These financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position of the Company at September 30, 2021 and December 31, 2020, and the results of operations, cash flows and changes in equity for the three and nine months ended September 30, 2021 and 2020 have been included. The results of operations and cash flows for the three and nine months ended September 30, 2021 are not necessarily indicative of the results of operations and cash flows that may be reported for the remainder of 2021 or any other future periods. These unaudited condensed consolidated financial statements should be read in conjunction with the

The Company was deemed the accounting acquirer in the Business Combination of Jaws based on an analysis of the criteria outlined in Accounting Standards Codification ("ASC") Topic 805, "Business Combinations" ("ASC 805"), as the Company’s former owner retained control after the Business Combination. Refer to Note 1, "Nature of Business", for details surrounding the Business Combination. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of the Company issuing stock for the net assets of Jaws, accompanied by a recapitalization. The net assets of Jaws were stated at historical cost, with no goodwill or other intangible assets recorded.

While Jaws was the legal acquirer in the Business Combination, because the Company was deemed the accounting acquirer, the historical financial statements of PCIH became the historical financial statements of the combined company upon the consummation of the Business Combination. As a result, the condensed consolidated financial statements reflect the historical operating results of PCIH prior to the Business Combination, the combined results of Jaws and the Company following the close of the Business Combination, the assets and liabilities of the Company at their historical cost, and the Company’s equity structure for all periods presented.

Pursuant to the Primary Care (ITC) Intermediate Holdings, LLC Second Amended and Restated Limited Liability Company Agreement, dated June 3, 2021, PCIH is required to issue limited liability company units to Cano Health, Inc. if Cano Health, Inc. issues any equity securities, on substantially the same terms, such that the capitalization structure of PCIH shall mirror the capitalization structure of Cano Health, Inc. During the quarters ended June 30, 2021 and September 30, 2021, Cano Health, Inc. issued in the aggregate 4,178,147 shares of Class A common stock in connection with certain acquisitions. Accordingly, in November 2021, PCIH issued 4,178,147 limited liability company units to Cano Health, Inc. The issuance of these Units resulted in a $39.6 million increase in the Company's non-controlling interests and a corresponding decrease in additional paid in capital with no effect on total stockholder's equity. The Company has reflected the November 2021 PCIH unit issuance related to the quarter ended June 30, 2021 totaling $38.6 million during the third quarter of 2021 as the amount was not material and did not impact total stockholders' equity / members’ capital.

The Company assumed 23.0 million public warrants ("Public Warrants") and 10.53 million private placement warrants ("Private Placement Warrants") upon the consummation of the Business Combination. The Company may issue or assume common stock warrants that are recorded as either liabilities or equity in accordance with the respective accounting guidance. Warrants recorded as equity are recorded at their relative fair value or fair value determined at the issuance date and remeasurement is not required. Warrants recorded as liabilities are recorded at their fair value, within warrant liability on the condensed consolidated balance sheets, and remeasured on each reporting date with changes recorded in revaluation of warrant liability on the Company’s condensed consolidated statements of operations.

The Public Warrants became exercisable 30 days after the consummation of the Business Combination, which occurred on June 3, 2021. The Public Warrants will expire five years after the consummation of the Business Combination, or earlier upon redemption or liquidation. The Private Placement Warrants are identical to the Public Warrants, except that so long as the Private Placement Warrants are held by the Sponsor or any of its permitted transferees, the Private Placement Warrants: (i) may be exercised for cash or on a “cashless basis”, (ii) may not be transferred, assigned or sold until 30 days after the completion of the initial Business Combination, (iii) shall not be redeemable by the Company when the Class A ordinary shares equal or exceed $18.00, and (iv) shall only be

The Company evaluated the Public Warrants and Private Placement Warrants and concluded that they do not meet the criteria to be classified as shareholders’ equity in accordance with ASC 815-40, “Derivatives and Hedging–Contracts in Entity’s Own Equity” ("ASC 815"). As the Public Warrants and Private Placement Warrants also meet the definition of a derivative under ASC 815, the Company has recorded these warrants as liabilities on its condensed consolidated balance sheets, with changes in their respective fair values recognized in the statement of operations at each reporting date.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers”, ASC 606 (“ASC 606”). On January 1, 2019, the Company adopted ASC 606, applying the full retrospective method as of the earliest period presented. The portfolio approach was used to apply the requirements of the standard to groups of contracts with similar characteristics.

Under ASC 606, the Company recognizes revenue when a customer obtains control of the promised goods or services. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company applies the following five-step model in order to determine this amount: (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 when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services the Company transfers to the customer (i.e., patient). At contract inception, once the contract is determined to be within the scope of ASC 606, management reviews the contract to determine which performance obligations must be satisfied and which of these performance obligations are distinct. The Company recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied.

Capitated revenue is derived from fees for medical services provided by the Company under capitated arrangements with health maintenance organizations’ (“HMOs”) health plans. Capitated revenue consists of revenue earned through Medicare as well as through commercial and other non-Medicare governmental programs, such as Medicaid, which is captured as other capitated revenue. The Company is required to deliver primary care physician services to the enrolled member population and is responsible for medical expenses related to healthcare services required by that patient group, including services not provided by the Company. Since the Company controls the primary care physician services provided to enrolled members, the Company acts as a principal. The gross fees under these contracts are reported as revenue and the cost of provider care is included in third-party medical costs. Neither the Company nor any of its affiliates is a registered insurance company because state law in the states in which they operate does not require such registration for risk-bearing providers.

Since contractual terms across these arrangements are similar, the Company groups them into one portfolio. The Company identifies a single performance obligation to stand-ready to provide healthcare services to enrolled members. Capitated revenue is recognized in the month in which the Company is obligated to provide medical care services. The transaction price for the Medicare Advantage and Medicare Direct Contracting services provided

depends upon the pricing established by the Centers for Medicare & Medicaid (“CMS”) and includes rates that are based on the cost of medical care within a local market and the average utilization of healthcare services by the members enrolled. The transaction price is variable since the rates are risk adjusted for projected health status (acuity) of members and demographic characteristics of the enrolled members. The risk adjustment to the transaction price is presented as the Medicare Risk Adjustment (“MRA”) within accounts receivable on the accompanying condensed consolidated balance sheets. The fees are paid on an interim basis based on submitted enrolled member data for the previous year and are adjusted in subsequent periods after the final data is compiled by the CMS.

In 2020, the Company entered into multi-year agreements with Humana, Inc. (“Humana”), a managed care organization, to provide services only to members covered by Humana in certain centers. The agreements contain an administrative payment from Humana in exchange for the Company providing certain care coordination services during the contract term. The care coordination payments are refundable to Humana on a pro-rata basis if the Company ceases to provide services at the centers within the specified contract term. The Company identified one performance obligation to stand-ready to provide care coordination services to patients and will recognize revenue ratably over the contract term. Care coordination revenue is included in other revenue along with other ancillary healthcare revenues.

Fee-for-service revenue is generated from primary care services provided in the Company’s medical centers. During an office visit, a patient may receive a number of medical services from a healthcare provider. These healthcare services are not separately identifiable and are combined into a single performance obligation. The Company recognizes fee-for-service revenue at the net realizable amount at the time the patient is seen by a provider, and the Company’s performance obligation to the patient is complete.

Pharmacy revenue is generated from the sales of prescription medication to patients. Pharmacy contracts contain a single performance obligation. The Company satisfies its performance obligation and recognizes revenue at the time the patient takes possession of the merchandise. Other revenue includes revenue from certain third parties which include ancillary fees earned under contracts with certain care organizations for the provision of care coordination services.


		Three Months Ended September 30,
(in thousands)		2021			2020
		Revenue $	Revenue %		Revenue $	Revenue %
Capitated revenue:
Medicare	$	447,250	84.9%	$	220,591	83.8	%
Other capitated revenue		54,530	10.4%		32,383	12.3	%
Total capitated revenue		501,780	95.3%		252,974	96.1	%
Fee-for-service and other revenue:
Fee-for-service		8,176	1.6%		3,258	1.2	%
Pharmacy		10,096	1.8%		6,154	2.4	%
Other		6,746	1.3%		747	0.3	%
Total fee-for-service and other revenue		25,018	4.7%		10,159	3.9	%

Total revenue	$	526,798	100.0%	$	263,133	100.0	%


		Nine Months Ended September 30,
		2021				2020
(in thousands)		Revenue $	Revenue %			Revenue $	Revenue %
Capitated revenue:
Medicare	$	1,008,329	84.0	%	$	455,986	80.0	%
Other capitated revenue		139,712	11.6	%		88,631	15.6	%
Total capitated revenue		1,148,041	95.7	%		544,617	95.6	%
Fee-for-service and other revenue:
Fee-for-service		17,113	1.4	%		6,269	1.1	%
Pharmacy		25,619	2.1	%		17,207	3.0	%
Other		9,323	0.8	%		1,544	0.3	%
Total fee-for-service and other revenue		52,055	4.3	%		25,020	4.4	%

Total revenue	$	1,200,096	100.0	%	$	569,637	100.0	%

As the performance obligations from the Company’s revenues are recognized at a point in time and the revenues recognized over time relate to contracts with a duration of one year or less, the Company elected the practical expedient in ASC 606-10-50-14(a) which provides relief from the requirement to disclose the transaction price for remaining performance obligations at the end of each reporting period and the requirement to disclose when the Company expects to recognize the related revenue. The Company has de minimis performance obligations remaining at the end of the reporting period as patients are not contractually obligated to continue to receive medical care from the network of providers.

Contracts with three of the HMOs accounted for approximately 57.2% and 63.6% of total revenues for the three and nine months ended September 30, 2021, respectively, and approximately 39.8% of total accounts receivable as of September 30, 2021. Contracts with three of the HMOs accounted for approximately 70.2% and 67.5% of total revenues for the three and nine months ended September 30, 2020, respectively, and approximately 67.1% of total accounts receivable as of December 31, 2020. The loss of revenue from these contracts could have a material adverse effect on the Company. The percentage of accounts receivable related to the three HMOs decreased over the nine-month period ended September 31, 2021 due to an increase in acquisitions over that time period. The acquisitions significantly increased overall accounts receivable over this period, effectively diluting accounts receivable from the HMOs.

Cash and cash equivalents are highly liquid investments purchased with original maturities of three months or less. During the third quarter of 2021, two health plans required the Company to maintain restricted cash balances for an aggregate amount of $3.5 million. These restricted cash balances are included within the caption cash and restricted cash in the accompanying condensed consolidated balance sheets.

Included in accounts receivable are MRA receivables which is an estimate derived from adjustments based on the health status of members and demographic characteristics of the plan. The health status of members is used to determine a risk score which is actuarially determined by comparing what was received from the CMS and what should have been received based on the health status of the enrolled member. Our accounts receivable included MRA receivables in the amount of $108.6 million and $18.1 million as of September 30, 2021 and December 31, 2020, respectively.

As of September 30, 2021 and December 31, 2020, the Company’s accounts receivable were presented net of the unpaid service provider costs. A right of offset exists when all of the following conditions are met: 1) each of the two parties owed the other determinable amounts; 2) the reporting party has the right to offset the amount owed with the amount owed to the other party; 3) the reporting party intends to offset; and 4) the right of offset is enforceable by law. The Company believes all of the aforementioned conditions existed as of September 30, 2021 and December 31, 2020.

Provider costs are accrued based on the date of services rendered to members, based in part on estimates, including an accrual for medical services incurred but not reported (“IBNR”). Liabilities for IBNR are estimated using standard actuarial methodologies including the Company’s accumulated statistical data, adjusted for current experience. These actuarially determined estimates are continually reviewed and updated. Differences between estimated IBNR and actual amounts incurred are adjusted as an increase or decrease to service provider cost in the condensed consolidated statements of operation in the period they become known.

The Company maintains a provider excess loss insurance policy to protect against claim expenses exceeding certain levels that were incurred by the Company on behalf of members. As of September 30, 2021 and December 31, 2020, the Company’s excess loss insurance deductible was $0.1 million and maximum coverage was $2.0 million per member per calendar year. The Company recorded excess loss insurance premiums of $1.9 million and $5.4 million, and insurance reimbursements of $3.6 million and $5.4 million, for the three and nine months ended September 30, 2021, respectively. The Company recorded excess loss insurance premiums of $1.3 million and $3.6 million, and no insurance reimbursements, for the three and nine months ended September 30, 2020, respectively. The Company recorded these amounts on a net basis in the caption third-party medical costs in the accompanying condensed consolidated statements of operations. The Company records excess loss insurance recoveries in accounts receivable on the accompanying condensed consolidated balance sheets. As of September 30, 2021 and December 31, 2020, the Company recorded insurance recoveries of $3.5 million and $2.5 million, respectively.

Debt issuance costs represent fees incurred by the Company in connection with securing funding from a lender. These are lender fees and third-party professional fees that would not have been incurred if the Company did not pursue and secure financing. In circumstances where an embedded derivative is bifurcated from a host credit agreement and recorded as a standalone instrument at fair value, the debt issuance costs will reflect the initial fair value of such derivative. At inception of a credit agreement, these debt issuance costs are capitalized and presented net against the carrying amount of the related debt liabilities in the accompanying condensed consolidated balance sheets. Following recognition, they are amortized over the term of their related credit agreement through interest expense in the accompanying statements of operations through the effective interest method. In instances where there is no related debt drawn or outstanding, the debt issuance costs are presented in prepaid expenses and other current assets on the accompanying condensed consolidated balance sheets.

As of September 30, 2021 and December 31, 2020, the Company recorded capitalized deferred issuance cost balances of $24.2 million and $24.9 million, respectively, in the accompanying condensed consolidated balance sheets, as described in Note 9, “Long-Term Debt”. Of the balance as of September 30, 2021, $23.5 million was included in the caption notes payable, net of current portion and debt issuance costs, $0.2 million in prepaid expenses and other current assets, and $0.5 million in other assets on the accompanying condensed consolidated balance sheets. Of the balance as of December 31, 2020, $18.5 million was included in the caption notes payable,

As described in Note 9, “Long-Term Debt”, Term Loan 3 (as defined below) was partially repaid by the Company on June 3, 2021. The Company’s partial extinguishment of this Term Loan consisted of a cash payment to the lender for (1) $400.0 million of the outstanding principal amount, and (2) the outstanding accrued interest. The Company recorded a loss on extinguishment of debt of $13.2 million which related to unamortized debt issuance costs.

The Company recorded $4.0 million and $7.7 million of amortization of deferred financing costs for the three and nine months ended September 30, 2021, respectively. The Company recorded amortization expense of $3.0 million and $3.9 million for the three and nine months ended September 30, 2020, respectively. Amortization expense is reflected under the caption interest expense in the accompanying condensed consolidated statements of operations.

Property and equipment are stated at cost less accumulated depreciation and amortization. The Company capitalizes asset purchases as well as major improvements that extend the useful life or add functionality, value, or productive capacity in amounts greater than one thousand dollars. Depreciation and amortization are computed using the straight-line method over the life of the assets, ranging from three to fifteen years. Leasehold improvements are amortized over the shorter of the estimated useful life of fifteen years or the term of the lease.

The Company periodically reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.

The Company accounts for acquired businesses using the acquisition method of accounting. All assets acquired and liabilities assumed are recorded at their respective fair values at the date of acquisition. The determination of fair value involves estimates and the use of valuation techniques when market value is not readily available. The Company uses various techniques to determine fair value in accordance with accepted valuation models, primarily the income approach. The significant assumptions used in developing fair values include, but are not limited to, EBITDA growth rates, revenue growth rates, the amount and timing of future cash flows, discount rates, useful lives, royalty rates and future tax rates. The excess of purchase price over the fair value of assets and liabilities acquired is recorded as goodwill. Refer to Note 3, "Business Acquisitions," for a discussion of the Company's recent acquisitions.

Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets acquired. The goodwill arising from acquisitions is a result of synergies that are expected to be derived from elimination of duplicative costs and the achievement of economies of scale. The Company assesses goodwill for impairment on an annual basis and between tests if events occur or circumstances exist that would reduce the fair value of a reporting unit below its carrying amount. The Company performs its annual assessment on the first of October. Goodwill is evaluated for impairment at the reporting unit level. The Company has identified one reporting unit for the annual goodwill impairment testing. First, the Company performs a qualitative analysis to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying value and a quantitative impairment test is required. If required, the Company applies the quantitative test to identify and measure the amount of impairment by comparing the fair value of the reporting unit, which the Company estimates on an income approach using the present value of expected future cash flows of the reporting unit to its carrying value.

The Company considered the effect of the COVID-19 pandemic on its business and the overall economy and resulting impact on its goodwill. As of October 1, 2020, the Company performed a quantitative goodwill impairment test and did not identify any impairment to goodwill. There was no impairment to goodwill during the nine months ended September 30, 2021 and 2020. The Company will perform its annual impairment analysis as of October 1, 2021.

The Company’s intangibles consist of trade names, brand, non-compete, and customer, payor, and provider relationships. The Company amortizes its intangibles using the straight-line method over the estimated useful lives of the intangible, which ranges from one to twenty years. Intangible assets are reviewed for impairment in conjunction with long-lived assets.

Minimum rent, including fixed escalations, is recorded on a straight-line basis over the lease term. The lease term commences when the Company takes possession of the leased premises and, in most cases, ends upon expiration of the initial non-cancelable term. When a lease provides for fixed escalations of the minimum rental payments during the lease term, the difference between the recorded straight-line rent and the amount payable under the lease is recognized as deferred rent obligation.

As a healthcare provider, the Company is subject to medical malpractice claims and lawsuits. The Company may also be liable, as an employer, for the negligence of healthcare professionals it employs or the healthcare professionals it engages as independent contractors. To mitigate a portion of this risk, the Company maintains medical malpractice insurance, principally on a claims-made basis, with a reputable insurance provider. This policy contains a retroactive feature which covers claims incurred at the sites the Company operates, regardless if the claim was filed after the site’s respective policy term. The policy contains various limits and deductibles.

The Company maintains a malpractice insurance policy with a coverage limit of $1.0 million per occurrence and $3.0 million aggregate coverage, with an umbrella policy coverage of $5.0 million. Any amounts over that threshold, or for which the insurance policy will not cover, will be borne by the Company and may materially affect the Company’s future consolidated financial position, results of operations, and cash flows. As of September 30, 2021 and December 31, 2020, the Company has recorded claims liabilities of $0.5 million and $0.1 million, respectively, in other liabilities. Insurance recoverables were immaterial as of September 30, 2021 and December 31, 2020, and are recorded in other assets on the accompanying condensed consolidated balance sheets.

Advertising and marketing costs are expensed as incurred. Advertising and marketing costs expensed totaled approximately $4.9 million and $2.4 million for the three months ended September 30, 2021 and 2020, respectively, and $10.5 million and $4.9 million for the nine months ended September 30, 2021 and 2020, respectively. Advertising and marketing costs are included in the caption selling, general, and administrative expenses in the accompanying condensed consolidated statements of operations.

The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions based on available information. Such estimates are based on historical experience and other assumptions that are considered appropriate in the circumstances. However, actual results could differ from those estimates and these differences may be material. Significant estimates made by the Company include, but are not limited to, fair value allocations for intangible assets acquired as part of the Company’s numerous acquisitions, recoverability of goodwill and intangibles, fair value of contingent considerations, unpaid service provider cost liability, and respective revenues and expenses related to these estimates for the years reported.

On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. The rapid spread of COVID-19 around the world led to the shutdown of cities as national, state, and local authorities implemented social distancing, quarantine and self-isolation measures. [While the restrictions have been eased across the United States, some restrictions remain in place.] The full extent to which the COVID-19 pandemic has and will directly or indirectly impact the Company, future results of operations and financial condition will depend on future factors that are uncertain and cannot be accurately predicted. These factors include, but are not limited to, new information that may emerge concerning COVID-19, including the impact of new variants of the virus, the scope and duration of business closures and restrictions, government-imposed or recommended suspensions of elective procedures, and expenses required for supplies and personal protective equipment. Due to these and other uncertainties, management cannot estimate the length or severity of the impact of the pandemic on the Company. Additionally, because of the Company’s business model, the full impact of the COVID-19 pandemic may not be fully reflected in the Company’s results of operations and overall financial condition until future periods. The impact of COVID-19 variants cannot be predicted at this time, and could depend on numerous factors, [including vaccination rates among the population, the effectiveness of the COVID-19 vaccines and boosters against COVID-19 variants, and the actions taken to contain the COVID-19 pandemic and the economic impact on our business]. Management will continue to closely evaluate and monitor the nature and extent of these potential impacts to the Company, results of operations, and liquidity

The acquisition of PCIH was implemented through an Up-C structure. Prior to the closing of the Business Combination, Jaws was reincorporated in the State of Delaware and became a U.S. domestic corporation named Cano Health, Inc. Merger Sub, a wholly owned subsidiary of Jaws, merged with and into PCIH, with PCIH as the surviving company in the merger. As of September 30, 2021, the Seller, the former sole owner and managing member of PCIH, held approximately 64.0% of voting rights in Cano Health, Inc. and 64.0% of economic rights in PCIH, while other investors, including the former stockholders of Jaws and PIPE Investors held approximately 36.0% of economic and voting rights in Cano Health, Inc. and 36.0% of economic and 100.0% of managing rights in PCIH. Subsequent to the closing of the Business Combination, income attributable to Cano Health, Inc. is taxed under Subchapter C while PCIH will continue to be treated as a partnership for tax purposes.

Prior to the close of the Business Combination, the Company was treated as a partnership for U.S. income tax purposes, whereby earnings and losses were included in the tax return of its members and taxed depending on the members’ tax situation. While the overall entity was previously treated as a partnership, the Company established in 2019 a subsidiary group that was taxed under Subchapter C with immaterial operations in 2019. The operations of the subsidiary group are conducted through a legal entity domiciled in Puerto Rico. The subsidiary group is subject to Puerto Rico and U.S. Federal taxes and Florida State taxes. Refer to Note 16, “Income Taxes”, for further details.

The Company recognizes and measures tax positions taken or expected to be taken in its tax return based on their technical merit and assesses the likelihood that the positions will be sustained upon examination based on the facts, circumstances and information available at the end of each period. Interest and penalties on tax liabilities, if any, would be recorded in the captions interest expense and other expenses, respectively, in the condensed consolidated statements of operations.

In February 2016, the FASB established Topic 842, “Leases”, by issuing ASU No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, “Land Easement Practical Expedient for Transition to Topic 842”, ASU No. 2018-10, “Codification Improvements to Topic 842, Leases”, ASU No. 2018-11, “Targeted Improvements”, ASU No. 2018-20, “Leases (Topic 842): Narrow-Scope Improvements for Lessors”, ASU No. 2021-05, “Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments”, and ASU No. 2020-05, “Leases (Topic 842): Effective Dates for Certain Entities” (collectively referred to as “ASC 842”). ASC 842 establishes a right of use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations.

Under ASC 842, a modified retrospective transition approach is required, and entities may choose to use either the effective date or the beginning of the earliest period presented in the financial statements as the date of initial application, with certain practical expedients available. The Company is in the process of evaluating the practical expedient options for adoption. ASC 842 is effective for fiscal years beginning after December 15, 2021 and for interim periods within fiscal years beginning after December 15, 2022, with early application permitted, and the Company expects to adopt the new standard on the effective date or the date it no longer qualifies as an emerging growth company, whichever is earlier.

The Company has identified and contracted with a software vendor for the technology to support compliance with ASU 842. In addition, the Company is in the process of identifying the complete population of leases, which includes testing over contracts for any potential embedded leases. Based on the provisions of ASU 842, the Company anticipates a material increase in both assets and liabilities when the current operating lease contracts are recorded on the balance sheet. The Company does not yet have a dollar estimate of the impact; however, the Company does not anticipate the update having a material effect on its condensed consolidated statements of operations or cash flows.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which was subsequently amended by ASU No. 2020-03, “Codification Improvements to Financial Instruments” (collectively referred to as “ASC 326”). which is intended to improve financial reporting by requiring earlier recognition of credit losses on certain financial assets. The standard replaces the current incurred loss impairment model that recognizes losses when a probable threshold is met with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The standard has been further refined through subsequent releases by the FASB, including the extension of the effective date. As amended by ASU No. 2019-10, the standard is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those annual periods, with early adoption permitted, and the Company expects to adopt ASU 326 on the effective date or the date it no longer qualifies as an emerging growth company, whichever is earlier. The Company is currently evaluating the effect that the standard will have on its condensed consolidated financial statements and related disclosures. The Company does not anticipate the update to have a material effect on the Company’s condensed consolidated statements of operations or cash flows.

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (“Topic 718”), which expands the scope of share-based compensation guidance to include share-based payment transactions for acquiring goods and services from nonemployees. The FASB has also issued an amendment to this update to include share-based payment awards granted to a customer. The update is effective for fiscal years beginning after December 15, 2019 and for interim periods within fiscal years beginning after December 15, 2020. The Company adopted the standard on January 1, 2020 and it did not have a material effect on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (“Topic 820”): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which simplifies the fair value measurement disclosure requirements, including removing certain disclosures related to transfers between fair value hierarchy levels and adds certain disclosures to related level 3 investments. The update is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted. The Company adopted the standard on January 1, 2020 and it did not have a material effect on its condensed consolidated financial statements.

In October 2018, the FASB issued ASU No. 2018-17, Consolidation (“Topic 810”) — Targeted Improvements to Related Party Guidance for Variable Interest Entities. The ASU creates a new private company accounting alternative in U.S. GAAP that allows a private company to not apply the VIE guidance to legal entities under common control if both the common control parent and the legal entity being evaluated for consolidation are not public business entities and other criteria are met. The new guidance also changes how all entities that apply the VIE guidance evaluate decision-making fees. For entities other than private companies, the guidance on decision-making fees is effective for annual periods beginning after December 15, 2019, and interim periods therein. The guidance is effective for private companies for annual periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption is permitted, including in an interim period. The Company does not expect the update to have a material effect on its condensed consolidated financial statements.