| 1,134 | | | 42 | % | | |
The increase in subscription services revenue during the year ended December 31, 2023 was attributed to growth in Locations on the Toast platform and the continued increase in products adopted by customers.
The increase in financial technology solutions revenue during the year ended December 31, 2023 was primarily attributable to the increase in Locations on the Toast platform.
The increase in hardware and professional services revenue during the year ended December 31, 2023 was primarily driven by growth in new Locations.
Costs of Revenue
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| % | | |
| 54 | | | 48 | % | | |
| | 40 | % | | |
| | 15 | % | | |
| | | | | | | | | | | |
| | — | % | | |
| 811 | | | 37 | % | | |
The increase in subscription services costs during the year ended December 31, 2023 was primarily attributable to an increase in employee-related costs.
The increase in financial technology solutions costs during the year ended December 31, 2023 was due to an increase in GPV.
The increase in hardware and professional services costs during the year ended December 31, 2023 was attributable to higher hardware shipment volume as a result of growth in Locations and higher employee related costs, partially offset by lower hardware freight costs.
We utilize our hardware and professional services as customer acquisition tools and price them competitively to reduce barriers to entry for new Locations.
Operating Expenses
Sales and Marketing
The increase in sales and marketing expenses during the year ended December 31, 2023 was primarily attributable to an increase in employee-related costs of $71 million.
Research and Development
The increase in research and development expenses during the year ended December 31, 2023 was primarily attributable to an increase in employee-related costs of $67 million.
General and Administrative
The increase in general and administrative expenses during the year ended December 31, 2023 was primarily attributable to an increase in bad debt and credit related expenses of $30 million driven by growth in our Toast Capital product offering, an increase in employee-related costs of $28 million, and $12 million, net, in lease termination expenses related to our corporate headquarters in Boston, MA.
Restructuring Plan
In February 2024, we announced a restructuring plan, or the Restructuring Plan, designed to promote overall operating expense efficiency, including a reduction in force and certain other actions to reorganize our facilities and operations. As part of this Restructuring Plan, we expect to incur restructuring and restructuring-related charges of approximately $45 to $55 million, primarily related to severance and severance related costs, and certain other costs related to facilities. We expect to complete the Restructuring Plan and incur all related charges by the end of fiscal year 2024 and expect to incur substantially all of these charges in the first quarter of fiscal year 2024. Although we expect certain cost savings in the near-term resulting from the Restructuring Plan, and a reduction in the rate of growth in our operating expenses, as compared to comparative periods, we still expect to see a continued increase in overall total operating expenses.
Interest Income (expense), net
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| % | | |
| 26 | | | N/M | | |
N/M - Not meaningful | | | | | | | | | | | |
The increase in interest income during the year ended December 31, 2023 was attributable to higher interest rates on our investments in marketable securities.
Change in Fair Value of Warrant Liability
The decrease in the change in fair value of warrant liability during the year ended December 31, 2023 was attributable to the change in our stock price from the beginning of the period to the end of period in 2023 when compared to 2022.
Non-GAAP Financial Measures
We use certain non-GAAP financial measures described below to supplement our consolidated financial statements 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.
Net Loss (GAAP) and Adjusted EBITDA (Non-GAAP)
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, income taxes and certain other items that are not considered to reflect our operating activities and performance within the ordinary course of business, such as restructuring and restructuring-related expenses, acquisition expenses, fair value adjustments on warrant liabilities, expenses related to early termination of leases (which includes associated asset impairments) and stock-based charitable contribution expense, as applicable. We have provided below a reconciliation of net loss, the most directly comparable GAAP financial measure, to Adjusted EBITDA.
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.
The following table reflects the reconciliation of net loss to Adjusted EBITDA for each of the periods presented:
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| Year Ended December 31, |
(in millions) | 2023 | | 2022 |
Net loss | $ | (246) | | | $ | (275) | |
Stock-based compensation expense and related payroll tax | 288 | | | 232 | |
Depreciation and amortization | 32 | | | 24 | |
Interest income, net | (37) | | | (11) | |
| |
Termination of leases | 14 | | | (1) | |
Stock-based charitable contribution expense | 10 | | | 10 | |
Change in fair value of warrant liability | (3) | | | (95) | |
Acquisition expenses | 1 | | | 2 | |
Other (income) expense, net | — | | | 1 | |
Income tax expense (benefit) | 2 | | | (2) | |
| Adjusted EBITDA | $ | 61 | | | $ | (115) | |
Subscription Services and Financial Technology Solutions Gross Profit (GAAP) and Non-GAAP Subscription Services and Financial Technology Solutions Gross Profit (Non-GAAP)
Non-GAAP Subscription Services and Financial Technology Solutions Gross Profit is defined as subscription services gross profit and financial technology solutions gross profit, adjusted to exclude stock-based compensation expense and related payroll tax expense, and depreciation and amortization expense. We believe this non-GAAP measure is useful to view the resulting figures excluding the aforementioned non-cash charges because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and such amounts vary substantially from company to company depending on their financing and capital structures and the method by which their assets were acquired. We have provided below a reconciliation of Subscription Services and Financial Technology Solutions Gross Profit, the most directly comparable GAAP financial measure, to Non-GAAP Subscription Services and Financial Technology Solutions Gross Profit.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2023 | | 2022 | | 2021 |
Revenue: | | | | | |
Subscription services | $ | 500 | | | $ | 324 | | | $ | 169 | |
Financial technology solutions | 3,189 | | | 2,268 | | | 1,406 | |
| Costs of Revenue: | | | | | |
Subscription services | 166 | | | 112 | | | 63 | |
Financial technology solutions | 2,503 | | | 1,792 | | | 1,120 | |
| Subscription Services and Financial Technology Solutions Gross Profit (GAAP) | $ | 1,020 | | | $ | 688 | | | $ | 392 | |
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| Year Ended December 31, |
(in millions) | 2023 | | 2022 | | 2021 (1) |
| Subscription Services and Financial Technology Solutions Gross Profit (GAAP) | $ | 1,020 | | | $ | 688 | | | $ | 392 | |
Stock-based compensation expense and related payroll tax | 20 | | | 13 | | | 5 | |
Depreciation and amortization | 17 | | | 10 | | | 9 | |
Non-GAAP Subscription Services and Financial Technology Solutions Gross Profit (Non-GAAP) | $ | 1,057 | | | $ | 711 | | | $ | 406 | |
(1) In prior periods, Non-GAAP Subscription Services and Financial Technology Solutions Gross Profit was not a key non-GAAP financial measure.
Net Cash Provided by (Used in) operating activities (GAAP) and Free Cash Flow (Non-GAAP)
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 (referred to as capital expenditures). We believe that free cash flow is a meaningful indicator of our sources of liquidity and capital requirements that provides information to management and investors in evaluating the cash flow trends of 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 net cash provided by (used in) operating activities to the free cash flow for each of the periods presented:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
| (in millions) | | | |
Net cash provided by (used in) operating activities | $ | 135 | | | $ | (156) | |
| |
Capital expenditures | (42) | | | (33) | |
| Free cash flow | $ | 93 | | | $ | (189) | |
LIQUIDITY AND CAPITAL RESOURCES
Upon completion of the IPO, we received net proceeds of $950 million after deducting underwriting discounts and commissions and invested them into interest-generating marketable securities and money market accounts. Our principal sources of liquidity are cash and cash equivalents and marketable securities. We also have access to external sources of liquidity through a credit facility as further described within “Debt” below. The following tables present selected financial information related to our liquidity:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 (1) | | 2022 (2) |
| (in millions) | | | |
Cash and cash equivalents | $ | 605 | | | $ | 547 | |
Marketable securities | 519 | | | 474 | |
Cash and cash equivalents and marketable securities | $ | 1,124 | | | $ | 1,021 | |
Available credit facility | $ | 330 | | | $ | 330 | |
Total | $ | 1,454 | | | $ | 1,351 | |
(1) Excludes $87 million of cash held on behalf of customers and $55 million of restricted cash(2) Excludes $60 million of cash held on behalf of customers and $28 million of restricted cash
| | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2023 | | 2022 |
Net cash provided by (used in) operating activities | $ | 135 | | | $ | (156) | |
| Net cash used in investing activities | (86) | | | (98) | |
| Net cash provided by financing activities | 63 | | | 38 | |
Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 112 | | | $ | (216) | |
Cash, cash equivalents and marketable securities
The net increase in cash, cash equivalents and marketable securities was primarily due to cash generated from operating activities of $108 million (which excludes changes in the balance of restricted cash) and proceeds of $36 million generated from the issuance of common stock. This was partially offset by $42 million in cash outflows related to capital expenditures in the period. Cash generated from operating activities was impacted by use of cash for working capital, primarily driven by higher deferred contract acquisition costs, resulting, in part, from continued growth in Locations, partially offset by higher accrued expenses and other current liabilities due to higher financial technology solutions expenses related to our growth in GPV. During the year ended December 31, 2023, the change in net cash provided by (used in) operating activities as compared to the year ended December 31, 2022, was driven by a lower net loss, an increase in non-cash adjustments, primarily related to stock-based compensation expense, amortization of deferred contract acquisition costs, and credit loss expenses, and favorable changes in operating assets and liabilities. The primary sources of cash generated and used in investing and financing activities remained materiality consistent during the years ended December 31, 2023 and 2022.
Looking forward, we expect operating cash flows to continue to expand and scale commensurate with the growth in our operating results. We do not anticipate any material changes, or material changes in trends, related to our net working capital requirements, liquidity or cash flows in the near term, other than for items disclosed within this Annual Report on Form 10-K.
Debt
During 2021 we entered into a senior secured credit facility, or the 2021 Facility, which we subsequently amended on March 2, 2023 to replace the London Interbank Offered Rate, or LIBOR, with the Secured Overnight Financing Rate, or SOFR. The 2021 Facility is subject to a minimum liquidity covenant of $250 million. As of December 31, 2023 and 2022, total available funds under the 2021 Facility were $330 million and no amounts were drawn or outstanding. In addition, as of December 31, 2023 and 2022, there were also $5 and $8 million in letters of credit outstanding, respectively. See Note 8, "Debt" to our Consolidated Financial Statements included in “Notes to Consolidated Financial Statements” included in this Annual Report on Form 10-K for further information.
Share Repurchase Program
In February 2024, we announced the authorization of a share repurchase program for the repurchase of shares of our Class A common stock, in an aggregate amount of up to $250 million. The repurchase program has no expiration date, does not obligate us to acquire any particular amount of our Class A common stock, and it may be suspended at any time at our discretion. The timing and actual number of shares repurchased may depend on a variety of factors, including price, general business and market conditions, and alternative investment opportunities. See “Note 18. Subsequent Events (unaudited)" included in this Annual Report on Form 10-K in “Notes to Consolidated Financial Statements”.
Dilution
We calculate our fully diluted share count on an unweighted basis taking our total outstanding share count in addition to unexercised stock options, unvested restricted stock, shares reserved for charitable donations and other securities that can be converted to common stock, such as our warrants to purchase common stock. As of December 31, 2023 our fully diluted share count was as follows:
| | | | | | | |
| Year Ended December 31, 2023 (1) |
(shares) (in millions) |
Class A and B common stock issued and outstanding | 543 | | | |
Options to purchase Class A common stock and Class B common stock | 48 | | | |
| Unvested restricted stock units | 33 | | | |
| Warrants to purchase Class B common stock | 7 | | | |
| | | |
| | | |
Shares reserved for charitable donations | 4 | | | |
| Unvested restricted stock | 1 | | | |
| | | |
Total fully diluted share count | 636 | | | |
(1) Share amounts presented above do not give effect to potential repurchases of common stock under the treasury stock method
For further information see "Note 3. Fair Value Measurements", “Note 11. Common Stock" and "Note 12. Stock-Based Compensation" included in this Annual Report on Form 10-K in “Notes to Consolidated Financial Statements”.
Other Capital Requirements
Recent and expected material cash and other capital requirements, in addition to the above also include the following:
•We expect the majority of the charges incurred in connection with the Restructuring Plan to result in cash payments within the next 12 months. See Note 18, “Subsequent Events (unaudited)" included in this Annual Report on Form 10-K in “Notes to Consolidated Financial Statements”.
•As of December 31, 2023, our non-cancelable purchase obligations to hardware suppliers totaled $84 million, all of which is due within the next 12 months.
•As of December 31, 2023, operating lease commitments totaled $51 million, of which $13 million is due in 2024 and $38 million is due thereafter. For further information refer to Note 7, "Lessee Arrangements” included in this Annual Report on Form 10-K in “Notes to Consolidated Financial Statements”.
•During the year ended December 31, 2023, cash paid for acquisitions net of cash acquired totaled $9 million. We expect to continue making strategic investments and acquisitions, the amounts of which could vary significantly. For further information related to our most recent acquisitions, see Note 9, "Business Combinations” included in this Annual Report on Form 10-K in “Notes to Consolidated Financial Statements”.
In addition to the above material cash requirements, we also recognize liabilities associated with financial guarantees related to loan purchase activities. Such activities are further described within Note 2, "Summary of Significant Accounting Policies" included in this Annual Report on Form 10-K in “Notes to Consolidated Financial Statements”. See also Note 17, "Commitments and Contingencies" and Note 7, "Lessee Arrangements" included in this Annual Report on Form 10-K in “Notes to Consolidated Financial Statements”.
We expect continued utilization of our available cash resources to support our ongoing business operations. To the extent applicable, material changes in the mix and relative cost of such resources, or changes considered necessary to understand our liquidity and financial condition, may also be reflected in our discussion on the results of operations, disclosed within “Results of Operations” under Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations” within this Annual Report on Form 10-K.
We believe that our existing cash and cash equivalents, along with our available borrowing capacity under our credit 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 Part I, Item 1A, "Risk Factors” in this Annual Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of 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. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. By their nature, estimates are inherently subject to a degree of uncertainty. Although we believe that our estimates and the assumptions supporting our assessments are reasonable, actual results could differ materially from our estimates and assumptions. 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.
We believe that the critical accounting estimates summarized below involve a greater degree of judgment and complexity. Accordingly, these are the estimates and policies we believe are the most critical in fully understanding and evaluating our financial condition and results of operations. For further information on our critical accounting estimates and policies summarized below, refer to Note 2, "Summary of Significant Accounting Policies" included in this Annual Report on Form 10-K in “Notes to Consolidated Financial Statements”. If the impact of changes in our critical accounting estimates are material or considered necessary to understand our results of operations for the periods presented, then such information is disclosed within this Annual Report on Form 10-K in Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Revenue Recognition
We recognize transaction fees for payment processing on a gross basis. Determining whether to recognize revenue on a gross or net basis requires judgment in evaluating whether we are the principal or agent in contracts with customers. We have concluded that we are the principal in providing a managed payment solution. Substantially all of our financial technology solutions revenue relates to our managed payment solution.
Our contracts often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately as opposed to being combined may require judgment. We allocate total arrangement consideration at the inception of an arrangement to each performance obligation using the relative selling price allocation method based on each distinct performance obligation’s standalone selling price, or SSP. Determining the SSP for each distinct performance obligation requires significant judgement.
Business Combinations
The acquisition purchase price is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition dates. When determining the fair value of assets acquired and liabilities assumed, we make significant estimates and assumptions, especially with respect to intangible assets. Valuation techniques generally consist of the market approach, income approach and/or cost approach. An estimate of fair value can be affected by many assumptions that require significant judgment. For example, the income approach and/or cost approach generally requires us to use assumptions to estimate future cash flows including those related to revenue and expense, long-term growth rates, discount rates, future tax rates and assumptions related to the time, cost and effort to recreate the technology acquired. Such assumptions are inherently uncertain and unpredictable and can differ from actual future events. Our estimate of the fair value of certain assets may differ materially from that determined by others who use different assumptions or utilize different business models and from the future cash flows actually realized. There were no impairments of acquired intangible assets through business combinations recognized during the years ended December 31, 2023 and 2022. The fair value of assets acquired and liabilities assumed related to our most recent acquisitions is further described in Note 9, "Business Combinations" included in this Annual Report on Form 10-K in “Notes to Consolidated Financial Statements”.
Stock-Based Compensation Expense
We use the Black-Scholes option-pricing model to determine the estimated fair value of stock option awards. We have limited historical stock option activity and therefore estimate the expected term of stock options granted using the simplified method, which represents the average of the contractual term of the stock option and its weighted-average vesting period. The expected volatility of stock options is based upon the average historical volatility of a number of publicly traded companies in a similar industry. We also estimate a forfeiture rate to calculate the stock-based compensation expense for options and restricted stock units, or RSUs, based on an analysis of actual historical experience and expected employee attrition rates.
We will continue to use judgment in evaluating the expected volatility, expected term and forfeiture rate utilized in our stock-based compensation expense calculation for stock option awards on a prospective basis. As we continue to accumulate additional data related to our Class A common stock and forfeiture rates, we may adjust our estimates, which could materially impact our future stock-based compensation expense inclusive of RSUs.
Total stock-based compensation recognized in fiscal year 2023 related to stock-options was $45 million. For further information related to stock-based compensation expense and key assumptions utilized refer to Note 12, "Stock-Based Compensation Expense" included in this Annual Report on Form 10-K in “Notes to Consolidated Financial Statements”.
Recent Accounting Pronouncements
Refer to the sections titled “Recent Accounting Pronouncements” in Note 2 of the "Notes to Consolidated Financial Statements" included in Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K for more information.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We have operations in North America, Europe and Asia, and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate and foreign currency exchange risks.
Interest Rate Sensitivity
We are exposed to interest rate risk related primarily to our investment portfolio. Changes in interest rates affect the interest earned on our cash and cash equivalents and marketable securities, and the fair value of those securities. We had cash and cash equivalents of $605 million and marketable securities of $519 million as of December 31, 2023. Our cash and cash equivalents are held primarily in cash deposits and money market funds, and the securities are considered investment-grade debt securities and classified as available-for-sale. The securities are recorded at fair value in the Consolidated Balance Sheets with unrealized gains or losses, net of tax, reported as a separate component of stockholders' equity within accumulated other comprehensive loss. The primary objective of our investment activities is to preserve capital and meet liquidity requirements without significantly increasing risk. We do not enter into investments for speculative purposes.
Based on our investment portfolio balance as of December 31, 2023, a hypothetical 100 basis point increase or decrease in interest rates would not have materially affected our financial position. We do not expect that any change in prevailing interest rates will have a material impact on our results of operations.
Foreign Currency Risk
Most of our sales and operating expenses are denominated in U.S. dollars, and therefore, neither our revenue nor operating expenses are currently subject to significant foreign currency risk. A portion of our operating expenses are denominated in Euros, Canadian dollars, Indian rupees and other currencies and may be subject to fluctuations due to changes in foreign currency exchange rates and result in transaction gains and losses that we may need to recognize in our results of operations. To date, foreign currency transaction gains and losses have not been material to our results of operations, and we have not engaged in any foreign currency hedging transactions.
Credit Risk
We are exposed to credit risk on accounts receivable and our loan servicing activities. This risk is mitigated due to our diverse customer base, dispersed over various geographic regions. During the years ended December 31, 2023, 2022, and 2021, we had no customers individually that accounted for more than 10% of our total revenue. No customers individually accounted for more than 10% of our total receivables at December 31, 2023 and 2022. We maintain provisions for potential credit losses and evaluate on an ongoing basis the solvency of our customers and the impact of current and future conditions to determine if additional allowances for credit losses need to be recorded.
Inflation Risk
Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the lack of precise estimates, we believe the effects of inflation, if any, on our results of operations and financial condition have been immaterial. We cannot assure you our business will not be affected in the future by inflation.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Toast, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Toast, Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive loss, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 27, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
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| | Valuation of Toast Capital Contingent Liability for Expected Credit Losses |
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| Description of the Matter | | As of December 31, 2023, the contingent liability for expected credit losses related to loan servicing activities through the Toast Capital loan program was $29 million. As discussed in Notes 2 and 5 to the consolidated financial statements, the Company records a contingent liability for expected credit losses accounted for under ASC 326 related to the Company’s contingent obligation to purchase ineligible loans. Management’s measurement of the contingent liability for expected credit losses is based on historical lifetime loss data, as well as macroeconomic forecasts applied to the loan portfolio.
Auditing the Company’s contingent liability for expected credit losses involved a high degree of complexity in evaluating loss severity estimates and subjectivity in evaluating management’s measurement of the economic forecasts used during the applicable period.
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| How We Addressed the Matter in Our Audit | | Our audit procedures included, among others, an evaluation of the key assumptions used in the calculation of the contingent liability for credit losses, including model estimates and qualitative factor adjustments, and whether the recorded contingent liability for credit losses appropriately reflects expected credit losses on the loan portfolio. We reviewed historical loss statistics, subsequent events and transactions and considered whether they corroborate or contradict the Company’s measurement of the contingent liability for credit losses.
To test the expected loss forecasting models, with the support of specialists, we evaluated the model methodology and replicated a sample of models. We also tested the appropriateness of key inputs used in these models by agreeing a sample of inputs to supporting information and tested the completeness and accuracy of the underlying data used by the Company. Our testing procedures over the key assumptions included, among others, comparing forecasted losses and default probabilities to historical and economic trends, while also considering changes in the Company’s loan portfolio.
Additionally, we evaluated the potential impact of imprecision in the quantitative models and hence the need to consider a qualitative adjustment to the contingent liability for credit losses. Regarding measurement of the qualitative factors, we evaluated the methodology applied and data utilized by management to estimate the appropriate level of the qualitative factors. We also considered if qualitative adjustments were consistent with external macroeconomic factors independently obtained during the audit. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2019.
Boston, Massachusetts
February 27, 2024
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Toast, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Toast Inc.’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Toast, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive loss, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2023 and the related notes and our report dated February 27, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 27, 2024
TOAST, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share values)
| | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 |
| Assets: | | | |
| Current Assets: | | | |
| |
Cash and cash equivalents | $ | | | | $ | | |
| Marketable securities | | | | | |
| Accounts receivable, net | | | | | |
Inventories, net | | | | | |
| |
Other current assets | | | | | |
Total current assets | | | | | |
| |
Property and equipment, net | | | | | |
| Operating lease right-of-use assets | | | | | |
Intangible assets, net | | | | | |
Goodwill | | | | | |
Restricted cash | | | | | |
| |
| |
Other non-current assets | | | | | |
Total non-current assets | | | | | |
Total assets | $ | | | | $ | | |
| Liabilities and Stockholders’ Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | | | | $ | | |
| |
| Deferred revenue | | | | | |
| Accrued expenses and other current liabilities | | | | | |
| Total current liabilities | | | | | |
| |
| |
| |
| Warrants to purchase common stock | | | | | |
| |
| Operating lease liabilities, non-current | | | | | |
| |
| Other long-term liabilities | | | | | |
| Total liabilities | | | | | |
Commitments and Contingencies (Note 17) | | | |
| |
| Stockholders’ Equity: | | | |
Preferred stock - par value $; shares authorized, shares issued or outstanding | | | | | |
| |
Common stock, $ par value: Class A - shares authorized; and shares issued and outstanding as of December 31, 2023 and 2022, respectively; Class B - shares authorized; and shares issued and outstanding as of December 31, 2023 and 2022, respectively | | | | | |
| |
Treasury stock, at cost - and shares outstanding as of December 31, 2023 and 2022, respectively | | | | | |
| Accumulated other comprehensive loss | | | | () | |
| Additional paid-in capital | | | | | |
| Accumulated deficit | () | | | () | |
| Total stockholders’ equity | | | | | |
| Total liabilities and stockholders’ equity | $ | | | | $ | | |
The accompanying notes are an integral part of these consolidated financial statements.
TOAST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Revenue: | | | | | |
| Subscription services | $ | | | | $ | | | | $ | | |
| Financial technology solutions | | | | | | | | |
Hardware and professional services | | | | | | | | |
| | | |
| Total revenue | | | | | | | | |
| Costs of revenue: | | | | | |
| Subscription services | | | | | | | | |
| Financial technology solutions | | | | | | | | |
Hardware and professional services | | | | | | | | |
| | | |
| Amortization of acquired intangible assets | | | | | | | | |
| Total costs of revenue | | | | | | | | |
| Gross profit | | | | | | | | |
| Operating expenses: | | | | | |
| Sales and marketing | | | | | | | | |
| Research and development | | | | | | | | |
| General and administrative | | | | | | | | |
| Total operating expenses | | | | | | | | |
| Loss from operations | () | | | () | | | () | |
| Other income (expenses): | | | | | |
| Interest income (expense), net | | | | | | | () | |
| | | |
| Change in fair value of warrant liability | | | | | | | () | |
| Change in fair value of derivative liability | | | | | | | () | |
| Loss on debt extinguishment | | | | | | | () | |
| Other income (expense), net | | | | | | | | |
Loss before income taxes | () | | | () | | | () | |
Income tax (expense) benefit | () | | | | | | | |
| Net loss | $ | () | | | $ | () | | | $ | () | |
| | | |
| | | |
| Net loss per share attributable to common stockholders: | | | | | |
| Basic | $ | () | | | $ | () | | | $ | () | |
| Diluted | $ | () | | | $ | () | | | $ | () | |
| Weighted average shares used in computing net loss per share: | | | | | |
| Basic | | | | | | | | |
| Diluted | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
TOAST, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in millions)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Net loss | $ | () | | | $ | () | | | $ | () | |
Other comprehensive gain (loss): | | | | | |
Unrealized gains (losses) on marketable securities, net of tax effect of $ | | | | () | | | () | |
| | | |
Total other comprehensive gain (loss) | | | | () | | | () | |
| Comprehensive loss | $ | () | | | $ | () | | | $ | () | |
| | | |
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