Toast Inc

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. We provide a comprehensive platform of software-as-a-service, or SaaS, products and 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 service models including dine-in, takeout, delivery, catering, and retail.

Basis of Presentation

The accompanying unaudited condensed 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 the 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 condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly our financial position, results of operations, comprehensive income (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, 2024 or any other future interim periods.

The accompanying unaudited condensed consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the unaudited condensed consolidated financial statements. The unaudited condensed 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, 2023, or the 2023 Annual Report. As of September 30, 2024, there have been no material changes in the Company's significant accounting policies from those that were disclosed in the Annual Report on Form 10-K, unless otherwise discussed below.

Risks and Uncertainties

We are subject to a number of risks and uncertainties, including global events and macroeconomic conditions such as inflation and its potential impact on consumer spending, rising interest rates, global supply chain issues, and any public health concerns, which may also impact consumer behavior, the restaurant industry, and our business.

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 condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.

2. 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 (in millions):

During the nine months ended September 30, 2024, there were no transfers into or out of Level 3 measurements within the fair value hierarchy.

Marketable Securities

The fair values of marketable securities by contractual maturities at September 30, 2024 were as follows (in millions):

Valuation of Warrants to Purchase Common Stock

The fair value of the warrants was determined using the Black-Scholes option-pricing model. The following table indicates the weighted-average assumptions made in estimating the fair value as of:

Fair Value of Liabilities

The following table provides a roll-forward of the aggregate fair value of our common stock warrant liability for which fair value is determined using Level 3 inputs (in millions):

On July 3, 2024, we repurchased a warrant, or the Warrant, to purchase 5 million shares of our Class B common stock for an aggregate purchase price of $61 million, or the Warrant Repurchase. The Warrant was canceled and isno longer outstanding. Immediately prior to the Warrant Repurchase, we recognized a remeasurement gain of $2 million within “Change in fair value of warrant liability” in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2024. Upon the Warrant Repurchase, we also recognized a gain on the extinguishment of the Warrant of $14 million within “Other income (expense), net” in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2024.

As of September 30, 2024, the maximum number of shares of our Class B common stock that could be required to be issued upon the exercise of outstanding warrants was 2 million.

3. Loan Servicing Activities and Acquired Loans Receivable, Net

Changes in the contingent liability for expected credit losses for the three and nine months ended September 30, 2024 and 2023 were as follows (in millions):

As of September 30, 2024 and December 31, 2023, the non-contingent stand-ready liability was $10 million and $11 million, respectively.

As of September 30, 2024 and December 31, 2023, $56 million and $55 million, respectively, were classified as restricted cash on the condensed consolidated balance sheets, representing cash held with commercial lending institutions. The restrictions are related to cash held as collateral pursuant to an agreement with the originating third-party bank for the working capital loans serviced by Toast Capital.

4. Lessee Arrangements

The components of lease expense were as follows for the three and nine months ended September 30, 2024 and 2023 (in millions):

Operating lease expense reflects the non-cash amortization of right-of-use assets.

The following table summarizes supplemental cash flow information related to operating leases during the nine months ended September 30, 2024 and 2023 (in millions):

5. Other Balance Sheet Information

Accounts Receivable, net (in millions)

Our allowance for credit losses was comprised of the following (in millions):

Other Current Assets (in millions)

Accrued Expenses and Current Liabilities (in millions)

6. Revenue from Contracts with Customers

The following table summarizes the activity in deferred revenue (in millions):

As of September 30, 2024, approximately $783 million of revenue is expected to be recognized from remaining performance obligations for customer contracts. We expect to recognize revenue of approximately $734 million 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 (in millions):

Amortization expense attributable to deferred contract acquisition costs was $44 million for the nine months ended September 30, 2023.

7. Stockholders’ Equity

Shares of Stock

The following table shows the changes in Class A and Class B shares of common stock (in millions):

Stock-Based Compensation

Stock-based compensation expense recognized for the three and nine months ended September 30, 2024 and 2023, is as follows (in millions):

Stock-based compensation of $3 million and $10 million, respectively, was capitalized as software development costs for the three and nine months ended September 30, 2024. Stock-based compensation of $4 million and $10 million, respectively, was capitalized as software development costs for the three and nine months ended September 30, 2023.

Stock Options

The following is a summary of stock option activity under our stock option plans for the nine months ended September 30, 2024:

(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 2024, 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 aggregate intrinsic value of options exercised was $58 million and$292 million, respectively, during the three and nine months ended September 30, 2024.

As of September 30, 2024, total unrecognized stock-based compensation expense related to option awards was $64 million and is expected to be recognized over the remaining weighted-average service period of 2.4 years.

Restricted Stock Units

The following table summarizes restricted stock units, or RSU, activity during thenine months ended September 30, 2024:

The fair value of RSUs vested during the three and nine months ended September 30, 2024 was $73 million and $199 million, respectively.

As of September 30, 2024, total unrecognized stock-based compensation expense related to the RSUs was $384 million and is expected to be recognized over the remaining weighted-average service period of 2.5 years.

Share Repurchase Program

In February 2024, we announced the authorization of a share repurchase program for the repurchase of shares in 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 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.

During the three and nine months ended September 30, 2024, we repurchased $20 million and $56 million, respectively, in Class A common stock. At September 30, 2024, approximately $194 million remained authorized for repurchase under our share repurchase program.

Shares Reserved for Charitable Donations

In recognition of our values and commitment to local communities, we joined the Pledge 1% movement to fund our social impact initiatives through Toast.org, our social impact arm. During the year ended December 31, 2021, our Board approved reserving 5 million shares of Class A common stock that we may, but are not obligated to, issue over a certain period to fund the Company’s social impact initiatives through Toast.org. During the three and nine months ended September 30, 2024, we extended the anticipated period of issuance and recognized stock-based charitable contribution expense of $5 million for the fair value of the donated shares. During the three and nine months ended September 30, 2023, we recognized stock-based charitable contribution expense of $10 million for the fair value of the donated shares. Such expenses were recorded within general and administrative expenses in the Condensed Consolidated Statement of Operations.

8. 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. In connection with this Restructuring Plan, we incurred restructuring and restructuring-related charges of $0 million and $46 million, respectively, during the three and nine months ended September 30, 2024. These charges were recorded within restructuring expenses on our Condensed Consolidated Statements of Operations, primarily consisting of cash severance costs and the acceleration of stock-based compensation for certain terminated employees. As of September 30, 2024, accrued restructuring expenses were immaterial. We expect immaterial costs to be incurred during the remainder of fiscal year 2024.

9. Income Taxes

Our effective income tax rate was 1.6% and (0.2)% for the three months ended September 30, 2024 and 2023, respectively, and was (23.3)% and (0.5)% for the nine months ended September 30, 2024 and 2023, 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 deferred tax assets, along with the release of a portion of our valuation allowance in the nine months ended September 30, 2023, as a result of an acquisition.

The income tax expense was $1 million and $0 million for the three months ended September 30, 2024 and 2023, respectively, and$3 million and $1 million for the nine months ended September 30, 2024 and 2023, respectively. The change in the provision is primarily driven by changes in the provision recorded on the earnings of our non-U.S. subsidiaries and a non-recurring benefit recognized in the nine months ended September 30, 2023 from the acquisition of Delphi of $1 million.

10. Earnings or Loss Per Share Attributable to Common Stockholders

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

Class A common stock and Class B common stock share proportionately, on a per share basis, in our net income (losses) and participate equally in the dividends on common stock, if declared. We allocate net income (losses) attributable to common stock between the common stock classes on aone-to-one basis when computing earnings (loss) per share. As a result, basic and diluted earnings (loss) per share of Class A common stock and Class B common stock are equivalent.

The following table sets forth the computation of basic and diluted earnings (loss) per share attributable to common stockholders for the periods presented (in millions, except per share amounts):

(1)During the three months ended September 30, 2024, we recorded a remeasurement gain of $2 million on the warrant liability immediately prior to the Warrant Repurchase on July 3, 2024 and a gain on the extinguishment of the Warrant upon the Warrant Repurchase of $14 million. During the three months ended September 30, 2023, we recorded a remeasurement gain of $18 million of our warrant liability. For purposes of computing diluted earnings (loss) per share, these gains were excluded from our net income (loss) and the corresponding weighted-average shares were also adjusted accordingly.

We excluded the following potential shares of common stock from the computation of diluted earnings (loss) per share because including them would have an anti-dilutive effect for the periods presented (in millions):

(2)During the three months ended September 30, 2024, we recorded a loss on fair value remeasurement of our remaining warrants outstanding after the Warrant Repurchase. These warrants were excluded from the computation of diluted net earnings (loss) per share due to their anti-dilutive impact. During the nine months ended September 30, 2024 and 2023, we recorded a loss on fair value remeasurement of our warrant liability and the warrants were excluded from the calculation of diluted earnings (loss) per share due to their anti-dilutive effect.

11. Commitments and Contingencies

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 reasonable estimates. We do not expect any claims with a reasonably possible adverse outcome to have a material impact on us, and, accordingly, have not accrued for any material claims.