Toast, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Toast operates a cloud-based restaurant platform combining subscription software, payment processing and other financial technology, hardware, and services. The company completed its IPO on September 24, 2021.
Financial results and key metrics
| Metric | Q3 2021 | Q3 2020 | Change |
|---|---|---|---|
| Revenue | $486.4 million | $236.8 million | +105% |
| Gross profit | $83.3 million | $48.3 million | +72% |
| Gross margin | 17.1% | 20.4% | Down 3.3 percentage points |
| Operating loss | $53.7 million | $38.7 million | Loss increased |
| Net loss | $252.5 million | $62.6 million | Loss increased substantially |
| Net loss per share | $1.05 | $0.31 | Per-share loss increased |
| Adjusted EBITDA (non-GAAP) | $(9.7) million | $(0.3) million | Weakened |
Financial technology solutions generated $404.2 million of Q3 revenue, up 115%; subscription services were $45.8 million, up 67%; hardware was $31.1 million, up 71%; and professional services were $5.3 million, up 76%. Gross payment volume (GPV) was $16.5 billion, up 123%. Annualized recurring run-rate (ARR), a company-defined operational measure and not a revenue forecast, was $543.8 million, up 77% year over year.
For the first nine months of 2021, revenue was $1.190 billion, up 105%; gross profit was $238.0 million; operating loss was $110.5 million; and net loss was $487.1 million, versus $187.2 million in the comparable 2020 period. Gross margin for the nine months was approximately 20.0%, compared with 16.1% in 2020. Adjusted EBITDA was $4.5 million versus a loss of $86.3 million.
Nine-month operating cash flow was $34.0 million, compared with cash used of $86.6 million in 2020. Free cash flow, a non-GAAP measure, was $17.7 million versus cash used of $128.5 million. The filing attributes much of the operating cash inflow to noncash adjustments and a $106.3 million increase in accrued expenses and other current liabilities, primarily from favorable payment terms on transaction costs.
At September 30, cash and cash equivalents were $1.302 billion; total current assets were $1.497 billion and current liabilities were $286.8 million. Toast reported no drawn debt and had $330 million available on its revolving facility, subject to a $250 million minimum-liquidity covenant. Cash includes neither $36.6 million held for customers nor $2.7 million of restricted cash. The company reported $116.7 million of operating lease commitments and $246.9 million of non-cancelable purchase commitments.
Material changes and unusual items
- Revenue more than doubled, supported by location growth, customer product adoption, and higher GPV. Financial technology solutions accounted for most revenue and growth.
- Gross profit rose, but Q3 gross margin declined as costs of revenue grew faster than revenue. Hardware costs also faced higher freight and product costs.
- Net loss included a $198.4 million Q3 noncash expense from remeasurement of warrant liabilities. For the first nine months, warrant and derivative fair-value charges totaled $318.2 million, and repayment of convertible notes generated a $49.8 million extinguishment loss. These items materially affected GAAP results.
- In June, Toast prepaid its convertible notes for $248.9 million and issued warrants to noteholders. The notes were fully repaid by quarter-end; a new $330 million revolving facility was undrawn.
- The xtraCHEF acquisition closed in June for a preliminary purchase price of $48.2 million. Its operating contribution was not material in the reported periods; purchase accounting remained provisional.
- The September IPO issued 25 million Class A shares at $40 per share and generated approximately $943.9 million of net proceeds after offering costs in the financial statements. All preferred stock converted to Class B common stock. Class B shares carry ten votes per share versus one vote for Class A.
Outlook, risks, and contingencies
The filing gives no numeric revenue, earnings, or cash-flow guidance. Management expects absolute sales and marketing, research and development, and general and administrative spending to rise as Toast invests in growth, product development, customer support, and public-company operations. Management stated existing cash and available credit were expected to meet needs for at least the next 12 months.
- COVID-19 effects remain uncertain. Management cited possible shifts between on-premise and off-premise dining, changing payment mix and margins, and continued supply-chain and logistics disruption.
- Semiconductor shortages, shipping delays, and higher freight costs could constrain hardware supply and increase costs.
- Payment-processing performance depends on GPV, restaurant health, transaction mix, and a significant third-party processor. Changes in card-present versus card-not-present mix may affect revenue and margins.
- Toast disclosed risks related to competition, customer retention and restaurant closures, cybersecurity and service availability, regulation of payments, payroll and lending, and dependence on its bank partner for Toast Capital loans.
- Toast stated its disclosure controls and procedures were not effective at quarter-end, citing previously identified material weaknesses in financial close controls and controls over unusual transactions, including complex stock transactions and revenue accounting. Remediation was ongoing.
- Management said it did not expect pending legal matters with reasonably possible adverse outcomes to have a material impact and had not recorded an accrual for such claims.
Important facts for investors to verify
- Whether growth in GPV, locations, and ARR continues, and how it translates into subscription growth, gross profit, and margins.
- How much of cash generation reflects sustainable operations versus timing of accrued transaction costs, and the future cash impact of working capital and commitments.
- The effect of warrant remeasurement on reported earnings and the timing or terms of any remaining warrant exercises or settlements.
- Progress in remediating material weaknesses and whether disclosure controls and financial reporting controls become effective.
- Exposure to hardware supply constraints, payment-processor concentration, customer credit losses, and Toast Capital guarantee obligations.
- Potential dilution and governance implications of equity awards, warrant shares, the dual-class voting structure, and the company’s post-IPO share supply.