EXPENSIFY, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 ("2021 Annual Report"). This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Part I, Item 1A. "Risk Factors" in our 2021 Annual Report and included elsewhere in this Quarterly Report on Form 10-Q. See "Special Note Regarding Forward-Looking Statements."
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 ofJune 30, 2022 , freeing people to spend less time managing expenses and more time doing the things they love. For the quarter endedJune 30, 2022 , an average of 754,000 paid members across 200 countries and territories used Expensify to make money easy.
IMPACT OF COVID-19
Our business and the operations of our customers, the majority of which are
small and medium businesses ("SMBs"), have been disrupted by the COVID-19
pandemic. For example, after a steady increase in paid members over multiple
years, the average number of paid members on our platform declined in 2020.
However, while the full lasting impact of the COVID-19 pandemic on the global
economy and SMBs in particular remains uncertain, we have seen our average paid
members increase to levels that surpass those of March 2020 when the pandemic
began as economies have reopened and business travel resumed.
See the section titled "Risk Factors" in our 2021 Annual Report for further discussion of the possible impact of the COVID-19 pandemic on our business.
Key Business Metrics and Non-GAAP Financial Measures
We regularly review the following key business metrics and non-United States generally accepted accounting principles ("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 our 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
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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.
While the resulting impact of the COVID-19 pandemic on paid members remains uncertain, we continue to see improvement.
The following table sets forth the average number of paid members (in thousands): Three months ended Paid membersJune 30, 2022 754 June 30, 2021 639 NON-GAAP FINANCIAL MEASURES
Limitations 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.
Adjusted EBITDA and Adjusted EBITDA Margin
We define adjusted EBITDA as net income from operations excluding the 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 June 30, Six months ended June 30,
2022 2021 2022 2021
(in thousands, except percentages)
Adjusted EBITDA $ 11,656 $ 9,510 $ 22,346 $ 22,933
Adjusted EBITDA margin 27 % 27 % 27 % 35 %
Non-GAAP Net Income and Non-GAAP Net Income Margin
We define non-GAAP net income as net (loss) income from operations in accordance
with GAAP excluding stock-based compensation and bonus costs related to our
initial public offering ("IPO"), which we consider to be the discretionary cash
bonuses paid to our employees during 2021. Refer to Part II, Item 7.
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations-Liquidity and Capital Resources" in our 2021 Annual Report for
further detail over the discretionary cash bonuses paid to employees in 2021. We
define non-GAAP net income margin as non-GAAP net income divided by total
revenue for the same period. We are focused on profitable growth and we consider
non-GAAP net income to be an important measure because it helps illustrate
underlying trends in our business that could otherwise be masked by the effect
of stock-based compensation and the one-time IPO-related discretionary cash
bonus costs. Both expenses are not
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considered indicative of the core operating performance of our business.
IPO-related bonus costs impacted the second, third and fourth fiscal quarters of
2021, but are not expected to impact future periods beginning with the first
quarter of 2022.
Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
(in thousands, except percentages)
Non-GAAP net income $ 6,054 $ 15,458 $ 13,058 $ 24,211
Non-GAAP net income margin 14 % 44 % 16 % 37 %
Reconciliations of Non-GAAP Financial Measures
The following tables reconcile the most directly comparable GAAP financial measure to each of these non-GAAP financial measures.
Adjusted EBITDA and Adjusted EBITDA Margin
Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
(in thousands, except percentages)
Net (loss) income $ (7,994) $ 6,631 $ (15,370) $ 14,674
Net (loss) income margin (19) % 19 % (18) % 23 %
Add:
Provision for income taxes 2,065 99 3,697 2,861
Interest and other expenses, net 1,955 769 2,856 1,506
Depreciation and amortization 1,582 1,123 2,735 2,294
Stock-based compensation 14,048 888 28,428 1,598
Adjusted EBITDA $ 11,656 $ 9,510 $ 22,346 $ 22,933
Adjusted EBITDA margin 27 % 27 % 27 % 35 %
Non-GAAP Net Income and Non-GAAP Net Income Margin
Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
(in thousands, except percentages)
Net (loss) income $ (7,994) $ 6,631 $ (15,370) $ 14,674
Net (loss) income margin (19) % 19 % (18) % 23 %
Add:
Stock-based compensation 14,048 888 28,428 1,598 IPO-related bonus expense - 7,939 - 7,939 Non-GAAP net income$ 6,054 $ 15,458 $ 13,058 $ 24,211 Non-GAAP net income margin 14 % 44 % 16 % 37 %
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
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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. InMay 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 the 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. We began offering a cashback rewards program to all customers based on volume of Expensify Card transactions and software as a service ("SaaS") subscription tier inAugust 2021 . Cashback rewards are earned on a monthly basis and are paid out the following month. We consider our cashback payments to customers as consideration payable to a customer, and the payments are recorded as contra revenue within Revenue on the condensed consolidated statements of operations. We also record a cashback rewards liability that represents the consideration payable to customers for earned cashback rewards. The cashback rewards fluctuate over time as customers meet eligibility requirements in conjunction with the applicable SaaS subscription tier of each customer and the timing of payments made to customers. Cost of Revenue,Net Cost of revenue, net primarily consists of expenses related to hosting our 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 our patented scanning technology SmartScan, 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. 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 less the amount retained by the vendor (our remainder portion, "Expensify interchange amount"). The vendor also charges us fees ("vendor fees") for the services it provides to us. Due to the nature of the vendor agreement, we do not 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, net," a 25
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contra-expense in Cost of revenue, net. The following summarizes these various amounts for the periods presented:
Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
(in thousands)
Expensify interchange amount $ 1,708 $ 707 $ 2,928 $ 1,195
Vendor fees (160) (45) (257) (77)
Consideration from a vendor, net $ 1,548 $ 662 $ 2,671 $ 1,118
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.
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. General and Administrative General and administrative expenses primarily consist of personnel-related expenses, including stock-based compensation, for 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 operating and 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 additional costs associated with being a publicly traded company, including legal, audit, business insurance and consulting fees.
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.
Provision for Income Taxes
Income taxes primarily consist of income taxes in
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Results of Operations
The results of operations presented below should be reviewed in conjunction with
the condensed 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 June 30, Six months ended June 30,
2022 2021 2022 2021
(in thousands, except per share data)
Revenue $ 43,162 $
35,304
15,876 7,934 30,010 15,571
Gross margin 27,286 27,370 53,522 49,453
Operating expenses:
Research and development(1) 3,584 4,874 7,285 5,971
General and administrative(1) 15,432 11,127 29,438 17,494
Sales and marketing(1) 12,244 3,870 25,616 6,947
Total operating expenses 31,260 19,871 62,339 30,412
(Loss) income from operations (3,974) 7,499 (8,817) 19,041
Interest and other expenses, net (1,955) (769) (2,856) (1,506)
(Loss) income before income taxes (5,929) 6,730 (11,673) 17,535
Provision for income taxes (2,065) (99) (3,697) (2,861)
Net (loss) income $ (7,994) $
6,631
Less: income allocated to participating securities - (4,706) - (9,426) Net (loss) income attributable to Class A, LT10 and LT50 common stockholders$ (7,994) $ 1,925 $ (15,370) $ 5,248 Net (loss) income per share attributable to Class A, LT10 and LT50 common stockholders: Basic$ (0.10) $ 0.06 $ (0.19) $ 0.18 Diluted$ (0.10) $ 0.05 $ (0.19) $ 0.13 Weighted-average shares of common stock used to compute net (loss) income per share attributable to Class A, LT10 and LT50 common stockholders: Basic 80,473,097 29,836,295 80,311,053 29,680,220 Diluted 80,473,097 41,341,330 80,311,053 41,216,420
(1)Includes stock-based compensation expense as follows:
Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
Cost of revenue, net $ 4,704 $ 237 $ 9,611 $ 425
Research and development 1,877 174 4,298 328
General and administrative 5,463 404 10,439 708
Sales and marketing 2,004 73 4,080 137
Total stock-based compensation expense
$ 28,428 $ 1,598 27
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COMPARISON OF THE THREE MONTHS ENDED
Revenue
Three months ended June 30, Change
2022 2021 Amount %
(in thousands, except percentages)
Revenue $ 43,162 $ 35,304 $ 7,858 22 %
Revenue increased by $7.9 million , or 22%, for the three months ended June 30,
2022 compared to the same period in 2021, primarily due to (i) an increase in
the number of paid members and reimbursement activity, which was the result of
increased demand for business travel due to continued lifting of travel
restrictions globally and higher rates of returning to office compared to the
same period in 2021 when COVID-19 vaccines did not yet have widespread
availability and distribution and (ii) an increase in average fees per paid
member due to an increase in the number of pay-per-use members, who have a
higher average fee per member than our annual members, compared to the same
period in 2021.
Cost of Revenue, Net and Gross Margin
Three months ended June 30, Change
2022 2021 Amount %
(in thousands, except percentages)
Cost of revenue, net $ 15,876 $ 7,934 $ 7,942 100 %
Gross margin 27,286 27,370 (84) - %
Gross margin % 63 % 78 %
Cost of revenue, net increased by $7.9 million , or 100%, for the three months
ended June 30, 2022 compared to the same period in 2021. Cost of revenue, net
increased primarily due to the recognition of $4.7 million of stock-based
compensation costs during the three months ended June 30, 2022 primarily related
to the restricted stock units ("RSUs") granted in September and November of 2021
to employees directly engaged in supporting our customers and providing
maintenance of our platform. In addition to increased stock-based compensation,
Cost of revenue, net increased due to a higher volume of payment processing fees
directly related to an increase in reimbursement activity, increased efforts in
support and implementation services, and increased outsourcing activities
related to maintaining the platform. These increases were partially offset by
Consideration from a vendor, net, which reduced Cost of revenue, net by $1.5
million and $0.7 million for the three months ended June 30, 2022 and 2021,
respectively. This increase in Consideration from a vendor, net was driven
primarily by the increased adoption and spend captured from members using the
Expensify Card.
Gross margin decreased to 63% for the three months ended June 30, 2022 compared
to 78% in the same period in 2021. Although revenue increased by 22% 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 June 30, Change
2022 2021 Amount %
(in thousands, except percentages)
Research and development $ 3,584 $ 4,874 $ (1,290) (26) %
Research and development expenses decreased by $1.3 million , or 26%, for the
three months ended June 30, 2022 compared to the same period in 2021, primarily
due to decreased employee time spent in
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the planning and preliminary project stage and the post-implementation stage of new products and features due to an increase in employee focus on customer support and sales and marketing of recently developed products and services such as the Free Plan and our Expensify Card and IPO-related bonuses of$3.6 million . Decreases to Research and development expenses were offset by the recognition of$1.9 million of stock-based compensation costs during the three months endedJune 30, 2022 primarily related to the RSUs granted in September and November of 2021 to employees directly engaged in the planning and preliminary project stage and post-implementation stage of new products and features. General and Administrative Three months ended June 30, Change 2022 2021 Amount % (in thousands, except percentages)
General and administrative $ 15,432 $ 11,127 General and administrative expenses increased by$4.3 million , or 39%, for the three months endedJune 30, 2022 compared to the same period in 2021, primarily due to increased compensation to our officers and the recognition of$5.5 million of stock-based compensation costs during the three months endedJune 30, 2022 primarily related to the RSUs granted in September and November of 2021 to employees directly engaged in general and administrative activities. Furthermore, General and administrative expenses increased due to additional employee time, insurance and professional service costs incurred for accounting, auditing and legal services as a result of our continued requirements as a public company compared to the same period in 2021. These increases were offset by a reduction of$4.3 million in IPO-related bonus costs. Sales and Marketing Three months ended June 30, Change 2022 2021 Amount % (in thousands, except percentages) Sales and marketing$ 12,244 $ 3,870 $ 8,374 216 % Sales and marketing expenses increased by$8.4 million , or 216%, for the three months endedJune 30, 2022 compared to the same period in 2021, primarily due to an increase in advertising spend to gain further brand awareness and increased employee focus on marketing initiatives related to our recently developed products and services such as the Free Plan and our Expensify Card. Furthermore, Sales and marketing expenses were higher due to the recognition of$2.0 million of stock-based compensation costs during the three months endedJune 30, 2022 primarily related to the RSUs granted in September and November of 2021 to employees directly engaged in sales and marketing activities.
Interest and Other Expenses, Net
Three months ended June 30, Change
2022 2021 Amount %
(in thousands, except percentages)
Interest and other expenses, net $ (1,955) $ (769) $ (1,186) 154 %
Interest and other expenses, net increased by $1.2 million , or 154%, for the
three months ended June 30, 2022 compared to the same period in 2021, due to
increased foreign currency losses resulting from the strengthening U.S. dollar
and increased interest expense incurred under the 2021 Amended Term Loan (as
defined below) and revolving line of credit facility due to increases in the
CIBC's reference rate.
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Provision for Income Taxes
Three months ended June 30, Change
2022 2021 Amount %
(in thousands, except percentages)
Provision for income taxes $ (2,065) $ (99) $ (1,966) 1986 %
We recorded a provision for income taxes of $2.1 million during the three months
ended June 30, 2022 compared to a provision for income taxes of $0.1 million for
the same period in 2021. 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. During the three months ended June 30, 2022 ,
we recorded a valuation allowance of $3.8 million . No valuation allowance was
recorded during the three months ended June 30, 2021 . 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 June 30, 2022 and 2021, our effective income tax
rate was (34.8)% and 1.5%, respectively. The effective income tax rate differs
from the statutory rate in 2022 primarily due to the change in valuation
allowance. The effective income tax rate differs from the statutory rate in 2021
primarily due to state taxes and stock-based compensation resulting from
incentive stock options granted during the period.
COMPARISON OF THE SIX MONTHS ENDED
Revenue
Six months ended June 30, Change
2022 2021 Amount %
(in thousands, except percentages)
Revenue $ 83,532 $ 65,024 $ 18,508 28 %
Revenue increased by $18.5 million , or 28%, for the six months ended June 30,
2022 compared to the same period in 2021, primarily due to (i) an increase in
the number of paid members and reimbursement activity, which was the result of
increased demand for business travel due to continued lifting of travel
restrictions globally and higher rates of returning to office compared to the
same period in 2021 when COVID-19 vaccines did not yet have widespread
availability and distribution and (ii) an increase in average fees per paid
member due to an increase in the number of pay-per-use members, who have a
higher average fee per member than our annual members, compared to the same
period in 2021.
Cost of Revenue, Net and Gross Margin
Six months ended June 30, Change
2022 2021 Amount %
(in thousands, except percentages)
Cost of revenue, net $ 30,010 $ 15,571 $ 14,439 93 %
Gross margin 53,522 49,453 4,069 8 %
Gross margin % 64 % 76 %
Cost of revenue, net increased by $14.4 million , or 93%, for the six months
ended June 30, 2022 compared to the same period in 2021. Cost of revenue, net
increased primarily due to the recognition of $9.6 million of stock-based
compensation costs during the six months ended June 30, 2022 primarily related
to the RSUs granted in September and November of 2021 to employees directly
engaged in supporting our customers and providing maintenance of our platform.
In addition to increased stock-
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based compensation, Cost of revenue, net increased due to a higher volume of payment processing fees directly related to an increase in reimbursement activity, increased efforts in support and implementation services and increased outsourcing activities related to maintaining the platform. These increases were partially offset by Consideration from a vendor, net, which reduced Cost of revenue, net by$2.7 million and$1.1 million for the six months endedJune 30, 2022 and 2021, respectively. This increase in Consideration from a vendor, net was driven primarily by the increased adoption and spend captured from members using the Expensify Card. Gross margin decreased to 64% for the six months endedJune 30, 2022 compared to 76% in the same period in 2021. Although revenue increased by 28% for the same period, Cost of revenue, net, increased at a higher rate due to the factors described in the preceding paragraph. Research and Development Six months ended June 30, Change 2022 2021 Amount % (in thousands, except percentages) Research and development$ 7,285 $ 5,971 $ 1,314 22 % Research and development expenses increased by$1.3 million , or 22%, for the six months endedJune 30, 2022 compared to the same period in 2021, due to the recognition of$4.3 million of stock-based compensation costs during the six months endedJune 30, 2022 primarily related to the RSUs granted in September and November of 2021 to employees directly engaged in the planning and preliminary project stage and post-implementation stage of new products and features. Increases to Research and development expenses were partially offset by decreased employee time spent in the planning and preliminary project stage and post-implementation stage of new products and features primarily due to an increase in employee focus on customer support and sales and marketing of recently developed products and services such as the Free Plan and our Expensify Card and a reduction in IPO-related bonus costs of$3.6 million . General and Administrative Six months ended June 30, Change 2022 2021 Amount % (in thousands, except percentages)
General and administrative $ 29,438 $ 17,494 General and administrative expenses increased by$11.9 million , or 68%, for the six months endedJune 30, 2022 compared to the same period in 2021, primarily due to increased compensation to our officers and the recognition of$10.4 million of stock-based compensation costs during the six months endedJune 30, 2022 primarily related to the RSUs granted in September and November of 2021 to employees directly engaged in general and administrative activities. Furthermore, general and administrative expenses increased due to additional employee time, insurance and professional service costs incurred for accounting, auditing and legal services as a result of our continued requirements as a public company compared to the same period in 2021. These increases were offset by a reduction of$4.3 million in IPO-related bonus costs. Sales and Marketing Six months ended June 30, Change 2022 2021 Amount % (in thousands, except percentages) Sales and marketing$ 25,616 $ 6,947 $ 18,669 269 % 31
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Sales and marketing expenses increased by$18.7 million , or 269%, for the six months endedJune 30, 2022 compared to the same period in 2021, primarily due to an increase in advertising spend to gain further brand awareness and increased employee focus on marketing initiatives related to our recently developed products and services, such as the Free Plan and our Expensify Card. Furthermore, sales and marketing expenses were higher due to the recognition of$4.1 million of stock-based compensation costs during the six months endedJune 30, 2022 primarily related to the RSUs granted in September and November of 2021 to employees directly engaged in sales and marketing activities.
Interest and Other Expenses, Net
Six months ended June 30, Change
2022 2021 Amount %
(in thousands, except percentages)
Interest and other expenses, net $ (2,856) $ (1,506) Interest and other expenses, net increased by$1.4 million , or 90%, for the six months endedJune 30, 2022 compared to the same period in 2021, primarily due to increased foreign currency losses resulting from the strengtheningU.S. dollar and increased interest expense under the 2021 Amended Term Loan and revolving line of credit facility due to increases in the CIBC's reference rate. Provision for Income Taxes Six months ended June 30, Change 2022 2021 Amount % (in thousands, except percentages) Provision for income taxes$ (3,697) $ (2,861) $ (836) 29 % We recorded a provision for income taxes of$3.7 million during the six months endedJune 30, 2022 compared to a provision for income taxes of$2.9 million for the same period in 2021. 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. During the six months endedJune 30, 2022 , we recorded a valuation allowance of$6.2 million . No valuation allowance was recorded during the six months endedJune 30, 2021 . The provision for income taxes reflects taxable income earned and taxed inU.S. federal and state and non-U.S. jurisdictions. During the six months endedJune 30, 2022 and 2021, our effective income tax rate was (31.7)% and 16.3%, respectively. The effective income tax rate differs from the statutory rate in 2022 primarily due to the change in valuation allowance. The effective income tax rate differs from the statutory rate in 2021 primarily due to state taxes and stock-based compensation resulting from incentive stock options granted during the period.
Liquidity and Capital Resources
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. InNovember 2021 , upon completion of our IPO, 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 ofJune 30, 2022 , we had$105.5 million in cash and cash equivalents. As ofJune 30, 2022 , we had$67.5 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,
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challenges or unforeseen circumstances. We believe that our existing cash resources will be sufficient to finance our continued operations and growth strategy for at least the next 12 months and for the foreseeable future.
CASH FLOWS
The following table summarizes our cash flows for the periods indicated:
Six months ended June 30,
2022 2021
(in thousands)
Net cash provided by operating activities $ 27,158 $ 24,213
Net cash used by investing activities (735) (3,293)
Net cash provided (used) by financing activities 996 (3,988)
Net increase in cash and cash equivalents and restricted cash
CASH PROVIDED BY OPERATING ACTIVITIES
During the six months endedJune 30, 2022 , net cash provided by operating activities was$27.2 million , which was primarily driven by increases in settlement liabilities which represent increased expense reimbursement activity and increases in other liabilities. 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 in the condensed consolidated statements of cash flows. The main offsets to net cash provided by operating activities were an increased net loss primarily due to the recognition of stock-based compensation costs as a result of the RSUs granted to certain employees in September andNovember 2021 , the increases in settlement assets, which represent increased expense reimbursement activity and increased Expensify Card receivables due to users adopting monthly settlement and the timing of settlement of accounts payable and accrued expenses and other liabilities. Net cash provided by operating activities increased for the six months endedJune 30, 2022 compared to the same period in 2021 primarily due to increases in settlement liabilities partially offset by the increases in settlement assets, which was primarily driven by increased expense reimbursement activity.
CASH USED IN INVESTING ACTIVITIES
During the six months endedJune 30, 2022 , net cash used by investing activities was$0.7 million , primarily consisting of software development costs and the purchase of property and equipment related to the build-out of our offices inPortland andSan Francisco . Net cash used by investing activities decreased for the six months endedJune 30, 2022 compared to the same period in 2021, primarily due to a decrease in software development costs. Software development costs decreased due to additional time spent by employees during the six months endedJune 30, 2022 on customer support and sales and marketing of recently developed products and services such as the Free Plan and our Expensify Card. The Free Plan resulted in higher software development costs for the same period in 2021 as it was still in the application development stage.
CASH PROVIDED BY FINANCING ACTIVITIES
During the six months endedJune 30, 2022 , net cash provided by financing activities was$1.0 million , primarily consisting of proceeds from common stock purchased under the Matching Plan and proceeds from the issuance of common stock on exercises of stock options, which was partially offset by principal payments of our term loan and finance leases. 33
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During the six months ended
CREDIT FACILITIES
Amortizing Term Mortgage
InAugust 2019 , we entered into an$8.3 million amortizing term mortgage agreement with CIBC for our commercial building inPortland, Oregon . The agreement requires interest and principal payments be made each month over a 30-year period. Interest accrues at a fixed rate of 5.00% per year untilAugust 2024 , at which point the interest rate changes to the Wall Street Journal Prime Rate less 0.25% for the remaining term of the mortgage. The borrowings are secured by the building. The outstanding balance of the amortizing term mortgage was$7.9 million as ofJune 30, 2022 .
Loan and Security Agreement
InSeptember 2021 , we amended and restated our loan and security agreement with CIBC ("2021 Amended Term Loan") to refinance the existing non-amortizing and amortizing term loans, establish a single term loan of up to$75.0 million , consisting of a$45.0 million initial term loan effective immediately with an option to enter into an additional$30.0 million delayed term loan, and increase the monthly revolving line of credit to$25.0 million . The term loan and revolving line of credit mature inSeptember 2026 andSeptember 2024 , respectively. Approximately$23.5 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, as well as commitment fees and other debt issuance costs associated with the amendment. The remaining proceeds from the initial term loan were utilized to fund our normal business operations. Under the 2021 Amended Term Loan, the initial term loan of$45.0 million is payable over a 60 month period with principal and accrued interest payments due each quarter thereafter, which commenced with the first payment due onSeptember 30, 2021 . Quarterly principal payments are fixed and escalate throughout the term. The amounts borrowed bear interest at the bank's reference rate plus 2.25% (7.00% as ofJune 30, 2022 ) and continue on a quarterly basis through the maturity of the term loan. The borrowings are secured by substantially all our assets. The outstanding balances of the 2021 Amended Term Loan and revolving line of credit were$44.7 million and$15.0 million , respectively, as ofJune 30, 2022 .
See Note 4 to our condensed 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 the 2021 Amended Term Loan, 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 fromSeptember 30, 2022 through and includingJune 30, 2023 , not less than 4.00 to 1.00 fromSeptember 30, 2023 through and includingJune 30, 2024 , and not less than 3.00 to 1.00 fromSeptember 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. 34
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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 ofJune 30, 2022 , we were not in compliance with all debt covenants. Specifically, we were not in compliance with the covenant restricting the amount of transfers for donations to Expensify.org during the period, but we obtained a waiver from CIBC. As of the date of this Quarterly Report on Form 10-Q, we do not believe non-compliance with this covenant had any material impact on us or our operations. We expect to be in compliance with all debt covenants by the end of the fiscal quarter endedSeptember 30, 2022 .
Contractual Obligations and Commitments
As of
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 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 condensed consolidated balance sheets, condensed consolidated statements of operations, condensed consolidated statements of convertible preferred stock and stockholders' equity (deficit), or condensed 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 condensed consolidated financial statements included elsewhere herein have been prepared in accordance with GAAP. The preparation of our condensed consolidated 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.
There have been no material changes to our critical accounting policies and
estimates as compared to those described in Part II, Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in our Annual Report on Form 10-K for the year ended
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Recent Accounting Pronouncements
See Note 1 to our condensed 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.
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