Toast, Inc 10-Q for FY2023 Q3
Toast, Inc. (TOST)
10-Q
2023-11-08
For: 2023-09-30
View Original
Added on
April 10, 2026
About this 10-Q
Toast, Inc filed this 10-Q on November 8, 2023, covering the quarter ended September 30, 2023 (FY2023 Q3).
Headline figures
Quarter ended September 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.03B
- up 37.2% from $752M a year earlier
- Net loss
- $31M
- compared with a net loss of $98M a year earlier
- Diluted EPS
- -$0.09
- compared with -$0.19 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended | |||||
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
| For the transition period from to | |||||
Commission File Number 001-40819
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Address of principal executive offices) | (Zip code) | ||||||||||
(617 ) 297-1005
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The registrant had outstanding 425,261,924 shares of Class A common stock and 114,945,975 shares of Class B common stock as of October 31, 2023.
i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations, financial condition, business strategy, plans and objectives of management for future operations, our market opportunity and the potential growth of that market, our liquidity and capital needs and other similar matters, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would,” or the negative of these words or other similar terms or expressions. These forward-looking statements are based on management’s current expectations and assumptions about future events, which are inherently subject to uncertainties, risks, and changes in circumstances that are difficult to predict. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements concerning the following:
•our future financial performance, including our revenue, costs of revenue or expenses, or other operating results;
•our ability to successfully execute our business and growth strategy;
•anticipated trends and growth rates in our business and in the markets in which we operate;
•our ability to effectively manage our growth and future expenses;
•our ability to maintain the security and availability of our platform;
•our ability to increase the number of customers using our platform;
•our ability to retain, and to sell additional products and services to, our existing customers;
•our ability to successfully expand in our existing markets and into new markets;
•our expectations concerning relationships with third parties;
•our estimated total addressable market;
•our ability to maintain, protect and enhance our intellectual property;
•our ability to comply with modified or new laws and regulations applying to our business;
•the attraction and retention of qualified employees and key personnel;
•our anticipated investments in sales and marketing and research and development;
•our ability to successfully defend litigation brought against us;
•our ability to successfully remediate and prevent material weaknesses in internal controls over financial reporting;
•the increased expenses associated with being a public company;
•the impact of global financial, economic, political, and health events such as rising inflation, capital market disruptions, sanctions, economic slowdowns or recessions, or the COVID-19 pandemic, on our business and the restaurant industry;
•our ability to compete effectively with existing competitors and new market entrants;
•our ability to source, finance and integrate companies and assets that we have or may acquire; and
•the sufficiency of our cash, cash equivalents, and investments to meet our liquidity needs.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.
ii
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q. And while we believe such information provides a reasonable basis for such statements, such information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.
iii
TABLE OF CONTENTS
| Page | ||||||||
iv
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TOAST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in millions, except share and per share amounts)
| September 30, 2023 | December 31, 2022 | ||||||||||
| Assets: | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Marketable securities | |||||||||||
| Accounts receivable, net | |||||||||||
| Inventories, net | |||||||||||
| Deferred costs, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Restricted cash | |||||||||||
| Deferred costs, non-current | |||||||||||
| Other non-current assets | |||||||||||
| Total non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity: | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Operating lease liabilities | |||||||||||
| Deferred revenue | |||||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Warrants to purchase common stock | |||||||||||
| Operating lease liabilities, non-current | |||||||||||
| Deferred revenue, non-current | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and Contingencies (Note 14) | |||||||||||
| Stockholders’ Equity: | |||||||||||
Preferred stock- par value $ | |||||||||||
Class A common stock, $ | |||||||||||
Class B common stock, $ | |||||||||||
Treasury stock, at cost; | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
TOAST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in millions, except share and per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Subscription services | $ | $ | $ | $ | |||||||||||||||||||
| Financial technology solutions | |||||||||||||||||||||||
| Hardware | |||||||||||||||||||||||
| Professional services | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Costs of revenue: | |||||||||||||||||||||||
| Subscription services | |||||||||||||||||||||||
| Financial technology solutions | |||||||||||||||||||||||
| Hardware | |||||||||||||||||||||||
| Professional services | |||||||||||||||||||||||
| Amortization of acquired intangible assets | |||||||||||||||||||||||
| Total costs of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest income, net | |||||||||||||||||||||||
| Change in fair value of warrant liability | ( | ( | |||||||||||||||||||||
| Other income (expense), net | ( | ||||||||||||||||||||||
Loss before benefit (provision) for income taxes | ( | ( | ( | ( | |||||||||||||||||||
Benefit (provision) for income taxes | ( | ||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share attributable to common stockholders: | |||||||||||||||||||||||
| Basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted average shares used in computing net loss per share: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
TOAST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
(in millions)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
Unrealized gains (losses) on marketable securities, net of tax effect of $ | ( | ||||||||||||||||||||||
| Currency translation adjustments | ( | ||||||||||||||||||||||
| Total other comprehensive income (loss) | ( | ||||||||||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
TOAST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
(in millions, except share amounts)
Nine Months Ended September 30, 2023
| Class A and Class B Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon net exercise of common stock warrants | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of common stock options | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plan | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with business combinations | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with charitable contribution | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances at September 30, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
TOAST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
(in millions, except share amounts)
Nine Months Ended September 30, 2022
| Class A and Class B Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders' (Deficit) Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon net exercise of common stock warrants | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of common stock options | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of stock in connection with business combination | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Unrealized loss on marketable securities | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
Balances at September 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
TOAST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
(in millions, except share amounts)
Three Months Ended September 30, 2023
| Class A and Class B Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances at June 30, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of common stock options | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plan | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with charitable contribution | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances at September 30, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
TOAST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
(in millions, except share amounts)
Three Months Ended September 30, 2022
| Class A and Class B Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders' (Deficit) Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
Balances at June 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of common stock options | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with business combination | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on marketable securities | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
Balances at September 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
TOAST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | |||||||||||||||||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Stock-based compensation expense | |||||||||||||||||||||||
| Amortization of deferred costs | |||||||||||||||||||||||
| Change in fair value of warrant liability | ( | ||||||||||||||||||||||
| Credit loss expense | |||||||||||||||||||||||
Stock-based charitable contribution expense | |||||||||||||||||||||||
| Asset impairments | |||||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||||||||
| Accounts receivable, net | ( | ( | |||||||||||||||||||||
| Prepaid expenses and other current assets | ( | ( | |||||||||||||||||||||
| Deferred costs, net | ( | ( | |||||||||||||||||||||
| Inventories, net | ( | ||||||||||||||||||||||
| Accounts payable | ( | ( | |||||||||||||||||||||
| Accrued expenses and other current liabilities | |||||||||||||||||||||||
| Deferred revenue | ( | ||||||||||||||||||||||
| Other assets and liabilities | ( | ( | |||||||||||||||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||||||||
| Cash paid for acquisition, net of cash acquired | ( | ( | |||||||||||||||||||||
| Capitalized software | ( | ( | |||||||||||||||||||||
| Purchases of property and equipment | ( | ( | |||||||||||||||||||||
| Purchases of marketable securities | ( | ( | |||||||||||||||||||||
| Proceeds from the sale of marketable securities | |||||||||||||||||||||||
| Maturities of marketable securities | |||||||||||||||||||||||
| Other investing activities | ( | ||||||||||||||||||||||
| Net cash used in investing activities | ( | ( | |||||||||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||||||||
| Change in customer funds obligations, net | |||||||||||||||||||||||
| Proceeds from issuance of common stock | |||||||||||||||||||||||
| Payment of contingent consideration | ( | ||||||||||||||||||||||
| Net cash provided by financing activities | |||||||||||||||||||||||
| Net increase (decrease) in cash, cash equivalents, cash held on behalf of customers and restricted cash | ( | ||||||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents and restricted cash | ( | ( | |||||||||||||||||||||
| Cash, cash equivalents, cash held on behalf of customers and restricted cash at beginning of period | |||||||||||||||||||||||
| Cash, cash equivalents, cash held on behalf of customers and restricted cash at end of period | $ | $ | |||||||||||||||||||||
| Reconciliation of cash, cash equivalents, cash held on behalf of customers and restricted cash | |||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | |||||||||||||||||||||
| Cash held on behalf of customers | |||||||||||||||||||||||
| Restricted cash | |||||||||||||||||||||||
| Total cash, cash equivalents, cash held on behalf of customers and restricted cash | $ | $ | |||||||||||||||||||||
| Supplemental disclosure of non-cash investing and financing activities: | |||||||||||||||||||||||
| Issuance of Class B common stock upon exercise of common stock warrants | |||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
TOAST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(amounts in millions, except share and per share amounts)
1. Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies
Toast, Inc. (“we,” or “the Company”), is a cloud-based all-in-one digital technology platform purpose-built for the entire restaurant community. We provide a comprehensive platform of software as a service (SaaS) products and financial technology solutions, including integrated payment processing, restaurant-grade hardware, and a broad ecosystem of third-party partners. We serve as the restaurant operating system, connecting front of house and back of house operations across dine in, take out and delivery channels.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, and the rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. Accordingly, they do not include all of the financial information and footnotes required by U.S. GAAP for complete financial statements.
The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly our financial position, results of operations, comprehensive loss, stockholders’ equity, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be expected for the full year ending December 31, 2023 or any other future interim periods.
Risks and Uncertainties
We are subject to a number of risks and uncertainties, including global events and macroeconomic conditions such as inflation and its potential impact on consumer spending, rising interest rates, global supply chain issues, and public health concerns, which may also impact consumer behavior, the restaurant industry, and our business.
Reclassifications
Certain amounts in prior period financial statements have been reclassified to conform to the current period presentation.
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2. Fair Value of Financial Instruments
The following table presents information about our financial assets and liabilities that are measured at fair value on a recurring basis and indicates the level of the fair value hierarchy used to determine such fair values:
September 30, 2023 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Certificates of deposit | |||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||
| U.S. government agency securities | |||||||||||||||||||||||
| Treasury securities | |||||||||||||||||||||||
| Asset-backed securities | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Warrants to purchase common stock | $ | $ | $ | $ | |||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
December 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Certificates of deposit | |||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||
| U.S. government agency securities | |||||||||||||||||||||||
| Treasury securities | |||||||||||||||||||||||
| Asset-backed securities | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Warrants to purchase common stock | $ | $ | $ | $ | |||||||||||||||||||
| Contingent consideration | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
During the nine months ended September 30, 2023 and 2022, there were no transfers into or out of Level 3 measurements within the fair value hierarchy.
Valuation of Warrants to Purchase Common Stock
The fair value of the warrants was determined using the Black-Scholes option-pricing model. The following table indicates the weighted-average assumptions made in estimating the fair value as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | ||||||||||
| Risk-free interest rate | % | % | |||||||||
| Contractual term (in years) | |||||||||||
| Expected volatility | % | % | |||||||||
| Expected dividend yield | % | % | |||||||||
| Exercise price per share | $ | $ | |||||||||
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Fair Value of Liabilities
The following tables provide a roll-forward of the aggregate fair value of our common stock warrant liability for which fair value is determined using Level 3 inputs:
| Common Stock Warrant Liability | |||||||||||||||||
Balance as of December 31, 2022 | $ | ||||||||||||||||
| Change in fair value | |||||||||||||||||
| Settlement | ( | ||||||||||||||||
Balance as of September 30, 2023 | $ | ||||||||||||||||
| Common Stock Warrant Liability | |||||
Balance as of December 31, 2021 | $ | ||||
| Change in fair value | ( | ||||
| Settlement | ( | ||||
Balance as of September 30, 2022 | $ | ||||
3. Marketable Securities
The amortized cost, gross unrealized holding losses and fair value of marketable securities, excluding accrued interest receivable, consisted of the following:
| September 30, 2023 | ||||||||||||||||||||
| Amortized Cost | Gross Unrealized Losses | Fair Value | ||||||||||||||||||
| Commercial paper | $ | $ | $ | |||||||||||||||||
| Certificates of deposit | ||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||
| U.S. government agency securities | ||||||||||||||||||||
| Treasury securities | ( | |||||||||||||||||||
| Asset-backed securities | ||||||||||||||||||||
| Total | $ | $ | ( | $ | ||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||
| Commercial paper | $ | $ | $ | ||||||||||||||||||||
| Certificates of deposit | |||||||||||||||||||||||
| Corporate bonds | ( | ||||||||||||||||||||||
| U.S. government agency securities | |||||||||||||||||||||||
| Treasury securities | ( | ||||||||||||||||||||||
| Asset-backed securities | |||||||||||||||||||||||
| Total | $ | $ | ( | $ | |||||||||||||||||||
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The fair values of marketable securities by contractual maturities at September 30, 2023:
| September 30, 2023 | |||||
| Due within 1 year | $ | ||||
| Due after 1 year through 5 years | |||||
Due after 5 years and thereafter | |||||
| Total marketable securities | $ | ||||
We review marketable securities for impairment during each reporting period to determine if any of the securities have experienced an other-than-temporary decline in fair value. There were no impairment losses or expected credit losses related to our marketable securities during the three and nine months ended September 30, 2023 and 2022.
4. Loan Servicing Activities and Acquired Loans Receivable, Net
We service loans originated by our bank partner and assume liability for loan defaults on a limited basis based on a specified percentage of the total loans originated, which are measured on a quarterly basis. If the merchant’s payments are delayed for a defined period of time, the loan is considered delinquent and we are required to purchase the loan from our bank partner. The loan purchase, net of expected recoveries, reduces our potential liability with respect to the quarterly cohort of loans from which the defaulted loan originated. This obligation represents a financial guarantee with a contingent aspect related to our contingent obligation to purchase defaulted loans, and a non-contingent aspect related to our obligation to perform under the guarantee.
We recognize a liability for both these elements which are included in accrued expenses and other current liabilities on our Condensed Consolidated Balance Sheets.
Changes in the contingent liability for expected credit losses for the three and nine months ended September 30, 2023 and 2022 were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | |||||||||||||||||||
| Credit loss expense | |||||||||||||||||||||||
| Reductions due to loan purchase | ( | ( | ( | ( | |||||||||||||||||||
| Ending balance | $ | $ | $ | $ | |||||||||||||||||||
The balance of the non-contingent stand-ready liability was $11 and $6 , respectively, as of September 30, 2023 and December 31, 2022.
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5. Lessee Arrangements
During the second quarter of fiscal year 2023, we entered into an agreement to terminate the lease for a portion of our corporate headquarters in Boston, MA, and modify the remaining lease term to end on December 31, 2024. As a result, we agreed to pay a net fee of $11 . We recorded a net charge of $12 within general and administrative expenses on our Condensed Consolidated Statement of Operations, inclusive of a loss on impairment of certain property plant and equipment associated with the terminated portion of the lease.
The components of lease expense were as follows for the three and nine months ended September 30, 2023 and 2022:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Operating lease expense | $ | $ | $ | $ | |||||||||||||||||||
| Variable lease expense | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
The following table summarizes supplemental cash flow information related to cash paid for amounts included in the measurement of lease liabilities during the nine months ended September 30, 2023 and 2022:
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating cash flows for operating leases | $ | ( | $ | ( | |||||||
| Supplemental non-cash amounts of increases in lease liabilities from obtaining right-of-use assets/ (decreases) of lease liabilities from lease terminations and modifications | ( | ||||||||||
| Total | $ | ( | $ | ( | |||||||
6. Debt
Revolving Line of Credit
On March 2, 2023, we entered into an amendment to our revolving credit facility agreement, as amended, the 2021 Facility, to replace the London Interbank Offered Rate, or LIBOR, with the Secured Overnight Financing Rate, or SOFR. Under the terms of the amendment, interest on loans will be determined based on loan type and accrue at an annual rate, as defined in the agreement, of 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 SOFR based upon loan duration plus 1.00 %. The 2021 Facility is subject to a minimum liquidity covenant of $250 . As of September 30, 2023 and December 31, 2022, no 330 available as of each period end.
7. Business Combinations
Delphi Display Systems, Inc.
On February 14, 2023, we acquired 100 % of the outstanding capital stock of Delphi Display Systems, Inc., or Delphi, a provider of digital display solutions and drive-thru technology, for a total purchase price of $10 , to extend our growing suite of products benefiting quick-service restaurants and enterprise brands.
We have not finalized the purchase price allocation. The purchase price was preliminarily allocated to goodwill, intangible assets and other net assets of $6 , $3 and $1 , respectively. Intangible assets consisted of $2 of developed technology and $1 of customer relationships, each with estimated useful lives of 5
The operating results of Delphi have been reflected in our results of operations from the date of the acquisition, but were not material to our consolidated financial statements.
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8. Other Balance Sheet Information
Accounts receivable, net consisted of the following:
| September 30, 2023 | December 31, 2022 | ||||||||||
| Accounts receivable | $ | $ | |||||||||
| Unbilled receivables | |||||||||||
| Less: Allowance for credit losses | ( | ( | |||||||||
| Accounts receivable, net | $ | $ | |||||||||
Our allowance for credit losses was comprised of the following:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Beginning balance | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Additions | ( | ( | ( | ( | |||||||||||||||||||
| Write offs | |||||||||||||||||||||||
| Ending balance | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Prepaid expenses and other current assets consisted of the following:
| September 30, 2023 | December 31, 2022 | ||||||||||
| Cash held on behalf of customers | $ | $ | |||||||||
| Prepaid expenses | |||||||||||
| Deposits for inventory purchases | |||||||||||
| Other current assets | |||||||||||
| $ | $ | ||||||||||
Accrued expenses and current liabilities consisted of the following:
| September 30, 2023 | December 31, 2022 | ||||||||||
| Accrued transaction-based costs | $ | $ | |||||||||
| Accrued payroll and bonus | |||||||||||
| Customer funds obligation | |||||||||||
| Accrued expenses | |||||||||||
| Accrued commissions | |||||||||||
| Contingent liability for expected credit losses | |||||||||||
| Other liabilities | |||||||||||
| $ | $ | ||||||||||
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9.
The following table summarizes the activity in deferred revenue:
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Deferred revenue, beginning of year | $ | $ | |||||||||
| Deferred revenue, end of period | |||||||||||
| Revenue recognized in the period from amounts included in deferred revenue at the beginning of period | $ | $ | |||||||||
As of September 30, 2023, approximately $617 of revenue is expected to be recognized from remaining performance obligations for customer contracts. We expect to recognize revenue of approximately $569 from these remaining performance obligations over the next 24 months, with the balance recognized thereafter.
The following tables summarize the activity in deferred contract acquisition costs and the classification of deferred costs:
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Beginning balance | $ | $ | |||||||||||||||||||||
| Capitalization of sales commissions costs | |||||||||||||||||||||||
| Amortization of sales commissions costs | ( | ( | |||||||||||||||||||||
| Ending balance | $ | $ | |||||||||||||||||||||
10. Stock-Based Compensation
Stock-based compensation expense recognized for the three and nine months ended September 30, 2023 and 2022, is as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Costs of revenue | $ | $ | $ | $ | |||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Total Stock based compensation | $ | $ | $ | $ | |||||||||||||||||||
Stock-based compensation expense of $4 and $10 , respectively, was capitalized as software development costs during the three and nine months ended September 30, 2023. Stock-based compensation expense of $3 and $5 , respectively, was capitalized as software development costs during each of the three and nine months ended September 30, 2022.
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Stock Options
The fair value of each option grant was estimated on its grant date using the Black-Scholes option-pricing model. The following table indicates the weighted-average assumptions made in estimating the fair value for the nine months ended September 30, 2023 and 2022:
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Risk-free interest rate | % | % | |||||||||
| Expected term (in years) | |||||||||||
| Expected volatility | % | % | |||||||||
| Expected dividend yield | % | % | |||||||||
| Weighted-average fair value of common stock | $ | $ | |||||||||
| Weighted-average grant date fair value | $ | $ | |||||||||
The following is a summary of stock option activity under our stock option plans for the nine months ended September 30, 2023:
| (in millions, except share and per share amounts) | Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value (1) | |||||||||||||||||||
Outstanding as of December 31, 2022 | $ | $ | |||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercised | ( | ||||||||||||||||||||||
| Forfeited | ( | ||||||||||||||||||||||
Outstanding as of September 30, 2023 | $ | $ | |||||||||||||||||||||
Options vested and expected to vest as of September 30, 2023 | $ | $ | |||||||||||||||||||||
Options exercisable as of September 30, 2023 | $ | $ | |||||||||||||||||||||
There were no options granted during the three months ended September 30, 2023. The weighted average grant date fair value of options granted during the three months ended September 30, 2022 was $15.94 . The aggregate intrinsic values of options exercised was $30 and $116 , respectively, during the three and nine months ended September 30, 2023 and $31 and $112 , respectively, during the three and nine months ended September 30, 2022.
As of September 30, 2023, total unrecognized stock-based compensation expense related to option awards was $92 and is expected to be recognized over the remaining weighted-average service period of 2.7 years .
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Restricted Stock Units
The following table summarizes RSU activity during the nine months ended September 30, 2023:
| RSU | Weighted Average Grant Date Fair Value | ||||||||||
Unvested balance as of December 31, 2022 | $ | ||||||||||
| Granted | $ | ||||||||||
| Vested | ( | $ | |||||||||
| Forfeited | ( | $ | |||||||||
Unvested balance as of September 30, 2023 | $ | ||||||||||
The weighted average grant-date fair value of RSUs granted during the three months ended September 30, 2023 and 2022 was $22.41 and $17.37 , respectively. The weighted average grant-date fair value of RSUs granted during the nine months ended September 30, 2022 was 18.23 . The fair value of RSUs vested during the three months ended September 30, 2023 and 2022 was $66 and $32 , respectively. The fair value of RSUs vested during the nine months ended September 30, 2023 and 2022 was $159 and $61 , respectively.
As of September 30, 2023, total unrecognized stock-based compensation expense related to the RSUs was $532 and is expected to be recognized over the remaining weighted-average service period of 3 years.
As of September 30, 2023, we had 67,377,775 shares of Class A common stock available for future issuance under our 2021 Stock Option and Incentive Plan.
2021 Employee Stock Purchase Plan
In 2021, our Board adopted, and our stockholders approved, the 2021 Employee Stock Purchase Plan ("ESPP") which became effective on September 23, 2021. As of September 30, 2023, 21,212,317 shares of our Class A common stock were available for issuance to participating employees who are allowed to purchase shares of Class A common stock at a price equal to 85 % of its fair market value at the beginning or the end of the offering period, whichever is lower.
During the three months ended September 30, 2023, 440,763 shares were purchased under the ESPP at $15.51 per share, resulting in cash proceeds of $7 . During the nine months ended September 30, 2023, 727,849 shares were purchased under the ESPP at $15.57 per share, resulting in cash proceeds of $11 . No
Restricted Stock
The number of issued and outstanding shares of Class A and Class B common stock subject to restrictions as of September 30, 2023 and December 31, 2022, were 881,133 2,703,538
As of September 30, 2023, this included 30,015 shares of Class A common stock and Class B common stock issued upon the early exercise of stock options and 851,118 shares of restricted Class A common stock issued to certain members of management of Delphi and Sling, Inc. as part of their consideration in connection with the acquisitions.
As of December 31, 2022, this included 1,365,310 shares of Class A common stock and Class B common stock issued upon the early exercise of stock options and 1,338,228 shares of restricted Class A common stock issued to certain members of management of Sling, Inc. as part of their consideration in connection with the acquisition in 2022.
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11. Income Taxes
12. Net Loss Per Share Attributable to Common Stockholders
Basic net loss per share is determined by dividing net loss by the weighted average shares outstanding for the period. We analyze the potential dilutive effect of stock options, unvested restricted stock, RSUs, our ESPP, and warrants to purchase common stock, during periods we generate net income, or when income is recognized related to changes in fair value of warrant liabilities.
During the three months ended September 30, 2023 and nine months ended September 30, 2022, we recorded a gain on fair value remeasurement of warrant liabilities which was added back to net loss to adjust for the dilutive impact of the warrants. We adjusted the weighted average shares outstanding for the incremental dilutive shares using the treasury stock method.
During the nine months ended September 30, 2023, we recorded a loss on fair value remeasurement of warrants to purchase common stock which are excluded from the computation of diluted net loss per share due to their anti-dilutive impact. During the three months ended September 30, 2022, the exercise price for the warrants to purchase common stock exceeded the average trading price of our Class A common stock for the period, and therefore the warrants were anti-dilutive and excluded from the computation of diluted net loss per share.
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The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders for the three and nine months ended September 30, 2023 and 2022:
| (in millions, except share and per share amounts) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net loss, basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Gain on change in fair value of warrant liability | |||||||||||||||||||||||
| Net loss, diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average shares of common stock outstanding—basic | |||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
Warrants to purchase Class B common stock | |||||||||||||||||||||||
| Weighted average shares of common stock outstanding—diluted | |||||||||||||||||||||||
| Net loss per share, basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share, diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
We excluded the following potential shares of common stock from the computation of diluted net loss per share because including them would have an anti-dilutive effect for the three and nine months ended September 30, 2023 and 2022:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Options to purchase Class A common stock and Class B common stock | |||||||||||||||||||||||
| Unvested restricted stock | |||||||||||||||||||||||
| Unvested restricted stock units | |||||||||||||||||||||||
Warrants to purchase Class B common stock | |||||||||||||||||||||||
| Employee Stock Purchase Plan | |||||||||||||||||||||||
13. Segment Information
We have significant operations in the United States, Ireland, and India. We did not generate material revenue in any country other than the United States during the three and nine months ended September 30, 2023 and 2022.
The following table sets forth the breakdown of long-lived assets based on geography:
| September 30, 2023 | December 31, 2022 | ||||||||||
| United States | $ | $ | |||||||||
| Ireland | |||||||||||
| India | |||||||||||
| Other | |||||||||||
| Total long-lived assets | $ | $ | |||||||||
Tangible long-lived assets consist of property and equipment and operating lease right-of-use assets. Long-lived assets are based upon the country in which the asset is located.
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14. Commitments and Contingencies
Purchase Commitments
We have non-cancelable purchase obligations with hardware suppliers and cloud service providers. As of September 30, 2023, there were no material changes outside the ordinary course of business to our commitments, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
Legal Proceedings
From time to time, we may be involved in legal actions arising in the ordinary course of business. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be resolved unfavorably. We establish accruals for losses that management deems to be probable and subject to a reasonable estimate. We do not expect any claims with a reasonably possible adverse outcome to have a material impact.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited condensed 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, 2022. 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. We provide a comprehensive platform of software as a service (SaaS) products and financial technology solutions, including integrated payment processing, restaurant-grade hardware, and a broad ecosystem of third-party partners. We serve as the restaurant operating system, connecting front of house and back of house operations across dine in, take out and delivery channels.
As of September 30, 2023, approximately 99,000 restaurant Locations (as defined below), processing approximately $118 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.
We define a live location, or Location, as a unique location that has used Toast Point of Sale to record transaction volumes above a minimum threshold, and has not been marked as a churned location as of the date of determination. A Location can use Toast payment services, which we refer to as a Toast Processing Location, or for select enterprise customers, not use Toast’s payment services, which we refer to as a Non-Toast Processing Location. Customers of legacy solutions provided by companies that we have acquired, that do not use Toast Point of Sale, are not included in our Location count.
Recent Developments in Macroeconomic Environment
Global events and macroeconomic conditions such as inflation and its potential impact on consumer spending, rising interest rates, global supply chain issues, and the COVID-19 pandemic have impacted and may continue to impact our business. While our business results remain positive, it is difficult to predict the potential impact these factors may have on our future business results because of the uncertainty they have produced or will produce among consumers and the restaurant industry.
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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| (dollars in billions) | 2023 | 2022 | % Growth | 2023 | 2022 | % Growth | |||||||||||||||||||||||||||||
| Gross Payment Volume (GPV)(1) | $ | 33.7 | $ | 25.2 | 34 | % | $ | 92.5 | $ | 66.3 | 40 | % | |||||||||||||||||||||||
| As of September 30, | |||||||||||||||||
| (dollars in millions) | 2023 | 2022 | % Growth | ||||||||||||||
| Annualized Recurring Run-Rate (ARR) | $ | 1,218 | $ | 868 | 40 | % | |||||||||||
Gross Payment Volume (GPV)(1)
Gross Payment Volume represents the sum of total dollars processed through the Toast payments platform across Toast Processing 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.
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(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 as the sum of (i) our monthly billings of 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. The MRR calculation includes all locations on the Toast platform and locations on legacy solutions, which have a negligible impact on ARR.
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, and can be impacted by seasonal needs of our customers (which may also impact the total number of Toast Processing Locations in such a period that contributes to our GPV). As a result, our financial technology solutions revenue per Toast Processing 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% 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.
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Hardware. We generate hardware revenue from the sale of terminals, tablets, handhelds, and related devices and accessories, net of estimated returns.
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, and related devices and 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 intangible assets. Amortization of acquired intangible assets’ 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.
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.
General and administrative. General and administrative expenses consist primarily of expenses related to management and administrative functions, including finance, legal, human resources, and information technology. General and administrative expenses also include costs related to fees paid for certain professional services, including legal, information technology, and tax and accounting services, as well as bad debt and credit related expenses.
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Other Income (Expense)
Our other income and expenses consist of the following:
Interest income, net. Consists of interest earned from cash held in money market accounts and interest earned on our marketable securities.
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 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 and other relevant valuation inputs, including estimated volatility of our Class A common stock, strike price, relevant risk-free interest rates, and time to expiration of the warrants, and may fluctuate in subsequent periods.
Other income (expense), net. Represents foreign currency transaction gains and losses, changes in fair value of our marketable securities, refundable research and development tax credits, and other items.
Benefit (provision) for income taxes
Benefit (provision) for income taxes. Consists of U.S. federal and state income tax as well as international taxes in various foreign jurisdictions. 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 U.S. GAAP and local tax laws.
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Results of Operations
Revenue
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2023 | 2022 | Amount | % | 2023 | 2022 | Amount | % | |||||||||||||||||||||||||||||||||||||||
| Subscription services | $ | 131 | $ | 90 | $ | 41 | 46 | % | $ | 358 | $ | 230 | $ | 128 | 56 | % | |||||||||||||||||||||||||||||||
| Financial technology solutions | 856 | 628 | 228 | 36 | % | 2,338 | 1,628 | 710 | 44 | % | |||||||||||||||||||||||||||||||||||||
| Hardware | 34 | 27 | 7 | 26 | % | 106 | 86 | 20 | 23 | % | |||||||||||||||||||||||||||||||||||||
| Professional services | 11 | 7 | 4 | 57 | % | 27 | 19 | 8 | 42 | % | |||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 1,032 | $ | 752 | $ | 280 | 37 | % | $ | 2,829 | $ | 1,963 | $ | 866 | 44 | % | |||||||||||||||||||||||||||||||
The increase in subscription services revenue during the three and nine months ended September 30, 2023 was attributed to growth in restaurant Locations on the Toast platform and the continued increase in products adopted by customers.
The increase in financial technology solutions revenue during the three and nine months ended September 30, 2023 was primarily attributable to the increase in restaurant Locations on the Toast platform.
The increase in hardware revenue during the three and nine months ended September 30, 2023 was largely driven by the growth in new restaurant Locations and higher hardware sales to existing restaurant Locations.
Costs of Revenue
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2023 | 2022 | Amount | % | 2023 | 2022 | Amount | % | |||||||||||||||||||||||||||||||||||||||
| Subscription services | $ | 43 | $ | 29 | $ | 14 | 48 | % | $ | 118 | $ | 81 | $ | 37 | 46 | % | |||||||||||||||||||||||||||||||
| Financial technology solutions | 674 | 494 | 180 | 36 | % | 1,828 | 1,289 | 539 | 42 | % | |||||||||||||||||||||||||||||||||||||
| Hardware | 58 | 52 | 6 | 12 | % | 181 | 165 | 16 | 10 | % | |||||||||||||||||||||||||||||||||||||
| Professional services | 30 | 25 | 5 | 20 | % | 90 | 71 | 19 | 27 | % | |||||||||||||||||||||||||||||||||||||
| Amortization of acquired technology and customer assets | 1 | 1 | — | — | % | 4 | 4 | — | — | % | |||||||||||||||||||||||||||||||||||||
| Total costs of revenue | $ | 806 | $ | 601 | $ | 205 | 34 | % | $ | 2,221 | $ | 1,610 | $ | 611 | 38 | % | |||||||||||||||||||||||||||||||
The increase in subscription services costs during the three and nine months ended September 30, 2023 was attributable to an increase in employee-related costs.
The increase in financial technology solutions costs during the three and nine months ended September 30, 2023 was due to an increase in GPV.
The increase in hardware costs during the three and nine months ended September 30, 2023 was attributable to higher shipment volume as a result of growth in restaurant Locations, partially offset by lower freight costs.
We utilize our hardware and related professional services as customer acquisition tools and price them competitively to reduce barriers to entry for new restaurant locations.
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Operating Expenses
Sales and Marketing
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2023 | 2022 | Amount | % | 2023 | 2022 | Amount | % | |||||||||||||||||||||||||||||||||||||||
| Sales and marketing | $ | 100 | $ | 84 | $ | 16 | 19 | % | $ | 299 | $ | 232 | $ | 67 | 29 | % | |||||||||||||||||||||||||||||||
The increase in sales and marketing expenses during the three and nine months ended September 30, 2023 was primarily attributable to an increase in employee-related costs of $14 million and $57 million, respectively.
Research and Development
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2023 | 2022 | Amount | % | 2023 | 2022 | Amount | % | |||||||||||||||||||||||||||||||||||||||
| Research and development | $ | 87 | $ | 74 | $ | 13 | 18 | % | $ | 264 | $ | 203 | $ | 61 | 30 | % | |||||||||||||||||||||||||||||||
The increase in research and development expenses during the three and nine months September 30, 2023 was primarily attributable to an increase in employee-related costs of $10 million and $51 million, respectively.
General and Administrative
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2023 | 2022 | Amount | % | 2023 | 2022 | Amount | % | |||||||||||||||||||||||||||||||||||||||
| General and administrative | $ | 98 | $ | 78 | $ | 20 | 26 | % | $ | 276 | $ | 203 | $ | 73 | 36 | % | |||||||||||||||||||||||||||||||
The increase in general and administrative expenses during the three and nine months ended September 30, 2023 was primarily attributable to an increase in bad debt and credit related expenses of $6 million and $28 million, respectively, driven by growth in our Toast Capital product offering and $10 million of share-based expense related to our charitable donation of Class A common stock.
The increase in general and administrative expenses for the nine months ended September 30, 2023 was also attributable to an increase in employee-related costs of $23 million and $12 million, net in lease termination expenses related to our corporate headquarters in Boston, MA.
Interest Income, Net
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2023 | 2022 | Amount | % | 2023 | 2022 | Amount | % | |||||||||||||||||||||||||||||||||||||||
| Interest income, net | $ | 10 | $ | 3 | $ | 7 | N/M | $ | 27 | $ | 5 | $ | 22 | N/M | |||||||||||||||||||||||||||||||||
N/M - Not meaningful | |||||||||||||||||||||||||||||||||||||||||||||||
The increase in interest income, net during the three and nine months ended September 30, 2023 was attributable to higher interest income generated on our investments in marketable securities.
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Change in Fair Value of Warrant Liability
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2023 | 2022 | Amount | % | 2023 | 2022 | Amount | % | |||||||||||||||||||||||||||||||||||||||
| Change in fair value of warrant liability | $ | 18 | $ | (21) | $ | 39 | (186) | % | $ | (5) | $ | 102 | $ | (107) | (105) | % | |||||||||||||||||||||||||||||||
The change in fair value of warrant liability for the three months ended September 30, 2023 was attributable to a decrease in the value of the common stock underlying the outstanding warrants at the end of period compared to the beginning of the period. The change in the fair value of warrant liability for the nine months ended September 30, 2023 was attributable to an increase in the value of the common stock underlying outstanding warrants at the end of the period compared to the beginning of the period.
Non-GAAP Financial Measures
We use certain non-GAAP financial measures described below to supplement our condensed 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.
Net Loss (GAAP) and Adjusted EBITDA (Non-GAAP)
Adjusted EBITDA is defined as net (loss) income, adjusted to exclude stock-based compensation expense and related payroll tax expense, depreciation and amortization expense, interest income, net, income taxes and certain other items that are not considered to reflect our operating activities and performance within the ordinary course of business, such as acquisition expenses, fair value adjustments on warrant liabilities, expenses related to early termination of leases (which includes associated asset impairments), and stock-based charitable contribution expense, as applicable. We have provided below a reconciliation of 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
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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:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net loss | $ | (31) | $ | (98) | $ | (210) | $ | (175) | |||||||||||||||
| Stock-based compensation expense and related payroll tax | 74 | 58 | 216 | 170 | |||||||||||||||||||
| Depreciation and amortization | 9 | 6 | 22 | 18 | |||||||||||||||||||
| Interest income, net | (10) | (3) | (27) | (5) | |||||||||||||||||||
| Change in fair value of warrant liability | (18) | 21 | 5 | (102) | |||||||||||||||||||
| Termination of leases | 1 | 1 | 14 | (1) | |||||||||||||||||||
Stock-based charitable contribution expense | 10 | — | 10 | — | |||||||||||||||||||
| Acquisition expenses | — | — | 1 | 2 | |||||||||||||||||||
| Provision (benefit) for income taxes | — | (4) | 1 | (4) | |||||||||||||||||||
| Adjusted EBITDA | $ | 35 | $ | (19) | $ | 32 | $ | (97) | |||||||||||||||
Net Cash Provided by (Used in) Operating Activities (GAAP) and Free Cash Flow (Non-GAAP)
Free cash flow is defined as net cash provided by (used in) operating activities reduced by purchases of property and equipment and capitalization of internal-use software costs. 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:
| Nine Months Ended September 30, | |||||||||||
| (in millions) | 2023 | 2022 | |||||||||
Net cash provided by (used in) operating activities | $ | 43 | $ | (137) | |||||||
| Purchases of property and equipment | (4) | (13) | |||||||||
| Capitalized software | (27) | (10) | |||||||||
| Free cash flow | $ | 12 | $ | (160) | |||||||
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Liquidity and Capital Resources
Our principal sources of liquidity are cash and cash equivalents and marketable securities. As of September 30, 2023, we had cash and cash equivalents and marketable securities of $1,030 million, excluding cash held on behalf of customers of $87 million, restricted cash of $49 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”.
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:
| Nine Months Ended September 30, | |||||||||||
| (in millions) | 2023 | 2022 | |||||||||
Net cash provided by (used in) operating activities | $ | 43 | $ | (137) | |||||||
| Net cash used in investing activities | (85) | (25) | |||||||||
| Net cash provided by financing activities | 58 | 36 | |||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 16 | $ | (126) | |||||||
Operating Activities
For the nine months ended September 30, 2023, net cash provided by operating activities was $43 million as a result of our net loss for the period, adjusted for certain non-cash items, such as stock-based compensation, credit loss expenses, amortization of deferred costs, depreciation and amortization, asset impairments, as well as a use of cash for working capital. The change in working capital was primarily driven by higher deferred costs, resulting, in part, from continued growth in restaurant locations, and higher accounts receivable, resulting from higher revenues, partially offset by higher accrued expenses and other current liabilities due to higher financial technology solutions expenses related to our growth in GPV.
For the nine months ended September 30, 2022, net cash used in operating activities was $137 million as a result of our net loss for the period, adjusted for certain non-cash items, such as stock-based compensation, the change in fair value of our warrant liabilities, amortization of deferred costs, depreciation and amortization, credit loss expense as well as a use of cash for working capital. The change in working capital was primarily driven by higher inventory balances, as well as higher deferred costs and accounts receivable, partially offset by higher accrued expenses and other current liabilities related to our growth in GPV.
Investing Activities
For the nine months ended September 30, 2023, cash used in investing activities was $85 million, which consisted primarily of cash paid for purchases of marketable securities, cash outflows for capitalized software, and cash paid for an acquisition, partially offset by proceeds from sales and maturities of marketable securities.
For the nine months ended September 30, 2022, cash used in investing activities was $25 million, which consisted primarily of cash paid for purchases of marketable securities and cash paid for an acquisition, partially offset by proceeds from sales and maturities of marketable securities.
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Financing Activities
For the nine months ended September 30, 2023, cash provided by financing activities was $58 million, which consisted of an increase in customer funds obligations and proceeds from issuance of common stock.
For the nine months ended September 30, 2022, cash provided by financing activities was $36 million, which consisted primarily of an increase in customer funds obligations and proceeds from issuance of common stock.
Credit Facilities
On March 2, 2023, we entered into an amendment to our revolving credit facility agreement, or 2021 Facility, to replace LIBOR with SOFR. The 2021 Facility is subject to a minimum liquidity covenant of $250 million. As of September 30, 2023 and December 31, 2022, no amount were drawn or outstanding under the 2021 Facility which had $330 million available as of each period end. In addition, as of September 30, 2023 and December 31, 2022, there were also $8 million in letters of credit outstanding. Additional information regarding our credit facilities is provided in this Quarterly Report in “Notes to Condensed Consolidated Financial Statements, Note 6. Debt.”
Contractual Obligations and Commitments and Off-Balance Sheet Arrangements
At September 30, 2023, other than for the changes disclosed in the “Notes to Condensed Consolidated Financial Statements”, or “Results of Operations”, there have been no material changes outside the ordinary course of business to our contractual obligations and commitments, as disclosed in our 2022 Annual Report. Please refer to Note 5, “Lessee Arrangements” and Note 14, “Commitments and Contingencies” to our unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for a discussion of our lease and purchase commitments.
Please refer to Note 4, “Loan Servicing Activities and Acquired Loans Receivable, Net” to our unaudited Condensed 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 September 30, 2023.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates, as well as credit risk on accounts receivable and our loan servicing activities. Our exposure to market and credit risk has not changed materially since the presentation set forth in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 1, 2023.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on management’s review, with participation of our Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the quarter ended September 30, 2023, our disclosure controls and procedures were not effective.
As disclosed in Item 9A, “Controls and Procedures” of our 2022 Annual Report, we previously identified a material weakness in our internal control over financial reporting related to deficiencies in our information technology general controls. Notwithstanding the identified material weakness, our management believes the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in accordance with GAAP.
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Remediation Plan for Material Weakness
Remediation generally requires making changes to how controls are designed and implemented, and then adhering to those changes for a sufficient period of time such that the effectiveness of those changes is demonstrated with an appropriate amount of consistency. We have continued actions, as previously planned, to remediate this material weakness including (i) creating and filling an IT Compliance Oversight function; (ii) developing and implementing additional training and awareness programs addressing information technology general controls and policies, including educating control owners concerning the principles and requirements of each control, with a focus on user access; (iii) increasing the extent of oversight and verification checks included in operation of user access controls and processes; (iv) deploying additional tools to support administration of user access; and (v) enhancing quarterly management reporting on the remediation measures to the Audit Committee of the Board of Directors.
We believe that these actions, when fully implemented, will remediate the material weakness. The material weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. As we continue to evaluate and improve the applicable controls, management may determine to take additional measures to modify the remediation plan described above. We expect that the remediation of this material weakness will be completed by the end of fiscal year 2023.
Changes in Internal Control Over Financial Reporting
Except for the ongoing remediation measures in connection with the material weaknesses described above, there were no other changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently a party to any litigation or claims that, if determined adversely to us, would have a material adverse effect on our business operating results, financial condition, or cash flows. We are, from time to time, party to litigation and subject to claims in the ordinary course of business. Regardless of the outcome, litigation can have an adverse impact on us because of the defense and settlement costs, diversion of management resources, and other factors.
Item 1A. Risk Factors
A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, including Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the risks actually occur, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the trading price of our Class A common stock could decline.
RISK FACTORS SUMMARY
The following is a summary of the principal risks that could materially adversely affect our business, results of operations, and financial condition. Additional discussion of the risks included in this summary, and other risks that we face, can be found below and should be carefully considered, together with other information in this Quarterly Report on Form 10-Q in its entirety before making investment decisions regarding our Class A common stock. This summary should not be relied upon as an exhaustive summary of the material risks facing our business.
•If we fail to manage our growth effectively and efficiently, we may be unable to execute our business plan, maintain high levels of service and customer satisfaction, or adequately address competitive challenges.
•If we do not attract new customers, retain existing customers, and increase our customers’ use of our platform, our business will suffer.
•We have a limited operating history in an evolving industry, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.
•We have a history of generating net losses, and if we are unable to achieve adequate revenue growth while our expenses increase, we may not achieve or maintain profitability in the future.
•Our operating results depend in significant part on our payment processing services, and the revenue and gross profit we derive from our payment processing activity in a particular period can vary due to a variety of factors.
•Unfavorable conditions in the restaurant industry or the global economy could limit our ability to grow our business and materially impact our financial performance.
•We depend upon third parties to manufacture our products and to supply key components necessary to manufacture our products. We do not have long-term agreements with all of our manufacturers and suppliers, and if these manufacturers or suppliers become unwilling or unable to provide an adequate supply of components, we may not be able to find alternative sources in a timely manner and our business would be impacted.
•Our future revenue will depend in part on our ability to expand the financial technology services we offer to our customers and increase adoption of those services.
•We rely on third-party payment processors to facilitate payments made by guests, payments made to customers, and payments made on behalf of customers, and if we cannot manage risks related to our relationships with our current or future third-party payment processors, our business, financial condition, and results of operations could be adversely affected.
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•The markets in which we participate are intensely competitive, and if we do not compete effectively, our operating results could be adversely affected.
•A majority of our customers are small- and medium-sized businesses, which can be more difficult and costly to retain than enterprise customers, and are subject to increased impacts of economic fluctuations, which may adversely affect our business and operations.
•We rely in part on revenue from subscription contracts, and because we recognize revenue from subscription contracts over the term of the relevant subscription period, downturns or upturns in sales are not immediately reflected in full in our results of operations.
•We are responsible for transmitting a high volume of sensitive and personal information through our platform and our success depends upon the security of this platform. Any actual or perceived breach of our system that would result in disclosure of such information could materially impact our business.
•Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business and operating results.
•Our success depends upon our ability to continually enhance the performance, reliability, and features of our platform.
•We are subject to additional risks relating to the financial products we make available to our customers, including relationships with partners, the ability of our customers to generate revenue to pay their obligations under these products, general macroeconomic conditions and the risk of fraud.
•If we fail to adequately protect our intellectual property rights, our competitive position could be impaired and we may lose valuable assets or revenue and become subject to costly litigation to protect our rights.
•Our business is subject to a variety of U.S. and international laws and regulations, many of which are unsettled and still developing, and our or our customers’ failure to comply with such laws and regulations could subject us to claims or otherwise adversely affect our business, financial condition, or results of operations.
•The trading price of our Class A common stock may be volatile, and you could lose all or part of your investment.
•The dual-class structure of our common stock as contained in our amended and restated certificate of incorporation has the effect of concentrating voting control with those stockholders who held our capital stock prior to our initial public offering, including our directors, executive officers and their respective affiliates. This ownership will limit or preclude your ability to influence corporate matters, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transactions requiring stockholder approval, and that may adversely affect the trading price of our Class A common stock.
•Our principal stockholders will continue to have significant influence over the election of our board of directors and approval of any significant corporate actions, including any sale of the company.
•We have identified a material weakness in our internal controls over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.
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Risks Related to Our Business and Business Development
If we fail to manage our growth effectively and efficiently, we may be unable to execute our business plan, maintain high levels of service and customer satisfaction, or adequately address competitive challenges.
We have experienced significant growth in recent periods, which puts a strain on our business, operations, and employees. We anticipate that our operations will continue to rapidly expand. To manage our current and anticipated future growth effectively, we must continue to maintain, enhance and scale our finance and accounting systems and controls, as well as our information technology, or IT, and security infrastructure. For example, we expect we will need to continue to invest in and seek to enhance our IT systems and capabilities, including with respect to internal information sharing and interconnectivity between various systems within our infrastructure and other business systems.
We must also attract, train, and retain qualified sales and marketing personnel, client support personnel, professional services personnel, software engineers, technical personnel, and management personnel, without undermining our corporate culture of rapid innovation, teamwork, and attention to customer success that has been central to our growth.
Failure to effectively manage our growth could also lead us to over-invest or under-invest in development and operations, result in weaknesses in our infrastructure, systems, or controls, give rise to operational mistakes, financial losses, loss of productivity or business opportunities, and result in loss of employees and reduced productivity of remaining employees. To support our growth, we expect to continue to invest in sales and marketing to increase sales of our platform and increase awareness of our brand and continue to invest in research and development to increase the functionality of our platform and to introduce additional related products and services. A significant portion of our investments in our sales and marketing and research and development activities will precede the benefits from such investments, and we cannot be sure that we will receive an adequate return on our investments. If our management is unable to effectively and efficiently manage our growth, our expenses may increase more than expected, our revenue may not increase or may grow more slowly than expected, and we may be unable to implement our business strategy.
If we do not attract new customers, retain existing customers, and increase our customers’ use of our platform, our business will suffer.
We derive, and expect to continue to derive, a majority of our revenue and cash inflows from our integrated cloud-based restaurant management platform, which encompasses software, financial technology, and hardware components. As such, our ability to attract new customers, retain existing customers, and increase use of the platform by existing customers is critical to our success.
Our future revenue will depend in large part on our success in attracting additional customers to our platform. Our ability to attract additional customers will depend on a number of factors, including the effectiveness of our sales team, the success of our marketing efforts, our levels of investment in expanding our sales and marketing teams, referrals by existing customers, and the availability of competitive restaurant technology platforms. We may not experience the same levels of success with respect to our customer acquisition strategies as seen in prior periods, and if the costs associated with acquiring new customers materially rises in the future, our expenses may rise significantly.
In addition, while a majority of our current customer base consists of small- and medium-sized businesses, or SMBs, we continue to pursue customer growth within the enterprise and mid-market segments of the restaurant market, as well as among SMBs. Each of those segments of the overall market poses different sales and marketing challenges, and has different requirements, and we cannot be sure that we will achieve the same success in those market segments as we have achieved to date in sales to SMBs.
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Our business also depends on retaining our existing customers. Our business is subscription-based, and contract terms for our SaaS products generally range from 12 to 36 months. Customers are not obligated to, and may not, renew their subscriptions after their existing subscriptions expire. As a result, even though the number of customers using our platform has grown rapidly in recent years, there can be no assurance that we will be able to retain these customers or any new customers that may enter into subscriptions. Renewals of subscriptions may decline or fluctuate as a result of a number of factors, including dissatisfaction with our platform or support, the perception that a competitive platform, product or service presents a better or less expensive option, or our failure to successfully deploy sales and marketing efforts towards existing customers as they approach the expiration of their subscription term. In addition, we may terminate our relationships with customers for various reasons, such as heightened credit risk, excessive card chargebacks, unacceptable business practices, or contract breaches.
Further, if customers on our platform were to cease operations, temporarily or permanently, or face financial distress or other business disruption, our ability to retain customers would suffer. This risk is particularly pronounced with restaurants, as each year a meaningful percentage of restaurants go out of business, and this risk has become particularly acute as a result of the COVID-19 pandemic, rising inflation and interest rates, and other recent global financial, economic, political, and health events that have impacted consumer behaviors and the restaurant industry.
In addition to attracting new customers and retaining existing customers, we seek to expand usage of our platform by broadening adoption by our customers of the various products included within our platform. Although in recent periods new customers have increasingly adopted our full suite of products, we cannot be certain that new customers will continue to adopt our full suite of products at existing rates or that we will be successful in increasing adoption of additional products by our existing customers. Further, while many of our customers deploy our platform to all of their restaurant locations, some of our customers initially deploy our platform to a subset of locations. For those customers, we seek to expand use of our platform to additional locations over time. Our ability to increase adoption of our products by our customers and to increase penetration of our existing customers’ locations will depend on a number of factors, including our customers’ satisfaction with our platform, competition, pricing, and our ability to demonstrate the value proposition of our products.
Our costs associated with renewals and generating sales of additional products to existing customers are substantially lower than our costs associated with entering into subscriptions with new customers. Accordingly, our business model relies to a significant extent on our ability to renew subscriptions and sell additional products to existing customers, and, if we are unable to retain revenue from existing customers or to increase revenue from existing customers, our operating results would be adversely impacted even if such lost revenue were offset by an increase in revenue from new customers.
We may not be able to sustain our recent revenue growth in future periods.
We have grown rapidly over the last several years, and our recent revenue growth rate and financial performance should not be considered indicative of our future performance. In the three months ended September 30, 2023 and 2022, our revenue was $1,032 million and $752 million, respectively, representing a 37% growth rate. You should not rely on our revenue or key business metrics for any previous quarterly or annual period as indicative of our revenue, revenue growth, key business metrics, or key business metrics growth in future periods. In particular, our revenue growth rate has fluctuated in prior periods. We expect our revenue growth rate to continue to fluctuate over the short and long term. We may experience declines in our revenue growth rate as a result of a number of factors, including slowing demand for our platform, insufficient growth in the number of customers and their guests that utilize our platform, increasing competition, changing customer and guest behaviors, a decrease in the growth of our overall market, our failure to continue to capitalize on growth opportunities, the impact of regulatory requirements, the maturation of our business, and macroeconomic conditions, among others. In addition, SMBs comprise the majority of our customer base. If the demand for restaurant management platforms by SMBs does not continue to grow, or if we are unable to maintain our category share with SMBs, our revenue and other growth rates could be adversely affected.
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We have a limited operating history in an evolving industry, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.
We launched our operations in 2013, have grown significantly in recent periods, and have a limited operating history, particularly at our current scale. In addition, we operate in an evolving industry and have frequently expanded our platform features and services and changed our pricing methodologies. This limited operating history and our evolving business make it difficult to evaluate our future prospects and the risks and challenges we may encounter. These risks and challenges include, but are not limited to, our ability to:
•accurately forecast our revenue and plan our operating expenses;
•increase the number of and retain existing customers and their guests using our platform;
•successfully compete with current and future competitors;
•successfully expand our business in existing markets and enter new markets and geographies;
•anticipate and respond to macroeconomic changes and changes in the markets in which we operate;
•maintain and enhance the value of our reputation and brand;
•comply with regulatory requirements in highly regulated markets;
•adapt to rapidly evolving trends in the ways customers and their guests interact with technology;
•avoid interruptions or disruptions in our service;
•develop a scalable, high-performance technology infrastructure that can efficiently and reliably handle significant surges of usage by our customers and their guests as compared to historic levels and increased usage generally, as well as the deployment of new features and services;
•maintain, scale, and effectively manage our internal infrastructure systems, such as information strategy and sharing and interconnectivity between systems;
•hire, integrate, and retain talented technology, sales, customer service, and other personnel;
•effectively manage rapid growth in our personnel and operations; and
•effectively manage our costs.
Further, because we have limited historical financial data relevant to our current scale and operations and operate in a rapidly evolving market, any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more predictable market. We have encountered in the past, and will encounter in the future, risks and uncertainties frequently experienced by growing companies with limited operating histories in rapidly changing industries. If our assumptions regarding these risks and uncertainties, which we use to plan and operate our business, are incorrect or change, or if we do not address these risks successfully, our results of operations could differ materially from our expectations and our business, financial condition, and results of operations could be adversely affected.
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Our platform includes our payment services, and our ability to attract new customers and retain existing customers depends in part on our ability to offer payment processing services with the desired functionality at an attractive price.
We generally sell subscriptions to our platform together with our payment services. Except for a small number of enterprise brands, customers are unable to subscribe to our platform without also subscribing to our payment services. While we believe that offering a complete all-in-one platform that includes payment processing functionality along with all the other functionality of our platform offers our customers significant advantages over separate point of sale solutions, some potential or existing customers may not desire to use our payment processing services or to switch from their existing payment processing vendors. Some of our potential customers for our platform may not be willing to switch payment processing vendors for a variety of reasons, such as transition costs, business disruption, and loss of accustomed functionality. There can be no assurance that our efforts to overcome these factors will be successful, and this resistance may adversely affect our growth.
The attractiveness of our payment processing services also depends on our ability to integrate emerging payment technologies, including crypto currencies, other emerging or alternative payment methods, and credit card systems that we or our processing partners may not adequately support or for which we or they do not provide adequate processing rates. In the event such methods become popular among consumers, any failure to timely integrate emerging payment methods into our software, anticipate consumer behavior changes, or contract with processing partners that support such emerging payment technologies could reduce the attractiveness of our payment processing services and of our platform, and adversely affect our operating results.
Our operating results depend in significant part on our payment processing services, and the revenue and gross profit we derive from our payment processing activity in a particular period can vary due to a variety of factors.
Even if we succeed in increasing subscriptions to our platform and retaining subscription customers, the revenue we derive from payment processing services may vary from period to period depending on a variety of factors, many of which are beyond our control and difficult to predict. Our revenue from payment processing services is generally calculated as a percentage of payment volume plus a per-transaction fee and, accordingly, varies depending on the total dollar amount processed through the Toast platform across all of our customers’ restaurant locations in a particular period. This amount may vary, depending on, among other things, the success of our customers’ restaurant locations, the proportion of our customers’ payment volumes processed through our platform, ticket size, consumer spending levels in general, and overall economic conditions. In addition, the revenue and gross profit derived from our payment processing services varies depending on the particular type of payment processed on our platform. For example, card-not-present transactions, which are transactions for which the credit card is not physically present at the merchant location at the time of the transaction, are generally associated with higher payment processing revenue and gross profit compared to card-present transactions, and debit card transactions are generally also associated with higher gross profit compared to credit card transactions. The ratio of card-not-present and debit card transactions as a proportion of the total payment transactions processed through our platform can fluctuate from time to time and may be impacted by global events, which may lead to corresponding fluctuations in our revenue and gross profit.
A majority of our customers are SMBs, which can be more difficult and costly to retain than enterprise customers and are subject to increased impacts of economic fluctuations, which may adversely affect our business and operations.
A majority of our customers are SMBs and we expect they will continue to comprise a large portion of our customer base for the foreseeable future. We define SMBs in the context of our customer base as customers that have between one and ten restaurant locations. Selling to and retaining SMBs can be more difficult than retaining enterprise customers, as SMBs often have higher rates of business failure and more limited resources, may have decisions related to the choice of payment processor dictated by their affiliated parent entity and are more readily able to change their payment processors than larger organizations.
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SMBs are also typically more susceptible to the adverse effects of economic fluctuations, including those caused by the COVID-19 pandemic, rising inflation and interest rates, and economic downturns. Adverse changes in the economic environment or business failures of our SMB customers may have a greater impact on us than on our competitors who do not focus on SMBs to the extent that we do.
We rely in part on revenue from subscription contracts, and because we recognize revenue from subscription contracts over the term of the relevant subscription period, downturns or upturns in sales are not immediately reflected in full in our results of operations.
Subscription services revenue accounts for a significant portion of our total revenue. Sales of new or renewal subscription contracts may decline or fluctuate as a result of a number of factors, including customers’ level of satisfaction with our platform, the prices of our subscriptions, the prices of subscriptions offered by our competitors, reductions in our customers’ spending levels, or other changes in consumer behavior. If our sales of new or renewal subscription contracts decline, our revenue and revenue growth may decline. We recognize subscription revenue ratably over the term of the relevant subscription period, which generally ranges from 12 to 36 months in duration. As a result, much of the subscription revenue we report each quarter is derived from subscription contracts that we sold in prior periods.
Consequently, a decline in new or renewed subscription contracts in any one quarter will not be fully reflected in revenue in that quarter but will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in new or renewal sales of our subscriptions is not reflected in full in our results of operations in a given period. Also, it is difficult for us to rapidly increase our subscription revenue through additional sales in any period, as revenue from new and renewal subscription contracts must be recognized ratably over the applicable subscription period. Furthermore, any increases in the average term of subscription contracts would result in revenue for those subscription contracts being recognized over longer periods of time.
Our future revenue will depend in part on our ability to expand the financial technology services we offer to our customers and increase adoption of those services.
We offer our customers a variety of financial technology products and services, and we intend to make available additional financial technology products and services to our customers in the future. A number of these services require that we enter into arrangements with financial institutions or other third parties. For example, one of our bank partners, which is a Utah-chartered and Federal Deposit Insurance Corporation, or the FDIC,-insured industrial bank, offers qualified customers working capital loans, which we service. In order to provide these and future financial technology products and services, we may need to establish additional partnerships with third parties, comply with a variety of regulatory requirements, and introduce internal processes and procedures to comply with applicable law and the requirements of our partners, all of which may involve significant cost, require substantial management attention, and expose us to new business and compliance risks. We cannot be sure that our current or future financial technology services will be widely adopted by our customers or that the revenue we derive from such services will justify our investments in developing and introducing these services.
Failure to maintain and enhance our brand recognition in a cost-effective manner could harm our business, financial condition, and results of operations.
We believe that maintaining and enhancing our brand identity and reputation is critical to our relationships with, and ability to attract, new customers, partners and employees. Accordingly, we have invested, and expect to continue to invest, increasing amounts of money in and greater resources to branding and other marketing initiatives, which may not be successful or cost effective. If we do not successfully maintain and enhance our brand and reputation in a cost-effective manner, our business may not grow, we may have reduced pricing power relative to competitors with stronger brands or reputations, and we could lose customers or partners, all of which would harm our business, financial condition, and results of operations.
In addition, any negative publicity about our company or our management, including about the quality, stability, and reliability of our platform or services, changes to our products and services, our privacy and security practices, litigation, regulatory enforcement, and other actions involving us, as well as the perception of us and our products by our customers and their guests, even if inaccurate, could cause a loss of confidence in us and adversely affect our brand.
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We depend on the experience and expertise of our senior management team and key technical employees, and the loss of any key employee could harm our business, financial condition, and results of operations.
Our success depends upon the continued service of our senior management team and key technical employees. Each of these employees could terminate his or her relationship with us at any time. Further, our competitors may be successful in recruiting and hiring members of our management team or other key employees, and it may be difficult for us to find suitable replacements on a timely basis, on competitive terms, or at all.
The loss of any member of our senior management team or key technical employees might significantly delay or prevent the achievement of our business objectives and could harm our business and our customer relationships.
Our ability to recruit, retain, and develop qualified personnel is critical to our success and growth.
All our businesses function at the intersection of rapidly changing technological, social, economic, and regulatory environments that require a wide range of expertise and intellectual capital. For us to successfully compete and grow, we must recruit, retain, and develop personnel who can provide the necessary expertise across a broad spectrum of disciplines. In addition, we must develop, maintain and, as necessary, implement appropriate succession plans to ensure we have the necessary human resources capable of maintaining continuity in our business.
The market for qualified personnel is competitive, and we may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors. Our effort to retain and develop personnel may also result in significant additional expenses, which could adversely affect our profitability. In addition, job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. The trading price of our Class A common stock has been and may continue to be volatile, could be subject to fluctuations in response to various factors and may not appreciate. If the perceived value of our equity awards declines for these or other reasons, it may adversely affect our ability to attract and retain highly qualified employees. Certain of our employees have received significant proceeds from sales of our equity in previous transactions and many of our employees may receive significant proceeds from sales of our equity in future transactions, which may reduce their motivation to continue to work for us.
We are also substantially dependent on our direct sales force to obtain new customers and increase sales to existing customers. There is significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training, and retaining a sufficient number of sales personnel to support our growth. If we are unable to hire, train, and retain a sufficient number of qualified and successful sales personnel, our business, financial condition, and results of operations could be harmed.
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From time to time, we are subject to various legal proceedings that could adversely affect our business, financial condition, or results of operations.
From time to time, we are or may become involved in claims, lawsuits (whether class actions or individual lawsuits), arbitration proceedings, government investigations, and other legal or regulatory proceedings involving commercial, corporate and securities matters; privacy, marketing and communications practices; labor and employment matters; alleged infringement of third-party patents and other intellectual property rights; and other matters. The results of any such claims, lawsuits, arbitration proceedings, government investigations, or other legal or regulatory proceedings cannot be predicted with any degree of certainty. Any claims against us, whether meritorious or not, could be time-consuming, result in costly litigation, require significant management attention, and divert significant resources. Determining reserves for our pending litigation is a complex and fact-intensive process that requires significant subjective judgment and speculation. It is possible that a resolution of one or more such proceedings could result in substantial damages, settlement costs, fines, and penalties. These proceedings could also result in harm to our reputation and brand, sanctions, consent decrees, injunctions, or other orders requiring a change in our business practices. Any of these consequences could adversely affect our business, financial condition, and results of operations. Further, under certain circumstances, we have contractual and other legal obligations to indemnify and to incur legal expenses on behalf of our business, customers, and commercial partners and current and former directors and officers. In addition, certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flows, expose us to increased risks that would be uninsured, and adversely impact our ability to attract directors and officers.
Notwithstanding the terms of our agreements with our customers, it is possible that a default on such obligations by one or more of our customers could adversely affect our business, financial condition, or results of operations. For example, if a customer defaults on its obligations under a customer agreement or terminates a customer agreement prior to the contractual termination date, we may be required to assert a claim to acquire the amount in full due under the customer agreement, which we may choose not to pursue. However, if we choose to pursue any such claim, we may incur substantial costs to resolve claims or enter into litigation or arbitration, and even if we were to prevail in the event of claims, litigation or arbitration, such claims, litigation, or arbitration could be costly and time-consuming and divert the attention of our management and other employees from our business operations.
We also include arbitration and class action waiver provisions in our terms of service with the customers that utilize our platform and certain agreements with our employees. These provisions are intended to streamline the litigation process for all parties involved, as they can in some cases be faster and less costly than litigating disputes in state or federal court. However, arbitration can nevertheless be costly and burdensome, and the use of arbitration and class action waiver provisions subjects us to certain risks to our reputation and brand, as these provisions have been the subject of increasing public scrutiny. In order to minimize these risks to our reputation and brand, we may limit our use of arbitration and class action waiver provisions, or we may be required to do so in any particular legal or regulatory proceeding, either of which could cause an increase in our litigation costs and exposure. Additionally, we permit certain customers and other users of our platform to opt out of such provisions, which could cause an increase in our litigation costs and exposure.
Further, with the potential for conflicting rules regarding the scope and enforceability of arbitration and class action waivers on a state-by-state basis, as well as between state and federal law, there is a risk that some or all of our arbitration and class action waiver provisions could be subject to challenge or may need to be revised to exempt certain categories of protection. If these provisions were found to be unenforceable, in whole or in part, or specific claims are required to be exempted, we could experience an increase in our costs to litigate disputes and in the time involved in resolving such disputes, and we could face increased exposure to potentially costly lawsuits, each of which could adversely affect our business, financial condition, and results of operations.
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We have closed multiple acquisitions and may acquire or invest in other companies or technologies in the future, which could divert management’s attention, fail to meet our expectations, result in additional dilution to our stockholders, increase expenses, disrupt our operations, or harm our operating results.
We closed multiple acquisitions since 2019 and may in the future acquire or invest in other businesses, products, or technologies that we believe could complement or expand our platform, enhance our technical capabilities, or otherwise offer growth opportunities. We may not be able to fully realize the anticipated benefits of our past or future acquisitions.
We cannot forecast the number, timing or size of any future acquisitions or other similar strategic transactions. We may not be able to successfully identify future acquisition opportunities or complete any such acquisitions if we cannot reach agreement on commercially favorable terms, if we lack sufficient resources to finance the transaction on our own and cannot obtain financing at a reasonable cost, or if regulatory authorities prevent such transactions from being completed. In addition, the pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses related to identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated. Further, we may have to pay cash, incur debt, or issue securities, including equity-based securities, to pay for acquisitions, joint ventures, or strategic investments, each of which could affect our financial condition or the value of our capital stock or result in dilution to our existing stockholders.
There are inherent risks in integrating and managing acquisitions. When we acquire additional businesses, we may not be able to assimilate or integrate the acquired personnel, operations, and technologies successfully or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including but not limited to: unanticipated costs associated with the acquisition, including but not limited to, integration and compliance costs; the inability to generate sufficient revenue to offset acquisition costs; the inability to maintain relationships with customers and partners of the acquired business; the difficulty of incorporating acquired technology into our platform and of maintaining quality and security standards consistent with our brand; harm to our existing business relationships as a result of the acquisition; and the potential loss of key employees. Acquisitions also increase the risk of unforeseen legal liability arising from prior or ongoing acts or omissions by the acquired businesses which are not discovered by due diligence during the acquisition process or that prove to have a greater than anticipated adverse impact. We have previously acquired and continue to evaluate companies that operate in highly regulated markets. There is no assurance that acquired businesses will have invested sufficient efforts in their own regulatory compliance, and we may need to invest in and seek to improve the regulatory compliance controls and systems of such businesses. Generally, if an acquired business fails to meet our expectations, or if we are unable to establish effective regulatory compliance controls with respect to an acquired business, our operating results, business, and financial condition may suffer.
In addition, we have previously acquired and may in the future pursue acquisitions of companies with extensive operations outside the United States. These types of acquisitions often involve additional or increased risks compared to acquisitions of operations within the United States.
The diversion of management’s attention and any delays or difficulties encountered in connection with acquisitions and their integration could adversely affect our business, financial condition, or results of operations.
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We do not have sufficient history with our subscription or pricing models to accurately predict optimal pricing strategies necessary to attract new customers and retain existing customers.
We have limited experience with respect to determining the optimal prices for our platform and services. The pricing models of our company and our competitors may be impacted by various other factors and changed from time to time. Given our limited experience, we may not be able to achieve the optimal pricing model at all times, which could lead to reduced profitability or market share. Changes to our pricing model may also lead to reputational damage, competitive harm, regulatory scrutiny, and potential legal liabilities, which could adversely affect our business and results of operations. Furthermore, as the market for our platform matures, or as competitors introduce new products or services that compete with ours, we may be unable to attract new customers at the same price or based on the same pricing models that we have used historically.
Moreover, while SMBs continue to comprise the majority of our customer base, we have and will continue to seek subscriptions from enterprise customers, which may be more likely to demand substantial price concessions. As a result, in the future, we may be required to reduce our prices, which could adversely affect our revenue, gross margin, profitability, financial position, and cash flow.
Our business is exposed to risks associated with the handling of customer funds.
Our business handles payroll processing administration for certain of our customers. Consequently, at any given time, we may be holding or directing funds of customers, while payroll payments are being processed. This function creates a risk of loss arising from, among other things, fraud by employees or third parties, execution of unauthorized transactions, or errors relating to transaction processing. We are also potentially at risk if the financial institution in which we hold these funds suffers any kind of insolvency or liquidity event or fails, for any reason, to deliver their services in a timely manner. The occurrence of any of these types of events could cause us financial loss and reputational harm.
Any failure to offer high-quality customer support may adversely affect our relationships with our customers and could adversely affect our business, financial condition, and results of operations.
In deploying and using our platform, our customers depend on our 24/7 support team to resolve complex technical and operational issues, including ensuring that our platform is implemented in a manner that integrates with a variety of third-party platforms. We also rely on third parties to provide some support services, and our ability to provide effective support is partially dependent on our ability to attract and retain qualified and capable third-party service providers. As we continue to grow our business and improve our offerings, we will face challenges related to providing high-quality support services at scale. We may be unable to respond quickly enough to accommodate short-term increases in demand for customer support or to modify the nature, scope, and delivery of our customer support to compete with changes in customer support services provided by our competitors. Increased demand for customer support, without corresponding revenue, could increase costs and adversely affect our operating results. Our sales are highly dependent on our business reputation and on positive recommendations from our existing customers. Any failure to maintain high-quality customer support, or a market perception that we do not maintain high-quality customer support, could adversely affect our reputation and brand, our ability to benefit from referrals by existing customers, our ability to sell our platform to existing and prospective customers, and our business, financial condition, or results of operations.
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The long-term potential of our business may be adversely affected if we are unable to expand our business successfully into international markets.
Although we currently do not derive significant revenue from customers located outside the United States, the long-term potential of our business will depend in part on our ability to expand our business into international markets. We have recently made an initial investment to establish our international presence and plan to continue such efforts, which has and may continue to be accomplished in part through acquisitions of companies located outside of the United States. However, we have limited experience with international customers and in selling our platform internationally. Accordingly, we cannot be certain that our business model will be successful, or that our platform will achieve commercial acceptance, outside the United States.
Conducting international operations subjects us to risks that we have not generally faced in the United States, including but not limited to:
•managing geographically separate organizations, systems, and facilities;
•challenges caused by language, cultural, and ethical differences;
•difficulties in staffing and managing foreign operations, including employment laws and regulations;
•presence of more established competitors and/or local competitors favored by local business practices;
•compliance challenges related to the complexity of multiple, conflicting, and changing governmental laws and regulations, including data privacy, employment, tax, anti-money laundering, and anti-bribery laws and regulations and sanction regimes, including but not limited to, additional exposure to GDPR, rules and programs administered by the Treasury Department’s Office of Foreign Assets Control, or OFAC, domestic and international anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, or FCPA, and the U.K. Bribery Act, as well as other similar anti-bribery and anti-kickback laws and regulations;
•different pricing environments, sales cycles, and collections issues;
•financial and other impacts to our business resulting from fluctuations in currency exchange rates and unit economics across multiple jurisdictions;
•increased financial accounting and reporting burdens and complexities;
•enforcing intellectual property rights outside of the United States;
•difficulty entering new non-U.S. markets due to, among other things, difficulties in achieving consumer acceptance of our platform in new markets and more limited business knowledge of these markets; and
•general economic and political conditions.
Expanding our business internationally requires significant additional investment in our platform, operations, infrastructure, compliance efforts, and sales and marketing organization, and any such investments may not be successful or generate an adequate return on our investment.
Our risk management strategies may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk.
We operate in a rapidly changing industry. Accordingly, our risk management strategies may not be fully effective to identify, monitor, and manage all risks that our business encounters. In addition, when we introduce new services, focus on expanding relationships with new types of customers, or begin to operate in new markets, we may be less able to forecast risk levels and reserve accurately for potential losses, as a result of fraud or otherwise. If our strategies are not fully effective or we are not successful in identifying and mitigating all risks to which we are or may be exposed, we may suffer uninsured liability or harm to our reputation, or be subject to litigation or regulatory actions, any of which could adversely affect our business, financial condition, and results of operations.
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Risks Related to Our Technology and Privacy
We are responsible for transmitting a high volume of sensitive and personal information through our platform and our success depends upon the security of this platform. Any actual or perceived breach of our system that would result in disclosure of such information could materially impact our business.
We, our customers, our partners, and other third parties, including third-party vendors, cloud service providers, and payment processors that we use, obtain and process large amounts of sensitive and personal information, including information related to our customers, their guests, and their transactions. We face risks, including to our reputation as a trusted brand, in the handling and protection of this information, and these risks will increase as our business continues to expand to include new products and technologies. Our operations involve the storage, transmission, and processing of our customers’ proprietary information and sensitive and personal information of our customers and their guests and employees, including contact information and payment information, purchase histories, lending information, and payroll information. Cyber incidents have been increasing in sophistication and frequency and can include third parties gaining access to employee or guest information using stolen or inferred credentials, computer malware, viruses, spamming, phishing attacks, ransomware, card skimming code, and other deliberate attacks and attempts to gain unauthorized access. In addition, these incidents can originate on our vendors’ websites or systems, which can then be leveraged to access our website or systems, further preventing our ability to successfully identify and mitigate the attack. As a result, unauthorized access to, security breaches of, or denial-of-service attacks against our platform (or any platform of our third-party vendors) could result in the unauthorized access to or use of, and/or loss of, such data, as well as loss of intellectual property, guest information, employee data, trade secrets, or other confidential or proprietary information.
We have administrative, technical, and physical security measures in place and proactively employ multiple security measures at different layers of our systems to defend against intrusion and attack and to protect our information; however, we have experienced security incidents in the past, and we may face additional security incidents in the future. Because the techniques used to obtain unauthorized access to or to sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures that will be sufficient to counter all current and emerging technology threats. In addition, any security breaches that occur may remain undetected for extended periods of time. While we also have and will continue to make significant efforts to address any IT security issues with respect to acquisitions we make, we may still inherit such risks when we integrate these companies.
We also have policies and procedures in place to contractually require third parties to which we transfer data to implement and maintain appropriate security measures. Sensitive and personal information is processed and stored by our customers, software and financial institution partners and third-party service providers to whom we outsource certain functions. Threats to third-party systems can originate from human error, fraud, or malice on the part of employees or third parties, or simply from accidental technological failure, and/or computer viruses and other malware that can be distributed and infiltrate systems of third parties on whom we rely. While we select third parties to which we transfer data carefully, we do not control their actions, and these third parties may experience security breaches that result in unauthorized access of data and information stored with them despite these contractual requirements and the security measures these third parties employ.
If any security breach involving our systems or the systems of third parties that store or process our data or significant denial-of-service attacks or other cyber attack occurs or is believed to have occurred, our reputation and brand could be damaged, we could be required to expend significant capital and other resources to alleviate problems caused by such actual or perceived breaches or attacks and remediate our systems. In addition, we could be exposed to a risk of loss, litigation, or regulatory action and possible liability, some or all of which may not be covered by insurance, and our ability to operate our business may be impaired. Unauthorized parties have in the past gained access, and may in the future gain access, to systems or facilities used in our business through various means, including gaining unauthorized access into our systems or facilities or those of customers and their guests, attempting to fraudulently induce our employees, customers, their guests, or others into disclosing usernames, passwords, payment card information, or other sensitive or personal information, which may in turn be used to access our IT systems or fraudulently transfer funds to bad actors.
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If new or existing customers believe that our platform does not provide adequate security for the storage of personal or sensitive information or its transmission over the Internet, they may not adopt our platform or may choose not to renew their subscriptions to our platform, which could harm our business. Additionally, actual, potential, or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants. Our errors and omissions insurance policies covering certain security and privacy damages and claim expenses may not be sufficient to compensate for all potential liability. Although we maintain cyber liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all.
Further, because data security is a critical competitive factor in our industry, we may make statements in our privacy statements and notices and in our marketing materials describing the security of our platform, including descriptions of certain security measures we employ or security features embedded within our products. Should any of these statements be untrue, become untrue, or be perceived to be untrue, even if through circumstances beyond our reasonable control, we may face claims, including claims of unfair or deceptive trade practices, brought by the U.S. Federal Trade Commission, state, local, or foreign regulators (e.g., a European Union-based data protection agency), or private litigants.
Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business and operating results.
Our continued growth depends in part on the ability of our existing and potential customers to access our platform at any time and within an acceptable amount of time. Our platform is proprietary, and we rely on the expertise of members of our engineering, operations, and software development teams for our platform’s continued performance. We have experienced system outages in the past, including in some cases as a result of disruptions at our third-party vendors, and may in the future experience, disruptions, outages, and other performance problems related to our platform due to a variety of factors, including infrastructure changes, introductions of new functionality, human or software errors, delays in scaling our technical infrastructure if we do not maintain enough excess capacity and accurately predict our infrastructure requirements, capacity constraints due to an overwhelming number of users accessing our platform simultaneously, denial-of-service attacks, actions or inactions attributable to third parties, earthquakes, hurricanes, floods, fires, natural disasters, power losses, disruptions in telecommunications services, fraud, military or political conflicts, terrorist attacks and other geopolitical unrest, computer viruses, ransomware, malware, or other events. Our systems also may be subject to break-ins, sabotage, theft, and intentional acts of vandalism, including by our own employees. Some of our systems are not fully redundant and our disaster recovery planning may not be sufficient for all eventualities. Further, our business and/or network interruption insurance may not be sufficient to cover all of our losses that may result from interruptions in our service as a result of system failures and similar events.
From time to time, we may experience limited periods of server downtime due to server failure or other technical difficulties. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our performance, especially during peak usage times and as our platform becomes more complex and our user traffic increases. If our platform is unavailable or if our users are unable to access our platform within a reasonable amount of time, or at all, our business would be adversely affected and our brand could be harmed. In the event of any of the factors described above, or certain other failures of our infrastructure, customer or guest data may be permanently lost. Moreover, a limited number of our agreements with customers provide for limited service-level commitments, and we may enter into additional agreements providing such commitments from time to time. If we experience significant periods of service downtime in the future, we may be subject to claims by our customers against these service level commitments. These events have resulted in losses in revenue, though such losses have not been material to date. System failures in the future could result in significant losses of revenue.
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We have and may, from time to time, voluntarily provide certain credits to our customers to compensate them for the inconvenience caused by a system failure or similar event, to support our customers and for the benefit of the restaurant community as part of our ongoing goodwill efforts. We are committed to providing our customers high platform reliability, and may utilize significant time, human capital and other resources to analyze the root causes of these performance problems and address any gaps identified, which in turn may take away resources from other business activities. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed, and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business and operating results may be adversely affected.
Our success depends upon our ability to continually enhance the performance, reliability, and features of our platform.
The markets in which we compete are characterized by constant change and innovation, and we expect them to continue to evolve rapidly. Our success has been based on our ability to identify and anticipate the needs of our customers and their guests and design and maintain a platform that provides them with the tools they need to operate their businesses successfully. Our ability to attract new customers, retain existing customers, and increase sales to both new and existing customers will depend in large part on our ability to continue to improve and enhance the performance, reliability, and features of our platform. To grow our business, we must develop products and services that reflect the changing nature of restaurant management software and expand beyond our core functionalities to other areas of managing relationships with our customers, as well as their relationships with their guests. Competitors may introduce new offerings embodying new technologies, or new industry standards and practices could emerge that render our existing technology, services, website, hardware, and mobile applications obsolete. Accordingly, our future success will depend in part on our ability to respond to new product offerings by competitors, technological advances, and emerging industry standards and practices in a cost-effective and timely manner in order to retain existing customers and attract new customers. Furthermore, as the number of our customers with higher volume sales increases, so does the need for us to offer increased functionality, scalability, and support, which requires us to devote additional resources to such efforts.
The success of these and any other enhancements to our platform depends on several factors, including timely completion, adequate quality testing and sufficient demand, and the accuracy of our estimates regarding the total addressable market for new products and/or enhancements and the portion of such total addressable market that we expect to capture for such new products and/or enhancements. Any new product or service that we develop may not be introduced in a timely or cost-effective manner, may contain defects, may not have an adequate total addressable market or market demand or may not achieve the market acceptance necessary to generate meaningful revenue.
We have scaled our business rapidly, and significant new platform features and services have in the past resulted in, and in the future may continue to result in, operational challenges affecting our business. Developing and launching enhancements to our platform and new services on our platform may involve significant technical risks and upfront capital investments that may not generate return on investment. For example, we may use new technologies ineffectively, or we may fail to adapt to emerging industry standards. We may experience difficulties with software development that could delay or prevent the development, introduction or implementation of new products and enhancements. Software development involves a significant amount of time, as it can take our developers months to update, code, and test new and upgraded products and integrate them into our platform. The continual improvement and enhancement of our platform requires significant investment, and we may not have the resources to make such investment.
If we are unable to successfully develop new products or services, enhance the functionality, performance, reliability, design, security, and scalability of our platform in a manner that responds to our customers’ and their guests’ evolving needs, or gain market acceptance of our new products and services, or if our estimates regarding the total addressable market and the portion of such total addressable market which we expect to capture for new products and/or enhancements prove inaccurate, our business and operating results will be harmed.
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Defects, errors, or vulnerabilities in our applications, backend systems, hardware, or other technology systems and those of third-party technology providers could harm our reputation and brand and adversely impact our business, financial condition, and results of operations.
The software underlying our platform is highly complex and may contain undetected errors or vulnerabilities, some of which may only be discovered after the code has been released. Our practice is to effect frequent releases of software updates. Third-party software that we incorporate into our platform and our backend systems, hardware, or other technology systems, or those of third-party technology providers, may also be subject to defects, errors, or vulnerabilities. Any such defects, errors, or vulnerabilities could result in negative publicity, a loss of customers or loss of revenue, and access or other performance issues. Such vulnerabilities could also be exploited by bad actors and result in exposure of customer or guest data, or otherwise result in a security breach or other security incident. We may need to expend significant financial and development resources to analyze, correct, eliminate, or work around errors or defects or to address and eliminate vulnerabilities. Any failure to timely and effectively resolve any such errors, defects, or vulnerabilities could adversely affect our business, reputation, brand, financial condition, and results of operations.
We may use artificial intelligence in our platform and product offerings. Issues relating to the use of artificial intelligence and machine learning could adversely affect our results of operations.
We and our partners may incorporate artificial intelligence, or AI, solutions into our business and operation from time to time. As with many innovations, AI presents risks and challenges that could affect its further development, adoption, and utilization, and therefore affect our business. If the content, recommendation or analyses that AI applications assist in producing are or are alleged to be deficient or inaccurate, we could be subject to competitive risks, potential legal liability, and reputational harm. The use of AI applications may also result in cybersecurity incidents. Any such cybersecurity incidents related to our use of AI applications could adversely affect our business. In addition, AI may present emerging ethical issues. If our use of AI becomes controversial, we may experience reputational harm or legal liability. Further, given the early stage of AI, factors that may impact AI, such as government regulations and market demand, are uncertain, and we may be unsuccessful in our product development efforts.
Our competitors or other third parties may also incorporate AI into their products. If they adopt the use of AI more quickly or more successfully than us, our ability to compete effectively maybe impaired, which may adversely affect our results of operations.
Risks Related to Our Financial Condition and Capital Requirements
We have a history of generating net losses, and if we are unable to achieve adequate revenue growth while our expenses increase, we may not achieve or maintain profitability in the future.
We have incurred a net loss in each year since our inception and have a significant accumulated deficit. We incurred net losses of $31 million and $98 million for the three months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, we had an accumulated deficit of $1,587 million. These losses and our accumulated deficit are a result of the substantial investments we have made to grow our business. We expect our costs will increase over time and our losses to continue as we expect to continue to invest significant additional funds in expanding our business, sales and marketing activities, research and development as we continue to build software and hardware designed specifically for the restaurant industry, and maintaining high levels of customer support, each of which we consider critical to our continued success. We also expect to incur additional general and administrative expenses as a result of our growth and expect our costs to increase to support our operations as a public company. In addition, to support the continued growth of our business and to meet the demands of continuously changing security and operational requirements, we plan to continue investing in our technology infrastructure. Historically, our costs have increased over the years due to these factors, and we expect to continue to incur increasing costs to support our anticipated future growth. If we are unable to generate adequate revenue growth and manage our expenses, we may continue to incur significant losses and may not achieve or maintain profitability.
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Further, we may make decisions that will adversely affect our short-term operating results if we believe those decisions will improve the experiences of our customers and their guests and if we believe such decisions will improve our operating results over the long term. These decisions may not be consistent with the expectations of investors and may not produce the long-term benefits that we expect, in which case our business may be materially and adversely affected.
Unfavorable conditions in the restaurant industry or the global economy could limit our ability to grow our business and materially impact our financial performance.
Our operating results may vary based on the impact of global events and macroeconomic conditions, such as inflation and its potential impact on consumer spending, rising interest rates, global supply chain issues, and pandemics. For example, the COVID-19 pandemic impacted our business and operations in a variety of ways, including supply chain challenges, disruptions in our sales and marketing efforts, restrictions in our ability to conduct research and development and other business activities, uncertainty in restaurant technology spending, and fluctuation on the payment volume processed through our platform.
Furthermore, our revenue growth and potential profitability depend on demand for business management software and platforms serving the restaurant industry. Historically, during economic downturns, there have been reductions in spending on IT as well as pressure for extended billing terms and other financial concessions. The adverse impact of economic downturns may be particularly acute among SMBs, which comprise the majority of our customer base. If economic conditions deteriorate, our current and prospective customers may elect to decrease their IT budgets, which would limit our ability to grow our business and adversely affect our operating results.
A deterioration in general economic conditions (including distress in financial markets, rising inflation and interest rates, and turmoil in specific economies around the world) may adversely affect our financial performance by causing a reduction in locations through restaurant closures or a reduction in gross payment volume. A reduction in the amount of consumer spending or credit card transactions could result in a decrease of our revenue and profits. Adverse economic factors may accelerate the timing, or increase the impact of, risks to our financial performance. These factors could include:
•restrictions on credit lines to consumers or limitations on the issuance of new credit cards;
•uncertainty and volatility in the performance of our customers’ businesses, particularly SMBs;
•customers or consumers decreasing spending for value-added services we market and sell;
•declining economies and the pace of economic recovery which can change consumer spending behaviors;
•low levels of consumer and business confidence typically associated with inflationary or recessionary environments;
•high unemployment levels, which may result in decreased spending by consumers;
•budgetary concerns in the United States and other countries around the world, which could impact consumer confidence and spending; and
•government actions, including the effect of laws and regulations and any related government stimulus.
We are subject to additional risks relating to the financial products we make available to our customers, including relationships with partners, the ability of our customers to generate revenue to pay their obligations under these products, general macroeconomic conditions and the risk of fraud.
Current and any future financial products offered by Toast, Toast Capital, or through either party’s bank partners, subject us to additional risks. If we cannot source capital or partner with financial institutions to fund financial solutions for our customers, we might have to reduce the availability of these services, or cease offering them altogether.
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Toast Capital’s bank partner offers qualified Toast customers working capital loans in accordance with credit policies established by our bank partner. Toast Capital markets the loans and acts as servicer of the loans and receives a servicing fee based on the outstanding balance of loans being serviced as well as a fee that varies depending on the credit performance of the loans extended under the program. We do not currently have similar partnerships with other financial institutions and are solely reliant on our bank partner to support this program. If our bank partner were to terminate its relationship with us, we would be unable to make working capital loans available to our customers, at least in the short-term, until we are able to enter into a relationship with another financial institution to offer similar loans. In addition, our bank partner may not expand its lending under this program to support future demand for such loans from our customers. There can be no assurance that we would be able into a similar relationship with another financial institution to make working capital loans available to our customers on terms our customers would find attractive, or at all.
Under our agreement with our bank partner, on a monthly basis, we are obligated to purchase loans made in a particular quarter that have been (or are scheduled to be) charged off, are otherwise non-performing, or do not satisfy our bank partner’s credit policy, unless such purchase would cause the principal amount of such purchased loans to exceed 15% of the original principal amount of loans made in the applicable quarter. As a result of this potential repurchase obligation, and our servicing fee and credit performance fee, we are subject to credit risk on the loans extended by our bank partner under this program. Accordingly, if we fail to accurately predict the likelihood of default or timely repayment of loans, our business may be materially and adversely affected. For example, if more of our customers cease operations, experience a decline in their revenue, or engage in fraudulent behavior and are not able to repay their loans, our business may be materially and adversely affected. A decline in macroeconomic conditions could increase the risk of non-payment or fraud and could also lead to a decrease in the number of customers eligible for loans or financing. In addition, although our bank partner acts as the lender with respect to these working capital loans, we are subject to numerous contractual and regulatory requirements in connection with our marketing and servicing activities in connection with these loans. If we were to fail to comply with these requirements, we could be subject to liability, regulatory sanctions, or claims by our customers or our bank partner, and our bank partner could terminate its relationship with us.
We intend to continue to explore other financial solutions to offer to our customers. Some of those solutions may require, or be deemed to require, additional procedures, partnerships, licenses, regulatory approvals and requirements, or capabilities. Should we fail to address these requirements, or should these new solutions, or new regulations or interpretations of existing regulations, impose requirements on us that are impractical or that we cannot satisfy, the future growth and success of our financial business may be materially and adversely affected. Macroeconomic factors such as changes in interest rates may also increase our costs in servicing certain financial solutions products. Further, we have and may continue to have obligations to share in certain losses incurred in offering these financial solutions to our customers, which could negatively impact our business, financial condition, and results of operations.
If we are unable to properly manage the risks of offering financial solutions, either ourselves or through partner financial institutions, our business may be materially and adversely affected. If we are unable to maintain third-party insurance coverage to mitigate these risks, such as errors and omissions insurance, our exposure to losses would increase, which could have an adverse impact on our results. If laws and regulations change, or are interpreted by courts or regulators as subjecting us to licensing or other compliance requirements, we may be subject to government supervision and enforcement actions, litigation, and related liabilities, our ability to offer financial solutions may be negatively impacted, our costs associated with existing financial solutions, including Toast Capital, may increase or we may decide to discontinue offering financial solutions altogether, and our business, financial condition, and results of operations would be negatively impacted.
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Our failure to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies in the future could reduce our ability to compete successfully and harm our financial condition.
Historically, we have funded our operations, capital expenditures, and acquisitions primarily through our revenue, the issuance of convertible preferred stock, common stock and convertible notes, payments received for the delivery of our services as well as borrowings under our revolving credit facility. We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges. Although we currently anticipate that our existing cash and cash equivalents, marketable securities, and amounts available under our revolving credit facility will be sufficient to meet our cash needs for at least the next twelve months, our future capital requirements and the adequacy of available funds will depend on many factors. We may require additional financing, and we may not be able to obtain debt or equity financing on favorable terms, if at all. If we raise additional funds through further issuances of debt, equity, or other securities convertible into equity, including convertible debt securities, our existing stockholders may experience significant dilution of their ownership interests, and any new securities we issue could have rights, preferences, and privileges superior to those of holders of our Class A common stock.
We have outstanding debt obligations that restrict our ability to incur additional indebtedness and require us to maintain specified minimum liquidity amounts, among other restrictive covenants. The terms of any additional debt financing may be similar or more restrictive.
If we need additional capital and cannot raise it on acceptable terms, or at all, we may not be able to, among other things:
•develop and enhance our platform and product offerings and operating infrastructure;
•continue to expand our technology development, sales, and marketing organizations;
•hire, train, and retain employees;
•respond to competitive pressures or unanticipated working capital requirements; or
•acquire complementary businesses and technologies.
Our inability to do any of the foregoing could reduce our ability to compete successfully and harm our results of operations.
Our revolving credit facility provides our lenders with a first-priority lien against substantially all of our assets, and contains financial covenants and other restrictions on our actions that may limit our operational flexibility or otherwise adversely affect our results of operations.
We are party to a revolving credit and guaranty agreement which contains a number of covenants that restrict our and our subsidiaries’ ability to, among other things, incur additional indebtedness, create or incur liens, merge or consolidate with other companies, sell substantially all of our assets, liquidate or dissolve, make distributions to equity holders, pay dividends, make redemptions and repurchases of stock, or engage in transactions with affiliates. We are also required to maintain a minimum liquidity balance. The terms of our outstanding debt may restrict our current and future operations and could adversely affect our ability to finance our future operations or capital needs or to execute business strategies in the manner desired. In addition, complying with these covenants may make it more difficult for us to successfully execute our business strategy, invest in our growth strategy, and compete against companies who are not subject to such restrictions.
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A failure by us to comply with these covenants or payment requirements specified in the revolving credit and guaranty agreement could result in an event of default under the agreement, which would give the lenders the right to terminate their commitments to provide additional loans and extensions of credit and to declare any and all debt outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. In addition, the lenders would have the right to proceed against the collateral in which we granted a security interest to them, which consists of substantially all our assets. If our outstanding debt were to be accelerated, we may not have sufficient cash or be able to borrow sufficient funds to refinance the debt or sell sufficient assets to repay the debt, which could materially and adversely affect our cash flows, business, results of operations, and financial condition. Further, the terms of any new or additional financing may be on terms that are more restrictive or less desirable to us.
Our results of operations may be adversely affected by changes in foreign currency exchange rates.
Our operations and customer base are currently concentrated in the United States. Therefore, we currently have limited foreign currency diversification and exposure. However, our foreign currency diversification and exposure may increase as international sales of our products and services increase over time. Our revenue and profits generated by any non-U.S. operations may fluctuate from period to period as a result of changes in foreign currency exchange rates. In addition, we may become subject to exchange control regulations that restrict or prohibit the conversion of our other revenue currencies into U.S. dollars. Any of these factors could decrease the value of revenue and profits we derive from our non-U.S. operations and adversely affect our business.
We may also seek to reduce our exposure to fluctuations in foreign currency exchange rates through the use of hedging arrangements. To the extent that we hedge our foreign currency exchange rate exposure, we forgo the benefits we would otherwise experience if foreign currency exchange rates changed in our favor. No strategy can completely insulate us from risks associated with such fluctuations and our currency exchange rate risk management activities could expose us to substantial losses if such rates move materially differently from our expectations.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2022, we had accumulated $597 million and $573 million of federal and state net operating loss carryforwards, or NOLs, respectively, available to reduce future taxable income. Of the federal NOLs, $513 million have an indefinite carryforward period but may not offset more than 80% of current taxable income annually in accordance with the Tax Cuts and Jobs Act of 2017, and $85 million will expire at various dates through 2037. Of the state NOLs, the majority will begin to expire in 2034. It is possible that we will not generate taxable income in time to use NOLs before their expiration, or at all. Under Section 382 and Section 383 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs and other tax attributes, including R&D tax credits, to offset its post-change income may be limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership by “5 percent stockholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. Our ability to use NOLs and other tax attributes to reduce future taxable income and liabilities may be subject to annual limitations as a result of prior ownership changes and ownership changes that may occur in the future.
We experience elements of seasonal fluctuations in our financial results, which could cause our stock price to fluctuate.
Our business is highly dependent on the behavior patterns of our customers and their guests. We experience seasonality in our financial technology revenue which is largely driven by the level of GPV processed through our platform. For example, our average customers typically have greater sales during the warmer months, though this seasonal effect varies regionally. As a result, our financial technology revenue per location has historically been stronger in the second and third quarters. As a result, seasonality may cause fluctuations in our financial results, and other trends that develop may similarly impact our results of operations.
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We rely primarily on third-party insurance policies to insure our operations-related risks. If our insurance coverage does not cover a particular loss or is insufficient for the needs of our business or our insurance providers are unable to meet their obligations, we may not be able to mitigate the risks facing our business, which could adversely affect our business, financial condition, and results of operations.
We procure third-party insurance policies to cover various operations-related risks including employment practices liability, workers’ compensation, business interruptions, cybersecurity and data breaches, crime, directors’ and officers’ liability, and general business liabilities, but our insurance may not cover 100% of the costs and losses from all events. For certain types of operations-related risks or future risks related to our new and evolving services, we may not be able to, or may choose not to, acquire insurance. In addition, we may not obtain enough insurance to adequately mitigate such operations-related risks or risks related to our new and evolving services, and we may have to pay high premiums, self-insured retentions, or deductibles for the coverage we do obtain. Additionally, if any of our insurance providers becomes insolvent, it would be unable to pay any operations-related claims that we make. Further, some of our agreements with customers may require that we procure certain types of insurance, and if we are unable to obtain and maintain such insurance, we would be in violation of the terms of these customer agreements.
We are responsible for certain retentions and deductibles that vary by policy, and we may suffer losses that exceed our insurance coverage by a material amount. If the amount of one or more operations-related claims were to exceed our applicable aggregate coverage limits, we would bear the excess, in addition to amounts already incurred in connection with deductibles, or self-insured retentions. Insurance providers have raised premiums and deductibles for many businesses and may do so in the future. As a result, our insurance and claims expenses could increase, or we may decide to raise our deductibles or self-insured retentions when our policies are renewed or replaced. Our business, financial condition, and results of operations could be adversely affected if the cost per claim, premiums, or the number of claims significantly exceeds our historical experience and coverage limits; we experience a claim in excess of our coverage limits; our insurance providers fail to pay on our insurance claims; we experience a claim for which coverage is not provided; or the number of claims under our deductibles or self-insured retentions differs from historical averages.
Risks Related to Competition, Sales, and Marketing
The markets in which we participate are intensely competitive, and if we do not compete effectively, our operating results could be adversely affected.
The overall market for restaurant management software is rapidly evolving and subject to changing technology, shifting customer and guest needs, and frequent introductions of new applications. Our competitors vary in size and in the breadth and scope of the products and services they offer. In addition, there are a number of companies that are not currently direct competitors but that could in the future shift their focus to the restaurant industry and offer competing products and services, which could compete directly in our entire customer community or in a certain segment within the restaurant industry. There is also a risk that certain of our current customers and business partners could terminate their relationships with us and use the insights they have gained from partnering with us to introduce their own competing products.
Some of our current and future competitors may enjoy competitive advantages, such as greater name recognition, longer operating histories, greater category share in certain markets, market-specific knowledge, established relationships with restaurants, larger existing user bases in certain markets, more successful marketing capabilities, more integrated products and/or platforms, and substantially greater financial, technical, sales, and marketing, and other resources than we have. Additionally, some potential customers in the restaurant industry, particularly large organizations, have elected, and may in the future elect, to develop their own business management and point of sale software and platforms. Certain of our competitors have partnered with, or have acquired or been acquired by, and may in the future partner with or acquire, or be acquired by, other competitors, thereby leveraging their collective competitive positions and making it more difficult to compete with them. We believe that there are significant opportunities to further increase our revenue by expanding internationally. As we expand our business by selling subscriptions to our platform in international markets, we will also face competition from local incumbents in these markets.
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Additionally, many of our competitors are well capitalized and offer discounted services, lower customer processing rates and fees, customer discounts and promotions, innovative platforms and offerings, and alternative pay models, any of which may be more attractive than those that we offer. Such competitive pressures may lead us to maintain or lower our processing rates and fees or maintain or increase our incentives, discounts, and promotions in order to remain competitive, particularly in markets where we do not have a leading position. Such efforts have negatively affected, and may continue to negatively affect, our financial performance, and there is no guarantee that such efforts will be successful. Further, the markets in which we compete have attracted significant investments from a wide range of funding sources, and we anticipate that many of our competitors will continue to be highly capitalized. These investments, along with the other competitive advantages discussed above, may allow our competitors to continue to lower their prices and fees, or increase the incentives, discounts, and promotions they offer and thereby compete more effectively against us.
Some of our competitors offer specific point solutions addressing particular needs in the restaurant industry, including subscriptions to software products without the requirement to use related payment processing services. While we believe that our integrated software and payments platform offers significant advantages over such point solutions, customers who have specific needs that are addressed by these point solutions, and customers who do not want to change from an existing payment processing relationship to use our payment processing services, may believe that products and services offered by competitors better address their needs.
Additionally, our competitors may be able to respond more quickly and effectively than us to new or changing opportunities, technologies, standards, or customer requirements. With the introduction of new technologies and new market entrants, we expect competition to intensify in the future. For example, our competitors may adopt certain of our platform features or may adopt innovations that customers value more highly than ours, which would render our platform less attractive and reduce our ability to differentiate our platform. Pricing pressures and increased competition generally could result in reduced sales, reduced margins, increased churn, reduced customer retention, losses, or the failure of our platform to achieve or maintain more widespread market acceptance. For all of these reasons, we may fail to compete successfully against our current and future competitors. If we fail to compete successfully, our business will be harmed.
Potential changes in competitive landscape, including disintermediation from other participants in the payments chain, could harm our business.
We expect the competitive landscape in the restaurant technology industry will continue to change in a variety of ways, including:
•rapid and significant changes in technology, resulting in new and innovative payment methods and programs, that could place us at a competitive disadvantage and reduce the use of our platform and services;
•competitors, including third-party processors and integrated payment providers, customers, governments, and/or other industry participants may develop products and services that compete with or replace our platform and services, including products and services that enable payment networks and banks to transact with consumers directly;
•competitors may also elect to focus exclusively on one segment of the restaurant industry and develop product offerings uniquely tailored to that segment, which could impact our addressable market and reduce the use of our platform and services;
•participants in the financial services, payments, and payment technology industries may merge, create joint ventures, or form other business alliances that may strengthen their existing business services or create new payment services that compete with our platform and services; and
•new services and technologies that we develop may be impacted by industry-wide solutions and standards related to migration to Europay, Mastercard, and Visa standards, including chip technology, tokenization, and other safety and security technologies.
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Certain competitors could use strong or dominant positions in one or more markets to gain a competitive advantage against us, such as by integrating competing platforms or features into products they control, including search engines, web browsers, mobile device operating systems, or social networks; by making acquisitions; or by making access to our platform more difficult. Failure to compete effectively against any of these or other competitive threats could adversely affect our business, financial condition, or results of operations.
We expend significant resources pursuing sales opportunities, and if we fail to close sales after expending significant time and resources to do so, our business, financial condition, and results of operations could be adversely affected.
The initial installation and set-up of many of our services often involve significant resource commitments by our customers, particularly those with larger operational scale. Potential customers generally commit significant resources to an evaluation of available services and may require us to expend substantial time, effort, and money educating them as to the value of our services. Our sales cycle may be extended due to our customers’ budgetary constraints or for other reasons. In addition, as we seek to sell subscriptions to our platform to additional enterprise customers, we anticipate that the sales cycle associated with those potential customers will be longer than the typical sales cycle for SMB customers, and that sales to enterprise customers will require us to expend greater sales and marketing and management resources. If we are unsuccessful in closing sales after expending significant funds and management resources, or we experience delays or incur greater than anticipated costs, our business, financial condition, and results of operations could be adversely affected.
Risks Related to Our Partners and Other Third Parties
We rely on third-party payment processors to facilitate payments made by guests, payments made to customers, and payments made on behalf of customers, and if we cannot manage risks related to our relationships with our current or future third-party payment processors, our business, financial condition, and results of operations could be adversely affected.
We rely on third-party payment processors to facilitate payments made by guests and payments made to customers on our platform. While we may continue to seek payment processing relationships with additional payment processors from time to time, we expect to continue to rely on a limited number of payment processors for the foreseeable future. We have experienced interrupted operations with respect to payments processed through our third-party payment partners, which in some cases resulted in the temporary inability of our customers to collect payments from their guests through our platform and disruptions in certain features, and we may experience similar events in the future. In the event that any of our current or future third-party payment processors fail to maintain adequate levels of support, experience interrupted operations, do not provide high quality service, increase the fees they charge us, discontinue their lines of business, terminate their contractual arrangements with us, or cease or reduce operations, we may suffer additional costs and be required to pursue new third-party relationships, which could materially disrupt our operations and our ability to provide our products and services, and could divert management’s time and resources. In addition, such incidents have resulted in and may result in periods of time during which our platform cannot function properly, and therefore cannot collect payments from customers and their guests, which could adversely affect our relationships with our customers and our business, reputation, brand, financial condition, and results of operations. It would be difficult to replace third-party processors in a timely manner if they were unwilling or unable to provide us with these services in the future, and our business and operations could be adversely affected. If these services fail or are of poor quality, our business, reputation, and operating results could be harmed.
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Further, our contracts with third-party payment processors require, and additional contracts may in the future require, us to bear risk for compliance with the operating rules, or the Payment Network Rules, of Visa, Mastercard, and other payment networks, or collectively, the Payment Networks, with whom we are registered as a payment facilitator or certified service provider, and applicable law, and the risk of fraud. In the event any of our current or future third-party payment processors are subjected to losses, including any fines for reversals, chargebacks, or fraud assessed by the Payment Networks, that are caused by us or our customers due to failure to comply with the Payment Network Rules or applicable law, our third-party payment processor may impose penalties on us, increase our transaction fees, or restrict our ability to process transactions through the Payment Networks, and we may lose our ability to process payments through one or more Payment Networks. Thus, in the event of a significant loss by a third-party payment processor, we may be required to expend a large amount of cash promptly upon notification of the occurrence of such an event. A contractual dispute with our processing partner could adversely affect our business, financial condition, or results of operations.
We are also dependent upon various large banks and regulators to execute electronic payments and wire transfers as part of our client payroll, tax, and other money movement services. Termination of any such banking relationship, a bank’s refusal or inability to provide services on which we rely, outages, delays, or systemic shutdown of the banking industry would impede our ability to process funds on behalf of our payroll, tax, and other money movement services clients and could have an adverse impact on our financial results and liquidity.
If we fail to comply with the applicable requirements of payment networks, they could seek to fine us, suspend us, or terminate our registrations. If our customers incur fines or penalties that we cannot collect from them, we may have to bear the cost of such fines or penalties.
In order to provide our transaction processing services, we are registered as a payment facilitator or certified service provider with the Payment Networks. We and our customers must comply with the Payment Network Rules. The Payment Network Rules require us to also comply with the Payment Card Industry Data Security Standard, or the Security Standard, which is a set of rules and standards designed to ensure that all companies that process, store, or transmit payment card information maintain a secure environment to protect cardholder data.
If we fail to, or are alleged to have failed to, comply with the Payment Network Rules or the Security Standard, we may be subject to fines, penalties, or restrictions, including, but not limited to, higher transaction fees that may be levied by the Payment Networks for failure to comply with the Payment Network Rules. If a customer fails or is alleged to have failed to comply with the Payment Network Rules, we could also be subject to a variety of fines or penalties that may be levied by the Payment Networks. If we cannot collect such amounts from the applicable customer, we may have to bear the cost of the fines or penalties, and we may also be unable to continue processing payments for that customer. These potential fines or penalties may result in lower earnings for us. In addition to these fines and penalties, if we or our customers do not comply with the Payment Network Rules or the Security Standard, we may lose our status as a payment facilitator or certified service provider. Our failure to comply with such rules and standards could mean that we may no longer be able to provide certain of our services as they are currently offered, and that existing customers, sales partners, or other third parties may cease using or referring our services. Prospective merchant customers, financial institutions, sales partners, or other third parties may choose to terminate negotiations with us or delay or choose not to consider us for their processing needs. In each of these instances, our business, financial condition, and results of operations would be adversely affected.
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In addition, as our business continues to develop and expand, and we create new product offerings, we may become subject to additional rules, regulations, and industry standards. We may not always accurately interpret or predict the scope or applicability of certain regulations and standards, including the Security Standard, to our business, particularly as we expand into new product offerings, which could lead us to fall out of compliance with the Security Standard or other rules. Further, the Payment Networks could adopt new operating rules or interpret or re-interpret existing rules in ways that might prohibit us from providing certain services to some users, be costly to implement, or be difficult to follow. Any changes in the Payment Network Rules or the Security Standard, including our interpretation and implementation of the Payment Network Rules or the Security Standard to our existing or future business offerings, or additional contractual obligations imposed on us by our customers relating to privacy, data protection, or information security, may increase our cost of doing business, require us to modify our data processing practices or policies, or increase our potential liability in connection with breaches or incidents relating to privacy, data protection, and information security, including resulting in termination of our registrations with the Payment Networks. The termination of our registrations, or any changes in the Payment Network Rules that would impair our registrations, could require us to stop providing payment facilitation services relating to the affected Payment Network, which would adversely affect our business, financial condition, or results of operations.
The Payment Network Rules, including rules related to the assessment of interchange and other fees, may be influenced by our competitors. Increases in Payment Network fees or new regulations could negatively affect our earnings.
The Payment Network Rules are set by their boards, which may be influenced by card issuers, and some of those issuers are our competitors with respect to these processing services. Many banks directly or indirectly sell processing services to customers in direct competition with us. These banks could attempt, by virtue of their influence on the Payment Networks, to alter the Payment Networks’ rules or policies to the detriment of other members and non-members including certain of our businesses.
We pay interchange, assessment, transaction, and other fees set by the Payment Networks to such networks and, in some cases, to the card issuing financial institutions for each transaction we process. From time to time, the Payment Networks increase the fees that they charge members or certified service providers. We could attempt to pass these increases along to our customers and their guests, but this strategy might result in the loss of customers to our competitors that do not pass along the increases. If competitive practices prevent us from passing along the higher fees to our customers and their guests in the future, we may have to absorb all or a portion of such increases, which may increase our operating costs and reduce our earnings.
In addition, regulators are subjecting interchange and other fees to increased scrutiny, and new regulations or interpretations of existing regulations could require greater pricing transparency of the breakdown in fees or fee limitations, which could lead to increased price-based competition, lower margins, and higher rates of customer attrition, and affect our business, financial condition, or results of operations.
We rely on customers on our platform for many aspects of our business, and any failure by them to maintain their service levels or any changes to their operating costs could adversely affect our business.
We rely on customers on our platform to provide quality foods, beverages, and service and experience to their guests. Further, an increase in customer operating costs could cause customers on our platform to raise prices, cease operations, or renegotiate processing rates, which could in turn adversely affect our financial condition and results of operations. Many of the factors affecting customer operating costs, including the cost of offering off-premise dining, are beyond the control of customers and include inflation, costs associated with the goods provided, labor and employee benefit costs, costs associated with third-party delivery services, rent costs, and energy costs. Additionally, if customers try to pass along increased operating costs by raising prices for their guests, order volume may decline, which we expect would adversely affect our financial condition and results of operations.
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We depend upon third parties to manufacture our products and to supply key components necessary to manufacture our products. We do not have long-term agreements with all of our manufacturers and suppliers, and if these manufacturers or suppliers become unwilling or unable to provide an adequate supply of components, we may not be able to find alternative sources in a timely manner and our business would be impacted.
Many of the key components used to manufacture our products, such as our customer-facing displays, come from limited or single sources of supply, and therefore a disruption with one manufacturer in our supply chain may have an adverse effect on other aspects of our supply chain and may disrupt our ability to effectively and timely deliver our hardware products. In addition, in some cases, we rely only on one hardware manufacturer to fabricate, test, and assemble our products. In general, our contract manufacturers fabricate or procure components on our behalf, subject to certain approved procedures or supplier lists, and we do not have firm commitments from all of these manufacturers to provide all components, or to provide them in quantities and on timelines that we may require. Due to our reliance on the components or products produced by suppliers such as these, we are subject to the risk of shortages and long lead times in the supply of certain components or products. We are still in the process of identifying alternative manufacturers for the assembly of our products and for many of the single-sourced components used in our products. In the case of off-the-shelf components, we are subject to the risk that our suppliers may discontinue or modify them, or that the components may cease to be available on commercially reasonable terms, or at all. We have in the past experienced, and may in the future experience, component shortages, or delays or other problems in product assembly, and the availability and cost of these components or products may be difficult to predict. For example, our manufacturers may experience temporary or permanent disruptions in their manufacturing operations due to equipment breakdowns, labor strikes or shortages, natural disasters, disease outbreaks (such as the COVID-19 pandemic), civil unrest, hostilities or wars (such as the Israel-Hamas war and Russia-Ukraine war), component or material shortages, cost increases, acquisitions, insolvency, changes in legal or regulatory requirements, or other similar problems.
As the scale of our hardware production increases, we will also need to accurately forecast, purchase, warehouse, and transport components at high volumes to our manufacturing facilities and servicing locations. If we are unable to accurately match the timing and quantities of component purchases to our actual needs or successfully implement automation, inventory management, and other systems to accommodate the increased complexity in our supply chain and parts management, or if we are affected by adverse global supply chain dynamics, we may incur unexpected production disruption, storage, transportation, and write off costs, which may harm our business and operating results. For example, we have recently experienced fluctuation in freight costs. If freight costs is elevated in the near-term, it may adversely impact our hardware costs and our profitability. Given the uncertainty and instability of global economic and political environment, we cannot predict how, the duration of and the extent to which our operations and financial results may be affected.
In the event of a shortage or supply interruption from suppliers of components used in our hardware products, we may not be able to develop alternate sources quickly, cost effectively, or at all. This supply interruption could harm our relationships with our customers, prevent us from acquiring new customers, and materially and adversely affect our business.
Additionally, various sources of supply-chain risk, including strikes or shutdowns at delivery ports or loss of or damage to our products while they are in transit or storage, intellectual property theft, losses due to tampering, third-party vendor issues with quality or sourcing control, failure by our suppliers to comply with applicable laws and regulation, potential tariffs (including those applicable to our relationships with vendors in China) or other trade restrictions, or other similar problems could limit or delay the supply of our products, or harm our reputation.
We also rely on certain suppliers located internationally as part of our supply chain, and the supply risks described above may similarly apply to or be more pronounced in respect of those international suppliers. For example, we have several long-term contracts with companies based in China and other parts of Asia. A violation of these contracts may require us to bring a claim in China or another jurisdiction in Asia and which may be difficult to enforce. In addition, there is uncertainty as to whether the courts in these international jurisdictions would recognize or enforce judgments of U.S. courts. Any litigation in international jurisdictions, including in China or other parts of Asia, may be protracted and result in substantial costs and diversion of resources and management attention.
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We primarily rely on Amazon Web Services to deliver our services to customers on our platform, and any disruption of or interference with our use of Amazon Web Services could adversely affect our business, financial condition, and results of operations.
We currently host our platform and support our operations on multiple data centers provided by Amazon Web Services, or AWS, a third-party provider of cloud infrastructure services. We do not have control over the operations of the facilities of AWS that we use. AWS’ facilities have been and could in the future be subject to damage or interruption from natural disasters, cybersecurity attacks, terrorist attacks, power outages, and similar events or acts of misconduct. The occurrence of any of the above circumstances or events and the resulting impact on our platform may harm our reputation and brand, reduce the availability or usage of our platform, lead to a significant short-term loss of revenue, increase our costs, and impair our ability to retain existing customers or attract new customers, any of which could adversely affect our business, financial condition, and results of operations.
Even though our platform is hosted in the cloud solely by AWS, we believe that we could transition to one or more alternative cloud infrastructure providers on commercially reasonable terms. In the event that our agreement with AWS is terminated or we add additional cloud infrastructure service providers, we may experience significant costs or downtime for a short period in connection with the transfer to, or the addition of, new cloud infrastructure service providers. However, we do not believe that such transfer to, or the addition of, new cloud infrastructure service providers would cause substantial harm to our business, financial condition, or results of operations over the longer term.
We depend on the interoperability of our platform across third-party applications and services that we do not control.
We have integrations with various third parties, both within and outside the restaurant ecosystem. Third-party applications, products, and services are constantly evolving, and we may not be able to maintain or modify our platform to ensure its compatibility with third-party offerings. In addition, some of our competitors or customers on our platform may take actions that disrupt the interoperability of our platform with their own products or services, or they may exert strong business influence on our ability to, and the terms on which we operate and distribute our platform. As our platform evolves, we expect the types and levels of competition we face to increase. Should any of our competitors or customers on our platform modify their technologies, standards, or terms of use in a manner that degrades the functionality or performance of our platform or is otherwise unsatisfactory to us or gives preferential treatment to our competitors’ products or services, our platform, business, financial condition, and results of operations could be adversely affected.
Our partnerships with third parties are an important source of new business for us, and, if those third parties were to reduce their referral of customers to us, our ability to increase our revenue would be adversely affected.
We have partnerships with third parties that are an important source of new business. If any of our third-party partners, such as our partners in the online food marketplace that provide referrals, were to switch to providing marketing support for another payment processor, terminate their relationship with us, merge with or be acquired by one of our competitors, or shut down or become insolvent, we may no longer receive the benefits associated with that relationship, such as new customer referrals, and we also risk losing existing customers and the related payment processing that were originally referred to us by such third party. Any of these events could adversely affect our ability to increase our revenue.
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Risks Related to Government Regulation and Other Compliance Requirements
Our business is subject to a variety of U.S. and international laws and regulations, many of which are unsettled and still developing, and our or our customers’ failure to comply with such laws and regulations could subject us to claims or otherwise adversely affect our business, financial condition, or results of operations.
The restaurant technology industry and the offering of financial products therein is relatively nascent and rapidly evolving. We are or may become subject to a variety of laws and regulations. Laws, regulations, and standards governing issues such as worker classification, labor and employment, anti-discrimination, online credit card payments and other electronic payments, money transmission and money services, payment and payroll processing, on-demand pay, lending and loan brokering, loan servicing, debt collection, insurance, financial services, gratuities, pricing and commissions, text messaging, subscription services, intellectual property, data retention, privacy, data security, consumer protection, background checks, accessibility, wages, and tax are often complex and subject to varying interpretations, in many cases due to their lack of specificity. The scope and interpretation of existing and new laws, and whether they are applicable to us, is often uncertain and may be conflicting, including varying standards and interpretations between state and federal law, between individual states, and even at the city and municipality level. As a result, their application in practice may change or develop over time through judicial decisions or as new guidance or interpretations are provided by regulatory and governing bodies, such as federal, state, and local administrative agencies.
It is also likely that if our business grows and evolves and our services are used in a greater number of geographies, we would become subject to laws and regulations in additional jurisdictions. It is difficult to predict how existing laws would be applied to our business and the new laws to which it may become subject.
We may not be able to respond quickly or effectively to regulatory, legislative, and other developments, and these changes may in turn impair our ability to offer our existing or planned features, products, and services, and/or increase our cost of doing business. While we have and will need to continue to invest in the development of policies and procedures in order to comply with the requirements of the evolving, highly regulated regulatory regimes applicable to our business and those of our customers, our compliance programs are relatively nascent and we cannot assure that our compliance programs will prevent the violation of one or more laws or regulations. If we are not able to comply with these laws or regulations or if we become liable under these laws or regulations, including any future laws or obligations that we may not be able to anticipate at this time, we could be adversely affected, and we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend substantial resources, discontinue certain services or platform features, limit our customer base, or find ways to limit our offerings in particular jurisdictions, which would adversely affect our business. Any failure to comply with applicable laws and regulations could also subject us to claims and other legal and regulatory proceedings, fines, or other penalties, criminal and civil proceedings, forfeiture of significant assets, revocation of licenses, inability to offer our products and services in all jurisdictions as we do currently, and other enforcement actions. In addition, the increased attention focused upon liability issues as a result of lawsuits and legislative proposals could adversely affect our reputation or otherwise impact the growth of our business.
Further, from time to time, we may leverage third parties to help conduct our businesses in the United States or abroad. We may be held liable for any corrupt or other illegal activities of these third-party partners and intermediaries, our employees, representatives, contractors, channel partners, and agents, even if we do not explicitly authorize such activities. While we have policies and procedures to address compliance with such laws, we cannot assure you that our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible.
Illegal or improper activities of customers or customer noncompliance with laws and regulations governing, among other things, online credit card payments, financial services, gratuities, pricing and commissions, insurance, data retention, privacy, data security, consumer protection, wages, and tax could expose us to liability and adversely affect our business, brand, financial condition, and results of operations. While we have implemented various measures intended to anticipate, identify, and address the risk of these types of activities, these measures may not adequately address or prevent all illegal or improper activities by these parties from occurring and such conduct could expose us to liability, including through litigation, or adversely affect our brand or reputation.
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We are subject to extensive and complex rules and regulations, licensing, and examination by various federal, state and local government authorities, and a failure to comply with the laws and regulations applicable to us could have a material adverse effect on our business.
We are subject to extensive and complex rules and regulations, licensing, and examination by various federal, state and local government authorities designed to protect our customers and guests of our customers when using our financial technology solutions. In connection with our financial technology solutions, we must comply with a number of federal, state and local laws and regulations, including state and federal unfair, deceptive, or abusive acts and practices laws, the Federal Trade Commission Act, the Equal Credit Opportunity Act, the Servicemembers Civil Relief Act, the Electronic Fund Transfer Act, the Gramm-Leach-Bliley Act, and the Dodd Frank Act. We must also comply with laws related to lending, loan brokering, loan servicing, debt collection, on-demand pay, insurance, money laundering, money transfers, and advertising, as well as a number of domestic and international privacy and information security laws, including the CCPA and the GDPR. Noncompliance with these privacy and security laws could result in significant penalties and remediation obligations. For example, under the GDPR, noncompliance can result in penalties up to the greater of 4% of worldwide annual revenue or €20 million depending on the circumstances. Additionally, we are or may become subject to a wide range of complex laws and regulations concerning the withholding, filing, and remittance of income and payroll taxes in connection with our payroll processing business. We may, in the future, offer additional financial technology solutions to guests of our customers that may be subject to additional laws and regulations or be subject to the aforementioned laws and regulations in novel ways.
Lending facilitated through the Toast Capital platform must comply with anti-discrimination statutes such as the Equal Credit Opportunity Act and state law equivalents that prohibit creditors from discriminating against loan applicants and borrowers based on certain characteristics, such as race, religion and national origin. In addition to reputational harm, violations of the Equal Credit Opportunity Act can result in actual damages, punitive damages, injunctive or equitable relief, attorneys’ fees, and civil money penalties.
In addition, federal and state financial services regulators are aggressively enforcing existing laws, regulations, and rules and enhancing their supervisory expectations regarding the management of legal and regulatory compliance risks. This shift in government enforcement policies and priorities may increase the risk that we will be subject to penalties and other materially adverse consequences through government enforcement actions. A finding that we failed to comply with applicable federal, state, and local law could result in actions that make our platform less convenient and attractive to, and potentially unsuitable for, customers and their guests or that have other materially adverse effects on our operations or financial condition.
Our subsidiary, Toast Processing Services LLC, or TPS, holds or is in the process of obtaining money transmitter licenses or similar authorizations in multiple states where they may be required in order for us to offer our payroll processing products. Each of the issuers of licenses has the authority to supervise and examine our activities. Licensing determinations are matters of regulatory interpretation and could change over time. For example, certain states may have a more expansive view than others of what activities qualify as lending, loan brokering, loan servicing, debt collection, on-demand pay, money transmission, or payroll processing and require a license. Government authorities could disagree with our licensing position or our reliance on certain exemptions from licensing requirements or determine that Toast, TPS, or another Toast subsidiary or affiliate should have applied for licenses sooner, and they could require us to obtain such licenses, fine us for unlicensed activity, require us to enter into a consent agreement, or subject us to other investigations and enforcement actions. They could also require us to cease conducting certain aspects of our business until we are properly licensed or deny us a license. An adverse licensing determination or the revocation of a license in one jurisdiction could adversely affect our licensing status in other jurisdictions. There can be no assurance that we will be able to obtain any such licenses, and, even if we are able to do so, we could be required to make products and services changes in order to obtain and maintain such licenses, which could have a material and adverse effect on our business. As we obtain such licenses, we are and will become subject to many additional requirements and limitations, including those with respect to the custody of customer funds; record-keeping requirements; disclosure requirements; examination requirements; annual or biennial activity reporting and license renewal requirements; notification and approval requirements for changes in our officers, directors, stock ownership, or corporate control; permissible investment requirements; capital or minimum net worth requirements; bonding; restrictions on marketing and advertising; qualified individual requirements; anti-money laundering and compliance program requirements; data security and privacy requirements; and review requirements for customer-facing documents. The cost of obtaining and maintaining licenses can be material.
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Our subsidiary, Toast Insurance Services, Inc., and certain personnel hold insurance related licenses. We cannot assure you that we, or our licensed personnel, are and will remain at all times, in full compliance with insurance laws and regulations and we may be subject to fines, enforcement actions, void contracts, or our insurance operations in that state may be suspended or prohibited in the event of any non-compliance. If we, or our licensed personnel, apply for new licenses, we may become subject to additional licensing requirements, which we may not be in compliance with at all times.
Our relationship with our bank partner that makes loans to our customers may subject us to regulation as a service provider.
The working capital loans that we market to our customers are made by our bank partner. We are a service provider of this bank, providing marketing and loan administration services. Our contract with our bank partner requires us to comply with state and federal lending and servicing-related laws and regulations. In addition, the payroll cards that are offered to our customers’ workers are issued by a bank partner. We are a service provider of this bank, providing marketing and account administration services. Our contract with the bank partner requires us to comply with state and federal laws and regulations (including laws that apply only to the bank directly). These contracts with bank partners may make us responsible for program compliance. In the future, we may enter into similar partner arrangements with other state or federally chartered financial institutions that may require us to comply with the laws to which such third parties are subject. As a service provider to financial institutions, such as banks, we are or may become subject to regulatory oversight and examination by the Federal Financial Institutions Examination Council, an interagency body, the Board of Governors of the Federal Reserve System, or the Federal Reserve, the Office of the Comptroller of the Currency, or the OCC, the FDIC, the Consumer Financial Protection Bureau, or CFPB, and various other federal and state regulatory authorities. We also may be subject to similar review by state agencies that regulate our partner financial institutions.
We may be considered a “bank service provider” to our bank partners, and therefore be subject to supervision and regulation by the FDIC in connection with its supervision of the banks. On July 29, 2016, the board of directors of the FDIC released examination guidance relating to third-party lending as part of a package of materials designed to “improve the transparency and clarity of the FDIC’s supervisory policies and practices” and consumer compliance measures that FDIC-supervised institutions should follow when lending through a business relationship with a third party. The proposed guidance would cover relationships for originating loans on behalf of, through or jointly with third parties, or using platforms developed by third parties. If adopted as proposed, the guidance would result in increased supervisory attention to institutions that engage in significant lending activities through third parties. The guidance would require at least one examination every 12 months, and it would include supervisory expectations for third-party lending risk management programs and third-party lending policies that contain certain minimum requirements, such as self-imposed limits as a percentage of total capital for each third-party lending relationship and for the overall loan program, relative to origination volumes, credit exposures (including pipeline risk), growth, loan types, and acceptable credit quality. The future formal adoption of this guidance could impose increased operating costs on us. It could also have a material negative impact on our partner financial institutions by making bank service provider arrangements more costly. As a result, we may have increased difficulty in establishing or maintaining such arrangements, each of which could have a material adverse effect on our business, financial condition, and results of operations.
These and other potential changes to laws and regulations and enhanced regulatory oversight of our partner financial institutions may require us to divert more resources to our compliance programs and maintaining our relationships with our partner financial institutions, terminate or modify our relationships with our partner financial institutions, or otherwise limit the manner in which we conduct our business. If we are unable to adapt our products and services to conform to the new laws and regulations, or if these laws and regulations have a negative impact on our clients, we may experience client losses or increased operating costs, which could have a material adverse effect on our business, financial condition, and results of operations.
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If loans made by our bank partner were found to violate the laws of one or more states, whether at origination or after sale by our bank partner, loans facilitated through the Toast Capital platform may be unenforceable or otherwise impaired, we may be subject to, among other things, fines and penalties, and/or our commercial relationships may suffer, each of which would adversely affect our business and results of operations.
When establishing the factor rate and payment structures that are charged to borrowers on loans we market and service, our bank partner relies on certain authority under federal law to export the interest requirements of the state where the bank is located to borrowers in all other states. Further, we rely on the ability of subsequent holders to continue charging such factor rate and payment structures and to enforce other contractual terms of the loans that are permissible under federal banking laws following the acquisition of the loans. In some states, the factor rate of some loans facilitated through the Toast Capital platform, if considered interest, would exceed the maximum interest rate permitted for loans made by non-bank lenders to borrowers residing in, or that have nexus to, such states. In addition, the rate structures for some loans facilitated through the Toast Capital platform may not be permissible in all states for non-bank lenders and/or the amounts charged in connection with loans facilitated through the Toast Capital platform may not be permissible in all states for non-bank lenders.
Usury, fee, and disclosure related claims involving loans facilitated through the Toast Capital platform may be raised in multiple ways. We and our bank partner may face litigation, government enforcement, or other challenge, for example, based on claims that the bank did not establish loan terms that were permissible in the state in which it is located or did not correctly identify the home or host state in which it is located for purposes of interest exportation authority under federal law.
If a borrower or any state agency were to successfully bring a claim against us or our bank partner for a state licensing or usury law violation and the rate at issue on the loan was deemed impermissible under applicable state law, we and our bank partner may face various commercial and legal repercussions, including not receiving the total amount of payments expected, and in some cases, the loans could be deemed void, voidable, rescindable, or otherwise impaired or we or our bank partner may be subject to monetary, injunctive or criminal penalties. Were such repercussions to apply to us, they could have a material adverse effect on our business, financial condition and results of operations; and were such repercussions to apply to our bank partner, it could be discouraged from making loans to our customers. We may also be subject to the payment of damages in situations where we agreed to provide indemnification to our bank partner, as well as fines and penalties assessed by state and federal regulatory agencies.
If loans facilitated through our platform were subject to successful challenge that our bank partner was not the “true lender,” such loans may be unenforceable, subject to rescission, or otherwise impaired, we and our bank partner may be subject to penalties, and/or our commercial relationships may suffer, each which would adversely affect our business and results of operations.
Loans facilitated by Toast Capital are made by our bank partner in reliance on the position that the bank is the “true lender” for such loans. That true lender status determines various elements of the structure of the loan program, including that we do not hold licenses required solely for being the party that makes loans to our customers, and loans facilitated through the Toast Capital platform may involve pricing and payment structures permissible at origination because the lender is a bank, and/or the disclosures provided to borrowers are accurate and compliant in reliance of the status of the lender as a bank. Because the loans facilitated through the Toast Capital platform are made by our bank partner, many state financial regulatory requirements, including usury restrictions (other than the restrictions of the state in which our bank partner made a particular loan is located) and many licensing requirements and substantive requirements under state lender licensing laws, are treated as inapplicable based on principles of federal preemption or express exemptions provided in relevant state laws for certain types of financial institutions or loans they make.
Certain recent litigation and regulatory enforcement has challenged, or is currently challenging, the characterization of bank partners as the “true lender” in connection with programs involving marketing, processing, and/or servicing relationships between a bank partner and non-bank lending platforms. In addition, the House Committee on Financial Services has issued statements and held a hearing in response to concerns that bank partner arrangements undermine consumer safeguards, including state usury laws, and encouraged federal regulators to intervene.
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We and our bank partners could also become subject to challenges regarding “true lender” status and, if so, we could face penalties and/or loans facilitated through the Toast Capital platform may be or become void, voidable, or otherwise impaired in a manner that may have adverse effects on our operations (either directly or as a result of an adverse impact on our relationship with our bank partner).
There have been no formal proceedings against us or indications of any proceedings against us to date, but there can be no assurance that state agencies or regulators will not make assertions with respect to the loans facilitated by our platform in the future. If a court or a state or federal enforcement agency were to deem Toast or Toast Capital, rather than our bank partner, the “true lender” for loans facilitated through our platform, and if for this reason (or any other reason) the loans were deemed subject to and in violation of certain state lender licensing and usury laws, we could be subject to fines, damages, injunctive relief (including required modification or discontinuation of our business in certain areas), and other penalties or consequences, and the loans could be rendered void or unenforceable in whole or in part, any of which could have a material adverse effect on our business (directly, or as a result of adverse impact on our relationships with our bank partner).
Changes in legislative and regulatory policy affecting payment processing or small business lending could have a material adverse effect on our business.
We provide our financial technology solutions in a constantly changing legal and regulatory environment. New laws or regulations, or new interpretations of existing laws or regulations, affecting our financial technology solutions could have a materially adverse impact on our ability to operate as currently intended and cause us to incur significant expense in order to ensure compliance. For example, government agencies may impose new or additional rules that (i) prohibit, restrict, and/or impose taxes or fees on payment processing transactions in, to or from certain countries or with certain governments, individuals, and entities; (ii) impose additional client identification and client due diligence requirements; (iii) impose additional reporting or recordkeeping requirements, or require enhanced transaction monitoring; (iv) limit the types of entities capable of providing payment processing services, or impose additional licensing or registration requirements; (v) impose minimum capital or other financial requirements; (vi) require enhanced disclosures to our payment processing clients; (vii) cause loans facilitated through the Toast Capital platform, or any of the underlying terms of those loans, to be unenforceable against the relevant borrowers; (viii) limit the number or principal amount of payment processing transactions that may be sent to or from a jurisdiction, whether by an individual or in the aggregate; and (ix) restrict or limit our ability to facilitate processing transactions using centralized databases. These regulatory changes and uncertainties make our business planning more difficult. They could require us to invest significant resources and devote significant management attention to pursuing new business activities, change certain of our business practices or our business model, or expose us to additional costs (including increased compliance costs and/or customer remediation), any of which could adversely impact our results of operations. If we fail to comply with new laws or regulations, or new interpretations of existing laws or regulations, our ability to operate our business, our relationships with our customers, our brand, and our financial condition and results of operations could be adversely affected.
Further, proposals to change the statutes affecting working capital loans facilitated through the Toast Capital platform may periodically be introduced in Congress and state legislatures. If enacted, those proposals could affect Toast Capital’s operating environment in substantial and unpredictable ways. For example, California, New York, Utah and Virginia have enacted laws requiring non-bank commercial financing providers to register with the state financial services regulators and/or to deliver consumer-style disclosures to certain business customers in accordance with agency regulations, including regulations that are being promulgated. These new laws may impose new compliance requirements on previously unregulated aspects of our business, including but not limited to the requirements for new, consumer-style disclosures for certain financial products that we offer or facilitate.
As we expand our presence internationally, we may become subject to the laws, regulations, licensing schemes, industry standards, and payment card networks rules applicable in such jurisdictions, which may require us to invest additional resources to adopt appropriate compliance policies and measures. If we are unable to timely comply with the rules or laws of new jurisdictions in which we conduct business, our business or reputation may be adversely affected.
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NACHA Rules and related oversight are material to our transaction processing business and our failure to comply could materially harm our business.
Our transaction processing services are subject to the National Automated Clearing House Association Rules, or NACHA Rules. Any changes in the NACHA Rules that increase our cost of doing business or limit our ability to provide processing services to our customers will adversely affect the operation of our business. If we or our customers fail to comply with the NACHA Rules or if our processing of customer transactions is materially or routinely delayed or otherwise disrupted, our partner financial institutions could suspend or terminate our access to NACHA’s clearing and settlement network, which would make it impossible for us to conduct our business on its current scale.
Additionally, we periodically conduct audits and self-assessments to verify our compliance with NACHA Rules. If an audit or self-assessment under NACHA Rules identifies any deficiencies that we need to remediate, the remediation efforts may distract our management team and other staff and be expensive and time consuming. NACHA may update its operating rules and guidelines at any time, which could require us to take more costly compliance measures or to develop more complex monitoring systems. Our partner financial institutions could also change their interpretation of NACHA requirements, similarly requiring costly remediation efforts and potentially preventing us from continuing to provide services through such partner financial institutions until we have remediated such issues to their satisfaction.
Failure to comply with anti-money laundering, economic and trade sanctions regulations, the FCPA, and similar laws could subject us to penalties and other adverse consequences.
TPS is registered with the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, as a money services business, or MSB. Registration as an MSB subjects us to the regulatory and supervisory jurisdiction of FinCEN, the anti-money laundering provisions of the Bank Secrecy Act of 1970, as amended by the USA PATRIOT Act of 2001, or the BSA, and its implementing regulations applicable to MSBs. FinCEN may also interpret the BSA and its regulations as requiring registration of our parent company or other subsidiaries as MSBs. State regulators often impose similar requirements on licensed money transmitters. In addition, our contracts with financial institution partners and other third parties may contractually require us to maintain an anti-money laundering program. We are also subject to economic and trade sanctions programs, including those administered by OFAC, which prohibit or restrict transactions to or from or dealings with specified countries, their governments, and in certain circumstances, their nationals, and with individuals and entities that are specially-designated nationals of those countries, narcotics traffickers, terrorists or terrorist organizations, and other sanctioned persons and entities.
We may in the future operate our business in foreign countries where companies often engage in business practices that are prohibited by U.S. and other regulations applicable to us. We are subject to anti-corruption laws and regulations, including the FCPA and other laws that prohibit the making or offering of improper payments to foreign government officials and political figures, including anti-bribery provisions enforced by the Department of Justice and accounting provisions enforced by the SEC. These laws prohibit improper payments or offers of payments to foreign governments and their officials and political parties by the United States and other business entities for the purpose of obtaining or retaining business. We have implemented policies, procedures, systems, and controls designed to identify and address potentially impermissible transactions under such laws and regulations; however, there can be no assurance that all of our employees, consultants, and agents, including those that may be based in or from countries where practices that violate U.S. or other laws may be customary, will not take actions in violation of our policies, for which we may be ultimately responsible.
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Our failure to comply with anti-money laundering, economic, and trade sanctions regulations, the FCPA, and similar laws could subject us to substantial civil and criminal penalties or result in the loss or restriction of our federal MSB registration and state money transmitter licenses (or the inability to obtain new licenses necessary to operate in certain jurisdictions). We may also face liability under our contracts with third parties, which may significantly affect our ability to conduct some aspects of our business. Additionally, changes in this regulatory environment may significantly affect or change the manner in which we currently conduct some aspects of our business. For example, bank regulators are imposing additional and stricter requirements on banks to ensure they are meeting their BSA obligations, and banks are increasingly viewing money services businesses, as a class, to be higher risk customers for money laundering. As a result, our bank partners may limit the scope of services they provide to us or may impose additional requirements on us. These regulatory restrictions on banks and changes to banks’ internal risk-based policies and procedures may result in a decrease in the number of banks that may do business with us, may require us to change the manner in which we conduct some aspects of our business, may decrease our revenue and earnings and could have a materially adverse effect on our results of operations or financial condition.
Our involvement in our payroll and transaction processing services could be subject to federal and state money service business or money transmitter registration and licensing requirements that could result in substantial compliance costs, and our business could be adversely affected if we fail to predict how a particular law or regulation should be applied to our business.
In jurisdictions where we are involved in providing payroll processing services, including as a result of our acquisition of StratEx Holdco, LLC, or StratEx, we may be required to apply for a state money transmitter or similar license or registration. StratEx had not historically obtained state money transmitter licenses in connection with its payroll services based on the position that it has the benefit of various state exemptions relating, among other things, to the nature of the payroll and other services that it provides. Nevertheless, governmental authorities in various states may determine that such exemptions were not available and that StratEx was required to comply with state money transmitter licensing requirements. We are applying for state money transmitter licenses for TPS, which will be administering our payroll processing services after such licenses are obtained. In the course of such license applications, or otherwise, one or more state governmental authorities may determine that the activities conducted by StratEx required a money transmitter or similar license and assess fines related to the activities that StratEx engaged in on an unlicensed basis.
In addition, while we believe we have defensible arguments in support of our positions that our involvement in our transaction processing services is not subject to federal MSB registration and state money transmitter licensing, we have not expressly obtained confirmation of such positions from FinCEN or all state regulators that administer the state money transmission or payroll processor laws. It is possible that certain state regulators may determine that our activities are subject to licensing. Any determination that we are in fact required to be licensed may require substantial expenditures of time and money and could lead to liability in the nature of penalties or fines, costs, legal fees, reputational damage, or other negative consequences as well as cause us to be required to cease operations in some of the states we service, which would result have a material adverse effect on our business, financial condition, results of operations, and reputation. In the past, certain competitors have been found to violate laws and regulations related to money transmission, and they have been subject to fines and other penalties by regulatory authorities. Regulators and third-party auditors have also identified gaps in how similar businesses have implemented anti-money laundering programs. The adoption of new money transmitter, payroll processor, or money services business laws in jurisdictions, or changes in regulators’ interpretation of existing state and federal money transmitter, payroll processor, or money services business laws or regulations, could subject us to new registration or licensing requirements. There can be no assurance that we will be able to obtain or maintain any such licenses in all of states where we offer transaction processing services, and, even if we were able to do so, there could be substantial costs and potential product changes involved in maintaining such licenses, which could have a material adverse effect on our business. In addition, there are substantial costs and potential product changes involved in maintaining and renewing such licenses, and we could be subject to fines, license revocation, or other enforcement action if we are found to violate disclosure, reporting, anti-money laundering, capitalization, corporate governance, or other requirements of such licenses. An adverse licensing determination or the revocation of a license in one jurisdiction could prevent us from operating certain aspects of our business in that jurisdiction, and could adversely affect our licensing status in other jurisdictions. These factors could impose substantial additional costs, involve considerable delay in the development or provision of our products or services, require significant and costly operational changes, or prevent us from providing our products or services in any given market.
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Our platform regularly collects and stores personal information and, as a result, both domestic and international privacy and data security laws apply. As these laws are enhanced or new laws are introduced, our business could incur additional costs and liabilities and our ability to perform our services and generate revenue could be impacted.
As we seek to build a trusted and secure platform for and to expand our network of customers and facilitate their transactions and interactions with their guests, we will increasingly be subject to laws and regulations relating to the collection, use, retention, privacy, security, and transfer of information, including the personal information of their employees and guests. Domestically, this includes federal as well as state-specific legislation, including but not limited to the CCPA and the Virginia Consumer Data Protection Act, or the VCDPA. Additionally, a number of U.S. state-specific privacy laws have recently become or will become effective in 2023. As we expand internationally, international privacy laws pertaining to the processing and security of personal information become more relevant to our business, including but not limited to the GDPR, the United Kingdom GDPR and local privacy legislation, as well as Canadian privacy legislation, including Canada’s Personal Information Protection and Electronic Documents Act and local provincial legislation. As with the other laws and regulations noted above, these laws and regulations may change or be interpreted and applied differently over time and from jurisdiction to jurisdiction, and it is possible they will be interpreted and applied in ways that will materially and adversely affect our business.
As noted above, many states in which we operate have laws that protect the privacy and security of sensitive and personal information. Certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to sensitive and personal information than federal or other state laws, and such laws may differ from each other, which may complicate compliance efforts. For example, California enacted the CCPA, which went into effect in January 2020 and became enforceable by the California Attorney General in July 2020, and which, among other things, requires companies covered by the legislation to provide new disclosures to California consumers and afford such consumers new rights with respect to their personal information, including the right to request deletion of their personal information, the right to receive the personal information on record for them, the right to know what categories of personal information generally are maintained about them, as well as the right to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action may increase the likelihood of, and risks associated with, data breach litigation.
Additionally, on January 1, 2023, the California Privacy Rights Act, or the CPRA, went into effect and amended the CCPA. The CPRA imposes additional obligations on companies covered by the legislation and will significantly modify the CCPA, including by expanding consumers’ rights with respect to certain sensitive personal information and imposing additional personal information processing and use limitations. The CPRA amendment to the CCPA also creates a new state agency that will be vested with authority to implement and enforce the CCPA. The effects of the CCPA are potentially significant and may require us to modify our data collection or processing practices and policies and to incur substantial costs and expenses in an effort to comply and increase our potential exposure to regulatory enforcement and/or litigation.
Certain other state laws, such as the VCDPA, impose similar privacy obligations as the CCPA and we anticipate that more states may enact legislation similar to the CCPA, the VCDPA and the forthcoming state privacy laws in 2023, which provides consumers with new privacy rights and increases the privacy and security obligations of entities handling certain personal information of such consumers. The CCPA and the additional state-specific privacy laws noted above have prompted a number of proposals for new federal and state-level privacy legislation. Such proposed legislation, if enacted, may add additional complexity, variation in requirements, restrictions and potential legal risk, require additional investment of resources in compliance programs, impact strategies, and the availability of previously useful data, and could result in increased compliance costs and/or changes in business practices and policies.
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The regulatory framework governing the collection, processing, storage, use, and sharing of certain information, particularly financial and other personal information, is rapidly evolving and is likely to continue to be subject to uncertainty and varying interpretations. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the features of our services and platform capabilities. Any failure or perceived failure by us, or any third parties with which we do business, to comply with our posted privacy statements or notices, changing consumer expectations, evolving laws, rules and regulations, industry standards, or contractual obligations to which we or such third parties are or may become subject, may result in actions or other claims against us by governmental entities or private actors, the expenditure of substantial costs, time, and other resources or the incurrence of significant fines, penalties, or other liabilities. In addition, any such action, particularly to the extent we were found to have engaged in violations or otherwise liable for damages, would damage our reputation and adversely affect our business, financial condition, and results of operations.
We cannot yet fully determine the impact these or future laws, rules, regulations, and industry standards may have on our business or operations. Any such laws, rules, regulations, and industry standards may be inconsistent among different jurisdictions, subject to differing interpretations or may conflict with our current or future practices. Additionally, our partners and our customers and their guests may be subject to differing privacy laws, rules, and legislation, which may mean that our partners or customers require us to be bound by varying contractual requirements applicable to certain other jurisdictions. If our customers fail to comply with such privacy laws, rules, or legislation, we could be exposed to liability and our business, financial condition, results of operations, and brand could be adversely affected. Adherence to contractual requirements imposed by our partners or customers may impact our collection, use, processing, storage, sharing, and disclosure of various types of information including financial information and other personal information, and may mean we become bound by, or voluntarily comply with, self-regulatory or other industry standards relating to these matters that may further change as laws, rules, and regulations evolve. Complying with these requirements and changing our policies and practices may be onerous and costly, and we may not be able to respond quickly or effectively to regulatory, legislative, and other developments. These changes may in turn impair our ability to offer our existing or planned features, products, and services, and/or increase our cost of doing business. As we expand our partnerships and our customer base, these requirements may vary from customer to customer, and from guest to guest, further increasing the cost of compliance and doing business.
We publicly post documentation regarding our practices concerning the collection, processing, use, and disclosure of information. Although we endeavor to comply with our published statements, notices, and documentation, we may at times fail to do so or be alleged to have failed to do so. Any failure or perceived failure by us to comply with our privacy statements, notices, or any applicable privacy, security, or data protection, information security, or consumer-protection related laws, regulations, orders, or industry standards could expose us to costly litigation, significant awards, fines or judgments, civil and/or criminal penalties, or negative publicity, and could materially and adversely affect our business, financial condition, and results of operations. The publication of our privacy statements, notices, and other documentation that provide promises and assurances about privacy and security can subject us to potential state and federal action if they are found to be deceptive, unfair, or misrepresentative of our actual practices, which could, individually or in the aggregate, materially and adversely affect our business, financial condition, and results of operations.
We have incurred, and may continue to incur, significant expenses to comply with evolving mandatory privacy and security standards and protocols imposed by law, regulation, industry standards, shifting customer and guest expectations, or contractual obligations, both in the U.S. and internationally. We post on our website our privacy statement and practices concerning the collection, use, and disclosure of information. In particular, with laws and regulations such as the CCPA, VCDPA and similar laws in the United States imposing new and relatively burdensome obligations, and with substantial uncertainty over the interpretation and application of these and other laws and regulations, we may face challenges in addressing their requirements and making necessary changes to our policies and practices and may incur significant costs and expenses in an effort to do so. This also applies in the context of international privacy legislation such as the GDPR, UK GDPR and applicable Canadian privacy legislation. Any failure, real or perceived, by us to comply with our posted privacy statements or notices, changing customer and guest expectations, or with any evolving regulatory requirements, interpretations, or orders, other local, state, federal, or international privacy, data protection, information security, or consumer protection-related laws and regulations, industry standards, or contractual obligations could cause our customers to reduce their use of our products and services, disrupt our supply chain or third-party vendor or developer partnerships, and materially and adversely affect our business.
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Changes in tax law may adversely affect us or our investors.
We are subject to taxation in the United States and certain other jurisdictions in which we operate. Changes in applicable tax laws or regulations may be proposed or enacted that could materially and adversely affect our effective tax rate, tax payments, results of operations, financial condition and cash flows. Changes to tax laws (which changes may have retroactive application) could adversely affect us or holders of our Class A common stock. Prospective investors should consult their tax advisors regarding the potential consequences of changes in tax law on our business and on the ownership and disposition of our Class A common stock.
Changes in tax laws or accounting principles could affect our future worldwide effective tax rate. The Inflation Reduction Act, or IRA, which was enacted in August 2022, included provisions for a 15% minimum tax on adjusted financial statement income of certain large corporations, as well as an excise tax on certain share buybacks by public corporations. Additionally, various countries and organizations such as the Organization for Economic Cooperation and Development are in the process of considering changes to existing frameworks that could impact our company if proposed or new laws are enacted in countries where we operate our business. These recent domestic and global tax developments could increase our future tax liability, which in turn could adversely impact our business and future profitability.
Under state tax law, we may be deemed responsible for collecting and remitting sales taxes directly to certain states. State tax authorities may raise questions about, or challenge or disagree with, our calculation, reporting, or collection of taxes and may require us to collect taxes or to remit additional taxes and interest and could impose associated penalties and fees. Moreover, an increasing number of states have considered or adopted laws or administrative practices that attempt to impose obligations for online marketplaces, payment service providers, and other intermediaries. These obligations may require us to collect and remit taxes on the merchant customers behalf and take on additional reporting and record-keeping obligations. Any failure by us to prepare for and to comply with these and similar reporting and record-keeping obligations could result in substantial monetary penalties and other sanctions, adversely impact our ability to do business in certain jurisdictions, and harm our business.
Government regulation of the Internet, mobile devices, and e-commerce is evolving, and unfavorable changes could substantially adversely affect our business, financial condition, and results of operations.
We are subject to general business regulations and laws as well as federal and state regulations and laws specifically governing the Internet, mobile devices, and e-commerce that are constantly evolving. Existing and future laws and regulations, or changes thereto, may impede the growth of the Internet, mobile devices, e-commerce, or other online services, increase the cost of providing online services, require us to change our business practices, or raise compliance costs or other costs of doing business. These evolving regulations and laws may cover taxation, tariffs, user privacy, data protection, pricing and commissions, content, copyrights, distribution, social media marketing, advertising practices, sweepstakes, mobile, electronic contracts and other communications, consumer protection, and the characteristics and quality of our services. It is not clear how existing laws governing issues such as property ownership, sales, use, and other taxes, and personal privacy apply to the Internet and e-commerce. In addition, in the future, it is possible that foreign government entities in jurisdictions in which we seek to expand our business may seek to or may even attempt to block access to our mobile applications and website. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation and brand, a loss in business, and proceedings or actions against us by governmental entities or others, which could adversely affect our business, financial condition, and results of operations.
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We are developing new products and services that may be subject to additional state or federal laws or regulations or the authority of the Consumer Financial Protection Bureau.
We are constantly developing new products and services to make it easier for our customers to operate their businesses. These new products and services may include features that are subject to additional state or federal laws or regulations or the authority of the CFPB. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, created the CFPB to assume responsibility for implementing and enforcing most federal consumer financial protection laws and a prohibition on unfair, deceptive, and abusive acts and practices. Under the Dodd-Frank Act, the CFPB can take action against companies that have violated the Dodd-Frank Act, the federal consumer financial protection laws, or CFPB regulations. Due to products and services that are subject to the CFPB’s authority, we may face increased scrutiny or examination that could result in regulatory or enforcement actions that adversely affect the operation of our business by increasing our costs or otherwise limiting our ability to provide such products and services.
Risks Related to Our Intellectual Property
If we fail to adequately protect our intellectual property rights, our competitive position could be impaired and we may lose valuable assets or revenue and become subject to costly litigation to protect our rights.
Our success is dependent, in part, upon protecting our intellectual property rights. We rely on a combination of patents, copyrights, trademarks, service marks, trade secret laws, and contractual restrictions to establish and protect our intellectual property rights in our products and services. However, the steps we take to protect our intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create products and services that compete with ours. Some provisions in our licenses of our technology to customers and other third parties protecting against unauthorized use, copying, transfer, and disclosure of our products may be unenforceable under the laws of certain jurisdictions and foreign countries. Further, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States. To the extent we expand our international activities, our exposure to unauthorized copying and use of our products and proprietary information may increase.
Our issued patents and any patents issued in the future may not provide us with any competitive advantages, and our patent applications may never be granted. Additionally, the process of obtaining patent protection is expensive and time consuming, and we may not be able to file and prosecute all necessary or desirable patent applications, or we may not be able to do so at a reasonable cost or in a timely manner. Even if issued, these patents may not adequately protect our intellectual property, as the legal standards relating to the infringement, validity, enforceability, and scope of protection of patent and other intellectual property rights are complex and often uncertain.
Additionally, we have registered, among other trademarks, the name “Toast” in the United States and other jurisdictions. Competitors have and may continue to adopt service names similar to ours, thereby harming our ability to build brand identity and possibly leading to user confusion. There could also be potential trade name or trademark infringement claims brought by owners of other trademarks that are similar to our trademarks. Litigation or proceedings before the U.S. Patent and Trademark Office or other governmental authorities and administrative bodies in the United States and abroad may be necessary in the future to enforce our intellectual property rights and to determine the validity and scope of the proprietary rights of others. Further, we may not timely or successfully register our trademarks or otherwise secure our intellectual property.
We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships and business alliances. These agreements may not be effective in preventing unauthorized use or disclosure of confidential information or controlling access to and distribution of our products or other proprietary information. Further, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our products.
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In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation brought to protect and enforce our intellectual property rights could be costly, time consuming, and distracting to management, and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could delay further sales or the implementation of our existing products, impair the functionality of our products, delay introductions of new products, result in our substituting inferior or more costly technologies into our products, or harm our reputation or brand. In addition, we may be required to license additional technology from third parties to develop and market new products, and we may not be able to license that technology on commercially reasonable terms or at all. Our inability to license this technology could harm our ability to compete.
We have been, and may in the future be, subject to intellectual property rights claims by third parties, which are extremely costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies.
Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks, and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. In addition, many of these companies have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them than we do. Any intellectual property litigation in which we become involved may involve patent holding companies or other adverse patent owners that have no relevant product revenue and against which our patents may therefore provide little or no deterrence. From time to time, third parties have asserted and may assert patent, copyright, trademark, or other intellectual property rights against us, our partners, or our customers. We have received, and may in the future receive, notices that claim we have misappropriated, misused or infringed other parties’ intellectual property rights and, to the extent we gain greater market visibility, especially as a public company, we face a higher risk of being the subject of intellectual property infringement claims, which is not uncommon with respect to the restaurant technology market. In addition, our agreements with customers include indemnification provisions, under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement and, in some cases, for damages caused by us to property or persons or other third-party claims. Large indemnity payments could harm our business, financial condition, and results of operations.
The outcome of intellectual property claims, with or without merit, could be very time consuming, could be expensive to settle or litigate and could divert our management’s attention and other resources. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. These claims could also result in our having to stop using technology found to be in violation of a third-party’s rights. We might be required to seek a license for the intellectual property, which may not be available on reasonable terms or at all. Even if a license were available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of certain products or services and may be unable to compete effectively. Any of these results could harm our business, financial condition, and results of operations.
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Our platform makes use of open-source software components, and a failure to comply with the terms of the underlying open-source software licenses could negatively affect our ability to sell our products and subject us to possible litigation.
Our products incorporate and are dependent to a significant extent upon the use of open-source software, and we intend to continue our use of open-source software in the future. Such open-source software is generally licensed by its authors or other third parties under open-source licenses and is typically freely accessible, usable, and modifiable. Pursuant to such open-source licenses, we may be subject to certain conditions, including requirements, depending on how the licensed software is used or modified, that we offer our proprietary software that incorporates the open-source software for little or no cost, that we make available source code for modifications or derivative works we create based upon incorporating or using the open-source software and that we license such modifications or derivative works under the terms of the particular open-source license. These potential conditions could enable our competitors to create similar offerings with lower development effort and time and ultimately could result in a loss of our competitive advantage. Further, if an author or other third party that uses or distributes such open-source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, enjoined from the sale of our products that contained or are dependent upon the open-source software, and required to comply with the foregoing conditions, which could disrupt the distribution and sale of some of our products. Litigation could be costly for us to defend, negatively affect our operating results and financial condition or require us to devote additional research and development resources to change our platform. The terms of many open-source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to provide or distribute our platform. As there is little or no legal precedent governing the interpretation of many of the terms of certain of these licenses, the potential impact of these terms on our business is uncertain and may result in unanticipated obligations regarding our products and technologies. Any requirement that we make available source code for modifications or derivative works we create based upon incorporating or using open-source software or that we license such modifications or derivative works under the terms of open-source licenses, could be harmful to our business, financial condition, or results of operations, and could help our competitors develop products and services that are similar to or better than ours. In addition, to the extent that we have failed to comply with our obligations under particular licenses for open-source software, we may lose the right to continue to use and exploit such open-source software in connection with our operations and products, which could disrupt and adversely affect our business.
In addition to risks related to license requirements, usage, and distribution of open-source software can lead to greater risks than the use of third-party commercial software, as open-source licensors generally do not provide support, warranties, indemnification, controls on the origin or development of the software, remedies against the licensors or other contractual provisions regarding infringement claims or the quality of the code. Many of the risks associated with usage of open-source software cannot be eliminated and could adversely affect our business.
Although we have established procedures to monitor the use of open-source software, we rely on multiple software programmers to design our proprietary software and we cannot be certain that our programmers have never, directly or indirectly, incorporated open-source software into, or otherwise used open-source software in connection with, our proprietary software of which, or in a manner in which, we are not aware, or that they will not do so in the future. It is also possible that we may not be aware of all of our corresponding obligations under open-source licenses. We cannot guarantee that we have incorporated open-source software in our software in a manner that will not subject us to liability or in a manner that is consistent with our current policies and procedures.
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We may be unable to continue to use the domain names that we use in our business or prevent third parties from acquiring and using domain names that infringe on, are similar to, or otherwise decrease the value of our brand, trademarks, or service marks.
We have registered domain names that we use in, or are related to, our business, most importantly www.toasttab.com. If we lose the ability to use a domain name, whether due to trademark claims, failure to renew the applicable registration, or any other cause, we may be forced to market our offerings under a new domain name, which could cause us substantial harm, or to incur significant expense in order to purchase rights to the domain name in question. We may not be able to obtain preferred domain names outside the United States for a variety of reasons. In addition, our competitors and others could attempt to capitalize on our brand recognition by using domain names similar to ours. We may be unable to prevent third parties from acquiring and using domain names that infringe on, are similar to, or otherwise decrease the value of our brand or our trademarks or service marks. Protecting, maintaining, and enforcing our rights in our domain names may require litigation, which could result in substantial costs and diversion of resources, which could in turn adversely affect our business, financial condition, and results of operations.
Risks Related to Our Class A Common Stock
The trading price of our Class A common stock may be volatile, and you could lose all or part of your investment.
We cannot predict the prices at which our Class A common stock will trade. The market price of our Class A common stock has fluctuated and may fluctuate in the future substantially and will depend on a number of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our Class A common stock, because you might not be able to sell your shares at or above the price you paid. Factors that could cause fluctuations in the trading price of our Class A common stock include, but are not limited to, the following:
•actual or anticipated changes or fluctuations in our results of operations;
•the financial projections we may provide to the public, any changes in these projections, or our failure to meet these projections;
•announcements by us or our competitors of new products or new or terminated significant contracts, commercial relationships, or capital commitments;
•industry or financial analyst or investor reaction to our press releases, other public announcements, and filings with the SEC;
•rumors and market speculation involving us or other companies in our industry;
•price and volume fluctuations in the overall stock market from time to time;
•changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;
•failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
•whether investors or securities analysts view our stock structure unfavorably, particularly our dual-class structure and the significant voting control of our executive officers, directors and their affiliates;
•actual or anticipated developments in our business, or our competitors’ businesses, or the competitive landscape generally;
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•litigation involving us, our industry, or both, or investigations by regulators into our operations or those of our competitors;
•actual or perceived privacy or security breaches or other incidents;
•developments or disputes concerning our intellectual property rights, our products, or third-party proprietary rights;
•announced or completed acquisitions of businesses or technologies by us or our competitors;
•new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
•changes in accounting standards, policies, guidelines, interpretations, or principles;
•any significant changes in our management or our board of directors;
•general economic conditions, such as rising inflation and interest rates, global recessionary conditions, and slow or negative growth of our markets; and
•other events or factors, including those resulting from hostilities or wars (such as the Israel-Hamas war and Russia-Ukraine war), incidents of terrorism, natural disasters, public health concerns or epidemics (such as the COVID-19 pandemic), or responses to these events.
In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our Class A common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. Securities litigation, if instituted against us, could result in substantial costs and divert our management’s attention and resources from our business. This risk could materially adversely affect our business, financial condition, results of operations, and prospects.
The dual-class structure of our common stock as contained in our amended and restated certificate of incorporation has the effect of concentrating voting control with those stockholders who held our capital stock prior to our IPO, including our directors, executive officers and their respective affiliates. This ownership will limit or preclude your ability to influence corporate matters, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transactions requiring stockholder approval, and that may adversely affect the trading price of our Class A common stock.
Our Class B common stock has ten votes per share, and our Class A common stock has one vote per share. As of September 30, 2023, we had 114,944,182 shares of Class B common stock outstanding, representing approximately 75% of the voting power of our outstanding capital stock; our 5% stockholders, directors, executive officers and their affiliates beneficially owned in the aggregate approximately 85% of the voting power of our outstanding capital stock. Even if any of our directors or executive officers no longer have a service relationship with us, they may continue to have the same influence over matters requiring stockholder approval. In addition, because of the ten-to-one voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively could continue to control a majority of the combined voting power of our common stock and therefore control all matters submitted to our stockholders for approval until (i) the date the holders of two-thirds of our outstanding Class B common stock elect to convert the Class B common stock to Class A common stock, or (ii) September 24, 2028. This concentrated control may limit or preclude your ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets or other major corporate transactions requiring stockholder approval. In addition, this concentrated control may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that you may feel are in your best interest as one of our stockholders. As a result, such concentrated control may adversely affect the market price of our Class A common stock.
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Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions as specified in our amended and restated certificate of incorporation, such as transfers to family members and certain transfers effected for estate planning purposes. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. As a result, it is possible that one or more of the persons or entities holding our Class B common stock could gain significant voting control as other holders of Class B common stock sell or otherwise convert their shares into Class A common stock.
We cannot predict the effect our dual-class structure may have on the market price of our Class A common stock.
We cannot predict whether our dual-class structure will result in a lower or more volatile market price of our Class A common stock, adverse publicity or other adverse consequences. For example, certain index providers have announced and implemented restrictions on including companies with multiple-class share structures in certain of their indices. In July 2017, FTSE Russell announced that it would require new constituents of its indices to have greater than 5% of the company’s voting rights in the hands of public stockholders, and S&P Dow Jones announced that it would no longer admit companies with multiple-class share structures to certain of its indices. Affected indices include the Russell 2000 and the S&P 500, S&P MidCap 400 and S&P SmallCap 600, which together make up the S&P Composite 1500. Also, in 2017, MSCI, a leading stock index provider, opened public consultations on its treatment of no-vote and multi-class structures and temporarily barred new multi-class listings from certain of its indices; however, in October 2018, MSCI announced its decision to include equity securities “with unequal voting structures” in its indices and to launch a new index that specifically includes voting rights in its eligibility criteria. Under such announced and implemented policies, the dual-class structure of our common stock would make us ineligible for inclusion in certain indices and, as a result, mutual funds, exchange-traded funds and other investment vehicles that attempt to passively track those indices would not invest in our Class A common stock. It is unclear what effect, if any, these policies will have on the valuations of publicly-traded companies excluded from such indices, but it is possible that they may adversely affect valuations, as compared to similar companies that are included. Due to the dual-class structure of our common stock, we will likely be excluded from certain indices and we cannot assure you that other stock indices will not take similar actions. Given the sustained flow of investment funds into passive strategies that seek to track certain indices, exclusion from certain stock indices would likely preclude investment by many of these funds and could make our Class A common stock less attractive to other investors. As a result, the market price of our Class A common stock could be adversely affected.
Our principal stockholders will continue to have significant influence over the election of our board of directors and approval of any significant corporate actions, including any sale of the company.
Our founders, executive officers, directors, and other principal stockholders, in the aggregate, beneficially hold a majority of the voting power of our outstanding stock. These stockholders currently have, and likely will continue to have, significant influence with respect to the election of our board of directors and approval or disapproval of all significant corporate actions. The concentrated voting power of these stockholders could have the effect of delaying or preventing an acquisition of the company or another significant corporate transaction.
An active, liquid trading market for our Class A common stock may not be sustained, which may make it difficult for you to sell the Class A common stock you purchase.
We cannot predict if an active and liquid trading market of our Class A common stock will be sustained. If an active and liquid trading market for our Class A common stock is not sustained, you may have difficulty selling any of our Class A common stock at a price above the price you purchase it or at all. If an active market for our Class A common stock is not sustained, our ability to raise capital to fund our operations by selling shares and our ability to acquire other companies or technologies by using our shares as consideration may suffer.
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Future sales, or the perception of future sales, by us or our existing stockholders in the public market could cause the market price for our Class A common stock to decline.
Sales of a substantial number of shares of our Class A common stock in the public market, or the perception that such sales could occur in large quantities, could harm the prevailing market price of shares of our Class A common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
The market price of our Class A common stock could drop significantly if our stockholders sell, or are perceived as intending to sell, shares of our Class A common stock. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of Class A common stock or other securities.
You may incur dilution as a result of future equity issuances.
Any common stock that we issue under our existing equity incentive plans or other equity incentive plans that we may adopt in the future would dilute the percentage ownership held by our other equity holders. We have, and may in the future, issue securities in connection with investments, acquisitions, or capital raising activities. In particular, the number of shares of our Class A common stock issued in connection with an investment or acquisition, or to raise additional equity capital, could constitute a material portion of our then-outstanding shares of our Class A common stock. Any such issuance of additional securities in the future may result in additional dilution to you or may adversely impact the price of our Class A common stock.
Certain provisions in our charter documents and Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove members of our board of directors or current management and may adversely affect our stock price.
Our amended and restated certificate of incorporation and our second amended and restated bylaws contain provisions that could delay or prevent a change in control. These provisions could also make it difficult for stockholders to elect directors that are not nominated by the current members of our board of directors or take other corporate actions, including effecting changes in our management. These provisions include:
•a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors;
•the denial of any right of our stockholders to remove members of our board of directors except for cause and, in addition to any other vote required by law, upon the approval of not less than two-thirds of the total voting power of all our outstanding voting stock then entitled to vote in the election of directors;
•the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
•the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death, or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
•provide for a dual-class common stock structure in which holders of our Class B common stock have the ability to control the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the outstanding shares of our Class A and Class B common stock, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets;
•a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
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•the requirement that a special meeting of stockholders may be called only by the chairperson of our board of directors, chief executive officer, or by the board of directors acting pursuant to a resolution adopted by a majority of our board of directors, which could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;
•certain amendments to our amended and restated certificate of incorporation will require the approval of two-thirds of the then-outstanding voting power of our capital stock; and
• advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.
These provisions may discourage proxy contests and delay or prevent attempts by our stockholders to replace or remove our board of directors and to cause us to take corporate actions they desire. In addition, because we are incorporated in Delaware, we are subject to Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions, generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an “interested stockholder” for a specified period of time. Any of these provisions of our amended and restated certificate of incorporation, second amended and restated bylaws, and Delaware law could limit the price that investors might be willing to pay for shares of our Class A common stock and deter potential acquirers of our company, thereby reducing the likelihood that you would receive a premium for your shares of Class A common stock in an acquisition.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid cash dividends on our capital stock and do not intend to pay any cash dividends in the foreseeable future. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not anticipate declaring or paying any dividends to holders of our capital stock in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
Our third amended and restated bylaws designate certain specified courts as the sole and exclusive forums for certain disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our third amended and restated bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware, or the Chancery Court, will be the sole and exclusive forum for state law claims for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of, or a claim based on, a breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or our bylaws, (iv) any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws, or (v) any action asserting a claim governed by the internal affairs doctrine, or the Delaware Forum Provision. The Delaware Forum Provision does not apply to any causes of action arising under the Securities Act or the Exchange Act. Our third amended and restated bylaws further provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America will be the sole and exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, or the Federal Forum Provision. Our third amended and restated bylaws provide that any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have notice of and consented to the foregoing Delaware Forum Provision and the Federal Forum Provision; provided, however, that stockholders cannot and will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder.
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The Delaware Forum Provision and the Federal Forum Provision may impose additional litigation costs on stockholders in pursuing the claims identified above, particularly if the stockholders do not reside in or near the State of Delaware. Additionally, the Delaware Forum Provision and the Federal Forum Provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. While the Delaware Supreme Court ruled in March 2020 that federal forum selection provisions purporting to require claims under the Securities Act be brought in federal court are “facially valid” under Delaware law, there is uncertainty as to whether other courts will enforce our Federal Forum Provision. If the Federal Forum Provision is found to be unenforceable in an action, we may incur additional costs associated with resolving such an action. The Federal Forum Provision may also impose additional litigation costs on stockholders who assert that the provision is not enforceable or invalid. The Chancery Court or the federal district courts of the United States of America may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments may be more or less favorable to us than our stockholders.
If securities analysts cease to publish research or reports or publish inaccurate or unfavorable research about our business, if they downgrade our stock or our sector or if our financial results do not meet or exceed the guidance we provide to the public, our stock price could decline.
The trading market for our Class A common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts and the analysts’ estimates are based upon their own opinions and are often different from our estimates or expectations. If one or more of the analysts who do cover us downgrade our stock or our industry, or the stock of any of our competitors, or publish inaccurate or unfavorable research about our business, the price of our stock could decline. If one or more of these analysts stops covering us or fails to publish reports on us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.
In addition, the stock prices of many companies in the technology industry have declined significantly after those companies failed to meet the financial guidance publicly announced by the companies or the expectations of analysts, and stock prices have even declined significantly after such companies exceeded, or even significantly exceeded, such guidance or expectations. If our financial results fail to meet our announced guidance or the expectations of analysts or public investors, or even if our financial results exceed, or even significantly exceed, such guidance or expectations, or if we reduce our guidance for future periods, our stock price may decline.
General Risk Factors
As a public reporting company, we are subject to rules and regulations established from time to time by the SEC and PCAOB regarding our internal control over financial reporting. If we fail to establish and maintain effective internal control over financial reporting and disclosure controls and procedures, we may not be able to accurately report our financial results or report them in a timely manner.
As a public reporting company, we are subject to the rules and regulations established from time to time by the SEC and the Public Company Accounting Oversight Board, or PCAOB. These rules and regulations will require, among other things, that we establish and periodically evaluate procedures with respect to our internal control over financial reporting. Reporting obligations as a public company place a considerable strain on our financial and management systems, processes, and controls, as well as on our personnel.
We are also required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report on the effectiveness of our internal control over financial reporting as of the end of each fiscal year, which requires us to document and test our internal control over financial reporting. Management’s initial certification under Section 404 of the Sarbanes-Oxley Act was provided with our annual report on Form 10-K for the fiscal year ended December 31, 2022. In support of such certification, we were required to document and make significant changes and enhancements, including hiring personnel and establishing our internal audit functions. Likewise, our independent registered public accounting firm was required to provide an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2022. We anticipate to continue investing significant resources to develop and refine our disclosure controls and other procedures.
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If we identify future deficiencies in our internal control over financial reporting or if we are unable to comply with the demands that are placed upon us as a public company, including the requirements of Section 404 of the Sarbanes-Oxley Act, in a timely manner, we may be unable to accurately report our financial results, or report them within the timeframes required by the SEC. We also could become subject to sanctions or investigations by the SEC or other regulatory authorities. In addition, if we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports, we may face restricted access to the capital markets and our stock price may be adversely affected.
Our current controls and any new controls that we develop may also become inadequate because of changes in our business, and weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could cause us to fail to meet our reporting obligations, result in a restatement of our financial statements for prior periods, undermine investor confidence in us, and adversely affect the trading price of our Class A common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the New York Stock Exchange.
We have identified a material weakness in our internal controls over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. We identified a material weakness in our internal controls over financial reporting as of December 31, 2022, related to ineffective information technology general controls, or ITGCs, in the area of user access over certain IT systems that support our revenue financial reporting processes. As a result, the related process-level IT dependent manual controls, certain change management controls, and automated application controls for certain key IT systems were also ineffective. Although the material weakness identified above did not result in any material misstatements in our condensed consolidated financial statements for the periods presented and there were no changes to previously released financial results, our management concluded that these control weaknesses constitute a material weakness and that our internal control was not effective as of December 31, 2022.
Our management, under the oversight of the Audit Committee of our Board of Directors and in consultation with outside advisors, has begun evaluating and implementing measures designed to ensure that the control deficiencies contributing to the material weakness are remediated. In particular, we are taking steps to remediate this material weakness by (i) creating and filling an IT Compliance Oversight function; (ii) developing and implementing additional training and awareness programs addressing ITGCs and policies, including educating control owners concerning the principles and requirements of each control, with a focus on user access; (iii) increasing the extent of oversight and verification checks included in operation of user access controls and processes; (iv) deploying additional tools to support administration of user access; and (v) enhancing quarterly management reporting on the remediation measures to the Audit Committee of the Board of Directors. The above controls need to operate for a sufficient period of time so that management can conclude that our controls are operating effectively. As such, the material weakness will not be considered remediated until management has concluded through the implementation of these remediation measures and additional testing that these controls are effective.
While we are designing and implementing new controls and measures to remediate this material weakness as noted above, we cannot assure you that the measures we are taking will be sufficient to remediate the material weakness or avoid the identification of additional material weaknesses in the future. Our failure to implement and maintain effective internal control over financial reporting could result in errors in our consolidated financial statements that could result in a restatement of our financial statements and could cause us to fail to meet our periodic reporting obligations, any of which could diminish investor confidence in us and cause a decline in the price of our Class A common stock.
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We incur significant costs as a result of operating as a public company.
We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the New York Stock Exchange and other applicable securities laws and regulations. The expenses incurred by public companies generally for reporting and corporate governance purposes are greater than those for private companies. For example, the Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business, financial condition, and results of operations. Compliance with these rules and regulations have increased our legal and financial compliance costs and will increase demand on our systems. In addition, as a public company, we may be subject to stockholder activism, which can lead to additional substantial costs, distract management, and impact the manner in which we operate our business in ways we cannot currently anticipate. As a result of disclosure of information in our public filings, our business and financial condition has become more visible, which may result in threatened or actual litigation, including by competitors. These rules and regulations have and will increase our legal and financial compliance costs and have and will make some activities more difficult, time-consuming, and costly, although we are currently unable to estimate these costs with any degree of certainty.
As a public company subject to enhanced rules and regulations, it is also more expensive for us to obtain directors and officers liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Class A common stock, fines, sanctions, and other regulatory action and potentially civil litigation. These factors may therefore strain our resources, divert management’s attention, and affect our ability to attract and retain qualified board members and executive officers.
Our senior management team has limited experience managing a public company, and regulatory compliance obligations may divert its attention from the day-to-day management of our business.
The individuals who now constitute our senior management team have limited experience managing a publicly-traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to public companies. Our senior management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and reporting obligations under federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, financial condition, and results of operations.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
(c) On September 8, 2023 , Brian Elworthy , our General Counsel and Corporate Secretary , entered into a trading plan 263,534 shares of our Class A common stock pursuant to the terms of the plan. Mr. Elworthy’s Rule 10b5-1 trading plan expires on May 31, 2024, or earlier if all transactions under the trading arrangement are completed. The trading arrangement is intended to satisfy the affirmative defense in Rule 10b5-1(c).
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Item 6. Exhibits
The exhibits listed below are filed or incorporated by reference in this Quarterly Report on Form 10-Q.
| Exhibit Number | Description | ||||
| 101.INS* | Inline XBRL Instance Document. | ||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | ||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | ||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | ||||
| 101.LAB* | Inline XBRL Taxonomy Extension Labels Linkbase Document. | ||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | ||||
| 104* | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). | ||||
| † | Portions of this exhibit (indicated by asterisks) have been omitted in accordance with the rules of the Securities and Exchange Commission. | ||||
| * | Filed herewith. | ||||
| ** | Furnished herewith. The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are deemed furnished and not filed with the SEC and are not to be incorporated by reference into any filing of the Company under the Securities Act or the Exchange Act, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing. | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TOAST, INC. | |||||||||||
| (Registrant) | |||||||||||
November 7, 2023 | By: | /s/ Christopher P. Comparato | |||||||||
| Christopher P. Comparato | |||||||||||
| Chief Executive Officer (Principal Executive Officer) | |||||||||||
November 7, 2023 | By: | /s/ Elena Gomez | |||||||||
| Elena Gomez | |||||||||||
| Chief Financial Officer (Principal Financial Officer) | |||||||||||
November 7, 2023 | By: | /s/ Michael Matlock | |||||||||
| Michael Matlock | |||||||||||
| Chief Accounting Officer | |||||||||||
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Exhibit 10.1
Certain identified information has been excluded from this exhibit because it is both not material and is the type that the registrant treats as private or confidential. Information that was omitted has been noted in this document with a placeholder identified by the mark “[***]”.
SUBLEASE AGREEMENT
This Sublease Agreement (this “Sublease”) is made effective as of August 7, 2023 (the “Effective Date”), by and between GOTO GROUP, INC., a Delaware corporation (as successor-in-interest to LogMeIn, Inc.) (“Sublandlord”), and TOAST, INC. a Delaware corporation (“Subtenant”). Sublandlord agrees to sublease to Subtenant, and Subtenant agrees to sublease from Sublandlord, a portion of the Master Premises (defined below) comprising approximately 101,735 total rentable square feet as follows: approximately 15,339 rentable square feet of space on the Fourth (4th) Floor (“Fourth Floor Premises”), approximately 15,339 rentable square feet of space on the Third (3rd) Floor (“Third Floor Premises”), approximately 15,339 rentable square feet of space on the Second (2nd) Floor (“Second Floor Premises”), approximately 14,713 rentable square feet of space on the First (1st) Floor (“First Floor Premises”), approximately 11,198 rentable square feet of space on the Mezzanine (“Mezzanine Premises”), approximately 15,127 rentable square feet of space on the Ground Floor (“Ground Floor Premises”), and approximately 14,680 rentable square feet of space on the Lower Level (“Lower Level Premises”) (collectively, the “Subleased Premises”) in the building commonly known as and located at 327-337 Summer Street, Boston, Massachusetts (the “Building”), as such Subleased Premises as more particularly depicted on Exhibit A-1 attached hereto. By way of clarification, the Ground Floor Premises is referred to in the Master Lease as the “basement premises.” The First Floor Premises includes approximately 255 rentable square feet of shared space as highlighted in yellow on Exhibit A-2 attached hereto (“Shared Space”). Sublandlord reserves the right to access the Shared Space solely to access the elevator bank serving the Retained Premises (as hereinafter defined) from the 5th Floor Entrance (as hereinafter defined).
1. Master Lease and Other Agreements.
1.1 Subordinate to Master Lease. This Sublease is subject and subordinate to all of the terms and conditions of that Lease dated December 19, 2014 (the “Master Lease”), by and between ASB Summer Street Venture, LLC (successor in interest to DWF III Synergy, LLC), a Delaware limited liability company (“Master Landlord”), as “Landlord” and Sublandlord, as “Tenant”, whereby Sublandlord leases from Master Landlord approximately 117,801 rentable square feet of space in the Building (the “Master Premises”). The portion of the Master Premises not included in the Subleased Premises consists of approximately 15,339 rentable square feet on the fifth (5th) floor of the Building, and approximately 692 rentable square feet on the first (1st) floor of the Building as shown on Exhibit A-2 attached hereto, and shall be referred to herein as the “Retained Premises”. As used herein, “Subtenant’s Share” means 86.36%. Unless otherwise defined herein, all capitalized terms used herein shall have the same meanings as given them in the Master Lease. A partially redacted copy of the Master Lease is attached hereto as Exhibit B and incorporated herein by this reference. Subject to the terms of the Master Landlord Consent (as hereinafter defined), Subtenant shall not commit any act or omission which would violate any term or condition of the Master Lease. Subtenant shall neither do nor permit anything to be done by any of the Subtenant Parties (as hereinafter defined) which would cause the Master Lease to be terminated or forfeited by reason of any right of termination or forfeiture reserved or vested in Master Landlord under the Master Lease, and, subject to the limitations set forth in this Sublease, Subtenant shall indemnify, defend and hold Sublandlord harmless from and against all claims, losses, damages, liabilities, judgments, costs, demands, penalties, and expenses of any kind whatsoever, including, without limitation, attorneys’ fees, consultants’ fees and costs and court costs (collectively, “Claims”) by reason of any failure on the part of Subtenant to perform any of
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the obligations of Tenant under the Master Lease which Subtenant has become expressly obligated under this Sublease to perform, and such indemnity, defense and hold harmless shall survive the expiration or sooner termination of this Sublease.
1.2 Subtenant Assumption of Obligations. With respect to the Subleased Premises only, Subtenant covenants and agrees to assume, perform and observe all the terms, covenants and conditions required to be performed by Sublandlord, as tenant under the Master Lease, except to the extent such terms, covenants and conditions conflict with the terms of this Sublease and specifically excluding (1) the obligations to pay the Base Rent, Additional Rent and utility charges due under the Master Lease, other than as set forth in Section 3.4 below, (2) the repair and maintenance obligations under Section 8.1 of the Master Lease with respect to the utility, HVAC and Building systems serving the Subleased Premises, except for any such systems installed by Subtenant or any Subtenant Parties on or after the Early Access Date, (3) Tenant’s obligations under the seventh (7th) sentence of Section 5.2(a) of the Master Lease or under Section 8.1(b) of the Master Lease, and (4) any and all Excluded Lease Terms and any redacted terms or provisions in the Master Lease. Without limitation of the foregoing, Subtenant shall not be responsible for (and does not assume the Master Lease obligations with respect to) (i) any default of Sublandlord or any of Sublandlord’s affiliates or any of their respective agents, property managers, managers, officers, employees, subtenants, licensees, contractors or invitees (collectively, the “Sublandlord Parties”) under the Master Lease unless attributable to a default under this Sublease or the Master Lease by Subtenant, its agents, employees, contractors, managers, officers, invitees, subtenants or assigns (the “Subtenant Parties”), (ii) conditions at the Subleased Premises for which the obligation to maintain and repair resides with Sublandlord or Master Landlord under the Master Lease or which existed as of the Commencement Date, excepting only if such maintenance or repair was necessitated by any act of Subtenant or any Subtenant Parties prior to the Commencement Date, (iii) any violations of law resulting from the conditions described by subclause (ii) above, (iv) the removal of any Roof Equipment installed by or on behalf of Sublandlord on the Reserved Roof Area or the removal of Alterations (including Specialty Alterations, Permitted Alterations and Cable) existing in the Subleased Premises as of the Commencement Date of this Sublease (or, with respect to any portion of the Retained Premises that becomes part of the Subleased Premises, as of the commencement date of this Sublease as to the applicable Retained Premises) and the restoration of any damage resulting from such removal, provided, however, Subtenant shall be responsible for the removal of any Alterations (including any Permitted Alterations) and Cable that Subtenant or any Subtenant Party installs on or after the Early Access Date if and to the extent such removal is required by Master Landlord, (v) any Hazardous Materials existing in or on the Premises, the Building or the Property as of the Commencement Date, including, without limitation, the existing conditions disclosed in the Master Lease and the asbestos-containing-materials located in the non-operational boiler in the basement of the Premises, unless exacerbated by Subtenant or any Subtenant Parties or used, spilled, stored or released by Subtenant or any Subtenant Parties prior to the Commencement Date, (vi) the payment of any charges, fees and other costs imposed by Master Landlord on Sublandlord as a result of Sublandlord’s default under the Master Lease except if caused by a default by Subtenant under this Sublease, and (vii) making payment of any sums either to Master Landlord or Sublandlord in satisfaction of any charges accruing under the Master Lease (whether denominated as rent, rental, additional rent or otherwise) for any period prior or subsequent to the Term of this Sublease except, with respect to periods subsequent to the Term of this Sublease or during the Early Access Period, to the extent such charge arises from the act or omission any of the Subtenant Parties (including, without limitation any holdover by Subtenant or any Subtenant Parties.
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In the event of the termination of the Master Lease and, if applicable, subject to the Master Landlord Consent and the Recognition Agreement (as hereinafter defined), this Sublease shall terminate automatically upon such termination without any liability owed to Subtenant by Master Landlord, or by Sublandlord unless the termination is due to Sublandlord’s breach of the Master Lease and not due to Subtenant’s breach of this Sublease. Subtenant represents and warrants to Sublandlord that it has read and is familiar with the terms of the Master Lease exclusive of any redacted provisions thereof.
1.3 Sublandlord Continuing Obligations.
Sublandlord shall duly observe and perform all of the terms and conditions of the Master Lease that are required to be performed or observed by Sublandlord as the tenant thereunder and are not required to be performed or observed by Subtenant under this Sublease. Except with respect to a termination of the Master Lease by Sublandlord resulting from the exercise of a right to terminate the Master Lease expressly provided in the Master Lease and provided and so long as this Sublease is in full force and effect and has not been terminated, Sublandlord shall not, without Subtenant’s prior written consent in Subtenant’s sole discretion, (1) do or permit any of the Sublandlord Parties to do anything which would cause the Master Lease to be cancelled, terminated or surrendered unless Master Landlord has entered into the Recognition Agreement, or (2) amend the Master Lease in any way which is inconsistent with or would have an adverse effect (by more than a de minimis extent) on Subtenant’s rights under this Sublease, the Master Landlord Consent or, if applicable, the Recognition Agreement, or (3) voluntarily agree to terminate the Master Lease without Subtenant’s prior written consent (except in connection with any casualty or condemnation), or (4) except for the transfers expressly permitted without Master Landlord’s consent pursuant to Section 7.7 of the Master Lease, assign its interest in the Master Lease, or sublet, license or permit occupancy of the Retained Premises without first complying with Sublandlord’s obligations under Section 11 of this Sublease. Sublandlord shall deliver to Subtenant copies of all executed amendments to the Master Lease, which copies may be redacted so as to remove from view any confidential financial terms only. Sublandlord shall indemnify Subtenant for, and shall hold it harmless from and defend Subtenant against, any and all Claims (excluding consequential damages) arising by reason of (x) the failure of any representation or warranty of Sublandlord set forth in this Sublease to be true, correct or complete in any material respect when made, (y) any termination of the Master Lease resulting from the breach of the Master Lease by Sublandlord except to the extent such failure is caused by the default, acts, fault, or negligence of Subtenant or any of the Subtenant Parties, or (z) subject to the waiver of claims and subrogation in the Master Lease (and incorporated by reference into this Sublease), Sublandlord’s failure to perform its obligations under this Sublease or under the Master Lease beyond any applicable notice and cure period except to the extent such failure is caused by the default, acts, fault, or negligence of Subtenant or any of the Subtenant Parties.
1.4 Incorporation of Master Lease Provisions.
(a) All of the terms and conditions contained in the Master Lease as they may apply to the Subleased Premises are incorporated herein and shall be terms and conditions of this Sublease, except to the extent that the same are reasonably applicable only to the original parties to, or the landlord and tenant under, the Master Lease, or are inconsistent with or modified by the agreements and understandings expressed in this Sublease, and specifically excluding the following provisions of the Master Lease which are not incorporated herein (the “Excluded Lease Terms”): Sections 1.2 (except for the definitions of “Building”, “Lot”, “Permitted Use”,
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“Business Days” and “Business Hours”), 3.1, 3.2, 3.3, 4.1 (except 4.1(d), (e) and (f)), 4.2 (except 4.2(c)), 4.3, the second sentence of Section 6.1(a) (except that Subtenant shall have exclusive use of the patio constructed by Sublandlord pursuant to Section 6.1 of the Master Lease), the parenthetical in subclause (d) of Section 7.3, the second paragraph of Section 7.7, 8.1, 9.7, 17.9, 17.15, 17.22, 17.28 and 18.1; and Exhibit FP Premises, Exhibit Work Letter (except for Attachment I which shall be incorporated herein), Exhibit SNDA, and Exhibit L/C. For purposes of such incorporation, each reference therein to “Landlord”, “Tenant”, “Premises”, “Commencement Date” and “Lease” shall be deemed to refer to Sublandlord, Subtenant, Subleased Premises, the Commencement Date of this Sublease and Sublease, respectively, as appropriate.
(b) However, in the following provisions that are incorporated herein, the reference to Landlord shall mean Master Landlord only: Sections 5.2(a) (the fifth, sixth and seventh sentences only), 5.2(c) (the last sentence), 5.7 (the first and third sentences), 6.1(b)(iv), 8.2, 9.1 (the first sentence), 9.4 (the last sentence), 9.5(2), 11.6, 12.1, 12.2, 12.3, 12.4, 13.1, 13.2, 13.3, 16.1(b) and 17.31.
(c) In addition, in the following provisions that are incorporated herein, the reference to Landlord shall mean both Master Landlord and Sublandlord: Section 9.5(3), 5.6, 5.7 (except the first and third sentences), 6.1 (provided that Sublandlord’s consent shall at all times be conditioned upon obtaining Master Landlord’s consent), 10.1, 10.2, 10.3, 14.2, 15.1, 17.17(c) and 17.18. To the extent reasonably possible, the provisions of the Master Lease incorporated by reference into this Sublease shall be construed as consistent with and complementary to the other provisions of this Sublease, but in the event of any inconsistency, said other provisions of this Sublease (i.e., those not incorporated by reference from the Master Lease) shall control as between Sublandlord and Subtenant.
(d) Notwithstanding the incorporation of Section 16.1 of the Master Lease, Sublandlord and Master Landlord will not have any obligation to obtain an SNDA in favor of Subtenant provided Sublandlord will use commercially reasonable efforts to deliver to Subtenant an executed SNDA in favor of Sublandlord from the current and any future mortgagees and ground lessors which SNDA consents to this Sublease and the mortgagee or ground lessor, as applicable, agrees to be bound by the Master Landlord Consent and the Recognition Agreement in the event of any succession to the interest of Master Landlord in the Building. Provided that it will not cause a default under the Master Lease, Sublandlord covenants and agrees that Sublandlord shall not agree to any future SNDA with any future mortgagee of Master Landlord that is inconsistent with the SNDA executed by the current mortgagee in connection with the Sublease which agrees to be bound by the Master Landlord Consent and Recognition Agreement.
(e) Notwithstanding the incorporation of Section 17.17 of the Master Lease, Subtenant shall not modify, alter, disturb or remove any existing Roof Equipment or related wiring, conduits or equipment unless Subtenant subleases the entire Retained Premises, and Subtenant shall be responsible for any costs (including those costs included in Operating Costs) charged by Master Landlord to relocate or remove any of Subtenant’s roof equipment.
(f) If, during the Term, Sublandlord receives an abatement of rent under any of the provisions of the Master Lease applicable to the Subleased Premises, then Subtenant shall receive a parallel right of Rent abatement hereunder. All of the incorporated terms of the Master
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Lease as referenced and qualified above along with all of the terms and conditions set forth in this document shall constitute the complete terms and conditions of this Sublease.
1.5 Obligations of Sublandlord. To the extent that they apply to the Subleased Premises and as long as this Sublease is in full force and effect, Subtenant shall be entitled, with respect to the Subleased Premises, to the benefit of Master Landlord’s obligations and agreements under the Master Lease to furnish utilities and other services to the Subleased Premises. Notwithstanding anything herein to the contrary, the only services or rights to which Subtenant is entitled hereunder are those to which Sublandlord is entitled under the Master Lease and the Sublandlord’s Sublease Obligations (as hereinafter defined), and for all such services and rights other than the Sublandlord’s Sublease Obligations, Subtenant shall look solely to the Master Landlord under the Master Lease, and the obligations of Sublandlord hereunder shall be limited to using its commercially reasonable good faith efforts to obtain the performance by Master Landlord of its obligations under the Master Lease, provided Subtenant shall reimburse Sublandlord for its pro rata share of all reasonable costs incurred by Sublandlord in such efforts. Provided that Subtenant is not in default hereunder beyond any applicable notice and cure period, then, if after receipt of Subtenant’s request for services to which Subtenant is entitled hereunder and Master Landlord’s failure to provide such services following any applicable notice and cure period under the Master Lease, which default affects the Subleased Premises, Sublandlord shall, upon written notification to Subtenant, commence a proceeding or other action to enforce the obligations of Master Landlord insofar as such obligations relate to the Subleased Premises with legal counsel reasonably acceptable to Subtenant, in which case Subtenant shall reimburse Sublandlord for Subtenant’s pro rata share of the reasonable costs and expenses incurred therewith. Sublandlord has no obligation to perform any obligation of Master Landlord under the Master Lease. Sublandlord shall have no liability to Subtenant or any other person for damage of any nature whatsoever as a result of the failure of Master Landlord to perform said obligations unless due to a default of Sublandlord under the Master Lease that is not due to a default by Subtenant hereunder. With respect to any obligation of Subtenant to be performed under this Sublease, when the Master Lease grants Sublandlord a specific number of days to perform its obligations thereunder, Subtenant shall have [***] fewer Business Day to perform. With respect to approval required to be obtained by “Landlord” under the Master Lease, such consent must be obtained from Master Landlord and Sublandlord and the approval of Sublandlord may be withheld if Master Landlord’s approval is not obtained.
During the Term of this Sublease, Sublandlord shall, at Sublandlord’s expense, to the extent required of “Tenant” under the Master Lease, (i) perform Sublandlord’s obligations under the Master Lease to repair and maintain the utility and Building Systems (including, without limitation, the HVAC systems, elevators, electrical, plumbing, life/safety systems, generators and fire pump systems) serving the Master Premises (including the Subleased Premises) in good working order, condition and repair, in keeping with similarly-aged renovated historic office buildings located in the Fort Point Channel district of Boston, and in compliance all applicable laws (including the ADA) (only to the extent Sublandlord is responsible for such compliance with laws under the Master Lease, and provided such compliance is not triggered by any Subtenant Alterations or Subtenant’s specific use of the Subleased Premises as opposed to general office use), reasonable wear and tear and damage by casualty, as a result of condemnation only excepted; (ii) maintain maintenance contracts on the HVAC systems, elevators, life/safety systems, generators and fire pump systems serving the Building; (iii) provide HVAC service to the Subleased Premises and the Common Areas (as hereinafter defined) 24 hours per day, 7 days per week (subject to applicable laws, regulations, codes and
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ordinances) in accordance with the specifications set forth on Exhibit I attached hereto; (iv) provide janitorial service to the Subleased Premises on Business Days (excluding federal and state holidays) in accordance with the specifications set forth on Exhibit F attached hereto; (v) provide electrical service to the Subleased Premises and the Common Areas of not less than 4 watts per rentable square foot of the Subleased Premises; (vi) provide water and sewer service to the Subleased Premises and the Common Areas consistent with such service provided to the Premises as of the date of this Sublease; (vii) gas service to the Subleased Premises and the Common Areas consistent with such service provided to the Premises as of the date of this Sublease; (viii) snow and ice removal and landscaping services consistent with such services provided at office buildings located in the Fort Point Channel district of Boston; and (ix) professional, third party property management service for the Building consistent with such services provided at office buildings located in the Fort Point Channel district of Boston utilizing LPC Commercial Services, Inc. or another major national property management company (collectively, the “Sublandlord’s Sublease Obligations”. Subtenant shall have the same abatement rights set forth in Section 9.8 for any failure of Sublandlord to perform the Sublandlord’s Sublease Obligations.
1.6 Server Room and Access. Sublandlord shall designate not more than ten (10) employees of Sublandlord (the “Approved Server Room Employees”) who will have an access card provided by Subtenant to and be permitted access to the server room in the Lower Level Premises (the “Server Room”) via the Subtenant Elevator. Sublandlord and Subtenant will cooperate to provide a schedule of door readers that will accept swipes of such access cards. The Approved Server Room Employees may have access to and non-exclusive use of the Server Room solely to service, maintain, install, operate and remove equipment of Sublandlord located in the Server Room and use of the entryways, stairwells, elevators, plenums, risers, hallways in the Lower Level Premises necessary to access and use the Server Room for the purposes permitted hereunder. During normal business hours, Approved Server Room Employees shall check in with Subtenant’s lobby desk prior accessing the Server Room. Outside of normal business hours, Sublandlord shall notify Subtenant via email at [***] prior to any entry to the Server Room. Notwithstanding the foregoing, Sublandlord may access the Server Room at any time without prior notice (but with same day notice to Subtenant via email at [***]) in the event of an emergency. Sublandlord shall, prior to the Commencement Date and at Sublandlord’s expense, install a demising cage or other demising partitions reasonably acceptable to Subtenant in the Server Room in the locations shown on Exhibit H attached hereto to separately demise Sublandlord’s existing equipment from the remainder of the Server Room housing Subtenant’s equipment. From and after demising the Server Room, Sublandlord shall not expand Sublandlord’s area in the Server Room. Subtenant shall have the right to install demising installations and security in the Server Room for Subtenant’s equipment so long as such installations do not interfere with or reduce Sublandlord’s originally demised portion of the Server Room. Subject to Section 6 below, Sublandlord shall indemnify Subtenant for, and shall hold it harmless from and defend Subtenant against, any and all Claims for personal injury or property damage arising from the wrongful acts, negligence or willful misconduct of Sublandlord or any of the Sublandlord Parties in connection with Sublandlord’s exercise of its rights under this Section 1.6. Subject to Section 6 below, Subtenant shall indemnify Sublandlord for, and shall hold it harmless from and defend Sublandlord against, any and all Claims for personal injury or property damage arising from the acts, omissions, fault, negligence willful misconduct of Subtenant or any of the Subtenant Parties in connection with Subtenant’s exercise of its rights under this Section 1.6. If Subtenant subleases the entire Retained Premises, this Section 1.6 shall terminate and Sublandlord shall remove all of Sublandlord’s equipment from the Server Room
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and all related cabling and wiring in the Building (including in shafts and conduits) prior to the commencement date of Subtenant’s sublease of the Retained Premises.
1.7 Exclusive Entrance and Reception Desk. During the Term, Sublandlord hereby grants to Subtenant and Subtenant Parties the exclusive right to access the Building and the Subleased Premises through the Summer Street main entrance (the “Summer Street Entrance”) for access to, egress from and the use of the Subleased Premises and Sublandlord’s employees shall not and Sublandlord shall not permit any other party (other than Subtenant or Subtenant Parties) to have access to the Building through the Summer Street Entrance, except that Sublandlord expressly reserves the right of access to and use of the Summer Street Entrance by (i) Sublandlord and its agents, employees, contractors, and consultants to perform Sublandlord’s obligations under this Sublease but not for purposes of accessing the Retained Premises as a tenant or other occupant, and (ii) any other occupant or visitor in the Building if and to the extent required by law or any governmental authority (e.g., for emergency egress purposes only). Sublandlord agrees that the reception desk in the main lobby shall be exclusive to Subtenant and part of the Subleased Premises and all elevators other than the 5th Floor Elevator shall be exclusive to Subtenant. Sublandlord shall enforce the exclusive access rights of Subtenant under this Section 1.7 against Sublandlord’s agents, employees, contractors, subtenants, licensees and other invitees of Sublandlord and cause all such parties to enter the building through the separate entrance shown on the floor plan for the First Floor Premises attached hereto as Exhibit A (the “5th Floor Entrance”). All mail and other deliveries to Sublandlord and the Retained Premises shall be delivered to the 5th Floor Entrance only. In furtherance thereof, Sublandlord shall install directional signage in and about the other Building entrance to direct all visitors to that entrance to the elevator bank providing access to the Retained Premises.
1.8 Occupancy and Use of the Retained Premises. During the Term of this Sublease, Sublandlord covenants and agrees that the Retained Premises shall be used solely as general office space and shall not be used or occupied (i) for any fitness facility or activities that produce noise or vibrations not standard for a general office user, (ii) as a co-working facility, or (iii) by any entity that is a competitor of Subtenant and identified on Exhibit G attached hereto. During the Term, Subtenant shall have the exclusive right to exercise Sublandlord’s roof rights set forth in the Section 17.17 of the Master Lease.
1.9 Access Control System. Subtenant shall have the right at any time following the Early Access Date to install a new Brivo or comparable access control system for the Summer Street Entrance, the elevator identified as the “Toast Elevator” on Exhibit A-2 attached hereto (the “Subtenant Elevator”) and the basement through the fourth (4th) floor and the roof of the Building (“Subtenant’s Access Control System”). Subtenant may utilize existing infrastructure in Subtenant’s Access Control System, including existing cameras, badge readers, door hardware and cabling. Sublandlord shall remove all network gear and video for Sublandlord’s access control system. All elevators in the Building will require badge access (excepting for egress purposes) and only the 5th Floor elevator shown on Exhibit A-2 attached hereto (the “5th Floor Elevator”) will be programmed by Sublandlord to permit access to the Retained Premises and the 5th Floor Entrance. Subtenant will provide the Approved Server Room Employees with badges that solely permit access to the Server Room upon installation of the access control system. All elevators in the Building will have lock off controls from Subtenant’s Access Control System that prevent access to the Subleased Premises (including the Server Room) and the patio by anyone other than Subtenant’s agents, employees, contractors and invitees and, with respect to
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the Server Room only, the Approved Server Room Entrants, and Master Landlord per the terms of the Master Lease.
1.10 Entry and Inspection. Sublandlord shall at all reasonable times and with reasonable prior advance notice (which notice may be by email to [***]), except in emergencies, in which event prior notice shall not be required, have the right to enter the Subleased Premises to inspect them, to supply services, to perform Sublandlord’s Sublease Obligations, to make repairs as reasonably deemed necessary by Sublandlord, and, during the last twelve (12) months prior to the expiration of the Sublease Term, to show the Subleased Premises to prospective transferees, all without being deemed to have caused an eviction of Subtenant and without abatement of rent.
1.11 Sublandlord Representations and Warranties. Sublandlord hereby represents and warrants to Subtenant that as of the Effective Date (a) the copy of the Master Lease attached to this Sublease is a complete and accurate copy of the Master Lease (which may be redacted in part), which is in effect and has not been amended, (b) the Master Lease is in full force and effect and to Sublandlord’s actual knowledge there exists no default or state of facts, which, with the giving of notice or passage of time, or both, would constitute a default thereunder on the part of Sublandlord, (c) to the Sublandlord’s actual knowledge, there exists no default or state of facts, which, with the giving of notice or passage of time, or both, would constitute a default under the Master Lease on the part of Master Landlord, (d) to Sublandlord’s knowledge, all rent and other charges due under the Master Lease have been paid as billed or required in the normal course through the date hereof, (e) Sublandlord has not exercised any of the extension options set forth in Section 3.3 of the Master Lease, and (f) the term of the Master Sublease expires on or after the Expiration Date as set forth in this Sublease. As of the Effective Date, Sublandlord further represents that Sublandlord exercised its right under the Master Lease to connect the Building’s elevator and life safety system to the emergency power distribution system under Section 9.6 of the Lease, and Sublandlord has not exercised its right under Section 5.4 of the Master Lease to reallocate the electricity capacity available to the Subleased Premises and shall not exercise such right during the Sublease Term unless Subtenant requests that Sublandlord exercise such right on its behalf and at Subtenant’s cost. Subtenant acknowledges that the Building’s emergency power distribution system does not provide additional or back-up power to the Subleased Premises other than to the elevators and fire/life safety system.
In addition, Sublandlord herby represents and warrants to Subtenant that (i) Sublandlord has not received any written notice that the Subleased Premises is in violation of any applicable law relating to the presence of Hazardous Materials in, on, or about the Subleased Premises, (ii) to Sublandlord’s actual knowledge, no current violation of any Environmental Laws exists with respect to the Subleased Premises, and (iii) neither Sublandlord nor any of the Sublandlord Parties have previously or will introduce any Hazardous Materials in, on, or about the Subleased Premises, other than as expressly permitted under the Master Lease.
2. Sublease Term.
2.1 Sublease Term. Subject to Section 9 below, the term of this Sublease (the “Sublease Term”) shall commence on the later to occur of (i) the date that is one (1) Business Day following the date Sublandlord delivers possession of the Subleased Premises to Subtenant in the Delivery Condition (as hereinafter defined) and delivers written notice of such delivery to Subtenant (which notice may be by email to [***]), or (ii) January 1, 2024 (the “Commencement
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Date”) and shall end on June 30, 2028 (the “Expiration Date”), unless sooner terminated pursuant to any provision of this Sublease or the Master Lease. Notwithstanding the foregoing, if Subtenant commences business in the Subleased Premises during the early access period pursuant to Section 2.2 below, then the Commencement Date shall be deemed to have occurred (but in no event shall such Commencement Date occur prior to [***]). Notwithstanding the foregoing, if, during the Sublease Term, Subtenant subleases the Retained Premises, then the Expiration Date shall be automatically revised to June 29, 2028. Subtenant shall have no option to extend this Sublease and Sublandlord shall have no obligation to Subtenant to exercise any of its options to extend or other options under the Master Lease. Sublandlord shall use reasonable efforts to deliver possession of the Subleased Premises to Subtenant in the Delivery Condition by [***] (the “Target Commencement Date”). In the event Sublandlord is unable to deliver possession of the Subleased Premises on or before the Target Commencement Date, Sublandlord shall not be liable for any damage caused thereby, nor shall this Sublease be void or voidable, nor shall the Sublease Term be extended, but the Term shall not commence and Subtenant shall not be liable for any obligations under this Sublease until the date on which Sublandlord delivers possession of the Subleased Premises to Subtenant in the Delivery Condition except as set forth in Section 2.2. Notwithstanding the foregoing, if as of the date that Sublandlord would otherwise deliver possession of the Subleased Premises to Subtenant as described above, Subtenant has not delivered to Sublandlord (a) the Letter of Credit pursuant to the provisions of Section 4 below, (b) the prepaid Base Rent pursuant to the provisions of Section 3 below, and (c) evidence of Subtenant’s procurement of all insurance coverage required hereunder (collectively, the “Deliverables”), then Sublandlord will have no obligation to deliver possession of the Subleased Premises to Subtenant until such Deliverables are submitted, but the failure on the part of Sublandlord to so deliver possession of the Subleased Premises to Subtenant in such event will not serve to delay the occurrence of the Commencement Date and the commencement of Subtenant’s obligations under this Sublease. During the Term, Subtenant shall have exclusive use of the Patio constructed by Sublandlord pursuant to the Master Lease.
Sublandlord shall deliver possession of the Subleased Premises to Subtenant vacant, broom clean, free of all Hazardous Materials (exclusive of any pre-existing conditions affecting the Property as of the commencement date of the Master Lease that are Master Landlord’s obligation under the Master Lease to remove or remediate), free and clear of all personal property (exclusive of the FF&E, as hereinafter defined) and branding of Sublandlord in the interior of the Subleased Premises, in compliance with all applicable laws to the extent such compliance is Sublandlord’s obligation under the Master Lease, with all Building systems serving the Subleased Premises in good working order and condition and with the Sublandlord’s Work (as hereinafter defined) substantially completed (the “Delivery Condition”). If the Commencement Date has not occurred by [***] (the “Outside Delivery Date”), Subtenant shall be entitled to a rental credit equal to one (1) day of Base Rent for each day beyond the Outside Delivery Date until the Commencement Date occurs and if the Commencement Date has not occurred by [***] (the “Final Outside Delivery Date”), then Subtenant shall have the right to terminate this Sublease by delivery of written notice of such election to Sublandlord prior to delivery of the Subleased Premises. If Subtenant terminates this Sublease pursuant to this Section 2.1, then Subtenant shall return the Sublandlord Letter of Credit to Sublandlord within [***] of such termination, and Sublandlord shall return the Subtenant Letter of Credit to Subtenant within [***] of such termination. The Outside Delivery Date and Final Outside Delivery Date shall each be extended for any actual delays documented to have been caused by Subtenant or any Subtenant Party and/or any force majeure.
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2.2 Early Access. Provided that Master Landlord has consented to this Sublease and that the Deliverables are satisfied, Subtenant shall have early access to Subleased Premises up to [***] prior to the Commencement Date but in all events by not later than [***] (the “Early Access Date”) for the sole purpose of installing furniture, fixtures and equipment (including without limitation telephone and data cabling and equipment) and performing Subtenant’s approved alterations to the Subleased Premises, at no additional charge to Subtenant. Subtenant’s access shall be subject to all the terms and conditions of this Sublease, except the payment of Rent. Sublandlord shall remove all of its property, furniture, trade fixtures and equipment not included in the FF&E being transferred to Subtenant from the Subleased Premises (the “Required Removables”) by not later than the Early Access Date or the Commencement Date will be postponed on a day for day basis until all such Required Removables have been removed from the Premises. Notwithstanding anything in Section 1.2 of this Sublease to the contrary, Subtenant shall be responsible to repair or replace any damage caused to the Subleased Premises by Subtenant or any of the Subtenant Parties during the foregoing Early Access period. Notwithstanding the foregoing, the Deliverables will not include the Subtenant Letter of Credit for purposes of this Section 2.2 until Sublandlord delivers the Sublandlord Letter of Credit or the subsequent amendment thereto.
2.3 Sublandlord’s Work. Sublandlord shall, at Sublandlord’s sole cost and expense, perform the following work to the Building (i) lawfully demise the Subleased Premises from the Retained Premises, including installation of a glass finished enclosure for the internal staircase between the Fifth Floor and the Fourth Floor of the Building and substantially similar to the enclosure depicted on Exhibit E attached hereto, and otherwise using Sublandlord’s building standard materials, (ii) separately submeter or check meter the Subleased Premises for electrical supply, (iii) create and finish a common area lobby and hallway on the ground floor to provide access for Sublandlord and any subtenant or licensee leasing the Retained Premises from the 5th Floor Entrance to the elevator cab providing access to the Retained Premises, (iv) relocate the glass wall and door on the first floor to the other side of the hallway to the approximate location shown on the plan attached hereto as Exhibit A-2, (v) reprogram Sublandlord’s existing access control system to permit access for all badges issued presently or in the future from such system to only the 5th Floor Entrance, the 5th Floor Elevator and the Retained Premises, and (vi) install directional signage directing entrants to the Building from the 5th Floor Entrance to the Retained Premises elevator bank (collectively, the “Sublandlord’s Work”).
3. Rent.
3.1 Base Rent. Subject to the Base Rent Abatement set forth below, Subtenant shall pay to Sublandlord each month during the Sublease Term, base rent (“Base Rent”) in advance, without notice, offset or deduction (plus any sales, rent, and/or use tax due thereon), on or before the 1st day of each calendar month in accordance with the following schedule:
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| Period During Term | Monthly Base Rent | ||||
| January 1, 2024 – [***] | [***] | ||||
| [***] | [***] | ||||
| [***] | [***] | ||||
| [***] | [***] | ||||
| [***] – June 30, 2028 | [***] | ||||
*Subject to Section 3.2 below.
Rent for partial months at the commencement or termination of this Sublease shall be prorated based upon the actual number of days of the month involved. Rent shall be paid to the Sublandlord at its business address noted herein, or at any other place Sublandlord may from time to time designate by written notice to Subtenant, including by ACH or electronic funds transfer to Sublandlord’s bank account. Upon Subtenant’s execution hereof, Subtenant shall pay Base Rent for the first full month of the Term for which Base Rent is due.
3.2 Base Rent Abatement. Notwithstanding Section 3.1 above, provided that Subtenant is not in default, monthly Base Rent shall be abated in the amount of $[***] per month (such amount, the “Base Rent Abatement Amount”) for the first three (3) months following the Commencement Date (“Base Rent Abatement Period”). The Base Rent Abatement Amount shall cease if one of the following circumstances occurs: (a) Subtenant is in monetary default under this Sublease beyond any applicable notice or cure period; (b) Subtenant makes an assignment for the benefit of creditors; or (c) a receiver, liquidator or trustee is appointed for Subtenant or Subtenant is adjudicated a bankrupt or insolvent, or any petition for bankruptcy, reorganization or arrangement pursuant to federal bankruptcy law, or any similar federal or state law, is filed by or against, consented to, or acquiesced in by, Subtenant, or any proceeding for the dissolution or liquidation of Subtenant is instituted (and, if such appointment, adjudication, petition or proceeding was involuntary and not consented to by Subtenant, the same is not discharged, stayed or dismissed within [***]). Notwithstanding anything herein to the contrary, if a default by Subtenant occurs beyond applicable notice and cure period, there will be no further abatement of Base Rent pursuant to this Section unless and until such default is cured; provided, however, Subtenant acknowledges and agrees that nothing in this Section is intended to limit any other remedies available to Sublandlord at law or in equity under applicable law in the event Subtenant is in default under the Sublease.
3.3 Additional Rent. This is a “gross” sublease, and all Operating Costs and Taxes are included in Base Rent. Subtenant is responsible for the cost of electricity for lights and plugs and electricity for the supply of HVAC service to the Subleased Premises. If Subtenant shall procure any additional services from Master Landlord at Subtenant’s request, or if additional rent or other sums are incurred under the Master Lease due to any act or omission of Subtenant,
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Subtenant shall be solely liable for such additional rent and Subtenant shall make such payment to Sublandlord or Master Landlord, as Sublandlord shall direct. As part of Sublandlord’s Work, the Subleased Premises shall be separately submetered or checkmetered for electrical service and Subtenant shall, at its sole cost, pay for the cost of such electricity service supplied to the Subleased Premises based on the submeters or check meters measuring such usage and at the electrical rates charged by the utility provider without markup by Sublandlord. Any other rent or other sums payable by Subtenant under this Section 3.3 shall constitute and be due as additional rent. Base Rent and additional rent, plus any sales, rent, and/or use tax due thereon, shall be referred to herein as “Rent”.
4. Letter of Credit.
4.1 Subtenant Letter of Credit. By the date that is [***] following the full execution and delivery of the Master Landlord Consent, Subtenant shall deliver to Sublandlord, to secure the performance of all of Subtenant’s obligations hereunder, an unconditional, clean and irrevocable letter of credit (the “Subtenant Letter of Credit”) in the amount of $[***] (the “Subtenant Letter of Credit Amount”) meeting the requirements of this Section 4.1. Notwithstanding anything contained herein to the contrary, the Subtenant Letter of Credit shall authorize the issuer thereof to cancel the Subtenant Letter of Credit without the consent of or authorization of Sublandlord upon the issuer’s receipt of written certification from Subtenant and Master Landlord that the Master Lease has terminated and Subtenant has attorned to Master Landlord, and Master Landlord has recognized Subtenant, under the Recognition Agreement (the “SLC Termination Provision”). If the issuer of the Subtenant Letter of Credit will not permit the SLC Termination Provision in the Subtenant Letter of Credit, then Sublandlord agrees, in connection with the initial issuance of the Subtenant Letter of Credit, to provide and to execute the issuer’s reasonably required documentation to effectuate, a conditional assignment of the Subtenant Letter of Credit to the Master Landlord, which conditional assignment may be exercised by Master Landlord only when the Master Lease terminates and Master Landlord will be recognizing Subtenant under the Recognition Agreement. The Subtenant Letter of Credit shall be (i) substantially in form attached hereto as Exhibit J, (ii) name Sublandlord as beneficiary, (iii) issued by an FDIC-insured financial institution reasonably satisfactory to Sublandlord and which satisfies the Minimum Rating Requirement set forth in Section 17.15 of the Master Lease (which definition is hereby incorporated herein by reference) (the “Letter of Credit Issuer Requirements”), (iv) allow draws thereon by presentation of a sight draft in the Commonwealth of Massachusetts or by facsimile, (v) permit multiple and partial draws and (vi) transferrable without cost to Sublandlord. If Sublandlord receives written notice from the issuer of the Subtenant Letter of Credit that indicates that the Subtenant Letter of Credit will not be renewed beyond the current expiration date and Subtenant does not provide Sublandlord with a substitute Subtenant Letter of Credit complying with all of the requirements hereof at least [***] before the stated expiration date of any then current Subtenant Letter of Credit, and such failure is not cured within [***] following delivery of written notice from Sublandlord, then Sublandlord shall have the right to draw the full amount of the current Subtenant Letter of Credit and hold the funds drawn as a cash security deposit without obligation for interest thereon. The Subtenant Letter of Credit (or cash) shall be held by Sublandlord as security for the performance of Subtenant’s obligations under this Sublease. The Subtenant Letter of Credit is not an advance rental deposit or a measure of Sublandlord’s damages in case of Subtenant’s default. The Subtenant Letter of Credit shall be subject to the "International Standby Practices" (ISP 98) International Chamber of Commerce (Publication No. 590). Subtenant shall pay all expenses, points and/or fees incurred by Subtenant in obtaining the Subtenant Letter of Credit. Upon each
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occurrence of a default of Subtenant under this Sublease which is not cured within applicable notice and cure periods hereunder (provided, however, that if Sublandlord is prevented from delivering a notice of default to Subtenant or otherwise declaring a default by Subtenant because Subtenant has filed a voluntary petition, or an involuntary petition has been filed against Subtenant, under the Bankruptcy Code, then no such notice shall be required for an actual default to be in existence), Sublandlord may use all or any part of the Subtenant Letter of Credit to pay delinquent payments due under this Sublease, future rent damages established following a termination of this Sublease, and the cost of any damage, injury, expense or liability caused by such default, without prejudice to any other remedy provided herein or provided by law. If Subtenant fails to perform any provision of Subtenant under this Sublease which is not cured within applicable notice and cure periods hereunder (provided, however, that if Sublandlord is prevented from delivering a notice of default to Subtenant or otherwise declaring a default by Subtenant because Subtenant has filed a voluntary petition, or an involuntary petition has been filed against Subtenant, under the Bankruptcy Code, then no such notice shall be required for an actual default to be in existence), Sublandlord may (but shall not be required to) without notice to Subtenant draw upon all or any portion of the Subtenant Letter of Credit, and Sublandlord may then use, apply or retain all or any part of the proceeds (a) for the payment of any sum which Subtenant has failed to pay, (b) to reimburse Sublandlord for costs incurred by Sublandlord in connection with Subtenant’s failure to perform its obligations under this Sublease, (c) for the payment of any other amount which Sublandlord may spend or become obligated to spend by reason of Subtenant's failure to perform its obligations or to compensate Sublandlord for any loss or damage which Sublandlord may suffer as a result thereof. Sublandlord’s right to use the Subtenant Letter of Credit includes the right to use the Subtenant Letter of Credit to pay future rent damages but only following the termination of this Sublease for a default by Subtenant. Upon any use of all or any portion of the Subtenant Letter of Credit, Subtenant shall restore the Subtenant Letter of Credit within [***] after demand to the original amount. Subtenant hereby waives the provisions of any law, now or hereafter in force, which provide that Sublandlord may claim from a security deposit only those sums reasonably necessary to remedy defaults in the payment of Rent, to repair damage caused by Subtenant or to clean the Premises, it being agreed that Sublandlord may, in addition, claim those sums reasonably necessary to compensate Sublandlord for any other loss or damage caused by a default of Subtenant under this Sublease or any officer, employee, agent or invitee of Subtenant. If Subtenant shall fully perform all of its obligations of this Sublease to be performed by Subtenant, the Subtenant Letter of Credit or any balance thereof (i.e., after deducting therefrom all amounts to which Sublandlord is entitled under the provisions of this Sublease), shall be returned to Subtenant (or, at Sublandlord’s option, to the last assignee of Subtenant’s interest hereunder) within [***] after the expiration of this Sublease. If Sublandlord transfers its interest in the Sublease, Sublandlord shall transfer any Subtenant Letter of Credit or balance thereof then held by Sublandlord to a person or entity assuming Sublandlord’s obligations hereunder. Upon a proper and valid transfer to such transferee or the return of the Subtenant Letter of Credit or balance thereof to Subtenant, Sublandlord shall have no further obligation with respect to the Subtenant Letter of Credit, and Subtenant’s right to the return of the Subtenant Letter of Credit shall apply solely against Sublandlord’s transferee. Should Sublandlord elect to draw upon the Subtenant Letter of Credit as permitted by this Section, Subtenant expressly waives any right it might otherwise have to prevent Sublandlord from drawing on the Subtenant Letter of Credit and agrees that an action for damages and not injunctive or other equitable relief shall be Subtenant’s sole remedy in the event Subtenant disputes Sublandlord’s claim to any such amounts. No condition or term of this Sublease shall be deemed to render the Subtenant Letter of Credit conditional and thereby justify the issuer of the Subtenant Letter of Credit in failing to honor a drawing upon such Subtenant
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Letter of Credit in a timely manner. Subtenant acknowledges and agrees that Subtenant has no property interest whatsoever in the Subtenant Letter of Credit or the proceeds thereof. Neither any drawing under the Subtenant Letter of Credit (or proceeds thereof) nor any security deposit of Subtenant shall be deemed liquidated damages in the event of a default by Subtenant under this Sublease. Sublandlord shall be required to keep any proceeds from the Subtenant Letter of Credit in a bank account solely controlled by Sublandlord but which is separate from its general funds and Subtenant shall not be entitled to any interest thereon. Notwithstanding anything to the contrary herein, if at any time the Letter of Credit Issuer Requirements are not met, then Subtenant shall within [***] of written notice from Sublandlord deliver to Sublandlord a replacement Subtenant Letter of Credit which otherwise meets the requirements of this Sublease and the Letter of Credit Issuer Requirements. Notwithstanding anything in this Sublease to the contrary, Subtenant’s failure to replace the Subtenant Letter of Credit and satisfy the Letter of Credit Issuer Requirements within such [***] period shall constitute a material default for which there shall be no additional notice or grace or cure periods being applicable thereto. In addition and without limiting the generality of the foregoing, if the issuer of the Subtenant Letter of Credit held by Sublandlord is insolvent or is placed in receivership or conservatorship by the Federal Deposit Insurance Corporation, or any successor or similar entity, or if a trustee, receiver or liquidator is appointed for the issuer, then, effective as of the date of such occurrence, said Subtenant Letter of Credit shall be deemed to not meet the requirements of this Section, and Subtenant shall within [***] of written notice from Sublandlord deliver to Sublandlord a replacement Subtenant Letter of Credit which otherwise meets the requirements of this Section and that meets the Letter of Credit Issuer Requirements (and Subtenant’s failure to do so shall, notwithstanding anything in the Sublease to the contrary, constitute a material default for while there shall be no additional notice or grace or cure periods being applicable thereto other than the aforesaid [***] period). If the Master Lease is terminated in such manner that the Recognition Agreement becomes effective, then Sublandlord shall return the Subtenant Letter of Credit with written directive to the issuer to cancel the same within [***] after such termination.
4.2 Sublandlord Letter of Credit. As soon as reasonably practicable following the full execution and delivery of the Master Landlord Consent (but not later than [***] thereafter), Sublandlord shall deliver to Subtenant, to secure the payment and performance of Sublandlord’s rental obligations under the Master Lease, an unconditional, clean and irrevocable letter of credit (“Sublandlord Letter of Credit”) in the amount of $[***] (the “Sublandlord Letter of Credit Amount”) meeting the requirements of this Section 4.2. Within [***] following the full execution and delivery of the Master Landlord Consent, Sublandlord shall increase the Sublandlord Letter of Credit Amount to $[***], by an amendment to the existing Sublandlord Letter of Credit and $[***] shall become the “Sublandlord Letter of Credit Amount” required under this Section 4.2. Notwithstanding anything contained herein to the contrary, the Sublandlord Letter of Credit shall authorize the issuer thereof to cancel the Sublandlord Letter of Credit without the consent of or authorization of Subtenant upon the issuer’s receipt of written certification from Sublandlord that the Sublease has terminated and receipt of written certification from Master Landlord that Master Landlord has not recognized Subtenant under the Recognition Agreement. Notwithstanding anything contained herein to the contrary, provided Subtenant has not been entitled to draw upon the Letter of Credit under this Section 4.2 at any time prior to [***] (the “Conditional Review Date”), the Sublandlord Letter of Credit Amount shall be reduced, by way of automatic reduction to $[***] on the [***] following such Conditional Review Date. Unless fully drawn upon by Subtenant, the Sublandlord Letter of Credit shall automatically expire on June 30, 2028. The Sublandlord Letter of Credit shall be (i) substantially in form attached hereto as Exhibit K, (ii) name Subtenant as beneficiary, (iii) issued
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by an FDIC-insured financial institution reasonably satisfactory to Subtenant and which satisfies the same Letter of Credit Issuer Requirements set forth in Section 4.1 of this Sublease, (iv) allow draws thereon by presentation of a sight draft in the Commonwealth of Massachusetts or by facsimile, (v) permit multiple and partial draws, (vi) have a final expiration date not earlier than June 30, 2028, and (vi) be transferrable to an assignee or successor to Subtenant under the Sublease. If Sublandlord does not provide Subtenant with a substitute Sublandlord Letter of Credit complying with all of the requirements hereof at least [***] before the stated expiration date of any then current Sublandlord Letter of Credit, and such failure is not cured within [***] following delivery of written notice from Subtenant, then Subtenant shall have the right to draw the full amount of the current Sublandlord Letter of Credit and hold the funds drawn without obligation for interest thereon. The Sublandlord Letter of Credit (or cash) shall be held by Subtenant as security for the Master Lease Rent Deficiency Obligations (as hereinafter defined) under this Sublease. The Sublandlord Letter of Credit is not an advance rental deposit or a measure of Subtenant’s damages in case of Sublandlord’s default under the this Section 4.2. The Sublandlord Letter of Credit shall be subject to the "International Standby Practices" (ISP 98) International Chamber of Commerce (Publication No. 590). Sublandlord shall pay all expenses, points and/or fees incurred by Sublandlord in obtaining the Sublandlord Letter of Credit. Notwithstanding anything herein to the contrary, Subtenant shall be permitted to draw upon the Sublandlord Letter of Credit only if the Master Lease is terminated due to an uncured default of Sublandlord (that is not caused by an event of default by Subtenant under this Sublease) or is rejected by Sublandlord in any insolvency proceedings involving Sublandlord and thereafter Master Landlord requires Subtenant, pursuant to the Recognition Agreement, to pay rent to Master Landlord at the rates and in the amounts set forth in the Master Lease (a “Sublandlord LOC Draw Event”). The difference between the remaining rental amounts payable by Subtenant under this Sublease and the remaining rental obligations Subtenant will be obligated to pay under the Master Lease as of the first day that Master Landlord requires Subtenant, pursuant to the Recognition Agreement, to pay rent to Master Landlord at the rates and in the amounts set forth in the Master Lease (including all Additional Rent payable under the Master Lease for Operating Costs Payments, as defined in the Master Lease), is referred to herein as the “Master Lease Rent Deficiency Obligations”. Upon the occurrence of a Sublandlord LOC Draw Event, Subtenant may immediately and without notice or cure period applicable thereto draw upon all or any portion of the Sublandlord Letter of Credit and Subtenant shall then use, apply or retain all or any part of the proceeds of the Sublandlord Letter of Credit to pay the Master Lease Rent Deficiency Obligations to Master Landlord as and when they become due. If Sublandlord shall fully perform all of its rental obligations under the Master Lease, the Sublandlord Letter of Credit or any balance thereof (i.e., after deducting therefrom all amounts to which Subtenant is entitled under the provisions of this Sublease), shall be returned to Sublandlord (or, at Subtenant’s option, to the last assignee of Sublandlord’s interest hereunder) within [***] after the expiration of this Sublease. Subtenant agrees to pay to Sublandlord within [***] after the expiration of the Sublease the amount of any proceeds of the Sublandlord Letter of Credit received by Subtenant and not paid to Master Landlord for Master Lease Rent Deficiency Obligations pursuant to the Recognition Agreement. If Subtenant transfers its interest in the Sublease with any consents required under this Sublease or the Master Lease, Subtenant shall transfer any Sublandlord Letter of Credit or balance thereof then held by Subtenant to a person or entity assuming Subtenant’s obligations hereunder. Upon a proper and valid transfer to such transferee or the return of the Sublandlord Letter of Credit or balance thereof to Sublandlord, Subtenant shall have no further obligation with respect to the Sublandlord Letter of Credit, and Sublandlord’s right to the return of the Sublandlord Letter of Credit shall apply solely against Subtenant’s transferee. Should Subtenant be entitled to and elect to draw upon the Sublandlord
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Letter of Credit as permitted by this Section, Sublandlord expressly waives any right it might otherwise have to prevent Subtenant from drawing on the Sublandlord Letter of Credit and agrees that an action for damages and not injunctive or other equitable relief shall be Subtenant’s sole remedy in the event Sublandlord disputes Subtenant’s claim to any such amounts. No condition or term of this Sublease shall be deemed to render the Sublandlord Letter of Credit conditional and thereby justify the issuer of the Sublandlord Letter of Credit in failing to honor a drawing upon such Sublandlord Letter of Credit in a timely manner. Sublandlord acknowledges and agrees that Sublandlord has no property interest whatsoever in the Sublandlord Letter of Credit or the proceeds thereof. Neither any drawing under the Sublandlord Letter of Credit (or proceeds thereof) shall be deemed liquidated damages in the event of a default by Sublandlord under the Master Lease. Subtenant shall be required to keep any proceeds from the Sublandlord Letter of Credit not promptly applied to the Master Lease Rent Deficiency Obligations in a bank account solely controlled by Subtenant but separate from its general funds for payment of future Master Lease Rent Deficiency Obligations and Sublandlord shall not be entitled to any interest thereon. Notwithstanding anything to the contrary herein, if at any time the Letter of Credit Issuer Requirements are not met, then Sublandlord shall within [***] of written notice from Subtenant deliver to Subtenant a replacement Sublandlord Letter of Credit which otherwise meets the requirements of this Sublease and the Letter of Credit Issuer Requirements. Notwithstanding anything in this Sublease to the contrary, Sublandlord’s failure to replace the Sublandlord Letter of Credit and satisfy the Letter of Credit Issuer Requirements within such [***] period shall constitute a material default for which there shall be no additional notice or grace or cure periods being applicable thereto. In addition and without limiting the generality of the foregoing, if the issuer of the Sublandlord Letter of Credit held by Subtenant is insolvent or is placed in receivership or conservatorship by the Federal Deposit Insurance Corporation, or any successor or similar entity, or if a trustee, receiver or liquidator is appointed for the issuer, then, effective as of the date of such occurrence, said Sublandlord Letter of Credit shall be deemed to not meet the requirements of this Section, and Sublandlord shall within [***] of written notice from Subtenant deliver to Subtenant a replacement Sublandlord Letter of Credit which otherwise meets the requirements of this Section and that meets the Letter of Credit Issuer Requirements (and Sublandlord’s failure to do so shall, notwithstanding anything in the Sublease to the contrary, constitute a material default for while there shall be no additional notice or grace or cure periods being applicable thereto other than the aforesaid [***] period). If Sublandlord fails to deliver the Sublandlord Letter of Credit or the subsequent amendment thereto within the time periods required under this Section 4.2, and Subtenant is not in default under this Sublease beyond applicable notice and cure periods, then (1) Subtenant shall be entitled to a credit against the Base Rent due under this Sublease equal to one day’s Base Rent for each day that Sublandlord misses either deadline under this Section 4.2 for delivering the original Letter of Credit or the subsequent amendment thereto, and (2) at any time thereafter, Subtenant may elect to terminate this Sublease by delivery of [***] prior written notice to Sublandlord delivered prior to the date the Sublandlord Letter of Credit or the subsequent amendment thereto are provided. If Subtenant terminates this Sublease pursuant to this Section 4.2, then Subtenant shall return the Sublandlord Letter of Credit to Sublandlord within [***] of such termination, and Sublandlord shall return the Subtenant Letter of Credit to Subtenant within [***] of such termination. Notwithstanding the foregoing, if the Sublease terminates due to a default of Subtenant hereunder, then Subtenant shall return the Sublandlord Letter of Credit to Sublandlord with written directive to the issuer to cancel the same within [***] after such termination.
5. Condition and Use of the Subleased Premises; Surrender; Alterations.
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5.1 Condition and Use of the Subleased Premises. Subtenant shall use the Subleased Premises only for the permitted use under the Master Lease and no other purpose or purposes. Except as set forth in this Section 5.1 and subject to Sublandlord’s delivery of possession of the Subleased Premises in the Delivery Condition, Subtenant acknowledges that Subtenant is leasing the Subleased Premises in its “as is” condition existing as of the Commencement Date, subject to Sublandlord’s Sublease Obligations and Sublandlord repairing any damage to the Subleased Premises caused by Sublandlord’s removal of its personal property from the Subleased Premises after the date of this Sublease. Except as set forth herein and in the Master Landlord Consent, Subtenant acknowledges that neither Sublandlord nor Master Landlord have made any representations or warranties as to the condition of the Subleased Premises or their present or future suitability for Subtenant’s purposes. Subject to Sublandlord’s obligations under this Sublease and the Master Lease and Master Landlord’s obligations under the Master Lease, Subtenant shall keep the interior, non-structural portions of the Subleased Premises in good working order, condition and repair in keeping with leased space in similarly-aged renovated historic office buildings located in the Fort Point Channel district of Boston, reasonable wear and tear and damage by casualty, as a result of condemnation, as a result of the failure of Master Landlord or Sublandlord to provide services required to be provided hereunder or under the Master Lease only excepted.
5.2 Surrender. Subtenant shall surrender the Subleased Premises at the end of the Sublease Term in the condition Subtenant was obligated to maintain the same under this Sublease, provided, however, Subtenant’s surrender obligation will be deemed waived in the event Subtenant and Master Landlord have entered into a direct lease for the Subleased Premises to commence immediately following the expiration or earlier termination of the term of the Master Lease and Master Landlord releases Sublandlord from such obligations. Sublandlord will request Master Landlord’s acknowledgement in the Master Landlord Consent that Subtenant will not be required to remove any leasehold improvements or other Alterations in the Premises as of the date of the Master Landlord Consent (including the internal staircase and Roof Equipment) at the end of the term of the Master Lease or at the end of the term of the Direct Lease (as defined in the Master Landlord Consent), as applicable, provided, however, Subtenant shall be responsible to remove any kitchen appliances and equipment in the ground floor kitchen (the “Kitchen Equipment”) and any Cables at the expiration or earlier termination of the Master Lease or the Direct Lease (as defined in the Master Landlord Consent), whichever is later.
5.3 Alterations. Subtenant shall not make any alterations, modifications, improvements or changes (“Alterations”) to the Subleased Premises without the express prior written consent of Sublandlord and Master Landlord, which consent may be withheld in Sublandlord’s reasonable discretion but will not be withheld if Master Landlord consents thereto and does not designate such Alterations as a Special Alteration requiring removal at the expiration of the term of the Master Lease. All such Alterations shall be performed subject to and upon the terms and conditions of the Master Lease. Sublandlord acknowledges that Subtenant intends to perform initial Alterations to the Subleased Premises to prepare the same for Subtenant’s occupancy. If Master Landlord requires removal or restoration of any of Subtenant’s Alterations, including any Permitted Alterations installed by or on behalf of Subtenant (as opposed to existing alterations and improvements in the Subleased Premises as of the Early Access Date of this Sublease) at the expiration or earlier termination of the term of the Master Lease, then prior to the termination of this Sublease, Subtenant shall remove any Alterations (including any Permitted Alterations) made by or for Subtenant (exclusive of Sublandlord’s Work). Should Subtenant fail to remove any such Alterations (including any
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Permitted Alterations) or Cabling, Sublandlord shall have the right to do so, and charge Subtenant therefor, plus a service charge of [***] of the costs incurred by Sublandlord. The foregoing removal obligation of Subtenant shall not apply in the event that Subtenant and Master Landlord have entered into a direct lease for the Subleased Premises to commence immediately following the expiration or earlier termination of the term of the Master Lease and Master Landlord releases Sublandlord of any obligation to remove the Subtenant’s Alterations and Cabling.
6. Insurance. With respect to the Tenant’s insurance under the Master Lease, the same is to be provided by Subtenant as described in the Master Lease, and such policies of insurance shall include as additional insureds Master Landlord, Sublandlord and any lender as required by Master Landlord. Sublandlord shall continue to maintain all insurance coverages required under the Master Lease with respect to the Master Premises and Sublandlord’s liability under the Master Lease. With respect to the waiver of subrogation contained in the Master Lease, such waiver shall be deemed to be modified to constitute an agreement by and among Master Landlord, Sublandlord and Subtenant (and the Master Landlord Consent shall be deemed to constitute its approval of this modification).
7. Assignment and Subletting.
7.1 Consent Required. Subtenant shall not assign this Sublease or any interest therein nor shall Subtenant sublet, license, encumber or permit the Subleased Premises or any part thereof to be used or occupied by others, without Sublandlord’s and Master Landlord’s prior written consent. Sublandlord’s consent shall not be unreasonably withheld; provided, however, that Sublandlord’s withholding of consent shall in all events be deemed reasonable if for any reason Master Landlord’s consent is not obtained. The consent by Sublandlord and Master Landlord to any assignment or subletting shall not waive the need for Subtenant (and Subtenant’s assignee or subtenant) to obtain the consent of Sublandlord and Master Landlord to any different or further assignment or subletting. All rights, conditions and standards set forth in the Master Lease regarding assignments and subletting (including the transfers permitted without the consent of Master Landlord or Sublandlord in Section 7.7) shall apply and to the extent there is any excess rent received by Subtenant (i.e., rent paid by such assignee, sub-subtenant or other transferee in excess of Rent paid by Subtenant hereunder and after deduction of the expenses deductible therefrom under Section 7.6) such excess rent shall first be split per Section 7.6 of the Master Lease with Master Landlord and any portion of such excess rent remaining after payment to Master Landlord shall be [***]with Sublandlord to be paid to Sublandlord within [***] following receipt by Subtenant. Every assignment, agreement, or sublease shall recite that it is and shall be subject and subordinate to the provisions of this Sublease and that the termination of this Sublease shall, at Sublandlord’s sole election, constitute a termination of every such assignment or sublease. Notwithstanding the foregoing, if Subtenant leases the Retained Premises, Subtenant may, subject to the consent rights of Master Landlord set forth in the Master Lease, sublease the Retained Premises without Sublandlord’s consent and without any right of recapture by Sublandlord but upon at least [***] prior notice to Sublandlord and otherwise subject to the terms hereof.
7.2 No Release of Subtenant; Default. No subletting, transfer or assignment (with or without Sublandlord’s consent) shall release Subtenant of Subtenant’s obligation or alter the primary liability of Subtenant to pay the Rent and to perform all other obligations to be performed by Subtenant under this Sublease. The acceptance of Rent by Sublandlord from any
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other person shall not be deemed to be a waiver by Sublandlord of any provision hereof. In the event of default by any assignee, subtenant or any other successor of Subtenant, in the performance of any of the terms hereof, Sublandlord may proceed directly against Subtenant without the necessity of exhausting remedies against such assignee, subtenant or successor. An involuntary assignment shall constitute a default and Sublandlord shall have the right to elect to terminate this Sublease, in which case this Sublease shall not be treated as an asset of Subtenant.
7.3 Permitted Transfers. Subject to the prior consent of Master Landlord, Subtenant shall not be required to obtain the consent or approval of Sublandlord, if such assignment, sublease or transfer is to a Related Corporation or a Successor Entity of the Subtenant (each a “Subtenant Affiliate”) subject to and upon the same terms and conditions as set forth in Section 7.7 of the Master Lease.
8. Default.
8.1 Default Described. The occurrence of any of the following shall constitute a default by Subtenant: (i) failure to pay Rent or any other amount when due, where such failure continues for [***] after written notice; (ii) all those items of default set forth in the Master Lease where the obligation is incorporated in this Sublease which remain uncured after the [***]; or (iii) Subtenant’s failure to perform timely and remain uncured after [***] written notice of the default (or such longer period if cure is not reasonably possible within such [***] period), any other material provision of this Sublease.
8.2 Sublandlord’s Remedies. Sublandlord shall have the remedies set forth in the Master Lease as if Sublandlord is Master Landlord. Sublandlord may continue this Sublease in full force and effect, and Sublandlord shall have the right to collect rent and other sums when due. The rights, privileges, elections, and remedies of Sublandlord in this Sublease, at law, and in equity are cumulative and not alternative.
8.3 All Sums Due and Payable as Rent. Subtenant shall also pay without notice, or where notice is required under this Sublease, immediately upon demand without any abatement, deduction, or setoff, as additional rent all sums, impositions, costs, expenses, and other payments which Subtenant in any of the provisions of this Sublease assumes or agrees to pay, and, in case of any nonpayment thereof, Sublandlord shall have all the rights and remedies provided for in this Sublease or by law in the case of nonpayment of rent.
8.4 No Waiver. Sublandlord may accept Subtenant’s payments without waiving any rights under the Sublease, including rights under a previously served notice of default. No payment by Subtenant or receipt by Sublandlord of a lesser amount than any installment of rent due or other sums shall be deemed as other than a payment on account of the amount due, nor shall any endorsement or statement on any check or accompanying any check or payment be deemed an accord and satisfaction; and Sublandlord may accept such check or payment without prejudice of Sublandlord’s right to recover the balance of such Rent or other sum or pursue any other remedy provided in this Sublease, at law or in equity. No waiver of any provision of this Sublease shall be implied by any failure of Sublandlord or Subtenant to enforce any remedy for the violation of that provision, even if that violation continues or is repeated. Any waiver by Sublandlord or Subtenant of any provision of this Sublease must be in writing. Such waiver shall affect only the provisions specified and only for the time and in the manner stated in the writing. No delay or omission in the exercise of any right or remedy by Sublandlord or Subtenant shall
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impair such right or remedy or be construed as a waiver thereof. If Sublandlord accepts payments after serving a notice of default, Sublandlord may nevertheless commence and pursue an action to enforce rights and remedies under the previously served notice of default without giving Subtenant any further notice or demand. Furthermore, Sublandlord’s acceptance of Rent from Subtenant when the Subtenant is holding over without express written consent does not convert Subtenant’s tenancy from a tenancy at sufferance to a month-to-month tenancy. No delay or omission in the exercise of any right or remedy by Sublandlord or Subtenant shall impair such right or remedy or be construed as a waiver thereof. No act or conduct of Sublandlord, including, without limitation the acceptance of keys to the Subleased Premises shall constitute acceptance or the surrender of the Subleased Premises by Subtenant before the Expiration Date. Sublandlord’s consent to or approval of any act by Subtenant which requires Sublandlord’s consent or approval shall not be deemed to waive or render unnecessary Sublandlord’s consent to or approval of any subsequent act by Subtenant.
8.5 Sublandlord Default. For purposes of this Sublease, Sublandlord shall not be deemed in default hereunder unless and until Subtenant shall first deliver to Sublandlord [***]’ prior written notice, and Sublandlord shall fail to cure said default within said [***] period, or in the event Sublandlord shall reasonably require in excess of thirty [***] to cure said default, shall fail to commence said cure within said [***] period, and thereafter diligently prosecute the same to completion (but in no event to exceed [***]). In the event of a Sublandlord default beyond any notice and cure period under this Sublease or the Master Lease (which is not caused by a default of Subtenant hereunder), Subtenant shall have the same self-help rights under Section 14.2 of the Master Lease with respect to the Sublandlord’s obligations, subject to and in accordance with Section 14.2 of the Master Lease. In the event that Master Landlord is in default under the Master Lease beyond any applicable notice and cure period and Sublandlord has the right to, but fails to, exercise its self-help rights under Section 14.2 of the Master Lease, and such failure continues for [***] after written demand from Subtenant, then Subtenant shall have the right to exercise Sublandlord’s self-help rights under Section 14.2 of the Master Lease with respect to the applicable Master Landlord obligation and if Sublandlord or Master Landlord fails to timely reimburse Subtenant for its costs incurred in exercising its rights under Section 14.2 of the Master Lease, Subtenant shall have the right to offset its costs against the Rent payable under this Sublease subject to and in accordance with Section 14.2 of the Master Lease, only to the extent Sublandlord has the right to offset such costs against Rent payable under the Master Lease.
8.6 Consents. Notwithstanding any provision in this Sublease to the contrary, Sublandlord acknowledges and agrees that (i) in any case under this Sublease that requires the consent or approval of Master Landlord, Sublandlord agrees to submit the matter to be so consented to, or approved of, to Master Landlord within [***] after receipt by Subtenant and to use reasonable efforts, at no additional cost to Sublandlord, to obtain Master Landlord’s consent or approval to or thereof pursuant to the terms of the Master Lease, and (ii) if the consent or approval of any matter is not required of Master Landlord under the Master Lease, no such consent or approval of Sublandlord shall be required hereunder, unless pursuant to the express terms of this Sublease, Sublandlord’s consent or approval is required.
9. Master Landlord Consent and Recognition. The Master Lease requires that Sublandlord obtain the consent of Master Landlord to any subletting by Sublandlord. This Sublease shall not be effective unless and until Master Landlord signs (1) a consent (the “Master Landlord Consent”) to this subletting reasonably satisfactory to Sublandlord and Subtenant which includes
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the “Recognition Agreement” (defined below), (2) the SNDA in Section 1.4(d) of this Sublease is executed by Master Landlord’s current lender and delivered to Sublandlord and Subtenant (the “SNDA”) and (3) the Master Landlord Consent includes a recognition agreement from Master Landlord running in favor of Subtenant (the “Recognition Agreement”) in the event of an early termination of the Master Lease due to a default by Sublandlord through no fault or default of Subtenant. If Master Landlord’s current lender does not execute and deliver the SNDA within five [***] following the Effective Date, Sublandlord or Subtenant shall have the right to terminate this Sublease upon delivery of written notice to the other party prior to Master Landlord’s lender executing and delivering the SNDA. Either Sublandlord or Subtenant may deem the Master Landlord Consent unsatisfactory if (i) it does not contain Master Landlord’s acknowledgement that Subtenant will not be required to remove any leasehold improvements or other Alterations in the Premises as of the date of the Master Landlord Consent (including the internal staircase and Roof Equipment) at the end of the term of the Master Lease or at the end of the term of the Direct Lease (as defined in the Master Landlord Consent), as applicable, provided, however, Subtenant shall be responsible to remove any Kitchen Equipment and any Cables at the expiration or earlier termination of the Master Lease or the Direct Lease (as defined in the Master Landlord Consent), whichever is later, or (ii) it does not contain Master Landlord’s agreement to the transfer of all of the signage rights in Section 10.5 of this Sublease. If either party terminates this Sublease pursuant to this Section 9, then to the extent received, Subtenant shall return the Sublandlord Letter of Credit to Sublandlord within [***] of such termination, and to the extent received, Sublandlord shall return the Subtenant Letter of Credit to Subtenant within [***] of such termination.
If Master Landlord does not execute and deliver the Master Landlord Consent within [***] following the Effective Date, Sublandlord or Subtenant shall have the right to terminate this Sublease upon delivery of written notice to the other party prior to Master Landlord issuing the Master Landlord Consent; provided, however, that the Recognition Agreement shall not be a condition precedent to this Sublease and Subtenant agrees that it will sign the Master Landlord Consent even though it does not include a Recognition Agreement. In addition, during the Term, Sublandlord shall request Master Landlord to provide an appropriate Recognition Agreement from present or future mortgage holders or holders of other superior interests, if any. Subtenant shall be solely responsible for all costs relating to obtaining any Recognition Agreement. If agreed by Master Landlord, such forms shall be attached as an exhibit to the Master Landlord Consent.
10. Miscellaneous.
10.1 Conflict with Master Lease; Interpretation. In the event of any conflict between the provisions of the Master Lease and this Sublease, this Sublease shall govern and control as between Sublandlord and Subtenant. No presumption shall apply in the interpretation or construction of this Sublease as a result of Sublandlord having drafted the whole or any part hereof.
10.2 Waiver of Redemption; Waiver of Damages. Subtenant hereby expressly waives any and all rights of redemption to which it may be entitled by or under any present or future laws in the event Sublandlord shall obtain a judgment for possession of the Subleased Premises. In no event shall Sublandlord be liable for, and Subtenant hereby waives any claim for, any indirect, consequential or punitive damages, including loss of profits or business opportunity, arising under or in connection with this Sublease. Subtenant shall not be liable for, any indirect,
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consequential or punitive damages, including loss of profits or business opportunity, arising under or in connection with this Sublease, except for (i) any holding over by Subtenant or any party claiming by or through Subtenant, or (ii) any use, storage or release of Hazardous Materials on, in or under the Building by Subtenant or its agents, employees, contractors or invitees.
10.3 Damage and Destruction; Condemnation. In the event of any damage, destruction, casualty, condemnation or threat of condemnation affecting the Subleased Premises, Rent payable hereunder shall be abated but only to the extent that Rent is abated under the Master Lease with respect to the Subleased Premises. Subtenant shall have no right to terminate this Sublease in connection with any damage, destruction, casualty, condemnation or threat of condemnation except to the extent the Master Lease is also terminated as to the Subleased Premises or any portion thereof. Notwithstanding the foregoing, if the Subleased Premises shall be damaged by fire or casualty or taken by condemnation under circumstances which, under the Master Lease, entitles Sublandlord to terminate the Master Lease, Subtenant may give written notice to Sublandlord at least [***] prior to the date under Article XII or Article XIII, as applicable, of the Master Lease by which Sublandlord must notify Master Landlord of Sublandlord’s intention to exercise its termination right, requesting that Sublandlord exercise such termination right. If, after receipt of Subtenant’s request, Sublandlord exercises its right to terminate the Master Lease pursuant and consistent with the provisions of Article XII or Article XIII, as applicable, of the Master Lease, this Sublease shall automatically terminate on the date the Master Lease so terminates. If, after receipt of Subtenant’s request, Sublandlord does not exercise its right under Article XII or Article XIII, as applicable to terminate the Master Lease, this Sublease shall nevertheless terminate [***] after Sublandlord’s receipt of Subtenant’s request. In addition to and without limitation of the foregoing right of Subtenant, in the event that more than [***] of the Subleased Premises is materially damaged, destroyed or rendered inaccessible by fire or other casualty so as to render such affected area untenantable, then Subtenant may elect, as its sole and exclusive remedy, to terminate this Sublease by notice to Sublandlord sent not later than [***] following receipt by Subtenant of the Master Landlord’s restoration statement.
10.4 Holding Over. Subtenant shall have no right to holdover. If Subtenant does not surrender and vacate the Subleased Premises at the expiration or sooner termination of this Sublease, Subtenant shall be a tenant at sufferance and the reasonable rental value shall be Rent at the greater of (i) the monthly rate of [***] of the monthly Rent set forth in Section 3 (without taking into account any rent abatement then in effect), and (ii) all rent due under the Master Lease, and if the definition of Rent does not include additional rent or operating expenses and property taxes, then with any additional rent, operating expenses and property taxes due and payable during such holdover period of time; provided that if such holdover continues beyond the term of the Master Lease then Rent shall equal any and all rent due to Master Landlord from Sublandlord under the holdover provisions of the Master Lease during such holdover period of time. In connection with the foregoing, Sublandlord and Subtenant agree that the reasonable rental value of the Premises following the Expiration Date of the Sublease shall be the amounts set forth above per month. Sublandlord and Subtenant acknowledge and agree that, under the circumstances existing as of the Effective Date, it is impracticable and/or extremely difficult to ascertain the reasonable rental value of the Subleased Premises on the Expiration Date and that the reasonable rental value established herein is a reasonable estimate of the damage that Sublandlord would suffer as the result of the failure of Subtenant to timely surrender possession of the Subleased Premises. Notwithstanding the foregoing, and in addition to all other rights and remedies on the part of Sublandlord if Subtenant fails to surrender the Subleased Premises upon
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the termination or expiration of this Sublease, in addition to any other liabilities to Sublandlord accruing therefrom, Subtenant shall indemnify, defend and hold Sublandlord harmless from all Claims resulting from such failure, including, without limitation, any Claims by Master Landlord and/or any third parties based on such failure to surrender, provided, however, in no event shall Subtenant be liable for any indirect, consequential or special damages (including loss of business, loss of profit and similar damages) to Subtenant other than any such damages accruing to the Master Landlord under the Master Lease on account of Subtenant’s holding over in the Subleased Premises. Notwithstanding the foregoing, if Subtenant agrees with Master Landlord in writing to directly lease the Subleased Premises for a term commencing immediately following the Expiration Date, then this Section 10.4 shall no longer be applicable and Subtenant will not be required to vacate and surrender possession of the Subleased Premises on the Expiration Date.
10.5 Signage. Sublandlord shall attempt to obtain, in the Master Landlord Consent, the approval of Master Landlord to the replacement of all signs of Sublandlord on and in the Building and the assignment of all of Sublandlord’s signage rights and signage approvals in Section 5.6 of the Master Lease to Subtenant, except as set forth below. Subject to Subtenant first obtaining any necessary governmental permits and approvals and Master Landlord’s approval of Subtenant’s signage renderings, Subtenant shall have the right to install signs with Subtenant’s logo and branding on the Building and in the main lobby and elevator lobbies of the Building. Provided that this Sublease is in full force and effect, during the Term, Sublandlord assigns all of Sublandlord’s rights and approvals for signage in Section 5.6 of the Master Lease to Subtenant, except as set forth below. Sublandlord shall remove all of Sublandlord’s signage and branding in the Subleased Premises by not later than the Early Access Date and shall remove Sublandlord’s exterior signage within [***] following written direction from Subtenant to remove the same. All of Subtenant’s signs shall be at Subtenant’s sole cost and shall comply with the terms of the Master Lease and with all applicable laws, regulations, codes and ordinances at all times during the Sublease Term. Subtenant, at Subtenant’s cost, shall remove all such signs and graphics installed by Subtenant or any Subtenant Parties prior to the termination of this Sublease and repair any damage caused by such removal. Notwithstanding the foregoing, Sublandlord may install (i) one (1) plaque sign identifying Sublandlord at the 5th Floor Entrance of a size not larger or more prominent than Sublandlord’s existing plaque sign on the Building that Sublandlord is required to remove under this Section 10.5, provided and on the express condition that Master Landlord consents in writing and the installation of such plaque sign does not reduce the number or size of the signage assigned to and permitted to be used by Subtenant under the Master Lease (i.e. such plaque sign would have to be in addition to the signage currently permitted under the Master Lease and that is being assigned to Subtenant) and (ii) signage within the Retained Premises. Sublandlord has the right to transfer its plaque signage rights set forth in this Section 10.5 to any assignee of Sublandlord or other subtenant of the Retained Premises.
10.6 Due Authority. Each of Sublandlord and Subtenant represents and warrants that each of its signatories hereto has the authority to bind such party, such party has been and is qualified to do business in the State in which the Subleased Premises are located, that the applicable corporation or entity has full right and authority to enter into this Sublease, and that all persons signing on behalf of such party were authorized to do so by appropriate corporate or similar actions.
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10.7 Offer; Multiple Counterparts. Preparation of this Sublease by either Sublandlord or Subtenant or either party’s agent and submission of same to Sublandlord or Subtenant shall not be deemed an offer to Sublease. This Sublease is not intended to be binding until executed and delivered by all parties hereto. This Sublease may be executed by electronic signature including DocuSign or “pdf” and in counterparts, each of which shall be deemed an original, but such counterparts, when taken together, shall constitute one agreement, and copies of this Sublease executed and delivered by means of electronic or pdf signatures shall have the same force and effect as copies hereof executed and delivered with original signatures.
10.8 Brokers. Sublandlord and Subtenant represent and warrant to each other that each has dealt with CBRE, Inc. (“Sublandlord’s Broker”) and CBRE, Inc. (“Subtenant’s Broker” and, together with Sublandlord’s Broker, the “Brokers”) and with no other broker, agent, finder, or other such person with respect to this Sublease, and each agrees to indemnify and hold the other harmless from any Claims asserted against the other by any broker, agent, finder, or other such person other than the Brokers. Sublandlord shall pay a commission, if any, to the Brokers pursuant to a separate written agreement. If Sublandlord fails to pay a commission due to Subtenant's Broker by the day immediately following the expiration of the Base Rent Abatement Period, Subtenant's Broker may send written notice to Sublandlord and Subtenant of such failure, and if Sublandlord fails to pay such amount within [***] after said notice, Subtenant may pay such amount to Subtenant’s Broker and offset such amount against Rent.
10.9 Attorney’s Fees. In the event any action or proceeding at law or in equity or any arbitration proceeding be instituted by either party, for an alleged breach of any obligation of a party under this Sublease, to recover rent, to terminate the tenancy of Subtenant at the Subleased Premises, or to enforce, protect, or establish any right or remedy of a party to this Sublease, the prevailing party (by judgment or settlement) in such action or proceeding shall be entitled to recover as part of such action or proceeding such reasonable attorneys’ fees, expert witness fees, and court costs as may be fixed by the court or jury, but this provision shall not apply to any cross-complaint filed by anyone other than Sublandlord in such action or proceeding.
10.10 Sublandlord’s Costs. In any case where Subtenant requests permission from Sublandlord or Master Landlord to assign, sublet, make alterations, or receive any other consent or obtain any waiver from or modification to the terms of this Sublease, Subtenant shall pay to Master Landlord any reasonable fees and costs charged by Master Landlord and to Sublandlord a reasonable administrative charge and reasonable attorney’s fees incurred in reviewing such request, which administrative charge will not exceed [***] in any one case.
10.11 Furniture. On the Commencement Date, Sublandlord shall convey, and Subtenant shall purchase, title to the furniture, fixtures and equipment listed on Exhibit C attached hereto and associated cabling, if any (the “FF&E”) to Subtenant for $1.00 in accordance with a bill of sale in the form of Exhibit D attached hereto delivered by Sublandlord to Subtenant. Subtenant accepts the FF&E in its “as is” condition and Sublandlord makes no warranty as to the condition of the FF&E or its present or future suitability for Subtenant’s purposes. Subtenant shall be responsible for all costs associated with the maintenance, cleaning and repair of the FF&E and responsible to remove the FF&E from the Subleased Premises at the expiration or sooner termination of the Sublease.
10.12 Notices. Any notice, demand, request, consent, approval, submittal or communication that either party desires or is required to give to the other party or any other
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person shall be in writing and either served personally or sent by prepaid, first-class certified mail or commercial overnight delivery service. Such notice shall be effective on the date of actual receipt (in the case of personal service or commercial overnight delivery service) or two days after deposit in the United States mail, to the following addresses (or such other address of Sublandlord as Sublandlord may provide):
To Sublandlord: GoTo Group, Inc.
333 Summer Street
Boston, MA 02210
Attn: [***]
Email: [***]
With a copy to:
GoTo Group, Inc.
333 Summer Street
Boston, MA 02210
Attn: [***]
Attn: [***]
Email: [***]
To Subtenant: At the Subleased Premises, Attention: General Counsel
With a copy to:
Goodwin Procter LLP
100 Northern Avenue
Boston, MA 02210
Attn: [***]
When this Sublease requires service of a notice, that notice shall replace rather than supplement any equivalent or similar statutory notice. When a statute requires service of a notice in a particular manner, service of that notice (or a similar notice required by this Sublease) shall replace and satisfy the statutory service-of-notice procedures.
10.13 Subtenant Public Disclosure. Notwithstanding anything in this Sublease or the Master Lease to the contrary, Subtenant may disclose this Sublease in any publicly required filings that Subtenant is obligated to file under applicable securities or other laws. Sublandlord shall not make any press release or public statement regarding this Sublease without Subtenant’s prior written consent and Subtenant may issue a press release regarding this Sublease in form customary for press releases of lease transactions in the Boston market.
10.14 Exhibits and Attachments. All exhibits and attachments to this Sublease are a part hereof.
11. Right of First Offer. Sublandlord shall not sublease, license or permit occupancy of the Retained Premises to or by any third party (other than Subtenant or an affiliate of Sublandlord) prior to the date that is [***] months following the Commencement Date (“Hold Period”) of this Sublease. Provided that (i) this Sublease is in full force and effect and has not been terminated,
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(ii) Subtenant is not in default under this Sublease beyond applicable notice and cure periods and, and (iii) Subtenant, at the time of the Sublandlord Notice, is in occupancy of all or substantially all of the Subleased Premises, then during the Sublease Term from and after the last day of the Hold Period, Subtenant shall have the right of first offer to sublease from Sublandlord the Retained Premises (which sublease shall be consented to by Master Landlord in the Master Landlord Consent) upon all of the same terms and conditions of this Sublease applicable to the Subleased Premises and the Base Rent for the Retained Premises shall be payable at the same rate in effect for the Subleased Premises as of the commencement date of the term for the Retained Premises and subject to the same increases as the initial Subleased Premises; provided, however, the rent commencement date for the Retained Premises will be [***] after delivery of the Retained Premises to Subtenant. At Subtenant’s option, Sublandlord shall be required to remove the glass finished enclosure for the internal staircase and the demising walls installed as part of the Sublandlord’s Work and restore the affected areas to their condition prior to the installation of such enclosure and demising walls. Provided the conditions above are satisfied, then prior to Sublandlord entering into a sublease, license or other occupancy agreement for the Retained Premises with an unaffiliated third party, Sublandlord shall promptly provide written notice thereof to Subtenant (“Sublandlord Notice”). Subtenant shall have [***] after Sublandlord has given the Sublandlord Notice in which to provide Sublandlord with written notice (an “Election Notice”) of its election to exercise its right to sublease the Retained Premises. If Subtenant does not give Sublandlord timely written notice of its election to sublease the Retained Premises, Sublandlord shall thereafter be free to sublease such Retained Premises to a third party on any terms and conditions that Sublandlord shall elect, with no further obligation to Subtenant. If Subtenant timely and properly delivers an Election Notice, the parties shall enter into a final and binding amendment to this Sublease within [***] following the date Sublandlord delivers to Subtenant a first (1st) draft of the proposed amendment to this Sublease, but the failure to execute such amendment shall not affect Subtenant’s election to sublease the Retained Premises. The rights set forth in this Section 11 are personal to the original Subtenant named herein (and to any assignees pursuant to a transfer permitted without consent under Section 7.7 of the Master Lease), and shall not be assignable or transferable to any assignee or transferee of Subtenant (other than assignees pursuant to a transfer permitted without consent under Section 7.7 of the Master Lease), or any sublessee of all or any portion of the Subleased Premises, whether voluntarily or involuntarily or whether by operation of law or otherwise. If Subtenant subleases or assigns or otherwise transfers any interest under the Sublease (other than pursuant to transfers permitted without Master Landlord consent under the Master Lease) prior to the exercise of its rights in this Section to any other party, such rights shall lapse. For the avoidance of doubt, Sublandlord may not deliver a Sublandlord Notice to Subtenant prior to the day following the expiration of the Hold Period. For purposes of this Section 11, the Retained Premises shall include Sublandlord’s proportionate share of the Shared Space (i.e., 35 rentable square feet).
[Separate signature page to follow.]
26
IN WITNESS WHEREOF, Sublandlord and Subtenant have executed and delivered this Sublease on the Effective Date.
| SUBLANDLORD: | SUBTENANT: | ||||
GOTO GROUP, INC., a Delaware corporation | TOAST, INC., a Delaware corporation | ||||
By: /s/ Richard Veldran | By: /s/ Brian Elworthy | ||||
Name: Richard Veldran | Name: Brian Elworthy | ||||
Its: CFO | Its: General Counsel | ||||
Signature Page to Sublease
Exhibit A-1
Subleased Premises
[***]
Exhibit A-2
[***]
Exhibit B
Master Lease
[Intentionally Omitted]
Exhibit C
[***]
Exhibit D
FORM OF
BILL OF SALE
[***]
EXHIBIT E
Draft Depiction of Glass Enclosure for Fifth Floor
[***]
EXHIBIT F
Janitorial Specifications
[***]
EXHIBIT G
List of Competitors
[***]
EXHIBIT H
Locations of Server Room Demising
[***]
EXHIBIT I
HVAC Specifications
[***]
.
EXHIBIT J
Form of Subtenant Letter of Credit
[***]
EXHIBIT K
Form of Sublandlord Letter of Credit
[***]
Exhibit 10.2
Certain identified information has been excluded from this exhibit because it is both not material and is the type that the registrant treats as private or confidential. Information that was omitted has been noted in this document with a placeholder identified by the mark “[***]”.
September 28, 2023
Toast, Inc.
401 Park Drive
Boston, Massachusetts 02215
Re: 401 Park Drive, Boston, MA – Termination Agreement/Contingency Period
Ladies and Gentlemen:
Reference is made to that certain Indenture of Lease dated as of June 12, 2015, as amended by a First Amendment to Lease dated September 17, 2016, a Second Amendment to Lease dated February 14, 2017, a Third Amendment to Lease dated as of May 23, 2017, a Fourth Amendment to Lease dated as of February 6, 2019, a Fifth Amendment to Lease dated as of May 14, 2019, that certain Sixth Amendment to Lease dated as of December 16, 2020, that certain Seventh Amendment to Lease dated as of August 18, 2021, and that certain Agreement for Termination of Lease and Voluntary Surrender of Premises dated as of May 4, 2023 (the “Termination Agreement”) (as amended, the “Lease”), now between ARE-MA Region No. 112 Owner, LLC, a Delaware limited liability company (“Landlord”), and Toast, Inc., a Delaware corporation (“Tenant”), relating to the lease of premises at the above-referenced property. Capitalized terms used but not defined herein shall have the meanings given thereto in the Lease.
Notwithstanding anything to the contrary contained in the Termination Agreement, Landlord and Tenant acknowledge and agree that (i) the Contingency Period set forth in Section 1(b) of the Termination Agreement shall be from December 14, 2023 through December 14, 2024, (ii) the table in Section 1(b) (page 2) of the Termination Agreement shall be deleted in its entirety and replaced with the table immediately below, and (iii) the first sentence below the table in Section 1(b) of the Termination Agreement shall be deleted in its entirety and replaced with the following: “Following December 15, 2024, there shall be no refund of the Contingent Payment of any portion thereof to Tenant.”
| Date in which Rent is First Collected | Amount Reimbursable to Tenant | ||||
| [***] | [***] | ||||
| [***] | [***] | ||||
| [***] | [***] | ||||
| [***] | [***] | ||||
| [***] | [***] | ||||
| [***] | [***] | ||||
Except as amended and/or modified by this letter agreement, the Lease is hereby ratified and confirmed and all other terms of the Lease shall remain in full force and effect, unaltered and unchanged by this letter agreement.
Please acknowledge your agreement to the terms of this letter agreement by countersigning below.
| ARE-MA REGION NO. 112 OWNER, LLC, | |||||||||||
| A Delaware limited liability company | |||||||||||
By: | ARE-MA Region No. 112 JV, LLC, | ||||||||||
| a Delaware limited liability company, | |||||||||||
| managing member | |||||||||||
By: | ARE-MA Region No. 112 MM, LLC, | ||||||||||
| a Delaware limited liability company, | |||||||||||
| managing member | |||||||||||
By: | Alexandria Real Estate Equities, L.P., | ||||||||||
| a Delaware limited liability company, | |||||||||||
| managing member | |||||||||||
By: | ARE-QRS Corp., | ||||||||||
| a Maryland corporation, | |||||||||||
| managing member | |||||||||||
By: | /s/ Allison Grochola | ||||||||||
| Allison Grochola | |||||||||||
| SVP - Real Estate Legal Affairs | |||||||||||
ACCEPTED AND AGREED TO:
TENANT:
TOAST, INC.,
a Delaware corporation
By: /s/ Elena Gomez
Name: Elena Gomez
Its: Chief Financial Officer
X I hereby certify that the signature, name, and title above are my signature, name and title.
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Christopher Comparato, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Toast, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 7, 2023 | /s/ Christopher P. Comparato | ||||||||||
| Christopher P. Comparato | |||||||||||
| Chief Executive Officer | |||||||||||
| (Principal Executive Officer) | |||||||||||
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Elena Gomez, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Toast, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 7, 2023 | /s/ Elena Gomez | ||||||||||
| Elena Gomez | |||||||||||
| Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
Exhibit 32.1
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Christopher Comparato, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Toast, Inc. for the period ended September 30, 2023, as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Toast, Inc.
Date: November 7, 2023 | By: | /s/ Christopher P. Comparato | |||||||||
| Name: | Christopher P. Comparato | ||||||||||
| Title: | Chief Executive Officer | ||||||||||
| (Principal Executive Officer) | |||||||||||
Exhibit 32.2
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Elena Gomez, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Toast, Inc. for the period ended September 30, 2023, as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Toast, Inc.
Date: November 7, 2023 | By: | /s/ Elena Gomez | |||||||||
| Name: | Elena Gomez | ||||||||||
| Title: | Chief Financial Officer | ||||||||||
| (Principal Financial Officer) | |||||||||||