TOAST, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)
You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited consolidated financial statements, and the related notes that are included elsewhere in this Quarterly Report on Form 10-Q, and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section titled "Special Note Regarding Forward-Looking Statements" and Item 1A. Risk Factors included elsewhere in this Quarterly Report on Form 10-Q. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Overview Toast is a cloud-based, all-in-one digital technology platform purpose-built for the entire restaurant community. Our platform provides a comprehensive suite of SaaS products, financial technology solutions, including integrated payment processing, restaurant-grade hardware, and a broad ecosystem of third-party partners. We serve as the restaurant operating system, connecting front of house and back of house operations across dine-in, takeout, and delivery channels. As ofSeptember 30, 2022 , approximately 74,000 restaurant locations, processing approximately$83 billion of gross payment volume in the trailing 12 months on the Toast platform, partnered with Toast to optimize operations, increase sales, engage guests, and maintain happy employees.
By enabling these capabilities through a single, integrated platform, Toast
improves experiences for stakeholders across the restaurant ecosystem:
•Restaurant operators. We arm restaurants with a wide range of products and
capabilities to address their specific needs regardless of size, location, or
business model. As a result, restaurants using Toast often see higher sales and
greater operational efficiency.
•Guests. We are laser focused on helping our customers deliver memorable guest
experiences at scale. Guests can place orders easily, safely, and accurately
across web, mobile, and in-person channels for dine-in, takeout, or delivery. In
addition, our platform empowers restaurants to utilize their guest data to
deliver targeted and personalized experiences with loyalty programs and
marketing solutions.
•Employees. Our easy-to-learn and easy-to-use technology improves the experience
of restaurant employees across Toast customers. Employees are core to delivering
great hospitality, and it is critical for restaurants to engage and retain
employees in an increasingly competitive labor market. Our products enable new
employees to learn quickly through guided workflows, facilitate faster table
turns and safer, streamlined operations, and provide greater transparency
around, and timely access to, employees' wages.
•Suppliers. Our supplier management and accounting products give restaurants the
tools to optimize their back-office operations. Managing supplier networks and
procurement, and having high visibility into costs, are critical to efficiently
operating a restaurant. Our products enable customers to automate manual billing
processes, manage inventory, and improve profitability with real-time cost
insights on menu items. The seamless integration across our end-to-end platform
gives our customers the rich data and reporting capabilities to efficiently
operate and manage their restaurants.
The benefits to all stakeholders using the Toast platform create a powerful,
virtuous cycle that amplifies our impact on restaurants. Guest satisfaction
generates loyalty to restaurants, driving repeat sales, word-of-mouth referrals,
and larger checks and tips. This promotes employee satisfaction, helping reduce
turnover and motivating employees to continue to raise the bar on the guest
experience. In addition, our integrated software and payments platform
consolidates data on restaurant sales and operations, which enables our
reporting and analytics as well as financial technology solutions, such as
working capital loans, to further support our customers' success.
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Since our founding, we have translated our love for restaurants into a
commitment to innovation and digital transformation for the restaurant industry.
As we have expanded our platform, launched new products, and added new partners
over time, we have rapidly grown the number of restaurant locations on the Toast
platform.
Recent Developments in Macroeconomic Environment
Since early 2020, changes in consumers' behavior and government-imposed
restrictions because of the COVID-19 pandemic have impacted restaurants in
various ways, including limiting service to takeout orders for a period of time
or reducing capacity to accommodate social distancing measures. Though the exact
long-term circumstances are difficult to predict, we believe that the COVID-19
pandemic will result in a lasting shift in consumer demand towards omnichannel
consumption and increased guest demand for digital solutions such as Order &
Pay. Depending on the extent to which the prevalence of takeout and delivery
orders persists, our financial results may be impacted in a number of ways.
In addition to the ongoing COVID-19 pandemic, changes in macroeconomic
conditions, including inflation and its potential impact on consumer spending,
increase in interest rates, as well as continued global supply chain issues,
have impacted and may continue to impact our business. While our business
results remain positive, it is difficult to predict the potential impact these
factors may have on our future business results because of the associated
uncertainty they have produced or will produce among consumers and the
restaurant industry.
Key Business Metrics
We use the following key business metrics to help us evaluate our business,
identify trends affecting our business, formulate business plans, and make
strategic decisions:
Three Months Ended September
30, Nine Months Ended September 30,
(dollars in billions) 2022 2021 % Growth 2022 2021 % Growth
Gross Payment Volume
(GPV)(1) $ 25.2 $ 16.5 53 % $ 66.3 $ 39.9 66 %
As of September 30,
(dollars in millions) 2022 2021 % Growth
Annualized Recurring Run-Rate (ARR)$ 868 $ 544
60 % Gross Payment Volume (GPV)(1) Gross Payment Volume represents the sum of total dollars processed through the Toast payments platform across all restaurant locations in a given period. GPV is a key measure of the scale of our platform, which in turn drives our financial performance. As our customers generate more sales and therefore more GPV, we generally see higher financial technology solutions revenue. _________________
(1) Please note that numbers may not tie due to rounding to the nearest hundred
million.
26 -------------------------------------------------------------------------------- Table of Contents Annualized Recurring Run-Rate (ARR) We monitor Annualized Recurring Run-Rate as a key operational measure of the scale of our subscription and payment processing services for both new and existing customers. To calculate this metric, we first calculate recurring run-rate on a monthly basis. Monthly Recurring Run-Rate, or MRR, is measured on the final day of each month for all restaurant locations live on our platform as the sum of (i) our monthly subscription services fees, which we refer to as the subscription component of MRR, and (ii) our in-month adjusted payments services fees, exclusive of estimated transaction-based costs, which we refer to as the payments component of MRR. MRR does not include fees derived fromToast Capital or related costs. MRR is also not burdened by the impact of SaaS credits offered. ARR is determined by taking the sum of (i) twelve times the subscription component of MRR and (ii) four times the trailing-three-month cumulative payments component of MRR. We believe this approach provides an indication of our scale, while also controlling for short-term fluctuations in payments volume. Our ARR may decline or fluctuate as a result of a number of factors, including customers' satisfaction with our platform, pricing, competitive offerings, economic conditions, or overall changes in our customers' and their guests' spending levels. ARR is an operational measure, does not reflect our revenue or gross profit determined in accordance withU.S. Generally Accepted Accounting Principles, or GAAP, and should be viewed independently of, and not combined with or substituted for, our revenue, gross profit, and other financial information determined in accordance with GAAP. Further, ARR is not a forecast of future revenue and investors should not place undue reliance on ARR as an indicator of our future or expected results.
Seasonality
We experience seasonality in our financial technology solutions revenue, which
is largely driven by the level of GPV processed through our platform. For
example, customers typically have greater sales during the warmer months, though
this effect varies regionally. As a result, our financial technology solutions
revenue per location has historically been stronger in the second and third
quarters. We believe that financial technology solutions revenue from both
existing and potential future products will continue to represent a significant
proportion of our overall revenue mix, and seasonality will continue to impact
our results of operations.
Components of Results of Operations
Revenue
We generate revenue from four main sources that are further described below: (1) subscription services, (2) financial technology solutions, (3) hardware, and (4) professional services.
Our total revenue consists of the following:
Subscription services. We generate subscription services revenue from fees charged to customers for access to our software applications, generally over a term ranging from 12 to 36 months. Our subscription services revenue is primarily based on a rate per location, and this rate varies depending on the number of software products purchased, hardware configuration, and employee count at each location. Financial technology solutions. Revenue from financial technology solutions consists primarily of transaction-based fees paid by customers to facilitate their payment transactions, which are generally calculated as a percentage of the total transaction amount processed plus a per-transaction fee. The transaction fees collected are recognized as revenue on a gross basis. Financial technology solutions revenue also includes fees earned from marketing and servicing working capital loans to our customers throughToast Capital that are originated by a third-party bank. In these arrangements,Toast Capital's bank partner originates all loans, andToast Capital then services the loans using Toast's payments infrastructure to remit a fixed percentage of daily sales until the loan is paid back.Toast Capital is responsible for purchasing from our bank partner loans in default (or that have been or are scheduled to be charged off) until the aggregate principal amount of such purchased loans equals 15% (or 30% in the case of a limited program offered during the winter of 2020-2021 related to the COVID-19 pandemic) of the total originated amount for each quarterly loan cohort.Toast Capital earns a servicing fee as well as a credit performance fee that is tied to the portfolio performance.
Hardware. We generate hardware revenue from the sale of terminals, tablets,
handhelds, and related devices and accessories, net of estimated returns.
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Professional services. We generate professional services revenue from fees
charged to customers for installation services, including business process
mapping, configuration, and training. These services can be delivered on-site,
remotely, or on a self-guided basis.
Costs of Revenue
Costs of revenue consists of expenses that are directly related or closely correlated to revenue generation, including, but not limited to, employee-related costs for customer support and certain operational roles as well as allocated overhead. Employee-related costs consist of salaries, benefits, bonuses, and stock-based compensation expense. Allocated overhead includes certain facilities costs, depreciation expense, and amortization costs associated with internally developed software. Below are descriptions of the types of costs classified within each component of costs of revenue:
Subscription services. Subscription services costs consist of customer support
and associated employee-related costs, hosting costs, professional services
costs, other software costs to support our cloud-based platform, and
amortization costs associated with internally developed software.
Financial technology solutions. Financial technology solutions costs consist primarily of transaction-based costs, which are mostly fees and costs paid to issuers and card networks as well as other related fees associated with third-party payment processors and fraud management.
Hardware. Hardware costs consist of raw materials and the cost of manufacturing
and shipping hardware sold to customers, including terminals, tablets,
handhelds, card readers, printers, and other accessories. Included in the
manufacturing and shipping costs are employee-related costs, professional
services costs, and allocated overhead associated with our supply chain and
fulfillment teams.
Professional services. Professional services costs consist primarily of employee-related costs and allocated overhead associated with our onboarding team, along with fees paid to third-party service providers engaged to perform installations and other services.
Amortization of acquired technology. Amortization of acquired technology costs
is related to technologies acquired through acquisitions that have the
capability of producing revenue.
Operating Expenses
Our operating expenses consist of the following:
Sales and marketing. Sales and marketing expenses consist primarily of
employee-related costs incurred to acquire new customers and increase product
adoption across our existing customer base. Marketing expenses also include fees
incurred to generate demand through various advertising channels.
We expect that sales and marketing expenses will increase on an absolute dollar
basis as we invest to grow our field-based sales team, increase demand
generation, and enhance our brand awareness. We expect sales and marketing
expenses as a percentage of revenue will vary from period-to-period over the
short term and decrease over the long term.
Research and development. Research and development expenses consist primarily of
employee-related costs associated with improvements to our platform and the
development of new product offerings, as well as allocated overhead and expenses
associated with the use of third-party software directly related to development
of our products and services.
We plan to continue to hire employees to support our research and development
efforts to expand the capabilities and scope of our platform and related
products and services. As a result, we expect that research and development
expenses will increase on an absolute dollar basis as we continue to invest to
support these activities and innovate over the long term.
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General and administrative. General and administrative expenses consist primarily of expenses related to operations, finance, legal, human resources, information technology, and administrative personnel. General and administrative expenses also include costs related to fees paid for certain professional services, including legal, information technology, tax and accounting services, and bad debt and credit related expenses. We expect that general and administrative expenses will increase on an absolute dollar basis as we add personnel and enhance our systems, processes, and controls to support the growth of our business as well as our increased compliance and reporting requirements as a public company. We expect general and administrative expenses as a percentage of revenue will vary from period-to-period over the short term and decrease over the long term.
Other Income (Expense)
Our other income and expenses consist of the following:
Interest income (expense), net. Consists of interest earned from cash held in money market accounts, interest earned on our marketable securities, and interest incurred on our convertible notes, which were issued inJune 2020 and repaid inJune 2021 . Change in fair value of warrant liability. Represents the change in the fair value of our warrant liability related to warrants issued to purchase shares of our convertible preferred stock and our common stock. The warrant liability is remeasured at fair value at each reporting date which could have a significant effect on other income (expense) and our results of operations during each period. The fair value is based on the trading price of our Class A common stock and other relevant valuation inputs, including volatility of our Class A common stock, strike price, relevant risk-free interest rates, and time to expiration of the warrants, and may fluctuate in subsequent periods.
Change in fair value of derivative liability. Represents the change in fair
value of derivative liability related to the conversion option provided for in
the convertible notes which were repaid in
Loss on debt extinguishment. Represents the loss on settlement of our
convertible notes which were repaid in
Other income (expense), net. Represents foreign currency transaction gains and
losses, gains or losses realized from sales of our marketable securities,
refundable research and development tax credits, and other items.
Income Tax Benefit (Expense)
Income tax benefit (expense). Consists ofU.S. federal and state income tax as well as international taxes inIreland ,India , andIceland . Our effective tax rate fluctuates from period to period due to changes in the mix of income and losses in jurisdictions with a wide range of tax rates, the effect of acquisitions, changes resulting from the amount of recorded valuation allowance, and permanent differences between GAAP and local tax laws. 29
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Results of Operations
Comparison of the Three and Nine Months Ended
The following table summarizes our results of operations for the three and nine
months ended
Three Months Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2022 2021 2022 2021
Revenue:
Subscription services $ 90 $ 46 $ 230 $ 115
Financial technology solutions 628 404 1,628 985
Hardware 27 31 86 81
Professional services 7 5 19 12
Total revenue 752 486 1,963 1,193
Costs of revenue:
Subscription services 29 18 81 41
Financial technology solutions 494 327 1,289 779
Hardware 52 43 165 94
Professional services 25 14 71 35
Amortization of acquired technology and
customer assets 1 1 4 3
Total costs of revenue(1) 601 403 1,610 952
Gross profit 151 83 353 241
Operating expenses:
Sales and marketing (1) 84 56 232 130
Research and development (1) 74 40 203 113
General and administrative (1) 78 42 203 110
Total operating expenses 236 138 638 353
Loss from operations (85) (55) (285) (112)
Other income (expense):
Interest income (expense), net 3 - 5 (12)
Change in fair value of warrant liability (21) (198) 102 (215)
Change in fair value of derivative
liability - - - (103)
Loss on debt extinguishment - - - (50)
Other income (expense), net 1 (1) (1) -
Loss before benefit from income taxes (102) (254) (179) (492)
Benefit from income taxes 4 - 4 4
Net loss $ (98) $ (254) $ (175) $ (488)
_________________
(1)Includes stock-based compensation expense recognized for the three and nine
months ended
Stock-Based Compensation Expense
Three Months Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2022 2021 2022 2021
Costs of revenue $ 8 $ 5 $ 24 $ 7
Sales and marketing 12 10 37 13
Research and development 18 9 52 35
General and administrative 19 12 54 42
Total stock-based compensation expense $ 57 $
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Revenue
Three Months Ended September Nine Months Ended September
30, Change 30, Change
(dollars in millions) 2022 2021 Amount % 2022 2021 Amount %
Subscription services $ 90 $ 46 $ 44 96 % $ 230 $ 115 $ 115 100 %
Financial technology
solutions 628 404 224 55 % 1,628 985 643 65 %
Hardware 27 31 (4) (13) % 86 81 5 6 %
Professional services 7 5 2 40 % 19 12 7 58 %
Total revenue $ 752 $ 486 $ 266 55 % $ 1,963 $ 1,193 $ 770 65 %
The increase in subscription services revenue during the three and nine months
ended September 30, 2022 was attributed to growth in live restaurant locations
and the continued increase in the number of products adopted by both new and
existing customers.
The increase in financial technology solutions revenue during the three and nine
months ended September 30, 2022 was attributable to the increase in live
restaurant locations and the increase in GPV per processing location, which was
due to both higher customer demand and higher average transaction values.
The decrease in hardware revenue during the three months ended September 30,
2022 was due to lower upsell revenue from sales to existing customers and the
impact of pricing and packaging across bundled sales, partially offset by an
increase in hardware sales to new locations. The impact of pricing and packaging
benefited revenue in the prior year period compared to a negative impact in the
current quarter. Revenue from sales to existing customers in last year's period
benefited from the recovery of in-person dining after COVID. The increase in
hardware revenue during the nine months ended September 30, 2022 was largely
driven by growth in live locations and sales to existing locations.
The increase in professional services revenue during the three and nine months
ended
locations.
Costs of Revenue
Three Months Ended September Nine Months Ended September
30, Change 30, Change
(dollars in millions) 2022 2021 Amount % 2022 2021 Amount %
Subscription services $ 29 $ 18 $ 11 61 % $ 81 $ 41 $ 40 98 %
Financial technology
solutions 494 327 167 51 % 1,289 779 510 65 %
Hardware 52 43 9 21 % 165 94 71 76 %
Professional services 25 14 11 79 % 71 35 36 103 %
Amortization of
acquired technology and
customer assets 1 1 - - % 4 3 1 33 %
Total costs of revenue $ 601 $ 403 $ 198 49 % $ 1,610 $ 952 $ 658 69 %
The increase in subscription services costs during the three and nine months
ended
employee-related and overhead costs and contractor services to support our
growth, as well as stock-based compensation expense.
The increase in financial technology solutions costs during the three and nine
months ended
The increase in hardware costs during the three and nine months endedSeptember 30, 2022 was attributable to higher shipment volume as a result of growth in new locations. The increase for the nine months endedSeptember 30, 2022 was also attributable to higher freight and product costs. 31
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The increase in professional services costs during the three and nine months endedSeptember 30, 2022 was primarily due to an increase in employee-related and overhead costs and contractor services to support our growth, as well as stock-based compensation expense. We utilize our hardware and related professional services as customer acquisition tools and price them competitively to reduce barriers to entry for new locations. Operating Expenses Sales and Marketing Three Months Ended September Nine Months Ended September 30, Change 30, Change (dollars in millions) 2022 2021 Amount % 2022 2021 Amount % Sales and marketing$ 84 $ 56 $ 28 50 %$ 232 $ 130 $ 102 78 % The increase in sales and marketing expenses during the three and nine months endedSeptember 30, 2022 was primarily attributable to a$22 million and$58 million increase in employee-related and overhead costs, respectively. The increase for the nine months endedSeptember 30, 2022 was also attributable to a$24 million increase in stock-based compensation.
Research and Development
Three Months Ended September Nine Months Ended September
30, Change 30, Change
(dollars in millions) 2022 2021 Amount % 2022 2021 Amount %
Research and development
85 %$ 203 $ 113 $ 90
80 %
The increase in research and development expenses during the three and nine monthsSeptember 30, 2022 was primarily attributable to a$21 million and$59 million increase in employee-related and overhead costs, respectively, and a$9 million and$17 million increase in stock-based compensation, respectively, in each case due to increased headcount.
General and Administrative
Three Months Ended September Nine Months Ended September
30, Change 30, Change
(dollars in millions) 2022 2021 Amount % 2022 2021 Amount %
General and administrative $ 78 $ 42 $ 36 86 % $ 203 $ 110 $ 93 85 %
The increase in general and administrative expenses during the three and nine
months ended September 30, 2022 was primarily attributable to employee-related
and overhead costs and stock-based-compensation due to increased headcount, as
well as bad debt and credit related expenses mainly due to growth in our Toast
Capital product offering. Employee-related and overhead costs increased $13
million and $38 million , respectively, and stock-based compensation increased $7
million and $12 million , respectively, during the three and nine months ended
September 30, 2022 .
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Interest Income (Expense), Net
Three Months Ended September 30, Change Nine Months Ended September 30, Change
(dollars in millions) 2022 2021 Amount % 2022 2021 Amount %
Interest income
(expense), net $ 3 $ - $ 3 100 % $ 5 $ (12) $ 17 (142) %
The increase in interest income (expense), net during the nine months ended
September 30, 2022 was primarily due to the payoff of outstanding convertible
notes in June 2021 and interest income generated on our investments in
marketable securities. We made our initial investment in marketable securities
in October 2021 .
Change in Fair Value of Warrant Liability
Three Months Ended Nine Months Ended September
September 30, Change 30, Change
(dollars in millions) 2022 2021 Amount % 2022 2021 Amount %
Change in fair value
of warrant liability $ (21) $ (198) $ 177 (89) % $ 102 $ (215) $ 317 (147) %
The change in fair value of warrant liability for the three months ended
September 30, 2022 was primarily attributable to a smaller increase in the value
of the common stock underlying the outstanding warrants at the end of period
relative to the value of the common stock at the beginning of the period. The
change in fair value of warrant liability for the nine months ended September
30, 2022 was primarily attributable to a lower value of the common stock
underlying outstanding warrants at the end of the period compared to the
beginning of the period, as well as the issuance of additional common stock
warrants in June 2021 .
Change in Fair Value of Derivative Liability
Nine Months Ended September
Three Months Ended September 30, Change 30, Change
(dollars in millions) 2022 2021 Amount % 2022 2021 Amount %
Change in fair value of
derivative liability $ - $ - $ - - % $ - $ (103) $ 103 (100) %
The decrease in expense associated with the change in fair value of derivative
liability during the nine months ended September 30, 2022 was due to the
repayment of our convertible notes in June 2021 and the extinguishment of the
corresponding liability.
Loss on Debt Extinguishment
Three Months Ended September 30, Change Nine Months Ended September 30, Change
(dollars in millions) 2022 2021 Amount % 2022 2021 Amount %
Loss on debt extinguishment $ - $ - $ - - % $ - $ (50) $ 50 (100) %
The decrease in loss on debt extinguishment during the nine months ended
2021
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Other Income (Expense), Net
Nine Months Ended September
Three Months Ended September 30, Change 30, Change
(dollars in millions) 2022 2021 Amount % 2022 2021 Amount %
Other income (expense), net $ 1 $ (1) $ 2 (200) % $ (1) $ - $ (1) 100 %
Other income (expense), net, remained materially consistent during the three and
nine months ended September 30, 2022 , as compared to the three and nine months
ended September 30, 2021 .
Benefit from income taxes
Three Months Ended September 30, Change Nine Months Ended September 30, Change
(dollars in millions) 2022 2021 Amount % 2022 2021 Amount %
Benefit from income taxes $ 4 $ - $ 4 100 % $ 4 $ 4 $ - - %
The difference between the income tax benefit for the three months ended
September 30, 2022 of $4 million , as compared to the income tax provision of $0
for the three months ended September 30, 2021 is primarily due to the impact of
a deferred tax benefit generated as a result of the acquisition of Sling. The
difference between the income tax benefit for the nine months ended September
30, 2022 and September 30, 2021 is not significant.
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Non-GAAP Financial Measures
We use certain non-GAAP financial measures described below to supplement our
consolidated financial statements, which are prepared and presented in
accordance with GAAP and to understand and evaluate our core operating
performance. These non-GAAP financial measures, which may be different than
similarly titled measures used by other companies, are presented to enhance
investors' overall understanding of our financial performance and should not be
considered substitutes for, or superior to, the financial information prepared
and presented in accordance with GAAP.
We believe that these non-GAAP financial measures provide useful information
about our financial performance, enhance the overall understanding of our past
performance and future prospects, and allow for greater transparency with
respect to important metrics used by our management for financial and
operational decision-making. We are presenting these non-GAAP metrics to provide
investors insight to the information used by our management to evaluate our
business and financial performance. We believe that these measures provide
investors increased comparability of our core financial performance over
multiple periods with other companies in our industry.
Three Months Ended September 30, Nine Months Ended September 30,
(in millions) 2022 2021 2022 2021
Adjusted EBITDA $ (19) $ (12) $ (97) $ 3
Nine Months Ended September 30,
(in millions) 2022 2021
Free Cash Flow $ (160) $ 17
Adjusted EBITDA
Adjusted EBITDA is defined as net income (loss), adjusted to exclude stock-based
compensation expense and related payroll tax expense, depreciation and
amortization expense, interest (income) expense, net, other income (expense)
net, acquisition-related expenses, fair value adjustments on warrant and
derivative liabilities, expenses related to early termination of leases, loss on
debt extinguishment, charitable contribution stock-based expense, and income
taxes, as applicable. We have provided below a reconciliation of Adjusted EBITDA
to net loss, the most directly comparable GAAP financial measure.
We believe Adjusted EBITDA is useful for investors in comparing our financial
performance to other companies and from period to period. Adjusted EBITDA is
widely used by investors and securities analysts to measure a company's
operating performance without regard to items such as depreciation and
amortization, interest expense, and interest income, which can vary
substantially from company to company depending on their financing and capital
structures and the method by which their assets were acquired. In addition,
Adjusted EBITDA eliminates the impact of certain items that may obscure trends
in the underlying performance of our business. Adjusted EBITDA also has
limitations as an analytical tool, and should not be considered in isolation or
as a substitute for analysis of our results as reported under GAAP. For example,
although depreciation expense is a non-cash charge, the assets being depreciated
may have to be replaced in the future, and Adjusted EBITDA does not reflect cash
capital expenditure requirements for such replacements or for new asset
acquisitions. In addition, Adjusted EBITDA excludes stock-based compensation
expense, which has been, and will continue to be for the foreseeable future, a
significant recurring expense for our business and an important part of our
compensation strategy. Adjusted EBITDA also does not reflect changes in, or cash
requirements for, our working capital needs; interest expense, or the cash
requirements necessary to service interest or principal payments on our debt,
which reduces the cash available to us; or tax payments that may represent a
reduction in cash available to us. The expenses and other items which are
excluded from the calculation of Adjusted EBITDA may differ from the expenses
and other items that other companies may exclude from Adjusted EBITDA when they
report their financial results.
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The following table reflects the reconciliation of net loss to Adjusted EBITDA
for each of the periods presented:
Three Months Ended September 30, Nine Months Ended September 30,
(in millions) 2022 2021 2022 2021
Net loss $ (98) $ (254) $ (175) $ (488)
Stock-based compensation expense and
related payroll tax 58 36 170 97
Depreciation and amortization 6 7 18 16
Interest (income) expense, net (3) - (5) 12
Acquisition related expenses - - 2 1
Change in fair value of warrant liability 21 198 (102) 215
Change in fair value of derivative
liability - - - 103
Termination of leases 1 1 (1) 1
Loss on debt extinguishment - - - 50
Income tax benefit (4) - (4) (4)
Adjusted EBITDA $ (19) $
(12) $ (97)$ 3 Free Cash Flow Free cash flow is defined as net cash provided by (used in) operating activities reduced by purchases of property and equipment and capitalization of internal-use software costs. We believe that free cash flow is a meaningful indicator of liquidity that provides information to management and investors about the amount of cash generated from operations and used for purchases of property and equipment, capitalization of software costs, and investments in our business. Once our business needs and obligations are met, cash can be used to maintain a strong balance sheet and invest in future growth. Free cash flow has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Other companies may calculate free cash flow or similarly titled non-GAAP measures differently, which could reduce the usefulness of free cash flow as a tool for comparison. In addition, free cash flow does not reflect mandatory debt service and other non-discretionary expenditures that are required to be made under contractual commitments and does not represent the total increase or decrease in our cash balance for any given period. The following table presents a reconciliation of free cash flow to the net cash (used in) provided by operating activities for each of the periods presented: Nine Months Ended September 30, (in millions) 2022 2021 Net cash (used in) provided by operating activities$ (137) $ 33 Purchases of property and equipment (13) (10) Capitalized software (10) (6) Free cash flow$ (160) $ 17 36
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Liquidity and Capital Resources Our principal sources of liquidity are cash and cash equivalents and marketable securities. As ofSeptember 30, 2022 , we had cash and cash equivalents of$644 million , excluding cash held on behalf of customers of$61 million , restricted cash of$19 million , marketable securities of$409 million , and$330 million available under our 2021 Facility (as defined herein). Cash and cash equivalents consist of highly liquid investments with original maturities of 90 days or less at the time of purchase, other than those held for sale in the ordinary course of business. Marketable securities consisted of commercial paper, certificates of deposit, corporate bonds,U.S. Treasury securities, and asset-backed securities. We believe that our existing cash and cash equivalents, along with our available borrowing capacity under our 2021 Facility, will be sufficient to meet our working capital needs for at least the next 12 months, including planned capital expenditures, strategic transactions, and investment commitments that we may enter into from time to time. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under "Risk Factors".
In the event that additional financing is required from outside sources, we
cannot be sure that any additional financing will be available to us on
acceptable terms, if at all. If we are unable to raise additional capital when
desired, our business, operating results, and financial condition could be
adversely affected.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Nine Months Ended September 30,
(in millions) 2022 2021
Net cash (used in) provided by operating activities $ (137) $ 33
Net cash used in investing activities (25) (42)
Net cash provided by financing activities 36 756
Net (decrease) increase in cash, cash equivalents and restricted
cash $ (126) $ 747
Operating Activities
For the nine months ended September 30, 2022 , net cash used in operating
activities was $137 million as a result of our net loss for the period, adjusted
for certain non-cash items, such as stock-based compensation, the change in fair
value of our warrant liabilities, depreciation and amortization, as well as a
use of cash for working capital. The change in working capital was primarily
driven by higher inventory balances, in part due to the opening of a new
facility, as well as higher deferred costs and accounts receivable, partially
offset by higher accrued expenses and other current liabilities related to our
growth in GPV.
For the nine months ended September 30, 2021 , net cash provided by operating
activities was $33 million . This resulted from our net loss for the period,
adjusted for certain non-cash items, such as the change in fair value of warrant
liabilities, the change in fair value of the derivative liability, stock-based
compensation, loss on debt extinguishment, depreciation, and amortization as
well as a source of cash for working capital. The change in working capital was
primarily driven by higher accrued expenses and other current liabilities
related to our growth in GPV, partially offset by higher prepaid expenses as a
result of hardware purchases and higher deferred costs mostly related to sales
compensation.
Investing Activities
For the nine months ended September 30, 2022 , cash used in investing activities
was $25 million , which consisted of cash paid for purchases of marketable
securities and cash paid for an acquisition, partially offset by proceeds from
sales and maturities of marketable securities.
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For the nine months endedSeptember 30, 2021 , cash used in investing activities was$42 million , which consisted of cash paid for an acquisition, purchases of property and equipment and cash paid for capitalized software.
Financing Activities
For the nine months ended
activities was
funds obligations and proceeds from the exercise of stock options.
For the nine months endedSeptember 30, 2021 , cash provided financing activities was$756 million , which consisted of proceeds from our IPO, a change in customer funds obligations, proceeds from the exercise of stock options, and proceeds from the issuance of restricted stock, partially offset by repayments of our convertible notes. Credit Facilities OnJune 8, 2021 , we entered into a senior secured credit facility, or the 2021 Facility, which includes a revolving line of credit equal to$330 million . Interest on outstanding loans under the revolving line of credit is determined based on loan type and accrues at an annual rate, as defined in the agreement, of: (a) LIBO Rate multiplied by the Statutory Reserve Rate, plus 1.50% per annum; or 0.5% per annum plus the highest of: (i) the Prime Rate, (ii) theFederal Reserve Bank of New York Rate plus 0.5%, or (iii) the Adjusted LIBO Rate plus 1.00%. Subsequent toDecember 31, 2022 , interest on outstanding loans will be accrued based on the Secured Overnight Financing Rate, or SOFR. The 2021 Facility is subject to a minimum liquidity covenant of$250 million . As ofSeptember 30, 2022 andDecember 31, 2021 , no amount was drawn and outstanding under the 2021 Facility which had$330 million available for borrowings. As ofSeptember 30, 2022 andDecember 31, 2021 , there were$11 million and$13 million of letters of credit outstanding, respectively.
Contractual Obligations and Commitments and Off-Balance Sheet Arrangements
As ofSeptember 30, 2022 , our contractual obligations consisted of: (i) operating lease commitments of$116 million , of which$4 million is due in 2022 and$112 million is due thereafter, and (ii) purchase commitments of$243 million , a majority of which are due in 2022 and 2023. Please refer to Note 6, "Lessee Arrangements" and Note 13, "Commitments and Contingencies" to our unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for a discussion on our lease and purchase commitments. Please refer to Note 5, "Loan Servicing Activities and Acquired Loans Receivable, Net" to our unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for a discussion of credit exposure related to our financial guarantees as ofSeptember 30, 2022 . Critical Accounting Policies and Estimates The preparation of our unaudited consolidated financial statements in conformity with GAAP requires us to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet date, as well as reported amounts of revenue and expenses during the reporting period. Our most significant estimates and judgments are related to revenue recognition, allowances for credit losses and uncollectible loans, business combinations, and other acquired intangible assets, stock-based compensation expense, and common stock and derivative liabilities valuation. Actual results may differ from these estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. 38 -------------------------------------------------------------------------------- Table of Contents There have been no material changes to our critical accounting policies and estimates during the three and nine months endedSeptember 30, 2022 , as compared to those included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in our 2021 Annual Report on Form 10-K for the year endedDecember 31, 2021 . Recent Accounting Pronouncements Refer to the sections titled "Recently Adopted Accounting Pronouncements" in Note 1 in the Notes to our unaudited Consolidated Financial Statements included in Item 1, "Consolidated Financial Statements" for more information.
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