Expensify, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; unaudited. Expensify provides cloud-based expense-management software and related services, including the Expensify Card. Unless noted otherwise, financial figures below are in millions of dollars.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $37.4 | $21.7 | $102.5 | $62.3 |
| Gross margin | $19.3; 51% | $13.3; 61% | $68.7; 67% | $38.5; 62% |
| Operating income (loss) | $(8.9) | $(5.1) | $10.2 | $1.3 |
| Net income (loss) | $(6.3) | $(6.9) | $8.3 | $(3.5) |
| Adjusted EBITDA (non-GAAP) | $(6.5) | $7.4 | $16.4 | $16.6 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $34.6 | $(4.4) |
Q3 diluted and basic loss per share were both $0.18, compared with $0.25 loss in Q3 2020. For the nine months, diluted EPS was $0.07 and basic EPS was $0.09; $5.6 million of nine-month income was allocated to participating securities before calculating income attributable to common stockholders.
Revenue rose 73% in Q3 and 64% year to date. Management attributed growth to the 2020 pricing change, recovering business travel and increased activity as restrictions eased. Average paid members were 667,000 in Q3, up from 633,000 a year earlier; the nine-month average was approximately 656,000 versus 674,000.
Cash, debt and liquidity
- September 30 cash and cash equivalents were $68.1 million. Cash, cash equivalents and restricted cash totaled $92.0 million, including restricted customer and other funds.
- Operating cash flow of $34.6 million included substantial increases in accrued expenses and settlement liabilities. Accrued expenses and other liabilities rose to $23.2 million from $3.5 million at December 2020, including $16.8 million accrued for employee cash bonuses.
- Investing cash outflow was $7.0 million, including $4.4 million of software development costs and $2.6 million for property and equipment. Financing cash inflow was $17.6 million, reflecting new borrowing, debt repayments, IPO preparation costs and employee option exercises.
- Debt was approximately $67.6 million, including a $44.9 million term loan, a $15.0 million revolving credit draw and an $8.0 million building mortgage. The amended CIBC facility provides for up to $75 million in term loans and a $25 million revolving line; $10 million of revolving capacity remained. The company reported compliance with debt covenants.
- Management said existing cash resources were expected to fund operations, growth plans and public-company costs for at least the next 12 months.
Material changes and unusual items
- Employee option-exercise cash bonuses: Expensify recorded $34.2 million of related expense in the first nine months, including $26.3 million in Q3. These discretionary bonuses were intended to approximate the cost of exercising 45% of employees’ options; employees were not required to use them for option exercises. The large expense contributed to the Q3 operating and adjusted EBITDA losses. At the filing date, the company estimated approximately $27.8 million remained to be paid, principally in Q4 2021.
- Gross margin: Q3 margin fell to 51% from 61%, as cost of revenue increased 116%, faster than revenue. Year-to-date margin improved to 67% from 62%. Bonuses, payment-processing activity and platform support costs contributed to higher costs.
- Spending and investment: Q3 sales and marketing increased to $7.6 million from $1.5 million, reflecting advertising and bonuses. Software development costs capitalized in the first nine months rose to $4.4 million from $1.1 million.
- Stock awards: September RSUs were subject to IPO and service conditions. The filing reported $60.9 million of unrecognized compensation cost related to unvested RSUs, expected to be recognized over an eight-year service period. The IPO condition was satisfied after quarter-end.
- IPO, subsequent event: In November, Expensify sold 2.61 million shares at $27 per share and received approximately $57.5 million in net proceeds; selling stockholders sold an additional 8.58 million shares, from which the company received no proceeds. The IPO and related effects are not reflected in the September 30 financial statements.
Outlook, risks and controls
The filing provides no specific financial guidance. Management expected platform activity to recover as economies reopened and business travel resumed, while noting the pandemic’s continuing uncertainty. It planned continued investment in product development and sales and marketing, and anticipated higher public-company costs, employee bonus payments and stock-based compensation.
Key risks include uncertain recovery in paid members and customer spending; competition, pricing and customer retention; dependence on the Expensify Card’s third-party vendor, issuing bank and card network; money-transmission and other regulatory compliance; cybersecurity and service availability; foreign-exchange exposure; and debt covenants and repayment obligations. Management reported that disclosure controls were not effective at September 30, 2021 because of an ongoing material weakness involving insufficient technical accounting skills and staffing. Additional analyses and reconciliations were performed, and management said the financial statements fairly presented the company’s position and results. Remediation efforts, including hiring and process improvements, were ongoing.
The company also disclosed that a patent-infringement suit was settled in June 2021 with no payment required. It reported no other litigation expected to have a material adverse effect, while noting that claims and regulatory proceedings remain possible.
Investor facts to verify
- How much of operating cash flow reflects durable operating performance versus timing-related settlement liabilities and accrued bonus obligations?
- What were the final cash-bonus payments, and how did they affect Q4 profitability and liquidity?
- Can paid-member levels and gross margin recover while the company expands marketing, product investment and card activity?
- What are the current debt balances, covenant requirements and available liquidity after the IPO and bonus payments?
- Has the material weakness in internal controls been remediated and tested as effective?
- How are the IPO-related RSUs and their expected stock-based compensation expense affecting subsequent-period results and dilution?