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    TOST   US8887871080

TOAST, INC.

(TOST)
  Report
Delayed Nyse  -  05/17 04:00:01 pm EDT
13.51 USD   -2.81%
12:54pMizuho Adjusts Toast's Price Target to $18 from $19, Keeps Neutral Rating
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05/16Toast Announces Participation in Upcoming Investor Conferences
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05/16Toast and US Foods Renew Strategic Partnership to Help Restaurants Streamline Operations and Thrive
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TOAST, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/13/2022 | 04:10pm EDT
You should read the following discussion and analysis of our financial condition
and results of operations together with the unaudited consolidated financial
statements, and the related notes that are included elsewhere in this Quarterly
Report on Form 10-Q, and with our audited consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Some of the information contained in this discussion and analysis, including
information with respect to our plans and strategy for our business and related
financing, includes forward-looking statements that involve risks,
uncertainties, and assumptions. Our actual results may differ materially from
those anticipated in these forward-looking statements as a result of various
factors, including those set forth under the section titled "Special Note
Regarding Forward-Looking Statements" and Item 1A. Risk Factors included
elsewhere in this Quarterly Report on Form 10-Q. Our historical results are not
necessarily indicative of the results that may be expected for any period in the
future.

                                    Overview

Toast is a cloud-based, all-in-one digital technology platform purpose-built for
the entire restaurant community. Our platform provides a comprehensive suite of
SaaS products, financial technology solutions, including integrated payment
processing, restaurant-grade hardware, and a broad ecosystem of third-party
partners. We serve as the restaurant operating system, connecting front of house
and back of house operations across dine-in, takeout, and delivery channels. As
of March 31, 2022, approximately 62,000 restaurant locations, processing
approximately $66 billion of gross payment volume in the trailing 12 months on
the Toast platform, partnered with Toast to optimize operations, increase sales,
engage guests, and maintain happy employees.

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


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

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

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

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

The benefits to all stakeholders using the Toast platform create a powerful,
virtuous cycle that amplifies our impact on restaurants. Guest satisfaction
generates loyalty to restaurants, driving repeat sales, word-of-mouth referrals,
and larger checks and tips. This promotes employee satisfaction, helping reduce
turnover and motivating employees to continue to raise the bar on the guest
experience. In addition, our integrated software and payments platform
consolidates data on restaurant sales and operations, which enables our
reporting and analytics as well as financial technology solutions, such as
working capital loans, to further support our customers' success.
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Since our founding, we have translated our love for restaurants into a
commitment to innovation and digital transformation for the restaurant industry.
As we have expanded our platform, launched new products, and added new partners
over time, we have rapidly grown the number of restaurant locations on the Toast
platform.

                               Impact of COVID-19

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

In light of the evolving nature of the COVID-19 pandemic and the uncertainty it
has produced around the world, it is not possible to predict the cumulative and
ultimate impact of the pandemic on our future business operations, results of
operations, financial position, liquidity, and cash flows despite progress in
vaccination efforts. The extent of the impact of the pandemic on our business
and financial results will depend largely on future developments that cannot be
accurately predicted at this time, including the duration of the spread of the
pandemic both globally and within the United States, the introduction and
severity of new variants of the virus and their resistance to currently approved
vaccines, the impact on capital, foreign currency exchange, and financial
markets, the impact of governmental or regulatory orders that impact our
business, and the effect on global supply chains, all of which are highly
uncertain and cannot be predicted.

                              Key Business Metrics

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

                                            Three Months Ended March 31,
  (dollars in billions)                           2022                     2021       % Growth
  Gross Payment Volume (GPV)(1)    $           17.8                       $ 9.0           98  %


                                                     As of March 31,
         (dollars in millions)                       2022           2021       % Growth
         Annualized Recurring Run-Rate (ARR)    $    637           $ 384           66  %

Gross Payment Volume (GPV)(1)


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

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

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Annualized Recurring Run-Rate (ARR)

We monitor Annualized Recurring Run-Rate as a key operational measure of the
scale of our subscription and payment processing services for both new and
existing customers. To calculate this metric, we first calculate recurring
run-rate on a monthly basis. Monthly Recurring Run-Rate, or MRR, is measured on
the final day of each month for all restaurant locations live on our platform as
the sum of (i) our monthly subscription services fees, which we refer to as the
subscription component of MRR, and (ii) our in-month adjusted payments services
fees, exclusive of estimated transaction-based costs, which we refer to as the
payments component of MRR. MRR does not include fees derived from Toast Capital
or related costs. MRR is also not burdened by the impact of SaaS credits
offered.

ARR is determined by taking the sum of (i) twelve times the subscription
component of MRR and (ii) four times the trailing-three-month cumulative
payments component of MRR. We believe this approach provides an indication of
our scale, while also controlling for short-term fluctuations in payments
volume. Our ARR may decline or fluctuate as a result of a number of factors,
including customers' satisfaction with our platform, pricing, competitive
offerings, economic conditions, or overall changes in our customers' and their
guests' spending levels. ARR is an operational measure, does not reflect our
revenue or gross profit determined in accordance with U.S. Generally Accepted
Accounting Principles, or GAAP, and should be viewed independently of, and not
combined with or substituted for, our revenue, gross profit, and other financial
information determined in accordance with GAAP. Further, ARR is not a forecast
of future revenue and investors should not place undue reliance on ARR as an
indicator of our future or expected results.

Seasonality


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

                      Components of Results of Operations

Revenue


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

Our total revenue consists of the following:


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

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

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

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

Costs of Revenue


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

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


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

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


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

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

Operating Expenses

Our operating expenses consist of the following:


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

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

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

We plan to continue to hire employees to support our research and development
efforts to expand the capabilities and scope of our platform and related
products and services. As a result, we expect that research and development
expenses will increase on an absolute dollar basis as we continue to invest to
support these activities and innovate over the long term.
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General and administrative. General and administrative expenses consist
primarily of expenses related to operations, finance, legal, human resources,
information technology, and administrative personnel. General and administrative
expenses also include costs related to fees paid for certain professional
services, including legal, information technology, tax and accounting services,
and credit loss expenses.

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

Other Income (Expense)

Our other income and expenses consist of the following:

Interest income. Interest income consists of interest earned from cash held in money market accounts and interest earned on our marketable securities.

Interest expense. Interest expense represents primarily interest incurred on our convertible notes, which were issued in June 2020 and repaid in June 2021.


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

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

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

Income Tax Benefit (Expense)


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

Comparison of the Three Months Ended March 31, 2022 and 2021

The following table summarizes our results of operations for the three months ended March 31, 2022 and 2021:

                                                                         Three Months Ended March 31,
(dollars in millions)                                                      2022                  2021
Revenue:
Subscription services                                               $            63          $       31
Financial technology solutions                                                  438                 227
Hardware                                                                         29                  21
Professional services                                                             5                   3
Total revenue                                                                   535                 282
Costs of revenue:
Subscription services                                                            25                  10
Financial technology solutions                                                  347                 172
Hardware                                                                         52                  21
Professional services                                                            21                   9
Amortization of acquired technology and customer assets                           1                   1
Total costs of revenue(1)                                                       446                 213
Gross profit                                                                     89                  69
Operating expenses:
Sales and marketing(1)                                                           71                  32
Research and development(1)                                                      62                  23
General and administrative(1)                                                    57                  19
Total operating expenses                                                        190                  74
Loss from operations                                                           (101)                 (5)
Other income (expense):
Interest income (expense), net                                                    -                  (6)
Change in fair value of warrant liability                                        79                 (12)
Change in fair value of derivative liability                                      -                 (76)

Other income (expense), net                                                      (1)                  -
Loss before provision for income taxes                                          (23)                (99)
Provision for income taxes                                                        -                   -
Net loss                                                            $           (23)         $      (99)


_________________

(1)Includes stock-based compensation expense recognized for the three months ended March 31, 2022 and 2021 as follows:

Stock-Based Compensation Expense

                                                         Three Months Ended March 31,
    (dollars in millions)                                                           2022      2021
    Costs of revenue                                                               $  8      $  1
    Sales and marketing                                                              13         1
    Research and development                                                         16         2
    General and administrative                                                       16         1
    Total stock-based compensation expense                                         $ 53      $  5


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Revenue
                                          Three Months Ended March 31,                   Change
(dollars in millions)                           2022                     2021       Amount        %
Subscription services            $            63                        $  31      $   32       103  %
Financial technology solutions               438                          227         211        93  %
Hardware                                      29                           21           8        38  %
Professional services                          5                            3           2        67  %
Total revenue                    $           535                        $ 282      $  253        90  %

The increase in subscription services revenue during the three months ended March 31, 2022 was attributed to growth in live restaurant locations on the Toast platform and the continued increase in products adopted by both new and existing customers.

The increase in financial technology solutions revenue during the three months ended March 31, 2022 was attributable to the increase in live restaurant locations on the Toast platform and the increase in GPV per restaurant processing location.

The increase in hardware revenue during the three months ended March 31, 2022 was largely driven by the growth in locations and upsells to existing locations.

The increase in professional services revenue during the three months ended March 31, 2022 was attributable to the increase in the number of restaurant locations going live, partially offset by a shift toward self-guided installations, which are more favorably priced for customers.

Costs of Revenue
                                                      Three Months Ended March
                                                                 31,                             Change
(dollars in millions)                                   2022             2021            Amount             %
Subscription services                                $     25          $   10          $    15              150  %
Financial technology solutions                            347             172              175              102  %
Hardware                                                   52              21               31              148  %
Professional services                                      21               9               12              133  %
Amortization of acquired technology and customer
assets                                                      1               1                -                -  %
Total costs of revenue                               $    446          $  213          $   233              109  %

The increase in subscription services costs during the three months ended March 31, 2022 was primarily attributable to an increase in employee-related and overhead costs of $11 million.

The increase in financial technology solutions costs during the three months ended March 31, 2022 was due to an increase in GPV.


The increase in hardware costs during the three months ended March 31, 2022 was
attributable to higher shipment volume as a result of growth in locations, as
well as higher freight and product costs, and employee-related and overhead
costs.

The increase in professional services costs during the three months ended March
31, 2022 was primarily due to an increase in employee-related and overhead costs
to support our growth, including stock-based compensation expense.

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

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Operating Expenses

Sales and Marketing
                                     Three Months Ended March 31,                    Change
    (dollars in millions)                   2022                      2021      Amount        %
    Sales and marketing     $            71                          $ 32      $   39       122  %

The increase in sales and marketing expenses during the three months ended March 31, 2022 was attributable to a $30 million increase in employee-related and overhead costs because of increased headcount, of which $12 million was stock-based compensation expense, as well as higher advertising expenses.

Research and Development
                                       Three Months Ended March 31,                    Change
   (dollars in millions)                      2022                      2021      Amount        %
   Research and development   $            62                          $ 23 

$ 39 170 %



The increase in research and development expenses during the three months ended
March 31, 2022 was attributable to a $34 million increase in employee-related
and overhead costs because of increased headcount, of which $14 million was
stock-based compensation expense.

General and Administrative
                                        Three Months Ended March 31,                    Change
 (dollars in millions)                         2022                      2021      Amount        %
 General and administrative    $            57                          $ 19      $   38       200  %


The increase in general and administrative expenses during the three months
ended March 31, 2022 was primarily attributable to a $26 million increase in
employee-related and overhead costs because of increased headcount, of which $15
million was stock-based compensation expense.

Interest Income (Expense), Net

                                                     Three Months Ended March 31,                    Change
(dollars in millions)                                    2022               2021            Amount               %
Interest income (expense), net                      $          -          $   (6)         $      6              (100) %


The decrease in interest income (expense), net during the three months ended
March 31, 2022 was due to the payoff of outstanding convertible notes in June
2021.

Change in Fair Value of Warrant Liability

                                                     Three Months Ended March 31,                     Change
(dollars in millions)                                    2022                2021            Amount               %
Change in fair value of warrant liability          $           79          $  (12)         $     91              (758) %



Change in fair value of warrant liability resulted in income of $79 million for
the three months ended March 31, 2022, as compared to an expense of $12 million
for the three months ended March 31, 2021. The change was primarily attributable
to a lower value of the common stock underlying outstanding warrants at the end
of the period compared to the beginning of the period, as well as the issuance
of additional common stock warrants in June 2021. As of March 31, 2022, fair
value of the liability related to warrants issued to purchase our Class A common
stock was $84 million. The actual change in fair value of warrant liability in
subsequent periods will depend in part on the future trading price of our Class
A common stock, as well as other relevant valuation inputs, including volatility
of our Class A common stock, relevant risk-free interest rates, and time to
expiration of the warrants.
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Change in Fair Value of Derivative Liability

                                                     Three Months Ended March 31,                   Change
(dollars in millions)                                    2022              2021            Amount               %

Change in fair value of derivative liability $ - $ (76) $ 76

              (100) %



The decrease in expense associated with the change in fair value of derivative
liability was due to the repayment of our convertible notes in June 2021 and the
extinguishment of the corresponding liability.

Other Income (Expense), Net


                                        Three Months Ended March 31,                     Change
(dollars in millions)                          2022                       2021      Amount        %
Other income (expense), net   $             (1)                          $  

- $ (1) 100 %

Other income (expense), net, remained materially consistent during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

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                          Non-GAAP Financial Measures

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

We believe that these non-GAAP financial measures provide useful information
about our financial performance, enhance the overall understanding of our past
performance and future prospects, and allow for greater transparency with
respect to important metrics used by our management for financial and
operational decision-making. We are presenting these non-GAAP metrics to provide
investors insight to the information used by our management to evaluate our
business and financial performance. We believe that these measures provide
investors increased comparability of our core financial performance over
multiple periods with other companies in our industry.
                                        Three Months Ended March 31,
           (in millions)                       2022                       2021
           Adjusted EBITDA   $              (45)                         $  4


                                        Three Months Ended March 31,
             (in millions)                    2022                     2021
             Free Cash Flow    $           (50)                       $ (13)


Adjusted EBITDA

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

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

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

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                                                                      Three Months Ended March 31,
(in millions)                                                           2022                  2021
Net loss                                                         $           (23)         $      (99)
Stock-based compensation expense and related payroll tax                      53                   5
Depreciation and amortization                                                  6                   4

Interest (income) expense, net                                                 -                   6

Change in fair value of warrant liability                                    (79)                 12
Change in fair value of derivative liability                                   -                  76

Termination of leases                                                         (2)                  -

Adjusted EBITDA                                                  $           (45)         $        4


                                 Free Cash Flow

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

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

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

                                                    Three Months Ended March 31,
 (in millions)                                            2022                     2021
 Net cash used in operating activities     $           (47)                 

$ (5)

 Purchases of property and equipment                    (2)                          (6)
 Capitalized software                                   (1)                          (2)
 Free cash flow                            $           (50)                       $ (13)


                        Liquidity and Capital Resources

Our principal sources of liquidity are cash and cash equivalents and marketable
securities. As of March 31, 2022, we had cash and cash equivalents of $757
million, excluding cash held on behalf of customers and restricted cash of $73
million, marketable securities of $453 million, and $330 million available under
our 2021 Facility (as defined herein). Cash and cash equivalents consist of
highly liquid investments with original maturities of 90 days or less at the
time of purchase, other than those held for sale in the ordinary course of
business. Marketable securities consisted of commercial paper, certificates of
deposit, corporate bonds, U.S. government agency securities, U.S. Treasury
securities, and asset-backed securities.

We believe that our existing cash and cash equivalents, along with our available
borrowing capacity under our 2021 Facility, will be sufficient to meet our
working capital needs for at least the next 12 months, including planned capital
expenditures, strategic transactions, and investment commitments that we may
enter into from time to time. Our future capital requirements and the adequacy
of available funds will depend on many factors, including those set forth under
"Risk Factors".
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In the event that additional financing is required from outside sources, we cannot be sure that any additional financing will be available to us on acceptable terms, if at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition could be adversely affected.

Cash Flows

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

                                                                       Three Months Ended March 31,
(in millions)                                                            2022                   2021
Net cash used in operating activities                            $             (47)         $       (5)
Net cash used in investing activities                                           (3)                 (8)
Net cash provided by financing activities                                       29                  12

Net decrease in cash, cash equivalents and restricted cash $

   (21)         $       (1)


Operating Activities

For the three months ended March 31, 2022, net cash used in operating activities
was $47 million. This resulted from our net loss of $23 million, adjustments for
non-cash charges of $5 million, and a net use of cash from a change in operating
assets and liabilities of $19 million. The non-cash charges were primarily
related to changes in fair value of the warrant liability of $79 million, offset
by stock-based compensation expense of $53 million, amortization of deferred
costs of $10 million and depreciation and amortization of $6 million. The net
use of cash from a change in operating assets and liabilities was primarily
related to increases in deferred costs of $17 million, increases in prepaid
expenses and other current assets of $15 million, decreases in accounts payable
of $12 million, increases in operating right-of-use assets of $6 million and
decreases in deferred revenue of $6 million. These changes were partially offset
by increases in accrued expenses and other current liabilities of $39 million.

For the three months ended March 31, 2021, net cash used in operating activities
was $5 million. This consisted of a net loss of $99 million and a net use of
cash from a change in operating assets and liabilities of $16 million, partially
offset by adjustments for non-cash charges of $110 million. The non-cash charges
were related to changes in fair values of derivative and warrant liabilities of
$88 million, non-cash interest on convertibles notes of $6 million, stock-based
compensation expense of $5 million, and amortization of deferred costs of $5
million. The use of cash from a change in operating assets and liabilities
primarily related to increases in deferred costs of $8 million, a net decrease
from changes in other assets and liabilities of $7 million, increases in
accounts receivable of $6 million, and decreases in operating lease liabilities
of $5 million. These changes were partially offset by increases in accrued
expenses and other current liabilities of $12 million and decreases in
right-of-use assets of $5 million.

Investing Activities


For the three months ended March 31, 2022, cash used in investing activities was
$3 million, which consisted of purchases of marketable securities of $30
million, purchases of property and equipment of $2 million, and cash outflows
for capitalized software of $1 million. These cash outflows were partially
offset by proceeds from sales and maturities of marketable securities of $30
million.

For the three months ended March 31, 2021, cash used in investing activities was
$8 million, which consisted of purchases of property and equipment of $6 million
and cash outflows for capitalized software of $2 million.

Financing Activities


For the three months ended March 31, 2022, cash provided by financing activities
was $29 million, which consisted of the change in customer funds obligations of
$27 million and proceeds from the exercise of stock options of $4 million,
partially offset by the payment of contingent consideration of $2 million.
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For the three months ended March 31, 2021, cash provided by financing activities
was $12 million, which consisted of the change in customer funds obligations of
$10 million and proceeds from the exercise of stock options of $2 million.

Credit Facilities


On June 8, 2021, we entered into a senior secured credit facility, or the 2021
Facility, which includes a revolving line of credit equal to $330 million.
Interest on outstanding loans under the revolving line of credit is determined
based on loan type and accrues at an annual rate, as defined in the agreement,
of: (a) LIBO Rate multiplied by the Statutory Reserve Rate, plus 1.50% per
annum; or 0.5% per annum plus the highest of: (i) the Prime Rate, (ii) the
Federal Reserve Bank of New York Rate plus 0.5%, or (iii) the Adjusted LIBO Rate
plus 1.00%. Subsequent to December 31, 2022, interest on outstanding loans will
be accrued based on the Secured Overnight Financing Rate, or SOFR. The 2021
Facility is subject to a minimum liquidity covenant of $250 million. As of
March 31, 2022 and December 31, 2021, no amount was drawn and outstanding under
the 2021 Facility which had $330 million available for borrowings. As of
March 31, 2022 and December 31, 2021, there were $11 million and $13 million of
letters of credit outstanding, respectively.

Contractual Obligations and Commitments and Off-Balance Sheet Arrangements


As of March 31, 2022, our contractual obligations consisted of: (i) operating
lease commitments of $120 million, of which $18 million is due in 2022 and $102
million is due thereafter, and (ii) purchase commitments of $285 million, a
majority of which are due in 2022. Please refer to Note 5, "Lessee Arrangements"
and Note 12, "Commitments and Contingencies" to our unaudited Consolidated
Financial Statements included in this Quarterly Report on Form 10-Q for a
discussion on our lease and purchase commitments.

Please refer to Note 4, "Loan Servicing Activities" to our unaudited
Consolidated Financial Statements included in this Quarterly Report on Form 10-Q
for a discussion of credit exposure related to our financial guarantees as of
March 31, 2022.

                   Critical Accounting Policies and Estimates

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

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

                        Recent Accounting Pronouncements

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

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