Toast, Inc. - Quarter Report: 2022 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File 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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large

accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The registrant had outstanding 334,425,275 shares of Class A common stock and 186,312,785 shares of Class B common stock as of November 4, 2022.

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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;

•the impact of the COVID-19 pandemic, rising inflation, capital market disruptions, sanctions, economic slowdowns or recessions, and other global financial, economic and political events on our business and the restaurant industry;

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

•our ability to source, finance and 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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TABLE OF CONTENTS


		Page
Part I. Financial Information		1
Item 1.	Financial Statements (unaudited)	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations	2
	Consolidated Statements of Comprehensive Loss	3
	Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)	4
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	39

Part II. Other Information		41
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	90
Item 3.	Defaults Upon Senior Securities	90
Item 4.	Mine Safety Disclosures	90
Item 5.	Other Information	90
Item 6.	Exhibits	91
	Signatures	92

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TOAST, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in millions, except share and per share amounts)


	September 30, 2022		December 31, 2021
Assets:
Current assets:
Cash and cash equivalents	$	644	$	809
Marketable securities	409		457
Accounts receivable, net	78		55
Inventories	95		42
Deferred costs, net	40		30
Prepaid expenses and other current assets	136		92
Total current assets	1,402		1,485
Property and equipment, net	54		41
Operating lease right-of-use assets	74		79
Intangible assets	31		16
Goodwill	107		74


Deferred costs, non-current	36		25
Other non-current assets	37		15
Total non-current assets	339		250
Total assets	$	1,741	$	1,735
Liabilities and Stockholders’ Equity:
Current liabilities:
Accounts payable	$	28	$	40
Operating lease liabilities	13		22
Deferred revenue	40		44
Accrued expenses and other current liabilities	376		246
Total current liabilities	457		352
Warrants to purchase common stock	61		181
Operating lease liabilities, non-current	81		77
Deferred revenue, non-current	8		12
Other long-term liabilities	15		22

Total liabilities	622		644
Commitments and Contingencies (Note 13)
Stockholders’ Equity:
Preferred stock- par value $0.000001; 100,000,000 shares authorized, no shares issued or outstanding	—		—
Class A common stock, $0.000001 par value- 7,000,000,000 shares authorized as of September 30, 2022 and December 31, 2021, 332,432,107 and 167,732,925 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively	—		—
Class B common stock, $0.000001 par value- 700,000,000 shares authorized as of September 30, 2022 and December 31, 2021, 186,323,432 and 339,437,440 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively	—		—
Additional paid-in capital	2,400		2,194
Accumulated deficit	(1,277)		(1,102)
Accumulated other comprehensive loss	(4)		(1)
Treasury stock, at cost— 225,000 shares at September 30, 2022 and December 31, 2021	—		—
Total stockholders’ equity	1,119		1,091
Total liabilities and stockholders’ equity	$	1,741	$	1,735

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

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TOAST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in millions, except share and per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenue:
Subscription services	$	90	$	46	$	230	$	115
Financial technology solutions	628		404		1,628		985
Hardware	27		31		86		81
Professional services	7		5		19		12
Total revenue	752		486		1,963		1,193
Costs of revenue:
Subscription services	29		18		81		41
Financial technology solutions	494		327		1,289		779
Hardware	52		43		165		94
Professional services	25		14		71		35
Amortization of acquired technology and customer assets	1		1		4		3
Total costs of revenue	601		403		1,610		952
Gross profit	151		83		353		241
Operating expenses:
Sales and marketing	84		56		232		130
Research and development	74		40		203		113
General and administrative	78		42		203		110
Total operating expenses	236		138		638		353
Loss from operations	(85)		(55)		(285)		(112)
Other income (expense):
Interest income (expense), net	3		—		5		(12)
Change in fair value of warrant liabilities	(21)		(198)		102		(215)
Change in fair value of derivative liability	—		—		—		(103)
Loss on debt extinguishment	—		—		—		(50)
Other income (expense), net	1		(1)		(1)		—
Loss before benefit from income taxes	(102)		(254)		(179)		(492)
Benefit from income taxes	4		—		4		4
Net loss	$	(98)	$	(254)	$	(175)	$	(488)
Net loss per share attributable to common stockholders:
Basic	$	(0.19)	$	(1.06)	$	(0.34)	$	(2.22)
Diluted	$	(0.19)	$	(1.06)	$	(0.54)	$	(2.22)
Weighted average shares used in computing net loss per share:
Basic	513,719,867		239,358,805		509,507,937		219,746,454
Diluted	513,719,867		239,358,805		510,000,352		219,746,454

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 millions)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net loss	$	(98)	$	(254)	$	(175)	$	(488)
Other comprehensive income (loss):
Unrealized gains (losses) on marketable securities, net of tax effect of $0	1		—		(2)		—
Currency translation adjustments	—		—		(1)		—
Total other comprehensive income (loss)	1		—		(3)		—
Comprehensive loss	$	(97)	$	(254)	$	(178)	$	(488)

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TOAST, INC.

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

(unaudited)

(in millions, except share amounts)

Nine Months Ended September 30, 2022



	Class A and Class B Common Stock			Treasury Stock	Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss			Total Stockholders' Equity
	Shares	Amount				Shares					Amount
Balances at December 31, 2021	507,170,365	$	—		225,000		$	—	$	2,194		$	(1,102)	$	(1)	$	1,091
Repurchase of common stock	(33,475)	—			—		—		—			—		—		—
Issuance of common stock upon net exercise of common stock warrants	371,573	—			—		—		18			—		—		18
Issuance of common stock upon exercise of common stock options	6,360,377	—			—		—		12			—		—		12
Issuance of common stock upon vesting of restricted stock units	3,511,292	—			—		—		—			—		—		—
Stock-based compensation expense	—	—			—		—		172			—		—		172
Vesting of restricted stock	—	—			—		—		3			—		—		3
Issuance of common stock for contingent consideration payment	37,179	—			—		—		1			—		—		1
Issuance of restricted stock in connection with business combination	1,338,228	—			—		—		—			—		—		—
Cumulative translation adjustment	—	—			—		—		—			—		(1)		(1)
Unrealized loss on marketable securities	—	—			—		—		—			—		(2)		(2)
Net loss	—	—			—		—		—			(175)		—		(175)
Balances at September 30, 2022	518,755,539	$	—		225,000		$	—	$	2,400		$	(1,277)	$	(4)	$	1,119

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Nine Months Ended September 30, 2021



	Convertible Preferred Preferred Stock			Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Deficit		Total Stockholders' (Deficit) Equity
	Shares	Amount		Shares	Amount		Shares	Amount
Balances at December 31, 2020	253,832,025	$	849	219,755,430	$	—	225,000	$	—	$	145	$	(616)	$	(471)
Cumulative adjustment due to adoption of ASC 842 and ASC 326	—	—		—	—		—	—		—		1		1
Repurchase of common stock	—	—		(4,750)	—		—	—		—		—		—
Issuance of common stock upon exercise of common stock options	—	—		4,340,713	—		—	—		4		—		4
Issuance of common stock upon exercise of common stock options in connection with promissory notes repayment	—	—		—	—		—	—		14		—		14
Issuance of common stock upon vesting of restricted stock units	—	—		52,790	—		—	—		—		—		—
Vesting of restricted stock	—	—		—	—		—	—		3		—		3
Stock-based compensation expense (1)	—	—		—	—		—	—		96		—		96
Issuance of common stock in connection with business combination	—	—		569,400	—		—	—		15		—		15
Conversion of preferred stock warrants into common stock warrants and issuance of common stock upon net exercise of common stock warrants	—	—		860,422	—		—	—		43		—		43
Conversion of preferred stock	(253,832,025)	(849)		253,832,025	—		—	—		849		—		849
Issuance of common stock in connection with initial public offering, net of offering costs, underwriting discounts and commissions	—	—		25,000,000	—		—	—		944		—		944
Net loss	—	—		—	—		—	—		—		(488)		(488)
Balances at September 30, 2021	—	$	—	504,406,030	$	—	225,000	$	—	$	2,113	$	(1,103)	$	1,010

(1) During the nine months ended September 30, 2021, stock-based compensation expense recorded within additional paid-in capital did not include $2 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 2).

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Three Months Ended September 30, 2022



	Class A and Class B Common Stock			Treasury Stock	Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss			Total Stockholders' Equity
	Shares	Amount				Shares					Amount
Balances at June 30, 2022	513,406,811	$	—		225,000		$	—	$	2,334		$	(1,179)	$	(5)	$	1,150
Repurchase of common stock	—	—			—		—		—			—		—		—

Issuance of common stock upon exercise of common stock options	1,950,077	—			—		—		5			—		—		5
Issuance of common stock upon vesting of restricted stock units	2,060,423	—			—		—		—			—		—		—
Stock-based compensation expense	—	—			—		—		60			—		—		60
Vesting of restricted stock	—	—			—		—		1			—		—		1

Issuance of restricted stock in connection with business combination	1,338,228	—			—		—		—			—		—		—

Unrealized gain on marketable securities	—	—			—		—		—			—		1		1
Net loss	—	—			—		—		—			(98)		—		(98)
Balances at September 30, 2022	518,755,539	$	—		225,000		$	—	$	2,400		$	(1,277)	$	(4)	$	1,119

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Three Months Ended September 30, 2021



	Convertible Preferred Preferred Stock			Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Deficit		Total Stockholders' (Deficit) Equity
	Shares	Amount		Shares	Amount		Shares	Amount
Balances at June 30, 2021	253,832,025	$	849	223,761,525	$	—	225,000	$	—	$	236	$	(849)	$	(613)
Repurchase of common stock	—	—		(750)	—		—	—		—		—		—
Issuance of common stock upon net exercise of common stock warrants	—	—		860,422	—		—	—		43		—		43
Conversion of preferred stock	(253,832,025)	(849)		253,832,025	—		—	—		849		—		849
Issuance of common stock upon exercise of common stock options	—	—		952,808	—		—	—		1		—		1
Issuance of common stock in connection with initial public offering, net of offering costs, underwriting discounts and commissions	—	—		25,000,000	—		—	—		944		—		944

Stock-based compensation expense	—	—		—	—		—	—		37		—		37
Vesting of restricted stock	—	—		—	—		—	—		3		—		3
Net loss	—	—		—	—		—	—		—		(254)		(254)
Balances at September 30, 2021	—	$	—	504,406,030	$	—	225,000	$	—	$	2,113	$	(1,103)	$	1,010

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

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TOAST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in millions)


	Nine Months Ended September 30,
		2022		2021
Cash flows from operating activities:
Net loss		$	(175)	$	(488)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		18		16
Stock-based compensation expense		167		95
Amortization of deferred costs		32		17
Change in fair value of derivative liability		—		103
Change in fair value of warrant liabilities		(102)		215
Credit loss expense		18		1
Change in deferred income taxes		(5)		(4)
Change in fair value of contingent consideration		2		—
Loss on debt extinguishment		—		50
Non-cash interest expense on convertible notes		—		12
Other non-cash items		4		—
Changes in operating assets and liabilities:
Accounts receivable, net		(30)		(19)
Merchant cash advances and acquired loans repaid		3		1
Prepaid expenses and other current assets		(20)		(33)
Deferred costs, net		(53)		(31)
Inventories		(53)		(19)
Operating lease right-of-use assets		(2)		13
Accounts payable		(12)		8
Accrued expenses and other current liabilities		91		113
Deferred revenue		(9)		1
Operating lease liabilities		2		(13)
Other assets and liabilities		(13)		(5)
Net cash (used in) provided by operating activities		(137)		33
Cash flows from investing activities:
Cash paid for acquisition, net of cash acquired		(46)		(26)
Capitalized software		(10)		(6)
Purchases of property and equipment		(13)		(10)
Purchases of marketable securities		(187)		—
Proceeds from the sale of marketable securities		41		—
Maturities of marketable securities		190		—

Net cash used in investing activities		(25)		(42)
Cash flows from financing activities:
Proceeds from initial public offering, net		—		950
Payment of deferred offering costs		—		(4)

Extinguishment of convertible notes		—		(245)
Change in customer funds obligations, net		26		26

Proceeds from exercise of stock options		12		18
Payment of contingent consideration		(2)		—

Proceeds from issuance of restricted stock		—		10
Other financing activities		—		1


Net cash provided by financing activities		36		756
Net (decrease) increase in cash, cash equivalents, cash held on behalf of customers and restricted cash		(126)		747
Effect of exchange rate changes on cash and cash equivalents and restricted cash		(1)		—
Cash, cash equivalents, cash held on behalf of customers and restricted cash at beginning of period		851		594
Cash, cash equivalents, cash held on behalf of customers and restricted cash at end of period		$	724	$	1,341
Reconciliation of cash, cash equivalents, cash held on behalf of customers and restricted cash
Cash and cash equivalents		$	644	$	1,302
Cash held on behalf of customers		61		37
Restricted cash		19		2
Total cash, cash equivalents, cash held on behalf of customers and restricted cash		$	724	$	1,341

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Supplemental disclosure of non-cash investing and financing activities:
Purchase of property and equipment included in accounts payable and accrued expenses	$	1	$	—
Stock-based compensation included in capitalized software	5		1
Issuance of Class B common stock upon exercise of common stock warrants	18		43
Issuance of Class B common stock for payment of contingent consideration	1		—
Common stock issued for acquisition	—		15
Deferred offering costs included in accounts payable and accrued expenses	—		2
Conversion of convertible preferred stock into Class B common stock upon initial public offering	—		849
Issuance of common stock warrants upon debt extinguishment	—		125
Deferred payments included in purchase price	2		5
Contingent consideration included in purchase price	—		2

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 millions, except share and per share amounts)

1. Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies

Toast, Inc. (“we,” or “the Company”), is a cloud-based all-in-one digital technology platform purpose-built for the entire restaurant community. Our platform provides a comprehensive suite of software as a service, or 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.

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, or U.S. GAAP, and the rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. Accordingly, they do not include all of the financial information and footnotes required by U.S. GAAP for complete financial statements.

The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly our financial position, results of operations, comprehensive loss, stockholders’ equity, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be expected for the full year ending December 31, 2022 or any other future interim periods.

The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2021, or the 2021 Annual Report. The Consolidated Balance Sheet as of December 31, 2021 included herein was derived from the audited financial statements as of that date.

Risks and Uncertainties

We are subject to a number of risks common to emerging, technology-based companies, including a limited operating history, dependence on key individuals, rapid technological changes, competition from substitute products and larger companies, the ability to successfully develop, market, and outsource manufacturing of our products and services, as well as the impact of the novel coronavirus disease, or COVID-19, on the restaurant industry. Other global events, such as current or future military conflicts, political unrest, rising inflation and interest rates, and global supply chain issues, may also impact consumer behavior, the restaurant industry and our business.

Since early 2020, changes in consumers’ behavior and government-imposed restrictions because of the COVID-19 pandemic have impacted restaurants in various ways, including limiting service to takeout orders for a period of time or reducing capacity to accommodate social distancing measures. The extent of the impact of the COVID-19 pandemic over the longer term remains uncertain and will depend largely on future developments that cannot be accurately predicted at this time, including the duration and the spread of the pandemic both globally and within the United States, the introduction and severity of new variants of the virus and their resistance to currently approved vaccines, as well as the potential negative impact these and other factors may have on the restaurant industry and our business.

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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 credit losses, liabilities associated with financial guarantees (contingent liabilities for credit losses and related non-contingent liabilities), negative allowances for expected recoveries on repurchased loans, allowances for uncollectible loans, allowance for excessive and obsolete inventory, reserves for warranties on hardware sold, incremental borrowing rates applied in valuation of lease liabilities, reserves for sales returns, fair values of assets acquired and liabilities assumed through business combinations, useful lives of assets acquired in business combinations, stock-based compensation expense, warrants, as well as amortization periods for deferred contract acquisition costs. Actual results could vary from these estimates.

Recently Adopted Accounting Pronouncements

In October 2021, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, or ASU 2021-08. The standard requires an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers, as if it had originated the contracts, rather than at fair value on the acquisition date. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The amendments in ASU 2021-08 should be applied prospectively to business combinations occurring on or after the effective date of the standard. Early adoption is permitted.

We early adopted ASU 2021-08 during the three months ended September 30, 2022, which did not have a material impact on the consolidated financial statements and related disclosures. We applied ASU 2021-08 in our acquisition of Sling, Inc. as discussed in Note 2, “Business Combinations”.

Significant Accounting Policies

There have been no material changes to our significant accounting policies disclosed in Note 2, “Summary of Significant Accounting Policies” included in the Consolidated Financial Statements for the years ended December 31, 2021, 2020 and 2019 in our 2021 Annual Report.

Reclassifications

Certain amounts in prior period financial statements have been reclassified to conform to the current period presentation.

2. Business Combinations

Sling, Inc.

On July 6, 2022, we acquired 100% of the outstanding capital stock of Sling, Inc., or Sling, an employee scheduling, communication and management solution, to expand our product portfolio in the team scheduling and communication space. The total purchase price of $49 consisted of cash payments of $38 made on the acquisition date and $9 placed in escrow related to general representations, indemnities and warranties, as well as a deferred consideration of $2. The escrow will be released between 18 months and 60 months following the acquisition date.

In conjunction with the acquisition, we issued 1,338,228 shares of Class A restricted common stock at a fair market value of $13.91 per share to certain members of Sling management at a fair market value of $19. The shares vest over a service period of 1 to 3 years and are subject to forfeiture upon termination during the service period. No shares vested during the three months ended September 30, 2022. Stock-based compensation expense for these shares is recognized on a straight line basis over the related service period and amounted to $2 during the three months ended September 30, 2022.

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We used a market participant approach to record the assets acquired and liabilities assumed in the acquisition of Sling. Due to the timing of the acquisition, the accounting for this acquisition was not complete as of September 30, 2022. The fair values of the assets acquired and the liabilities assumed have been determined provisionally and are subject to adjustments as we obtain 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.

The following table summarizes the preliminary acquisition date fair values of assets acquired and liabilities assumed at the acquisition date:


	Amount
Cash	$	1
Intangible assets:
Developed technology, useful life of 5 years	17
Customer relationships, useful life of 5 years	2
Goodwill	33
Net working capital	1

Deferred tax liability	(5)
Net assets acquired	$	49

The fair values of the developed technology and customer relationships intangible assets were based on Level 3 inputs using the cost and income approaches, respectively. The primary unobservable inputs were development effort and after tax cash flows, respectively.

Goodwill, which is not deductible for tax purposes, represents the excess of the consideration transferred over the fair value of the net assets acquired, and is primarily attributable to expected synergies between our operations and those of Sling, as well as the assembled workforce.

During the nine months ended September 30, 2022, we incurred acquisition-related costs of $2 in connection with the acquisition of Sling, which were recorded in “General and administrative” expenses in our unaudited Consolidated Statements of Operations. There were no acquisition-related costs incurred during the three months ended September 30, 2022.

The operating results of Sling have been reflected in our results of operations from the date of the acquisition. Pro forma results of operations have not been presented as they are not material to our consolidated results of operations for the three and nine months ended September 30, 2022 and 2021.

xtraChef, Inc.

During the second quarter of fiscal year 2022, we finalized the purchase price allocation and fair values of assets acquired and liabilities assumed related to the acquisition of xtraCHEF, Inc. There were no purchase price adjustments recorded since the acquisition date. Please refer to Note 3, "Business Combinations" to our Consolidated Financial Statements included in the 2021 Annual Report on Form 10-K for further information on the transaction.

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3. Fair Value of Financial Instruments

The following table presents information about our 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, 2022 Using
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	461	$	—	$	—	$	461
Commercial paper	—		126		—		126
Certificates of deposit	—		50		—		50
Corporate bonds	—		166		—		166
Treasury securities	—		42		—		42
Asset-backed securities	—		25		—		25
	$	461	$	409	$	—	$	870
Liabilities:
Warrants to purchase common stock	$	—	$	—	$	61	$	61
Contingent consideration	—		—		3		3
	$	—	$	—	$	64	$	64


	Fair Value Measurement at December 31, 2021 Using
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	50	$	—	$	—	$	50
Commercial paper	—		134		—		134
Certificates of deposit	—		14		—		14
Corporate bonds	—		193		—		193
Treasury securities	—		67		—		67
Asset-backed securities	—		49		—		49
	$	50	$	457	$	—	$	507
Liabilities:
Warrants to purchase common stock	$	—	$	—	$	181	$	181
Contingent consideration	—		—		5		5
	$	—	$	—	$	186	$	186

During the nine months ended September 30, 2022 and 2021, there were no transfers into or out of Level 3 measurements within the fair value hierarchy.

Valuation of Warrants to Purchase Common Stock

The fair value of the warrants was determined using the Black-Scholes option-pricing model, which considered as inputs the underlying price of our Class A common stock, strike price, time to expiration, volatility, risk-free interest rates, and dividend yield.

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The following table indicates the weighted-average assumptions made in estimating the fair value as of September 30, 2022 and 2021:


	September 30,
(in millions, except per share amounts)	2022			2021
Risk-free interest rate	4.1		%	1.1		%
Contractual term (in years)	4.69			5.69
Expected volatility	59.1		%	53.3		%
Expected dividend yield	—		%	—		%
Exercise price per share	$	17.16		$	17.16

During the nine months ended September 30, 2022, we issued 371,573 shares of Class B common stock as a result of warrants exercised and recognized a related remeasurement gain of $6 within “Other income (expense)”. The remaining outstanding warrants were remeasured at fair value resulting in a remeasurement loss of $21 and a remeasurement gain of $96, respectively, recorded within “Other income (expense)” during the three and nine months ended September 30, 2022.

For further information on the warrants to purchase common stock, please refer to Note 15, “Warrants to Purchase Preferred and Common Stock”, in our Consolidated Financial Statements included in the 2021 Annual Report.

Contingent Consideration Liability

Fair value of the contingent consideration liability incurred in connection with the acquisition of xtraCHEF, Inc. is estimated based on a Monte Carlo simulation which 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. The contingent consideration liability is subject to remeasurement each reporting period until the contingency is resolved and the liability is settled, and changes in the assumptions used could materially impact the estimated fair value of the liability. We recognize the change in fair value of the contingent consideration liability in “General and administrative” expenses in our results of operations.

During the nine months ended September 30, 2022, we paid $2 in cash and issued 37,179 shares of our Class B common stock to settle a portion of the contingent consideration.

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Fair Value of Liabilities

The following tables provide a roll-forward of the aggregate fair value of our common stock warrant liability, contingent consideration liability, preferred stock warrant liability, and derivative liability, for which fair value is determined using Level 3 inputs:


	Common Stock Warrant Liability		Contingent Consideration Liability
Balance as of December 31, 2021	$	181	$	5


Change in fair value	(102)		2
Settlement	(18)		(4)

Balance as of September 30, 2022	$	61	$	3


	Preferred Stock Warrant Liability (1)		Common Stock Warrant Liability		Derivative Liability (1)		Contingent Consideration Liability
Balance as of December 31, 2020	$	11	$	—	$	37	$	—
Fair value at issuance	—		125		—		—
Fair value on the acquisition date	—		—		—		2
Change in fair value and other adjustments	38		177		103		—
Settlement	(43)		—		(140)		—
Conversion of preferred stock warrants into common stock warrants upon Initial public offering	(6)		6		—		—
Balance as of September 30, 2021	$	—	$	308	$	—	$	2

(1) Preferred stock warrant liability and derivative liability were settled during the nine months ended September 30, 2021. For further information, please refer to Note 4, “Fair Value of Financial Instruments” and Note 15, “Warrants to Purchase Preferred and Common Stock”, in our Consolidated Financial Statements included in the 2021 Annual Report.

4. Marketable Securities

The amortized cost, gross unrealized holding losses and fair value of marketable securities, excluding accrued interest receivable, consisted of the following:


	September 30, 2022
	Amortized Cost		Gross Unrealized Losses		Fair Value
Commercial paper	$	126	$	—	$	126
Certificates of deposit	50		—		50
Corporate bonds	168		(2)		166
Treasury securities	43		(1)		42
Asset-backed securities	25		—		25
Total	$	412	$	(3)	$	409

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	December 31, 2021
	Amortized Cost		Gross Unrealized Losses		Fair Value
Commercial paper	$	134	$	—	$	134
Certificates of deposit	14		—		14
Corporate bonds	194		(1)		193
Treasury securities	67		—		67
Asset-backed securities	49		—		49
Total	$	458	$	(1)	$	457

The fair values of marketable securities by contractual maturities at September 30, 2022:


	September 30, 2022
Due within 1 year	$	376
Due after 1 year through 5 years	33


Total marketable securities	$	409

We review marketable securities for impairment during each reporting period to determine if any of the securities have experienced an other-than-temporary decline in fair value. Unrealized losses were not material for the securities held in our portfolio as of September 30, 2022 or December 31, 2021. There were no impairment losses or expected credit losses related to our marketable securities during the three and nine months ended September 30, 2022.

5. Loan Servicing Activities and Acquired Loans Receivable, Net

We service loans originated by our bank partner and assume liability for loan defaults on a limited basis based on a specified percentage of the total loans originated, which are measured on a quarterly basis. If the merchant’s payments are delayed for a defined period of time, the loan is considered delinquent and we are required to purchase the loan from our bank partner. The loan purchase, net of expected recoveries, reduces our potential liability with respect to the quarterly cohort of loans from which the defaulted loan originated. This obligation represents a financial guarantee with a contingent aspect related to our contingent obligation to purchase defaulted loans, and a non-contingent aspect related to our obligation to perform under the guarantee. We recognize a liability for both these elements which is included in “Accrued expenses and other current liabilities” in the unaudited Consolidated Balance Sheets. The contingent liability for expected credit losses related to our guarantee was $8 and $2, respectively, as of September 30, 2022 and December 31, 2021. Changes in the contingent liability were not significant for the three months ended September 30, 2022 and 2021 and the nine months ended September 30, 2021. Credit loss expense was $11 for the nine months ended September 30, 2022. Other changes in the contingent liability were not significant for the nine months ended September 30, 2022.

We repurchase delinquent loans and establish a negative allowance for expected recoveries when we have an expectation of collecting cash flows on the repurchased loans at the portfolio level. As of September 30, 2022 and December 31, 2021, we had a negative allowance for acquired loans and merchant cash advances receivable of $2 and $1, respectively, which are included within “Prepaid expenses and other current assets.” Changes in the negative allowance were not significant for the three and nine months ended September 30, 2022 and 2021.

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6. Lessee Arrangements

During the nine months ended September 30, 2022, we entered into various operating leases for office space resulting in right-of use assets of $18, and related current and long-term operating lease liabilities of $18 in the accompanying unaudited Consolidated Balance Sheets. The right-of-use assets and lease liabilities are amortized over the lease terms of each lease. Additionally, during the nine months ended September 30, 2022, we entered into two lease agreements for office space in Asia with lease terms of up to approximately five years, which are expected to commence during the three months ended December 31, 2022. Future lease payments are approximately $6.

The components of lease expense were as follows for the three and nine months ended September 30, 2022 and 2021:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Operating lease expense	$	6	$	6	$	17	$	18
Variable lease expense	1		1		3		2
Total	$	7	$	7	$	20	$	20

The following table summarizes supplemental cash flow information related to cash paid for amounts included in the measurement of lease liabilities during the nine months ended September 30, 2022 and 2021:


	Nine Months Ended September 30,
	2022		2021
Operating cash flows for operating leases	$	(19)	$	(19)
Supplemental non-cash amounts of lease liabilities and right-of-use assets due to lease originations, modifications and terminations	11		3
Total	$	(8)	$	(16)

7. Other Balance Sheet Information

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” in the 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 and cash held as collateral pursuant to an agreement with the originating third-party bank for the working capital loans serviced by Toast Capital (See Note 5). Restricted cash is included in within “Other non-current assets” in the unaudited Consolidated Balance Sheets.

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


	September 30, 2022		December 31, 2021
Cash and cash equivalents	$	644	$	809
Cash held on behalf of customers	61		34
Restricted cash	19		8
Total cash, cash equivalents, cash held on behalf of customers and restricted cash	$	724	$	851

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Accounts receivable, net consisted of the following:


	September 30, 2022		December 31, 2021
Accounts receivable	$	47	$	20
Unbilled receivables	39		39
Less: Allowance for credit losses	(8)		(4)
Accounts receivable, net	$	78	$	55

Our allowance for credit losses was comprised of the following:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Beginning balance	$	(5)	$	(5)	$	(4)	$	(4)
Impact of adopting ASU 2016-13	—		—		—		(2)
Additions	(4)		(1)		(7)		—
Write offs	1		1		3		1
Ending balance	$	(8)	$	(5)	$	(8)	$	(5)

As of September 30, 2022 and December 31, 2021, substantially all inventory balances of $95 and $42, respectively, consisted of finished goods.

Prepaid expenses and other current assets consisted of the following:


	September 30, 2022		December 31, 2021
Cash held on behalf of customers	$	61	$	34

Prepaid expenses	17		25



Deposits for inventory purchases	24		21
Other current assets	34		12
	$	136	$	92

Accrued expenses and current liabilities consisted of the following:


	September 30, 2022		December 31, 2021
Accrued transaction-based costs	$	164	$	120
Accrued payroll and bonus	38		24
Customer funds obligation	61		34
Accrued expenses	57		21
Accrued commissions	14		19




Other liabilities	42		28
	$	376	$	246

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8. Revenue from Contracts with Customers

The following table summarizes the activity in deferred revenue:


	Nine Months Ended September 30,
	2022		2021
Deferred revenue, beginning of year	$	56	$	58
Deferred revenue, end of period	48		60

Revenue recognized in the period from amounts included in deferred revenue at the beginning of period	$	45	$	36

As of September 30, 2022, approximately $455 of revenue is expected to be recognized from remaining performance obligations for customer contracts. We expect to recognize revenue of approximately $438 from these remaining performance obligations over the next 24 months, with the balance recognized thereafter.

The following tables summarize the activity in deferred contract acquisition costs and the classification of deferred costs:


	Nine Months Ended September 30,
		2022		2021
Beginning balance		$	55	$	29
Capitalization of sales commissions costs		53		31
Amortization of sales commissions costs		(32)		(17)
Ending balance		$	76	$	43


	September 30,
		2022		2021
Deferred costs, current		$	40	$	24
Deferred costs, non-current		36		19
Total		$	76	$	43

9. Stock-Based Compensation

Stock-based compensation expense recognized for the three and nine months ended September 30, 2022 and 2021, is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Costs of revenue	$	8	$	5	$	24	$	7
Sales and marketing	12		10		37		13
Research and development	18		9		52		35
General and administrative	19		12		54		42
Stock based compensation	$	57	$	36	$	167	$	97

Stock-based compensation expense of $3 and $5, respectively, was capitalized as a part of software development costs during the three and nine months ended September 30, 2022, and $1 during each of the three and nine months ended September 30, 2021.

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Prior to consummation of our initial public offering, or IPO, no stock-based compensation expense was recognized for certain restricted stock units, or RSUs, with an IPO-related vesting condition. Subsequent to the consummation of our IPO, we began recognizing stock-based compensation expense related to these awards which amounted to $15 and $62, respectively, during the three and nine months ended September 30, 2022, and $28 during each of the three and nine months ended September 30, 2021.

Stock Options

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, 2022 and 2021:


(in millions, except per share amounts)	Nine Months Ended September 30,
	2022			2021
Risk-free interest rate	2.37		%	1.00		%
Expected term (in years)	6.07			6.32
Expected volatility	52.28		%	64.75		%
Expected dividend yield	—		%	—		%
Weighted-average fair value of common stock	$	17.20		$	16.87
Weighted-average grant date fair value	$	8.89		$	10.07

The following is a summary of stock option activity under our stock option plans for the nine months ended September 30, 2022:


(in millions, except share and per share amounts)	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (1)

Outstanding as of December 31, 2021	58,917,018	$	4.53	7.65	$	1,778
Granted	6,143,373	17.20
Exercised	(6,360,377)	1.88
Forfeited	(3,011,052)	9.84
Outstanding, vested, and expected to vest as of September 30, 2022	55,688,962	$	5.94	7.20	$	615



Options exercisable as of September 30, 2022	50,094,536	$	4.56	6.93	$	615

(1) The aggregate intrinsic value was determined as the difference between the closing price of the Class A common stock on the last trading day of September 2022, 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 of options granted during the three months ended September 30, 2022 and 2021 was $15.94 and $15.49, respectively. The aggregate intrinsic values of options exercised was $31 and $112, respectively, during the three and nine months ended September 30, 2022 and $30 and $82, respectively, during the three and nine months ended September 30, 2021. The total fair value of options vested during the nine months ended September 30, 2022 and 2021 was $65 and $26, respectively.

As of September 30, 2022, total unrecognized stock-based compensation expense related to the option awards was $106 and is expected to be recognized over the remaining weighted-average service period of 3.32 years.

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Restricted Stock Units

The following table summarizes RSU activity during the nine months ended September 30, 2022:


	RSU	Weighted Average Grant Date Fair Value
Unvested balance as of December 31, 2021	15,384,809	$	29.71
Granted	18,749,313	$	18.23
Vested	(3,522,458)	$	22.21
Forfeited	(1,763,366)	$	26.76
Unvested balance as of September 30, 2022	28,848,298	$	23.34

The weighted average grant-date fair value of RSUs granted during the three months ended September 30, 2022 and 2021 was $17.37 and $26.09, respectively. The weighted average grant-date fair value of RSUs granted during the nine months ended September 30, 2021 was $22.21. The fair value of RSUs vested during the nine months ended September 30, 2022 and 2021 was $61 and $1, respectively. The fair value of RSUs vested during the three months ended September 30, 2022 was $32. No RSUs vested during the three months ended September 30, 2021.

As of September 30, 2022, total unrecognized stock-based compensation expense related to the RSUs was $441 and is expected to be recognized over the remaining weighted-average service period of 3.42 years.

2021 Employee Stock Purchase Plan

In 2021, our Board adopted, and our stockholders approved, the 2021 Employee Stock Purchase Plan ("ESPP") which became effective on September 23, 2021, as discussed in Note 17, "Common Stock" to the Company’s Consolidated Financial Statements included in our 2021 Annual Report. As of September 30, 2022, 16,709,893 shares of our Class A common stock were authorized for issuance to participating employees who are allowed to purchase shares of Class A common stock at a price equal to 85% of its fair market value at the beginning or the end of the offering period, whichever is lower. As of September 30, 2022, there were no shares of Class A common stock purchased under the ESPP.

We recognize stock-based compensation expense related to shares issued under the ESPP on a straight-line basis over the offering period, which is typically 6 months. We estimate the fair value of shares to be issued under the ESPP on the commencement date of each offering period using the Black-Scholes option-pricing model. ESPP expense was not material to our consolidated results of operations for the three months ended September 30, 2022.

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Restricted Stock

As of September 30, 2022 and December 31, 2021, 1,970,995 and 4,133,955 shares of Class A and B common stock, respectively, were outstanding from early exercise of stock options. Pursuant to the associated agreements, upon termination of employment, unvested shares held by such individuals are subject to repurchase by us. As of September 30, 2022 and December 31, 2021, cash paid for unvested shares of $3 and $6, respectively, is included in “Other long-term liabilities” in the accompanying unaudited Consolidated Balance Sheets. During the nine months ended September 30, 2022, 2,156,790 shares vested that were previously issued upon early exercise of stock options.

As of each Consolidated Balance Sheet date, we had reserved shares of Class A common stock and Class B common stock for issuance in connection with the following:


	September 30, 2022	December 31, 2021

Options to purchase Class A common stock and Class B common stock	55,688,962	58,917,018
Restricted stock units	28,848,298	15,384,809

Warrants to purchase Class B common stock	6,902,633	7,961,455
Shares available for future grant under the Stock Plans	59,156,355	53,916,105
Shares reserved for charitable donations	4,922,001	4,922,001
Shares available for issuance under 2021 Employee Stock Purchase Plan	16,709,893	11,638,189
	172,228,142	152,739,577

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10. Income Taxes

Our effective income tax rate was 4.0% and (0.1)% for the three months ended September 30, 2022 and 2021, respectively, and was 2.0% and 0.7% for the nine months ended September 30, 2022 and 2021, respectively. The effective tax rate for each period differs from the statutory rate primarily as a result of having a full valuation allowance maintained against our U.S. deferred tax assets, along with the release of a portion of the valuation allowance as a result of acquisitions in each period as discussed further below.

The benefit from income taxes was ($4) and $0, respectively, for the three months ended September 30, 2022 and 2021, and ($4) and ($4), respectively, for the nine months ended September 30, 2022 and 2021. The change in the benefit from income taxes for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was primarily due to non-recurring income tax benefits of ($5) and ($4) as a result of the acquisitions of Sling and xtraCHEF, respectively. The non-recurring benefits are a result of a release of a portion of the Company’s valuation allowance 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 Sling, Inc. and xtraCHEF acquisitions, respectively.

11. Net Loss Per Share Attributable to Common Stockholders

Basic net loss per share is determined by dividing net loss by the weighted average shares outstanding for the period. We analyze the potential dilutive effect of stock options, unvested restricted stock, RSUs, our ESPP, and warrants to purchase common stock (as applicable), during periods we generate net income, or when income is recognized related to changes in fair value of warrant liabilities.

During the three months ended September 30, 2022, the exercise price for the warrants to purchase common stock exceeded the average trading price of our Class A common stock for the period, and therefore the warrants were anti-dilutive and excluded from the computation of diluted net loss per share.

During the nine months ended September 30, 2022, we recorded a gain on fair value remeasurement of warrant liabilities which was added back to the numerator to adjust net loss for the dilutive impact of the warrants. We adjusted the denominator for the incremental dilutive shares using the treasury stock method.

The following table sets forth the computation of basic and diluted net loss per share (in millions, except share and per share data) attributable to common stockholders for the three and nine months ended September 30, 2022 and 2021:


(in millions, except share and per share amounts)	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Numerator:
Net loss, basic	$	(98)	$	(254)	$	(175)	$	(488)
Gain on change in fair value of warrant liabilities	—		—		102		—
Net loss, diluted	$	(98)	$	(254)	$	(277)	$	(488)
Denominator:
Weighted average shares of common stock outstanding—basic	513,719,867		239,358,805		509,507,937		219,746,454
Effect of dilutive securities:
Warrants to purchase Class B common stock	—		—		492,415		—
Weighted average shares of common stock outstanding—diluted	513,719,867		239,358,805		510,000,352		219,746,454
Net loss per share, basic	$	(0.19)	$	(1.06)	$	(0.34)	$	(2.22)
Net loss per share, diluted	$	(0.19)	$	(1.06)	$	(0.54)	$	(2.22)

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We 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, 2022 and 2021:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2022	2021	2022	2021
Options to purchase Class A common stock, Class B common stock and common stock	55,688,962	61,307,085	55,688,962	61,307,085
Unvested restricted stock	3,309,223	5,056,655	3,309,223	5,056,655
Unvested restricted stock units	28,848,298	10,637,265	28,848,298	10,637,265

Warrants to purchase Class B common stock	6,902,633	8,245,210	—	8,245,210
Employee Stock Purchase Plan	24,588	—	24,588	—
	94,773,704	85,246,215	87,871,071	85,246,215

12. Segment Information

We have significant operations in the United States, Ireland, and India. We did not earn material revenue in any country other than the United States during the three and nine months ended September 30, 2022 and 2021.

The following table sets forth the breakdown of long-lived assets based on geography:


	September 30, 2022		December 31, 2021
United States	$	118	$	119
Ireland	9		1
Other	1		—
	$	128	$	120

Tangible long-lived assets consist of property and equipment and operating lease right-of-use assets. Long-lived assets attributed to specific countries are based upon the country in which the asset is located.

13. Commitments and Contingencies

Purchase Commitments

We had non-cancelable purchase obligations to hardware suppliers and cloud service providers of $243 and $315, respectively, as of September 30, 2022 and December 31, 2021. Most of our purchase obligations are payable within the next 12 months.

Legal Proceedings

From time to time, we 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. We establish accruals for losses that management deems to be probable and subject to a reasonable estimate. We do not expect any claims with a reasonably possible adverse outcome to have a material impact.

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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, and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section titled “Special Note Regarding Forward-Looking Statements” and Item 1A. Risk Factors included elsewhere in this Quarterly Report on Form 10-Q. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

Overview

Toast is a cloud-based, all-in-one digital technology platform purpose-built for the entire restaurant community. Our platform provides a comprehensive suite of SaaS products, financial technology solutions, including integrated payment processing, restaurant-grade hardware, and a broad ecosystem of third-party partners. We serve as the restaurant operating system, connecting front of house and back of house operations across dine-in, takeout, and delivery channels. As of September 30, 2022, approximately 74,000 restaurant locations, processing approximately $83 billion of gross payment volume in the trailing 12 months on the Toast platform, partnered with Toast to optimize operations, increase sales, engage guests, and maintain happy employees.

By enabling these capabilities through a single, integrated platform, Toast improves experiences for stakeholders across the restaurant ecosystem:

•Restaurant operators. We arm restaurants with a wide range of products and capabilities to address their specific needs regardless of size, location, or business model. As a result, restaurants using Toast often see higher sales and greater operational efficiency.

•Guests. We are laser focused on helping our customers deliver memorable guest experiences at scale. Guests can place orders easily, safely, and accurately across web, mobile, and in-person channels for dine-in, takeout, or delivery. In addition, our platform empowers restaurants to utilize their guest data to deliver targeted and personalized experiences with loyalty programs and marketing solutions.

•Employees. Our easy-to-learn and easy-to-use technology improves the experience of restaurant employees across Toast customers. Employees are core to delivering great hospitality, and it is critical for restaurants to engage and retain employees in an increasingly competitive labor market. Our products enable new employees to learn quickly through guided workflows, facilitate faster table turns and safer, streamlined operations, and provide greater transparency around, and timely access to, employees’ wages.

•Suppliers. Our supplier management and accounting products give restaurants the tools to optimize their back-office operations. Managing supplier networks and procurement, and having high visibility into costs, are critical to efficiently operating a restaurant. Our products enable customers to automate manual billing processes, manage inventory, and improve profitability with real-time cost insights on menu items. The seamless integration across our end-to-end platform gives our customers the rich data and reporting capabilities to efficiently operate and manage their restaurants.

The benefits to all stakeholders using the Toast platform create a powerful, virtuous cycle that amplifies our impact on restaurants. Guest satisfaction generates loyalty to restaurants, driving repeat sales, word-of-mouth referrals, and larger checks and tips. This promotes employee satisfaction, helping reduce turnover and motivating employees to continue to raise the bar on the guest experience. In addition, our integrated software and payments platform consolidates data on restaurant sales and operations, which enables our reporting and analytics as well as financial technology solutions, such as working capital loans, to further support our customers’ success.

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Since our founding, we have translated our love for restaurants into a commitment to innovation and digital transformation for the restaurant industry. As we have expanded our platform, launched new products, and added new partners over time, we have rapidly grown the number of restaurant locations on the Toast platform.

Recent Developments in Macroeconomic Environment

Since early 2020, changes in consumers’ behavior and government-imposed restrictions because of the COVID-19 pandemic have impacted restaurants in various ways, including limiting service to takeout orders for a period of time or reducing capacity to accommodate social distancing measures. Though the exact long-term circumstances are difficult to predict, we believe that the COVID-19 pandemic will result in a lasting shift in consumer demand towards omnichannel consumption and increased guest demand for digital solutions such as Order & Pay. Depending on the extent to which the prevalence of takeout and delivery orders persists, our financial results may be impacted in a number of ways.

In addition to the ongoing COVID-19 pandemic, changes in macroeconomic conditions, including inflation and its potential impact on consumer spending, increase in interest rates, as well as continued global supply chain issues, have impacted and may continue to impact our business. While our business results remain positive, it is difficult to predict the potential impact these factors may have on our future business results because of the associated uncertainty they have produced or will produce among consumers and the restaurant industry.

Key Business Metrics

We use the following key business metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions:


	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in billions)	2022		2021		% Growth		2022		2021		% Growth
Gross Payment Volume (GPV)(1)	$	25.2	$	16.5	53	%	$	66.3	$	39.9	66	%


	As of September 30,
(dollars in millions)	2022		2021		% Growth
Annualized Recurring Run-Rate (ARR)	$	868	$	544	60	%

Gross Payment Volume (GPV)(1)

Gross Payment Volume represents the sum of total dollars processed through the Toast payments platform across all restaurant locations in a given period. GPV is a key measure of the scale of our platform, which in turn drives our financial performance. As our customers generate more sales and therefore more GPV, we generally see higher financial technology solutions revenue.

_________________

(1) Please note that numbers may not tie due to rounding to the nearest hundred million.

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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.

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 U.S. Generally Accepted Accounting Principles, or GAAP, and should be viewed independently of, and not combined with or substituted for, our revenue, gross profit, and other financial information determined in accordance with GAAP. Further, ARR is not a forecast of future revenue and investors should not place undue reliance on ARR as an indicator of our future or expected results.

Seasonality

We experience seasonality in our financial technology solutions revenue, which is largely driven by the level of GPV processed through our platform. For example, customers typically have greater sales during the warmer months, though this effect varies regionally. As a result, our financial technology solutions revenue per location has historically been stronger in the second and third quarters. We believe that financial technology solutions revenue from both existing and potential future products will continue to represent a significant proportion of our overall revenue mix, and seasonality will continue to impact our results of operations.

Components of Results of Operations

Revenue

We generate revenue from four main sources that are further described below: (1) subscription services, (2) financial technology solutions, (3) hardware, and (4) professional services.

Our total revenue consists of the following:

Subscription services. We generate subscription services revenue from fees charged to customers for access to our software applications, generally over a term ranging from 12 to 36 months. Our subscription services revenue is primarily based on a rate per location, and this rate varies depending on the number of software products purchased, hardware configuration, and employee count at each location.

Financial technology solutions. Revenue from financial technology solutions consists primarily of transaction-based fees paid by customers to facilitate their payment transactions, which are generally calculated as a percentage of the total transaction amount processed plus a per-transaction fee. The transaction fees collected are recognized as revenue on a gross basis. Financial technology solutions revenue also includes fees earned from marketing and servicing working capital loans to our customers 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 is responsible for purchasing from our bank partner loans in default (or that have been or are scheduled to be charged off) until the aggregate principal amount of such purchased loans equals 15% (or 30% in the case of a limited program offered during the winter of 2020-2021 related to the COVID-19 pandemic) of the total originated amount for each quarterly loan cohort. Toast Capital earns a servicing fee as well as a credit performance fee that is tied to the portfolio performance.

Hardware. We generate hardware revenue from the sale of terminals, tablets, handhelds, and related devices and accessories, net of estimated returns.

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Professional services. We generate professional services revenue from fees charged to customers for installation services, including business process mapping, configuration, and training. These services can be delivered on-site, remotely, or on a self-guided basis.

Costs of Revenue

Costs of revenue consists of expenses that are directly related or closely correlated to revenue generation, including, but not limited to, employee-related costs for customer support and certain operational roles as well as allocated overhead. Employee-related costs consist of salaries, benefits, bonuses, and stock-based compensation expense. Allocated overhead includes certain facilities costs, depreciation expense, and amortization costs associated with internally developed software. Below are descriptions of the types of costs classified within each component of costs of revenue:

Subscription services. Subscription services costs consist of customer support and associated employee-related costs, hosting costs, professional services costs, other software costs to support our cloud-based platform, and amortization costs associated with internally developed software.

Financial technology solutions. Financial technology solutions costs consist primarily of transaction-based costs, which are mostly fees and costs paid to issuers and card networks as well as other related fees associated with third-party payment processors and fraud management.

Hardware. Hardware costs consist of raw materials and the cost of manufacturing and shipping hardware sold to customers, including terminals, tablets, handhelds, card readers, printers, and other accessories. Included in the manufacturing and shipping costs are employee-related costs, professional services costs, and allocated overhead associated with our supply chain and fulfillment teams.

Professional services. Professional services costs consist primarily of employee-related costs and allocated overhead associated with our onboarding team, along with fees paid to third-party service providers engaged to perform installations and other services.

Amortization of acquired technology. Amortization of acquired technology costs is related to technologies acquired through acquisitions that have the capability of producing revenue.

Operating Expenses

Our operating expenses consist of the following:

Sales and marketing. Sales and marketing expenses consist primarily of employee-related costs incurred to acquire new customers and increase product adoption across our existing customer base. Marketing expenses also include fees incurred to generate demand through various advertising channels.

We expect that sales and marketing expenses will increase on an absolute dollar basis as we invest to grow our field-based sales team, increase demand generation, and enhance our brand awareness. We expect sales and marketing expenses as a percentage of revenue will vary from period-to-period over the short term and decrease over the long term.

Research and development. Research and development expenses consist primarily of employee-related costs associated with improvements to our platform and the development of new product offerings, as well as allocated overhead and expenses associated with the use of third-party software directly related to development of our products and services.

We plan to continue to hire employees to support our research and development efforts to expand the capabilities and scope of our platform and related products and services. As a result, we expect that research and development expenses will increase on an absolute dollar basis as we continue to invest to support these activities and innovate over the long term.

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General and administrative. General and administrative expenses consist primarily of expenses related to operations, finance, legal, human resources, information technology, and administrative personnel. General and administrative expenses also include costs related to fees paid for certain professional services, including legal, information technology, tax and accounting services, and bad debt and credit related expenses.

We expect that general and administrative expenses will increase on an absolute dollar basis as we add personnel and enhance our systems, processes, and controls to support the growth of our business as well as our increased compliance and reporting requirements as a public company. We expect general and administrative expenses as a percentage of revenue will vary from period-to-period over the short term and decrease over the long term.

Other Income (Expense)

Our other income and expenses consist of the following:

Interest income (expense), net. Consists of interest earned from cash held in money market accounts, interest earned on our marketable securities, and interest incurred on our convertible notes, which were issued in June 2020 and repaid in June 2021.

Change in fair value of warrant liability. Represents the change in the fair value of our warrant liability related to warrants issued to purchase shares of our convertible preferred stock and our common stock. The warrant liability is remeasured at fair value at each reporting date which could have a significant effect on other income (expense) and our results of operations during each period. The fair value is based on the trading price of our Class A common stock and other relevant valuation inputs, including volatility of our Class A common stock, strike price, relevant risk-free interest rates, and time to expiration of the warrants, and may fluctuate in subsequent periods.

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

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

Other income (expense), net. Represents foreign currency transaction gains and losses, gains or losses realized from sales of our marketable securities, refundable research and development tax credits, and other items.

Income Tax Benefit (Expense)

Income tax benefit (expense). Consists of U.S. federal and state income tax as well as international taxes in Ireland, India, and Iceland. Our effective tax rate fluctuates from period to period due to changes in the mix of income and losses in jurisdictions with a wide range of tax rates, the effect of acquisitions, changes resulting from the amount of recorded valuation allowance, and permanent differences between GAAP and local tax laws.

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Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2022 and 2021

The following table summarizes our results of operations for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2022		2021		2022		2021
Revenue:
Subscription services	$	90	$	46	$	230	$	115
Financial technology solutions	628		404		1,628		985
Hardware	27		31		86		81
Professional services	7		5		19		12
Total revenue	752		486		1,963		1,193
Costs of revenue:
Subscription services	29		18		81		41
Financial technology solutions	494		327		1,289		779
Hardware	52		43		165		94
Professional services	25		14		71		35
Amortization of acquired technology and customer assets	1		1		4		3
Total costs of revenue(1)	601		403		1,610		952
Gross profit	151		83		353		241
Operating expenses:
Sales and marketing (1)	84		56		232		130
Research and development (1)	74		40		203		113
General and administrative (1)	78		42		203		110
Total operating expenses	236		138		638		353
Loss from operations	(85)		(55)		(285)		(112)
Other income (expense):
Interest income (expense), net	3		—		5		(12)
Change in fair value of warrant liability	(21)		(198)		102		(215)
Change in fair value of derivative liability	—		—		—		(103)
Loss on debt extinguishment	—		—		—		(50)
Other income (expense), net	1		(1)		(1)		—
Loss before benefit from income taxes	(102)		(254)		(179)		(492)
Benefit from income taxes	4		—		4		4
Net loss	$	(98)	$	(254)	$	(175)	$	(488)

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(1)Includes stock-based compensation expense recognized for the three and nine months ended September 30, 2022 and 2021 as follows:

Stock-Based Compensation Expense


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2022		2021		2022		2021
Costs of revenue	$	8	$	5	$	24	$	7
Sales and marketing	12		10		37		13
Research and development	18		9		52		35
General and administrative	19		12		54		42
Total stock-based compensation expense	$	57	$	36	$	167	$	97

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Revenue


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
(dollars in millions)	2022		2021		Amount		%		2022		2021		Amount		%
Subscription services	$	90	$	46	$	44	96	%	$	230	$	115	$	115	100	%
Financial technology solutions	628		404		224		55	%	1,628		985		643		65	%
Hardware	27		31		(4)		(13)	%	86		81		5		6	%
Professional services	7		5		2		40	%	19		12		7		58	%
Total revenue	$	752	$	486	$	266	55	%	$	1,963	$	1,193	$	770	65	%

The increase in subscription services revenue during the three and nine months ended September 30, 2022 was attributed to growth in live restaurant locations and the continued increase in the number of products adopted by both new and existing customers.

The increase in financial technology solutions revenue during the three and nine months ended September 30, 2022 was attributable to the increase in live restaurant locations and the increase in GPV per processing location, which was due to both higher customer demand and higher average transaction values.

The decrease in hardware revenue during the three months ended September 30, 2022 was due to lower upsell revenue from sales to existing customers and the impact of pricing and packaging across bundled sales, partially offset by an increase in hardware sales to new locations. The impact of pricing and packaging benefited revenue in the prior year period compared to a negative impact in the current quarter. Revenue from sales to existing customers in last year’s period benefited from the recovery of in-person dining after COVID. The increase in hardware revenue during the nine months ended September 30, 2022 was largely driven by growth in live locations and sales to existing locations.

The increase in professional services revenue during the three and nine months ended September 30, 2022 was primarily driven by the increase in new live locations.

Costs of Revenue


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
(dollars in millions)	2022		2021		Amount		%		2022		2021		Amount		%
Subscription services	$	29	$	18	$	11	61	%	$	81	$	41	$	40	98	%
Financial technology solutions	494		327		167		51	%	1,289		779		510		65	%
Hardware	52		43		9		21	%	165		94		71		76	%
Professional services	25		14		11		79	%	71		35		36		103	%
Amortization of acquired technology and customer assets	1		1		—		—	%	4		3		1		33	%
Total costs of revenue	$	601	$	403	$	198	49	%	$	1,610	$	952	$	658	69	%

The increase in subscription services costs during the three and nine months ended September 30, 2022 was primarily attributable to an increase in employee-related and overhead costs and contractor services to support our growth, as well as stock-based compensation expense.

The increase in financial technology solutions costs during the three and nine months ended September 30, 2022 was due to an increase in GPV.

The increase in hardware costs during the three and nine months ended September 30, 2022 was attributable to higher shipment volume as a result of growth in new locations. The increase for the nine months ended September 30, 2022 was also attributable to higher freight and product costs.

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The increase in professional services costs during the three and nine months ended September 30, 2022 was primarily due to an increase in employee-related and overhead costs and contractor services to support our growth, as well as stock-based compensation expense.

We utilize our hardware and related professional services as customer acquisition tools and price them competitively to reduce barriers to entry for new locations.

Operating Expenses

Sales and Marketing


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
(dollars in millions)	2022		2021		Amount		%		2022		2021		Amount		%
Sales and marketing	$	84	$	56	$	28	50	%	$	232	$	130	$	102	78	%

The increase in sales and marketing expenses during the three and nine months ended September 30, 2022 was primarily attributable to a $22 million and $58 million increase in employee-related and overhead costs, respectively. The increase for the nine months ended September 30, 2022 was also attributable to a $24 million increase in stock-based compensation.

Research and Development


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
(dollars in millions)	2022		2021		Amount		%		2022		2021		Amount		%
Research and development	$	74	$	40	$	34	85	%	$	203	$	113	$	90	80	%

The increase in research and development expenses during the three and nine months September 30, 2022 was primarily attributable to a $21 million and $59 million increase in employee-related and overhead costs, respectively, and a $9 million and $17 million increase in stock-based compensation, respectively, in each case due to increased headcount.

General and Administrative


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
(dollars in millions)	2022		2021		Amount		%		2022		2021		Amount		%
General and administrative	$	78	$	42	$	36	86	%	$	203	$	110	$	93	85	%

The increase in general and administrative expenses during the three and nine months ended September 30, 2022 was primarily attributable to employee-related and overhead costs and stock-based-compensation due to increased headcount, as well as bad debt and credit related expenses mainly due to growth in our Toast Capital product offering. Employee-related and overhead costs increased $13 million and $38 million, respectively, and stock-based compensation increased $7 million and $12 million, respectively, during the three and nine months ended September 30, 2022.

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Interest Income (Expense), Net


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
(dollars in millions)	2022		2021		Amount		%		2022		2021		Amount		%
Interest income (expense), net	$	3	$	—	$	3	100	%	$	5	$	(12)	$	17	(142)	%

The increase in interest income (expense), net during the nine months ended September 30, 2022 was primarily due to the payoff of outstanding convertible notes in June 2021 and interest income generated on our investments in marketable securities. We made our initial investment in marketable securities in October 2021.

Change in Fair Value of Warrant Liability


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
(dollars in millions)	2022		2021		Amount		%		2022		2021		Amount		%
Change in fair value of warrant liability	$	(21)	$	(198)	$	177	(89)	%	$	102	$	(215)	$	317	(147)	%

The change in fair value of warrant liability for the three months ended September 30, 2022 was primarily attributable to a smaller increase in the value of the common stock underlying the outstanding warrants at the end of period relative to the value of the common stock at the beginning of the period. The change in fair value of warrant liability for the nine months ended September 30, 2022 was primarily attributable to a lower value of the common stock underlying outstanding warrants at the end of the period compared to the beginning of the period, as well as the issuance of additional common stock warrants in June 2021.

Change in Fair Value of Derivative Liability


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
(dollars in millions)	2022		2021		Amount		%		2022		2021		Amount		%
Change in fair value of derivative liability	$	—	$	—	$	—	—	%	$	—	$	(103)	$	103	(100)	%

The decrease in expense associated with the change in fair value of derivative liability during the nine months ended September 30, 2022 was due to the repayment of our convertible notes in June 2021 and the extinguishment of the corresponding liability.

Loss on Debt Extinguishment


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
(dollars in millions)	2022		2021		Amount		%		2022		2021		Amount		%
Loss on debt extinguishment	$	—	$	—	$	—	—	%	$	—	$	(50)	$	50	(100)	%

The decrease in loss on debt extinguishment during the nine months ended September 30, 2022 was due to the repayment of our convertible notes in June 2021.

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Other Income (Expense), Net


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
(dollars in millions)	2022		2021		Amount		%		2022		2021		Amount		%
Other income (expense), net	$	1	$	(1)	$	2	(200)	%	$	(1)	$	—	$	(1)	100	%

Other income (expense), net, remained materially consistent during the three and nine months ended September 30, 2022, as compared to the three and nine months ended September 30, 2021.

Benefit from income taxes


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
(dollars in millions)	2022		2021		Amount		%		2022		2021		Amount		%
Benefit from income taxes	$	4	$	—	$	4	100	%	$	4	$	4	$	—	—	%

The difference between the income tax benefit for the three months ended September 30, 2022 of $4 million, as compared to the income tax provision of $0 for the three months ended September 30, 2021 is primarily due to the impact of a deferred tax benefit generated as a result of the acquisition of Sling. The difference between the income tax benefit for the nine months ended September 30, 2022 and September 30, 2021 is not significant.

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Non-GAAP Financial Measures

We use certain non-GAAP financial measures described below to supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP and to understand and evaluate our core operating performance. These non-GAAP financial measures, which may be different than similarly titled measures used by other companies, are presented to enhance investors’ overall understanding of our financial performance and should not be considered substitutes for, or superior to, the financial information prepared and presented in accordance with GAAP.

We believe that these non-GAAP financial measures provide useful information about our financial performance, enhance the overall understanding of our past performance and future prospects, and allow for greater transparency with respect to important metrics used by our management for financial and operational decision-making. We are presenting these non-GAAP metrics to provide investors insight to the information used by our management to evaluate our business and financial performance. We believe that these measures provide investors increased comparability of our core financial performance over multiple periods with other companies in our industry.


	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2022		2021		2022		2021
Adjusted EBITDA	$	(19)	$	(12)	$	(97)	$	3


	Nine Months Ended September 30,
(in millions)	2022		2021
Free Cash Flow	$	(160)	$	17

Adjusted EBITDA

Adjusted EBITDA is defined as net income (loss), adjusted to exclude stock-based compensation expense and related payroll tax expense, depreciation and amortization expense, interest (income) expense, net, other income (expense) net, acquisition-related expenses, fair value adjustments on warrant and derivative liabilities, expenses related to early termination of leases, loss on debt extinguishment, charitable contribution stock-based expense, and income taxes, as applicable. We have provided below a reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure.

We believe Adjusted EBITDA is useful for investors in comparing our financial performance to other companies and from period to period. Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items such as depreciation and amortization, interest expense, and interest income, which can vary substantially from company to company depending on their financing and capital structures and the method by which their assets were acquired. In addition, Adjusted EBITDA eliminates the impact of certain items that may obscure trends in the underlying performance of our business. Adjusted EBITDA also has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. For example, although depreciation expense is a non-cash charge, the assets being depreciated may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new asset acquisitions. In addition, Adjusted EBITDA excludes stock-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy. Adjusted EBITDA also does not reflect changes in, or cash requirements for, our working capital needs; interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces the cash available to us; or tax payments that may represent a reduction in cash available to us. The expenses and other items which are excluded from the calculation of Adjusted EBITDA may differ from the expenses and other items that other companies may exclude from Adjusted EBITDA when they report their financial results.

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The following table reflects the reconciliation of net loss to Adjusted EBITDA for each of the periods presented:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2022		2021		2022		2021
Net loss	$	(98)	$	(254)	$	(175)	$	(488)
Stock-based compensation expense and related payroll tax	58		36		170		97
Depreciation and amortization	6		7		18		16
Interest (income) expense, net	(3)		—		(5)		12

Acquisition related expenses	—		—		2		1
Change in fair value of warrant liability	21		198		(102)		215
Change in fair value of derivative liability	—		—		—		103

Termination of leases	1		1		(1)		1
Loss on debt extinguishment	—		—		—		50
Income tax benefit	(4)		—		(4)		(4)
Adjusted EBITDA	$	(19)	$	(12)	$	(97)	$	3

Free Cash Flow

Free cash flow is defined as net cash provided by (used in) operating activities reduced by purchases of property and equipment and capitalization of internal-use software costs. We believe that free cash flow is a meaningful indicator of liquidity that provides information to management and investors about the amount of cash generated from operations and used for purchases of property and equipment, capitalization of software costs, and investments in our business. Once our business needs and obligations are met, cash can be used to maintain a strong balance sheet and invest in future growth.

Free cash flow has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Other companies may calculate free cash flow or similarly titled non-GAAP measures differently, which could reduce the usefulness of free cash flow as a tool for comparison. In addition, free cash flow does not reflect mandatory debt service and other non-discretionary expenditures that are required to be made under contractual commitments and does not represent the total increase or decrease in our cash balance for any given period.

The following table presents a reconciliation of free cash flow to the net cash (used in) provided by operating activities for each of the periods presented:


	Nine Months Ended September 30,
(in millions)	2022		2021
Net cash (used in) provided by operating activities	$	(137)	$	33
Purchases of property and equipment	(13)		(10)
Capitalized software	(10)		(6)
Free cash flow	$	(160)	$	17

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Liquidity and Capital Resources

Our principal sources of liquidity are cash and cash equivalents and marketable securities. As of September 30, 2022, we had cash and cash equivalents of $644 million, excluding cash held on behalf of customers of $61 million, restricted cash of $19 million, marketable securities of $409 million, and $330 million available under our 2021 Facility (as defined herein). Cash and cash equivalents consist of highly liquid investments with original maturities of 90 days or less at the time of purchase, other than those held for sale in the ordinary course of business. Marketable securities consisted of commercial paper, certificates of deposit, corporate bonds, U.S. Treasury securities, and asset-backed securities.

We believe that our existing cash and cash equivalents, along with our available borrowing capacity under our 2021 Facility, will be sufficient to meet our working capital needs for at least the next 12 months, including planned capital expenditures, strategic transactions, and investment commitments that we may enter into from time to time. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under “Risk Factors”.

In the event that additional financing is required from outside sources, we cannot be sure that any additional financing will be available to us on acceptable terms, if at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition could be adversely affected.

Cash Flows

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


	Nine Months Ended September 30,
(in millions)	2022		2021
Net cash (used in) provided by operating activities	$	(137)	$	33
Net cash used in investing activities	(25)		(42)
Net cash provided by financing activities	36		756
Net (decrease) increase in cash, cash equivalents and restricted cash	$	(126)	$	747

Operating Activities

For the nine months ended September 30, 2022, net cash used in operating activities was $137 million as a result of our net loss for the period, adjusted for certain non-cash items, such as stock-based compensation, the change in fair value of our warrant liabilities, depreciation and amortization, as well as a use of cash for working capital. The change in working capital was primarily driven by higher inventory balances, in part due to the opening of a new facility, as well as higher deferred costs and accounts receivable, partially offset by higher accrued expenses and other current liabilities related to our growth in GPV.

For the nine months ended September 30, 2021, net cash provided by operating activities was $33 million. This resulted from our net loss for the period, adjusted for certain non-cash items, such as the change in fair value of warrant liabilities, the change in fair value of the derivative liability, stock-based compensation, loss on debt extinguishment, depreciation, and amortization as well as a source of cash for working capital. The change in working capital was primarily driven by higher accrued expenses and other current liabilities related to our growth in GPV, partially offset by higher prepaid expenses as a result of hardware purchases and higher deferred costs mostly related to sales compensation.

Investing Activities

For the nine months ended September 30, 2022, cash used in investing activities was $25 million, which consisted of cash paid for purchases of marketable securities and cash paid for an acquisition, partially offset by proceeds from sales and maturities of marketable securities.

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For the nine months ended September 30, 2021, cash used in investing activities was $42 million, which consisted of cash paid for an acquisition, purchases of property and equipment and cash paid for capitalized software.

Financing Activities

For the nine months ended September 30, 2022, cash provided by financing activities was $36 million, which consisted primarily of increase in customer funds obligations and proceeds from the exercise of stock options.

For the nine months ended September 30, 2021, cash provided financing activities was $756 million, which consisted of proceeds from our IPO, a change in customer funds obligations, proceeds from the exercise of stock options, and proceeds from the issuance of restricted stock, partially offset by repayments of our convertible notes.

Credit Facilities

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%. Subsequent to December 31, 2022, interest on outstanding loans will be accrued based on the Secured Overnight Financing Rate, or SOFR. The 2021 Facility is subject to a minimum liquidity covenant of $250 million. As of September 30, 2022 and December 31, 2021, no amount was drawn and outstanding under the 2021 Facility which had $330 million available for borrowings. As of September 30, 2022 and December 31, 2021, there were $11 million and $13 million of letters of credit outstanding, respectively.

Contractual Obligations and Commitments and Off-Balance Sheet Arrangements

As of September 30, 2022, our contractual obligations consisted of: (i) operating lease commitments of $116 million, of which $4 million is due in 2022 and $112 million is due thereafter, and (ii) purchase commitments of $243 million, a majority of which are due in 2022 and 2023. Please refer to Note 6, “Lessee Arrangements” and Note 13, “Commitments and Contingencies” to our unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for a discussion on our lease and purchase commitments.

Please refer to Note 5, “Loan Servicing Activities and Acquired Loans Receivable, Net” to our unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for a discussion of credit exposure related to our financial guarantees as of September 30, 2022.

Critical Accounting Policies and Estimates

The preparation of our unaudited consolidated financial statements in conformity with GAAP requires us to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet date, as well as reported amounts of revenue and expenses during the reporting period. Our most significant estimates and judgments are related to revenue recognition, allowances for credit losses and uncollectible loans, business combinations, and other acquired intangible assets, stock-based compensation expense, and common stock and derivative liabilities valuation. Actual results may differ from these estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.

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There have been no material changes to our critical accounting policies and estimates during the three and nine months ended September 30, 2022, as compared to those included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our 2021 Annual Report on Form 10-K for the year ended December 31, 2021.

Recent Accounting Pronouncements

Refer to the sections titled “Recently Adopted Accounting Pronouncements” in Note 1 in the Notes to our unaudited Consolidated Financial Statements included in Item 1, “Consolidated Financial Statements” for more information.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates, as well as credit risk on accounts receivable and our loan servicing activities. Our exposure to market and credit risk has not changed materially since the presentation set forth in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 1, 2022.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on management’s review, with participation of our Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the quarter ended September 30, 2022, our disclosure controls and procedures were not effective.

As disclosed in Item 1A, “Risk Factors”, we identified material weaknesses in our internal control over financial reporting related to deficiencies in our controls over the financial statement close process and the controls related to unusual and infrequent transactions. Notwithstanding the identified material weaknesses, our management believes the unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in accordance with GAAP.

Remediation Plan for Material Weakness

Remediation generally requires making changes to how controls are designed and implemented, and then adhering to those changes for a sufficient period of time such that the effectiveness of those changes is demonstrated with an appropriate amount of consistency. We continue to take steps to remediate these material weaknesses through the development and implementation of systems, processes, and controls over the financial close and reporting process. In addition, we continue to enhance our control environment through hiring additional qualified accounting and financial reporting personnel, and engaging external consultants with appropriate expertise for more challenging technical accounting issues, which will add to the depth of our skilled and managerial resources, and allow us to scale our accounting processes to match growth and changes in the business and operations. We have also undertaken efforts related to our IT systems and related processes, to optimize automation to enhance our financial statement close process, reduce the number of manual journal entries, and facilitate review controls related to our significant classes of transactions.

Neither we nor our independent registered public accounting firm has performed an evaluation of our internal control over financial reporting during any period in accordance with the provisions of the Sarbanes-Oxley Act. In light of the material weaknesses that were previously identified, we believe that it is possible that, had we and our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional material weaknesses or significant deficiencies may have been identified.

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Changes in Internal Control Over Financial Reporting

Except for the ongoing remediation measures in connection with the material weaknesses described above, there were no other changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently a party to any litigation or claims that, if determined adversely to us, would have a material adverse effect on our business operating results, financial condition, or cash flows. We are, from time to time, party to litigation and subject to claims in the ordinary course of business. Regardless of the outcome, litigation can have an adverse impact on us because of the defense and settlement costs, diversion of management resources, and other factors.

Item 1A. Risk Factors

A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, including Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the risks actually occur, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the trading price of our Class A common stock could decline.

Risk Factors Summary

The following is a summary of the principal risks that could materially adversely affect our business, results of operations, and financial condition. Additional discussion of the risks included in this summary, and other risks that we face, can be found below and should be carefully considered, together with other information in this Quarterly Report on Form 10-Q in its entirety before making investment decisions regarding our Class A common stock. This summary should not be relied upon as an exhaustive summary of the material risks facing our business.

•If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service and customer satisfaction, or adequately address competitive challenges.

•If we do not attract new customers, retain existing customers, and increase our customers’ use of our platform, our business will suffer.

•The ongoing COVID-19 pandemic has adversely impacted and may continue to adversely impact our business, financial condition, and results of operations.

•We have a limited operating history in an evolving industry, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.

•We have a history of generating net losses, and if we are unable to achieve adequate revenue growth while our expenses increase, we may not achieve or maintain profitability in the future.

•Our operating results depend in significant part on our payment processing services, and the revenue and gross profit we derive from our payment processing activity in a particular period can vary due to a variety of factors.

•We depend upon third parties to manufacture our products and to supply key components to our products. If these manufacturers or suppliers become unwilling or unable to provide an adequate supply of components, particularly of semiconductor chips, with respect to which there is a severe global shortage, we may not be able to find alternative sources in a timely manner and our business would be impacted.

•Our future revenue will depend in part on our ability to expand the financial technology services we offer to our customers and increase adoption of those services.

•We rely on third-party payment processors to facilitate payments made by guests and payments made to customers, and payments made on behalf of customers, and if we cannot manage risks related to our relationships with our current or future third-party payment processors, our business, financial condition, and results of operations could be adversely affected.

•The markets in which we participate are intensely competitive, and if we do not compete effectively, our operating results could be adversely affected.

•A majority of our customers are small- and medium-sized businesses, which can be more difficult and costly to retain than enterprise customers and are subject to increased impacts of economic fluctuations, which may adversely affect our business and operations.

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•We rely in part on revenue from subscription contracts, and because we recognize revenue from subscription contracts over the term of the relevant subscription period, downturns or upturns in sales are not immediately reflected in full in our results of operations.

•We are responsible for transmitting a high volume of sensitive and personal information through our platform and our success depends upon the security of this platform. Any actual or perceived breach of our system that would result in disclosure of such information could materially impact our business.

•Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business and operating results.

•Our success depends upon our ability to continually enhance the performance, reliability, and features of our platform. Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business and operating results.

•We are subject to additional risks relating to the financial products we make available to our customers, including relationships with partners, the ability of our customers to generate revenue to pay their obligations under these products, general macroeconomic conditions and the risk of fraud.

•If we fail to adequately protect our intellectual property rights, our competitive position could be impaired and we may lose valuable assets, generate reduced revenue, and become subject to costly litigation to protect our rights.

•Our business is subject to a variety of U.S. and international laws and regulations, many of which are unsettled and still developing, and our or our customers’ failure to comply with such laws and regulations could subject us to claims or otherwise adversely affect our business, financial condition, or results of operations.

•The trading price of our Class A common stock may be volatile, and you could lose all or part of your investment.

•The dual-class structure of our common stock as contained in our amended and restated certificate of incorporation has the effect of concentrating voting control with those stockholders who held our capital stock prior to our initial public offering, including our directors, executive officers and their respective affiliates. This ownership will limit or preclude your ability to influence corporate matters, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transactions requiring stockholder approval, and that may adversely affect the trading price of our Class A common stock.

•Our principal stockholders will continue to have significant influence over the election of our board of directors and approval of any significant corporate actions, including any sale of the company.

•We previously identified material weaknesses in our internal controls over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.

Risks Related to Our Business and Business Development

If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service and customer satisfaction, or adequately address competitive challenges.

We have experienced significant growth in recent periods, which puts a strain on our business, operations, and employees. We anticipate that our operations will continue to rapidly expand. To manage our current and anticipated future growth effectively, we must continue to maintain and enhance our finance and accounting systems and controls, as well as our information technology, or IT, and security infrastructure. For example, we expect we will need to continue our investment in and seek to enhance our IT systems and capabilities, including with respect to internal information sharing and interconnectivity between various systems within our infrastructure.

We must also attract, train, and retain a significant number of qualified sales and marketing personnel, client support personnel, professional services personnel, software engineers, technical personnel, and management personnel, without undermining our corporate culture of rapid innovation, teamwork, and attention to customer success that has been central to our growth.

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Failure to effectively manage our growth could also lead us to over-invest or under-invest in development and operations, result in weaknesses in our infrastructure, systems, or controls, give rise to operational mistakes, financial losses, loss of productivity or business opportunities, and result in loss of employees and reduced productivity of remaining employees. To support our growth, we expect to make significant sales and marketing expenditures to increase sales of our platform and increase awareness of our brand and significant research and development expenses to increase the functionality of our platform and to introduce additional related products and services. A significant portion of our investments in our sales and marketing and research and development activities will precede the benefits from such investments, and we cannot be sure that we will receive an adequate return on our investments. If our management is unable to effectively manage our growth, our expenses may increase more than expected, our revenue may not increase or may grow more slowly than expected, and we may be unable to implement our business strategy.

If we do not attract new customers, retain existing customers, and increase our customers’ use of our platform, our business will suffer.

We derive, and expect to continue to derive, a majority of our revenue and cash inflows from our integrated cloud-based restaurant management platform, which encompasses software, financial technology, and hardware components. As such, our ability to attract new customers, retain existing customers, and increase use of the platform by existing customers is critical to our success.

Our future revenue will depend in large part on our success in attracting additional customers to our platform. Our ability to attract additional customers will depend on a number of factors, including the effectiveness of our sales team, the success of our marketing efforts, our levels of investment in expanding our sales and marketing teams, referrals by existing customers, and the availability of competitive restaurant technology platforms. We may not experience the same levels of success with respect to our customer acquisition strategies as seen in prior periods, and if the costs associated with acquiring new customers materially rises in the future, our expenses may rise significantly.

In addition, while a majority of our current customer base consists of small- and medium-sized businesses, or SMBs, we continue to pursue customer growth within the enterprise and mid-market segments of the restaurant market, as well as among SMBs. Each of those segments of the overall market poses different sales and marketing challenges, and has different requirements, and we cannot be sure that we will achieve the same success in those market segments as we have achieved to date in sales to SMBs.

Our business also depends on retaining our existing customers. Our business is subscription-based, and contract terms for our SaaS products generally range from 12 to 36 months. Customers are not obligated to, and may not, renew their subscriptions after their existing subscriptions expire. As a result, even though the number of customers using our platform has grown rapidly in recent years, there can be no assurance that we will be able to retain these customers or any new customers that may enter into subscriptions. Renewals of subscriptions may decline or fluctuate as a result of a number of factors, including dissatisfaction with our platform or support, the perception that a competitive platform, product or service presents a better or less expensive option, or our failure to successfully deploy sales and marketing efforts towards existing customers as they approach the expiration of their subscription term. In addition, we may terminate our relationships with customers for various reasons, such as heightened credit risk, excessive card chargebacks, unacceptable business practices, or contract breaches.

Further, if customers on our platform were to cease operations, temporarily or permanently, or face financial distress or other business disruption, our ability to retain customers would suffer. This risk is particularly pronounced with restaurants, as each year a meaningful percentage of restaurants go out of business, and this risk has become particularly acute as a result of the ongoing COVID-19 pandemic, rising inflation and interest rates, and other recent global financial, economic and political events that may impact consumer behaviors and the restaurant industry.

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In addition to attracting new customers and retaining existing customers, we seek to expand usage of our platform by broadening adoption by our customers of the various products included within our platform. Although in recent periods new customers have increasingly adopted our full suite of products, we cannot be certain that new customers will continue to adopt our full suite of products at existing rates or that we will be successful in increasing adoption of additional products by our existing customers. Further, while many of our customers deploy our platform to all of their restaurant locations, some of our customers initially deploy our platform to a subset of locations. For those customers, we seek to expand use of our platform to additional locations over time. Our ability to increase adoption of our products by our customers and to increase penetration of our existing customers’ locations 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.

Our costs associated with renewals and generating sales of additional products to existing customers are substantially lower than our costs associated with entering into subscriptions with new customers. Accordingly, our business model relies to a significant extent on our ability to renew subscriptions and sell additional products to existing customers, and, if we are unable to retain revenue from existing customers or to increase revenue from existing customers, our operating results would be adversely impacted even if such lost revenue were offset by an increase in revenue from new customers.

We may not be able to sustain our recent revenue growth in future periods.

We have grown rapidly over the last several years, and our recent revenue growth rate and financial performance should not be considered indicative of our future performance. In the three months ended September 30, 2022 and 2021, our revenue was $752 million and $486 million, respectively, representing a 55% growth rate. You should not rely on our revenue or key business metrics for any previous quarterly or annual period as indicative of our revenue, revenue growth, key business metrics, or key business metrics growth in future periods. In particular, our revenue growth rate has fluctuated in prior periods. We expect our revenue growth rate to continue to fluctuate over the short and long term. We may experience declines in our revenue growth rate as a result of a number of factors, including slowing demand for our platform, insufficient growth in the number of customers and their guests that utilize our platform, increasing competition, changing customer and guest behaviors, a decrease in the growth of our overall market, our failure to continue to capitalize on growth opportunities, the impact of regulatory requirements, and the maturation of our business, among others. In addition, SMBs comprise the majority of our customer base. If the demand for restaurant management platforms by SMBs does not continue to grow, or if we are unable to maintain our category share with SMBs, our revenue and other growth rates could be adversely affected.

The ongoing COVID-19 pandemic has adversely impacted and may continue to adversely impact our business, financial condition, and results of operations.

The COVID-19 pandemic has adversely affected workforces, consumers, economies, and financial markets globally. The adverse impact of the pandemic has been and may continue to be particularly acute among SMBs, which comprise the majority of our customer base, and many of which have been required to cease or substantially diminish business operations for an indeterminate period of time. The pandemic also has disrupted, and may continue to disrupt, our supply chains and relationships with third-party partners. The pandemic has also had, and may continue to have, a variety of additional effects on our business and operations, including reducing the demand for our platform, restricting our operations and sales and marketing efforts, impeding our ability to conduct product development and other important business activities, and decreasing technology spending.

For example, during the COVID-19 pandemic, we:

•furloughed approximately 12% of our employees and terminated approximately 48% of our employees in connection with a reduction in force in April 2020;

•re-prioritized our capital projects;

•instituted a temporary company-wide hiring freeze; and

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•reduced salaries for management across the organization.

In addition, while adversely impacting the restaurant industry and our business, the COVID-19 pandemic has also increased the focus by restaurants on the need for a digital technology platform that can address the need for safe, frictionless, contact-free experiences in restaurants and address off-premise dining. While we believe these trends may positively impact our business in the longer-term, we cannot predict the extent to which the increased focus on the need for digital solutions such as those offered by our platform will persist. For example, we cannot predict the manner and extent to which the reemergence of on-premise dining and other types of in-person activity will impact our business, including with respect to levels of payment processing activity through our platform and our commission and margin rates on such payments.

Due to the uncertainty of the COVID-19 pandemic, including the highly transmissible variants thereof and any additional waves of infection, we will continue to assess the situation, including abiding by any government-imposed restrictions, market-by-market. We are unable to accurately predict the ultimate impact that the COVID-19 pandemic will have on our operations going forward due to uncertainties that will be dictated by the length of time that the disruptions resulting from the pandemic continue, which will, in turn, depend on the currently unknowable duration and severity of the COVID-19 pandemic, the impact of governmental regulations that might be imposed in response to the pandemic, the effectiveness and wide-spread availability of vaccines, the speed and extent to which normal economic and operating conditions will resume, and overall changes in consumer behavior. We also cannot accurately forecast the potential impact of additional outbreaks as government restrictions are relaxed, the impact of further shelter-in-place or other government restrictions that are implemented in response to such outbreaks, or the impact on our customers’ ability to remain in business, each of which could continue to have an adverse impact on our business.

To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our liquidity, our indebtedness, and our ability to comply with the covenants contained in the agreements that govern our indebtedness.

We have a limited operating history in an evolving industry, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.

We launched our operations in 2013, have grown significantly in recent periods, and have a limited operating history, particularly at our current scale. In addition, we operate in an evolving industry and have frequently expanded our platform features and services and changed our pricing methodologies. This limited operating history and our evolving business make it difficult to evaluate our future prospects and the risks and challenges we may encounter. These risks and challenges include, but are not limited to, our ability to:

•accurately forecast our revenue and plan our operating expenses;

•increase the number of and retain existing customers and their guests using our platform;

•successfully compete with current and future competitors;

•successfully expand our business in existing markets and enter new markets and geographies;

•anticipate and respond to macroeconomic changes and changes in the markets in which we operate;

•maintain and enhance the value of our reputation and brand;

•comply with regulatory requirements in highly regulated markets;

•adapt to rapidly evolving trends in the ways customers and their guests interact with technology;

•avoid interruptions or disruptions in our service;

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•develop a scalable, high-performance technology infrastructure that can efficiently and reliably handle significant surges of usage by our customers and their guests as compared to historic levels and increased usage generally, as well as the deployment of new features and services;

•maintain and effectively manage our internal infrastructure systems, such as information strategy and sharing and interconnectivity between systems;

•hire, integrate, and retain talented technology, sales, customer service, and other personnel;

•effectively manage rapid growth in our personnel and operations; and

•effectively manage our costs.

Further, because we have limited historical financial data relevant to our current scale and operations and operate in a rapidly evolving market, any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more predictable market. We have encountered in the past, and will encounter in the future, risks and uncertainties frequently experienced by growing companies with limited operating histories in rapidly changing industries. If our assumptions regarding these risks and uncertainties, which we use to plan and operate our business, are incorrect or change, or if we do not address these risks successfully, our results of operations could differ materially from our expectations and our business, financial condition, and results of operations could be adversely affected.

Our platform includes our payment services, and our ability to attract new customers and retain existing customers depends in part on our ability to offer payment processing services with the desired functionality at an attractive price.

We sell subscriptions to our platform together with our payment services, and customers are unable to subscribe to our platform without also subscribing to our payment services. While we believe that offering a complete all-in-one platform that includes payment processing functionality along with all the other functionality of our platform offers our customers significant advantages over separate point of sale solutions, some potential or existing customers may not desire to use our payment processing services or to switch from their existing payment processing vendors. Some of our potential customers for our platform may not be willing to switch payment processing vendors for a variety of reasons, such as transition costs, business disruption, and loss of accustomed functionality. There can be no assurance that our efforts to overcome these factors will be successful, and this resistance may adversely affect our growth.

The attractiveness of our payment processing services also depends on our ability to integrate emerging payment technologies, including crypto currencies, other emerging or alternative payment methods, and credit card systems that we or our processing partners may not adequately support or for which we or they do not provide adequate processing rates. In the event such methods become popular among consumers, any failure to timely integrate emerging payment methods into our software, anticipate consumer behavior changes, or contract with processing partners that support such emerging payment technologies could reduce the attractiveness of our payment processing services and of our platform, and adversely affect our operating results.

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Our operating results depend in significant part on our payment processing services, and the revenue and gross profit we derive from our payment processing activity in a particular period can vary due to a variety of factors.

Even if we succeed in increasing subscriptions to our platform and retaining subscription customers, the revenue we derive from payment processing services may vary from period to period depending on a variety of factors, many of which are beyond our control and difficult to predict. Our revenue from payment processing services is generally calculated as a percentage of payment volume plus a per-transaction fee and, accordingly, varies depending on the total dollar amount processed through the Toast platform across all of our customers’ restaurant locations in a particular period. This amount may vary, depending on, among other things, the success of our customers’ restaurant locations, the proportion of our customers’ payment volumes processed through our platform, ticket size, consumer spending levels in general, and overall economic conditions. In addition, the revenue and gross profit derived from our payment processing services varies depending on the particular type of payment processed on our platform. For example, card-not-present transactions, which are transactions for which the credit card is not physically present at the merchant location at the time of the transaction, are generally associated with higher payment processing revenue and gross profit compared to card-present transactions, and debit card transactions are generally also associated with higher gross profit compared to credit card transactions. During the COVID-19 pandemic, card-not-present transactions and debit card transactions accounted for a larger proportion of the total payment transactions processed through our platform than before the COVID-19 pandemic, which contributed to higher gross margins on those transactions than in prior periods. We expect the relative percentage of credit card transactions and transactions where the card is present to stabilize in future periods.

A majority of our customers are SMBs, which can be more difficult and costly to retain than enterprise customers and are subject to increased impacts of economic fluctuations, which may adversely affect our business and operations.

A majority of our customers are SMBs and we expect they will continue to comprise a large portion of our customer base for the foreseeable future. We define SMBs in the context of our customer base as customers that have between one and ten restaurant locations. Selling to and retaining SMBs can be more difficult than retaining enterprise customers, as SMBs often have higher rates of business failure and more limited resources, may have decisions related to the choice of payment processor dictated by their affiliated parent entity and are more readily able to change their payment processors than larger organizations.

SMBs are also typically more susceptible to the adverse effects of economic fluctuations, including those caused by the COVID-19 pandemic and rising inflation and interest rates. Adverse changes in the economic environment or business failures of our SMB customers may have a greater impact on us than on our competitors who do not focus on SMBs to the extent that we do.

We rely in part on revenue from subscription contracts, and because we recognize revenue from subscription contracts over the term of the relevant subscription period, downturns or upturns in sales are not immediately reflected in full in our results of operations.

Subscription services revenue accounts for a significant portion of our total revenue. Sales of new or renewal subscription contracts may decline or fluctuate as a result of a number of factors, including customers’ level of satisfaction with our platform, the prices of our subscriptions, the prices of subscriptions offered by our competitors, reductions in our customers’ spending levels, or other changes in consumer behavior. If our sales of new or renewal subscription contracts decline, our revenue and revenue growth may decline. We recognize subscription revenue ratably over the term of the relevant subscription period, which generally ranges from 12 to 36 months in duration. As a result, much of the subscription revenue we report each quarter is derived from subscription contracts that we sold in prior periods.

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Consequently, a decline in new or renewed subscription contracts in any one quarter will not be fully reflected in revenue in that quarter but will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in new or renewal sales of our subscriptions is not reflected in full in our results of operations in a given period. Also, it is difficult for us to rapidly increase our subscription revenue through additional sales in any period, as revenue from new and renewal subscription contracts must be recognized ratably over the applicable subscription period. Furthermore, any increases in the average term of subscription contracts would result in revenue for those subscription contracts being recognized over longer periods of time.

Our future revenue will depend in part on our ability to expand the financial technology services we offer to our customers and increase adoption of those services.

We offer our customers a variety of financial technology products and services, and we intend to make available additional financial technology products and services to our customers in the future. A number of these services require that we enter into arrangements with financial institutions or other third parties. For example, one of our bank partners, which is a Utah-chartered and Federal Deposit Insurance Corporation, or the FDIC,-insured industrial bank, offers qualified customers working capital loans, which we service. In order to provide these and future financial technology products and services, we may need to establish additional partnerships with third parties, comply with a variety of regulatory requirements, and introduce internal processes and procedures to comply with applicable law and the requirements of our partners, all of which may involve significant cost, require substantial management attention, and expose us to new business and compliance risks. We cannot be sure that our current or future financial technology services will be widely adopted by our customers or that the revenue we derive from such services will justify our investments in developing and introducing these services.

Failure to maintain and enhance our brand recognition in a cost-effective manner could harm our business, financial condition, and results of operations.

We believe that maintaining and enhancing our brand identity and reputation is critical to our relationships with, and ability to attract, new customers, partners and employees. Accordingly, we have invested, and expect to continue to invest, increasing amounts of money in and greater resources to branding and other marketing initiatives, which may not be successful or cost effective. If we do not successfully maintain and enhance our brand and reputation in a cost-effective manner, our business may not grow, we may have reduced pricing power relative to competitors with stronger brands or reputations, and we could lose customers or partners, all of which would harm our business, financial condition, and results of operations.

In addition, any negative publicity about our company or our management, including about the quality, stability, and reliability of our platform or services, changes to our products and services, our privacy and security practices, litigation, regulatory enforcement, and other actions involving us, as well as the perception of us and our products by our customers and their guests, even if inaccurate, could cause a loss of confidence in us and adversely affect our brand.

We depend on the experience and expertise of our senior management team and key technical employees, and the loss of any key employee could harm our business, financial condition, and results of operations.

Our success depends upon the continued service of our senior management team and key technical employees. Each of these employees could terminate his or her relationship with us at any time. Further, our competitors may be successful in recruiting and hiring members of our management team or other key employees, and it may be difficult for us to find suitable replacements on a timely basis, on competitive terms, or at all.

The loss of any member of our senior management team or key technical employees might significantly delay or prevent the achievement of our business objectives and could harm our business and our customer relationships.

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Our ability to recruit, retain, and develop qualified personnel is critical to our success and growth.

All our businesses function at the intersection of rapidly changing technological, social, economic, and regulatory environments that require a wide range of expertise and intellectual capital. For us to successfully compete and grow, we must recruit, retain, and develop personnel who can provide the necessary expertise across a broad spectrum of disciplines. In addition, we must develop, maintain and, as necessary, implement appropriate succession plans to ensure we have the necessary human resources capable of maintaining continuity in our business.

The market for qualified personnel is competitive, and we may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors. Our effort to retain and develop personnel may also result in significant additional expenses, which could adversely affect our profitability. In addition, job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. The trading price of our Class A common stock has been and may continue to be volatile, could be subject to fluctuations in response to various factors and may not appreciate. If the perceived value of our equity awards declines for these or other reasons, it may adversely affect our ability to attract and retain highly qualified employees. Certain of our employees have received significant proceeds from sales of our equity in previous transactions and many of our employees may receive significant proceeds from sales of our equity in future transactions, which may reduce their motivation to continue to work for us.

We are also substantially dependent on our direct sales force to obtain new customers and increase sales to existing customers. There is significant competiti