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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 June 30, 2022
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
Toast, Inc.
(Exact name of registrant as specified in its charter)
Delaware 45-4168768
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
401 Park Drive, Suite 801
Boston, Massachusetts 02215
(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
Class A common stock, par value of $0.000001 per share TOST New York Stock Exchange
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.
Large accelerated filer
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 323,800,079 shares of Class A common stock and 192,783,936 shares of Class B common stock as of August 5, 2022.

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;
the sufficiency of our cash, cash equivalents and investments to meet our liquidity needs;
anticipated trends and growth rates in our business and in the markets in which we operate;
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 ability to effectively manage our growth and future expenses;
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;
the increased expenses associated with being a public company;
the impact of the COVID-19 pandemic, rising inflation, and other global financial, economic and political events on our business and the restaurant industry;
our ability to compete effectively with existing competitors and new market entrants; and
our ability to source, finance and integrate companies and assets that we have or may acquire.

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.

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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.

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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TOAST, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in millions, except share and per share amounts)
June 30, 2022 December 31, 2021
Assets:
Current assets:
Cash and cash equivalents $ 697  $ 809 
Marketable securities 482  457 
Accounts receivable, net 68  55 
Inventories 62  42 
Deferred costs, net 36  30 
Prepaid expenses and other current assets 141  92 
Total current assets 1,486  1,485 
Property and equipment, net 45  41 
Operating lease right-of-use assets 74  79 
Intangible assets 13  16 
Goodwill 74  74 
Deferred costs, non-current 34  25 
Other non-current assets 24  15 
Total non-current assets 264  250 
Total assets $ 1,750  $ 1,735 
Liabilities and Stockholders’ Equity:
Current liabilities:
Accounts payable $ 37  $ 40 
Operating lease liabilities 14  22 
Deferred revenue 43  44 
Accrued expenses and other current liabilities 363  246 
Total current liabilities 457  352 
Warrants to purchase common stock 40  181 
Operating lease liabilities, non-current 78  77 
Deferred revenue, non-current 12 
Other long-term liabilities 16  22 
Total liabilities 600  644 
Commitments and Contingencies (Note 12)
Stockholders’ Equity:
Preferred stock- par value $0.000001; 100,000,000 shares authorized, no shares issued or outstanding
—  — 
Class A common stock, $0.000001 par value- 7,000,000,000 shares authorized as of June 30, 2022 and December 31, 2021, 305,457,431 and 167,732,925 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively
—  — 
Class B common stock, $0.000001 par value- 700,000,000 shares authorized as of June 30, 2022 and December 31, 2021, 207,949,380 and 339,437,440 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively
—  — 
Additional paid-in capital 2,334  2,194 
Accumulated deficit (1,179) (1,102)
Accumulated other comprehensive loss (5) (1)
Treasury stock, at cost— 225,000 shares at June 30, 2022 and December 31, 2021
—  — 
Total stockholders’ equity 1,150  1,091 
Total liabilities and stockholders’ equity $ 1,750  $ 1,735 
The accompanying notes are an integral part of these consolidated financial statements.
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TOAST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in millions, except share and per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Revenue:
Subscription services $ 76  $ 38  $ 139  $ 69 
Financial technology solutions 562  354  1,000  581 
Hardware 30  29  59  50 
Professional services 12 
Total revenue 675  426  1,210  707 
Costs of revenue:
Subscription services 27  13  51  23 
Financial technology solutions 448  280  796  452 
Hardware 61  31  113  51 
Professional services 25  12  46  21 
Amortization of acquired technology and customer assets
Total costs of revenue 562  337  1,008  549 
Gross profit 113  89  202  158 
Operating expenses:
Sales and marketing 77  41  148  74 
Research and development 67  50  129  73 
General and administrative 68  49  125  68 
Total operating expenses 212  140  402  215 
Loss from operations (99) (51) (200) (57)
Other income (expense):
Interest income (expense), net (6) (12)
Change in fair value of warrant liabilities 44  (5) 123  (16)
Change in fair value of derivative liability —  (27) —  (103)
Loss on debt extinguishment —  (50) —  (50)
Other income (expense), net —  —  (1) — 
Loss before benefit from income taxes (54) (139) (77) (238)
Benefit from income taxes —  — 
Net loss $ (54) $ (135) $ (77) $ (234)
Net loss per share attributable to common stockholders:
Basic $ (0.11) $ (0.64) $ (0.15) $ (1.13)
Diluted $ (0.11) $ (0.64) $ (0.39) $ (1.13)
Weighted average shares used in computing net loss per share:
Basic 509,532,418  211,799,234  507,420,257  207,091,280 
Diluted 509,532,418  211,799,234  508,176,495  207,091,280 
The accompanying notes are an integral part of these consolidated financial statements.
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TOAST, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
(in millions)

Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Net loss $ (54) $ (135) $ (77) $ (234)
Other comprehensive loss:
Unrealized losses on marketable securities, net of tax effect of $0
(1) —  (3) — 
Currency translation adjustments (1) —  (1) — 
Total other comprehensive loss (2) —  (4) — 
Comprehensive loss $ (56) $ (135) $ (81) $ (234)
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TOAST, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
(in millions, except share amounts)

Six Months Ended June 30, 2022

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, 2021
507,170,365  $ —  225,000  $ —  $ 2,194  $ (1,102) $ (1) $ 1,091 
Repurchase of common stock (33,475) —  —  —  —  —  —  — 
Issuance of common stock upon net exercise of common stock warrants 371,573  —  —  —  18  —  —  18 
Issuance of common stock upon exercise of common stock options 4,410,300  —  —  —  —  — 
Issuance of common stock upon vesting of restricted stock units 1,450,869  —  —  —  —  —  —  — 
Stock-based compensation expense —  —  —  —  112  —  —  112 
Vesting of restricted stock —  —  —  —  —  — 
Issuance of common stock for contingent consideration payment 37,179  —  —  —  —  — 
Cumulative translation adjustment —  —  —  —  —  —  (1) (1)
Unrealized loss on marketable securities —  —  —  —  —  —  (3) (3)
Net loss —  —  —  —  —  (77) —  (77)
Balances at June 30, 2022
513,406,811  $ —  225,000  $ —  $ 2,334  $ (1,179) $ (5) $ 1,150 

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Six Months Ended June 30, 2021

Convertible
Preferred
Preferred Stock
Common Stock Treasury Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders' Deficit
Shares Amount Shares Amount Shares Amount
Balances at December 31, 2020
253,832,025  $ 849  219,755,430  $ —  225,000  $ —  $ 145  $ (616) $ (471)
Cumulative adjustment due to adoption of ASC 842 and ASC 326 —  —  —  —  —  —  — 
Repurchase of common stock —  —  (4,000) —  —  —  —  —  — 
Issuance of common stock upon exercise of common stock options —  —  3,387,905  —  —  —  — 
Issuance of common stock upon exercise of common stock options in connection with promissory notes repayment —  —  —  —  —  —  14  —  14 
Issuance of common stock upon vesting of restricted stock units —  —  52,790  —  —  —  —  —  — 
Stock-based compensation expense (1) —  —  —  —  —  —  59  —  59 
Issuance of common stock in connection with business combination —  —  569,400  —  —  —  15  —  15 
Net loss —  —  —  —  —  —  —  (234) (234)
Balances at June 30, 2021
253,832,025  $ 849  223,761,525  $ —  225,000  $ —  $ 236  $ (849) $ (613)

Three Months Ended June 30, 2022

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 March 31, 2022
510,425,065  $ —  225,000  $ —  $ 2,271  $ (1,125) $ (3) $ 1,143 
Repurchase of common stock (3,000) —  —  —  —  —  —  — 
Issuance of common stock upon net exercise of common stock warrants —  —  —  —  —  —  —  — 
Issuance of common stock upon exercise of common stock options 1,659,609  —  —  —  —  — 
Issuance of common stock upon vesting of restricted stock units 1,325,137  —  —  —  —  —  —  — 
Stock-based compensation expense —  —  —  —  59  —  —  59 
Vesting of restricted stock —  —  —  —  —  — 
Issuance of common stock for payment of acquisition contingent consideration —  —  —  —  —  —  —  — 
Cumulative translation adjustment —  —  —  —  —  —  (1) (1)
Unrealized loss on marketable securities —  —  —  —  —  —  (1) (1)
Net loss —  —  —  —  —  (54) —  (54)
Balances at June 30, 2022
513,406,811  $ —  225,000  $ —  $ 2,334  $ (1,179) $ (5) $ 1,150 

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Three Months Ended June 30, 2021

Convertible
Preferred
Preferred Stock
Common Stock Treasury Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders' Deficit
Shares Amount Shares Amount Shares Amount
Balances at March 31, 2021
253,832,025  $ 849  221,713,410  $ —  225,000  $ —  $ 152  $ (714) $ (562)
Repurchase of common stock —  —  (4,000) —  —  —  —  —  — 
Issuance of common stock upon exercise of common stock options —  —  1,429,925  —  —  —  — 
Issuance of common stock upon exercise of common stock options in connection with promissory notes repayment —  —  —  —  —  —  14  —  14 
Issuance of common stock upon vesting of restricted stock units —  —  52,790  —  —  —  —  —  — 
Stock-based compensation expense (1) —  —  —  —  —  —  54  —  54 
Issuance of common stock in connection with business combination —  —  569,400  —  —  —  15  —  15 
Net loss —  —  —  —  —  —  —  (135) (135)
Balances at June 30, 2021
253,832,025  $ 849  223,761,525  $ —  225,000  $ —  $ 236  $ (849) $ (613)

(1) During the three and six months ended June 30, 2021, stock-based compensation expense recorded within additional paid-in capital did not include $2 of expense recognized as a result of the acquisition of xtraCHEF due to accelerated vesting of acquiree option awards on the acquisition date (see Note 6).

The accompanying notes are an integral part of these consolidated financial statements.


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TOAST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)
Six Months Ended June 30,
2022 2021
Cash flows from operating activities:
Net loss $ (77) $ (234)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization 12 
Stock-based compensation expense 110  59 
Amortization of deferred costs 20  11 
Change in fair value of derivative liability —  103 
Change in fair value of warrant liabilities (123) 16 
Credit loss expense
Change in deferred income taxes —  (4)
Change in fair value of contingent consideration — 
Loss on debt extinguishment —  50 
Non-cash interest expense on convertible notes —  12 
Other non-cash items — 
Changes in operating assets and liabilities:
Accounts receivable, net (15) (15)
Merchant cash advances and acquired loans repaid
Prepaid expenses and other current assets (13) (18)
Deferred costs, net (35) (18)
Inventories (20) (15)
Operating lease right-of-use assets (1)
Accounts payable (4) — 
Accrued expenses and other current liabilities 76  98 
Deferred revenue (4)
Operating lease liabilities (10)
Other assets and liabilities (7) (8)
Net cash (used in) provided by operating activities (68) 51 
Cash flows from investing activities:
Cash paid for acquisition, net of cash acquired —  (26)
Capitalized software (5) (4)
Purchases of property and equipment (7) (8)
Purchases of marketable securities (140) — 
Proceeds from the sale of marketable securities 32  — 
Maturities of marketable securities 78  — 
Net cash used in investing activities (42) (38)
Cash flows from financing activities:
Extinguishment of convertible notes —  (245)
Change in customer funds obligations, net 37  16 
Proceeds from exercise of stock options 17 
Payment of contingent consideration (2) — 
Proceeds from issuance of restricted stock —  10 
Net cash provided by (used in) financing activities 42  (202)
Net decrease in cash, cash equivalents, cash held on behalf of customers and restricted cash (68) (189)
Cash, cash equivalents, cash held on behalf of customers and restricted cash at beginning of period 851  594 
Cash, cash equivalents, cash held on behalf of customers and restricted cash at end of period $ 783  $ 405 
Reconciliation of cash, cash equivalents, cash held on behalf of customers and restricted cash
Cash and cash equivalents $ 697  $ 376 
Cash held on behalf of customers 72  27 
Restricted cash 14 
Total cash, cash equivalents, cash held on behalf of customers and restricted cash $ 783  $ 405 
Supplemental disclosure of non-cash investing and financing activities:
Purchase of property and equipment included in accounts payable and accrued expenses $ $
Stock-based compensation included in capitalized software — 
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Issuance of Class B common stock upon exercise of common stock warrants 18 — 
Issuance of Class B common stock for payment of contingent consideration 1 — 
Common stock issued for acquisition
—  15
Issuance of common stock warrants upon debt extinguishment —  125
Deferred payments included in purchase price —  5
Contingent consideration included in purchase price —  2
The accompanying notes are an integral part of these consolidated financial statements.
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TOAST, INC.
NOTES TO 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. Our platform provides a comprehensive suite of software as a service, or SaaS, products, financial technology solutions, including integrated payment processing, restaurant-grade hardware, and a broad ecosystem of third-party partners. We serve as the restaurant operating system, connecting front of house and back of house operations across dine-in, takeout, and delivery channels.
Basis of Presentation

The accompanying unaudited 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 consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The unaudited 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, 2022 or any other future interim periods.

The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2021, or the 2021 Annual Report. The Consolidated Balance Sheet as of December 31, 2021 included herein was derived from the audited financial statements as of that date.

Risks and Uncertainties

We are subject to a number of risks common to emerging, technology-based companies, including a limited operating history, dependence on key individuals, rapid technological changes, competition from substitute products and larger companies, the ability to successfully develop, market, and outsource manufacturing of our products and services, as well as the impact of the novel coronavirus disease, or COVID-19, on the restaurant industry. Other global events, such as current or future military conflicts, political unrest, rising inflation and interest rates, and global supply chain issues, may also impact consumer behavior, the restaurant industry and our business.

Since early 2020, changes in consumers’ behavior and government-imposed restrictions because of the COVID-19 pandemic have impacted restaurants in various ways, including limiting service to takeout orders for a period of time or reducing capacity to accommodate social distancing measures. The extent of the impact of the COVID-19 pandemic over the longer term remains uncertain and will depend largely on future developments that cannot be accurately predicted at this time, including the duration and the spread of the pandemic both globally and within the United States, the introduction and severity of new variants of the virus and their resistance to currently approved vaccines, as well as the potential negative impact these and other factors may have on the restaurant industry and our business.
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Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates, judgments, and assumptions in these consolidated financial statements include, but are not limited to, those related to revenue recognition, allowance for credit losses, liabilities associated with financial guarantees (contingent liabilities for credit losses and related non-contingent liabilities), negative allowances for expected recoveries on repurchased loans, allowances for uncollectible loans, allowance for excessive and obsolete inventory, reserves for warranties on hardware sold, incremental borrowing rates applied in valuation of lease liabilities, reserves for sales returns, fair values of assets acquired and liabilities assumed through business combinations, useful lives of assets acquired in business combinations, stock-based compensation expense, warrants, as well as amortization periods for deferred contract acquisition costs. Actual results could vary from these estimates.

Recently Adopted Accounting Pronouncements

There have been no material changes to recently adopted accounting standards disclosed in Note 2, Recently Adopted Accounting Pronouncements” included in the Consolidated Financial Statements for the years ended December 31, 2021, 2020 and 2019 in our 2021 Annual Report.

Significant Accounting Policies

There have been no material changes to our significant accounting policies disclosed in Note 2, “Summary of Significant Accounting Policies” included in the Consolidated Financial Statements for the years ended December 31, 2021, 2020 and 2019 in our 2021 Annual Report.

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:

Fair Value Measurement at June 30, 2022 Using
Level 1 Level 2 Level 3 Total
Assets:
Money market funds $ 554  $ —  $ —  $ 554 
Commercial paper —  158  —  158 
Certificates of deposit —  26  —  26 
Corporate bonds —  209  —  209 
Treasury securities —  59  —  59 
Asset-backed securities —  30  —  30 
$ 554  $ 482  $ —  $ 1,036 
Liabilities:
Warrants to purchase common stock $ —  $ —  $ 40  $ 40 
Contingent consideration —  — 
$ —  $ —  $ 43  $ 43 

Fair Value Measurement at December 31, 2021 Using
Level 1 Level 2 Level 3 Total
Assets:
Money market funds $ 50  $ —  $ —  $ 50 
Commercial paper —  134  —  134 
Certificates of deposit —  14  —  14 
Corporate bonds —  193  —  193 
Treasury securities —  67  —  67 
Asset-backed securities —  49  —  49 
$ 50  $ 457  $ —  $ 507 
Liabilities:
Warrants to purchase common stock $ —  $ —  $ 181  $ 181 
Contingent consideration —  — 
$ —  $ —  $ 186  $ 186 
During the six months ended June 30, 2022 and 2021, 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, which considered as inputs the underlying price of our Class A common stock, strike price, time to expiration, volatility, risk-free interest rates, and dividend yield.

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The following table indicates the weighted-average assumptions made in estimating the fair value as of June 30, 2022 and 2021:
June 30,
(in millions, except per share amounts) 2022 2021
Risk-free interest rate 3.0  % 1.1  %
Contractual term (in years) 4.94  5.94 
Expected volatility 57.6  % 50.2  %
Expected dividend yield —  % —  %
Exercise price per share $ 17.16  $ 17.16 
During the six months ended June 30, 2022, we issued 371,573 shares of Class B common stock as a result of warrants exercised and recognized a related remeasurement gain of $6 within “Other income (expense)”. The remaining outstanding warrants were remeasured at fair value resulting in total remeasurement gains of $44 and $117, respectively, recorded within “Other income (expense)” during the three and six months ended June 30, 2022.

For further information on the warrants to purchase common stock, please refer to Note 15, “Warrants to Purchase Preferred and Common Stock”, in our Consolidated Financial Statements included in the 2021 Annual Report.
Contingent Consideration Liability
Fair value of the contingent consideration liability incurred in connection with the acquisition of xtraCHEF, Inc. is estimated based on a Monte Carlo simulation which performs numerous simulations utilizing certain assumptions, such as projected revenue amounts over the related period, risk-free rate, and risk-adjusted discount rate. The fair value measurement of contingent consideration is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The contingent consideration liability is subject to remeasurement each reporting period until the contingency is resolved and the liability is settled, and changes in the assumptions used could materially impact the estimated fair value of the liability. We recognize the change in fair value of the contingent consideration liability in our results of operations.

During the six months ended June 30, 2022, we paid $2 in cash and issued 37,179 shares of our Class B common stock to settle a portion of the contingent consideration.
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The following tables provide a roll-forward of the aggregate fair value of our common stock warrant liability, contingent consideration liability, preferred stock warrant liability, and derivative liability, for which fair value is determined using Level 3 inputs:
Common Stock Warrant
Liability
Contingent
Consideration
Liability
Balance as of December 31, 2021
$ 181  $
Change in fair value (123)
Settlement (18) (4)
Balance as of June 30, 2022
$ 40  $

Preferred
Stock Warrant
Liability (1)
Common Stock Warrant Liability
Derivative
Liability (1)
Contingent Consideration Liability
Balance as of December 31, 2020
$ 11  $ —  $ 37  $ — 
Fair value at issuance —  125  —  — 
Fair value on the acquisition date —  —  — 
Change in fair value and other adjustments 17  —  103  — 
Settlement —  —  (140) — 
Balance as of June 30, 2021
$ 28  $ 125  $ —  $

(1) Preferred stock warrant liability and derivative liability were settled during the year ended December 31, 2021. For further information, please refer to Note 4, “Fair Value of Financial Instruments” and Note 15, “Warrants to Purchase Preferred and Common Stock”, in our Consolidated Financial Statements included in the 2021 Annual Report.

3. Marketable Securities

The amortized cost, gross unrealized holding losses and fair value of marketable securities, excluding accrued interest receivable, consisted of the following:
June 30, 2022
Amortized Cost Gross Unrealized Losses Fair Value
Commercial paper $ 159  $ (1) $ 158 
Certificates of deposit 26  —  26 
Corporate bonds 211  (2) 209 
Treasury securities 60  (1) 59 
Asset-backed securities 30  —  30 
Total $ 486  $ (4) $ 482 

December 31, 2021
Amortized Cost Gross Unrealized Losses Fair Value
Commercial paper $ 134  $ —  $ 134 
Certificates of deposit 14  —  14 
Corporate bonds 194  (1) 193 
Treasury securities 67  —  67 
Asset-backed securities 49  —  49 
Total $ 458  $ (1) $ 457 

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The fair values of marketable securities by contractual maturities at June 30, 2022 :

   June 30,
2022
Due within 1 year $ 438 
Due after 1 year through 5 years 44 
Total marketable securities $ 482 

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. Unrealized losses were not material for the securities held in our portfolio as of June 30, 2022 or December 31, 2021. There were no impairment losses or expected credit losses related to our marketable securities during the three and six months ended June 30, 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 is included in “Accrued expenses and other current liabilities” in the unaudited Consolidated Balance Sheets. The contingent liability for expected credit losses related to our guarantee was $5 and $2, respectively, as of June 30, 2022 and December 31, 2021. Changes in the contingent liability were not significant for the three and six months ended June 30, 2022 and 2021.

We repurchase delinquent loans and establish a negative allowance for expected recoveries when we have an expectation of collecting cash flows on the repurchased loans at the portfolio level. As of June 30, 2022 and December 31, 2021, we had a negative allowance for acquired loans and merchant cash advances receivable of $2 and $1, respectively, which are included within “Prepaid expenses and other current assets.” Changes in the negative allowance were not significant for the three and six months ended June 30, 2022 and 2021.

5. Lessee Arrangements

During the six months ended June 30, 2022, we entered into various operating leases for office space resulting in right-of use assets of $11, and related current and long-term operating lease liabilities of $11 in the accompanying unaudited Consolidated Balance Sheets. The right-of-use assets and lease liabilities are amortized over the 5-year lease terms of each lease. Additionally, during the six months ended June 30, 2022, we entered into a lease agreement for approximately 44 thousand square feet of office space located in Omaha, Nebraska. The lease term of approximately ten years is expected to commence during the three months ended September 30, 2022. Future lease payments are approximately $9 over the lease term.

The components of lease expense were as follows for the three and six months ended June 30, 2022 and 2021:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Operating lease expense $ $ $ 11  $ 12 
Variable lease expense
Total $ $ $ 13  $ 13 

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The following table summarizes supplemental cash flow information related to cash paid for amounts included in the measurement of lease liabilities during the six months ended June 30, 2022 and 2021:

Six Months Ended June 30,
2022 2021
Operating cash flows for operating leases $ (13) $ (13)
Supplemental non-cash amounts of lease liabilities arising from obtaining right-of-use assets/ (decreases) of lease liabilities due to lease terminations — 
Total $ (10) $ (13)
6. Other Balance Sheet Information
Cash held on behalf of customers represents an asset that is restricted for the purpose of satisfying obligations to remit funds to various tax authorities to satisfy customers’ payroll, tax, and other obligations. Cash held on behalf of customers is included within “Prepaid expenses and other current assets”, and the corresponding customer funds obligation is included within “Accrued expenses and other current liabilities” in the unaudited Consolidated Balance Sheets.

Restricted cash represents cash held with commercial lending institutions. The restrictions are related to cash collateralized letters of credit to cover potential customer defaults on third-party financing arrangements and cash held as collateral pursuant to an agreement with the originating third-party bank for the working capital loans serviced by Toast Capital (See Note 4). Restricted cash is included in within “Other non-current assets” in the unaudited Consolidated Balance Sheets.
Cash, cash equivalents, cash held on behalf of customers, and restricted cash consisted of the following:
June 30,
2022
December 31,
2021
Cash and cash equivalents $ 697  $ 809 
Cash held on behalf of customers 72  34 
Restricted cash 14 
Total cash, cash equivalents, cash held on behalf of customers and restricted cash $ 783  $ 851 
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Accounts receivable, net consisted of the following:
June 30,
2022
December 31,
2021
Accounts receivable $ 32  $ 20 
Unbilled receivables 41  39 
Less: Allowance for credit losses (5) (4)
Accounts receivable, net $ 68  $ 55 
Our allowance for credit losses was comprised of the following:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Beginning balance $ (4) $ (6) $ (4) $ (4)
Impact of adopting ASU 2016-13 —  —  —  (2)
Additions (2) (3)
Write offs —  — 
Ending balance $ (5) $ (5) $ (5) $ (5)

As of June 30, 2022 and December 31, 2021, substantially all inventory balances of $62 and $42, respectively, consisted of finished goods.

Prepaid expenses and other current assets consisted of the following:
June 30,
2022
December 31,
2021
Cash held on behalf of customers $ 72  $ 34 
Prepaid expenses 15  25 
Deposits for inventory purchases 26  21 
Other current assets 28  12 
$ 141  $ 92 

Accrued expenses and current liabilities consisted of the following:
June 30,
2022
December 31,
2021
Accrued transaction-based costs $ 157  $ 120 
Accrued payroll and bonus 37  24 
Customer funds obligation 72  34 
Accrued expenses 46  21 
Accrued commissions 12  19 
Other liabilities 39  28 
$ 363  $ 246 

During the three months ended June 30, 2022, we finalized the purchase price allocation and fair values of assets acquired and liabilities assumed related to the acquisition of xtraCHEF, Inc. There were no purchase price adjustments recorded since the acquisition date. Please refer to Note 3, "Business Combinations" to the Company’s Consolidated Financial Statements, included in the 2021 Annual Report on Form 10-K for further information on the transaction.

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7. Revenue from Contracts with Customers

The following table summarizes the activity in deferred revenue:
Six Months Ended June 30,
2022 2021
Deferred revenue, beginning of year $ 56  $ 58 
Deferred revenue, end of period 52  62 
Revenue recognized in the period from amounts included in deferred revenue at the beginning of period $ 35  $ 33 
As of June 30, 2022, approximately $449 of revenue is expected to be recognized from remaining performance obligations for customer contracts. We expect to recognize revenue of approximately $431 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:
Six Months Ended June 30,
2022 2021
Beginning balance $ 55  $ 29 
Capitalization of sales commissions costs 35  18 
Amortization of sales commissions costs (20) (11)
Ending balance $ 70  $ 36 
June 30,
2022 2021
Deferred costs, current $ 36  $ 21 
Deferred costs, non-current 34  15 
Total $ 70  $ 36 
8. Stock-Based Compensation

Stock-based compensation expense recognized for the three and six months ended June 30, 2022 and 2021, is as follows:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Costs of revenue $ $ $ 16  $
Sales and marketing 13  25 
Research and development 18  25  34  27 
General and administrative 19  28  35  30 
Stock based compensation $ 58  $ 56  $ 110  $ 61 

Stock-based compensation expense of $1 and $2, respectively, was capitalized as software development costs during the three and six months ended June 30, 2022. There were no such costs capitalized during the three and six months ended June 30, 2021.

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Prior to consummation of our initial public offering, or IPO, no stock-based compensation expense was recognized for certain restricted stock units, or RSUs, with an IPO-related vesting condition. Subsequent to the consummation of our IPO, we began recognizing stock-based compensation expense related to these awards which amounted to $21 and $47, respectively, during the three and six months ended June 30, 2022.
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 six months ended June 30, 2022 and 2021:

(in millions, except per share amounts) Six Months Ended June 30,
2022 2021
Risk-free interest rate 2.16  % 1.01  %
Expected term (in years) 6.06 6.32
Expected volatility 51.41  % 65.00  %
Expected dividend yield —  % —  %
Weighted-average fair value of common stock $ 17.76  $ 16.07 
Weighted-average grant date fair value $ 9.02  $ 9.60 
The following is a summary of stock option activity under our stock option plans for the six months ended June 30, 2022:
(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, 2021
58,917,018  $ 4.53  7.65 $ 1,778 
Granted 4,257,768  17.76 
Exercised (4,410,300) 1.66 
Forfeited (2,076,988) 10.69 
Outstanding, vested, and expected to vest as of June 30, 2022
56,687,498  $ 5.52  7.29 $ 474 
Options exercisable as of June 30, 2022
52,741,405  $ 4.54  7.11 $ 474 
(1) The aggregate intrinsic value was determined as the difference between the closing price of the Class A common stock on the last trading day of June 2022, or the date of exercise, as appropriate, and the exercise price, multiplied by the number of in-the-money options that would have been received by the option holders had all option holders exercised their in-the-money options at period end.

There were no options granted during the three months ended June 30, 2022. The weighted average grant date fair value per share of options granted was $12.55 during the three months ended June 30, 2021. The aggregate intrinsic values of options exercised was $25 and $81, respectively, during the three and six months ended June 30, 2022 and $28 and $52, respectively, during the three and six months ended June 30, 2021. The total fair value of options vested during the six months ended June 30, 2022 and 2021 was $48 and $14, respectively.

As of June 30, 2022, total unrecognized stock-based compensation expense related to the option awards was $104 and is expected to be recognized over the remaining weighted-average service period of 3.46 years.
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Restricted Stock Units 

The following table summarizes RSU activity during the six months ended June 30, 2022:
RSU
Weighted
Average
Grant Date
Fair Value
Unvested balance as of December 31, 2021
15,384,809  $ 29.71 
Granted 13,315,671  18.59 
Vested (1,456,968) 17.68 
Forfeited (1,045,173) 28.53 
Unvested balance as of June 30, 2022
26,198,339  $ 24.77 

The weighted average grant-date fair value of RSUs granted during the three months ended June 30, 2022 and 2021 was $15.88 and $20.94, respectively. The weighted average grant-date fair value of RSUs granted during the six months ended June 30, 2021 was $17.85. The fair value of RSUs vested during the six months ended June 30, 2022 and 2021 was $29 and $1, respectively. The fair value of RSUs vested during the three months ended June 30, 2022 and 2021 was $26 and $1, respectively.
As of June 30, 2022, total unrecognized stock-based compensation expense related to the RSUs was $412 and is expected to be recognized over the remaining weighted-average service period of 3.55 years.

Restricted Stock

As of June 30, 2022 and December 31, 2021, 2,624,790 and 4,133,955 shares of Class A and B common stock, respectively, were outstanding from early exercise of stock options. Pursuant to the associated agreements, upon termination of employment, unvested shares held by such individuals are subject to repurchase by us. As of June 30, 2022 and December 31, 2021, cash paid for unvested shares of $4 and $6, respectively, is included in “Other long-term liabilities” in the accompanying unaudited Consolidated Balance Sheets. During the six months ended June 30, 2022, 1,502,995 shares vested that were previously issued upon early exercise of stock options. As of each Consolidated Balance Sheet date, we had reserved shares of Class A common stock and Class B common stock for issuance in connection with the following:
June 30,
2022
December 31,
2021
Options to purchase Class A common stock and Class B common stock
56,687,498  58,917,018 
Restricted stock units
26,198,339  15,384,809 
Warrants to purchase Class B common stock
6,902,633  7,961,455 
Shares available for future grant under the Stock Plans
64,823,345  53,916,105 
Shares reserved for charitable donations
4,922,001  4,922,001 
Shares available for issuance under 2021 Employee Stock Purchase Plan
16,709,893  11,638,189 
176,243,709  152,739,577 
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9. Income Taxes
Our effective income tax rate was (0.5)% and 4.3% for the three months ended June 30, 2022 and 2021, respectively, and was (0.7)% and 2.1% for the six months ended June 30, 2022 and 2021, respectively. The effective tax rate for each period differs from the statutory rate primarily as a result of having a full valuation allowance maintained against our U.S. deferred tax assets, along with the release of a portion of the valuation allowance as a result of the xtraCHEF acquisition as discussed further below.

There was no income tax benefit recorded for the three and six months ended June 30, 2022. We recorded an income tax benefit of $4 for the three and six months ended June 30, 2021. The benefit from income taxes for the six months ended June 30, 2021 was primarily due to a non-recurring benefit of $4 for the release of a portion of the Company’s valuation allowance due to taxable temporary differences resulting from the xtraCHEF acquisition being available as a source of income to realize certain pre-existing Toast, Inc. deferred tax assets.
10. 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, and warrants to purchase common stock (as applicable), 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 June 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.

During the six months ended June 30, 2022, we recorded a gain on fair value remeasurement of warrant liabilities which was added back to the numerator to adjust net loss for the dilutive impact of the warrants. We adjusted the denominator for the incremental dilutive shares using the treasury stock method.

The following table sets forth the computation of basic and diluted net loss per share (in millions, except share and per share data) attributable to common stockholders for the three and six months ended June 30, 2022 and 2021:
(in millions, except share and per share amounts) Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Numerator:
Net loss, basic $ (54) $ (135) $ (77) $ (234)
Gain on change in fair value of warrant liabilities —  —  123  — 
Net loss, diluted $ (54) $ (135) $ (200) $ (234)
Denominator:
Weighted average shares of common stock outstanding—basic 509,532,418  211,799,234  507,420,257  207,091,280 
Effect of dilutive securities:
Warrants to purchase Class B common stock
—  —  756,238  — 
Weighted average shares of common stock outstanding—diluted 509,532,418  211,799,234  508,176,495  207,091,280 
Net loss per share, basic $ (0.11) $ (0.64) $ (0.15) $ (1.13)
Net loss per share, diluted $ (0.11) $ (0.64) $ (0.39) $ (1.13)
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We excluded the following potential shares of common stock from the computation of diluted net loss per share because including them would have an antidilutive effect for the three and six months ended June 30, 2022 and 2021:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Options to purchase Class A common stock, Class B common stock and common stock 56,687,498  61,925,005  56,687,498  61,925,005 
Unvested restricted stock 2,624,790  7,148,735  2,624,790  7,148,735 
Unvested restricted stock units 26,198,339  5,085,865  26,198,339  5,085,865 
Convertible preferred stock (as converted to common stock) —  253,832,025  —  253,832,025 
Warrants to purchase Class B common stock and common stock and preferred stock (as if converted to warrants to purchase common stock)
6,902,633  9,115,620  —  9,115,620 
92,413,260  337,107,250  85,510,627  337,107,250 
11. Segment Information
We have significant operations in the United States, Ireland and India. We did not earn material revenue in any country other than the United States during the three and six months ended June 30, 2022 and 2021.

The following table sets forth the breakdown of long-lived assets based on geography:
June 30,
2022
December 31,
2021
United States $ 109  $ 119 
Ireland
Other — 
$ 119  $ 120 

Tangible long-lived assets consist of property and equipment and operating lease right-of-use assets. Long-lived assets attributed to specific countries are based upon the country in which the asset is located.
12. Commitments and Contingencies
Purchase Commitments
We had non-cancelable purchase obligations to hardware suppliers and cloud service providers of $250 and $315, respectively, as of June 30, 2022 and December 31, 2021. Most of our purchase obligations are payable within the next 12 months.
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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13. Subsequent Events
Acquisition
On July 6, 2022, we acquired 100% of the outstanding capital stock of Sling Inc., or Sling, an employee scheduling, communication and management solution. We made a total cash payment (net of cash acquired) of $42. Our initial accounting for the acquisition and the related purchase price allocation is in process.
In addition to the cash payment noted above, in conjunction with the acquisition we issued 1,338,228 shares of Class A common stock to certain members of Sling management as restricted stock at a fair market value of approximately $13.91 per share for a total of $19. The shares vest over a 1 to 3 year service period, and are subject to forfeiture upon termination of service during such vesting periods.
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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 consolidated financial statements, and the related notes that are included elsewhere in this Quarterly Report on Form 10-Q, and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section titled “Special Note Regarding Forward-Looking Statements” and Item 1A. Risk Factors included elsewhere in this Quarterly Report on Form 10-Q. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

Overview
Toast is a cloud-based, all-in-one digital technology platform purpose-built for the entire restaurant community. Our platform provides a comprehensive suite of SaaS products, financial technology solutions, including integrated payment processing, restaurant-grade hardware, and a broad ecosystem of third-party partners. We serve as the restaurant operating system, connecting front of house and back of house operations across dine-in, takeout, and delivery channels. As of June 30, 2022, approximately 68,000 restaurant locations, processing approximately $75 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.

Recent Development in Macroeconomic Environment
Since early 2020, changes in consumers’ behavior and government-imposed restrictions because of the COVID-19 pandemic have impacted restaurants in various ways, including limiting service to takeout orders for a period of time or reducing capacity to accommodate social distancing measures. Though the exact long-term circumstances are difficult to predict, we believe that the COVID-19 pandemic will result in a lasting shift in consumer demand towards omnichannel consumption and increased guest demand for digital solutions such as Order & Pay. Depending on the extent to which the prevalence of takeout and delivery orders persists, our financial results may be impacted in a number of ways.
In addition to the ongoing COVID-19 pandemic, changes in macroeconomic conditions, including inflation and its potential impact on consumer spending, as well as continued global supply chain issues, 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 associated 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 June 30, Six Months Ended June 30,
(dollars in billions) 2022 2021 % Growth 2022 2021 % Growth
Gross Payment Volume (GPV)(1)
$ 23.3  $ 14.4  62  % $ 41.1  $ 23.4  76  %
As of June 30,
(dollars in millions) 2022 2021 % Growth
Annualized Recurring Run-Rate (ARR) $ 787  $ 494  59  %
Gross Payment Volume (GPV)(1)
Gross Payment Volume represents the sum of total dollars processed through the Toast payments platform across all restaurant locations in a given period. GPV is a key measure of the scale of our platform, which in turn drives our financial performance. As our customers generate more sales and therefore more GPV, we generally see higher financial technology solutions revenue.
_________________

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

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

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

Seasonality

We experience seasonality in our financial technology solutions revenue, which is largely driven by the level of GPV processed through our platform. For example, customers typically have greater sales during the warmer months, though this effect varies regionally. As a result, our financial technology solutions revenue per location has historically been stronger in the second and third quarters. We believe that financial technology solutions revenue from both existing and potential future products will continue to represent a significant proportion of our overall revenue mix, and seasonality will continue to impact our results of operations.
Components of Results of Operations
Revenue
We generate revenue from four main sources that are further described below: (1) subscription services, (2) financial technology solutions, (3) hardware, and (4) professional services.
Our total revenue consists of the following:
Subscription services. We generate subscription services revenue from fees charged to customers for access to our software applications, generally over a term ranging from 12 to 36 months. Our subscription services revenue is primarily based on a rate per location, and this rate varies depending on the number of software products purchased, hardware configuration, and employee count at each location.

Financial technology solutions. Revenue from financial technology solutions consists primarily of transaction-based fees paid by customers to facilitate their payment transactions, which are generally calculated as a percentage of the total transaction amount processed plus a per-transaction fee. The transaction fees collected are recognized as revenue on a gross basis. Financial technology solutions revenue also includes fees earned from marketing and servicing working capital loans to our customers through Toast Capital that are originated by a third-party bank. In these arrangements, Toast Capital’s bank partner originates all loans, and Toast Capital then services the loans using Toast’s payments infrastructure to remit a fixed percentage of daily sales until the loan is paid back. Toast Capital is responsible for purchasing from our bank partner loans in default (or that have been or are scheduled to be charged off) until the aggregate principal amount of such purchased loans equals 15% (or 30% in the case of a limited program offered during the winter of 2020-2021 related to the COVID-19 pandemic) of the total originated amount for each quarterly loan cohort. Toast Capital earns a servicing fee as well as a credit performance fee that is tied to the portfolio performance.
Hardware. We generate hardware revenue from the sale of terminals, tablets, handhelds, and related devices and accessories, net of estimated returns.
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Professional services. We generate professional services revenue from fees charged to customers for installation services, including business process mapping, configuration, and training. These services can be delivered on-site, remotely, or on a self-guided basis.
Costs of Revenue
Costs of revenue consists of expenses that are directly related or closely correlated to revenue generation, including, but not limited to, employee-related costs for customer support and certain operational roles as well as allocated overhead. Employee-related costs consist of salaries, benefits, bonuses, and stock-based compensation expense. Allocated overhead includes certain facilities costs, depreciation expense, and amortization costs associated with internally developed software. Below are descriptions of the types of costs classified within each component of costs of revenue:
Subscription services. Subscription services costs consist of customer support and associated employee-related costs, hosting costs, professional services costs, other software costs to support our cloud-based platform, and amortization costs associated with internally developed software.
Financial technology solutions. Financial technology solutions costs consist primarily of transaction-based costs, which are mostly fees and costs paid to issuers and card networks as well as other related fees associated with third-party payment processors and fraud management.
Hardware. Hardware costs consist of raw materials and the cost of manufacturing and shipping hardware sold to customers, including terminals, tablets, handhelds, card readers, printers, and other accessories. Included in the manufacturing and shipping costs are employee-related costs, professional services costs, and allocated overhead associated with our supply chain and fulfillment teams.
Professional services. Professional services costs consist primarily of employee-related costs and allocated overhead associated with our onboarding team, along with fees paid to third-party service providers engaged to perform installations and other services.
Amortization of acquired technology. Amortization of acquired technology costs is related to technologies acquired through acquisitions that have the capability of producing revenue.
Operating Expenses
Our operating expenses consist of the following:
Sales and marketing. Sales and marketing expenses consist primarily of employee-related costs incurred to acquire new customers and increase product adoption across our existing customer base. Marketing expenses also include fees incurred to generate demand through various advertising channels.
We expect that sales and marketing expenses will increase on an absolute dollar basis as we invest to grow our field-based sales team, increase demand generation, and enhance our brand awareness. We expect sales and marketing expenses as a percentage of revenue will vary from period-to-period over the short term and decrease over the long term.
Research and development. Research and development expenses consist primarily of employee-related costs associated with improvements to our platform and the development of new product offerings, as well as allocated overhead and expenses associated with the use of third-party software directly related to development of our products and services.
We plan to continue to hire employees to support our research and development efforts to expand the capabilities and scope of our platform and related products and services. As a result, we expect that research and development expenses will increase on an absolute dollar basis as we continue to invest to support these activities and innovate over the long term.
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General and administrative. General and administrative expenses consist primarily of expenses related to operations, finance, legal, human resources, information technology, and administrative personnel. General and administrative expenses also include costs related to fees paid for certain professional services, including legal, information technology, tax and accounting services, and credit loss expenses.
We expect that general and administrative expenses will increase on an absolute dollar basis as we add personnel and enhance our systems, processes, and controls to support the growth of our business as well as our increased compliance and reporting requirements as a public company. We expect general and administrative expenses as a percentage of revenue will vary from period-to-period over the short term and decrease over the long term.
Other Income (Expense)
Our other income and expenses consist of the following:

Interest income (expense), net. Consists of interest earned from cash held in money market accounts, interest earned on our marketable securities, and interest incurred on our convertible notes, which were issued in June 2020 and repaid in June 2021.
Change in fair value of warrant liability. Represents the change in the fair value of our warrant liability related to warrants issued to purchase shares of our convertible preferred stock and our common stock. The warrant liability is remeasured at fair value at each reporting date which could have a significant effect on other income (expense) and our results of operations during each period. The fair value is based on the trading price of our Class A common stock and other relevant valuation inputs, including volatility of our Class A common stock, strike price, relevant risk-free interest rates, and time to expiration of the warrants, and may fluctuate in subsequent periods.
Change in fair value of derivative liability. Represents the change in fair value of derivative liability related to the conversion option provided for in the convertible notes which were repaid in June 2021.

Loss on debt extinguishment. Represents the loss on settlement of our convertible notes which were repaid in June 2021.

Other income (expense), net. Represents foreign currency transaction gains and losses, gains or losses realized from sales of our marketable securities, refundable research and development tax credits, and other items.
Income Tax Benefit (Expense)
Income tax benefit (expense). Consists of U.S. federal and state income tax as well as international taxes in Ireland and India. Our effective tax rate fluctuates from period to period due to changes in the mix of income and losses in jurisdictions with a wide range of tax rates, the effect of acquisitions, changes resulting from the amount of recorded valuation allowance, and permanent differences between GAAP and local tax laws.
27

Results of Operations
Comparison of the Three and Six Months Ended June 30, 2022 and 2021
The following table summarizes our results of operations for the three and six months ended June 30, 2022 and 2021:
Three Months Ended June 30, Six Months Ended June 30,
(dollars in millions) 2022 2021 2022 2021
Revenue:
Subscription services $ 76  $ 38  $ 139  $ 69 
Financial technology solutions 562  354  1,000  581 
Hardware 30  29  59  50 
Professional services 12 
Total revenue 675  426  1,210  707 
Costs of revenue:
Subscription services 27  13  51  23 
Financial technology solutions 448  280  796  452 
Hardware 61  31  113  51 
Professional services 25  12  46  21 
Amortization of acquired technology and customer assets
Total costs of revenue(1) 562  337  1,008  549 
Gross profit 113  89  202  158 
Operating expenses:
Sales and marketing(1) 77  41  148  74 
Research and development(1) 67  50  129  73 
General and administrative(1) 68  49  125  68 
Total operating expenses 212  140  402  215 
Loss from operations (99) (51) (200) (57)
Other income (expense):
Interest income (expense), net (6) (12)
Change in fair value of warrant liability 44  (5) 123  (16)
Change in fair value of derivative liability —  (27) —  (103)
Loss on debt extinguishment —  (50) —  (50)
Other income (expense), net —  —  (1) — 
Loss before benefit from income taxes (54) (139) (77) (238)
Benefit from income taxes —  — 
Net loss $ (54) $ (135) $ (77) $ (234)
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(1)Includes stock-based compensation expense recognized for the three and six months ended June 30, 2022 and 2021 as follows:
Stock-Based Compensation Expense
Three Months Ended June 30, Six Months Ended June 30,
(dollars in millions) 2022 2021 2022 2021
Costs of revenue $ $ $ 16  $
Sales and marketing 13  25 
Research and development 18  25  34  27 
General and administrative 19  28  35  30 
Total stock-based compensation expense $ 58  $ 56  $ 110  $ 61 
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Revenue
Three Months Ended June 30, Change Six Months Ended June 30, Change
(dollars in millions) 2022 2021 Amount % 2022 2021 Amount %
Subscription services $ 76  $ 38  $ 38  100  % $ 139  $ 69  $ 70  101  %
Financial technology solutions 562  354  208  59  % 1,000  581  419  72  %
Hardware 30  29  % 59  50  18  %
Professional services 40  % 12