EXPENSIFY, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

December 23, 2021 at 06:05 am EST

You should read the following discussion and analysis of our financial condition
and results of operations together with our consolidated financial statements
and the related notes included elsewhere in this Quarterly Report on Form 10-Q ,
as well as our audited financial statements and related notes disclosed in our
prospectus, or the Prospectus, dated November 9, 2021, filed with the SEC
pursuant to Rule 424(b) under the Securities Act of 1933, as amended, or the
Securities Act, in connection with our initial public offering. This discussion
contains forward-looking statements based upon current expectations that involve
risks and uncertainties. As discussed in the section titled "Note About
Forward-Looking Statements", 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 "Risk factors" and in other parts of this
Quarterly Report on Form 10-Q.
Overview
Expensify is a cloud-based expense management software platform that helps the
smallest to the largest businesses simplify the way they manage money. Every
day, people from all walks of life in organizations around the world use
Expensify to scan and reimburse receipts from flights, hotels, coffee shops,
office supplies and ride shares. Since our founding in 2008, we have added over
10 million members to our community and processed and automated over 1.2 billion
expense transactions on our platform as of September 30, 2021, freeing people to
spend less time managing expenses and more time doing the things they love. For
the quarter ended September 30, 2021, an average of 667,000 paid members across
200 countries and territories used Expensify to make money easy.
Initial Public Offering
In November 2021, we closed our initial public offering (IPO) of 11,190,392
shares of our Class A common stock at $0.0001 par value per share (the Class A
common stock), in which we sold 2,608,696 shares of Class A common stock, and
the selling stockholders sold 8,581,696 shares of Class A common stock at an IPO
price of $27.00 per share. This total sale of 11,190,392 shares of Class A
common stock in our IPO includes the full exercise of the underwriters' option
to purchase an additional 1,459,616 shares of Class A common stock from certain
selling stockholders at an IPO price of $27.00 per share. We did not receive any
proceeds from the sale of shares of Class A Common Stock in the offering by the
selling stockholders. We received aggregate net proceeds of approximately $57.5
million after deducting underwriting discounts and commissions of approximately
$4.9 million and offering costs of approximately $8.0 million.
Immediately prior to the effectiveness of our IPO Registration Statement, we
filed an Amendment to the Amended and Restated Certificate of Incorporation to
create three classes of authorized common stock: Class A, LT10, and LT50 common
stock. All shares of common stock then outstanding were reclassified as Class A
common stock except for shares under our exchange offer, which provided
employees and other service providers the opportunity to exchange, on a
one-for-one basis, their Class A common stock into LT10 or LT50 shares. Under
our exchange offer, 13,556,800 shares of Class A common stock were exchanged for
7,332,640 shares of LT10 common stock and 6,224,160 shares of LT50 common stock.
Upon closing of the IPO, all convertible preferred stock then outstanding, was
converted into 42,031,390 shares of common stock on a ten-for-one basis and
reclassified into Class A common stock. In addition, 430,080 shares of common
stock warrants were converted to an equivalent number of shares of Class A
common stock warrants.
Immediately prior to the closing of our IPO, we filed our Amended and Restated
Certificate of Incorporation authorizing a total of 1,000,000,000 shares of
Class A common stock which entitles holders
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to one vote per share, 25,000,000 shares of LT10 common stock, which entitles
holders to 10 votes per share, and 25,000,000 shares of LT50 common stock, which
entitles holders to 50 votes per share. In addition, the Amended and Restated
Certificate of Incorporation authorized a total of 10,000,000 shares of
undesignated preferred stock.
Our Business Model
Our employee-centric product strategy, viral and bottom-up business model,
word-of-mouth adoption and unique company culture come together to drive value
for our members and a competitive advantage for us. We believe that if we remain
hyper-focused on our end-user members, and build great products, our members
will continue to drive adoption.
We believe our approach is effective because we enable a self-service,
low-friction model that makes it simple for anyone to try and use our platform
and then easily share it with others. Anyone can easily download our application
or go to our website and sign up for free on their own, and later upgrade to a
paid subscription for advanced features. The adoption of Expensify within an
organization typically starts with the individual employee, who downloads our
mobile application for free and uses it to easily submit expenses to their
manager with a few taps. After the employee realizes the benefits of our
platform, they become a champion of Expensify and spread it internally to other
employees - as well as to their friends in other companies. With multiple
employees using Expensify, and valuable features simplifying the manager's job,
the decision maker often purchases a subscription to Expensify and becomes a
paying customer with a few members. Our usage within an organization expands
further as the company adds members and adopts new features such as the
Expensify Card or Bill Pay. For the nine months ended September 30, 2021,
approximately 58% of our revenue can be attributed to an instance where an
employee used our application before the purchaser, and recommended it to their
manager. Most of the remaining 42% of our revenue is attributed to instances
where the decision maker institutes Expensify within the organization after
learning about it through word-of-mouth, brand recognition, or referral from
their accountant - through our ExpensifyApproved! Partner Program, we train and
support accountants who then encourage their customers to use Expensify.
Though we offer onboarding and ongoing support to everyone, our members and
customers generally prefer to take advantage of our self-service options. We
have developed Concierge, our customer support engine, to make handling customer
support inquiries much more efficient. Concierge is powered by AI-assisted
customer support agents, with different levels of skill and training, spread out
across the world. Our product managers use the information we gather from
Concierge to remain closely in tune with customer needs and guide our future
platform roadmap.
We primarily generate revenue from annual subscriptions to our cloud-based
platform, driven by the number of paid members active on a monthly basis.
Individuals or companies pay for subscriptions on behalf of themselves, their
employees and contractors, who we collectively refer to as members. We define a
customer as any member who pays for themselves and zero or more other members,
grouped into one or more "expense policies". This might be an individual, an
entire company, or a department of a larger company. The definition of customer
inherently excludes sole proprietors on Track or Submit plans.
Our individual subscriptions include our Track and Submit plans, which include
an optional paid monthly upgrade for anyone wishing to SmartScan more than 25
receipts in a given month. These subscriptions are billed monthly, irrespective
of activity:
•Free Plans (Optional upgrade for unlimited SmartScan)
•Track. Our free Track plan comes with our SmartScan receipt scanning
functionality and is used primarily by individuals and sole-proprietors to
streamline their receipt and mileage tracking.
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•Submit. Our free Submit plan includes the same functionality in Track, and also
adds the ability to automatically submit expense reports to anyone for
reimbursement.
Our business subscriptions can be used by teams, organizations and companies for
free or upgraded to one of our paid plans, which include our Collect and Control
plans, following a free trial. We bill customers on Collect and Control plans at
the start of each month based on the number of policy members who were active in
the previous month. Each customer has either a "pay per use" plan in which they
are billed a flat rate for each active member, or an "annual" plan where they
commit to a minimum number of monthly seats in exchange for a lower subscription
rate. Collect and Control customers can access lower rates if they spend on the
Expensify Card:
•Free Plans
•Free. Our Free plan, introduced in September 2021, enables our members to roll
out a corporate card program with the Expensify Card, reimburse cash expenses
for employees, send invoices to clients and set up bill payment for their team.
•Paid Plans
•Collect. Our Collect plan enables our members to integrate with popular small
business accounting systems, configure simple expense report approval workflows,
as well as reimburse employees, contractors and volunteers via Direct Deposit
ACH.
•Control. Our Control plan, which is by far our most popular plan, includes
everything in Collect and adds the ability to configure rules-based approval
workflows, and integrate with financial, travel, HR and other internal systems
commonly used by mid-market and enterprise companies.
We fully launched the Expensify Card in 2020 and, despite pullback in corporate
expenses with the COVID-19 pandemic, customers have begun to adopt the card. We
monetize transactions from the Expensify Card by receiving a percentage of the
interchange for all spend on the card. As we expand our platform, we intend to
increase the number of integrations and to more actively promote the Expensify
Card with complementary use cases beyond expense management to both new and
existing customers to drive increased adoption.
Through our pricing, we aim to encourage viral adoption of Expensify, make it
easy for SMBs to become customers, and encourage customers to commit to annual
subscriptions as well as adopt the Expensify Card. To encourage viral adoption,
we offer viral features that are free and accessible without a paid subscription
because using the feature has the secondary effect of promoting Expensify. For
example, individual employees download the Expensify app, for free, and use it
to submit their expenses to their bosses - turning every expense report into a
highly targeted marketing message, straight to a decision maker. To lower the
barrier for companies to adopt Expensify, we offer customers free trials, and
lower subscription rates to customers who commit to an annual subscription
and/or adopt the Expensify Card.
Key Factors Affecting our Performance
For a discussion of the key factors affecting our performance, please see "Key
factors affecting our performance" in the Management's Discussion and Analysis
section and the "Risk factors" section of our Prospectus.
Impact of COVID-19
As a result of the COVID-19 pandemic, we temporarily closed our offices, asked
our employees to work remotely and implemented travel restrictions, all of which
represent a disruption in how we operate our business. The operations of our
customers, the majority of which are SMBs, have likewise been disrupted. The
outsized impact of the pandemic on SMBs was evident in 2020 as an abnormal
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percentage of our customers stopped adding new members to our platform, ceased
(or paused) operations and/or scaled back or terminated subscriptions to the
Expensify platform.
Business travel, traditionally a significant driver of expenses on our platform,
has been severely curtailed during the pandemic with complex regional effects as
lockdowns were put in place and altered rapidly. As a result of the pull-back in
travel related expenses and other expenses that were not generated in a work
from home environment, many of our customers that remained on our platform had
fewer employees incurring expenses on a monthly basis in 2020. After a steady
increase in paid members over multiple years, the average number of paid members
on our platform declined 15% from 742,000 in the quarter ended March 31, 2020 to
633,000 in the quarter ended September 30, 2020 and we have rebounded to 667,000
paid members in the quarter ended September 30, 2021. Our activity is still
recovering from May 2020 as the United States and certain other parts of the
world continue to rebound from COVID-19. The amount of expenses incurred by the
paid members remaining on our platform has also declined as a result of the
factors stated above. While activity decreased and remains at lower levels than
pre-pandemic, our revenue only declined until the quarter ended June 30, 2020.
This initial adverse impact on revenue was mitigated by the prevalence of our
annual contracts and minimum user requirements in those contracts as well as a
price change that became effective in May 2020. We introduced the Expensify Card
in 2020, immediately before the pandemic. Given the decline in the volume of
expenses and potential customers' reluctance to adopt a new card in this unusual
environment, growth from monetizing the transactions from the Expensify Card has
taken longer than anticipated, but the rate of adoption is increasing despite
the COVID headwinds.
While the full lasting impact of the COVID-19 pandemic on the global economy and
SMBs in particular remains uncertain, we believe that use of our platform will
increase as economies reopen and business travel resumes.
While uncertainty remains on many fronts, we are confident that the pandemic has
also had a positive impact on the way we operate our business. We have fully
embraced the distributed workforce and reimagined how we use our existing office
space. As demand for expense management slowed during the pandemic, we invested
in building our platform outside of our core expense management features, which
will result in a more diversified range of use cases that is better insulated
against similar shocks in the future.
Key Business Metrics and Non-GAAP Financial Measures
We review the following key metrics and non-GAAP financial measures to evaluate
our business, measure our performance, identify trends affecting our business,
formulate business plans and make strategic decisions. Accordingly, we believe
that these key business metrics and non-GAAP financial measures provide useful
information to investors and others in understanding and evaluating our results
of operations in the same manner as our management team. These key business
metrics and non-GAAP financial measures are presented for supplemental
informational purposes only, should not be considered a substitute for financial
information presented in accordance with GAAP, and may be different from
similarly titled metrics or measures presented by other companies.
Key Business Metrics
Paid Members
We believe that our ability to increase the number of paid members on our
platform will drive our success as a business. Companies pay for subscriptions
on behalf of employees and contractors who use the platform, whom we refer to as
paid members. We define paid members as the average number of users (employees,
contractors, volunteers, team members, etc.) who are billed on Collect or
Control plans during any particular quarter. For SMBs or sole proprietors with
only one employee, the business owner may also be the only paid member.
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While the full lasting impact of the COVID-19 pandemic on the global economy and
SMBs in particular remains uncertain, there have been signs of recovery as the
economy has slowly reopened. See the section titled "Impact of COVID-19" above
for additional information.
The following table sets forth the average number of paid members for the three
months ended September 30, 2021 and 2020, respectively.
Three months ended Paid members (in thousands)
September 30, 2021 667
September 30, 2020 633

Components of Results of Operations
Revenue
We generate revenue from subscription fees based on the usage of our expense
reporting cloud-based platform under arrangements paid monthly in arrears that
are either month-to-month that can be terminated by either party without penalty
at any time or annual arrangements based on a minimum number of monthly members.
Annual subscription customers who wish to terminate their contracts before the
end of the term are required to pay the remaining obligation in full plus any
fees or penalties set forth in the agreement. In May 2020, we updated our terms
of service whereby annual contracts became non-cancelable. We charge our
customers subscription fees for access to our platform based on the number of
monthly active members and level of service. The contractual price is based on
either negotiated fees or rates published on our website. We generate most of
our revenue from customers who have a credit card or debit card on file with us
that is automatically charged each month. Virtually all of our customers have a
standard terms of service contract, with the few exceptions on bespoke service
contracts.
Our contracts with our customers include two performance obligations: access to
the hosted software service, inclusive of all features available within the
platform and related customer support. We account for the platform access and
the support as a combined performance obligation because they have the same
pattern of transfer over the same period and are therefore delivered
concurrently. We satisfy our performance obligation over time each month as we
provide platform access and support services to customers and as such recognize
revenue over time. We recognize revenue net of applicable taxes imposed on the
related transaction.
Cost of Revenue, Net
Cost of revenue, net primarily consists of expenses related to hosting the
company's service, including the costs of data center capacity, credit card
processing fees, third-party software license fees, outsourcing costs to support
customer service and outsourcing costs to support and process the SmartScan
technology, net of consideration from a vendor. Additional costs include
amortization expense on capitalized software development costs and
personnel-related expenses, including stock-based compensation and employee
costs attributable to supporting our customers and maintenance of our platform.
The consideration from a vendor is related to the Expensify Card. We use a
third-party vendor to issue Expensify Cards and process the related
transactions. When purchases are made with the Expensify Card, a fee is charged
by the card network to the merchant (also known as "Interchange"). The vendor is
contractually entitled to the Interchange through its relationships with the
card network and card issuing bank. The vendor keeps a portion of the
Interchange for their services, and our agreement with the vendor results in us
receiving the remainder of the Interchange minus the amount retained by the
vendor (our remainder portion, the "Expensify Interchange Amount"). The vendor
also charges us fees (the "Vendor Fees") for the services it provides to us. Due
to the nature of the vendor agreement, we do not
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record the Expensify Interchange Amount as revenue. Instead, the net of the
Expensify Interchange Amount and Vendor Fees are paid to us, and we record it as
"consideration from a vendor", a contra-expense in Cost of revenue, net. The
following summarizes these various amounts for the periods presented:
Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
(in thousands)
Expensify Interchange Amount $ 872 $ 284 $ 2,067 $ 698
Vendor Fees 65 22 142 66
Consideration from a Vendor $ 807 $

262 $ 1,925 $ 632




We anticipate an increase in Cost of revenue, net expenses during the three
months and year ended December 31, 2021 in which we completed our initial public
offering as a result of the discretionary cash bonuses anticipated to be paid to
our employees during the fourth quarter of fiscal year 2021 as described in the
subsection titled "Critical accounting policies and estimates - Cash bonuses",
as well as additional stock-based compensation expense going forward, as
described within our notes to the consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q.
Operating Expenses
Research and Development
Research and development expenses consist primarily of personnel-related
expenses, including stock-based compensation, incurred related to the planning
and preliminary project stage and post-implementation stage of new products or
enhancing existing products or services. We capitalize certain software
development costs that are attributable to developing or adding significant
functionality to our internal-use software during the application development
stage of the projects. All research and development expenses, excluding
capitalized software development costs, are expensed as incurred.
We believe delivering new functionality is critical to attract new customers and
expand our relationships with existing customers. We expect to continue to make
investments in and expand our product and service offerings to enhance our
customers' experience and satisfaction and to attract new customers. We expect
research and development expenses will increase as we expand our research and
development team to develop new products and product enhancements.
We anticipate an increase in Research and development expenses during the three
months and year ended December 31, 2021 in which we completed our initial public
offering as a result of the discretionary cash bonuses anticipated to be paid to
our employees during the fourth quarter of fiscal year 2021 as described in the
subsection titled "Critical accounting policies and estimates - Cash bonuses",
as well as additional stock-based compensation expense going forward, as
described within our notes to the consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q.
Sales and Marketing
Sales and marketing expenses primarily consist of personnel-related expenses,
including stock-based compensation, advertising expenses, branding and public
relations expenses and referral fees for strategic partners and other benefits
that we provide to our referral and affiliate partners. We expect sales and
marketing expenses will increase as we expand our sales efforts to pursue our
market opportunity.
We anticipate an increase in Sales and marketing expenses during the three
months and year ended December 31, 2021 in which we completed our initial public
offering as a result of the discretionary cash bonuses anticipated to be paid to
our employees during the fourth quarter of fiscal year 2021 as
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described in the subsection titled "Critical accounting policies and estimates -
Cash bonuses", as well as additional stock-based compensation expense going
forward, as described within our notes to the consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-Q.
General and Administrative
General and administrative expenses primarily consist of personnel-related
expenses, including stock-based compensation, for executive management and any
employee time allocated to administrative functions, including finance and
accounting, legal and human resources. In addition to personnel-related
expenses, general and administrative expenses consist of rent, utilities,
depreciation on property and equipment, amortization of finance lease
right-of-use assets and external professional services, including accounting,
audit, tax, finance, legal and compliance, human resources and information
technology. We expect that general and administrative expenses will continue to
increase as we scale our business and as we incur costs associated with being a
publicly traded company, including legal, audit, business insurance and
consulting fees.
We anticipate an increase in General and administrative expenses during the
three months and year ended December 31, 2021 in which we completed our initial
public offering as a result of the discretionary cash bonuses anticipated to be
paid to our employees during the fourth quarter of fiscal year 2021 as described
in the subsection titled "Critical accounting policies and estimates - Cash
bonuses", as well as additional stock-based compensation expense going forward,
as described within our notes to the consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q.
Interest and Other Expenses, Net
Interest and other expenses, net, consist primarily of interest paid under our
credit facilities with Canadian Imperial Bank of Commerce (CIBC). It also
includes realized gains and losses on foreign currency transactions and foreign
currency remeasurement.
Benefit (Provision) for Income Taxes
Income taxes primarily consist of income taxes in the United States, United
Kingdom, Australia, Netherlands and Canada, as well as states in the United
States in which we do business.
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Results of Operations
The results of operations presented below should be reviewed in conjunction with
the consolidated financial statements and notes included elsewhere in this
Quarterly Report on Form 10-Q.
The following table sets forth our results of operations for the periods
presented:
                                              Three months ended September 30,                 Nine months ended September 30,
                                                 2021                    2020                     2021                    2020
                                                               (in thousands, except share and per share data)
Revenue                                   $         37,447          $     21,694          $         102,471          $     62,335
Cost of revenue, net(1)                             18,197                 8,443                     33,768                23,881
Gross margin                                        19,250                13,251                     68,703                38,454
Operating expenses:
Research and development(1)                          2,167                 2,268                      8,138                 4,645
General and administrative(1)                       18,333                14,579                     35,827                24,717
Sales and marketing(1)                               7,608                 1,491                     14,555                 7,814
Total operating expenses                            28,108                18,338                     58,520                37,176
(Loss) income from operations                       (8,858)               (5,087)                    10,183                 1,278
Interest and other expenses, net                    (1,054)                 (646)                    (2,560)               (2,160)
(Loss) income before income taxes                   (9,912)               (5,733)                     7,623                  (882)
Benefit (provision) for income taxes                 3,567                (1,205)                       706                (2,570)
Net (loss) income                         $         (6,345)         $     (6,938)         $           8,329          $     (3,452)

Less: income allocated to participating
securities                                               -                     -                     (5,625)                    -
Net (loss) income attributable to common
stockholders                              $         (6,345)         $     (6,938)         $           2,704          $     (3,452)
Net (loss) income per share attributable
to common stockholders:
Basic                                     $          (0.18)         $      (0.25)         $            0.09          $      (0.13)
Diluted                                   $          (0.18)         $      (0.25)         $            0.07          $      (0.13)
Weighted-average shares of common stock
used to compute net (loss) income per
share attributable to common
stockholders:
Basic                                           34,490,860            27,951,536                 31,301,387            27,095,925
Diluted                                         34,490,860            27,951,536                 41,452,880            27,095,925


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(1)Includes stock-based compensation expense as follows:
                                           Three months ended September 30,             Nine months ended September 30,
                                               2021                 2020                   2021                   2020
                                                                           (in thousands)
Cost of revenue, net                     $         245          $      956          $            670          $    1,280
Research and development                           154               1,062                       482               1,302
General and administrative                         410               9,689                     1,118              10,205
Sales and marketing                                 88                  58                       225                 164

Total stock-based compensation expense $ 897 $ 11,765

$ 2,495 $ 12,951




Comparison of the three months ended September 30, 2021 and 2020
Revenue
                    Three months ended September 30,                   Change
                           2021                      2020         Amount         %
                               (in thousands, except percentages)
Revenue     $         37,447                      $ 21,694      $ 15,753        73  %


Revenue increased by $15.8 million, or 73%, for the three months ended September
30, 2021 compared to the same period in 2020, primarily due to a pricing change
implemented in May 2020, which led to a gradual increase in per member price for
our paid members over time from existing customers not using the Expensify Card
in connection with our expense management platform for 50% or more of their
approved expenses and increased demand for business travel, which is a
significant use for our platform and driver for an increase in the number of
paid members, that can be attributed to the lifting of travel restrictions
within the United States and certain other countries and higher rates of
returning to the office as a result of the widespread availability and
distribution of COVID-19 vaccines. Our revenue for the three months ended
September 30, 2020 was adversely affected by the COVID-19 pandemic, particularly
due to the decrease in business travel.
Cost of Revenue, Net and Gross Margin
                                   Three months ended September 30,                    Change
                                   2021                              2020        Amount         %
                                              (in thousands, except percentages)
   Cost of revenue, net    $         18,197                       $ 8,443       $ 9,754       116  %
   Gross margin                      19,250                        13,251       $ 5,999        45  %
   Gross margin %                        51   %                        61  %


Cost of revenue, net increased by $9.8 million, or 116%, for the three months
ended September 30, 2021 compared to the same period in 2020. Cost of revenue,
net increased primarily due to discretionary cash bonuses of $3.6 million paid
out to employees directly engaged in supporting our customers and providing
maintenance of our platform as well as a related bonus accrual of $5.4 million
during the three months ended September 30, 2021 for discretionary cash bonuses
to be paid to our employees during the fourth quarter of fiscal year 2021. For
further detail over the cash bonuses, refer to the subsection titled "Critical
accounting policies and estimates-Cash bonuses". Another contributing factor to
the increase is a higher volume of payment processing fees directly related to
the increase in reimbursement activity. In addition, consideration from a
vendor, which represents monetizing Expensify Card activities, reduced cost of
revenue, net by $0.8 million and $0.3 million for the three months ended
September 30, 2021 and
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September 30, 2020, respectively. This increase in reduction to cost of revenue,
net was driven primarily by increased adoption and spend captured from members
on the Expensify Card.
Gross margin decreased to 51% for the three months ended September 30, 2021
compared to 61% in the same period in 2020. The decrease was primarily driven by
the 116% increase in cost of revenue, net for the three months ended September
30, 2021 compared to the same period in 2020. Although revenue increased by 73%
for the same period, cost of revenue, net increased at a higher rate due to the
factors described in the preceding paragraph.
Operating Expenses
Research and Development
                                    Three months ended September 30,                   Change
                                           2021                       2020        Amount        %
                                              (in thousands, except percentages)
Research and development   $           2,167                        $ 2,268      $ (101)       (4) %


Research and development expenses decreased by $0.1 million, or 4%, for the
three months ended September 30, 2021 compared to the same period in 2020. The
decrease is primarily driven by increased capitalization of internally developed
software costs directly related to employee time spent in the application
development stage of projects for new products and features that are crucial for
the success of our Company partially offset by discretionary cash bonuses of
$2.0 million paid out to employees directly engaged in the planning and
preliminary project stage and post-implementation stage of new products and
features as well as a related bonus accrual of $1.9 million during the three
months ended September 30, 2021 for discretionary cash bonuses to be paid to our
employees during the fourth quarter of fiscal year 2021. For further detail over
the cash bonuses, refer to the subsection titled "Critical accounting policies
and estimates-Cash bonuses". We continue to believe that focused investments in
research and development are critical to our future growth and competitive
position in the marketplace, and to the development of new and updated features,
products and services that are central to our core business strategy.
Sales and Marketing
                                   Three months ended September 30,                    Change
                                          2021                       2020        Amount         %
                                              (in thousands, except percentages)
  Sales and marketing     $           7,608                        $ 1,491      $ 6,117       410  %


Sales and marketing expenses increased by $6.1 million, or 410%, for the three
months ended September 30, 2021 compared to the same period in 2020. The
increase was driven primarily by out of home advertising campaigns, the purchase
of ads on podcasts and various other platforms to promote our products and
services and discretionary cash bonuses of $1.3 million paid out to employees
directly engaged in sales and marketing activities as well as a related bonus
accrual of $1.8 million during the three months ended September 30, 2021 for
discretionary cash bonuses to be paid to our employees during the fourth quarter
of fiscal year 2021. For further detail over the cash bonuses, refer to the
subsection titled "Critical accounting policies and estimates-Cash bonuses". For
the three months ended September 30, 2020, we aggressively reduced our
advertising and other sales and marketing expenses due to the impact of the
COVID-19 pandemic.
General and Administrative
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                                      Three months ended September 30,                   Change
                                             2021                      2020        Amount         %
                                                 (in thousands, except percentages)
General and administrative    $         18,333                      $

14,579 $ 3,754 26 %




General and administrative expenses increased by $3.8 million, or 26%, for the
three months ended September 30, 2021 compared to the same period in 2020,
primarily due to increased employee compensation of our executive employees,
hiring of additional accounting and finance employees, increased professional
service costs for accounting, auditing and legal services related to our annual
financial statement audits and quarterly reviews and discretionary cash bonuses
of $2.6 million paid out to employees directly engaged in general and
administrative activities as well as a related bonus accrual of $7.7 million
during the three months ended September 30, 2021 for discretionary cash bonuses
to be paid to our employees during the fourth quarter of fiscal year 2021. For
further detail over the cash bonuses, refer to the subsection titled "Critical
accounting policies and estimates-Cash bonuses".
Interest and Other Expenses, Net
                                      Three months ended September 30,                       Change
                                          2021                 2020               Amount                 %
                                                          (in thousands, except percentages)
Interest and other expenses, net     $     (1,054)         $     (646)         $     (408)                  63  %
                                     (1,054)               (646)


Interest and other expenses, net increased by $0.4 million, or 63%, for the
three months ended September 30, 2021 compared to the same period in 2020. The
increase was driven by the U.S. dollar getting stronger in 2021 resulting in
higher foreign transaction exchange losses.
Benefit (Provision) for Income Taxes
                                          Three months ended September 30,                         Change
                                              2021                   2020               Amount                  %
                                                              (in

thousands, except percentages) Benefit (provision) for income taxes $ 3,567 $ (1,205) $ 4,772

                  (396) %


We recorded a $3.6 million benefit for income taxes for the three months ended
September 30, 2021 compared to a $1.2 million provision for the same period in
2020. We follow the asset and liability method of accounting for income taxes,
whereby we recognize deferred income taxes for the tax consequences of temporary
differences between the financial statement carrying amounts and the tax basis
of the assets and liabilities. Valuation allowances are recorded to reduce
deferred tax assets when it is more likely than not that a tax benefit will not
be realized. The provision for income taxes reflects taxable income earned and
taxed in U.S. federal and state and non-U.S. jurisdictions.
During the three months ended September 30, 2021, we recorded a benefit for
income taxes primarily due to cash bonuses for employees that were approved by
management in July 2021, which resulted in a net loss for the three months ended
September 30, 2021 and a change to our estimated taxable income for the annual
period ended December 31, 2021. For further detail over these cash bonuses,
refer to the Employee stock option exercise cash bonus discussion within Note 2.
During the three months ended
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September 30, 2020, we had a loss before income taxes, however a significant
secondary market transaction occurred that was not tax deductible, which
resulted in taxes owed on the transaction.
In addition, we prepared our interim tax provision by applying a year-to-date
effective tax rate starting in the three months ended September 30, 2021. For
the three months ended September 30, 2020, we prepared our interim tax provision
by applying an annual effective tax rate. We believe that using the actual
year-to-date effective tax rate going forward results in the best estimate of
the annual effective tax rate.
Comparison of the nine months ended September 30, 2021 and 2020
Revenue
                    Nine months ended September 30,                   Change
                          2021                      2020         Amount         %
                               (in thousands, except percentages)
Revenue     $         102,471                    $ 62,335      $ 40,136        64  %


Revenue increased by $40.1 million, or 64%, for the nine months ended September
30, 2021 compared to the same period in 2020. In May 2020, the Company updated
its terms of service, which resulted in annual contracts becoming noncancellable
and implemented a pricing change, which led to a significant increase in the
average paid member price during the nine months ended September 30, 2021
compared to the same period in 2020.
Revenue growth was partially offset by a slight decrease in average paid members
for the nine months ended September 30, 2021 compared to the same period in
2020. Although the number of paid members decreased from approximately 674,000
paid members on average during the nine months ended September 30, 2020 to
approximately 656,000 paid members on average during the nine months ended
September 30, 2021, the monthly average paid member numbers continue to
incrementally recover back to pre-COVID levels that were evident during the
first quarter of 2020. We continue to see further evidence of recovery with
increased reimbursement activity each quarter during the nine months ended
September 30, 2021 as global restrictions are eased.
Cost of Revenue, Net and Gross Margin
                                   Nine months ended September 30,                   Change
                                  2021                            2020          Amount         %
                                              (in thousands, except percentages)
   Cost of revenue, net    $        33,768                     $ 23,881       $  9,887        41  %
   Gross margin                     68,703                       38,454       $ 30,249        79  %
   Gross margin %                       67   %                       62  %


Cost of revenue, net increased by $9.9 million, or 41%, for the nine months
ended September 30, 2021 compared to the same period in 2020. Cost of revenue,
net increased primarily due to the increase in employee compensation related to
the discretionary cash bonuses of $3.6 million paid to employees directly
engaged in supporting our customers and providing maintenance of our platform as
well as a related bonus accrual of $5.4 million during the nine months ended
September 30, 2021 for discretionary cash bonuses to be paid to our employees
during the fourth quarter of fiscal year 2021. For further detail over the cash
bonuses, refer to the subsection titled "Critical accounting policies and
estimates-Cash bonuses". In addition to the cash bonuses, Cost of revenue, net
primarily increased due to a higher volume of payment processing fees directly
related to the increase in reimbursement activity, increased
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efforts in support and implementation services, amortization related to
capitalized software as our research and development efforts continue to grow to
develop new products and services, and increased outsourcing activities related
to maintaining the platform. In addition, consideration from a vendor, which
represents monetizing Expensify Card activities, reduced cost of revenue, net by
$1.9 million and $0.6 million for the nine months ended September 30, 2021 and
September 30, 2020, respectively. This increase in reduction to cost of revenue,
net was driven primarily by increased adoption and spend captured from members
on the Expensify Card.
Gross margin increased to 67% for the nine months ended September 30, 2021
compared to 62% in the same period in 2020. The increase was primarily driven by
the 64% increase in revenue for the nine months ended September 30, 2021
compared to the same period in 2020. Although revenue increased by 64% for the
same period, cost of revenue, net did not increase at the same rate due to the
factors described in the preceding paragraph.
Research and Development
                                    Nine months ended September 30,                    Change
                                           2021                      2020        Amount         %
                                              (in thousands, except percentages)
Research and development   $           8,138                       $ 4,645      $ 3,493        75  %


Research and development expenses increased by $3.5 million, or 75%, for the
nine months ended September 30, 2021 compared to the same period in 2020. The
increase is primarily driven by discretionary cash bonuses of $5.6 million paid
out to employees directly engaged in the planning and preliminary project stage
and post-implementation stage of new products and features that are crucial for
the success of our Company as well as a related bonus accrual of $1.9 million
during the nine months ended September 30, 2021 for discretionary cash bonuses
to be paid to our employees during the fourth quarter of fiscal year 2021. For
further detail over the cash bonuses, refer to the subsection titled "Critical
accounting policies and estimates-Cash bonuses". These increases were partially
offset by increased capitalization of internally developed software costs
directly related to employee time spent in the application development stage of
projects for our new products and features.
Sales and Marketing
                                    Nine months ended September 30,                    Change
                                           2021                      2020        Amount         %
                                              (in thousands, except percentages)
   Sales and marketing     $           14,555                      $ 7,814      $ 6,741        86  %


Sales and marketing expenses increased by $6.7 million, or 86%, for the nine
months ended September 30, 2021 compared to the same period in 2020. The
increase was driven primarily by discretionary cash bonuses of $1.3 million paid
out to employees directly engaged in sales and marketing activities as well as a
related bonus accrual during the nine months ended September 30, 2021 for
discretionary cash bonuses of $1.8 million to be paid to our employees during
the fourth quarter of fiscal year 2021. For further detail over the cash
bonuses, refer to the subsection titled "Critical accounting policies and
estimates-Cash bonuses". The Company also increased advertising spend to gain
further brand awareness. Following an Expensify Card launch advertising campaign
during the first three months of 2020, we aggressively reduced our advertising
and other sales and marketing expenses for the nine months ended September 30,
2020 due to the impact of the COVID-19 pandemic.
General and Administrative
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                                      Nine months ended September 30,                   Change
                                            2021                      2020         Amount         %
                                                 (in thousands, except percentages)
General and administrative    $         35,827                     $ 24,717      $ 11,110        45  %


General and administrative expenses increased by $11.1 million, or 45%, for the
nine months ended September 30, 2021 compared to the same period in 2020,
primarily due to increased compensation of our executive employees and
discretionary cash bonuses of $6.9 million paid out to employees directly
engaged in general and administrative activities as well as a related bonus
accrual of $7.7 million during the nine months ended September 30, 2021 for
discretionary cash bonuses to be paid to our employees during the fourth quarter
of fiscal year 2021. For further detail over the cash bonuses, refer to the
subsection titled "Critical accounting policies and estimates-Cash bonuses". The
increase was also due to higher professional service costs for accounting,
auditing, and legal services related to our annual financial statement audits
and quarterly reviews.
Interest and Other Expenses, Net
                                         Nine months ended September 30,                         Change
                                            2021                   2020               Amount                 %
                                                            (in thousands, except percentages)
Interest and other expenses, net     $         (2,560)         $   (2,160)         $     (400)                  19  %


Interest and other expenses, net increased by $0.4 million, or 19% for the nine
months ended September 30, 2021 compared to the same period in 2020. The
increase was driven by the U.S. dollar getting stronger in 2021 resulting in
higher foreign transaction exchange losses.
Benefit (Provision) for Income Taxes
                                         Nine months ended September 30,                        Change
                                             2021                 2020               Amount                  %
                                                             (in thousands, except percentages)
Benefit (provision) for income taxes   $         706          $   (2,570)         $    3,276                  (127) %


We recorded a $0.7 million benefit for income taxes for the nine months ended
September 30, 2021 compared to a $2.6 million provision for income taxes for the
same period in 2020. We follow the asset and liability method of accounting for
income taxes, whereby we recognize deferred income taxes for the tax
consequences of temporary differences between the financial statement carrying
amounts and the tax basis of the assets and liabilities. Valuation allowances
are recorded to reduce deferred tax assets when it is more likely than not that
a tax benefit will not be realized. The provision for income taxes reflects
taxable income earned and taxed in U.S. federal and state and non-U.S.
jurisdictions.
Our tax benefit for the nine months ended September 30, 2021 was affected
primarily by our change to the estimated taxable income for the annual period
ended December 31, 2021 as a result of the one time bonus expenses we incurred
during the nine months ended September 30, 2021 as well as expected bonus
expenses to be incurred during the fiscal quarter ended December 31, 2021.
During the nine months ended September 30, 2020, we had a loss before income
taxes, however a significant secondary market transaction occurred that was not
tax deductible, which resulted in taxes owed on the transaction.
In addition, we prepared our interim tax provision by applying a year-to-date
effective tax rate starting in the three months ended September 30, 2021. For
the nine months ended September 30, 2020 and the
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first two fiscal quarters of 2021, we prepared our interim tax provision by
applying an annual effective tax rate. We believe that using the actual
year-to-date effective tax rate going forward results in the best estimate of
the annual effective tax rate.
Non-GAAP Financial Measures
Adjusted EBITDA and Adjusted EBITDA Margin
We define adjusted EBITDA as net income from operations excluding provision for
income taxes, interest and other expenses, net, depreciation and amortization
and stock based compensation. We define adjusted EBITDA margin as adjusted
EBITDA divided by total revenue for the same period. We are focused on
profitable growth and we consider adjusted EBITDA to be an important measure
because it helps illustrate underlying trends in our business that could
otherwise be masked by the effect of the income or expenses that are not
indicative of the core operating performance of our business.
                                                     Three months ended September 30,         Nine months ended September 30,
                                                         2021                   2020             2021                   2020
                                                                        (in thousands, except percentages)
Adjusted EBITDA                                  $         (6,523)          $    7,422    $        16,410           $   16,582
Adjusted EBITDA margin                                        (17)  %               34  %              16   %               27  %


Limitations and Reconciliations of Non-GAAP Financial Measures
Non-GAAP financial measures have limitations as analytical tools and should not
be considered in isolation or as substitutes for financial information presented
under GAAP. There are a number of limitations related to the use of non-GAAP
financial measures versus comparable financial measures determined under GAAP.
For example, other companies in our industry may calculate these non-GAAP
financial measures differently or may use other measures to evaluate their
performance. All of these limitations could reduce the usefulness of these
non-GAAP financial measures as analytical tools. Investors are encouraged to
review the related GAAP financial measures and the reconciliations of these
non-GAAP financial measures to their most directly comparable GAAP financial
measures and to not rely on any single financial measure to evaluate our
business.
The following table reconciles the most directly comparable GAAP financial
measure to each of these non-GAAP financial measures.
Adjusted EBITDA and adjusted EBITDA margin
                                          Three months ended September 30,               Nine months ended September 30,
                                              2021                   2020                   2021                   2020
                                                                (in thousands, except percentages)
Net (loss) income                      $        (6,345)          $   (6,938)         $         8,329           $   (3,452)
Net (loss) income margin                           (17)  %              (32) %                     8   %               (6) %
Add:
(Benefit) provision for income taxes            (3,567)               1,205                     (706)               2,570
Interest and other expenses, net                 1,054                  646                    2,560                2,160
Depreciation and amortization                    1,438                  744                    3,732                2,353
Stock-based compensation                           897               11,765                    2,495               12,951
Adjusted EBITDA                        $        (6,523)          $    7,422          $        16,410           $   16,582
Adjusted EBITDA margin                             (17)  %               34  %                    16   %               27  %


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Liquidity and Capital Resources
As of September 30, 2021, we had $68.1 million in cash and cash equivalents.
Since our inception, we have financed our operations primarily through our cash
flow from operations, sales of our equity securities and borrowings under our
credit facilities. In November 2021, we completed our IPO in which we received
aggregate net proceeds of approximately $57.5 million after deducting
underwriting discounts and commissions of approximately $4.9 million and
offering costs of approximately $8.0 million. As of September 30, 2021, we had
$67.6 million in outstanding indebtedness.
Our future capital requirements will depend on many factors, including revenue
growth and costs incurred to support growth in our business and our need to
respond to business opportunities, challenges or unforeseen circumstances. We
believe that our existing cash resources will be sufficient to finance our
continued operations, growth strategy and the additional expenses we expect to
incur as a public company for at least the next 12 months.
Cash Bonuses
As described in the subsection titled "Critical accounting policies and
estimates-Cash bonuses," we determined that we would pay a cash bonus to each of
our employees in a value that approximates the cost of each employee exercising
45% of their total stock options, limited by the total stock options outstanding
and held by each existing employee as of June 15, 2021, including the tax
withholding applicable to each employee. We included both vested and unvested
stock options outstanding and held by each existing employee as of June 15, 2021
by each employee in determining the cash bonus paid. No employee is obligated to
use the cash bonus to exercise their outstanding stock options.
During the fourth quarter of the year ended December 31, 2021, we intend to use
a portion of the net proceeds we received from completion of our IPO to pay the
remaining discretionary cash bonuses to our employees, the total of which we
currently estimate at approximately $27.8 million as of the date of this
Quarterly Report on Form 10-Q.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
                                                                  Nine months ended September 30,
                                                                     2021                   2020
                                                                             (in thousands)
Net cash provided (used) by operating activities              $         34,580          $   (4,392)
Net cash used by investing activities                                   (6,999)             (2,908)
Net cash provided by financing activities                               17,564               8,463

Net increase in cash, cash equivalents and restricted cash $ 45,145 $ 1,163




Cash Provided (Used) by Operating Activities
During the nine months ended September 30, 2021, cash provided by operating
activities was $34.6 million, which was primarily driven by net income, non-cash
charges including depreciation and amortization and stock-based compensation,
increases in settlement liabilities which represent increased expense
reimbursement activity, and increases in accrued expenses and other liabilities
primarily resulting from employee compensation related to discretionary cash
bonuses to be paid to employees. The timing of the settlement of certain
operating liabilities and receipt of certain operating assets can affect the
amounts reported as net cash provided by operating activities on the
consolidated statements
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of cash flows. The main offsets to net cash provided by operating activities
were due to the timing of receipt of certain operating assets such as accounts
receivable.
Net cash provided (used) by operating activities increased for the nine months
ended September 30, 2021 compared to the same period in 2020 primarily due to an
increase in net income and net changes in operating assets and liabilities,
particularly for settlement liabilities and accrued expenses and other
liabilities.
Cash Used in Investing Activities
During the nine months ended September 30, 2021, cash used in investing
activities was $7.0 million, primarily consisting of the purchase of property
and equipment related to the build-out of our offices in Portland and San
Francisco and software development costs.
Net cash used in investing activities increased for the nine months ended
September 30, 2021 compared to the same period in 2020 primarily due to the
increased activity during 2021 related to the build-out of our offices in
Portland and San Francisco and software development costs as we continue to
invest in our platform.
Cash Provided by Financing Activities
During the nine months ended September 30, 2021, cash provided by financing
activities was $17.6 million, primarily consisting of proceeds from our amended
and restated loan and security agreement with CIBC and exercises of stock
options partially offset by principal payments to fully payoff our remaining
principal balances on our amortizing and non-amortizing term loans with CIBC and
payments of deferred offering costs related to our IPO.
Net cash provided by financing activities increased for the nine months ended
September 30, 2021 compared to the same period in 2020 primarily due to the
proceeds received from our amended and restated loan and security agreement with
CIBC net of principal payments made to fully payoff our amortizing and
non-amortizing term loans with CIBC as well as increased proceeds from exercises
of stock options. These increases were partially offset by the borrowings under
our line of credit that occurred during the nine months ended September 30,
2020.
Financing Arrangements
Amortizing Term Mortgage
In 2019, we purchased a commercial building in Portland, Oregon. In connection
with the purchase, we entered into a credit agreement with CIBC that provides
for a $8.3 million amortizing term mortgage. The agreement requires interest and
principal payments be made each month over a 30-year period. Interest accrues at
a fixed rate of 5% per year until August 2024, at which point the interest rate
changes to the Wall Street Journal Prime Rate minus 0.25% for the remaining term
of the mortgage. The borrowings are secured by the building. As of September 30,
2021 and December 31, 2020, the outstanding balance of the amortizing term
mortgage was $8.0 million and $8.1 million, respectively.
Loan and Security Agreement
Our loan and security agreement with CIBC, as amended and restated in September
2021 (2021 amended term loan), includes a $75.0 million term loan, consisting of
a $45.0 million initial term loan with an option at a later date to enter into
an additional $30.0 million delayed term loan, and a $25.0 million revolving
line of credit. Approximately $24.0 million of the loan proceeds were used to
immediately repay the remaining balances under the amortizing and non-amortizing
term loans at the time of the amendment and restatement in September 2021 as
well as the commitment fees and any other debt issuance costs
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associated with the amended agreement. The remaining proceeds from the initial
term loan went towards the Company's normal business operations and towards debt
issuance costs.
The loan and security agreement was originally entered into in May 2018. The
initial term loan of $45.0 million entered into by the Company in September 2021
is payable over a 60 month period with principal and accrued interest payments
due each quarter thereafter, which commences with the first payment due on
September 30, 2021. Quarterly principal payments are fixed and escalate
throughout the term. The amounts borrowed are payable with interest at the
bank's reference rate plus 2.25% (5.5% as of September 30, 2021) and continuing
on a quarterly basis through the end of the term loan. The borrowings are
secured by substantially all the Company's assets. As of September 30, 2021, the
outstanding balance of the 2021 amended term loan and revolving line of credit
was $44.9 million and $15.0 million, respectively.The term loan and revolving
line of credit mature in September 2026 and September 2024, respectively.
See Note 7 to our consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q for further information.
Certain Covenants
We are subject to customary covenants under our loan and security agreement,
which unless waived by CIBC, restrict our and our subsidiaries' ability to,
among other things incur additional indebtedness, create or incur liens, permit
a change of control or merge or consolidate with other companies, sell or
transfer assets, pay dividends or make distributions, make acquisitions,
investments or loans, or payments and prepayments of subordinated indebtedness,
subject to certain exceptions. We must also maintain certain financial
covenants: for the first year, a total annual recurring revenue leverage ratio
not to exceed 0.8 to 1.0, tested on the last day of each fiscal quarter, and
maintaining liquidity at times not less than $10.0 million, in each case as
defined in the loan and security agreement; and thereafter, a total EBITDA net
leverage ratio, tested each quarter, of not less than 5.00 to 1.00 from
September 30, 2022 through and including June 30, 2023, not less than 4.00 to
1.00 from September 30, 2023 through and including June 30, 2024, and not less
than 3.00 to 1.00 from September 30, 2024 and thereafter, and a fixed charge
coverage ratio of not less than 1.10 to 1.00, tested on the last day of each
calendar quarter.
If we fail to perform our obligations under these and other covenants, CIBC's
credit commitments could be terminated and any outstanding borrowings, together
with accrued interest, under the credit or loan agreements could be declared
immediately due and payable.
As of September 30, 2021, we were in compliance with all debt covenants.
Contractual Obligations and Commitments
Our contractual obligations and commitments primarily consist of obligations
under financing arrangements, operating leases for corporate offices, and
finance leases for data center equipment. For additional information on
financing arrangements, operating leases, and finance leases, see Note 5 and
Note 7 to our consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q for further information. Except for our financing
arrangements, there have been no material changes in our contractual obligations
and commitments, as disclosed in the Prospectus.
Indemnification Agreements
In the ordinary course of business, we enter into agreements of varying scope
and terms whereby we agree to indemnify customers, issuing banks, card networks,
vendors, and other parties with respect to certain matters, including, but not
limited to, losses arising out of the breach of such agreements, services to be
provided by us or from intellectual property infringement claims made by third
parties. In addition, we have entered into indemnification agreements with our
directors and certain officers and employees
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that will require us, among other things, to indemnify them against certain
liabilities that may arise by reason of their status or service as directors,
officers, or employees. No demands have been made upon us to provide
indemnification under such agreements and there are no claims that we are aware
of that could have a material effect on our consolidated balance sheets,
consolidated statements of income, consolidated statements of convertible
preferred stock and stockholder's deficit, or consolidated statements of cash
flows.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, and we do not currently have, any
off-balance sheet financing arrangements or any relationships with
unconsolidated entities or financial partnerships, including entities sometimes
referred to as structured finance or special purpose entities, that were
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our consolidated financial statements included elsewhere herein have been
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of our financial statements requires us to make estimates and
judgments that affect our reported amounts of assets, liabilities, revenues and
expenses. We base our estimates on historical experience and on various other
assumptions that we believe are reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or
conditions. While our significant accounting policies are more fully described
in the notes to our consolidated financial statements included elsewhere herein,
we believe that the following accounting policies and estimates are critical to
our business operations and understanding of our financial results. See Note 2
to our consolidated financial statements contained elsewhere herein for a
description of our other significant accounting policies.
Employee and Employee-related Expenses
Allocating our employee and employee-related expenses, which consist of
contractor costs, employee salary and wages, stock-based compensation and travel
and other employee-related costs, to their appropriate financial statement line
items on the consolidated statements of income, requires us to make estimates
and judgments as a result of our generalist model and organizational structure.
We base our estimates for allocating employee and employee related expenses on
our internal time tracking tools. Management reviews the estimates each
reporting period to evaluate the estimate of the allocated amounts to each
expense financial statement line item in the consolidated financial statements.
Revenue Recognition
We generate revenue from subscription fees paid by our customers to access and
use our hosted software services, as well as standard customer support. We
adopted Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts
with Customers (Topic 606) as of January 1, 2019, utilizing the full
retrospective method of transition.
We recognize revenue when control of the promised goods or services is
transferred to customers, in an amount that reflects the consideration we expect
to be entitled to in exchange for those goods or services.
Under Topic 606, we determine the amount of revenue to be recognized through the
following five-step framework:
1.Identification of the contract, or contracts, with a customer;
2.Identification of the performance obligations in the contract;
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3.Determination of the transaction price;
4.Allocation of the transaction price to the performance obligations in the
contract; and
5.Recognition of revenue when, or as, we satisfy a performance obligation.
Our contracts are either month-to-month arrangements billed monthly in arrears
based on a specified number of members or annual arrangements billed monthly in
arrears based on a minimum number of monthly members. Month-to-month contracts
can be terminated by either party at any time without penalty. Annual
subscription customers who wish to terminate their contracts before the end of
the term are required to pay the remaining obligation in full plus any fees or
penalties set forth in the agreement. In May 2020, we updated our terms of
service, which resulted in annual contracts becoming noncancelable and a pricing
change, which led to an increase in the per member price for paid members.
We charge our customers subscription fees for access to our platform based on
the number of monthly members and level of service. The contractual price per
member is based on either negotiated fees or rates published on our website. Our
contracts with our customers include two performance obligations: access to the
hosted software service (SaaS), inclusive of all features available within the
platform, and related customer support. We account for the SaaS and the support
as a combined performance obligation because they have the same pattern of
transfer over the same period and are therefore delivered concurrently. We
satisfy our performance obligation over time each month as we provide the SaaS
and support services to customers and as such generally recognize revenue
monthly based on the number of monthly members and contractual rate per member.
Certain annual contracts provide the customer the option to increase the minimum
number of members and extend the contract term on a prospective basis or to
purchase members beyond the minimum contracted number of members at a higher
rate for a particular month. We account for these options when the customer
exercises the option as they do not represent a material right, and we account
for them as a contract modification when exercised by the customer.
We recognize revenue net of applicable taxes imposed on the related transaction.
We charge the customer on a monthly basis, in arrears, with typical payment
terms being 30 days. A contract asset is the right to consideration for
transferred goods or services and arises when the amount of revenue recognized
exceeds amounts billed to a customer. As a result of a price increase in 2020
that was applicable to certain annual contracts and is being billed
incrementally by us over a twelve month period, we recorded revenue for such
contracts on a straight line basis over the twelve month period affected by the
price increase. This resulted in contract assets that consist of unbilled
receivables for revenue recognized in excess of billings. We recorded contract
assets for unbilled receivables of $0.1 million and $1.2 million within Other
current assets on our consolidated balance sheets as of September 30, 2021 and
December 31, 2020, respectively. The contract asset will decrease as the price
increase is applied to the amounts billed to customers, over the twelve month
period. Since our performance obligation is satisfied monthly, at any reporting
period, we have no unsatisfied, or partially unsatisfied, performance
obligations.
Common Stock Valuations
Prior to the IPO, given the absence of a public trading market for our common
stock, and in accordance with the American Institute of Certified Public
Accountants Accounting and Valuation Guide, Valuation of Privately-Held Company
Equity Securities Issued as Compensation, our board of directors exercised its
reasonable judgment and considered numerous objective and subjective factors to
determine the best estimate of fair value of our common stock underlying the
stock options and RSUs, including:
•independent third-party valuations of our common stock;
•the expected price range of our common stock upon IPO determined by bankers;
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•the rights, preferences and privileges of our convertible preferred stock
relative to those of our common stock;
•our financial condition, results of operations and capital resources;
•the likelihood and timing of achieving a liquidity event, such as an initial
public offering or sale of the company, given prevailing market conditions;
•the lack of marketability of our common stock;
•our estimates of future financial performance;
•valuations of comparable companies;
•the hiring or loss of key personnel;
•the status of our development, product introduction and sales efforts;
•industry information, such as market growth and volume and macro-economic
events; and
•additional objective and subjective factors relating to our business.
To determine the fair value of our common stock, we first determined our
enterprise value and then allocated that enterprise value to our common stock
and common stock equivalents. Our enterprise value was estimated using two
generally accepted approaches: the income approach and the market approach.
The income approach estimates enterprise value based on the estimated present
value of future cash flows the business is expected to generate over its
remaining life. The estimated present value is calculated using a discount rate
reflective of the risks associated with an investment in a similar company in a
similar industry or having a similar history of revenue growth. The market
approach measures the value of a business through an analysis of recent sales or
offerings of comparable investments or assets, and in our case, focused on
comparing us to a group of our peer companies. In applying this method,
valuation multiples are derived from historical operating data of the peer
company group. We then apply multiples to our operating data to arrive at a
range of indicated values of the company.
For each valuation, we prepared a financial forecast to be used in the
computation of the value of invested capital for both the income approach and
market approach. The financial forecast considered our past results and expected
future financial performance. The risk associated with achieving this forecast
was assessed in selecting the appropriate discount rate. There is inherent
uncertainty in these estimates as the assumptions used are highly subjective and
subject to changes as a result of new operating data and economic and other
conditions that impact our business.
As an additional indicator of fair value, we provided weighting to arm's-length
transactions involving issuances of our securities near the respective valuation
dates.
Following our initial public offering, it will not be necessary to determine the
fair value of our common stock, as our shares will be traded in the public
market.
Stock-Based Compensation
We account for stock-based compensation under the fair value recognition and
measurement provisions of U.S. generally accepted accounting principles. Those
provisions require all stock-based awards granted to employees, including stock
options and restricted stock units, to be measured based on fair value at the
date of grant, with the resulting expense generally recognized in the
consolidated statements of income over the period during which the employee is
required to perform service in exchange for the award.
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We utilize the Black-Scholes option pricing model to determine the estimated
fair value of stock options. We recognize these stock-based compensation costs
on a straight-line basis over the requisite service period of the award, which
is generally the option vesting term of four years. We record forfeitures as
they occur.
The Black-Scholes option pricing model requires management to make a number of
assumptions, including the fair value and expected volatility of our underlying
common stock, expected life of the award, risk-free interest rate and expected
dividend yield. The fair value of common stock is determined by the Board of
Directors based on a number of factors, including independent third-party
valuations of our common stock, which consider estimates of our future
performance and valuations of comparable companies. We also consider prices at
which others have purchased our stock, and the likelihood and timing of
achieving a liquidity event. When awards are granted or revalued between the
dates of valuation reports, we consider the change in common stock fair value
and the amount of time that lapsed between the two reports to determine whether
to use the latest common stock valuation or an interpolation between two
valuation dates for purposes of valuing stock-based awards. We estimate the
volatility of our common stock at the date of grant based on the expected
weighted-average volatility for a group of publicly traded companies in a
similar industry or with similar service offerings, with a term of one year or
greater. The expected life represents the period that the our stock-based award
is expected to be outstanding. The expected life for option grants is determined
using the simplified method. The simplified method deems the expected life to be
the average of the time-to-vesting and the contractual life of the stock-based
awards. The risk-free interest rate is based on the U.S. Treasury yield for a
term consistent with the expected life of the awards in effect at the time of
grant. The expected dividend yield is assumed to be zero as we have not paid and
do not expect to pay dividends.
Subsequent to the completion of the IPO, the fair value of our underlying common
stock will be determined by the closing price, on the date of grant, of our
Class A common stock, which is traded on the Nasdaq Global Select Market.
On September 24, 2021, we granted to employees restricted stock units (RSUs)
that settle in shares of Class A and LT50 common stock, effective as of
immediately before the effectiveness of the IPO Registration Statement on
November 9, 2021. As such, these are considered to be RSUs with a performance
condition for accounting purposes. We measure these RSUs based on the fair value
of the underlying common stock on the grant date, which was consistent with the
factors described within the Black-Scholes option pricing model. Subsequent to
the completion of the IPO, the fair value of our underlying common stock will be
determined by the closing price, on the date of grant, of its Class A common
stock, which is traded on the Nasdaq Global Select Market.
Once the performance condition is satisfied for these RSUs, we will recognize
stock-based compensation costs on a straight-line basis over the requisite
service period of the award, which is generally the RSU vesting term of eight
years. For these RSUs, we will recognize a cumulative one-time stock-based
compensation expense on the date the performance condition is satisfied for the
service period satisfied prior to this date and recognize all remaining
stock-based compensation expense for RSUs over the remaining requisite service
period. Forfeitures are recorded as they occur.
No income tax benefit has been recognized relating to stock-based compensation
expense and no tax benefits have been realized from exercised stock options
during the three months and nine months ended September 30, 2021 and 2020.
Cash Bonuses
In July 2021, we determined that we would pay a cash bonus to each of our
employees in a value that approximates the cost of each employee exercising 45%
of their total stock options issued, limited by the total stock options
outstanding as of June 15, 2021, including the tax withholding applicable to
each
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employee. We included both vested and unvested stock options outstanding and
held by each existing employee as of June 15, 2021 to each employee in
determining the cash bonus paid.
In addition to using the exercise cost of the stock options through June 15,
2021, management relied on an estimate to determine the tax withholding that
could be applicable to each employee based on if they were to exercise the stock
options. In order to determine this estimate, we relied on third-party tax
consultants that reviewed a number of assumptions provided by management,
including the applicable taxable income to the employee as a result of the cash
bonus in 2021 and the spread of the fair value of the options based on the
latest independent third-party common stock valuation and the exercise price of
the same options applicable to each employee. No employee was obligated to use
the cash bonus to exercise their outstanding stock options.
During the fourth quarter of the year ended December 31, 2021, we intend to use
a portion of the net proceeds we received from completion of our IPO to pay the
remaining discretionary cash bonuses to our employees, the total of which we
currently estimate at approximately $27.8 million as of the date of this
Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q for recently adopted accounting pronouncements and
recently issued accounting pronouncements not yet adopted as of the date of this
Quarterly Report on Form 10-Q.
Emerging Growth Company Status
We are an "emerging growth company," as defined in the JOBS Act. Under the JOBS
Act, emerging growth companies can delay adopting new or revised accounting
standards issued subsequent to the enactment of the JOBS Act until such time as
those standards apply to private companies. We have elected to use this extended
transition period to enable us to comply with new or revised accounting
standards that have different effective dates for public and private companies
until the earlier of the date we (1) are no longer an emerging growth company or
(2) affirmatively and irrevocably opt out of the extended transition period
provided in the JOBS Act. As a result, our consolidated financial statements may
not be comparable to companies that comply with new or revised accounting
pronouncements as of public company effective dates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
We report our results in U.S. dollars, which is our reporting currency. For our
foreign operations, the majority of our revenues and expenses are denominated in
other currencies, such as the British Pound and the Australian Dollar. Foreign
currency assets and liabilities are remeasured into the U.S. dollar at the
end-of-period exchange rates except for prepaid expenses, property and equipment
and related depreciation and amortization, and lease right-of-use assets and
related amortization, which are remeasured at the historical exchange rates.
Revenues and expenses are remeasured at average exchange rates in effect during
each period. Gains or losses from foreign currency transactions are included in
the consolidated statements of income.
If the value of the U.S. dollar weakens relative to the foreign currencies, this
may have an unfavorable effect on our cash flows and operating results. We do
not believe that a 10% change in the relative value of the U.S. dollar to other
foreign currencies would have a material effect on our cash flows and operating
results.
Interest Rate Risk
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We are subject to interest rate risk in connection with borrowings under our
amortizing term mortgage, our monthly revolving line of credit and our
amortizing term loan. Interest rate changes generally impact the amount of our
interest payments and, therefore, our future net income and cash flows, assuming
other factors held constant. Assuming the amounts outstanding under these
borrowing facilities are fully drawn, a hypothetical 10% change in interest
rates would not have a material impact on our consolidated financial statements.
Inflation Risk
We do not believe that inflation has had a material effect on our business,
results of operations, or financial condition. Nonetheless, if our costs were to
become subject to significant inflationary pressures, we may not be able to
fully offset such higher costs. Our inability or failure to do so could harm our
business, results of operations, or financial condition.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief
financial officer, has evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act), as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on such evaluation, and as discussed below, our chief executive officer
and chief financial officer have concluded that as of September 30, 2021, our
disclosure controls and procedures were not effective at a reasonable assurance
level due to the material weakness in our internal control over financial
reporting described below. In light of this fact, our management has performed
additional analyses, reconciliations, and other post-closing procedures and has
concluded that, notwithstanding the material weakness in our internal control
over financial reporting, the consolidated financial statements for the periods
covered by and included in this Quarterly Report on Form 10-Q fairly present, in
all material respects, our financial position, results of operations and cash
flows for the periods presented in conformity with GAAP.
Material Weakness
As previously identified, in connection with our management's assessment of
controls over financial reporting during the years ended December 31, 2020 and
2019, we identified a material weakness in our internal controls. A material
weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting such that there is a reasonable possibility that a
material misstatement of our annual or interim financial statements will not be
prevented or detected on a timely basis. The material weakness that we
identified related to having insufficient technical skills to address complex
issues combined with insufficient accounting staff to implement the processes
and reviews necessary to ensure material misstatements did not occur.
To address this material weakness, we are continuing to develop and refine our
disclosure controls and other procedures that are designed to ensure that
information required to be disclosed by us in the reports that we will file with
the SEC is recorded, processed, summarized, and reported within the time periods
specified in SEC rules and forms and that information required to be disclosed
in reports under the Securities Exchange Act of 1934, as amended, or the
Exchange Act, is accumulated and communicated to our principal executive and
financial officers. We are also continuing to improve our internal control over
financial reporting. For example, as we have prepared to become a public
company, we have worked to improve the controls around our key accounting
processes and our quarterly close process, and we have hired additional
accounting and finance personnel to help us implement these processes and
controls. In order to maintain and improve the effectiveness of our disclosure
controls and procedures and internal control over financial reporting, we have
expended, and anticipate that we will continue to expend, significant resources,
including accounting-related costs and investments to
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strengthen our accounting systems. We will not be able to sufficiently remediate
these control deficiencies until these steps have been completed and the
controls have been operating effectively for a sufficient period of time. If any
of these new or improved controls and systems do not perform as expected, we may
continue to experience material weaknesses in our controls.
Changes in Internal Control Over Financial Reporting
Except for the remediation efforts described above, there were no changes in our
internal control over financial reporting identified in connection with the
evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that
occurred during the period covered by this Quarterly Report on Form 10-Q that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
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Market Closed - Nasdaq Other stock markets 04:00:00 2024-04-19 pm EDT			5-day change	1st Jan Change
1.64 ^USD	+3.14%		+14.69%	-33.60%

Apr. 17	Expensify Insider Bought Shares Worth $466,734, According to a Recent SEC Filing	MT
Feb. 26	Expensify Insider Bought Shares Worth $290,876, According to a Recent SEC Filing	MT

Expensify Insider Bought Shares Worth $466,734, According to a Recent SEC Filing	Apr. 17	MT
Expensify Insider Bought Shares Worth $290,876, According to a Recent SEC Filing	Feb. 26	MT
Piper Sandler Cuts Price Target on Expensify to $2 From $3, Maintains Neutral Rating	Feb. 23	MT
Transcript : Expensify, Inc., Q4 2023 Earnings Call, Feb 22, 2024	Feb. 22
Expensify, Inc. Enters into a Second Amended and Restated Loan and Security Agreement	Feb. 22	CI
Earnings Flash (EXFY) EXPENSIFY Posts Q4 Revenue $35.2M, vs. Street Est of $35.6M	Feb. 22	MT
Expensify, Inc. Reports Earnings Results for the Full Year Ended December 31, 2023	Feb. 22	CI
Expensify, Inc. Reports Earnings Results for the Fourth Quarter Ended December 31, 2023	Feb. 22	CI
Expensify Insider Bought Shares Worth $345,094, According to a Recent SEC Filing	Jan. 30	MT
Piper Sandler Adjusts Price Target on Expensify to $3 From $2, Maintains Neutral Rating	Jan. 02	MT
Expensify Insider Sold Shares Worth $641,870, According to a Recent SEC Filing	Dec. 13	MT
Expensify, Inc. Announces Business Travel Integration with Booking.com for Business	Dec. 12	CI
Expensify Insider Sold Shares Worth $349,930, According to a Recent SEC Filing	Dec. 11	MT
Expensify Insider Bought Shares Worth $100,217, According to a Recent SEC Filing	Nov. 16	MT
Expensify Insider Bought Shares Worth $1,845,839, According to a Recent SEC Filing	Nov. 13	MT
Tranche Update on Expensify, Inc.'s Equity Buyback Plan announced on May 12, 2022.	Nov. 09	CI
Sector Update: Tech Stocks Rise in Late Afternoon Trading	Nov. 08	MT
Top Midday Decliners	Nov. 08	MT
Top Premarket Decliners	Nov. 08	MT
Morgan Stanley Cuts Price Target on Expensify to $2 From $5, Keeps Underweight Rating	Nov. 08	MT
Expensify Plunges 21% in Premarket Activity Wednesday After Q3 Net Loss Widens Following Decline in Sales	Nov. 08	MT
Expensify, Inc. Reports Earnings Results for the Third Quarter and Nine Months Ended September 30, 2023	Nov. 08	CI
Transcript : Expensify, Inc., Q3 2023 Earnings Call, Nov 07, 2023	Nov. 07
Earnings Flash (EXFY) EXPENSIFY Posts Q3 Revenue $36.5M, vs. Street Est of $39.2M	Nov. 07	MT
Expensify Insider Bought Shares Worth $418,857, According to a Recent SEC Filing	23-10-31	MT

	1st Jan change	Capi.
EXPENSIFY, INC.	-33.60%	135M
MICROSOFT CORPORATION	+6.14%	3,004B
SYNOPSYS INC.	-0.82%	79.28B
CADENCE DESIGN SYSTEMS, INC.	+2.89%	77.94B
DASSAULT SYSTÈMES SE	-13.87%	53.9B
ATLASSIAN CORPORATION	-19.47%	50.22B
PALANTIR TECHNOLOGIES INC.	+19.22%	46.76B
THE TRADE DESK, INC.	+7.42%	39.49B
SEA LIMITED	+35.95%	31.91B
TAKE-TWO INTERACTIVE SOFTWARE, INC.	-12.64%	23.99B

Expensify, Inc.

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EXPENSIFY, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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