Net cash provided by (used for) operating activities $ 350,142 $ (301,194) Net cash used for investing activities (127,986) (96,391) Net cash used for financing activities (87,106) (154,906) Abercrombie & Fitch Co. 26 2023 3Q Form 10-Q Table of Contents RESULTS OF OPERATIONS The estimated basis point (“BPS”) change disclosed throughout this Results of Operations section has been rounded based on the change in the percentage of net sales. Net sales Net sales by segment are presented by attributing revenues on the basis of the segment that fulfills the order. The Company’s net sales by reportable segment for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022 were as follows: Thirteen Weeks Ended (in thousands, except ratios) October 28, 2023 October 29, 2022 $ Change % Change Comparable Sales (1 ) By segmen Americas $ 867,566 $ 713,860 $ 153,706 22 % 16 % EMEA 157,976 138,840 19,136 14 15 APAC 30,889 27,384 3,505 13 32 Total $ 1,056,431 $ 880,084 $ 176,347 20 16 Thirty-Nine Weeks Ended (in thousands, except ratios) October 28, 2023 October 29, 2022 $ Change % Change Comparable Sales (1) Americas $ 2,264,415 $ 1,949,066 $ 315,349 16 % 12 % EMEA 468,045 465,394 2,651 1 6 APAC 95,310 83,477 11,833 14 28 Total $ 2,827,770 $ 2,497,937 $ 329,833 13 11 (1) Comparable sales are calculated on a constant currency basis. Refer to “ NON-GAAP FINANCIAL MEASURES, ” for further details on the comparable sales calculation. For the third quarter of Fiscal 2023, net sales increased 20%, as compared to the third quarter of Fiscal 2022, primarily due to an increase in units sold and AUR. The year-over-year increase in net sales reflects a positive comparable sales of 16%, as compared to the third quarter of Fiscal 2022, with growth in the Americas, EMEA and APAC segments. For the year-to-date period of Fiscal 2023, net sales increased 13%, as compared to the year-to-date period of Fiscal 2022, primarily due to an increase in AUR. The year-over-year increase in net sales reflects positive comparable sales of 11%, as compared to the year-to-date period of Fiscal 2022, with comparable sales growth in the Americas, EMEA and APAC segments. The Company’s net sales by brand for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022 were as follows: Thirteen Weeks Ended (in thousands, except ratios) October 28, 2023 October 29, 2022 $ Change % Change Comparable Sales (1) Abercrombie (2) $ 547,728 $ 422,332 $ 125,396 30 % 26 % Hollister (3) 508,703 457,752 50,951 11 7 Total $ 1,056,431 $ 880,084 $ 176,347 20 16 Thirty-Nine Weeks Ended (in thousands, except ratios) October 28, 2023 October 29, 2022 $ Change % Change Comparable Sales (1) Abercrombie (2) $ 1,446,483 $ 1,174,445 $ 272,038 23 % 21 % Hollister (3) 1,381,287 1,323,492 57,795 4 2 Total $ 2,827,770 $ 2,497,937 $ 329,833 13 11 (1) Comparable sales are calculated on a constant currency basis. Refer to “ NON-GAAP FINANCIAL MEASURES, ” for further details on the comparable sales calculation. (2) Includes Abercrombie & Fitch and abercrombie kids. (3) Includes Hollister, Gilly Hicks, and Social Tourist. Abercrombie & Fitch Co. 27 2023 3Q Form 10-Q Table of Contents Cost of sales, exclusive of depreciation and amortization Thirteen Weeks Ended October 28, 2023 October 29, 2022 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Cost of sales, exclusive of depreciation and amortization $ 370,762 35.1 % $ 359,268 40.8 % (570) Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 (in thousands, except ratios) % of Net Sales % of Net Sales BPS Change Cost of sales, exclusive of depreciation and amortization $ 1,047,927 37.1 % $ 1,061,684 42.5 % (540) For the third quarter of Fiscal 2023, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 570 basis points, as compared to the third quarter of Fiscal 2022. The year-over-year decrease was primarily driven by a benefit of 250 basis points from year-over-year AUR growth, approximately 200 basis points from lower freight costs, and approximately 200 basis points in lower levels of inventory write downs compared to last year, partially offset by 80 basis points from higher raw material costs. For the year-to-date period of Fiscal 2023, cost of sales, exclusive of depreciation and amortization, as a percentage of net sales decreased by approximately 540 basis points, as compared to the year-to-date period of Fiscal 2022. The year-over-year decrease was primarily attributable to a benefit from lower freight costs of approximately 420 basis points and approximately 360 basis points from year-over-year AUR growth. These benefits were partially offset by approximately 120 basis points from higher raw material costs. Gross profit, exclusive of depreciation and amortization Thirteen Weeks Ended October 28, 2023 October 29, 2022 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Gross profit, exclusive of depreciation and amortization $ 685,669 64.9 % $ 520,816 59.2 % 570 Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 (in thousands, except ratios) % of Net Sales % of Net Sales BPS Change Gross profit, exclusive of depreciation and amortization $ 1,779,843 62.9 % $ 1,436,253 57.5 % 540 Stores and distribution expense Thirteen Weeks Ended October 28, 2023 October 29, 2022 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Stores and distribution expense $ 383,883 36.3 % $ 367,333 41.7 % (540) Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 (in thousands, except ratios) % of Net Sales % of Net Sales BPS Change Stores and distribution expense $ 1,068,226 37.8 % $ 1,045,667 41.9 % (410) For the third quarter of Fiscal 2023, stores and distribution expense, as a percentage of net sales decreased, as compared to the third quarter of Fiscal 2022. The decrease was primarily driven by expense leverage as a result of net sales growth, slightly offset with increases in store occupancy and fulfillment costs as compared to the third quarter of 2022. For the year-to-date period of Fiscal 2023, stores and distribution expense, as a percentage of net sales decreased, as compared to the year-to-date period of Fiscal 2022. The decrease was primarily driven by expense leverage as a result of net sales growth, slightly offset by an increase in store occupancy expense compared to the year-to-date period of Fiscal 2022. Abercrombie & Fitch Co. 28 2023 3Q Form 10-Q Table of Contents Marketing, general and administrative expense Thirteen Weeks Ended October 28, 2023 October 29, 2022 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Marketing, general and administrative expense $ 162,510 15.4 % $ 133,201 15.1 % 30 Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 (in thousands, except ratios) % of Net Sales % of Net Sales BPS Change Marketing, general and administrative expense $ 449,643 15.9 % $ 379,518 15.2 % 70 For the third quarter of Fiscal 2023, marketing, general and administrative expense, as a percentage of net sales, increased 30 basis points, as compared to the third quarter of Fiscal 2022, primarily driven by an increase in marketing and technology expenses and incentive-based compensation. For the year-to-date period of Fiscal 2023, marketing, general and administration expense, as a percentage of net sales, increased 70 basis points as compared to the year-to-date period of Fiscal 2022, primarily due to an increase in technology expenses and incentive-based compensation. Asset impairment Thirteen Weeks Ended October 28, 2023 October 29, 2022 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Asset impairment $ — —% $ 3,744 0.4% (40) Excluded items: Asset impairment charges (1) — — (3,744) (0.4) 40 Adjusted non-GAAP asset impairment (1) $ — — $ — — — Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 (in thousands, except ratios) % of Net Sales % of Net Sales BPS Change Asset impairment $ 4,436 0.2% $ 9,336 0.4% (20) Excluded items: Asset impairment charges (1) (4,436) (0.2) (9,336) (0.4) 20 Adjusted non-GAAP asset impairment (1) $ — — $ — — — (1) Refer to “ NON-GAAP FINANCIAL MEASURES ” for further details. Refer to Note 8, “ ASSET IMPAIRMENT .” Other operating (loss) income, net Thirteen Weeks Ended October 28, 2023 October 29, 2022 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Other operating (loss) income, net $ (1,256) (0.1) % $ 1,005 0.1 % (20) Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 (in thousands, except ratios) % of Net Sales % of Net Sales BPS Change Other operating income, net $ 4,332 0.2 % $ 3,894 0.2 % — Abercrombie & Fitch Co. 29 2023 3Q Form 10-Q Table of Contents Operating income Thirteen Weeks Ended October 28, 2023 October 29, 2022 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Operating income $ 138,020 13.1 % $ 17,543 2.0 % 1,110 Excluded items: Asset impairment charges (1) — — 3,744 0.4 (40) Adjusted non-GAAP operating income ⁽¹⁾ $ 138,020 13.1 $ 21,287 2.4 1,070 Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 (in thousands, except ratios) % of Net Sales % of Net Sales BPS Change Operating income $ 261,870 9.3 % $ 5,626 0.2 % 910 Excluded items: Asset impairment charges (1) 4,436 0.2 9,336 0.4 (20) Adjusted non-GAAP operating income $ 266,306 9.4 $ 14,962 0.6 880 (1) Refer to “ NON-GAAP FINANCIAL MEASURES ” for further details. Interest expense, net Thirteen Weeks Ended October 28, 2023 October 29, 2022 (in thousands, except ratios) % of Net sales % of Net sales BPS Change Interest expense $ 8,568 0.8 % $ 7,586 0.9 % (10) Interest income (7,897) (0.7) (291) (0.1) (60) Interest expense, net $ 671 0.1 $ 7,295 0.8 (70) Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 (in thousands, except ratios) % of Net Sales % of Net Sales BPS Change Interest expense $ 23,661 0.8 % $ 23,055 0.9 % (10) Interest income (18,450) (0.6) (1,536) 0.0 (60) Interest expense, net $ 5,211 0.2 $ 21,519 0.9 (70) For the third quarter of Fiscal 2023, interest expense, net decreased $6.6 million, as compared to the third quarter of Fiscal 2022, as a result of lower borrowings in the current quarter due to the purchase of Senior Secured Notes as well as higher interest income due to the increase in balance and rates received on deposits and money market accounts. For the year-to-date period of Fiscal 2023, interest expense, net decreased $16.3 million, as compared to the year-to-date period of Fiscal 2022, as a result of lower borrowings in the current quarter due to the purchase of Senior Secured Notes as well as higher interest income due to the increase in balance and rates received on deposits and money market accounts. Abercrombie & Fitch Co. 30 2023 3Q Form 10-Q Table of Contents Income tax expense Thirteen Weeks Ended October 28, 2023 October 29, 2022 (in thousands, except ratios) Effective Tax Rate Effective Tax Rate Income tax expense $ 39,617 28.8 % $ 10,966 107.0 % Excluded items: Tax effect of pre-tax excluded items (1) — 976 Adjusted non-GAAP income tax expense ⁽¹⁾ $ 39,617 28.8 $ 11,942 85.3 Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 (in thousands, except ratios) Effective Tax Rate Effective Tax Rate Income tax expense $ 82,349 32.1 % $ 14,413 (90.7) % Excluded items: Tax effect of pre-tax excluded items (1) 1,207 2,505 Adjusted non-GAAP income tax expense $ 83,556 32.0 $ 16,918 (258.0) (1) The tax effect of pre-tax excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. Refer to “ Operating income ” and “ NON-GAAP FINANCIAL MEASURES ” for details of pre-tax excluded items. Compared with Fiscal 2022, the change in the effective tax rates during the third quarter and year-to-date period of Fiscal 2023 is due to higher levels of income offsetting tax losses incurred outside of the U.S., for which no benefit is recognized. Refer to Note 9, “ INCOME TAXES .” Net income (loss) attributable to A&F Thirteen Weeks Ended October 28, 2023 October 29, 2022 (in thousands) % of Net sales % of Net sales BPS Change Net income (loss) attributable to A&F $ 96,211 9.1 % $ (2,214) (0.3) % 940 Excluded items, net of tax (1) — — 2,768 0.4 (40) Adjusted non-GAAP net income attributable to A&F (2) $ 96,211 9.1 $ 554 0.1 900 Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 (in thousands) % of Net Sales % of Net Sales BPS Change Net income (loss) attributable to A&F. $ 169,676 6.0 % $ (35,517) (1.4) % 740 Excluded items, net of tax (1) 3,229 0.1 6,831 0.3 (20) Adjusted non-GAAP net income (loss) attributable to A&F (2) $ 172,905 6.1 $ (28,686) (1.1) 720 (1) Excluded items presented above under “ Operating income ,” and “ Income tax expense ” (2) Refer to “ NON-GAAP FINANCIAL MEASURES ” for further details. Abercrombie & Fitch Co. 31 2023 3Q Form 10-Q Table of Contents Net income (loss) per share attributable to A&F Thirteen Weeks Ended October 28, 2023 October 29, 2022 $ Change Net income (loss) per diluted share attributable to A&F $ 1.83 $ (0.04) $ 1.87 Excluded items, net of tax (1) — 0.05 (0.05) Adjusted non-GAAP net income per diluted share attributable to A&F 1.83 0.01 1.82 Impact from changes in foreign currency exchange rates — (0.06) 0.06 Adjusted non-GAAP net income per diluted share attributable to A&F on a constant currency basis (2) 1.83 (0.05) 1.88 Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 $ Change Net income (loss) per diluted share attributable to A&F $ 3.25 $ (0.70) $ 3.95 Excluded items, net of tax (1) 0.06 0.13 (0.07) Adjusted non-GAAP net income (loss) per diluted share attributable to A&F 3.32 (0.57) 3.89 Impact from changes in foreign currency exchange rates — (0.20) 0.20 Adjusted non-GAAP net income (loss) per diluted share attributable to A&F on a constant currency basis (2) 3.32 (0.77) 4.09 (1) Excluded items presented above under “ Operating income ,” and “ Income tax expense . ” (2) Refer to “ NON-GAAP FINANCIAL MEASURES ” for further details. Abercrombie & Fitch Co. 32 2023 3Q Form 10-Q Table of Contents LIQUIDITY AND CAPITAL RESOURCES Overview The Company’s capital allocation strategy and priorities are reviewed by A&F’s Board of Directors quarterly considering both liquidity and valuation factors. The Company believes that it will have adequate liquidity to fund operating activities for the next 12 months. The Company monitors financing market conditions and may in the future determine whether and when to amend, modify, repurchase, or restructure its ABL Facility and/or the Senior Secured Notes or repurchase shares of its Common Stock. For a discussion of the Company’s share repurchase activity and suspended dividend program, please see below under “ Share repurchases and dividends .” Primary sources and uses of cash The Company’s business has two principal selling seaso the spring season, which includes the first and second fiscal quarters (“Spring”) and the fall season, which includes the third and fourth fiscal quarters (“Fall”). The Company generally experiences its greatest sales activity during the Fall season, due to the back-to-school and holiday sales periods. The Company relies on excess operating cash flows, which are largely generated in Fall, to fund operations throughout the year and to reinvest in the business to support future growth. The Company also has the ABL Facility available as a source of additional funding, which is described further below under “ Credit facility and Senior Secured Notes ”. Over the next twelve months, the Company expects its primary cash requirements to be directed towards prioritizing investments in the business and continuing to fund operating activities, including the acquisition of inventory, and obligations related to compensation, marketing, leases and any lease buyouts or modifications it may exercise, taxes and other operating activities. The Company evaluates opportunities for investments in the business that are in line with initiatives that position the business for sustainable long-term growth that align with its strategic pillars as described within Part I, “Item 1. Business - STRATEGY AND KEY BUSINESS PRIORITIES” included on the Fiscal 2022 Form 10-K, including being opportunistic regarding growth opportunities. Examples of potential investment opportunities include, but are not limited to, new store experiences, and investments in the Company’s digital and omnichannel initiatives. Historically, the Company has utilized free cash flow generated from operations to fund any discretionary capital expenditures, which have been prioritized towards new store experiences, as well as digital and omnichannel investments, information technology, and other projects. For the year-to-date period ended October 28, 2023, the Company used $128.6 million towards capital expenditures. Total capital expenditures for Fiscal 2023 are expected to be approximately $160 million. The Company measures liquidity using total cash and cash equivalents and incremental borrowing available under the ABL Facility. As of October 28, 2023, the Company had cash and cash equivalents of $649.5 million and total liquidity of approximately $1.0 billion, compared with cash and cash equivalents of $517.6 million and total liquidity of approximately $865.7 million at the beginning of Fiscal 2023. This allows the Company to evaluate potential opportunities to strategically deploy excess cash and/or deleverage the balance sheet, depending on various factors, such as market and business conditions, including the Company’s ability to accelerate investments in the business. Such opportunities include, but are not limited to, returning cash to shareholders through purchasing outstanding Senior Secured Notes or share repurchases. Share repurchases and dividends In November 2021, A&F’s Board of Directors approved a $500 million share repurchase authorization, replacing the prior 2021 share repurchase authorization of 10.0 million shares, which had approximately 3.9 million shares remaining available. During the year-to-date period ended October 28, 2023, the Company did not repurchase any shares of its common stock pursuant to this share repurchase authorization. The Company has $232 million in share repurchase authorization remaining under the authorization approved in November 2021. Historically, the Company has repurchased shares of its Common Stock from time to time, dependent on excess liquidity, market conditions, and business conditions, with the objectives of returning excess cash to shareholders and offsetting dilution from issuances of Common Stock associated with the exercise of employee stock appreciation rights and the vesting of restricted stock units. Shares may be repurchased in the open market, including pursuant to trading plans established in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), through privately negotiated transactions or other transactions or by a combination of such methods. Refer to “ Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ” of Part II of this Quarterly Report on Form 10-Q for the amount remaining available for purchase under the Company’s publicly announced share repurchase authorization. In May 2020, the Company announced that it had suspended its dividend program in order to preserve liquidity and maintain financial flexibility in light of COVID-19. The Company may in the future review its dividend program to determine, in light of facts and circumstances at that time, whether and when to reinstate. Any dividends are declared at the discretion of A&F’s Board of Directors. A&F’s Board of Directors reviews and establishes a dividend amount, if at all, based on A&F’s financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors, including any restrictions under the Company’s agreements related to the Senior Secured Notes and the ABL Facility. There can be no Abercrombie & Fitch Co. 33 2023 3Q Form 10-Q Table of Contents assurance that the Company will declare and pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends. Credit facility and Senior Secured Notes As of October 28, 2023, the Company had $249.7 million of gross borrowings outstanding under the Senior Secured Notes. During the thirteen weeks ended October 28, 2023, A&F Management purchased $50.0 million of outstanding Senior Secured Notes in the open market and incurred a $1.3 million loss on extinguishment of debt, comprised of a premium of $0.9 million and the write-off of unamortized fees of $0.4 million, recognized in interest expense, net on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). In addition, the Amended and Restated Credit Agreement, as amended by the First Amendment (as defined below), provides for the ABL Facility, which is a senior secured asset-based revolving credit facility of up to $400 million. As of October 28, 2023, the Company did not have any borrowings outstanding under the ABL Facility. The ABL Facility matures on April 29, 2026. Details regarding the remaining borrowing capacity under the ABL Facility as of October 28, 2023 are as follows: (in thousands) October 28, 2023 Loan cap $ 400,000 L Outstanding stand-by letters of credit (422) Borrowing capacity 399,578 L Minimum excess availability (1) (40,000) Borrowing capacity available $ 359,578 (1) The Company must maintain excess availability equal to the greater of 10% of the loan cap or $30 million under the ABL Facility. Refer to Note 10, “ BORROWINGS .” Income taxes The Company’s earnings and profits from its foreign subsidiaries could be repatriated to the U.S. without incurring additional federal income tax. The Company determined that the balance of the Company’s undistributed earnings and profits from its foreign subsidiaries as of February 2, 2019 are considered indefinitely reinvested outside of the U.S., and if these funds were to be repatriated to the U.S., the Company would expect to incur an insignificant amount of state income taxes and foreign withholding taxes. The Company accrues for both state income taxes and foreign withholding taxes with respect to earnings and profits earned after February 2, 2019, in such a manner that these funds could be repatriated without incurring additional tax expense. As of October 28, 2023, $213.1 million of the Company’s $649.5 million of cash and equivalents were held by foreign affiliates. Refer to Note 9, “ INCOME TAXES .” Analysis of cash flows The table below provides certain components of the Company’s Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 28, 2023 and October 29, 2022: Thirty-Nine Weeks Ended October 28, 2023 October 29, 2022 (in thousands) Cash and equivalents, and restricted cash and equivalents, beginning of period $ 527,569 $ 834,368 Net cash provided by (used for) operating activities 350,142 (301,194) Net cash used for investing activities (127,986) (96,391) Net cash used for financing activities (87,106) (154,906) Effect of foreign currency exchange rates on cash (4,491) (14,871) Net increase (decrease) in cash and equivalents, and restricted cash and equivalents 130,559 (567,362) Cash and equivalents, and restricted cash and equivalents, end of period $ 658,128 $ 267,006 Operating activities - During the year-to-date period ended October 28, 2023, net cash provided by operating activities included increased cash receipts as a result of the 13% year-over-year increase in net sales as well as increased payments to vendors in the fourth quarter of Fiscal 2022 which resulted in lower cash payments in the first quarter of Fiscal 2023. Abercrombie & Fitch Co. 34 2023 3Q Form 10-Q Table of Contents Investing activities - During the year-to-date period ended October 28, 2023, net cash used for investing activities was primarily used for capital expenditures of $128.6 million. Net cash used for investing activities for the year-to-date period ended October 29, 2022 was primarily used for capital expenditures of $120.3 million, partially offset by the proceeds from the withdrawal of $12.0 million of excess funds by Rabbi Trust assets and the sale of property and equipment of $11.9 million. Financing activities - During the year-to-date period ended October 28, 2023, net cash used for financing activities included the purchase of $50.0 million of outstanding Senior Secured Notes at a premium of $0.9 million as well as amounts related to shares of Common Stock withheld (repurchased) to cover tax withholdings upon vesting of share-based compensation awards. During the year-to-date period ended October 29, 2022, net cash used for financing activities included the repurchase of approximately 4.8 million shares of Common Stock with a market value of approximately $125.8 million as well as amounts related to shares of Common Stock withheld (repurchased) to cover tax withholdings upon vesting of share-based compensation awards. Contractual obligations The Company’s contractual obligations consist primarily of operating leases, purchase orders for merchandise inventory, unrecognized tax benefits, certain retirement obligations, lease deposits, and other agreements to purchase goods and services that are legally binding and that require minimum quantities to be purchased. These contractual obligations impact the Company’s short-term and long-term liquidity and capital resource needs. There have been no material changes in the Company’s contractual obligations since January 28, 2023, with the exception of those obligations which occurred in the normal course of business (primarily changes in the Company’s merchandise inventory-related purchases and lease obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company’s operations). RECENT ACCOUNTING PRONOUNCEMENTS The Company describes its significant accounting policies in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES , ” of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” included on the Fiscal 2022 Form 10-K. The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those that did not have, or are not expected to have, a material impact on the Company’s consolidated financial statements. CRITICAL ACCOUNTING ESTIMATES The Company describes its critical accounting estimates in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included on the Fiscal 2022 Form 10-K. There have been no significant changes in critical accounting policies and estimates since the end of Fiscal 2022. NON-GAAP FINANCIAL MEASURES This Quarterly Report on Form 10-Q includes discussion of certain financial measures calculated and presented on both a GAAP and a non-GAAP basis. The Company believes that each of the non-GAAP financial measures presented in this “ Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations ” is useful to investors as it provides a meaningful basis to evaluate the Company’s operating performance excluding the effect of certain items that the Company believes may not reflect its future operating outlook, such as certain asset impairment charges, thereby supplementing investors’ understanding of comparability of operations across periods. Management used these non-GAAP financial measures during the periods presented to assess the Company’s performance and to develop expectations for future operating performance. These non-GAAP financial measures should be used as a supplement to, and not as an alternative to, the Company’s GAAP financial results, and may not be calculated in the same manner as similar measures presented by other companies. Comparable sales The Company provides comparable sales, defined as the year-over-year percentage change in the aggregate of (1) net sales for stores that have been open as the same brand at least one year and square footage has not been expanded or reduced by more than 20% within the past year, with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations, and (2) digital net sales with the prior year’s net sales converted at the current year’s foreign currency exchange rates to remove the impact of foreign currency exchange rate fluctuations. Comparable sales excludes revenue other than store and digital sales. Management uses comparable sales to understand the drivers of year-over-year changes in net sales and believes comparable sales is a useful metric as it can assist investors in distinguishing the portion of the Company’s revenue attributable to existing locations from the portion attributable to the opening or closing of stores. The most directly comparable GAAP financial measure is change in net sales. In light of store closures related to COVID-19, comparable sales for periods prior to Fiscal 2023 included in the Company’s Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q are not disclosed. Abercrombie & Fitch Co. 35 2023 3Q Form 10-Q Table of Contents Excluded items The following financial measures are disclosed on a GAAP and on an adjusted non-GAAP basis excluding the following items, as applicab Financial measures (1) Excluded items Operating income Asset impairment charges Income tax expense (2) Tax effect of pre-tax excluded items Net income (loss) and net income (loss) per share attributable to A&F (2) Pre-tax excluded items and the tax effect of pre-tax excluded items (1) Certain of these financial measures are also expressed as a percentage of net sales. (2) The tax effect of excluded items is the difference between the tax provision calculation on a GAAP basis and on an adjusted non-GAAP basis. Financial information on a constant currency basis The Company provides certain financial information on a constant currency basis to enhance investors’ understanding of underlying business trends and operating performance by removing the impact of foreign currency exchange rate fluctuations. Management also uses financial information on a constant currency basis to award employee performance-based compensation. The effect from foreign currency exchange rates, calculated on a constant currency basis, is determined by applying the current period’s foreign currency exchange rates to the prior year’s results and is net of the year-over-year impact from hedging. The per diluted share effect from foreign currency exchange rates is calculated using a 26% effective tax rate. Reconciliations of non-GAAP financial metrics on a constant currency basis to financial measures calculated and presented in accordance with GAAP for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022 were as follows: (in thousands, except change in net sales, gross profit rate, operating margin and per share data) Thirteen Weeks Ended Thirty-Nine Weeks Ended Net sales October 28, 2023 October 29, 2022 % Change October 28, 2023 October 29, 2022 % Change GAAP $ 1,056,431 $ 880,084 20 % $ 2,827,770 $ 2,497,937 13 % Impact from changes in foreign currency exchange rates — 6,937 (1) — 1,213 — Non-GAAP on a constant currency basis $ 1,056,431 $ 887,021 19 $ 2,827,770 $ 2,499,150 13 Gross profit, exclusive of depreciation and amortization expense October 28, 2023 October 29, 2022 BPS Change (1) October 28, 2023 October 29, 2022 BPS Change (1) GAAP $ 685,669 $ 520,816 570 $ 1,779,843 $ 1,436,253 540 Impact from changes in foreign currency exchange rates — 2,906 20 — (12,671) 50 Non-GAAP on a constant currency basis $ 685,669 $ 523,722 590 $ 1,779,843 $ 1,423,582 590 Operating income October 28, 2023 October 29, 2022 BPS Change (1) October 28, 2023 October 29, 2022 BPS Change (1) GAAP $ 138,020 $ 17,543 1,110 $ 261,870 $ 5,626 910 Excluded items (2) — (3,744) 40 (4,436) (9,336) 30 Adjusted non-GAAP $ 138,020 $ 21,287 1,070 $ 266,306 $ 14,962 880 Impact from changes in foreign currency exchange rates — (4,230) 50 — (13,841) 60 Adjusted non-GAAP on a constant currency basis $ 138,020 $ 17,057 1,120 $ 266,306 $ 1,121 940 Net income (loss) per share attributable to A&F October 28, 2023 October 29, 2022 $ Change October 28, 2023 October 29, 2022 $ Change GAAP $ 1.83 $ (0.04) $ 1.87 $ 3.25 $ (0.70) $ 3.95 Excluded items, net of tax (2) — (0.05) 0.05 (0.06) (0.13) 0.07 Adjusted non-GAAP $ 1.83 $ 0.01 $ 1.82 $ 3.32 $ (0.57) $ 3.89 Impact from changes in foreign currency exchange rates — (0.06) 0.06 — (0.20) 0.20 Adjusted non-GAAP on a constant currency basis $ 1.83 $ (0.05) $ 1.88 $ 3.32 $ (0.77) $ 4.09 (1) The estimated basis point change has been rounded based on the change in the percentage of net sales. (2) Excluded items for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022 consisted of pre-tax store asset impairment charges, and pre-tax store asset and other asset impairment charges, respectively and the tax effect of pre-tax excluded items. Abercrombie & Fitch Co. 36 2023 3Q Form 10-Q Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk INVESTMENT SECURITIES The Company maintains its cash equivalents in financial instruments, primarily time deposits and money market funds, with original maturities of three months or less. Due to the short-term nature of these instruments, changes in interest rates are not expected to materially affect the fair value of these financial instruments. The Rabbi Trust includes amounts to meet funding obligations to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II, and the Supplemental Executive Retirement Plan. The Rabbi Trust assets primarily consist of trust-owned life insurance policies, which are recorded at cash surrender value. The change in cash surrender value resulted in realized gains of $0.3 million for each of the thirteen weeks ended October 28, 2023 and October 29, 2022, respectively. For the thirty-nine weeks ended October 28, 2023 and October 29, 2022, the change in cash surrender value and benefits paid pursuant to the trust-owned life insurance policies held in the Rabbi Trust resulted in realized gains of $1.6 million and $1.1 million respectively. The realized gains were recorded in interest expense, net on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The Rabbi Trust assets were included in other assets on the Condensed Consolidated Balance Sheets as of October 28, 2023 and January 28, 2023 and are restricted in their use as noted above. INTEREST RATE RISK Prior to July 2, 2020, the Company’s exposure to market risk due to changes in interest rates related primarily to the increase or decrease in the amount of interest expense from fluctuations in the LIBO rate, or an alternate base rate associated with the Company’s former term loan facility (the “Term Loan Facility”) and the ABL Facility. On July 2, 2020, the Company issued the Senior Secured Notes and repaid all outstanding borrowings under the Term Loan Facility and the ABL Facility, thereby eliminating any then-existing cash flow market risk due to changes in interest rates. The Senior Secured Notes are exposed to interest rate risk that is limited to changes in fair value. This analysis for Fiscal 2023 may differ from the actual results due to potential changes in gross borrowings outstanding under the ABL Facility and potential changes in interest rate terms and limitations described within the Amended and Restated Credit Agreement. In July 2017, the Financial Conduct Authority (the authority that regulates LIBO rate) announced it intended to stop compelling banks to submit rates for the calculation of LIBO rate after 2021. Certain publications of the LIBO rate were phased out at the end of 2021 and all LIBO rate publications ceased after June 30, 2023. On March 15, 2023, the Company entered into the First Amendment to the Amended and Restated Credit Agreement (the “First Amendment”) to eliminate LIBO rate based loans and to use the current market definitions with respect to the Secured Overnight Financing Rate, as well as to make other conforming changes. FOREIGN CURRENCY EXCHANGE RATE RISK A&F’s international subsidiaries generally operate with functional currencies other than the U.S. Dollar. Since the Company’s Condensed Consolidated Financial Statements are presented in U.S. Dollars, the Company must translate all components of these financial statements from functional currencies into U.S. Dollars at exchange rates in effect during or at the end of the reporting period. The fluctuation in the value of the U.S. Dollar against other currencies affects the reported amounts of revenues, expenses, assets, and liabilities. The potential impact of foreign currency exchange rate fluctuations increases as international operations relative to domestic operations increase. A&F and its subsidiaries have exposure to changes in foreign currency exchange rates associated with foreign currency transactions and forecasted foreign currency transactions, including the purchase of inventory between subsidiaries and foreign-currency-denominated assets and liabilities. The Company has established a program that primarily utilizes foreign currency exchange forward contracts to partially offset the risks associated with the effects of certain foreign currency transactions and forecasted transactions. Under this program, increases or decreases in foreign currency exchange rate exposures are partially offset by gains or losses on foreign currency exchange forward contracts, to mitigate the impact of foreign currency exchange gains or losses. The Company does not use forward contracts to engage in currency speculation. Outstanding foreign currency exchange forward contracts are recorded at fair value at the end of each fiscal period. Abercrombie & Fitch Co. 37 2023 3Q Form 10-Q Table of Contents Foreign currency exchange forward contracts are sensitive to changes in foreign currency exchange rates. As of October 28, 2023, the Company assessed the risk of loss in fair values from the effect of a hypothetical 10% devaluation of the U.S. Dollar against the exchange rates for foreign currencies under contract. Such a hypothetical devaluation would decrease derivative contract fair values by approximately $10.2 million. As the Company’s foreign currency exchange forward contracts are primarily designated as cash flow hedges of forecasted transactions, the hypothetical change in fair values would be expected to be largely offset by the net change in fair values of the underlying hedged items. Refer to Note 12, “ DERIVATIVE INSTRUMENTS ,” for the fair value of any outstanding foreign currency exchange forward contracts included in other current assets and accrued expenses as of October 28, 2023 and January 28, 2023. Abercrombie & Fitch Co. 38 2023 3Q Form 10-Q Table of Contents Item 4. Controls and Procedures DISCLOSURE CONTROLS AND PROCEDURES A&F maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports that A&F files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to A&F’s management, including A&F’s Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met. A&F’s management, including the Chief Executive Officer of A&F (who serves as Principal Executive Officer of A&F) and the Executive Vice President, Chief Financial Officer and Chief Operating Officer of A&F (who serves as Principal Financial Officer and Principal Accounting Officer of A&F), evaluated the effectiveness of A&F’s design and operation of its disclosure controls and procedures as of the end of the fiscal quarter ended October 28, 2023. The Chief Executive Officer of A&F (in such individual’s capacity as the Principal Executive Officer of A&F) and the Executive Vice President, Chief Financial Officer and Chief Operating Officer of A&F (in such individual’s capacity as the Principal Financial Officer of A&F) concluded that A&F’s disclosure controls and procedures were effective at a reasonable level of assurance as of October 28, 2023. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in A&F’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended October 28, 2023 that materially affected, or are reasonably likely to materially affect, A&F’s internal control over financial reporting. Abercrombie & Fitch Co. 39 2023 3Q Form 10-Q Table of Contents PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company and its affiliates are defendants in lawsuits and other adversary proceedings that may range from individual actions involving a single plaintiff to class action lawsuits. The Company’s legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes estimated liabilities for the outcome of litigation where losses are deemed probable and the amount of loss, or range of loss, is reasonably estimable. The Company also determines estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when it has determined that a loss is reasonably possible, and it is able to determine such estimates. The Company’s accrued charges for certain legal contingencies are classified within accrued expenses on the Condensed Consolidated Balance Sheets included in “ Item 1. Financial Statements (Unaudited) ,” of Part I of this Quarterly Report on Form 10-Q. Based on currently available information, the Company cannot estimate a range of reasonably possible losses in excess of the accrued charges for legal contingencies. In addition, the Company has not established accruals for certain claims and legal proceedings pending against the Company where it is not possible to reasonably estimate the outcome or potential liability, and the Company cannot estimate a range of reasonably possible losses for these legal matters. Actual liabilities may differ from the amounts recorded, due to uncertainties regarding final settlement agreement negotiations and the terms of any approval by the courts, and there can be no assurance that the final resolution of legal matters will not have a material adverse effect on the Company’s financial condition, results of operations, or cash flows. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts. In addition, pursuant to Item 103(c)(3)(iii) of Regulation S-K under the Exchange Act, the Company is required to disclose certain information about environmental proceedings to which a governmental authority is a party if the Company reasonably believes such proceedings may result in monetary sanctions, exclusive of interest and costs, above a stated threshold. The Company has elected to apply a threshold of $1 million for purposes of determining whether disclosure of any such proceedings is required. Item 1A. Risk Factors The Company’s risk factors as of October 28, 2023 have not changed materially from those disclosed in Part I, “Item 1A. Risk Factors” of the Fiscal 2022 Form 10-K. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no sales of equity securities during the third quarter of Fiscal 2023 that were not registered under the Securities Act of 1933, as amended. The following table provides information regarding the purchase of shares of Common Stock made by or on behalf of A&F or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Exchange Act during each fiscal month of the thirteen weeks ended October 28, 2023: Period (fiscal month) Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)(3) July 30, 2023 through August 26, 2023 6,240 $ 43.13 — $ 232,184,768 August 27, 2023 through September 30, 2023 167,153 49.58 — 232,184,768 October 1, 2023 through October 28, 2023 986 62.93 — 232,184,768 Total 174,379 49.43 — 232,184,768 (1) An aggregate of 174,379 shares of Common Stock purchased during the thirteen weeks ended October 28, 2023 were withheld for tax payments due upon the vesting of employee restricted stock units and the exercise of employee stock appreciation rights. (2) On November 23, 2021, the Company announced that A&F’s Board of Directors approved a new $500 million share repurchase authorization, replacing the prior 2021 share repurchase authorization of 10.0 million shares, which had approximately 3.9 million shares remaining available for repurchase. (3) The number shown represents, as of the end of each period, the approximate dollar value of Common Stock that may yet be purchased under A&F’s publicly announced share repurchase authorization described in footnote 2 above. The shares may be purchased, from time to time depending on business and market conditions. Abercrombie & Fitch Co. 40 2023 3Q Form 10-Q Table of Contents Item 5. Other Information Rule 10b5-1 Trading Plans During the thirteen weeks ended October 28, 2023, no director or officer of the Company adopted a new “Rule 10b5-1 trading arrangement ” or “non-Rule 10b5-1 trading arrangement,” and no director or officer of the Company modified or terminated an existing “Rule 10b5-1 trading arrangement ” or “non-Rule 10b5-1 trading arrangemen t,” as each term is defined in Item 408(a) of Regulation S-K under the Exchange Act, other than as follows: • On August 24, 2023 , Scott D. Lipesky , our Executive Vice President, Chief Financial Officer and Chief Operating Officer , adopted a trading plan intended to satisfy the conditions under Rule 10b5-1(c) of the Exchange Act. Mr. Lipesky's plan is for the sale of up to 50,000 shares of our common stock in amounts and prices determined in accordance with plan terms and terminates on the earlier of the date all the shares under the plan are sold or March 08, 2024 . • On August 25, 2023 , Kristin Scott , our President, Global Brands and Managing Director, Americas , adopted a trading plan intended to satisfy the conditions under Rule 10b5-1(c) of the Exchange Act. Ms. Scott's plan is for the sale of up to 80,000 shares of our common stock in amounts and prices determined in accordance with plan terms and terminates on the earlier of the date all the shares under the plan are sold or May 29, 2024 . Item 6. Exhibits Exhibit Document 3.1 Amended and Restated Certificate of Incorporation of Abercrombie & Fitch Co., reflecting amendments through the date of this Quarterly Report on Form 10-Q, incorporated herein by reference to Exhibit 3.2 to A&F’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2011 (File No. 001-12107). [This document represents the Amended and Restated Certificate of Incorporation of Abercrombie & Fitch Co. in compiled form incorporating all amendments. This compiled document has not been filed with the Delaware Secretary of State.] 3.2 Amended and Restated Bylaws of Abercrombie & Fitch Co. reflecting amendments through the date of this Quarterly Report on Form 10-Q, incorporated herein by reference to Exhibit 3.1 to A&F’s Current Report on Form 8-K dated and filed November 22, 2022 (File No. 001-12107) [This document represents the Amended and Restated Bylaws of Abercrombie & Fitch Co. in compiled form incorporating all amendments.] 10.1 First A mend ment to the Amended and Restated Abercrombie & Fitch Co Short - T erm C ash I ncentive Compensation Performance Plan , dated as of August 16, 2023 * 10.2 First A mendment to the Abercrombie & Fitch Co . Long- T erm Cash Incentive Compensation Performance Plan , dated as of August 16, 2023 * 31.1 Certifications by Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 31.2 Certifications by Executive Vice President, Chief Financial Officer and Chief Operating Officer (Principal Financial Officer) pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 32.1 Certifications by Chief Executive Officer (who serves as Principal Executive Officer) and Executive Vice President, Chief Financial Officer and Chief Operating Officer (who serves as Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** 101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its Inline XBRL tags are embedded within the Inline XBRL document.* 101.SCH Inline XBRL Taxonomy Extension Schema Document.* 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.* 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.* 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.* 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.* 104 Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).* *     Filed herewith. **    Furnished herewith. Abercrombie & Fitch Co. 41 2023 3Q Form 10-Q Table of Contents Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Abercrombie & Fitch Co. Date: December 4, 2023 By: /s/ Scott D. Lipesky Scott D. Lipesky Executive Vice President, Chief Financial Officer and Chief Operating Officer (Principal Financial Officer, Principal Accounting Officer and Authorized Officer) Abercrombie & Fitch Co. 42 2023 3Q Form 10-Q

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STATES SECURITIES AND EXCHANGE COMMISSION Washington,

D.C. 20549 Form 10-K ☒ ANNUAL REPORT PURSUANT

TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For

the fiscal year ended December 31, 2021 or ☐ TRANSITION REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _______________ to _______________ Commission File Numbe 001-34441 Aberdeen Standard Gold ETF Trust (Exact name of registrant as specified in

its charter) New York 26-4587209 (State or other jurisdiction

of incorporation or organization) (I.R.S. Employer Identification No.) c/o

Aberdeen Standard Investments ETFs Sponsor LLC 712

Fifth Avenue , 49 th Floor New York , NY (Address of principal executive

offices) 10019 (Zip Code) ( 844 ) 383-7289 (Registrant’s telephone number,

including area code) Securities registered pursuant to Section 12(b) of the Ac Title of each class Trading Symbol(s) Name of each exchange on which registered Aberdeen Standard Physical Gold Shares ETF SGOL NYSE Arca Indicate

by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ Indicate

by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒ Indicate

by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities

Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),

and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate

by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant

to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the

registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated

filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the

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

and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer ☒ Accelerated Filer ☐ Non-Accelerated Filer ☐ Smaller Reporting Company ☐ Emerging Growth Company ☐ If an emerging growth company, indicate

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

accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate

by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No Aggregate market value of the registrant’s shares outstanding

held by non-affiliates of the registrant based upon the closing price of a share on June 30, 2021 as reported by the NYSE Arca,

Inc. on that date: $ 2,359,911,000 . As of February 24,

2022, Aberdeen Standard Gold ETF Trust had 143,900,000 Aberdeen Standard Physical Gold Shares ETF outstanding. DOCUMENTS INCORPORATED BY REFERENCE: None FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K contains various “forward-looking

statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities

Exchange Act of 1934, as amended, and within the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking

statements usually include the words, “anticipates,” “believes,” “estimates,” “expects,”

“intends,” “plans,” “projects,” “understands” and other words suggesting uncertainty.

We remind readers that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and

other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our

achievements, or industry results, to be materially different from any future results, performance, levels of activity, or our

achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these

forward-looking statements, which speak only as of the date hereof. The Trust undertakes no obligation to publicly release any

revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence

of unanticipated events. Additional significant uncertainties and other factors affecting

forward-looking statements are presented in the Risk Factors section herein. TABLE OF CONTENTS PART I 2 Item 1. Business 2 Trust Objective 2 Overview of the Gold Industry 3 Operation of the Gold Bullion Market 5 Secondary Market Trading 9 Valuation of Gold and Computation of Net Asset Value 9 Trust Expenses 10 Creation and Redemption of Shares 11 Creation and Redemption Transaction Fee 15 The Sponsor 16 The Trustee 16 The Custodian 17 Inspection of Gold 18 Description of the Shares 18 Custody of the Trust’s Gold 19 United States Federal Income Tax Consequences 20 ERISA and Related Considerations 23 Item 1A. Risk Factors 24 Item 1B. Unresolved Staff Comments 33 Item 2. Properties 33 Item 3. Legal Proceedings 33 Item 4. Mine Safety Disclosure 34 PART II 35 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 35 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 37 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 41 Item 8. Financial Statements and Supplementary Data 42 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 43 Item 9A. Controls and Procedures 43 Item 9B. Other Information 46 PART III 47 Item 10. Directors, Executive Officers and Corporate Governance 47 Item 11. Executive Compensation 47 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 47 Item 13. Certain Relationships and Related Transactions, and Director Independence 48 Item 14. Principal Accounting Fees and Services 49 PART IV 50 Item 15. Exhibits, Financial Statement Schedule 50 Item 16. Form 10K Summary 51 1 PART I Item 1. Business The purpose of the Aberdeen Standard Gold ETF Trust (the “Trust”) is to own gold transferred to the Trust in exchange for

shares issued by the Trust (“Shares”). Each Share represents a fractional undivided beneficial interest in and ownership

of the Trust. The assets of the Trust consist solely of gold bullion. The Trust was formed on September 1, 2009

when an initial deposit of gold was made in exchange for the issuance of two Baskets (a “Basket” consists of 100,000

Shares). The sponsor of the Trust is Aberdeen Standard Investments

ETFs Sponsor LLC (the “Sponsor”). The trustee of the Trust is The Bank of New York Mellon (the

“Trustee”) and the custodian is JPMorgan Chase Bank N.A., London Branch (the “Custodian”). The Trust’s Shares at redeemable value decreased from

$2,652,511,503 at December 31, 2020 to $2,391,232,291 at December 31, 2021, the Trust’s fiscal year end. Outstanding Shares

in the Trust decreased from 146,200,000 Shares at December 31, 2020 to 138,000,000 Shares at December 31, 2021. The Trust is not managed like a corporation or an active investment

vehicle. The Trust has no directors, officers or employees. It does not engage in any activities designed to obtain a profit from

or to improve the losses caused by changes in the price of gold. The gold held by the Trust will only be delivered to

pay the remuneration due to the Sponsor (the “Sponsor’s Fee”), distributed to Authorized Participants (defined

below) in connection with the redemption of Baskets or sold (1) on an as-needed basis to pay Trust expenses not assumed by the

Sponsor, (2) in the event the Trust terminates and liquidates its assets, or (3) as otherwise required by law or regulation. The Trust is not registered as an investment company under the

Investment Company Act of 1940 and is not required to register under such act. The Trust does not and will not hold or trade in

commodities futures contracts, “commodity interests” or any other instruments regulated by the Commodity Exchange Act

(the “CEA”), as administered by the Commodity Futures Trading Commission (the “CFTC”) and the National

Futures Association (“NFA”). The Trust is not a commodity pool for purposes of the CEA and the Shares are not “commodity

interests,” and neither the Sponsor nor the Trustee is subject to regulation as a commodity pool operator or a commodity