Toast, Inc. - Quarter Report: 2021 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the quarterly period ended September 30, 2021


o			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 001-40819

Toast, Inc.

(Exact name of registrant as specified in its charter)


Delaware		45-4168768
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

401 Park Drive,	Suite 801
Boston,	Massachusetts	02215
(Address of principal executive offices)		(Zip code)

(617) 297-1005

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock, par value of $0.000001 per share	TOST	New York Stock Exchange

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 o No x

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 x No o

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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

The registrant had outstanding 73,730,137 shares of Class A common stock and 431,016,172 shares of Class B common stock as of November 2, 2021.

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TABLE OF CONTENTS


		Page
Part I. Financial Information		1
Item 1.	Financial Statements (unaudited)	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Comprehensive Loss	4
	Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)	5
	Consolidated Statements of Cash Flows	9
	Notes to Consolidated Financial Statements	11
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56
Item 4.	Controls and Procedures	56

Part II. Other Information		58
Item 1.	Legal Proceedings	58
Item 1A.	Risk Factors	58
Item 2.	Recent Sales of Unregistered Securities and Use of Proceeds	107
Item 3.	Defaults Upon Senior Securities	108
Item 4.	Mine Safety Disclosures	108
Item 5.	Other Information	108
Item 6.	Exhibits	109
	Signatures	111

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations, financial condition, business strategy, plans and objectives of management for future operations, our market opportunity and the potential growth of that market, our liquidity and capital needs and other similar matters, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would,” or the negative of these words or other similar terms or expressions. These forward-looking statements are based on management’s current expectations and assumptions about future events, which are inherently subject to uncertainties, risks, and changes in circumstances that are difficult to predict. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements concerning the following:

•our future financial performance, including our revenue, costs of revenue or expenses, or other operating results;

•our ability to successfully execute our business and growth strategy;

•the sufficiency of our cash, cash equivalents and investments to meet our liquidity needs;

•anticipated trends and growth rates in our business and in the markets in which we operate;

•our ability to maintain the security and availability of our platform;

•our ability to increase the number of customers using our platform;

•our ability to retain, and to sell additional products and services to, our existing customers;

•our ability to successfully expand in our existing markets and into new markets;

•our expectations concerning relationships with third parties;

•our ability to effectively manage our growth and future expenses;

•our estimated total addressable market;

•our ability to maintain, protect and enhance our intellectual property;

•our ability to comply with modified or new laws and regulations applying to our business;

•the attraction and retention of qualified employees and key personnel;

•our anticipated investments in sales and marketing and research and development;

•our ability to successfully defend litigation brought against us;

•the increased expenses associated with being a public company;

•our use of the net proceeds from our initial public offering;

•the impact of the COVID-19 pandemic on our business and industry;

•our ability to compete effectively with existing competitors and new market entrants; and

•our ability to integrate companies and assets that we have or may acquire.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

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In addition, statements that “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 date of this Quarterly Report on Form 10-Q. And while we believe such information provides a reasonable basis for such statements, such information may be limited or incomplete. 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 you are cautioned not to unduly rely upon these statements.

iii

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TOAST, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share and per share amounts)

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	September 30, 2021		December 31, 2020
Assets:
Current assets:
Cash and cash equivalents	$	1,301,619	$	581,824
Accounts receivable, net of allowance for doubtful accounts of $2,568 and $4,438, respectively, at September 30, 2021 and December 31, 2020	52,730		32,633
Merchant cash advances and loans receivable, net of allowance for uncollectible loans of $3,668 and $4,454, respectively, at September 30, 2021 and December 31, 2020	409		872
Inventories	38,665		19,330
Costs capitalized to obtain revenue contracts, net	23,931		16,794
Prepaid expenses and other current assets	79,561		21,611
Total current assets	1,496,915		673,064
Property and equipment, net	42,381		44,111
Intangible assets	17,188		6,835
Goodwill	74,738		35,887
Restricted cash	2,694		1,214
Security deposits	806		1,633
Non-current costs capitalized to obtain revenue contracts, net	18,755		12,612
Other non-current assets	3,776		600
Total non-current assets	160,338		102,892
Total assets	$	1,657,253	$	775,956
Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit):
Current liabilities:
Accounts payable	$	33,696	$	30,554
Current portion of deferred revenue	46,865		42,680
Accrued expenses and other current liabilities	206,218		63,172
Total current liabilities	286,779		136,406
Long-term debt, net of discount	—		171,709
Derivative liabilities	—		37,443
Warrants to purchase preferred stock	—		11,405
Warrants to purchase common stock	308,195		—
Deferred revenue, net of current portion	12,832		15,533
Deferred rent, net of current portion	16,106		18,536
Other long-term liabilities	23,867		7,007
Total long-term liabilities	361,000		261,633
Total liabilities	647,779		398,039
Commitments and Contingencies (Note 19)
Convertible preferred stock, $0.000001 par value—no shares authorized, issued or outstanding as of September 30, 2021; 257,245,680 authorized and 253,832,025 shares issued and outstanding at December 31, 2020; total liquidation value of $849,970 at December 31, 2020.	—		848,893
Stockholders’ Equity (Deficit):
Preferred stock- par value $0.000001; 100,000,000 shares authorized, no shares issued or outstanding	—		—
Common stock, $0.000001 par value— no shares authorized, issued and outstanding as of September 30, 2021; 570,000,000 shares authorized, 219,755,430 shares issued and outstanding as of December 31, 2020	—		—
Class A common stock, $0.000001 par value- 7,000,000,000 shares authorized, 25,000,000 shares issued and outstanding as of September 30, 2021; no shares authorized, issued and outstanding at December 31, 2020	—		—
Class B common stock, $0.000001 par value- 700,000,000 shares authorized, 479,406,030 shares issued and outstanding as of September 30, 2021; no shares authorized, issued and outstanding at December 31, 2020	—		—
Treasury stock, at cost— 225,000 shares outstanding at September 30, 2021 and December 31, 2020	(665)		(665)
Accumulated other comprehensive income	45		228
Additional paid-in capital	2,113,107		145,327
Accumulated deficit	(1,103,013)		(615,866)
Total stockholders’ equity (deficit)	1,009,474		(470,976)
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)	$	1,657,253	$	775,956

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The accompanying notes are an integral part of these consolidated financial statements.

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TOAST, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

(in thousands, except share and per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue:
Subscription services	$	45,803	$	27,406	$	113,844	$	72,193
Financial technology solutions	404,224		188,195		983,699		450,265
Hardware	31,051		18,148		80,005		48,335
Professional services	5,301		3,008		12,579		9,806
Total revenue	486,379		236,757		1,190,127		580,599
Costs of revenue:
Subscription services	18,016		10,388		41,044		29,205
Financial technology solutions	327,235		145,945		779,111		358,402
Hardware	42,109		21,914		93,521		63,336
Professional services	14,585		9,282		35,276		33,655
Amortization of acquired technology and customer assets	1,180		908		3,147		2,695
Total costs of revenue	403,125		188,437		952,099		487,293
Gross profit	83,254		48,320		238,028		93,306
Operating expenses:
Sales and marketing	56,622		32,216		130,480		104,326
Research and development	39,700		34,274		112,978		78,658
General and administrative	40,633		20,481		105,095		73,558
Total operating expenses	136,955		86,971		348,553		256,542
Loss from operations	(53,701)		(38,651)		(110,525)		(163,236)
Other income (expense):
Interest income	8		137		61		819
Interest expense	(247)		(5,661)		(12,403)		(6,846)
Change in fair value of warrant liabilities	(198,389)		(202)		(214,881)		60
Change in fair value of derivative liability	—		(18,208)		(103,281)		(18,208)
Loss on debt extinguishment	—		—		(49,783)		—
Other income (expense), net	(39)		104		42		325
Loss before (provision for) benefit from income taxes	(252,368)		(62,481)		(490,770)		(187,086)
(Provision for) benefit from income taxes	(129)		(127)		3,623		(69)
Net loss	$	(252,497)	$	(62,608)	$	(487,147)	$	(187,155)
Net loss per share attributable to common stockholders, basic and diluted	$	(1.05)	$	(0.31)	$	(2.22)	$	(0.94)
Weighted average shares used in computing net loss per share, basic and diluted	239,358,805		200,579,529		219,746,454		199,245,332

Net loss	$	(252,497)	$	(62,608)	$	(487,147)	$	(187,155)
Other comprehensive income (loss):
Foreign currency translation	(69)		(24)		(183)		5
Comprehensive loss	$	(252,566)	$	(62,632)	$	(487,330)	$	(187,150)

The accompanying notes are an integral part of these consolidated financial statements.

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TOAST, INC.

CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(unaudited)

(in thousands, except share amounts)


Nine Months Ended September 30, 2021
	Convertible Preferred Preferred Stock			Class A and Class B Common Stock			Treasury Stock	Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income			Total Stockholders' Equity (Deficit)
	Shares	Amount		Shares	Amount				Shares					Amount
Balances at December 31, 2020	253,832,025	$	848,893	219,755,430	$	—		225,000		$	(665)	$	145,327		$	(615,866)	$	228	$	(470,976)
Repurchase of common stock	—	—		(4,750)	—			—		—		—			—		—		—
Issuance of common stock in connection with business combination	—	—		569,400	—			—		—		14,857			—		—		14,857
Exercise of common stock options	—	—		4,340,713	—			—		—		4,187			—		—		4,187
Exercise of common stock options in connection with promissory notes repayment	—	—		—	—			—		—		13,540			—		—		13,540
Issuance of common stock upon vesting of restricted stock units	—	—		52,790	—			—		—		—			—		—		—
Vesting of restricted stock	—	—		—	—			—		—		3,354			—		—		3,354
Stock-based compensation (1)	—	—		—	—			—		—		95,755			—		—		95,755
Conversion of preferred stock warrants into common stock warrants and issuance of common stock upon net exercise of common stock warrants	—	—		860,422	—			—		—		43,297			—		—		43,297
Conversion of preferred stock	(253,832,025)	(848,893)		253,832,025	—			—		—		848,892			—		—		848,892
Issuance of common stock in connection with initial public offering, net of offering costs, underwriting discounts and commissions	—	—		25,000,000	—			—		—		943,898			—		—		943,898
Cumulative translation adjustment	—	—		—	—			—		—		—			—		(183)		(183)
Net loss	—	—		—	—			—		—		—			(487,147)		—		(487,147)
Balances at September 30, 2021	—	$	—	504,406,030	$	—		225,000		$	(665)	$	2,113,107		$	(1,103,013)	$	45	$	1,009,474

(1)During the nine months ended September 30, 2021, stock-based compensation expense recorded within additional paid-in capital does not include $2,011 of expense recognized as a result of the acquisition of xtraCHEF due to accelerated vesting of acquiree option awards on the acquisition date (see Note 4).

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Nine Months Ended September 30, 2020
	Convertible Preferred Preferred Stock			Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Stockholders' Deficit
	Shares	Amount		Shares	Amount		Shares	Amount
Balances at December 31, 2019	209,608,075	$	446,555	214,901,400	$	—	200,000	$	(460)	$	56,010	$	(385,921)	$	(55)	$	(330,426)
Cumulative adjustment due to adoption of ASC 606	—	—		—	—		—	—		—		18,258		—		18,258
Repurchase of common stock	—	—		(220,940)	—		25,000	(205)		(70)		—		—		(275)
Issuance of Series F preferred stock	44,301,220	402,368		—	—		—	—		—		—		—		—
Exercise of stock options	—	—		3,146,345	—		—	—		1,158		—		—		1,158
Vesting of restricted stock	—	—		—	—		—	—		294		—		—		294
Stock-based compensation	—	—		—	—		—	—		58,357		—		—		58,357
Cumulative translation adjustment	—	—		—	—		—	—		—		—		5		5
Net loss	—	—		—	—		—	—		—		(187,155)		—		(187,155)
Balances at September 30, 2020	253,909,295	$	848,923	217,826,805	$	—	225,000	$	(665)	$	115,749	$	(554,818)	$	(50)	$	(439,784)

The accompanying notes are an integral part of these consolidated financial statements.

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Three Months Ended September 30, 2021
	Convertible Preferred Preferred Stock			Class A and Class B Common Stock			Treasury Stock	Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income			Total Stockholders' Equity (Deficit)
	Shares	Amount		Shares	Amount				Shares					Amount
Balances at June 30, 2021	253,832,025	$	848,893	223,761,525	$	—		225,000		$	(665)	$	235,921		$	(850,516)	$	114	$	(615,146)
Repurchase of common stock	—	—		(750)	—			—		—		—			—		—		—
Exercise of warrants	—	—		860,422	—			—		—		43,297			—		—		43,297
Conversion of preferred stock	(253,832,025)	(848,893)		253,832,025	—			—		—		848,892			—		—		848,892
Exercise of common stock options	—	—		952,808	—			—		—		1,139			—		—		1,139
Issuance of common stock in connection with initial public offering, net of offering costs, underwriting discounts and commissions	—	—		25,000,000	—			—		—		943,898			—		—		943,898
Stock-based compensation	—	—		—	—			—		—		36,897			—		—		36,897
Vesting of restricted stock	—	—		—	—			—		—		3,063			—		—		3,063
Cumulative translation adjustment	—	—		—	—			—		—		—			—		(69)		(69)
Net loss	—	—		—	—			—		—		—			(252,497)		—		(252,497)




Balances at September 30, 2021	—	$	—	504,406,030	$	—		225,000		$	(665)	$	2,113,107		$	(1,103,013)	$	45	$	1,009,474

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Three Months Ended September 30, 2020
	Convertible Preferred Preferred Stock			Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Stockholders' Deficit
	Shares	Amount		Shares	Amount		Shares	Amount
Balances at June 30, 2020	253,909,295	$	848,945	215,718,820	$	—	225,000	$	(665)	$	78,734	$	(492,210)	$	(26)	$	(414,167)
Repurchase of common stock	—	—		(13,250)	—		—	—		(70)		—		—		(70)
Issuance cost of Series F preferred stock	—	(22)		—	—		—	—		—		—		—		—
Exercise of common stock options	—	—		2,121,235	—		—	—		803		—		—		803
Vesting of restricted stock	—	—		—	—		—	—		81		—		—		81
Stock-based compensation (1)	—	—		—	—		—	—		36,201		—		—		36,201
Cumulative translation adjustment	—	—		—	—		—	—		—		—		(24)		(24)
Net loss	—	—		—	—		—	—		—		(62,608)		—		(62,608)


Balances at September 30, 2020	253,909,295	$	848,923	217,826,805	$	—	225,000	$	(665)	$	115,749	$	(554,818)	$	(50)	$	(439,784)

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TOAST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Nine Months Ended September 30,
	2021		2020
Cash flows from operating activities:
Net loss	$	(487,147)	$	(187,155)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	15,617		9,498
Stock-based compensation	95,210		58,357
Amortization of costs capitalized to obtain revenue contracts	17,596		10,818
Change in fair value of derivative liability	103,281		18,208
Change in fair value of warrant liabilities	214,881		(60)
Change in deferred income taxes	(3,920)		—
Loss on debt extinguishment	49,783		—
Non-cash interest expense on convertible notes	11,771		6,404
Other	305		256
Changes in operating assets and liabilities:
Accounts receivable, net	(20,083)		(8,425)
Factor receivable, net	153		2,568
Merchant cash advances repaid	537		8,233
Prepaid expenses and other current assets	(31,867)		8,395
Costs capitalized to obtain revenue contracts, net	(30,876)		(17,580)
Inventories	(19,336)		698
Accounts payable	8,207		(6,289)
Accrued expenses and other current liabilities	106,306		8,276
Deferred revenue	1,484		(2,268)
Other assets and liabilities	2,068		3,436
Net cash provided by (used in) operating activities	33,970		(86,630)
Cash flows from investing activities:
Cash paid for acquisition, net of cash acquired	(26,142)		—
Capitalized software	(5,712)		(6,479)
Purchases of property and equipment	(10,570)		(35,385)
Other	—		233
Net cash used in investing activities	(42,424)		(41,631)
Cash flows from financing activities:
Proceeds from issuance of Class A common stock upon initial public offering, net of underwriter discounts	950,360		—
Payment of deferred offering costs	(4,044)		—
Repayments of secured borrowings	—		(8,544)
Extinguishment of convertible notes	(244,528)		—
Change in customer funds obligations, net	26,002		6,138
Proceeds from issuance of long-term debt	—		194,850
Proceeds from exercise of stock options	17,727		1,158
Proceeds from issuance of Series F preferred stock	—		402,368
Proceeds from exercise of restricted stock	10,397		265
Repurchase of restricted stock	—		(155)
Repurchase of common stock	—		(275)
Net cash provided by financing activities	755,914		595,805

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Net increase in cash, cash equivalents, cash held on behalf of customers and restricted cash	747,460		467,544
Effect of exchange rate changes on cash and cash equivalents and restricted cash	(183)		5
Cash, cash equivalents, cash held on behalf of customers and restricted cash at beginning of period	593,676		159,389
Cash, cash equivalents, cash held on behalf of customers and restricted cash at end of period	$	1,340,953	$	626,938
Reconciliation of cash, cash equivalents, cash held on behalf of customers and restricted cash
Cash and cash equivalents	$	1,301,619	$	611,907
Cash held on behalf of customers	36,640		12,853
Restricted cash	2,694		2,178
Total cash, cash equivalents, cash held on behalf of customers and restricted cash	$	1,340,953	$	626,938
Supplemental disclosures of cash flow information
Cash paid for interest	$	13,226	$	—

Non-cash items in investing and financing activities
Purchase of property and equipment included in accounts payable and accrued expenses	$	148	$	8,868
Contingent consideration included in purchase price	1,876		—
Deferred payments included in purchase price	5,357		—
Common stock issued in acquisition	14,857		—
Conversion of convertible preferred stock into Class B common stock upon initial public offering	848,893		—
Issuance of Class B common stock upon exercise of common stock warrants	43,297		—
Issuance of common stock warrants upon debt extinguishment	125,111		—
Deferred offering costs included in accounts payable and accrued expenses	2,298		—
Stock-based compensation included in capitalized software	545		—

The accompanying notes are an integral part of these consolidated financial statements.

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TOAST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(Amounts in thousands, except share and per share amounts)

1. Description of Business and Basis of Presentation

Toast, Inc. (together with its subsidiaries, the “Company” or “Toast”), a Delaware corporation, is a cloud-based end-to-end technology platform purpose-built for the entire restaurant community. Toast’s platform provides a comprehensive suite of software as a service (“SaaS”) products, financial technology solutions, including integrated payment processing, restaurant-grade hardware, and a broad ecosystem of third-party partners. Toast serves as the restaurant operating system, connecting front of house and back of house operations across dine-in, takeout, and delivery channels.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations.

The accompanying unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary for the fair presentation of the Company's consolidated financial position as of September 30, 2021, the results of operations and comprehensive loss for the three and nine months ended September 30, 2021 and 2020, and cash flows for the nine months ended September 30, 2021 and 2020. The consolidated balance sheet as of December 31, 2020 included herein was derived from the audited financial statements as of that date. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021, or for any other future annual or interim period. The information included in these consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s final prospectus dated September 21, 2021 (the “Prospectus”) as filed with the SEC on September 22, 2021 pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”).

The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Comprehensive loss consists of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes income and expenses that are recorded as an element of stockholders’ equity (deficit), but are excluded from the Company’s net loss. For all periods presented, the Company’s other comprehensive income (loss) consists of foreign currency translation adjustments related to the Company’s foreign subsidiaries.

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Stock Split

On September 9, 2021, the Company’s Board of Directors and stockholders approved a 5-for-1 stock-split of the Company’s common stock and convertible preferred stock which became effective upon the filing of the Company’s amended and restated certificate of incorporation on September 10, 2021. Upon the effectiveness of the stock split, (i) every one share of common stock outstanding was converted into 5 shares of common stock, (ii) every one share of convertible preferred stock outstanding was converted into 5 shares of convertible preferred stock, (iii) the number of shares of common stock into which each outstanding option to purchase common stock is exercisable was proportionally increased on a 5-for-1 basis, (iv) the exercise price of each outstanding option to purchase common stock was proportionately decreased on a 5-for-1 basis, (v) the number of shares of common stock that will be issued when each outstanding RSU vests was proportionally increased on a 5-for-1 basis, (vi) the number of shares issuable upon the exercise of warrants to purchase common stock and preferred stock was proportionally increased on a 5-for-1 basis, and (vii) the exercise price of each outstanding warrant to purchase common stock and preferred stock was proportionately decreased on a 5-for-1 basis. Additionally, shares of common stock that remain available for issuance to officers, directors, employees, and consultants pursuant to the Company’s 2014 Amended and Restated Stock Incentive Plan, as amended, were proportionately increased on a 5-for-1 basis. All share and per share data shown in the accompanying consolidated financial statements and related notes have been retroactively revised to reflect the stock split.

Initial Public Offering

On September 24, 2021, the Company completed its initial public offering (“IPO”) in which it issued and sold 25,000,000 shares of its Class A common stock at the public offering price of $40.00 per share, which included the full exercise of the underwriters’ option to purchase an additional 3,260,869 shares. The Company received net proceeds of $943.9 million after deducting underwriting discounts and commissions and other offering costs.

Immediately prior to the completion of the IPO, 253,832,025 shares of convertible preferred stock were automatically converted into an equal number of shares of Class B common stock, outstanding warrants to purchase shares of Series B convertible preferred stock were automatically exchanged into 255,910 shares of Class B common stock for immaterial cash consideration, and 400,000 outstanding warrants to purchase shares of Series B convertible preferred stock became exercisable for the same number of shares of Class B common stock. Additionally, outstanding warrants to purchase 214,500 and 131,625 shares of Series C convertible preferred stock, respectively, became exercisable for the same number of shares of Class B common stock.

In connection with the consummation of the IPO, the Company filed an amended and restated certificate of incorporation (the “Restated Certificate”) with the Secretary of State of the State of Delaware on September 24, 2021. The Restated Certificate amended and restated the Company’s then existing amended and restated certificate of incorporation in its entirety, and, among other things: (i) authorized 7,000,000,000 shares of Class A common stock; (ii) authorized 700,000,000 shares of Class B common stock; (iii) authorized 100,000,000 shares of undesignated preferred stock that may be issued from time to time by the Board in one or more series; and (iv) eliminated all references to the previously-existing series of preferred stock. Upon completion of the IPO, each share of common stock issued and outstanding was reclassified as, and became, one share of Class B common stock. Each share of Class A common stock entitles the holder to one vote per share and each share of Class B common stock entitles the holder to ten votes per share on all matters submitted to a vote of stockholders. Holders of Class A common stock and Class B common stock are entitled to receive dividends, when and if declared by the Board. In addition, each share of Class B common stock will convert automatically into a share of Class A common stock on the earlier of (i) the date that is seven years from the date of the filing and effectiveness of the Restated Certificate in Delaware, or (ii) the date the holders of at least two-thirds of the Company’s outstanding Class B common stock elect to convert the Class B common stock to Class A common stock.

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Impact of COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The COVID-19 pandemic has rapidly impacted market and economic conditions globally. In an attempt to limit the spread of the virus, various governmental restrictions have been implemented, including business activity and travel restrictions as well as “shelter-at-home” orders. These restrictions impacted restaurants in various ways, including limiting service to takeout orders for a period of time or reducing capacity to accommodate social distancing recommendations.

The Company considered the potential effects of the COVID-19 pandemic on its consolidated financial statements and the carrying amounts of assets or liabilities as of September 30, 2021 and December 31, 2020. As of September 30, 2021 and December 31, 2020, the Company had recognized a liability of $8,987 and $6,930, respectively, in connection with lease termination fees. During the nine months ended September 30, 2020, the Company completed a significant reduction in workforce, pursuant to which it incurred severance costs of $10,127 and stock-based compensation expense of $980 in connection with the modification of previously issued employee stock option awards. Additionally, the Company was also engaged in efforts to reduce operating expenses and took other measures to reduce discretionary spending while conditions remained uncertain for the restaurant industry.

Reclassifications

Certain amounts in prior period financial statements have been reclassified to conform to the current period presentation. Such reclassifications have not materially affected previously reported amounts.

2. Summary of Significant Accounting Policies and Supplemental Financial Statement Disclosures

The Company believes that other than the adoption of new accounting pronouncements as described below, there have been no significant changes during the nine months ended September 30, 2021 and 2020 to the items disclosed in Note 2, "Summary of Significant Accounting Policies", included the audited financial statements for the years ended December 31, 2020 and 2019.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management 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 at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates, judgments, and assumptions in these consolidated financial statements include, but are not limited to, those related to revenue recognition, allowance for doubtful accounts, allowances for uncollectible loans and merchant cash advances, loan servicing assets, allowance for excessive and obsolete inventory, reserves for warranties on hardware sold, reserves for sales returns, guarantees for losses on customer loans held with a bank the Company partners with, business combinations and other acquired intangible assets, stock-based compensation, warrants, convertible debt, debt derivatives and common stock valuation. Actual results could vary from those estimates.

Deferred Offering Costs

The Company capitalized certain legal, accounting and other third-party fees that were directly associated with in-process equity financings as deferred offering costs until such financings were consummated. Upon completion of the IPO, $6,462 of such costs were recorded as a reduction of the proceeds generated from the offering which were recognized in additional paid-in capital. As of December 31, 2020, $120 of deferred offering costs included in other non-current assets on the unaudited consolidated balance sheets.

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Recently Issued Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), as amended, which supersedes the guidance in ASC 840, Leases. The new standard requires lessees to classify leases as either finance or operating leases based on whether they effectively represent a financed purchase by the lessee.

This classification determines lease expense recognition based on an effective interest method or a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a lease term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for as operating leases. Topic 842 is effective for fiscal years beginning after December 15, 2019 for public entities, and for fiscal years beginning after December 15, 2021, and interim periods in annual periods beginning after December 15, 2022, for non-public entities. Early adoption is permitted. The Company is currently evaluating the impact of Topic 842 adoption on its consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and has since issued various amendments, including ASU No. 2018-19, ASU No. 2019-04, ASU No. 2019-05, ASU No. 2019-11, and ASU 2020-02. The guidance and the related amendments modify the accounting for credit losses for most financial assets and require the use of an expected credit loss model replacing the currently used incurred loss method. Under this model, entities will be required to estimate the expected lifetime credit losses for such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. Topic 326 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years, for public entities and for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, for non-public entities. Early adoption is permitted. The Company is currently evaluating the impact of Topic 326 adoption on its consolidated financial statements and related disclosures.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements (Topic 326), Financial Instruments — Credit Losses (Topic 815), Derivatives and Hedging (Topic 815), and Financial Instruments (Topic 825). The amendments clarify the scope of the credit losses standard, among other things. With respect to hedge accounting, the amendments address partial-term fair value hedges and fair value hedge basis adjustments. Additionally, the amendments address the scope of the guidance related to recognition and measurement of financial instruments, the requirements for remeasurement to fair value when using the measurement alternative, and certain disclosure requirements. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, for the entities that adopted Topic 326, and for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, for non-public entities. Early adoption is permitted for the entities that have adopted Topic 326. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The amendments simplify the accounting for income taxes by removing certain exceptions and improving consistent application of other areas of the topic by clarifying the guidance. The new guidance is effective for fiscal years beginning after December 15, 2020 for public entities and for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, for non-public entities. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on the consolidated financial statements and related disclosures.

In August 2020, the FASB issued Accounting Standards Update (“ASU”) No. 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 (“ASU 2020-06”). The new guidance simplifies the accounting for certain financial instruments by removing certain separation models required under current U.S. GAAP, including the beneficial conversion feature and cash conversion feature. ASU 2020-06 also improves and amends the related earnings per share guidance for both subtopics. ASU 2020-06 is effective for public business entities for fiscal years beginning after December 15, 2021 and interim periods within that fiscal year. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is evaluating the impact of the adoption of ASU 2020-06 on its consolidated financial statements and related disclosures.

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Emerging Growth Company Status

The Company is an “emerging growth company” (“EGC”), as defined in the Jumpstart Our Business Startups Act (“JOBS Act”) and accordingly the Company may choose to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not EGCs. The Company may take advantage of these exemptions until the Company is no longer an EGC under Section 107 of the JOBS Act, which provides that an EGC can take advantage of the extended transition period afforded by the JOBS Act for complying with new or revised accounting standards. The Company has elected to use the extended transition period for complying with new or revised accounting standards, and as a result of this election, the unaudited consolidated financial statements may not be comparable to companies that comply with public company effective dates. If the Company were to lose EGC status for purposes of its 2021 consolidated financial statements, it would need to adopt ASUs No. 2016-02, 2016-13, 2019-04 and 2019-12, retroactive to January 1, 2021 in its annual consolidated financial statements.

3. Revenue from Contracts with Customers

During the nine months ended September 30, 2021 and 2020, the Company generated four types of revenue, including: (1) subscription services from its software as a service (the “SaaS”) products, (2) financial technology services, including loan servicing activities, (3) hardware, and (4) professional services. Our contracts often include promises to transfer multiple products and services to a customer.

The following table summarizes the activity in deferred revenue:


	Nine Months Ended September 30,
	2021		2020
Deferred revenue, beginning of year	$	58,213	$	59,494
Cumulative adjustment for adoption of ASC 606	—		7,048
Deferred revenue, beginning of year, as adjusted	58,213		66,542
Deferred revenue, end of period	59,697		64,276
Revenue recognized in the period from amounts included in deferred revenue at the beginning of period	$	36,078	$	23,413

As of September 30, 2021, approximately $352,045 of revenue is expected to be recognized from remaining performance obligations for customer contracts. The Company expects to recognize revenue of approximately $343,391 from these remaining performance obligations over the next 24 months, with the balance recognized thereafter.

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The following table summarizes the activity in deferred contract acquisition costs:


	Nine Months Ended September 30,
		2021		2020
Beginning balance		$	29,406	$	—
Adjustment due to adoption of ASC 606		—		19,617
Capitalization of sales commissions costs		30,876		17,580
Amortization of sales commissions costs		(17,596)		(10,818)
Ending balance		$	42,686	$	26,379


	Nine Months Ended September 30,
		2021		2020
Capitalized sales commissions costs, current		$	23,931	$	14,758
Capitalized sales commissions costs, non-current		18,755		11,621
Total capitalized sales commissions costs		$	42,686	$	26,379

Amortization of sales commissions costs was $6,604 and $4,051, respectively, during the three months ended September 30, 2021 and 2020.

4. Business Combination

On June 8, 2021, the Company acquired 100% of the outstanding capital stock of xtraCHEF, Inc. (“xtraCHEF”), a provider of restaurant-specific invoice management software that automates the accounts payable and inventory workflow and improves efficiencies related to expense tracking and recording. The acquisition is expected to expand the Company’s product portfolio and enable its customers to improve operational efficiencies and financial decision-making.

The preliminary aggregate purchase price, net of cash acquired of $883, is subject to normal and customary purchase price adjustments and is as follows on the acquisition date:


	Amount
Cash consideration, net of cash acquired	$	23,528
Fair value of common stock issued	14,857
Fair value of settled stock option awards	1,343
Fair value of contingent consideration	1,876
Liabilities settled on behalf of xtraCHEF	1,271
Deferred payments for indemnity claims and working capital funds, net of adjustments (1)	5,357
Total purchase price	$	48,232

(1)The amount includes the indemnity funds related to the seller's satisfaction of potential indemnity claims that may be released to the sellers no later than 15 months following the acquisition date, as well as a cash payment related to working capital, subject to further working capital adjustments, that will be released to the sellers or remitted back to the Company no later than 12 months following the acquisition date.

In consideration for the acquisition of xtraCHEF, the Company issued 569,400 shares of common stock to the seller shareholders with a fair value of $26.10 per share on the acquisition date supported by a contemporaneous valuation. Additionally, the Company settled 265,250 acquiree option awards that were subject to accelerated vesting on the acquisition date. Total consideration transferred for the settled option awards consisted of cash consideration of $2,823 and deferred consideration of $531, which included the indemnity fund, the working capital fund and the fair value of contingent consideration. The consideration transferred for the settled option awards of $3,354 approximated the estimated fair value of the settled option awards on the acquisition date, of which $1,343 was attributable to pre-acquisition services and included in the purchase price. The remaining amount of $2,011 was recorded as a stock-based compensation expense on the acquisition date within general and administrative expenses in the Company’s unaudited consolidated statements of comprehensive loss.

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Fair value of contingent consideration of $2,013 on the acquisition date was estimated based on a Monte Carlo simulation and recorded as a liability in the consolidated balance sheets. Contingent consideration liability was $2,293 at September 30, 2021. Contingent consideration is based on a cumulative achievement of certain recurring revenue targets, as defined in the acquisition agreement, and represents a potential obligation of the Company to pay cash and issue additional shares of its common stock to the former xtraCHEF shareholders up to a certain amount based on the achievement of the required revenue targets during the years ended December 31, 2021 and 2022. The contingent consideration obligation is limited to a maximum payment amount of $7,300. The liability of $5,650 related to the indemnity fund will be released to the sellers, to the extent there are no claims for indemnification by the Company against the fund, no later than 15 months following the acquisition date and is included within other long-term liabilities in the unaudited consolidated balance sheets.

The Company accounted for the acquisition as a business combination in accordance with provisions of ASC 805, Business Combinations ("ASC 805"). The operating results of xtraCHEF have been reflected in the Company’s results of operations from the date of the acquisition. The Company used a market participant approach to record the assets acquired and liabilities assumed in the xtraCHEF acquisition. Due to the timing of the acquisition, the accounting for this acquisition was not complete as of September 30, 2021. The fair values of the assets acquired and the liabilities assumed have been determined provisionally and are subject to adjustment as the Company obtains additional information. In particular, additional time is needed to review and finalize the results of the valuation of assets acquired and liabilities assumed. Any adjustments to the purchase price allocation will be made as soon as practicable, but no later than one year from the acquisition date.

Goodwill represents the excess of the consideration transferred over the fair value of the net assets acquired. Goodwill is primarily the result of expected synergies from combining the operations of xtraCHEF with the Company’s operations and is currently not deductible for tax purposes.

The following table summarizes the allocation of the preliminary purchase price and the amounts of assets acquired and liabilities assumed for the acquisition based upon their estimated fair values at the date of acquisition. Such balances are reflected in the unaudited consolidated balance sheets as of September 30, 2021:


	Amount
Property and equipment	$	22
Intangible assets	13,500
Goodwill	38,851
Net working capital	(221)
Deferred tax liability	(3,920)
Net assets acquired	$	48,232

The developed technology and the customer relationships intangible assets of $12,600 and $900, respectively, have a weighted average amortization period of 10 years and 6 years, respectively, on the acquisition date. The Company used the income approach in accordance with the relief-from-royalty method to estimate the fair value of the developed technology which is equal to the present value of the after-tax royalty savings attributable to owning the intangible asset. Fair value of the customer relationships was estimated based on the income approach in accordance with the excess-earnings method which is equal to the present value of the after-tax cash flows attributable to the intangible asset only.

During the nine months ended September 30, 2021, the Company incurred acquisition-related costs of $1,113 in connection with the acquisition of xtraCHEF which were recorded in general and administrative expenses in the Company’s unaudited consolidated statements of comprehensive loss. There were no such costs incurred during the three months ended September 30, 2021.

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The Company did not present proforma financial information for its consolidated results of operations for the nine months ended September 30, 2021 and the three and nine months ended September 30, 2020 as if the acquisition of xtraCHEF occurred on January 1, 2020 because such results were not material. Revenue and result of operations from xtraCHEF were not material to the Company's consolidated revenue and consolidated net loss during the three and nine months ended September 30, 2021.

5. Cash and Cash Equivalents, Cash Held on Behalf of Customers and Restricted Cash

The Company defines cash and cash equivalents as highly liquid investments with original maturities of 90 days or less at the time of purchase. At September 30, 2021 and December 31, 2020, the Company’s cash and cash equivalents consisted primarily of cash held in checking and money market accounts.

Cash held on behalf of customers represents an asset that is restricted for the purpose of satisfying obligations to remit funds to various tax authorities to satisfy customers’ payroll, tax, and other obligations. Cash held on behalf of customers is included within prepaid expenses and other current assets, and the corresponding customer funds obligation is included within accrued expenses and other current liabilities on the Company’s unaudited consolidated balance sheets.

Restricted cash represents cash held with commercial lending institutions. The restrictions are related to cash collateralized letters of credit to cover potential customer defaults on third-party financing arrangements. Additionally, restricted cash is held as collateral pursuant to an agreement with the originating bank for the Company’s loan product (see Note 9).

Cash, cash equivalents, cash held on behalf of customers, and restricted cash consisted of the following:


	September 30, 2021		December 31, 2020
Cash and cash equivalents	$	1,301,619	$	581,824
Cash held on behalf of customers	36,640		10,638
Restricted cash	2,694		1,214
Total cash, cash equivalents, cash held on behalf of customers and restricted cash	$	1,340,953	$	593,676

6. Fair Value of Financial Instruments

Certain assets and liabilities of the Company are carried at fair value and measured based on the valuation techniques that are classified and disclosed based on three levels of the fair value hierarchy. The fair value of the Company’s Level 1 financial instruments is based on quoted market prices for identical instruments in active markets. The fair value of the Company’s Level 3 financial instruments is based on unobservable inputs that are supported by little or no market activity, including pricing models, discounted cash flow methodologies, and similar techniques. As of September 30, 2021 and December 31, 2020, there were no financial instruments with fair value measured based on Level 2 hierarchy.

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The following table presents information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis and indicates the level of the fair value hierarchy used to determine such fair values:


	Fair Value Measurement at September 30, 2021 Using
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	183,000	$	—	$	—	$	183,000
	$	183,000	$	—	$	—	$	183,000
Liabilities:
Warrants to purchase common stock	—		—		308,195		308,195
Contingent consideration	—		—		2,293		2,293
	$	—	$	—	$	310,488	$	310,488


	Fair Value Measurement at December 31, 2020 Using
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	142,000	$	—	$	—	$	142,000
	$	142,000	$	—	$	—	$	142,000
Liabilities:
Warrants to purchase preferred stock	$	—	$	—	$	11,405	$	11,405
Derivative liabilities	—		—		37,443		37,443
	$	—	$	—	$	48,848	$	48,848

During the nine months ended September 30, 2021 and 2020, there were no transfers into or out of Level 3 measurements within the fair value hierarchy.

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Valuation of Warrants to Purchase Preferred Stock

The fair value of the liability for warrants to purchase preferred stock in the table above was determined based on significant inputs not observable in the market, which represent Level 3 measurements within the fair value hierarchy. The fair value of the warrants was determined using the Black-Scholes option-pricing model, which considered as inputs the underlying price, strike price, time to expiration, volatility, risk-free interest rates, and dividend yield. The following table indicates the weighted-average assumptions made in estimating the fair value for the nine months ended September 30, 2021 and 2020.


	Nine Months Ended September 30, 2021 (1)			Nine Months Ended September 30, 2020
Risk-free interest rate	0.8		%	0.2		%
Contractual term (in years)	4.7			6.0
Expected volatility	53.6		%	60.0		%
Expected dividend yield	—		%	—		%
Exercise price	$	0.74		$	0.74

_______________

(1) During the nine months ended September 30, 2021, fair value of the preferred stock warrants liability was measured based on the weighted average assumptions from January 1, 2021 through September 24, 2021, the date they were converted into common stock warrants.

Immediately prior to the completion of the IPO on September 24, 2021, all outstanding warrants to purchase preferred stock were automatically converted into warrants to purchase common stock for no consideration or became exercisable for the same number of shares of Class B common stock (see Note 11). As a result, the associated preferred stock warrant liability was reclassified into common stock warrant liability following the IPO.

Valuation of Warrants to Purchase Common Stock

The fair value of the liability for warrants to purchase common stock in the table above was determined based on significant inputs not observable in the market, which represent Level 3 measurements within the fair value hierarchy. The fair value of the warrants was determined using the Black-Scholes option-pricing model, which considered as inputs the underlying price, strike price, time to expiration, volatility, risk-free interest rates, and dividend yield.

The following table indicates the weighted-average assumptions made in estimating the fair value for the nine months ended September 30, 2021:


	Nine Months Ended September 30, 2021 (1)
Risk-free interest rate	1.1		%
Contractual term (in years)	5.69
Expected volatility	53.3		%
Expected dividend yield	—		%
Exercise price	$	17.15

_______________

(1) Fair value of the common stock warrants liability excludes the warrants to purchase preferred stock which were converted into warrants to purchase Class B common stock immediately prior to the completion of the IPO.

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Valuations of Convertible Notes, Related Bifurcated Derivative Liability and Contingently Issuable Warrants

In June 2020, the Company issued $200,000 aggregate principal amount of senior unsecured convertible promissory notes (the “Convertible Notes”). The Convertible Notes provided a conversion option whereby upon the closing of an underwritten public offering or direct listing of the Company’s common stock on a national securities exchange, in each case, that meets certain criteria, the Convertible Notes would convert into common stock at a conversion price that represented a discount to the price paid by investors (see Note 10). The conversion option was determined to be an embedded derivative, required to be bifurcated and accounted for separately from the Convertible Notes. Upon a voluntary redemption of the Convertible Notes, the Company is obligated to issue warrants to the note holders to purchase common stock equal to two-thirds the principal balance divided by the strike price which is determined assuming a total equity value of $9,500,000 divided by the fully diluted share count at the time of conversion. These contingently issuable warrants to purchase common stock met the definition of a derivative and were accounted for separately and recorded based on the fair value of those warrants as adjusted for the probability that there would be a voluntary redemption of the Convertible Notes.

The fair value of the bifurcated derivative liability and contingently issuable warrants was determined based on inputs not observable in the market, which represented a Level 3 measurement within the fair value hierarchy. The Company’s valuations of the bifurcated derivative liability and contingently issuable warrants were measured using an income approach based on a discounted cash flow model, as well as a probability-weighted expected return method (“PWERM”). The Company used various key assumptions, such as estimation of the timing and probability of expected future events, and selection of discount rates applied to future cash flows using a yield curve representative of the Company’s credit risk.

The estimated fair value of the Convertible Notes at December 31, 2020 was $249,301, a Level 3 measurement, based on assumptions about a plain vanilla debt instrument based on entity specific credit risk assumptions and the contractual term of the debt and the values previously noted for the bifurcated derivative liability and contingently issuable warrants, and adjusted for the expected probability of the settlement options allowable under the Convertible Notes.

On June 21, 2021, the Company prepaid all of the then-outstanding Convertible Notes as an optional prepayment (see Note 10). In connection with the optional prepayment, the Company derecognized the bifurcated derivative liability and contingently issuable warrants which were remeasured at fair value on the settlement date.

Contingent Consideration Liability

Fair value of contingent consideration liability incurred in connection with the acquisition of xtraCHEF was estimated at $2,013 on the acquisition date based on a Monte Carlo simulation (see Note 4). The Monte Carlo simulation performs numerous simulations utilizing certain assumptions, such as projected revenue amounts over the related period, risk-free rate, and risk-adjusted discount rate. The fair value measurement of contingent consideration is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. Changes in the assumptions used could materially change the estimated fair value of the contingent consideration which is subject to remeasurement during each reporting period until the contingency is resolved and the liability is settled. The Company recognizes the change in fair value of the contingent consideration liability in its results of operations.

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The following tables provide a roll-forward of the aggregate fair value of the Company’s warrants to purchase preferred stock, common stock, derivative liability, and contingent consideration liability, for which fair value is determined using Level 3 inputs:


	Preferred Stock Warrant Liability		Common Stock Warrant Liability		Derivative Liability		Contingent Consideration Liability
Balance as of December 31, 2020	$	11,405	$	—	$	37,443	$	—
Fair value at issuance	—		125,111		—		—
Fair value on the acquisition date	—		—		—		2,013
Change in fair value and other adjustments	38,284		176,692		103,281		280
Settlement	(43,297)		—		(140,724)		—
Conversion of preferred stock warrants into common stock warrants upon the IPO	(6,392)		6,392		—		—
Balance as of September 30, 2021	$	—	$	308,195	$	—	$	2,293


	Preferred Stock Warrant Liability		Derivative Liability
Balance as of December 31, 2019	$	3,187	$	—
Fair value at issuance	—		30,161
Change in fair value and other adjustments	(60)		18,324
Balance as of September 30, 2020	$	3,127	$	48,485

7. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:


	September 30, 2021		December 31, 2020
Cash held on behalf of customers	$	36,640	$	10,638
Prepaid software subscriptions	9,144		6,088
Prepaid expenses	4,699		2,365
Prepaid commissions	1,757		999
Prepaid rent	2,229		830
Prepaid insurance	9,022		399
Deposits for inventory purchases	15,293		—
Other current assets	777		292
	$	79,561	$	21,611

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8. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:


	September 30, 2021		December 31, 2020
Accrued transaction-based costs	$	107,502	$	14,226
Accrued payroll and bonus	13,711		12,185
Customer funds obligation	36,640		10,638
Accrued expenses	18,337		7,989
Accrued commissions	11,403		7,493
Sales return and allowance	8,032		4,137
Product warranty liability	4,468		2,362
Deferred rent	1,572		1,290
Sales taxes payable	1,825		849
Servicing loan guarantee liability	838		509
Other liabilities	1,890		1,494
	$	206,218	$	63,172

9. Loan Servicing Activities

The Company performs loan servicing activities through the Toast Capital loan program, where the Company partners with an industrial bank to provide working capital loans to qualified Toast customers based on the customer’s current payment processing and POS data. Under the program, the Company’s bank partner originates the loans and the Company markets and services the loans and facilitates the loan application and origination process. These loans provided eligible customers with access to financing of up to $250, and loan repayment occurs automatically through a fixed percentage of every payment transaction on Toast’s platform. These loans had a maximum size of $250 prior to the COVID-19 pandemic when lending was temporarily paused. Since resuming loan servicing activities starting in the fourth quarter of 2020, the Company has had a maximum loan size of $100. The Company earns a share of interest and fees paid on loans, which is recognized as servicing revenue as the services are delivered and included within financial technology services revenue in the unaudited consolidated statements of comprehensive loss. Servicing revenue is adjusted for the amortization of servicing rights carried at amortized cost.

Under the terms of the contracts with the bank partner, the Company provides limited credit enhancement to the bank partner in the event of excess bank partner portfolio credit losses by holding cash in restricted escrow accounts in an amount equal to a contractual percentage of the bank partner’s monthly originations and month-end outstanding portfolio balance, which was $2,694 and $906, respectively, at September 30, 2021 and December 31, 2020.

The Company assumes on a limited basis a liability for defaults on the loans it services based on a specified percentage of the total loans originated which is measured on a quarterly basis. The estimated liability is accounted for as a guarantee based on ASC 460, Guarantees, which is recorded as a reduction of net revenue at the time the loans are originated and is trued up over the period of repayment. Customers historically repaid their Toast Capital loans in nine months on average. If the merchants fall behind in payments for a defined period of time, the Company is obligated to purchase the loans from its bank partner and such purchases are recorded as a reduction to the Company’s potential liability with respect to the quarterly cohort of loans from which the defaulted loan originated. At September 30, 2021 and December 31, 2020, the Company had $2,915 and $3,483, respectively, of acquired loans outstanding which are largely reserved based on collectability risk.

As of September 30, 2021 and December 31, 2020, the Company recorded a guarantee liability of $838 and $509, respectively, which represents the Company’s estimate of additional loans expected to be repurchased under the guarantee.

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10. Debt

Revolving Line of Credit

In March 2019, the Company entered into a senior secured credit facility (the “2019 Facility”), which comprised a revolving line of credit equal to $100,000. Interest on outstanding loans under the 2019 Facility accrued interest at a per annum rate of, at the election of the Company, LIBOR plus 3.00% or the base rate plus 2.00%. Interest was payable in arrears quarterly, in the case of base rate loans, and at the end of the applicable interest period (but not less frequently than three months), in the case of LIBOR loans. This credit facility was subject to certain financial maintenance covenants, including maximum total net debt to recurring revenue ratio, maximum senior net debt to recurring revenue ratio, minimum liquidity and minimum last quarter annualized recurring revenue. Amortization of the debt issuance costs totaled $82 for the three months ended September 30, 2020, and $163 and $245, respectively, for the nine months ended September 30, 2021 and 2020. There was no amortization of the debt issuance costs recognized for the three months ended September 30, 2021. As of December 31, 2020, no amount was drawn and outstanding under the 2019 Facility; however, approximately $13,700 of letters of credit were outstanding, which reduced the amount available under this credit facility to $86,300.

On June 8, 2021, the Company terminated the 2019 Facility and entered into a new revolving line of credit facility (the “2021 Facility”) equal to $330,000. Interest on outstanding loans under the 2021 Facility 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) the Federal Reserve Bank of New York Rate plus 0.5%, or (iii) the Adjusted LIBO Rate plus 1.00%. The 2021 Facility is subject to a minimum liquidity covenant of $250,000. As of September 30, 2021, no amount was drawn and outstanding under the 2021 Facility which had $330,000 available for borrowings. As of September 30, 2021, there were $11,744 of letters of credit outstanding. As a result of entering into a 2021 Facility, the Company became obligated to prepay or redeem the Convertible Notes which occurred on June 21, 2021.

The Company incurred $2,582 of debt issuance costs in connection with obtaining the 2021 Facility which are presented within other non-current assets in the unaudited consolidated balance sheets and amortized over the term of the 2021 Facility. Amortization of debt issuance costs related to the 2021 Facility was $137 and $141, respectively, for the three and nine months ended September 30, 2021.

Convertible Notes

Convertible Notes consisted of the following:


	December 31, 2020
Convertible notes	$	200,000
Accrued paid in kind interest	4,533
Less: Unamortized discount	(32,824)
Long-term debt, net of discount	$	171,709

In June 2020, the Company issued the Convertible Notes pursuant to the Senior Unsecured Convertible Promissory Note Purchase Agreement (the “NPA”), dated as of June 19, 2020. The aggregate principal amount of Convertible Notes issued at the time of closing of the convertible notes transaction was $200,000. The Convertible Notes bore interest at a rate of 8.5% per annum, 50% of which was payable in cash and the other 50% payable in kind. Interest was payable semi-annually in arrears, beginning on December 30, 2020. Unless earlier converted, redeemed, or repaid, the Convertible Notes would mature on June 19, 2027. Interest expense related to the Convertible Notes was $5,559 for the three months ended September 30, 2020 and $11,771 and $6,404, respectively, for the nine months ended September 30, 2021 and 2020. There was no interest expense related to the Convertible Notes during the three months ended September 30, 2021 since the Company prepaid all of the outstanding Convertible Notes on June 21, 2021.

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Upon the issuance of the Convertible Notes, the Company identified and assessed the embedded features of the Convertible Notes. The Company concluded that the conversion features upon both IPO and non-IPO events pursuant to which the Company’s securities would become publicly traded, as well as the redemption features upon a change in control, certain events of default and sales of certain assets were not clearly and closely related to the Convertible Notes and met the definition of a derivative and therefore were required to be bifurcated and separately accounted from the Convertible Notes. The Company estimated the fair value of these bifurcated derivative features as a combined single derivative liability. Additionally, the contingently issuable warrants to purchase common stock met the definition of a derivative and were accounted for separately and recorded based on their fair value as adjusted for the probability that there would be a voluntary redemption of the Convertible Notes. The estimated fair values of the derivative liability and warrants on the issuance date were deducted from the carrying value of the Convertible Notes and recorded in long-term liabilities. The bifurcated derivative liability and contingently issuable warrants were subsequently adjusted to their fair value during each reporting period with the change in fair value recorded in other income (expense).

The Company allocated the transaction costs related to the Convertible Notes and bifurcated derivatives using the same proportion as the allocation of proceeds from the Convertible Notes. Transaction costs attributable to Convertible Notes were recorded as a direct deduction from the debt liability in the consolidated balance sheets, along with the original issue discount, and amortized to interest expense over the term of the Convertible Notes. The transaction costs attributable to the bifurcated derivatives were expensed as incurred. The carrying value of the Convertible Notes was accreted to the principal amount along with the 15% exit fee payable at maturity as interest expense using the effective interest method over the term of the Convertible Notes. The effective interest rate on the Convertible Notes was 13.33%.

Upon a voluntary redemption of the Convertible Notes in whole (but not in part), the Company was obligated to pay an applicable premium, as further described in the NPA and in the Convertible Notes, and issue warrants to the note holders to purchase a number of shares of common stock equal to the quotient of: (i) two-thirds of the outstanding principal amount, plus any accrued and unpaid interest, on such redemption date, divided by (ii) the Capped Price, provided that if the Convertible Notes were voluntarily redeemed prior to December 19, 2021, the number of shares underlying such warrants would be calculated as of December 19, 2021. On June 21, 2021, the Company prepaid all of the outstanding Convertible Notes with a carrying amount of $183,478, including principal and accrued cash and paid in kind interest, net of an unamortized discount, for an aggregate amount equal to $248,875, including the associated transaction costs of $145. In connection with the prepayment, the Company issued to the registered holders of the Convertible Notes the warrants to purchase 8,113,585 shares of the Company’s common stock with an exercise price of $17.51 per share. The fair value of the warrants of $125,111 was included in the Convertible Notes’ aggregate settlement consideration of $373,986. Additionally, the Company derecognized the liability for the bifurcated derivative and contingently issuable warrants of $140,724 which were remeasured at fair value on the settlement date. During the nine months ended September 30, 2021, the Company recognized a loss of $49,783 on the settlement of the Convertible Notes and a loss of $103,281 on the change in fair value of the bifurcated derivative liability and contingently issuable warrants which were recorded in other income (expense) in the unaudited statements of comprehensive loss.

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11. Warrants to Purchase Preferred and Common Stock

Warrants to Purchase Preferred Stock

In conjunction with certain debt financing transactions, the Company issued warrants to purchase shares of preferred stock. These warrants were exercisable upon issuance and were not subject to any vesting or restrictions on timing of exercise.

The Company classified the warrants as liabilities on its unaudited consolidated balance sheets as the warrants were free-standing financial instruments that could require the Company to transfer assets upon exercise. The initial value of the warrants was recorded as a discount to the related convertible debt and amortized as interest expense. All debt financing arrangements entered into prior to March 2019 have been settled; however, the associated warrants remained outstanding prior to the completion of the IPO on September 24, 2021. Upon the completion of the IPO, 255,910 outstanding warrants to purchase shares of Series B convertible preferred stock were automatically exchanged into 255,910 shares of Class B common stock upon payment of immaterial aggregate consideration for all such shares, and 400,000 outstanding warrants to purchase shares of Series B convertible preferred stock became exercisable for the same number of shares of Class B common stock. Additionally, outstanding warrants of 214,500 and 131,625, respectively, to purchase Series C convertible preferred stock became exercisable for the same number of shares of Class B common stock. As a result, the associated preferred stock warrant liability was reclassified into common stock warrant liability following the IPO.

The warrants consisted of the following instruments:


	December 31, 2020
Issuance Date	Contractual Term	Class of Stock	Balance Sheet Classification	Shares Issuable Upon Exercise	Exercise Price		Fair Value of Warrant Liability
December 7, 2015	10.5 years	Series B	Liability	255,910	$	0.40	$	2,943
August 9, 2016	10 years	Series B	Liability	400,000	$	0.40	4,601
December 28, 2017	10 years	Series C	Liability	214,500	$	1.40	2,317
January 23, 2018	8 years	Series C	Liability	131,625	$	1.40	1,544
				1,002,035			$	11,405

The warrants were measured at fair value at issuance and subsequently remeasured at fair value at each reporting date. Changes in the fair value of the warrant liability were recognized as a component of other income (expense) in the Company’s unaudited consolidated statements of comprehensive loss. The Company recorded an expense of $21,701 and $202, respectively, related to the change in the fair value of the preferred stock warrant liability during the three months ended September 30, 2021 and 2020, and an expense of $38,193 and a gain of $60, respectively, during the nine months ended September 30, 2021 and 2020.

Warrants to Purchase Common Stock

In conjunction with the optional prepayment of the Convertible Notes on June 21, 2021, the Company issued warrants to purchase 8,113,585 shares of the Company’s common stock with an exercise price of $17.51 per share (see Note 10). These warrants are exercisable upon issuance and are not subject to any vesting or restrictions on timing of exercise.

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The Company classifies the warrants as liabilities and recognizes them at fair value in its unaudited consolidated balance sheets because they meet the definition of a derivative. Subsequent changes in the warrants’ respective fair values are recognized in the Company’s results of operations in its unaudited consolidated statements of comprehensive loss at each reporting period. The Company evaluated the warrants and concluded that they do not meet the criteria to be classified within stockholders’ equity (deficit). The agreement governing the warrants includes a provision the application of which could result in a different exercise price and a settlement value depending on the assumption of the warrants by their holders. The warrants are not considered to be indexed to the Company’s own stock because the actions of the warrant holders do not represent an input into the pricing of a fixed-for-fixed option on the Company’s shares of common stock which precludes the Company from classifying the warrants in stockholders’ equity (deficit).

The warrants were initially measured at fair value upon their issuance and are subsequently measured at fair value during each reporting date. Changes in the fair value of the warrants liability are recognized as a component of other income (expense) in the Company’s unaudited consolidated statements of comprehensive loss. Changes in the fair value of the warrants liability will continue to be recognized in the Company’s results of operations until the warrants are exercised or expire.

Immediately prior to the completion of the IPO, outstanding warrants to purchase Series B convertible stock were automatically exchanged into 255,910 shares of Class B common stock. Upon completion of the IPO, the remaining 746,125 outstanding warrants formerly related to convertible preferred stock became exercisable for the same number of shares of Class B common stock. Warrant holders exercised a portion of these warrants following the IPO for immaterial cash consideration which resulted in the issuance of 604,512 shares of the Company’s Class B common stock. On October 1, 2021, warrant holders exercised the remaining warrants for immaterial cash consideration which resulted in the issuance of 128,379 shares of the Company’s Class B common stock. The Company derecognized the associated common stock warrant liability with a corresponding adjustment to the additional paid in capital in the unaudited consolidated balance sheets. The warrant liability was remeasured at fair value on the exercise date resulting in a remeasurement loss of $18,902 recorded within other income (expense) for the warrants exercised during the three months ended September 30, 2021. Additionally, during the three months ended September 30, 2021, the Company recognized a remeasurement loss of $2,799 for the warrants exercised on October 1, 2021.

12. Convertible Preferred Stock

The Company has previously issued Series A convertible preferred stock (the “Series A Preferred Stock”), Series B convertible preferred stock (the “Series B Preferred Stock”), Series C convertible preferred stock (the “Series C Preferred Stock”), Series D convertible preferred stock (the “Series D Preferred Stock”), Series E convertible preferred stock (the “Series E Preferred Stock”), and Series F convertible preferred stock (the “Series F Preferred Stock”) (collectively, the “Preferred Stock”).

Immediately prior to the completion of the IPO on September 24, 2021, all of then outstanding 253,832,025 shares of the Company’s convertible preferred stock were automatically converted into an aggregate 253,832,025 shares of Class B common stock. The holders of the Company’s convertible preferred stock had certain voting, conversion, dividend, and redemption rights, as well as liquidation preferences and conversion privileges, in respect of the convertible preferred stock. All of such rights, preferences, and privileges associated with the convertible preferred stock were terminated at the time of the Company’s IPO in conjunction with the conversion of all outstanding shares of convertible preferred stock into shares of Class B common stock.

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The following table summarizes convertible preferred stock at December 31, 2020 and immediately prior to the conversion into Class B common stock upon completion of the IPO:


	Preferred Stock Authorized	Preferred Stock Issued and Outstanding	Carrying Value		Liquidation Preference		Common Stock Issuable Upon Conversion
Series A Preferred Stock	18,072,290	18,072,290	$	1,500	$	1,500	18,072,290
Series B Preferred Stock	76,536,695	75,803,515	29,449		29,621		75,803,515
Series C Preferred Stock	38,773,865	36,643,445	50,965		51,154		36,643,445
Series D Preferred Stock	33,223,530	33,223,530	114,827		115,000		33,223,530
Series E Preferred Stock	45,788,025	45,788,025	249,784		250,000		45,788,025
Series F Preferred Stock	44,851,275	44,301,220	402,368		402,695		44,301,220
	257,245,680	253,832,025	$	848,893	$	849,970	253,832,025

13. Common Stock

As of December 31, 2020, the Company’s amended and restated certificate of incorporation authorized the Company to issue 570,000,000 shares, of $0.000001 par value common stock, of which 219,755,430 shares were issued and outstanding. The holders of the common stock were entitled to one vote for each share of common stock held at all meetings of stockholders.

In connection with the consummation of the IPO, the Company filed the Restated Certificate with the Secretary of State of the State of Delaware on September 24, 2021 (see Note 1). The Restated Certificate amended and restated the Company’s then existing amended and restated certificate of incorporation in its entirety and authorized 7,000,000,000 shares of Class A common stock and 700,000,000 shares of Class B common stock. Upon completion of the IPO, each share of common stock issued and outstanding was reclassified as, and became, one share of Class B common stock. As of September 30, 2021, 25,000,000 shares of Class A common stock and 479,406,030 shares of Class B common stock were issued and outstanding.

During the nine months ended September 30, 2020, the Company repurchased 25,000 shares of common stock at a cost of $205. Shares that are repurchased are classified as treasury stock pending future use and reduce the number of shares outstanding. There were no shares repurchased by the Company during the nine months ended September 30, 2021.

As of each consolidated balance sheet date, the Company had reserved shares of Class A common stock, Class B common stock and common stock for issuance in connection with the following:


	September 30, 2021	December 31, 2020
Conversion of shares of preferred stock (as if converted to common stock)	—	253,832,025
Options to purchase Class A common stock, Class B common stock and common stock	61,307,085	58,035,220
Restricted stock units	10,637,265	—
Warrants to purchase preferred stock (as if converted to warrants to purchase common stock)	—	1,002,035
Warrants to purchase Class B common stock	8,245,210	—
Shares available for future grant under the Stock Plans	58,225,697	33,435,380
	138,415,257	346,304,660

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14. Restricted Stock and Promissory Notes

As of September 30, 2021 and December 31, 2020, 5,056,655 shares of Class B common stock and 1,096,800 shares of common stock, respectively, were issued upon early exercise of stock options. Pursuant to the associated agreements, upon termination of employment, unvested shares held by such individuals were subject to repurchase by the Company. As of September 30, 2021 and December 31, 2020, cash paid for unvested shares of $7,545 and $576, respectively, is included in other long-term liabilities in the unaudited consolidated balance sheets.

At each consolidated balance sheet date, shares subject to restriction consisted of the following:


			Shares
Nonvested as of January 1, 2020			1,877,710
Exercise of stock options			321,400
Repurchases			(185,190)
Vested			(917,120)
Nonvested as of December 31, 2020			1,096,800
Exercise of stock options			412,810
Exercise of stock options in connection with promissory notes repayment			14,267,650
Repurchases			(4,750)
Vested			(10,715,855)

Nonvested as of September 30, 2021			5,056,655

In February 2019, the Board of Directors authorized certain senior executives to exercise an aggregate of 15,057,340 of stock options by issuing to the Company an aggregate of $22,797 in promissory notes (the “Promissory Notes”) that bore interest at 2.63% per annum and were repayable through proceeds of any sales of the stock (once it is vested) or upon a maturity date of five years from issuance, sixty days following termination of employment or immediately prior to the Company filing a registration statement under the Securities Act of 1933, as amended. The Promissory Notes were considered non-recourse for accounting purposes. Accordingly, the exercises were not considered substantive and not recorded in the consolidated balance sheets or consolidated statements of convertible preferred stock and stockholders’ equity (deficit) or consolidated statements of cash flows. Interest earned on the Promissory Notes was not recognized as income, but was incorporated into the exercise price used to determine the fair value of the underlying stock options. The fair value of the underlying stock options was recognized in the Company’s consolidated balance sheets and consolidated statements of comprehensive loss over the requisite service period through a charge to compensation expense and a corresponding adjustment to additional paid in capital. The then outstanding principal and accrued interest of $22,959 under the Promissory Notes were repaid in full in May 2021. The total repayment excluded underlying stock options as part of the Promissory Notes which were not vested, forfeited, and cancelled upon employee termination.

The Company issued 8,045,300 shares for the exercise of vested options upon the Promissory Notes repayment and recognized $13,540 of the associated cash proceeds in additional paid in capital during the nine months ended September 30, 2021. Additionally, the Company recognized a liability of $9,421 related to unvested shares in other long-term liabilities in the unaudited consolidated balance sheets.

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15. Stock-Based Compensation

2021 Stock Option and Incentive Plan

The 2021 Stock Option and Incentive Plan (the “2021 Plan”) was adopted by the Board of Directors on August 13, 2021, approved by the stockholders on September 9, 2021 and became effective on September 20, 2021. The 2021 Plan replaced the Amended and Restated 2014 Stock Incentive Plan, as amended (the “2014 Plan”), which continues to govern outstanding equity awards granted thereunder as the Board determined not to make additional awards under the 2014 Plan following the pricing of the Company’s IPO. The 2021 Plan allows the Company to make equity-based and cash-based incentive awards to its officers, employees, directors, and consultants. The Company initially reserved 58,190,945 shares of Class A common stock for the issuance of awards under the 2021 Plan. The number of shares reserved and available for issuance under the 2021 Plan will automatically increase on January 1, 2022 and each January 1 thereafter, by 5% of the outstanding number of shares of the Class A common stock and Class B common stock on the immediately preceding December 31, or such lesser number of shares as determined by the Compensation Committee of the Board. As of September 30, 2021, no shares of common stock, stock options, or restricted stock units have been granted and are currently outstanding under the 2021 Plan, and 58,225,697 shares of Class A common stock remain available for issuance to officers, directors, employees, and consultants pursuant to the 2021 Plan. As of September 30, 2021 and December 31, 2020, 71,944,350 shares of Class B common stock and 58,035,220 shares of common stock, stock options, or restricted stock units, respectively, have been granted and were outstanding under the 2014 Plan. As of December 31, 2020, 33,435,380 of common stock were available for issuance to officers, directors, employees, and consultants pursuant to the 2014 Stock Plan.

Stock-based compensation expense recognized for the three and nine months ended September 30, 2021 and 2020, is as follows:


	Three Months Ended September 30,			Nine Months Ended September 30,
	2021		2020	2021	2020
Costs of revenue	$	5,270	2,250	6,523	$	3,169
Sales and marketing	10,337		7,445	13,276	9,094
Research and development	8,627		17,422	35,138	19,622
General and administrative	12,118		9,084	42,284	26,472
Stock based compensation	$	36,352	36,201	97,221	$	58,357

Stock-based compensation expense of $545 was capitalized as software development costs during the three and nine months ended September 30, 2021. There were no such costs during the three and nine months ended September 30, 2020.

The Company applied an estimated forfeiture rate in determining the expense recorded in the unaudited consolidated statements of comprehensive loss for the three and nine months ended September 30, 2021 and 2020. The Company has not recognized any tax benefits related to the effects of employee stock-based compensation.

Stock Options

For the majority of stock option awards with service conditions, 20% of each option award vests on the first anniversary of the date of grant, and the remaining 80% vests in equal quarterly installments over the next 16 quarters. Awards with performance or market conditions vest upon occurrence of certain events or meeting certain financial targets set forth in the individual grant agreements. The awards have a contractual life of ten years. The determination of the fair value of stock-based payment awards utilizing the Black-Scholes model is affected by the stock price and a number of assumptions, including expected volatility, expected term, risk-free interest rate, and expected dividends. The Company does not have a sufficient history of market prices of its common stock due to the recently completed IPO, and as such, volatility shown below is estimated using historical volatilities of similar public entities. The expected term of the awards is estimated based on the simplified method. The risk-free interest rate assumption is based on observed interest rates appropriate for the term of the awards. The dividend yield assumption is based on history and expectations of paying no dividends. The majority of stock compensation expense is related to the Company's employees.

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Prior to the IPO, the fair value of the common stock was determined at each award grant date based upon a variety of factors, including the illiquid nature of the common stock, arm’s-length sales of the Company’s capital stock (including convertible preferred stock), the effect of the rights and preferences of the preferred shareholders, and the prospects of a liquidity event. Other factors included, but were not limited to, the Company’s consolidated financial position and historical financial performance and the status of technological developments within the Company’s research. The fair value of each option grant was estimated on its grant date using the Black-Scholes option-pricing model.

The following table indicates the weighted-average assumptions made in estimating the fair value for the nine months ended September 30, 2021 and 2020:


	Nine Months Ended September 30, 2021			Nine Months Ended September 30, 2020
Risk-free interest rate	1.00		%	0.48		%
Expected term (in years)	6.32			6.70
Expected volatility	64.75		%	62.86		%
Expected dividend yield	—		%	—		%
Weighted-average fair value of common stock	$	16.87		$	2.23
Weighted average fair value per share of options granted	$	10.07		$	1.37

The following is a summary of stock option activity under the Company’s stock option plans:


	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (1)

Outstanding as of December 31, 2020	58,035,220	$	2.08	8.27	$	447,365
Granted	9,804,500	$	16.87
Exercised	(4,340,713)	$	1.19
Forfeited	(2,191,922)	$	4.35
Outstanding as of September 30, 2021	61,307,085	$	4.43	7.87	$	2,790,996
Options vested and expected to vest as of December 31, 2020	58,035,220	$	2.08	8.27	$	447,365
Options exercisable as of December 31, 2020	57,620,665	$	2.08	8.26	$	445,547
Options vested and expected to vest as of September 30, 2021	61,307,085	$	4.43	7.87	$	2,790,996
Options exercisable as of September 30, 2021	61,307,085	$	4.43	7.87	$	2,790,996

(1) The aggregate intrinsic value was determined as the difference between the estimated fair value of the Company’s common stock as of each reporting date prior to the completion of the IPO and the closing price of the Class A common stock on the last trading day of the month of September 2021, or the date of exercise, as appropriate, and the exercise price, multiplied by the number of in-the-money options that would have been received by the option holders had all option holders exercised their in-the-money options at period end.

The weighted average grant date fair value per share of options granted was $15.49 and $10.07, respectively, during the three and nine months ended September 30, 2021 and $1.40 and $1.37, respectively, during the three and nine months ended September 30, 2020. As of September 30, 2021 and December 31, 2020, the total number of vested, unexercised options was 24,782,480 and 18,151,770, respectively, with an intrinsic value of $1,199,194 and $158,607, respectively. As of September 30, 2021 and December 31, 2020, the total number of non-vested options was 41,586,495 and 50,758,305, respectively.

The aggregate intrinsic values of options exercised was $30,142 and $81,950, respectively, during the three and nine months ended September 30, 2021 and $4,168 and $6,208, respectively, during the three and nine months ended September 30, 2020. The total fair value of options vested during the nine months ended September 30, 2021 and 2020 was $25,848 and $15,814, respectively.

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As of September 30, 2021, total unrecognized stock-based compensation expense related to the options was $103,657 and is expected to be recognized over the remaining weighted-average service period of 4.02 years.

Restricted Stock Units

The Company granted restricted stock units ("RSUs") to employees and directors, some of which contain service-based vesting conditions, and some of which contain both service and performance-based vesting conditions, including liquidity event-related (“IPO-related”) vesting conditions under the 2014 Stock Plan. Compensation expense related to RSUs is equal to the fair value of the underlying shares on the date of grant. Compensation expense associated with awards that have performance-based vesting conditions is recognized when the performance conditions become probable of being achieved. RSUs that contain both service and performance-based vesting conditions (as defined in the award) become eligible to vest when both the service and performance criteria have been met. Upon consummation of the IPO, the Company began recognizing stock-based compensation expense for RSUs with the IPO-related vesting condition based on the applicable service period. During the three months ended September 30, 2021, the Company recognized $27,762 of stock-based compensation expense related to such awards.

The Company reflects RSUs as issued and outstanding shares of common stock when such units vest. The following table summarizes RSU activity during the nine months ended September 30, 2021:


	RSU	Weighted Average Grant Date Fair Value

Unvested balance as of December 31, 2020	158,370	$	2.21
Granted	10,713,085	22.21
Vested	(52,790)	2.21
Forfeited	(181,400)	21.44
Unvested balance as of September 30, 2021	10,637,265	$	22.02

The weighted average grant-date fair value of RSUs granted during the three months ended September 30, 2021 was $26.09. There were no RSUs granted during the three months ended September 30, 2020. During the nine months ended September 30, 2021, the Company issued 52,790 shares of common stock to settle RSUs upon vesting. The fair value of RSUs vested during the nine months ended September 30, 2021 was $1,106. No RSUs vested during the nine months ended September 30, 2020.

As of September 30, 2021, total unrecognized stock-based compensation expense related to the RSUs was $156,546 and is expected to be recognized over the remaining weighted-average service period of 3.93 years.

Performance Incentive Plan

During the nine months ended September 30, 2020, the Company granted stock-based awards to certain members of management that vest based on both service and market conditions. No such awards were granted during the nine months ended September 30, 2021. Vesting of awards is based on service conditions and the Company’s achievement of certain market capitalization targets. The weighted average fair value of awards containing market-based performance condition was determined based on a Monte Carlo simulation.

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The Monte Carlo weighted-average assumptions utilized to determine the fair value of options granted during the nine months ended September 30, 2020 are as follows:


	Nine Months Ended September 30, 2020
Risk-free interest rate	0.30		%
Expected volatility	60		%
Expected dividend yield	—		%
Weighted-average fair value of common stock	$	3.16
Weighted average fair value per share of options granted	$	0.60

Market capitalization targets related to the awards with market-based vesting conditions were achieved upon the consummation of the IPO. The Company expensed the remaining grant date fair value of these awards upon satisfaction of the service-based and market-based vesting conditions and recognized $254 of stock-based compensation expense during the three months ended September 30, 2021. The Company recognized $314 and $958, respectively, of stock-based compensation expense related to these awards during the nine months ended September 30, 2021 and 2020, and $148 during the three months ended September 30, 2020. Additionally, during the nine months ended September 30, 2020, the Company amended the terms of previously issued employee stock option awards and accelerated the vesting of certain awards. The Company accounted for the amendment as a modification of previously issued awards and incurred $343 of incremental stock-based compensation expense in connection with the modifications.

16. Income Taxes

The Company's effective income tax rate was -0.05% and -0.2% for the three months ended September 30, 2021 and 2020, respectively, and was 0.7% and -0.04% for the nine months ended September 30, 2021 and 2020, respectively. The (provision for) benefit from income taxes was $(129) and $(127), respectively, for the three months ended September 30, 2021 and 2020, and $3,623 and $(69), respectively, for the nine months ended September 30, 2021 and 2020.

The change in the provision for (benefit from) income taxes for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to a non-recurring benefit of $3,920 for the release of a portion of the Company's valuation allowance during the period ending September 30, 2021. This release was due to taxable temporary differences available as a source of income to realize the benefit of certain pre-existing Toast, Inc. deferred tax assets as a result of the xtraCHEF acquisition. The provision for income taxes recorded for the three months ended September 30, 2021 and 2020 is consistent, with any differences related to changes in the jurisdictional mix of earnings.

The effective income tax rate for the nine months ended September 30, 2021 differed from the federal statutory tax rate primarily due to the release of a portion of the valuation allowance as a result of the xtraCHEF acquisition and the valuation allowance maintained against the Company's remaining deferred tax assets. The effective income tax rate for the nine months ended September 30, 2020 differed from the federal statutory tax rate primarily due to the valuation allowance maintained against the Company's deferred tax assets.

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17. Net Loss Per Share Attributable to Common Stockholders

The following table sets forth the computation of net loss per share attributable to common stockholders:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Numerator:
Net loss attributable to common stockholders	$	(252,497)	$	(62,608)	$	(487,147)	$	(187,155)
Denominator:
Weighted average shares of common stock outstanding—basic and diluted	239,358,805		200,579,529		219,746,454		199,245,332
Net loss per share attributable to common stockholders—basic and diluted	$	(1.05)	$	(0.31)	$	(2.22)	$	(0.94)

The Company considers its currently outstanding unvested restricted stock awards, restricted shares issued upon early exercise of stock options and its convertible preferred stock which was outstanding prior to the completion of the IPO to be participating securities. Unvested restricted stock awards currently outstanding and restricted shares issued upon early exercise of stock options are considered participating securities because holders of such shares have non-forfeitable dividend rights in the event of a dividend declaration for common shares. The holders of the Company’s convertible preferred stock were entitled to non-cumulative dividends in preference to common stockholders, at specified rates, if declared. There were no dividends declared for common stock and convertible preferred stock during the three and nine months ended September 30, 2021 and 2020.

During the nine months ended September 30, 2021, the Company amended its certificate of incorporation and created two classes of common stock: Class A common stock and Class B common stock (see Note 1). The Class A common stock and Class B common stock share proportionately, on a per share basis, in the Company’s net income (losses) and participate equally in the dividends on common stock, if declared. The Company allocates net losses attributable to common stock between the common stock classes on a one-to-one basis when computing net income (loss) per share. As a result, basic and diluted net income (loss) per share of Class A common stock and share of Class B common stock are equivalent.

Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of our Class A and Class B common stock outstanding, adjusted for outstanding shares that are subject to repurchase. Weighted average shares of Class A and Class B common stock outstanding exclude shares which were acquired from the early exercise of options and the exercise of options under the Promissory Notes, both of which are not considered substantive exercises for accounting purposes (see Note 14). During the nine months ended September 30, 2021, the weighted average shares of common stock outstanding include shares issued as a result of the exercise of vested options upon the repayment of the Promissory Notes.

The Company computes net loss per common share based on the two-class method required for multiple classes of common stock and participating securities. The two-class method requires income (loss) available to common stockholders for the period to be allocated between multiple classes of common stock and participating securities based upon their respective rights to receive dividends as if all income (loss) for the period had been distributed. The holders of the Company’s convertible preferred stock were not, and unvested restricted stock awards are not contractually obligated to participate in the Company’s losses. As such, the Company’s net losses for the three and nine months ended September 30, 2021 and 2020 were not allocated to these participating securities.

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Diluted net loss per common share gives effect to all potentially dilutive securities. The Company’s potentially dilutive securities, which include convertible preferred stock, options to purchase common stock, unvested restricted stock units, exercised options for which the Company received non-recourse notes from the individuals, as well as warrants to purchase common stock and convertible preferred stock, and contingently convertible debt, have been excluded from the computation of diluted net loss per share as the effect would be antidilutive as a result of a net loss incurred during each period. Therefore, the weighted-average number of shares of common stock outstanding used to calculate both basic and diluted net loss per share was the same during each reporting period.

The Company excluded the following potential shares of common stock from the computation of diluted net loss per share because including them would have an antidilutive effect for the three and nine months ended September 30, 2021 and 2020:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2021	2020	2021	2020
Options to purchase Class A common stock, Class B common stock and common stock	61,307,085	59,480,870	61,307,085	59,480,870
Unvested restricted stock	5,056,655	1,110,055	5,056,655	1,110,055

Unvested restricted stock units	10,637,265	—	10,637,265	—
Shares issued for exercise of non-recourse notes	—	15,057,340	—	15,057,340
Convertible preferred stock (as converted to common stock)	—	253,909,295	—	253,909,295
Warrants to purchase Class B common stock and common stock and preferred stock (as if converted to warrants to purchase common stock)	8,245,210	1,002,035	8,245,210	1,002,035
	85,246,215	330,559,595	85,246,215	330,559,595

Potential shares issuable based on the contingent conversion features under the Convertible Notes prior to their repayment were also excluded from the computation of diluted net loss per share because the number of shares issuable was contingent on the enterprise value of the business and number of shares outstanding at the time of conversion and such shares would be antidilutive for the three and nine months ended September 30, 2021 and 2020 (see Note 10).

18. Segment Information

The Company conducts its operations in the United States, Ireland, and India. The Company earns all of its revenue in the United States.

The Company’s long-lived assets, consisting solely of property and equipment, net, by geographic region are as follows:


	September 30, 2021		December 31, 2020
United States	$	42,044	$	43,904
Ireland	299		207
India	38		—
	$	42,381	$	44,111

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19. Commitments and Contingencies

Operating Leases

The Company is a party to various non-cancelable operating leases for certain offices with contractual lease periods expiring between 2021 and 2029. The Company recognized total rent expense of $5,643 and $6,975, respectively during the three months ended September 30, 2021 and 2020, and $17,532 and $21,615, respectively, during the nine months ended September 30, 2021 and 2020.

Future minimum lease payments under non-cancelable operating leases (with initial lease terms in excess of one year) as of September 30, 2021, are as follows:


Year ended December 31,	Amount
2021 (remaining 3 months)	$	6,257
2022	23,609
2023	13,653
2024	13,029
2025	13,098
Thereafter	47,027
	$	116,673

As of September 30, 2021 and December 31, 2020, there were approximately $11,600 and $13,700, respectively, of standby letters of credit held as collateral for various real estate leases.

Lease Agreements

The Company leases office and warehouse space in various cities primarily throughout the United States, Ireland, and India, pursuant to operating leases. Monthly lease payments, inclusive of base rent, expansion costs, tenant improvement allowances and ancillary charges, amount to $2,086. Monthly base rent is subject to escalation which varies based on the provisions of the related lease agreements. The leases expire at various dates in 2021 through 2029 and contain the right to exercise multi-year extension options at the Company’s discretion.

Lease Terminations

During the three months ended September 30, 2021, the Company partially terminated the lease for one of its office facilities. The lease termination penalty of $3,250 is payable in monthly installments through 2029. The Company recognized a loss of $2,298 related to lease termination costs and $1,241 of write-offs on certain leasehold improvements and other property and equipment through the planned exit date.

Net present value of the outstanding portion of lease termination fees was $8,987 and $7,171, respectively, as of September 30, 2021 and December 31, 2020, of which $7,161 and $6,237, respectively, was included in accrued expenses and other current liabilities and $1,826 and $934, respectively, in other long-term liabilities in the unaudited consolidated balance sheets based on their scheduled repayments.

Purchase Commitments

The Company had non-cancelable purchase obligations to hardware suppliers and cloud service providers of $246,881 and $62,651, respectively, as of September 30, 2021 and December 31, 2020.

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Legal Proceedings

From time to time, the Company may be involved in legal actions arising in the ordinary course of business. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be resolved unfavorably. The Company establishes accruals for losses that management deems to be probable and subject to a reasonable estimate. As of September 30, 2021 and December 31, 2020, the Company does not expect any claims with a reasonably possible adverse outcome to have a material impact to the Company, and accordingly, has not accrued for any such claims.

20. Subsequent Events

Toast Equity Pledge

In recognition of Toast’s values and commitment to local communities, Toast joined the Pledge 1% movement to fund its social impact initiatives through Toast.org, the philanthropic branch. Toast.org is dedicated to solving critical food issues that impact communities across the United States. As a part of this initiative, the Board of Directors reserved 5,468,890 shares of Class A common stock that the Company may, but is not required to, issue over a period of ten years in ten equal annual installments as a bona fide gift to a charitable organization to fund its social impact initiatives through Toast.org. On November 8, 2021, the Board of Directors authorized the issuance of 546,889 shares of its Class A common stock to an independent donor advised fund as the first installment of its Pledge 1% commitment. Total value of Class A common stock approved for issuance was approximately $31,900 based on the closing stock price of $58.34 on November 8, 2021.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, along with the financial information included in our final prospectus dated September 21, 2021 (the “Prospectus”) as filed with the Securities Exchange Commission (the “SEC”) on September 22, 2021 pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”). 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 sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q.

Overview

Toast is a cloud-based, end-to-end 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 of September 30, 2021, our customers processed over $47.6 billion of gross payment volume in the trailing 12 months on the Toast platform, partnering with us to optimize operations, increase sales, engage guests, and maintain happy employees.

By enabling these capabilities through a single, integrated platform, Toast improves experiences 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.

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. Our revenue is driven by our ability to attract new customers, retain existing customers, increase sales from both new and existing customers, and ultimately help our customers grow their businesses. Unless otherwise specified, we define a customer as a restaurant organization, which may have multiple locations, with at least one location live on the Toast platform. A single organization with multiple divisions, segments, or subsidiaries is generally counted as a single customer, even though we may enter into agreements with multiple parties within that organization. We serve restaurants of all sizes, ranging from single-location, family-owned operations to large, multi-location brands with hundreds of locations, across all dining types such as fast casual, fine dining establishments, bars and lounges, and everything in between.

On September 24, 2021, we completed our initial public offering, or IPO, in which we issued and sold 25,000,000 shares of our Class A common stock at the public offering price of $40.00 per share, which included the full exercise of the underwriters’ option to purchase additional 3,260,869 shares. We received net proceeds of $943.9 million after deducting $47.2 million of underwriting discounts and commissions and $6.5 million of other offering costs. Immediately prior to the completion of the IPO, all of the outstanding shares of our convertible preferred stock and our common stock were automatically converted into an aggregate of 477,593,550 shares of Class B common stock on a one-for-one basis.

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)	2021		2020		% Growth		2021		2020		% Growth
Gross Payment Volume (GPV)	$	16.5	$	7.4	123	%	$	39.9	$	17.8	124	%


	As of September 30,
(dollars in millions)	2021		2020		% Growth
Annualized Recurring Run-Rate (ARR)	$	543.8	$	308.1	77	%

Gross Payment Volume (GPV)

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.

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 from Toast Capital or related costs. MRR is also not burdened by the impact of SaaS credits offered, which we expect to be immaterial on an ongoing basis despite being larger in 2020 as we supported our customers through the COVID-19 pandemic.

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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 with 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.

Impact of COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The COVID-19 pandemic rapidly impacted market and economic conditions globally. In an attempt to limit the spread of the virus, various governmental restrictions have been implemented, including business activity and travel restrictions as well as “shelter-at-home” orders. These restrictions impacted restaurants in various ways, including limiting service to takeout orders for a period of time or reducing capacity to accommodate social distancing recommendations.

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. For example, during the COVID-19 pandemic we saw a relative increase in card-not-present transactions related to takeout and delivery orders. Card-not-present transactions typically generate higher payment processing revenue and gross margins for us than card-present transactions. As a result, the increase in the proportion of card-not-present transactions contributed to an increase in our financial technology solutions revenue and gross margins during 2020. To the extent that this trend reverses as the effects of the pandemic subside, our payment processing revenue and gross margins may be impacted.

In light of the evolving nature of the COVID-19 pandemic and the uncertainty it has produced around the world, it is not possible to predict the cumulative and ultimate impact of the pandemic on our future business operations, results of operations, financial position, liquidity, and cash flows despite progress in vaccination efforts. The extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including the duration of the spread of the pandemic both globally and within the United States, the impact on capital, foreign currency exchange, and financial markets, the impact of governmental or regulatory orders that impact our business, and the effect on global supply chains, all of which are highly uncertain and cannot be predicted. For example, increased demand for semiconductor chips in 2020, due in part to the COVID-19 pandemic and increased use of personal electronics, has created a global shortfall of microchip supply. Similarly, disruptions in logistics networks and increasing demands for shipping services have resulted in shipping delays and increased shipping costs. While we have experienced some impact from these and other COVID-19-related disruptions, the full extent to which we may be impacted is not yet known. We will continue to actively monitor the impacts of and responses to the COVID-19 pandemic and its related risks.

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Key Factors Affecting Our Performance

Acquisition of new locations

We believe there is a substantial opportunity to continue to grow our restaurant locations across the United States. We intend to continue to drive new location growth through our differentiated go-to-market strategy, including through sales representatives who are deeply integrated in their local restaurant communities. In addition, we will continue to invest in marketing efforts in key U.S. cities to grow our brand awareness. Our ability to acquire new locations will depend on a number of factors, including the effectiveness and growth of our sales team, the success of our marketing efforts, and the continued satisfaction of, and word-of-mouth referrals generated by, our existing customers. We expect our absolute investment in sales and marketing and other customer acquisition costs related to our hardware and professional services to increase as we continue to grow.

Retention and expansion within our existing customer base

Our ability to retain and increase revenue from our existing customer base is a key driver of our business growth. We expand within our existing customer base by selling additional products, adding more locations, and helping restaurants generate greater sales per location.

Adoption of additional products

We believe there is an opportunity to increase adoption of more of our products by existing customers through a combination of customer relationship management investments, product-led growth, and the introduction of new products. We believe that we provide the most value when our customers have multiple touchpoints across our platform. We also believe that adoption of additional products will drive profitability improvements for our customers, allowing them to reinvest in their success. Our ability to increase adoption of our products will depend on a number of factors, including our customers’ satisfaction with our platform, competition, pricing, and our ability to demonstrate the value proposition of our products.

Expansion of locations per customer

As our customers grow their businesses and open new locations, we expect to see a corresponding increase in locations on our platform. To that end, we work closely with restaurants across our customer-facing teams to support their expansion efforts. We believe that we are well-positioned to extend our reach to and onboard these new locations based on our customers’ desire to use a single, integrated platform across all locations.

Support of our customers’ revenue growth

We believe our long-term revenue growth is correlated with the growth of our existing customers’ businesses, and we strive to support their success. Our revenue grows with that of our customers – as our customers generate more sales and therefore more GPV, we generally see higher financial technology solutions revenue. We have a demonstrated track record of partnering with restaurants to help grow their revenue, and will continue to invest in our customer success team and in new products that help customers thrive.

Innovation and development of new products

We have a culture of continuous innovation evidenced by our history of consistent and timely product launches and refinements. We intend to continue to invest in research and development to expand and improve the functionality of our current platform and broaden our capabilities to address new market opportunities. As a result, we expect our total operating expenses will increase over time and, in some cases, have short-term negative impacts on our operating margin. Our continued growth is dependent, in part, on our ability to successfully develop, market, and sell new products to our customers.

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Investments in customer experience

We will continue to invest in our customer acquisition and customer success efforts to capture the market opportunity ahead of us. We intend to continue prioritizing efficient growth that balances the cost of acquiring customers with efforts focused on increasing the lifetime value, or LTV, of our customers. To improve customer LTV, we will continue to invest in our customer support team that helps drive restaurant success after initial onboarding, and expect that these investments will continue to impact our subscription gross margin.

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, while fees and costs paid to issuers and card networks as well as other related fees associated with third-party payment processors and fraud management are recognized as costs of revenue (see below). Financial technology solutions revenue also includes fees earned from marketing and servicing working capital loans to our customers through Toast Capital that are originated by a third-party bank. In these arrangements, Toast Capital’s bank partner originates all loans, and Toast 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 revenue is recognized net of expected defaults, and 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.

Professional services. We primarily 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.

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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 operations roles as well as allocated overhead. Employee-related costs consist of salaries, benefits, bonuses, and stock-based compensation. 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 primarily 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 primarily consist of transaction-based costs, which are primarily 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 primarily consist of raw materials and the cost to manufacture and ship 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 primarily consist 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 consist of amortization 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. During the nine months ended September 30, 2020, we also incurred one-time costs, including severance, in connection with a reduction in workforce resulting from changes to our operations as a result of the COVID-19 pandemic.

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. During the nine months ended September 30, 2020, we also incurred one-time costs, including severance, in connection with a reduction in workforce resulting from changes to our operations as a result of the COVID-19 pandemic.

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, bad debt expenses and lease exit costs. During the nine months ended September 30, 2020, we also incurred one-time costs, including severance and impairment of property and equipment in connection with a reduction in workforce resulting from changes to our operations as a result of the COVID-19 pandemic.

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. Interest income consists of interest earned from cash held in money market accounts. Upon completion of the IPO, we received net proceeds of $943.9 million after deducting underwriting discounts and commissions and other offering costs.

Interest expense. Interest expense represents primarily interest incurred on our convertible notes, which were issued in June 2020 and repaid in June 2021.

Change in fair value of warrant liability. This represents the change in fair value of 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. Upon completion of the IPO, all warrants to purchase shares of our convertible preferred stock were converted into warrants to purchase shares of our Class B common stock. Additionally, upon completion of the IPO, the warrant liability began to be measured based on stock trading price.

Change in fair value of derivative liability. This represents the change in fair value of derivative liability related to the conversion option provided for in the convertible notes which were repaid in June 2021.

Loss on debt extinguishment. This represents the loss on settlement of our convertible notes which were repaid in June 2021.

Other income (expense), net. This represents certain reserves recorded on certain municipal grants we received in previous years and foreign currency gains and losses.

Income Tax Benefit (Expense)

Income tax benefit (expense) primarily consists of state income tax, as well as international taxes in Ireland and India. Income tax benefit (expense) for the nine months ended September 30, 2021 also includes the deferred tax benefit related to our acquisitions of xtraCHEF, Inc.

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Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2021 and 2020

The following table summarizes our results of operations for the three and nine months ended September 30, 2021 and 2020:


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2021		2020		2021		2020
Revenue:
Subscription services	$	45,803	$	27,406	$	113,844	$	72,193
Financial technology solutions	404,224		188,195		983,699		450,265
Hardware	31,051		18,148		80,005		48,335
Professional services	5,301		3,008		12,579		9,806
Total revenue	486,379		236,757		1,190,127		580,599
Costs of revenue:
Subscription services	18,016		10,388		41,044		29,205
Financial technology solutions	327,235		145,945		779,111		358,402
Hardware	42,109		21,914		93,521		63,336
Professional services	14,585		9,282		35,276		33,655
Amortization of acquired technology and customer assets	1,180		908		3,147		2,695
Total costs of revenue(1)	403,125		188,437		952,099		487,293
Gross profit	83,254		48,320		238,028		93,306
Operating expenses:
Sales and marketing(1)	56,622		32,216		130,480		104,326
Research and development(1)	39,700		34,274		112,978		78,658
General and administrative(1)	40,633		20,481		105,095		73,558
Total operating expenses	136,955		86,971		348,553		256,542
Loss from operations	(53,701)		(38,651)		(110,525)		(163,236)
Other income (expense):
Interest income	8		137		61		819
Interest expense	(247)		(5,661)		(12,403)		(6,846)
Change in fair value of warrant liability	(198,389)		(202)		(214,881)		60
Change in fair value of derivative liability	—		(18,208)		(103,281)		(18,208)
Loss on debt extinguishment	—		—		(49,783)		—
Other income (expense), net	(39)		104		42		325
Loss before income taxes	(252,368)		(62,481)		(490,770)		(187,086)
(Provision for) benefit from income taxes	(129)		(127)		3,623		(69)
Net loss	$	(252,497)	$	(62,608)	$	(487,147)	$	(187,155)

_________________

(1)Includes stock-based compensation expense recognized for the three and nine months ended September 30, 2021 and 2020 as follows:

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	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020
Costs of revenue	$	5,270	$	2,250	$	6,523	$	3,169
Sales and marketing	10,337		7,445		13,276		9,094
Research and development	8,627		17,422		35,138		19,622
General and administrative	12,118		9,084		42,284		26,472
Total stock-based compensation expense	$	36,352	$	36,201	$	97,221	$	58,357

Revenue


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
(dollars in thousands)	2021		2020		Amount		%		2021		2020		Amount		%
Subscription services	$	45,803	$	27,406	$	18,397	67	%	$	113,844	$	72,193	$	41,651	58	%
Financial technology solutions	404,224		188,195		216,029		115	%	983,699		450,265		533,434		118	%
Hardware	31,051		18,148		12,903		71	%	80,005		48,335		31,670		66	%
Professional services	5,301		3,008		2,293		76	%	12,579		9,806		2,773		28	%
Total revenue	$	486,379	$	236,757	$	249,622	105	%	$	1,190,127	$	580,599	$	609,528	105	%

Total revenue increased 105% to $486.4 million for the three months ended September 30, 2021 and 105% to $1,190.1 million for the nine months ended September 30, 2021, as compared to $236.8 million for the three months ended September 30, 2020 and $580.6 million for the nine months ended September 30, 2020.

Revenue from subscription services increased 67% to $45.8 million for the three months ended September 30, 2021 and 58% to $113.8 million for the nine months ended September 30, 2021, as compared to $27.4 million for the three months ended September 30, 2020 and $72.2 million for the nine months ended September 30, 2020. The increase in each period was primarily attributed to growth in restaurant locations on the Toast platform combined with the continued upsell of products to existing customers.

Revenue from financial technology solutions increased 115% to $404.2 million for the three months ended September 30, 2021 and 118% to $983.7 million for the nine months ended September 30, 2021, as compared to $188.2 million for the three months ended September 30, 2020 and $450.3 million for the nine months ended September 30, 2020. The increase was generally reflective of our increase in GPV of 123% for the three months ended September 30, 2021 and 124% for the nine months ended September 30, 2021, which was driven both by the continued increase in the number of locations live on the Toast platform and the increase in GPV per restaurant location.

Revenue from hardware increased 71% to $31.1 million for the three months ended September 30, 2021 and 66% to $80.0 million for the nine months ended September 30, 2021, as compared to $18.1 million for the three months ended September 30, 2020 and $48.3 million for the nine months ended September 30, 2020. The increase was primarily driven by greater hardware demand in the three and nine months ended September 30, 2021, resulting from both increased locations going live and greater hardware upsells to existing locations.

Revenue from professional services increased 76% to $5.3 million for the three months ended September 30, 2021 and 28% to $12.6 million for the nine months ended September 30, 2021, as compared to $3.0 million for the three months ended September 30, 2020 and $9.8 million for the nine months ended September 30, 2020. This was primarily due to the increase in the number of locations going live on the Toast platform, partially offset by lowered upfront services pricing for the three and nine months ended September 30, 2021.

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Costs of Revenue


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
(dollars in thousands)	2021		2020		Amount		%		2021		2020		Amount		%
Subscription services	$	18,016	$	10,388	$	7,628	73	%	$	41,044	$	29,205	$	11,839	41	%
Financial technology solutions	327,235		145,945		181,290		124	%	779,111		358,402		420,709		117	%
Hardware	42,109		21,914		20,195		92	%	93,521		63,336		30,185		48	%
Professional services	14,585		9,282		5,303		57	%	35,276		33,655		1,621		5	%
Amortization of acquired technology and customer assets	1,180		908		272		30	%	3,147		2,695		452		17	%
Total costs of revenue	$	403,125	$	188,437	$	214,688	114	%	$	952,099	$	487,293	$	464,806	95	%

Total costs of revenue increased 114% to $403.1 million for the three months ended September 30, 2021 and 95% to $952.1 million for the nine months ended September 30, 2021, as compared to $188.4 million for the three months ended September 30, 2020 and $487.3 million for the nine months ended September 30, 2020.

Subscription services costs increased 73% to $18.0 million for the three months ended September 30, 2021 and 41% to $41.0 million for the nine months ended September 30, 2021, as compared to $10.4 million for three months ended September 30, 2020 and $29.2 million for nine months ended September 30, 2020. The increase was primarily attributable to an increase in employee-related and overhead costs of $4.2 million for the three months ended September 30, 2021 and $3.4 million for the nine months ended September 30, 2021, an increase in hosting and other infrastructure costs attributable to growth in restaurant locations on our platform of $1.7 million for the three months ended September 30, 2021 and $5.1 million for the nine months ended September 30, 2021, and an increase in professional services costs of $1.4 million for the three months ended September 30, 2021 and $3.1 million increase for the nine months ended September 30, 2021.

Financial technology solutions costs increased 124% to $327.2 million for the three months ended September 30, 2021 and 117% to $779.1 million for the nine months ended September 30, 2021, as compared to $145.9 million for the three months ended September 30, 2020 and $358.4 million for the nine months ended September 30, 2020. The increase was generally reflective of our increase in GPV over the same period, with slower growth in costs, primarily due to an increase in average transaction value.

Hardware costs increased 92% to $42.1 million for the three months ended September 30, 2021 and 48% to $93.5 million for the nine months ended September 30, 2021, as compared to $21.9 million for the three months ended September 30, 2020 and $63.3 million for the nine months ended September 30, 2020. The growth was largely due to increased shipment volume, in addition to higher costs per shipment as a result of increased freight charges and product costs.

Professional services costs increased 57% to $14.6 million for the three months ended September 30, 2021 and 5% to $35.3 million for the nine months ended September 30, 2021, as compared to $9.3 million for the three months ended September 30, 2020 and $33.7 million for the nine months ended September 30, 2020. The increase during the three months ended September 30, 2021 was primarily driven by an increase in employee-related and overhead costs of $4.3 million and an increase in third-party contractor costs of $1.0 million as we shifted the mix of services resourcing. The increase during the nine months ended September 30, 2021 was primarily driven by an increase in third-party contractor costs of $3.3 million as we shifted the mix of services resourcing, partially offset by a $1.7 million decrease resulting from workforce reductions related to the COVID-19 pandemic.

Amortization of acquired technology and customer assets increased 30% to $1.2 million for the three months ended September 30, 2021 and 17% to $3.1 million for the nine months ended September 30, 2021, as compared to $0.9 million for the three months ended September 30, 2020 and $2.7 million for the nine months ended September 30, 2020, due to newly acquired intangible assets as a result of the xtraCHEF acquisition.

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Operating Expenses

Sales and Marketing


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
(dollars in thousands)	2021		2020		Amount		%		2021		2020		Amount		%
Sales and marketing	$	56,622	$	32,216	$	24,406	76	%	$	130,480	$	104,326	$	26,154	25	%

Sales and marketing expenses increased 76% to $56.6 million for the three months ended September 30, 2021 and 25% to $130.5 million for the nine months ended September 30, 2021, as compared to $32.2 million for the three months ended September 30, 2020 and $104.3 million during the nine months ended September 30, 2020. The $24.4 million increase for the three months ended September 30, 2021 was primarily due to a $15.0 million increase in employee-related and overhead costs due to an increase in employee headcount, $2.9 million of which was related to stock based compensation, a $3.7 million increase in advertising and related spend due to an increase in online paid advertising and brand awareness efforts, and a $2.6 million increase in commissions due to increased sales. The $26.2 million increase for the nine months ended September 30, 2021 was driven by an $8.4 million increase in employee-related and overhead costs due to an increase in employee headcount, $4.2 million of which was related to stock based compensation, a $6.3 million increase in advertising and related spend primarily due to increased online paid advertising and brand awareness efforts, and a $7.6 million increase in commissions due to increased sales.

Research and Development


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
(dollars in thousands)	2021		2020		Amount		%		2021		2020		Amount		%
Research and development	$	39,700	$	34,274	$	5,426	16	%	$	112,978	$	78,658	$	34,320	44	%

Research and development expenses increased 16% to $39.7 million for the three months ended September 30, 2021 and 44% to $113.0 million for the nine months ended September 30, 2021, as compared to $34.3 million for the three months ended September 30, 2020 and $78.7 million during the nine months ended September 30, 2020. The $5.4 million increase for the three months ended September 30, 2021 was primarily due to a $3.9 million increase in employee related-costs due to increased employee headcount and a $1.0 million increase in professional services expense. The $34.3 million increase for the nine months ended September 30, 2021 was driven primarily by a $32.6 million increase in employee related-costs due to increased employee headcount, of which $16.1 million was stock based compensation.

General and Administrative


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
(dollars in thousands)	2021		2020		Amount		%		2021		2020		Amount		%
General and administrative	$	40,633	$	20,481	$	20,152	98	%	$	105,095	$	73,558	$	31,537	43	%

General and administrative expenses increased 98% to $40.6 million for the three months ended September 30, 2021 and 43% to $105.1 million for the nine months ended September 30, 2021, as compared to $20.5 million for the three months ended September 30, 2020 and $73.6 million during the nine months ended September 30, 2020. The $20.2 million increase for the three months ended September 30, 2021 was primarily due to an increase of $13.8 million in employee-related and overhead costs resulting from increased employee headcount and a $4.8 million increase in professional services expense. The $31.5 million increase for the nine months ended September 30, 2021 was largely driven by a $27.2 million increase in employee-related and overhead costs due to increased employee headcount, of which $15.8 million was related to stock based compensation, and a $7.6 million increase in professional services expense, partially offset by a $5.5 million decrease in bad debt expense as a result of a more favorable outcome on collection activities than estimated.

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Interest Income


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
(dollars in thousands)	2021		2020		Amount		%		2021		2020		Amount		%
Interest income	$	8	$	137	$	(129)	(94)	%	$	61	$	819	$	(758)	(93)	%

Interest income decreased 93% to $0.1 million for the nine months ended September 30, 2021, as compared to $0.8 million for the nine months ended September 30, 2020. The decrease was primarily due to a lower average interest rate on invested balances. Interest income decreased for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, but the decrease was insignificant.

Interest Expense


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
(dollars in thousands)	2021		2020		Amount		%		2021		2020		Amount		%
Interest expense	$	(247)	$	(5,661)	$	5,414	(96)	%	$	(12,403)	$	(6,846)	$	(5,557)	81	%

Interest expense decreased 96% to $0.2 million for the three months ended September 30, 2021, as compared to $5.7 million for the three months ended September 30, 2020, which was attributable to the payoff of outstanding convertible notes in June 2021.

Interest expense increased 81% to $12.4 million for the nine months ended September 30, 2021, as compared to an expense of $6.8 million during the nine months ended September 30, 2020 due to the issuance of certain convertible notes in June 2020 which were paid off in June 2021.

Change in fair value of warrant liability


	Three Months Ended September 30,				Change				Nine Months Ended September 30,			Change
(dollars in thousands)	2021		2020		Amount		%		2021	2020		Amount		%
Change in fair value of warrant liability	$	(198,389)	$	(202)	$	(198,187)	98112	%	(214,881)	$	60	$	(214,941)	(358235)	%

Change in fair value of warrant liability was an expense of $198.4 million for the three months ended September 30, 2021, as compared to an expense of $0.2 million for the three months ended September 30, 2020. Change in fair value of warrant liability was an expense of $214.9 million for the nine months ended September 30, 2021, as compared to a gain of $0.1 million during the nine months ended September 30, 2020. These increases were primarily attributable to higher value of the common stock underlying outstanding warrants at the end of the period. As of September 30, 2021, fair value of the liability related to warrants issued to purchase our Class A common stock was $308.2 million. The actual change in fair value of warrant liability in subsequent periods will depend in part on the future trading price of our Class A common stock, as well as other relevant valuation inputs, including volatility of our Class A common stock, relevant risk-free interest rates, and time to expiration of the warrants.

Change in fair value of derivative liability


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
(dollars in thousands)	2021		2020		Amount		%		2021		2020		Amount		%
Change in fair value of derivative liability	$	—	$	(18,208)	$	18,208	(100)	%	$	(103,281)	$	(18,208)	$	(85,073)	467	%

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Change in fair value of derivative liability was $103.3 million for the nine months ended September 30, 2021, as compared to $18.2 million for the nine months ended September 30, 2020. The convertible notes were fully repaid on June 21, 2021 resulting in no derivative liability as of September 30, 2021 and no corresponding impact on our results of operations during the three months ended September 30, 2021. The derivative liability was adjusted to its fair value during each reporting period and on the convertible notes' settlement date.

Loss on debt extinguishment


	Nine Months Ended September 30,				Change
(dollars in thousands)	2021		2020		Amount		%
Loss on debt extinguishment	$	(49,783)	$	—	$	(49,783)	—	%

Loss on debt extinguishment was $49.8 million for the nine months ended September 30, 2021 due to the repayment of our convertible notes in June 2021. There was no loss on debt extinguishment during the three months ended September 30, 2021 and 2020 and the nine months ended September 30, 2020 because there were no debt settlements during these periods.

Income tax benefit


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
(dollars in thousands)	2021		2020		Amount		%		2021		2020		Amount		%
(Provision for) benefit from income taxes	$	(129)	$	(127)	$	(2)	2	%	$	3,623	$	(69)	$	3,692	(5351)	%

Income tax benefit was $3.6 million for the nine months ended September 30, 2021, as compared to an expense of $0.1 million during the nine months ended September 30, 2020. The change was primarily due to the impact of a deferred tax benefit generated during the nine months ended September 30, 2021 as a result of our acquisition of xtraCHEF. The provision for income taxes increased for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, the increase was insignificant.

Non-GAAP Financial Measures

To supplement our unaudited consolidated financial statements, which are prepared and presented in accordance with U.S. Generally Accepted Accounting Principles, or GAAP, we use certain non-GAAP financial measures, as described below, 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 assist investors in seeing our financial performance using a management view. We believe that these measures provide an additional tool for investors to use in comparing 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)	2021		2020		2021		2020
Adjusted EBITDA	$	(9.7)	$	(0.3)	$	4.5	$	(86.3)

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	Nine Months Ended September 30,
(in millions)	2021		2020
Free Cash Flow	$	17.7	$	(128.5)

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, interest expense, other income (expense) net, acquisition expenses, fair value adjustments on warrant and derivative liabilities, expenses related to COVID-19 pandemic initiatives resulting from a reduction of workforce in 2020 and early termination of leases, loss on debt extinguishment, and income taxes. 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 to use 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 you should not consider this measure 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 we exclude in our 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.

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 thousands)	2021		2020		2021		2020
Net loss	$	(252,497)	$	(62,608)	$	(487,147)	$	(187,155)
Stock-based compensation expense and related payroll tax	36,372		36,201		97,359		58,357
Depreciation and amortization	6,673		3,118		15,617		9,498
Interest income	(8)		(137)		(61)		(819)
Interest expense	247		5,661		12,403		6,846
Other (income) expense, net	39		(104)		(42)		(325)
Acquisition expenses	—		—		1,113		—
Change in fair value of warrant liability	198,389		202		214,881		(60)
Change in fair value of derivative liability	—		18,208		103,281		18,208
Reduction of workforce	—		154		—		10,127
Termination of leases	922		(1,092)		922		(1,092)
Loss on debt extinguishment	—		—		49,783		—
Provision for (benefit from) income taxes	129		127		(3,623)		69
Adjusted EBITDA	$	(9,734)	$	(270)	$	4,486	$	(86,346)

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Free Cash Flow

Free cash flow is defined as net cash 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 you should not consider it 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 provided by (used in) operating activities for each of the periods presented:


	Nine Months Ended September 30,
(in thousands)	2021		2020
Net cash provided by (used in) operating activities	$	33,970	$	(86,630)
Purchase of property and equipment	(10,570)		(35,385)
Capitalized software	(5,712)		(6,479)
Free cash flow	$	17,688	$	(128,494)

Liquidity and Capital Resources

Since our inception, we have financed our operations, capital expenditures, and acquisitions primarily through issuance of convertible preferred stock and convertible notes as well as through payments received for the delivery of products and services. Upon completion of the IPO, we received net proceeds of $950.4 million after deducting underwriting discounts and commissions. Subsequent to September 30, 2021, we invested the proceeds from the IPO into interest-generating marketable securities and money market accounts.

Our principal sources of liquidity are our cash and cash equivalents. As of September 30, 2021, we had cash and cash equivalents of $1,302 million, excluding cash held on behalf of customers and restricted cash, and $330 million available under our senior debt credit facility. 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.

We believe that our existing cash and cash equivalents, along with our available financial resources from our credit facility, will be sufficient to meet our working capital needs for at least the next 12 months, including any expenditures related to strategic transactions and investment commitments that we may from time to time enter into, and planned capital expenditures. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under “Risk Factors”. We expect to incur additional costs as a result of operating as a public company.

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.

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Cash Flows

The following table summarizes our cash flows for the periods indicated:


	Nine Months Ended September 30,
(in thousands)	2021		2020
Net cash provided by (used in) operating activities	$	33,970	$	(86,630)
Net cash used in investing activities	(42,424)		(41,631)
Net cash provided by financing activities	755,914		595,805
Net increase in cash, cash equivalents and restricted cash	$	747,460	$	467,544

Operating Activities

For the nine months ended September 30, 2021, net cash provided by operating activities was $34.0 million. The net loss of $487.1 million was more than offset by adjustments for non-cash charges of $504.5 million and a net source of cash from a change in operating assets and liabilities of $16.6 million. The non-cash charges were primarily related to changes in fair value related to derivative and warrant liabilities of $318.2 million, stock-based compensation expense of $95.2 million, loss on debt extinguishment of $49.8 million, amortization of costs capitalized to obtain revenue contracts of $17.6 million, depreciation and amortization of $15.6 million, non-cash interest on convertible notes of $11.8 million, and other non-cash items of $0.3. These charges were partially offset by changes in deferred income taxes of $3.9 million. The net source of cash from a change in operating assets and liabilities was primarily related to increases in accrued expenses and other current liabilities of $106.3 million primarily due to favorable payment terms on certain transaction-based costs, increases in accounts payable of $8.2 million, increases in other assets and liabilities of $2.1 million, increases in deferred revenue of $1.5 million and merchant cash advances repaid of $0.5 million. These changes were partially offset by increases in prepaid expenses and other current assets of $31.9 million, increases in costs capitalized to obtain revenue contracts of $30.9 million, increases in accounts receivable of $20.1 million, increases in inventories of $19.3 million and increases in factor receivables of $0.2 million.

For the nine months ended September 30, 2020, net cash used in operating activities was $86.6 million. This consisted of a net loss of $187.2 million and a net use of cash from a change in operating assets and liabilities of $3.0 million, partially offset by adjustments for non-cash charges of $103.5 million. The non-cash charges primarily related to stock-based compensation expense of $58.4 million, change in fair value of derivative liability of $18.2 million, amortization of costs capitalized to obtain revenue contracts of $10.8 million, depreciation and amortization of $9.5 million, and other items of $6.7 million, partially offset by a gain on changes in fair value of warrant liabilities of $0.1 million. The use of net cash from a change in operating assets and liabilities primarily related to increases in costs capitalized to obtain revenue contracts of $17.6 million, increases in accounts receivable of $8.4 million, decreases in accounts payable of $6.3 million, and decreases in deferred revenue of $2.3 million. These changes were partially offset by decreases in prepaid expenses and other current assets of $8.4 million, increases in accrued expenses and other current liabilities of $8.3 million, merchant cash advances repaid of $8.2 million, increases in other assets and liabilities of $3.4 million, decreases in factor receivables of $2.6 million and decreases in inventories of $0.7 million.

Investing Activities

For the nine months ended September 30, 2021, cash used in investing activities was $42.4 million, which primarily consisted of cash paid for a business combination of $26.1 million, net of cash acquired, purchases of property and equipment of $10.6 million, and cash outflows for capitalized software of $5.7 million.

For the nine months ended September 30, 2020, cash used in investing activities was $41.6 million, which primarily consisted of purchases of property and equipment of $35.4 million and cash outflows for capitalized software of $6.5 million.

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Financing Activities

For the nine months ended September 30, 2021, cash provided by financing activities was $755.9 million, which primarily consisted of proceeds from our IPO of $950.4 million, net of underwriting discounts and commissions, offset by $4.0 million of previously deferred offering costs, proceeds from the exercise of stock options of $17.7 million, the change in customer funds obligations of $26.0 million and proceeds received from the early exercise of stock options and corresponding issuance of restricted stock of $10.4 million, partially offset by the repayment of our convertible notes of $244.5 million.

For the nine months ended September 30, 2020, cash provided by financing activities was $595.8 million, which consisted of proceeds from the issuance of Series F convertible preferred stock of $402.4 million, proceeds from issuance of long-term debt of $194.9 million, change in customer funds obligations of $6.1 million and proceeds from the exercise of stock options and issuance of restricted stock of $1.4 million. These inflows were partially offset by repayments of secured borrowings of $8.5 million, and the repurchase of common stock and restricted stock of $0.4 million.

Debt

Credit Facilities

In March 2019, we entered into a senior secured credit facility, or the 2019 Facility, which included a revolving line of credit equal to $100 million. Loans under this agreement accrued interest at a per annum rate of, at our election, LIBOR plus 3.00% or the base rate plus 2.00%. Interest was payable in arrears quarterly, in the case of base rate loans, and at the end of the applicable interest period (but not less frequently than three months) in the case of LIBOR loans. The 2019 Facility was subject to certain financial covenants, including maximum total net debt to recurring revenue ratio, maximum senior net debt to recurring revenue ratio, minimum liquidity and minimum last quarter annualized recurring revenue. As of December 31, 2020, no amount was drawn and outstanding under this credit facility; however, $13.7 million of letters of credit were outstanding, which reduced the amount available under this credit facility to $86.3 million. On June 8, 2021, the 2019 Facility and all commitments thereunder were terminated. There were no amounts outstanding under the 2019 Facility.

On June 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) the Federal Reserve Bank of New York Rate plus 0.5%, or (iii) the Adjusted LIBO Rate plus 1.00%. The 2021 Facility is subject to a minimum liquidity covenant of $250 million. As of September 30, 2021, no amount was drawn and outstanding under the 2021 Facility which had $330 million available for borrowings. As of September 30, 2021, there were $11.7 million of letters of credit outstanding. As a result of entering into the 2021 Facility, we became obligated to prepay or redeem the convertible notes discussed below which were prepaid on June 21, 2021.

Convertible Notes

On June 19, 2020, we issued $200 million in aggregate principal amount of senior unsecured convertible promissory notes, or the convertible notes, pursuant to the Senior Unsecured Convertible Promissory Note Purchase Agreement between us and investors party thereto. We received net proceeds of $195 million, net of a $5 million original issue discount and certain legal fees. The convertible notes bore interest at a rate of 8.5% per annum, 50% of which was payable in cash and the other 50% of which was payable in kind. Unless earlier converted or redeemed, the convertible notes were scheduled to mature on June 19, 2027.

On June 21, 2021, we prepaid all of the outstanding convertible notes with a carrying amount of $183.5 million, including principal and accrued interest, net of an unamortized discount, for an aggregate cash amount of $248.9 million, or the Optional Prepayment, which included an applicable redemption premium. In connection with the Optional Prepayment, we issued warrants to purchase 8,113,585 shares of our Class B common stock to the registered holders of the convertible notes, with an exercise price of $17.51 per share.

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of September 30, 2021 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:


	Payments Due by Period
(in thousands)	Total		Less than 1 Year		1 to 3 Years		3 to 5 Years		More than 5 Years
Operating lease commitments (1)	$	116,673	$	24,573	$	28,710	$	26,232	$	37,158
Purchase commitments (2)	246,881		242,866		4,015		—		—
Total	$	363,554	$	267,439	$	32,725	$	26,232	$	37,158

(1)Reflects minimum payments due for our leases of office and warehouse space under operating leases that expire between 2021 and 2029.

(2)Reflects non-cancelable purchase obligations to hardware suppliers and cloud service providers.

Off-Balance Sheet Arrangements

See Note 9 to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q for discussion of our off-balance sheet credit exposure as it relates to our financial guarantee as of September 30, 2021.

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, allowance for doubtful accounts, allowances for uncollectible loans, loan servicing assets, business combinations and other acquired intangible assets, stock-based compensation, 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.