Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. 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 “Risk Factors” and in other parts of this Annual Report on Form 10-K.
The following discussion and analysis of our financial condition and results of operations generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. A discussion of 2020 items and year-to-year comparisons between 2021 and 2020 can be found in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 31, 2022.
OVERVIEW
Expensify is a cloud-based expense management software platform that helps the smallest to the largest businesses simplify the way they manage money. Every day, people from all walks of life in organizations around the world use Expensify to scan and reimburse receipts from flights, hotels, coffee shops, office supplies and ride shares. Since our founding in 2008, we have added over 12 million members to our community and processed and automated over 1.4 billion expense transactions on our platform as of December 31, 2022, freeing people to spend less time managing expenses and more time doing the things they love. For the year ended December 31, 2022, an average of 779,000 paid members across 53,000 companies and over 200 countries and territories used Expensify to make money easy.
Initial Public Offering
In November 2021, we closed our initial public offering ("IPO") of 11,190,392 shares of our Class A common stock at $0.0001 par value per share ("Class A common stock"), in which we sold 2,608,696 shares of Class A common stock, and the selling stockholders sold 8,581,696 shares of Class A common stock, including 1,459,616 shares of Class A common stock pursuant to the exercise in full of the underwriters’ option to purchase additional shares, at an IPO price of $27.00 per share. We did not receive any proceeds from the sale of shares of Class A Common Stock in the offering by the selling stockholders. We received aggregate net proceeds of approximately $57.5 million after deducting underwriting discounts and commissions of approximately $4.9 million and offering costs of approximately $8.0 million.
OUR BUSINESS MODEL
Our employee-centric product strategy, viral and bottom-up business model, word-of-mouth adoption and unique company culture come together to drive value for our members and a competitive advantage for us. We believe that if we remain hyper-focused on our end-user members, and build great products, our members will continue to drive adoption.
We primarily generate revenue from annual subscriptions to our cloud-based platform, driven by the number of paid members active on a monthly basis. Individuals or companies pay for subscriptions on behalf of themselves, their employees and contractors, who we collectively refer to as members. We define a customer as any member who pays for themselves and zero or more other members, grouped into one or more "expense policies." This might be an individual, an entire company, or a department of
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a larger company. The definition of customer inherently excludes sole proprietors on Track or Submit plans.
We monetize transactions from the Expensify Card by receiving a percentage of the interchange for all spend on the card. As we expand our platform, we intend to increase the number of integrations and to more actively promote the Expensify Card with complementary use cases beyond expense management to both new and existing customers to drive increased adoption.
Key Factors Affecting Our Performance
Our performance depends on many factors, including the following:
INVESTING IN PRODUCT-LED GROWTH
We are focused on continuing to grow the number of paid members on our platform. Relative to other software companies, we invest more in product development and less in sales. This investment in product allows us to develop easy-to-use but powerful features that encourage adoption of our platform. Our ability to grow our paid members depends on our viral, bottom-up adoption cycle that starts with an individual employee. After downloading our free app to submit expenses and realizing the benefits of Expensify, our enthusiastic members champion our platform internally, spread it via word-of-mouth or invites to other employees and often convince decision makers to adopt Expensify company-wide. In order to continue to grow, we believe we must continue prioritizing investments in our platform to delight our members and drive viral expansion.
CONTINUING TO CONVERT FREE MEMBERS
Our success depends on converting users who try the free aspects of the Expensify platform into paid members. While our viral model means that employees or contractors often introduce Expensify into SMBs, companies subscribe and pay for the majority of our paid members.
INVESTING TO MAINTAIN MARKET CONSENSUS
Our viral and word-of-mouth adoption model is effective in part because we have established ourselves as a recognized leader in expense management for SMBs. We deploy large scale brand advertising to promote our platform superiority and create market consensus that Expensify is the category leader for expense management software. Additionally, in 2023 we are hosting our third ExpensiCon, an invite-only, all-expenses paid industry conference, with the goal of increasing our market consensus among our Approved! Accounting partners and increasing adoption of our platform. We believe investing in market consensus enables us to focus on creating great viral features for our members rather than relying on low-margin, unscalable activities of traditional sales and marketing to drive customer acquisition.
RETAINING EXISTING CUSTOMERS
Expense management touches many functions across a company. To provide a seamless experience for our customers, we integrate with accounting, ERP and travel software used by SMBs and their employees every day. We also have frictionless integrations with many of the technology providers that generate the most receipts for our members, such as Uber and Lyft. Expensify delivers an expense management platform that we believe customers like, and that embeds us within organizations. Because of these two factors, we have historically enjoyed high customer retention rates that often outperform enterprise retention rates. We believe an additional factor that drives our retention rates is that SMBs generally re-evaluate their technology solutions less frequently, and as such, there is rarely a conscious choice to choose to continue using Expensify for another year.
Gross logo retention and net seat retention are important indicators of customer satisfaction and usage of our platform. We calculate our gross logo retention rate as of the end of a period by using (a) the number of distinct companies who have ever had five or more paid members paying for a subscription
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during the period ending one year prior as the denominator and (b) the number of those same companies that are still paying for at least one subscription during the more recent period as the numerator. In both 2022 and 2021, our annual gross logo retention was 83%. We calculate our net seat retention rate as of the end of a period by using (a) the number of paid member seats from companies who have ever had five or more paid members paying for a subscription during the period ending one year prior as the denominator and (b) the number of paid member seats at those same companies during the more recent period as the numerator. In 2022 and 2021, our net seat retention was 108% and 93%, respectively. Our growth will depend on our ability to continue to retain existing customers.
INTRODUCING FEATURES TO EXPAND OUR RELATIONSHIP WITH EXISTING CUSTOMERS
We fully launched the Expensify Card in 2020 and, despite pullback in corporate expenses with the COVID-19 pandemic, customers began adopting the card. Going forward, we intend to more actively promote the Expensify Card to both new and existing customers to drive increased adoption. Outside of the Expensify Card, we have invested, and will continue to invest, in developing features complementary and adjacent to expense management. At most companies, not every employee generates expenses that would be submitted via an expense report on a monthly basis. As we add additional features that are used by all employers, we have the potential to monetize the segment of our customers’ employees that are not submitting expense reports.
MACROECONOMIC TRENDS
Our business and the operations of our customers, the majority of which are SMBs, was disrupted by the COVID-19 pandemic. For example, after a steady increase in paid members over multiple years, the average number of paid members on our platform declined in 2020. However, while the full lasting impact of the COVID-19 pandemic on the global economy and SMBs in particular remains uncertain, we have seen our average paid members increase to levels that surpass those of March 2020 when the pandemic began as economies have reopened and business travel resumed.
See the section titled "Risk Factors" in this Annual Report on Form 10-K for further discussion of the possible impact of the COVID-19 pandemic on our business. Additionally, potential challenging macroeconomic conditions, including inflationary pressures, rising interest rates and foreign currency fluctuations, and the resulting impact on business continuity and travel, could negatively impact our business.
CASH BONUSES
In June 2021 for our named executive officers, and in July 2021 for all other employees, we determined that we would pay a cash bonus to each of our employees in a value that approximated the cost of each employee exercising 45% of their total stock options, limited by the total stock options outstanding and held by each existing employee as of June 15, 2021, including the tax withholding applicable to each employee. During the year ended December 31, 2021, we recorded bonus expenses related to the employee stock option exercise cash bonus of $48.4 million. See Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K for further information.
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Components of Results of Operations
Revenue
We generate revenue from subscription fees based on the usage of our cloud-based expense management software platform under arrangements paid monthly in arrears that are either month-to-month which can be terminated by either party without penalty at any time or annual arrangements based on a minimum number of monthly members. Annual subscription customers who wish to terminate their contracts before the end of the term are required to pay the remaining obligation in full plus any fees or penalties set forth in the agreement. In May 2020, we updated our terms of service whereby annual contracts became non-cancelable. We charge our customers subscription fees for access to our platform based on the number of monthly active members and level of service. The contractual price is based on either negotiated fees or rates published on our website. We generate most of our revenue from customers who have a credit card or debit card on file with us that is automatically charged each month. Virtually all of our customers have a standard terms of service contract, with the few exceptions on bespoke service contracts.
Our contracts with our customers include two performance obligations: access to the hosted software service, inclusive of all features available within the platform, and the related customer support. We account for the platform access and the support as a combined performance obligation because they have the same pattern of transfer over the same period and are therefore delivered concurrently. We satisfy our performance obligation over time each month as we provide platform access and support services to customers and as such recognize revenue over time. We recognize revenue net of applicable taxes imposed on the related transaction.
We began offering a cashback rewards program to all customers based on volume of Expensify Card transactions and software as a service ("SaaS") subscription tier in August 2021. Cashback rewards are earned on a monthly basis and are paid out the following month. We consider our cashback payments to customers as consideration payable to a customer, and the payments are recorded as contra revenue within Revenue on the Consolidated Statements of Operations. We also record a cashback rewards liability that represents the consideration payable to customers for earned cashback rewards. The cashback rewards fluctuate over time as customers meet eligibility requirements in conjunction with the applicable SaaS subscription tier of each customer and the timing of payments made to customers.
Cost of Revenue, Net
Cost of revenue, net primarily consists of expenses related to hosting our service, including the costs of data center capacity, credit card processing fees, third-party software license fees, outsourcing costs to support customer service and outsourcing costs to support and process our patented scanning technology, net of consideration from a vendor. Additional costs include amortization of finance right-of-use assets, amortization expense on capitalized software development costs and personnel-related expenses, including stock-based compensation and employee costs attributable to supporting our customers and maintenance of our platform.
Consideration from a vendor is related to the Expensify Card. We use a third-party vendor to issue Expensify Cards and process the related transactions. When purchases are made with the Expensify Card, a fee is charged by the card network to the merchant (also known as "interchange"). The vendor is contractually entitled to the interchange through its relationships with the card network and card issuing bank. The vendor keeps a portion of the interchange for their services, and our agreement with the vendor results in us receiving the remainder of the interchange less the amount retained by the vendor (our remainder portion, "Expensify interchange amount"). The vendor also charges us fees ("vendor fees") for the services it provides to us. Due to the nature of the vendor agreement, we do not record the Expensify interchange amount as revenue. Instead, the net of the Expensify interchange amount and vendor fees are paid to us, and we record it as "Consideration from a vendor, net," a contra
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expense in Cost of revenue, net. The following summarizes these various amounts for the periods presented:
Year ended December 31,
(in thousands)
As described in the subsection titled "Liquidity and Capital Resources", discretionary cash bonuses, which we also refer to as "IPO-related bonus expense" as described in the subsection titled "Non-GAAP Financial Measures," were paid to employees in 2021 and had a significant impact to Cost of revenue, net during the year ended December 31, 2021.
OPERATING EXPENSES
Research and Development
Research and development expenses consist primarily of personnel-related expenses, including stock-based compensation, incurred related to the planning and preliminary project stage and post-implementation stage of new products or enhancing existing products or services. We capitalize certain software development costs that are attributable to developing or adding significant functionality to our internal-use software during the application development stage of the projects. All research and development expenses, excluding capitalized software development costs, are expensed as incurred.
We believe delivering new functionality is critical to attract new customers and expand our relationships with existing customers. We expect to continue to make investments in and expand our product and service offerings to enhance our customers’ experience and satisfaction and to attract new customers. We expect research and development expenses will increase as we expand our research and development team to develop new products and product enhancements.
As described in the subsection titled "Liquidity and Capital Resources", discretionary cash bonuses, which we also refer to as "IPO-related bonus expense" as described in the subsection titled "Non-GAAP Financial Measures," were paid to employees in 2021 and had a significant impact to Research and development expenses during the year ended December 31, 2021.
Sales and Marketing
Sales and marketing expenses primarily consist of personnel-related expenses, including stock-based compensation, advertising expenses, branding and public relations expenses and referral fees for strategic partners and other benefits that we provide to our referral and affiliate partners. We expect sales and marketing expenses will increase as we expand our sales efforts to pursue our market opportunity.
As described in the subsection titled "Liquidity and Capital Resources", discretionary cash bonuses, which we also refer to as "IPO-related bonus expense" as described in the subsection titled "Non-GAAP Financial Measures," were paid to employees in 2021 and had a significant impact to Sales and marketing expenses during the year ended December 31, 2021.
General and Administrative
General and administrative expenses primarily consist of personnel-related expenses, including stock-based compensation, for any employee time allocated to administrative functions, including finance and accounting, legal and human resources. In addition to personnel-related expenses, general and administrative expenses consist of rent, utilities, depreciation on property and equipment, amortization
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of operating right-of-use assets and external professional services, including accounting, audit, tax, finance, legal and compliance, human resources and information technology. We expect that general and administrative expenses will continue to increase as we scale our business and as we incur additional costs associated with being a publicly traded company, including legal, audit, business insurance and consulting fees.
As described in the subsection titled "Liquidity and Capital Resources", discretionary cash bonuses, which we also refer to as "IPO-related bonus expense" as described in the subsection titled "Non-GAAP Financial Measures," were paid to employees in 2021 and had a significant impact to General and administrative expenses during the year ended December 31, 2021.
Interest and Other Expenses, Net
Interest and other expenses, net, consist primarily of interest paid under our credit facilities with Canadian Imperial Bank of Commerce ("CIBC"). It also includes realized gains and losses on foreign currency transactions and foreign currency remeasurement.
(Provision for) Benefit from Income Taxes
Income taxes primarily consist of income taxes in the United States, United Kingdom, Australia, Netherlands and Canada, as well as states in the United States in which we do business.
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Results of Operations
The results of operations presented below should be reviewed in conjunction with the consolidated financial statements and notes included elsewhere in this Annual Report on Form 10-K.
The following table sets forth our results of operations for the periods presented:
Year ended December 31,
(in thousands, except per share data)
Operating expenses:
(Provision for) benefit from income taxes (6,366) 174 (4,662)
Net loss per share attributable to Class A, LT10 and LT50 common stockholders:
Net loss margin (16) % (9) % (2) %
(1)Includes stock-based compensation expense as follows:
Year ended December 31,
(in thousands)
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COMPARISON OF THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Revenue
Year ended December 31, Change
(in thousands, except percentages)
Revenue increased $26.7 million, or 19%, for the year ended December, 31, 2022 compared to the same period in 2021, primarily due to (i) an increase in the number of paid members and reimbursement activity, which was the result of the normalization of business travel and higher rates of returning to office compared to the same period in 2021 and (ii) an increase in average fees per paid member due to an increase in the number of pay-per-use members, who have a higher average fee per member than our annual members, compared to the same period in 2021.
Cost of Revenue, Net and Gross Margin
Year ended December 31, Change
(in thousands, except percentages)
Gross margin % 63 % 62 %
Cost of revenue, net increased by $9.0 million, or 17%, for the year ended December 31, 2022 compared to the same period in 2021. Cost of revenue, net increased primarily due to the recognition of $18.4 million of stock-based compensation costs during the year ended December 31, 2022 as compared to $4.1 million during the year ended December 31, 2021, primarily related to the RSUs granted in September and November of 2021 to employees directly engaged in supporting our customers and providing maintenance of our platform. In addition to increased stock-based compensation, Cost of revenue, net increased due to a higher volume of payment processing fees directly related to an increase in reimbursement activity, increased efforts in support and implementation services and increased outsourcing activities related to maintaining the platform. These increases were partially offset by $13.7 million in IPO-related bonus costs impacting the year ended December 31, 2021. Furthermore, Consideration from a vendor, net, was $6.2 million for the year ended December 31, 2022 compared to $2.9 million for the year ended December, 31 2021. This increase in Consideration from a vendor, net was driven primarily by the increased adoption of and the resulting spend captured from members using the Expensify Card.
Gross margin increased slightly to 63% in 2022 compared to 62% in the same period in 2021. Although revenue increased by 19% for the same period, Cost of revenue, net also increased due to the factors described in the preceding paragraph.
Research and Development
Year ended December 31, Change
(in thousands, except percentages)
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Research and development expenses increased by $2.7 million, or 25%, for the year ended December 31, 2022 compared to the same period in 2021, due to the recognition of $7.9 million of stock-based compensation costs during the year ended December 31, 2022 as compared to $1.6 million during the year ended December 31, 2021, primarily related to the RSUs granted in September and November of 2021 to employees directly engaged in the planning and preliminary project stage and post-implementation stage of new products and features. Furthermore, Research and development expenses increased due to increased employee time spent in the planning and preliminary project stage and post-implementation stage of new products and features primarily due to an increase in employee focus on customer support and sales and marketing of recently developed products and services such as the Free Plan and our Expensify Card. These increases were partially offset by $8.5 million in IPO-related bonus costs impacting the year ended December 31, 2021.
General and Administrative
Year ended December 31, Change
(in thousands, except percentages)
General and administrative expenses decreased $2.3 million, or 4%, for the year ended December 31, 2022 compared to the same period in 2021, primarily due to $21.2 million in IPO-related bonus costs impacting the year ended December 31, 2021. These decreases were partially offset by the recognition of $17.9 million of stock-based compensation costs during the year ended December 31, 2022 as compared to $7.4 million during the year ended December 31, 2021, primarily related to the RSUs granted in September and November of 2021 to employees directly engaged in general and administrative activities. The decrease was further offset by an increase of General and administrative expenses due to increases in employee time allocated to administrative functions, insurance costs and professional service costs incurred for accounting, auditing and legal services as a result of our continued requirements as a public company.
Sales and Marketing
Year ended December 31, Change
(in thousands, except percentages)
Sales and marketing expenses increased $22.2 million, or 80%, for the year ended December 31, 2022 compared to the same period in 2021, primarily due to an increase in advertising spend and marketing events to gain further brand awareness and increased employee focus on marketing initiatives related to our recently developed products and services, such as the Free Plan and our Expensify Card. Furthermore, sales and marketing expenses were higher due to the recognition of $8.2 million of stock-based compensation costs during the year ended December 31, 2022 as compared to $1.5 million during the year ended December 31, 2021, primarily related to the RSUs granted in September and November of 2021 to employees directly engaged in sales and marketing activities. These increases were partially offset by $5.0 million in IPO-related bonus costs impacting the year ended December 31, 2021.
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Interest and Other Expenses, Net
Year ended December 31, Change
(in thousands, except percentages)
Interest and other expenses, net increased by $1.9 million, or 55% for the year ended December 31, 2022 compared to the same period in 2021 primarily due to increased interest expense under the 2021 Amended Term Loan (as defined below) and revolving line of credit facility as a result of increases in CIBC's reference rate and increased foreign currency losses resulting from the strengthening U.S. dollar.
(Provision for) Benefit from Income Taxes
Year ended December 31, Change
(in thousands, except percentages)
(Provision for) benefit from income taxes $ (6,366) $ 174 $ (6,540) (3,759) %
We recorded a provision for income taxes of $6.4 million for the year ended December 31, 2022 compared to a $0.2 million benefit from income taxes for the year ended December 31, 2021. We follow the asset and liability method of accounting for income taxes, whereby we recognize deferred income taxes for the tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of the assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. During the years ended December 31, 2022 and 2021, we recorded an incremental valuation allowance of $2.8 million and $2.5 million, respectively. The provision for income taxes reflects taxable income earned and taxed in U.S. federal and state, and non-U.S. jurisdictions.
Our effective income tax rate was (30.8)% and 1.3%, for the years ended December 31, 2022 and 2021, respectively. The effective income tax rate differs from the statutory rate in 2022 primarily due to nondeductible stock-based compensation, the compensation limitations imposed by Internal Revenue Code ("IRC") Section 162(m), and the change in the valuation allowance. The effective income tax rate differs from the statutory rate in 2021 primarily due to the compensation limitations imposed by IRC Section 162(m), establishing the valuation allowance, and stock-based compensation.
Key Business Metrics and Non-GAAP Financial Measures
We supplement the reporting of our financial information determined under U.S. generally accepted accounting principles ("GAAP") with certain business metrics and non-GAAP financial measures which we regularly review to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. Accordingly, we believe that these key business metrics and non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management team. These key business metrics and non-GAAP financial measures are presented for supplemental informational purposes only, should not be considered a substitute for our financial information presented in accordance with GAAP and may be different from similarly titled metrics or measures presented by other companies.
KEY BUSINESS METRICS
Paid Members
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We believe that our ability to increase the number of paid members on our platform will drive our success as a business. Companies pay for subscriptions on behalf of employees and contractors who use the platform, whom we refer to as paid members. We define paid members as the average number of users (employees, contractors, volunteers, team members, etc.) who are billed on Collect or Control plans during any particular quarter. For SMBs or sole proprietors with only one employee, the business owner may also be the only paid member.
The number of paid members on our platform grew each quarter through March 31, 2020, when the COVID-19 pandemic severely impacted the operations of our customers and SMBs broadly, and greatly reduced business travel, which has traditionally been a significant driver of expenses on our platform. While the full lasting impact of the COVID-19 pandemic on the global economy and SMBs in particular remains uncertain, we continue to see improvement.
The following table sets forth the average number of paid members for the quarters ended March 31, 2020 through December 31, 2022.
Quarter ended Paid members (in thousands)
NON-GAAP FINANCIAL MEASURES
Limitations of Non-GAAP Financial Measures
Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as substitutes for financial information presented under GAAP. There are a number of limitations related to the use of non-GAAP financial measures versus comparable financial measures determined under GAAP. For example, other companies in our industry may calculate these non-GAAP financial measures differently or may use other measures to evaluate their performance. All of these limitations could reduce the usefulness of these non-GAAP financial measures as analytical tools. Investors are encouraged to review the related GAAP financial measures and the reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures and to not rely on any single financial measure to evaluate our business.
Adjusted EBITDA and Adjusted EBITDA Margin
We define adjusted EBITDA as net loss from operations excluding provision for income taxes, interest and other expenses, net, depreciation and amortization and stock-based compensation. We define adjusted EBITDA margin as adjusted EBITDA divided by total revenue for the same period. We are focused on profitable growth and we consider adjusted EBITDA to be an important measure because it
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helps illustrate underlying trends in our business that could otherwise be masked by the effect of the income or expenses that are not indicative of the core operating performance of our business.
Year ended December 31,
(in thousands, except percentages)
Adjusted EBITDA margin 25 % 7 % 30 %
Non-GAAP Net Income and Non-GAAP Net Income Margin
We define non-GAAP net income as net loss from operations in accordance with GAAP excluding stock-based compensation and bonus costs related to our IPO, which we consider to be the discretionary cash bonuses paid to our employees during 2021. Refer to the subsection titled "Liquidity and Capital Resources”, for further detail over the discretionary cash bonuses paid to employees in 2021. We define non-GAAP net income margin as non-GAAP net income divided by total revenue for the same period. We are focused on profitable growth and we consider non-GAAP net income to be an important measure because it helps illustrate underlying trends in our business that could otherwise be masked by the effect of stock-based compensation and the one-time IPO-related discretionary cash bonus costs. Both expenses are not considered indicative of the core operating performance of our business. IPO-related bonus costs impacted the second, third and fourth fiscal quarters of 2021, but have not impacted subsequent periods beginning with the first quarter of 2022.
Year ended December 31,
(in thousands, except percentages)
Non-GAAP net income margin 15 % 35 % 18 %
Reconciliations of Non-GAAP Financial Measures
The following tables reconcile the most directly comparable GAAP financial measure to each of these non-GAAP financial measures.
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Adjusted EBITDA and Adjusted EBITDA Margin
Year ended December 31,
(in thousands, except percentages)
Net loss margin (16) % (9) % (2) %
Add:
Provision for (benefit from) income taxes 6,366 (174) 4,662
Adjusted EBITDA margin 25 % 7 % 30 %
Non-GAAP net income and non-GAAP net income margin
Year ended December 31,
(in thousands, except percentages)
Net loss margin (16) % (9) % (2) %
Add:
IPO-related bonus expense — 48,416 —
Non-GAAP net income margin 15 % 35 % 18 %
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through our cash flow from operations, sales of our equity securities and borrowings under our credit facilities. In November 2021, upon completion of our IPO, we received aggregate net proceeds of approximately $57.5 million after deducting underwriting discounts and commissions of approximately $4.9 million and offering costs of approximately $8.0 million. As of December 31, 2022, we had $103.8 million in cash and cash equivalents. As of December 31, 2022, we had $67.3 million in outstanding indebtedness.
Our future capital requirements will depend on many factors, including revenue growth and costs incurred to support growth in our business and our need to respond to business opportunities, challenges or unforeseen circumstances. We believe that our existing cash resources will be sufficient to finance our continued operations and growth strategy for the next 12 months and the foreseeable future.
CASH FLOWS
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The following table summarizes our cash flows for the periods indicated:
Year ended December 31,
(in thousands)
Net cash provided by operating activities $ 32,876 $ 5,486 $ 7,585
Net cash used in investing activities (2,199) (7,614) (4,295)
Net cash (used in) provided by financing activities (8,282) 80,565 8,787
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $32.9 million for the year ended December 31, 2022 as compared to $5.5 million for the same period in 2021. The increase was primarily due to an increase in revenue, a decrease in employee stock option exercise cash bonuses, and settlement liabilities, which represent increased expense reimbursement activity, offset by an increase in advertising spend and marketing events to gain further brand awareness, an increase in insurance and professional service costs incurred for accounting, auditing and legal services as a result of our continued requirements as a public company, higher volume of payment processing fees directly related to an increase in reimbursement activity, increased efforts in support and implementation services, increased outsourcing activities related to maintaining the platform, the timing of the payments for costs of our services and operating expenses and an increase in settlement assets, which represent increased expense reimbursement activity and increased Expensify Card receivables due to users adopting monthly settlement and the timing of settlement of accounts payable.
CASH FLOWS FROM INVESTING ACTIVITIES
During the year ended December 31, 2022, net cash used in investing activities was $2.2 million, primarily consisting of software development costs and the purchase of property and equipment related to multiple booth constructions for marketing conferences.
Net cash used in investing activities decreased for the year ended December 31, 2022 compared to the same period in 2021, primarily due to IPO bonuses that were capitalized as internally developed software costs of $1.5 million for the year ended December 31, 2021 and a decrease in purchases related to the build-out of offices in Portland and San Francisco.
CASH FLOWS FROM FINANCING ACTIVITIES
During the year ended December 31, 2022, net cash used in financing activities was $8.3 million, primarily consisting of payments for employee taxes withheld from stock-based awards and the repurchase and retirement of common stock partially offset by proceeds from common stock purchased under our 2021 Stock Purchase and Matching Plan and proceeds from the issuance of common stock on exercises of stock options.
Net cash used in financing activities increased for the year ended December 31, 2022 compared to the same period in 2021, primarily due to repurchases of early exercises of common stock and payments for employee taxes withheld from stock-based awards during the year ended December 31, 2022, and the proceeds received from our IPO and loan and security agreement with CIBC during the year ended December 31, 2021.
Share Repurchase Program
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On May 10, 2022, the Executive Committee approved a share repurchase program with authorization to purchase up to $50.0 million of shares of Class A common stock ("2022 Share Repurchase Program"). The Company may repurchase shares from time to time through open market purchases, in privately negotiated transactions or by other means, including the use of trading plans intended to qualify under Rule 10b5-1 of the Securities Exchange Act of 1934, in accordance with applicable securities laws and other restrictions. The actual timing, manner, price and total amount of future repurchases will depend on a variety of factors, including business, economic and market conditions, corporate and regulatory requirements, prevailing stock prices, restrictions under the terms of loan agreements and other considerations. The 2022 Share Repurchase Program does not obligate the Company to acquire any particular amount of Class A common stock, and the program may be suspended or terminated at any time by the Company at any time at its discretion without prior notice.
CREDIT FACILITIES
Amortizing Term Mortgage
In August 2019, we entered into an $8.3 million amortizing term mortgage agreement with CIBC for our commercial building in Portland, Oregon. The agreement requires interest and principal payments to be made each month over a 30-year period. Interest accrues at a fixed rate of 5.00% per year until August 2024, at which point the interest rate changes to the Wall Street Journal Prime Rate less 0.25% for the remaining term of the mortgage. The borrowings are secured by the building. The outstanding balance of the amortizing term mortgage was $7.8 million as of December 31, 2022.
Loan and Security Agreement
In September 2021, we amended and restated our loan and security agreement with CIBC ("2021 Amended Term Loan") to refinance the existing non-amortizing and amortizing term loans, establish a single term loan of up to $75.0 million, consisting of a $45.0 million initial term loan effective immediately with an option to enter into an additional $30.0 million delayed term loan, and increase the monthly revolving line of credit to $25.0 million. The term loan and revolving line of credit mature in September 2026 and September 2024, respectively. Approximately $23.5 million of the loan proceeds were used to immediately repay the remaining balances under the amortizing and non-amortizing term loans at the time of the amendment, as well as commitment fees and other debt issuance costs associated with the amendment. The remaining proceeds from the initial term loan were utilized to fund our normal business operations.
Under the 2021 Amended Term Loan, the initial term loan of $45.0 million is payable over a 60 month period with principal and accrued interest payments due each quarter thereafter, which commenced with the first payment due on September 30, 2021. Quarterly principal payments are fixed and escalate throughout the term. The amounts borrowed bear interest at the bank’s reference rate plus 2.25% (9.75% as of December 31, 2022) and continue on a quarterly basis through the maturity of the term loan. The borrowings are secured by substantially all our assets. The outstanding balances of the 2021 Amended Term Loan and revolving line of credit were $44.4 million and $15.0 million, respectively, as of December 31, 2022.
See Note 7 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further information.
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Certain Covenants
We are subject to customary covenants under the 2021 Amended Term Loan, which unless waived by CIBC, restrict our and our subsidiaries' ability to, among other things incur additional indebtedness, create or incur liens, permit a change of control, merge or consolidate with other companies, sell or transfer assets, pay dividends or make distributions, make acquisitions, investments or loans, or payments and prepayments of subordinated indebtedness, subject to certain exceptions. We must also maintain certain financial covenants: a total EBITDA net leverage ratio, as defined in the loan and security agreement, tested each quarter, of not less than 5.00 to 1.00 from the quarters ending September 30, 2022 through and including June 30, 2023, not less than 4.00 to 1.00 from the quarters ending September 30, 2023 through and including June 30, 2024, and not less than 3.00 to 1.00 from the quarters ending September 30, 2024 and each quarter thereafter, and a fixed charge coverage ratio of not less than 1.10 to 1.00, tested on the last day of each calendar quarter.
If we fail to perform our obligations under these and other covenants, CIBC’s credit commitments could be terminated and any outstanding borrowings, together with accrued interest, under the credit or loan agreements could be declared immediately due and payable.
As of December 31, 2022, we were not in compliance with all of our debt covenants. Specifically, we were not in compliance with the covenant in our loan and security agreement with CIBC restricting the amount of repurchases of common stock, which includes RSU net share settlements; however, we obtained a waiver from CIBC for our non-compliance with this covenant. As of the date of this Annual Report on Form 10-K, we do not believe non-compliance with this covenant had a material impact on us or our operations. We expect to be in compliance with all debt covenants by the end of the fiscal quarter ended March 31, 2023.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations and commitments as of December 31, 2022:
Payments due by period
(in thousands)
Less than 1 year 1-3 years More than 3 years Total
Finance lease commitments $ 476 $ — $ — $ 476
Operating lease commitments $ 332 $ — $ — $ 332
Indemnification Agreements
In the ordinary course of business, we enter into agreements of varying scope and terms whereby we agree to indemnify customers, issuing banks, card networks, vendors and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit), or Consolidated Statements of Cash Flows.
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Off-Balance Sheet Arrangements
During the periods presented, we did not have, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our consolidated financial statements included elsewhere herein have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For our accounting policies, see Note 2 to our consolidated financial statements contained elsewhere herein for a description of our significant accounting policies.
EMPLOYEE AND EMPLOYEE-RELATED EXPENSES
Allocating our employee and employee-related expenses, which consist of contractor costs, employee salary and wages, stock-based compensation and travel and other employee-related costs, to their appropriate financial statement line items on the Consolidated Statements of Operations, requires us to make estimates and judgments as a result of our generalist model and organizational structure. We base our estimates for allocating employee and employee related expenses on our internal productivity and team management tools. Management reviews the estimates each reporting period to evaluate the amounts allocated to Cost of revenue, net, Research and development, General and administrative, and Sales and marketing on the Consolidated Statements of Operations.
REVENUE RECOGNITION
We generate revenue from subscription fees paid by our customers to access and use our hosted software services, as well as standard customer support. We adopted Accounting Standard Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) as of January 1, 2019, utilizing the full retrospective method of transition.
Revenue is recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
Our contracts are either month-to-month arrangements billed monthly in arrears based on a specified number of members or annual arrangements billed monthly in arrears based on a minimum number of monthly members. Month-to-month contracts can be terminated by either party at any time without penalty. Annual subscription customers who wish to terminate their contracts before the end of the term are required to pay the remaining obligation in full plus any fees or penalties set forth in the agreement.
We charge customers subscription fees for access to our platform based on the number of monthly members and level of service. The contractual price per member is based on either negotiated fees or rates published on our website. Our contracts with customers include two performance obligations: access to the hosted software service ("SaaS"), inclusive of all features available within the platform and related customer support. The SaaS and the support are accounted for as a combined performance obligation because they have the same pattern of transfer over the same period and, therefore, are delivered concurrently. We satisfy our performance obligation over time each month as it provides the SaaS and support services to customers and as such generally recognizes revenue monthly based on the number of monthly members and contractual rate per member.
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Certain annual contracts provide the customer the option to increase the minimum number of members and extend the contract term on a prospective basis or to purchase members beyond the minimum contracted number of members at a higher rate for a particular month. These options are accounted for when the customer exercises the option as they do not represent a material right and are accounted for as a contract modification.
Revenue is recognized net of applicable taxes imposed on the related transaction. We charge customers on a monthly basis, in arrears, with typical payment terms being 30 days. A contract asset is the right to consideration for transferred goods or services and arises when the amount of revenue recognized exceeds amounts billed to a customer. As a result of a price increase in 2020 that was applicable to certain annual contracts and billed incrementally by us over a twelve month period, we recorded revenue for such contracts on a straight line basis over the twelve month period affected by the price increase. This resulted in contract assets that consist of unbilled receivables for revenue recognized in excess of billings. The contract asset decreases as the price increase is applied to the amounts billed to customers, over the twelve month period. We recorded an immaterial amount of contract assets for unbilled receivables within Other current assets on our Consolidated Balance Sheets as of December 31, 2021. There were no contract assets as of December 31, 2022. Since our performance obligation is satisfied monthly, at any reporting period, we have no unsatisfied, or partially unsatisfied, performance obligations.
COMMON STOCK VALUATIONS
Prior to the IPO, given the absence of a public trading market for our common stock, and in accordance with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation, our Board of Directors exercised its reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of fair value of our common stock underlying the stock options and RSUs, including:
•independent third-party valuations of our common stock;
•the expected price range of our common stock upon IPO determined by bankers;
•the rights, preferences and privileges of our convertible preferred stock relative to those of our common stock;
•our financial condition, results of operations and capital resources;
•the likelihood and timing of achieving a liquidity event, such as an initial public offering or sale of the company, given prevailing market conditions;
•the lack of marketability of our common stock;
•our estimates of future financial performance;
•valuations of comparable companies;
•the hiring or loss of key personnel;
•the status of our development, product introduction and sales efforts;
•industry information, such as market growth and volume and macro-economic events; and
•additional objective and subjective factors relating to our business.
To determine the fair value of our common stock, we first determined our enterprise value and then allocated that enterprise value to our common stock and common stock equivalents. Our enterprise value was estimated using two generally accepted approaches: the income approach and the market approach.
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The income approach estimates enterprise value based on the estimated present value of future cash flows the business is expected to generate over its remaining life. The estimated present value is calculated using a discount rate reflective of the risks associated with an investment in a similar company in a similar industry or having a similar history of revenue growth. The market approach measures the value of a business through an analysis of recent sales or offerings of comparable investments or assets, and in our case, focused on comparing us to a group of our peer companies. In applying this method, valuation multiples are derived from historical operating data of the peer company group. We then apply multiples to our operating data to arrive at a range of indicated values of the company.
For each valuation, we prepared a financial forecast to be used in the computation of the value of invested capital for both the income approach and market approach. The financial forecast considered our past results and expected future financial performance. The risk associated with achieving this forecast was assessed in selecting the appropriate discount rate. There is inherent uncertainty in these estimates as the assumptions used are highly subjective and subject to changes as a result of new operating data and economic and other conditions that impact our business.
As an additional indicator of fair value, we provided weighting to arm’s-length transactions involving issuances of our securities near the respective valuation dates.
Following our initial public offering, it has not been necessary to estimate the fair value of our common stock, as our shares are traded in the public market.
STOCK-BASED COMPENSATION
We account for stock-based compensation under the fair value recognition and measurement provisions of GAAP. Those provisions require all stock-based awards granted to employees, including stock options and RSUs, to be measured based on fair value at the date of grant, with the resulting expense generally recognized in the Consolidated Statements of Operations over the period during which the employee is required to perform service in exchange for the award.
We utilize the Black-Scholes option pricing model to determine the estimated fair value of stock options.
The Black-Scholes option pricing model requires management to make a number of assumptions, including the fair value and expected volatility of our underlying common stock, expected life of the award, risk-free interest rate and expected dividend yield. Prior to the IPO, the fair value of common stock was determined by the Board of Directors based on a number of factors, including independent third-party valuations of our common stock, which considered estimates of our future performance and valuations of comparable companies. We also considered prices at which others have purchased our stock, and the likelihood and timing of achieving a liquidity event. When awards were granted or revalued between the dates of valuation reports, we considered the change in common stock fair value and the amount of time that lapsed between the two reports to determine whether to use the latest common stock valuation or an interpolation between two valuation dates for purposes of valuing stock-based awards. Subsequent to the completion of the IPO, the fair value of our underlying common stock is determined by the closing price, on the date of grant, of our Class A common stock, which is traded on the Nasdaq Global Select Market.
All RSUs granted to employees before the effectiveness of the IPO Registration Statement were measured based on the fair value of the underlying common stock on the grant date, which was consistent with the factors described within the Black-Scholes option pricing model. All RSUs granted to employees after the effectiveness of the IPO Registration Statement are measured based on the fair value of the underlying common stock on the grant date, which is determined by the closing price, on the date of the grant, of our Class A common stock, which is traded on the Nasdaq Global Select Market.
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Refer to Note 9 to our consolidated financial statements in this Annual Report on Form 10-K for further detail over stock-based compensation and our stock incentive plans.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements in this Annual Report on Form 10-K for recently adopted accounting pronouncements.
Emerging Growth Company Status
Upon the completion of our IPO, we elected to be an emerging growth company ("EGC"), as defined in the Jumpstart Our Business Startups Act of 2012, which, among other things, allowed us to take advantage of reduced disclosure requirements and an extended transition period for the implementation of new or revised accounting pronouncements.
Effective December 31, 2022, based on the market value of our common stock held by non-affiliates as of June 30, 2022, we were deemed to be a large accelerated filer and no longer qualified as an EGC. As a result, we must now comply with all financial disclosure and governance requirements applicable to large accelerated filers. The effect of the loss of EGC status and the impact on the adoption of new accounting pronouncements is discussed further in Note 2 to our consolidated financial statements in this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
FOREIGN CURRENCY EXCHANGE RISK
We report our results in U.S. dollars, which is our reporting currency. For our foreign operations, the majority of our revenues and expenses are denominated in other currencies, such as the British pound and the Australian dollar. Foreign currency assets and liabilities are remeasured into the U.S. dollar at end-of-period exchange rates except for prepaid expenses, property and equipment and related depreciation and amortization and lease right-of-use assets and related amortization, which are remeasured at historical exchange rates. Revenues and expenses are remeasured at average exchange rates in effect during each period. Gains or losses from foreign currency transactions are included in the Consolidated Statements of Operations.
If the value of the U.S. dollar weakens relative to foreign currencies, this may have an unfavorable impact on our cash flows and operating results. We do not believe that a 10% change in the relative value of the U.S. dollar to other foreign currencies would have a material effect on our cash flows and operating results.
INTEREST RATE RISK
We are subject to interest rate risk in connection with borrowings under our amortizing term mortgage, our monthly revolving line of credit and our amortizing term loan. Interest rate changes generally impact the amount of our interest payments and, therefore, our future profitability and cash flows. Assuming the amounts outstanding under these borrowing facilities are fully drawn, a hypothetical 10% change in interest rates would not have a material impact on our consolidated financial statements.
INFLATION RISK
We do not believe that inflation has had a material impact on our business, results of operations or financial condition. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, results of operations or financial condition.
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Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) 89
Consolidated Financial Statements
Consolidated Balance Sheets 93
Consolidated Statements of Operations 94
Consolidated Statements of Cash Flows 97
Notes to Consolidated Financial Statements 99
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Expensify, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Expensify, Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended in December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 8, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Employee and Employee-Related Expenses
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2020.
San Francisco, California
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Expensify, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Expensify, Inc.’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Expensify, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2022 consolidated financial statements of the Company and our report dated March 8, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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/s/ Ernst & Young LLP
San Francisco, California
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Expensify, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share data)
As of December 31,
Assets
Related party loan receivable — 14
Deferred tax assets, net 344 370
Liabilities and stockholders' equity
Accrued expenses and other liabilities 9,070 11,046
Lease liabilities, current 800 1,549
Lease liabilities, non-current — 802
Commitments and contingencies (Note 12)
Stockholders' equity:
Total liabilities and stockholders' equity $ 210,241 $ 183,213
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Expensify, Inc.
Consolidated Statements of Operations
(in thousands, except share and per share data)
Year ended December 31,
Operating expenses:
(Provision for) benefit from income taxes (6,366) 174 (4,662)
Net loss per share attributable to Class A, LT10 and LT50 common stockholders:
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Expensify, Inc.
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(in thousands, except share and per share data)
Shares Amount Shares Amount
Issuance of common stock upon exercise of warrants — — 428,067 — — — —
Vesting of early exercised stock options — — — — 567 — 567
Issuance of common stock upon exercise of stock options — — 478,547 — 711 — 711
Vesting of early exercised stock options — — — — 1,242 — 1,242
Issuance of restricted stock units — — 14,719 — 106 — 106
Repurchases of early exercised stock options — — (17,079) — (25) — (25)
Issuance of common stock under Matching Plan — — 294,397 — 3,672 — 3,672
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Expensify, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
Cash flows from operating activities:
Adjustments to reconcile net loss to cash provided by operating activities:
Reduction of operating lease right-of-use assets 666 741 1,311
Loss on impairment, receivables and sale or disposal of equipment 881 319 162
Amortization of original issue discount and debt issuance costs 42 32 32
Deferred tax liabilities — (916) 916
Changes in assets and liabilities:
Related party loan receivable 14 586 —
Cash flows from investing activities:
Purchase of property and equipment (585) (2,706) (2,488)
Proceeds from sale or disposal of property and equipment 5 — 2
Net cash used in investing activities (2,199) (7,614) (4,295)
Cash flows from financing activities:
Principal payments of finance leases (793) (774) (808)
Proceeds from term loan — 45,000 —
Principal payments of line of credit — — (1,000)
Proceeds from line of credit — — 9,613
Vesting of restricted common stock — 567 —
Repurchases of early exercises of common stock (25) — —
Proceeds from common stock purchased under Matching Plan 3,672 — —
Payments for employee taxes withheld from stock-based awards (5,336) — —
Repurchase and retirement of common stock (6,000) — —
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Net cash (used in) provided by financing activities (8,282) 80,565 8,787
Supplemental disclosure of cash flow information:
Noncash investing and financing items:
Right-of-use assets acquired with lease liabilities $ — $ — $ 1,260
Restricted cash included in other current assets 19,542 8,651 1,955
Restricted cash included in other assets — 47 48
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Expensify, Inc.
Notes to Consolidated Financial Statements
NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of the Business
Expensify, Inc. ("Expensify") was incorporated in Delaware on April 29, 2009. Expensify offers a comprehensive expense management platform that integrates with a variety of third-party accounting applications, including QuickBooks Desktop, QuickBooks Online, Xero, NetSuite, Intacct, Sage, Microsoft Dynamics, MYOB and others. Expensify's product simplifies the way that employees and vendors manage and submit expense receipts and bills and provides efficiencies to companies for the payment of those bills. Expensify delivers its services over the internet to corporations and individuals under a license arrangement and offers unique pricing options for small and midsized businesses and enterprises on a per-active-member basis.
Expensify also offers an Expensify charge card ("Expensify Card"), which is primarily distributed to corporate customers in the United States ("U.S.") that subsequently distribute the card to their employees for business use. The Expensify Card allows customers to have real-time control over their employees' spending and compliance with spending limits in addition to eReceipt reporting on purchases.
Information regarding the subsidiaries of Expensify is as follows:
•Expensify established a wholly-owned subsidiary in the United Kingdom ("UK"), Expensify LTD., in 2015 that primarily serves to promote and market Expensify's services to customers and potential customers of Expensify in the UK.
•Expensify established a wholly-owned subsidiary in Australia, Expensify Australia PTY LTD., in 2017 that primarily serves to promote and market Expensify's services to customers and potential customers of Expensify in Australia.
•Expensify established a wholly-owned subsidiary, 401 SW 5th Ave LLC, in 2019 with the subsidiary’s primary purpose being to hold title to the commercial building purchased in Portland, Oregon.
•Expensify established a wholly-owned subsidiary, Expensify.org, in 2019 which is a nonprofit benefit organization. Expensify.org is included within the consolidated financial statements of Expensify as Expensify has both a majority voting interest in the board of Expensify.org and an economic interest in the organization. In early 2020 with the introduction of the Expensify Card, Expensify committed to donate 10% of its consideration received from a vendor for monetizing Expensify Card activities to Expensify.org in addition to lump sum discretionary contributions. Any contributions from Expensify.org to a charitable organization is recorded as an expense within General and administrative expenses on the consolidated financial statements upon payment.
•Expensify established wholly-owned subsidiaries, Expensify Canada Inc. and Expensify Netherlands B.V., in 2020 that primarily serve to promote and market Expensify's services to customers and potential customers of the Company in Canada and the Netherlands, respectively.
•Expensify established a wholly-owned subsidiary, Expensify Payments LLC, in 2020 that primarily serves as the licensed provider of money transmission services for Expensify with its expense management program.
•Expensify established a wholly-owned subsidiary, Expensify Lounge LLC, in 2021 that primarily serves to manage, promote and market Expensify's lounge operations in the United States.
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Expensify, Inc.
Notes to Consolidated Financial Statements
Initial Public Offering
The Company’s registration statement on Form S-1 (the "IPO Registration Statement") related to its initial public offering ("IPO") was declared effective on November 9, 2021 and the Company’s Class A common stock began trading on the Nasdaq Global Select Market on November 10, 2021. On November 15, 2021, the Company closed its IPO of 11,190,392 shares of the Company's Class A common stock at $0.0001 par value per share (the "Class A common stock"), in which the Company sold 2,608,696 shares of Class A common stock, and the selling stockholders sold 8,581,696 shares of Class A common stock at an IPO price of $27.00 per share. This total sale of 11,190,392 shares of Class A common stock in the IPO includes the full exercise of the underwriters’ option to purchase an additional 1,459,616 shares of Class A common stock from certain selling stockholders at an IPO price of $27.00 per share. The Company did not receive any proceeds from the sale of shares of Class A Common Stock in the offering by the selling stockholders. The Company received aggregate net proceeds of approximately $57.5 million after deducting underwriting discounts and commissions of approximately $4.9 million and offering costs of approximately $8.0 million.
Immediately prior to the effectiveness of the IPO Registration Statement, the Company filed an Amendment to the Amended and Restated Certificate of Incorporation to create three classes of authorized common stock: Class A, LT10, and LT50 common stock. All shares of common stock then outstanding were reclassified as Class A common stock except for shares under the Company's exchange offer, which provided employees and other service providers the opportunity to exchange, on a one-for-one basis, their Class A common stock into LT10 or LT50 shares. Under this exchange offer, 13,556,800 shares of Class A common stock were exchanged for 7,332,640 shares of LT10 common stock and 6,224,160 shares of LT50 common stock. Upon closing of the IPO, all convertible preferred stock then outstanding, was converted into 42,031,390 shares of common stock on a ten-for-one basis and reclassified into Class A common stock. In addition, 430,080 shares of common stock warrants were converted to an equivalent number of shares of Class A common stock warrants.
Immediately prior to the closing of the IPO, the Company filed its Amended and Restated Certificate of Incorporation authorizing a total of 1,000,000,000 shares of Class A common stock which entitles holders to one vote per share; 25,000,000 shares of LT10 common stock, which entitles holders to 10 votes per share; and 25,000,000 shares of LT50 common stock, which entitles holders to 50 votes per share. In addition, the Amended and Restated Certificate of Incorporation authorized a total of 10,000,000 shares of undesignated preferred stock.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Expensify and its wholly-owned subsidiaries (the "Company") and have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). All intercompany transactions and balances have been eliminated in consolidation.
Stock Split
On October 27, 2021, the Company effected a ten-for-one stock split of its common stock. All share and per share information has been retroactively adjusted to reflect the stock split for all periods presented.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during
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Expensify, Inc.
Notes to Consolidated Financial Statements
the reporting period. Estimates and judgments are based on historical experience, forecasted events and various other assumptions that the Company believes to be reasonable under the circumstances. Estimates and judgments may differ under different assumptions or conditions. Estimates and judgments are evaluated on an ongoing basis. Actual results could differ from those estimates. Changes in estimates are recorded in the period in which they become known.
Significant estimates and assumptions by management affect the Company’s revenues, classification of employee and employee-related expenses, the useful lives and recoverability of long-lived assets, income taxes, capitalization of internal-use software costs, and stock-based compensation.
Foreign Currency
The Company uses the U.S. dollar as its functional currency. Foreign currency assets and liabilities are remeasured into the U.S. dollar at the end-of-period exchange rates except for prepaid expenses, property and equipment and related depreciation and amortization, and lease right-of-use assets and related amortization, which are remeasured at the historical exchange rates. Revenues and expenses are remeasured at average exchange rates in effect during each period. Gains or losses from foreign currency transactions are included in the Consolidated Statements of Operations within Interest and other expenses, net.
Cash and Cash Equivalents
Cash consists of funds deposited with banks. The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. The recorded carrying amount of cash equivalents, which is cost plus accrued interest, if any, approximates fair value. As of December 31, 2022 and 2021, the Company had no cash equivalents.
Restricted Cash
Restricted cash includes cash in transit for funds held for customers to the Company's Payment Processor, Expensify Card collateral for funds held for customers, and cash held by Expensify.org for social justice and equity efforts of Expensify.org. Refer to Note 6 for the breakout of these amounts within Other current assets as of December 31, 2022 and 2021.
Restricted cash also includes amounts included within Settlement assets, net for funds held for customers that are deposited into a commercial bank account held by the Company for the benefit of the customers until remitted to the customer's members. Refer to the Settlement assets and liabilities policy note below for further detail.
Accounts Receivable and Allowance for Expected Credit Losses
Accounts receivable are recorded at the invoiced amount, net of an allowance for expected credit losses. The allowance for expected credit losses is based on the Company’s assessment of the collectability of the accounts receivable. Management considers the following factors when determining the collectability of specific customer accounts: customer creditworthiness, past transaction history with the customer, current economic industry trends and changes in customer payment terms. The Company recorded an immaterial allowance for expected credit losses as of December 31, 2022 and 2021.
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Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents are deposited with federally insured commercial banks in the United States that may at times exceed federally insured limits. Management believes that these financial institutions are financially sound, and the Company has not experienced material losses to date. The Company generally does not require collateral or other security in support of accounts receivable except for the restricted cash accounts discussed in the Restricted cash policy note above. No customer represented 10% or more of revenue during the years ended December 31, 2022, 2021, and 2020. In addition, there were no customers representing 10% or more of accounts receivable as of December 31, 2022 and 2021.
Settlement Assets and Liabilities and Allowance for Expected Credit Losses
Upon an approved request for expense reimbursement from customers, the Company initiates a transaction facilitated by a third-party vendor to collect funds from customers that are deposited into a commercial bank account held by the Company for the benefit of the customers until remitted to the customer’s members after a clearing period of three business days, including the day of the transaction. The Company records a settlement receivable upon approval of the expense reimbursement until funds are cleared in the Company’s commercial bank account. A corresponding liability is recorded upon approval of the expense reimbursement until funds are remitted from the Company’s commercial bank account to the customer’s members.
For customer transactions incurred through the Expensify Card the Company initiates a transaction facilitated by a third-party vendor to collect funds from customers that are deposited into a commercial bank account held by the Company until remitted to the issuing bank the next business day. The majority of customers settle Expensify Card transactions on a daily basis while certain customers settle Expensify Card transactions on a monthly basis. The company records a settlement receivable for Expensify Card transactions until funds are cleared in the Company’s commercial bank account. A corresponding liability is recorded until funds are remitted from the Company’s commercial bank account to the issuing bank.
Settlement receivables are recorded net of an allowance for expected credit losses. The allowance for expected credit losses is based on the Company’s assessment of the collectability of the settlement receivables. Management considers the following factors when determining the collectability of specific customer accounts: customer creditworthiness, past transaction history with the customer, current economic industry trends and changes in customer settlement terms. The Company recorded an immaterial allowance for expected credit losses as of December 31, 2022 and 2021.
Leases
The Company determines if an arrangement is or contains a lease at inception by evaluating whether there is an identified asset and whether the Company controls the use of the identified asset throughout the period of use. The Company determines the classification of the lease, whether operating or financing, at the lease commencement date, which is the date the leased assets are made available for use.
Operating and finance leases are included in lease right-of-use ("ROU") assets and lease liabilities in the Consolidated Balance Sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at commencement date based on the present value of future minimum lease payments over the lease term. The Company uses rates implicit in the lease, or if not readily available, its incremental borrowing rate, to calculate its ROU assets and liabilities. The operating and finance lease ROU assets also include any lease payments made before commencement and exclude lease incentives.
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Notes to Consolidated Financial Statements
The Company’s lease terms may include options to extend or terminate the lease, and the Company includes those options in the lease terms when it is reasonably certain it will exercise them. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Lease expense for finance lease payments is recognized on a straight-line basis over the lesser of the lease term or the estimated useful life of the asset. The Company made the policy election to account for short-term leases by recognizing the lease payments in the Consolidated Statements of Operations on a straight-line basis over the lease term rather than recognizing these leases on the Company’s Consolidated Balance Sheets. Variable lease payments are recognized in the Consolidated Statements of Operations in the period in which the obligation for those payments is incurred. The Company has real estate and data center equipment lease agreements with lease and non-lease components for which the Company has made the accounting policy election to account for these agreements as a single lease component. Modifications are assessed to determine whether incremental differences result in new contract terms to accounted for as a new lease or whether the additional right-of-use should be included in the original lease and continue to be accounted with the remaining ROU asset.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets, typically three years for computer equipment, five years for furniture and fixtures and thirty years for buildings. Land has an indefinite useful life and is not depreciated. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful life of the asset. Expenditures for repairs and maintenance are charged to expense as incurred. Upon disposal, the cost and related accumulated depreciation and amortization are removed from the Consolidated Balance Sheets and the resulting gain or loss is reflected in the Consolidated Statements of Operations. Gains or losses from disposition of property and equipment for the years ended December 31, 2022, 2021, and 2020 have been immaterial.
Construction in progress is stated at cost, which includes the cost of construction and other direct costs attributable to the construction. No depreciation is recorded for construction in progress until the relevant assets are completed and put into use. Construction in progress as of December 31, 2022 and 2021 represents leasehold improvements under installation.
Capitalized Software Development Costs
The Company capitalizes internal and external costs directly related to obtaining or developing internal-use software during the application development stage of the projects. Additionally, the Company capitalizes qualifying costs incurred for upgrades and enhancements that result in additional functionality to existing software. Maintenance activities or minor upgrades are expensed in the period performed. The Company's internal-use software is reported at cost less accumulated amortization. Amortization begins once the project is ready for its intended use, which is usually when the software code goes into production. The Company amortizes the asset on a straight-line basis over a period of three years, which is the estimated useful life. During the years ended December 31, 2022, 2021, and 2020, the Company capitalized $3.4 million, $4.9 million and $1.8 million, respectively, in software development costs.
Long-Lived Assets
Long-lived assets, primarily capitalized software development costs, property and equipment and lease right-of-use assets, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. When indications of impairment are present and the estimated undiscounted future cash flows from the use of the asset are less than the asset's carrying value, the related asset will be written down to fair value. Any impairment losses are included in the same financial statement caption as the related depreciation and amortization for the
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Notes to Consolidated Financial Statements
respective asset class on the Consolidated Statements of Operations. Impairment losses on long-lived assets were immaterial for each of the years ended December 31, 2022, 2021, and 2020.
Deferred Offering Costs
Deferred offering costs consist primarily of accounting, legal and other fees related to the IPO. Upon completion of the IPO, deferred offering costs of $8.0 million were reclassified to stockholders’ equity and recorded net against the IPO proceeds. The Company had no capitalized deferred offering costs as of December 31, 2022 and 2021.
Revenue Recognition
The Company generates revenue from subscription fees paid by its customers to access and use the Company’s hosted software services, as well as standard customer support. The Company adopted Accounting Standard Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) as of January 1, 2019, utilizing the full retrospective method of transition.
Revenue is recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those goods or services.
The Company’s contracts are either month-to-month arrangements billed monthly in arrears based on a specified number of members or annual arrangements billed monthly in arrears based on a minimum number of monthly members. Month-to-month contracts can be terminated by either party at any time without penalty. Annual subscription customers who wish to terminate their contracts before the end of the term are required to pay the remaining obligation in full plus any fees or penalties set forth in the agreement. In May 2020, the Company updated its terms of service, which resulted in annual contracts becoming noncancelable and a pricing change, which led to an increase in the per member price for paid members.
The Company charges its customers subscription fees for access to its platform based on the number of monthly members and level of service. The contractual price per member is based on either negotiated fees or rates published on the Company’s website. The Company’s contracts with customers include two performance obligations: access to the hosted software service ("SaaS"), inclusive of all features available within the platform, and related customer support. The SaaS and the support are accounted for as a combined performance obligation because they have the same pattern of transfer over the same period and, therefore, are delivered concurrently. The Company satisfies its performance obligation over time each month as it provides the SaaS and support services to customers and, as such, generally recognizes revenue monthly based on the number of monthly members and contractual rate per member.
Certain annual contracts provide the customer the option to increase the minimum number of members and extend the contract term on a prospective basis or to purchase members beyond the minimum contracted number of members at a higher rate for a particular month. These options are accounted for when the customer exercises the option as they do not represent a material right and are accounted for as a contract modification.
Revenue is recognized net of applicable taxes imposed on the related transaction. The Company charges the customer on a monthly basis, in arrears, with typical payment terms being 30 days.
A contract asset is the right to consideration for transferred goods or services and arises when the amount of revenue recognized exceeds amounts billed to a customer. As a result of a price increase in 2020 that was applicable to certain annual contracts and billed incrementally by the Company over a twelve month period, the Company recorded revenue for such contracts on a straight line basis over the twelve month period affected by the price increase. This resulted in contract assets that consisted of unbilled receivables for revenue recognized in excess of billings. The contract assets decreased as
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Notes to Consolidated Financial Statements
the price increase was applied to the amounts billed to customers, over the twelve month period. The Company recorded an immaterial amount of contract assets for unbilled receivables within Other current assets on the Company’s Consolidated Balance Sheets as of December 31, 2021. There were no contract assets as of December 31, 2022. Since the Company's performance obligation is satisfied monthly, at any reporting period, the Company has no unsatisfied, or partially unsatisfied, performance obligations.
Cashback Rewards
In August 2021, the Company began offering a cashback rewards program to all customers based on volume of Expensify card transactions and SaaS subscription tier. Cashback rewards are earned on a monthly basis are paid out the following month. The Company considers their cashback payments to customers as consideration payable to a customer under the scope of Accounting Standards Codification ("ASC") 606 and it is recorded as contra revenue within Revenue on the Consolidated Statements of Operations. The Company records a cashback rewards liability that represents the consideration payable to customers for earned cashback rewards. The cashback rewards liability is impacted over time by customers meeting eligibility requirements in conjunction with the SaaS subscription tier of the customer and the timing of payments to customers. The accrued cashback rewards liability was $0.2 million and $0.2 million as of December 31, 2022 and 2021, respectively, and is recorded within Accrued expenses and other liabilities on the Consolidated Balance Sheets. The cashback rewards cost was $2.8 million and $1.1 million for the years ended December 31, 2022 and 2021, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation under the fair value recognition and measurement provisions of GAAP. Those provisions require all stock-based awards granted to employees, including stock options and restricted stock units, to be measured based on fair value at the date of grant, with the resulting expense generally recognized in the Consolidated Statements of Operations over the period during which the employee is required to perform service in exchange for the award.
The Company utilizes the Black-Scholes option pricing model to determine the estimated fair value of stock options. The Company recognizes stock-based compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of four years. Forfeitures are recorded as they occur.
The Black-Scholes option pricing model requires management to make a number of assumptions, including the fair value and expected volatility of the Company’s underlying common stock, expected life of the award, risk-free interest rate and expected dividend yield. Prior to the IPO, the fair value of common stock was determined by the Board of Directors based on a number of factors, including independent third-party valuations of our common stock, which considered estimates of our future performance and valuations of comparable companies. The Company also considered prices at which others have purchased our stock, and the likelihood and timing of achieving a liquidity event. When awards were granted or revalued between the dates of valuation reports, the Company considered the change in common stock fair value and the amount of time that lapsed between the two reports to determine whether to use the latest common stock valuation or an interpolation between two valuation dates for purposes of valuing stock-based awards. Subsequent to the completion of the IPO, the fair value of the Company’s underlying common stock is determined by the closing price, on the date of grant, of its Class A common stock, which is traded on the Nasdaq Global Select Market.
The Company granted employees, consultants and directors (collectively, "Service Providers") restricted stock units ("RSUs") that settle in shares of Class A and LT50 common stock, effective immediately prior to the effectiveness of the IPO Registration Statement. All RSUs granted to Service Providers after the effectiveness of the IPO Registration Statement have a service condition only and
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Notes to Consolidated Financial Statements
are recognized on a straight-line basis over the requisite service period of the award, which is generally the RSU vesting term of eight years. The Company measures these RSUs granted based on the fair value of the underlying common stock on the grant date, which is determined by the closing price, on the date of the grant, of its Class A common stock, which is traded on the Nasdaq Global Select Market.
All RSUs granted to Service Providers before the effectiveness of the IPO Registration Statement were considered RSUs with both a service and performance condition for accounting purposes. The Company measures these RSUs based on the fair value of the underlying common stock on the grant date, which was consistent with the factors described within the Black-Scholes option pricing model. Once the performance condition was satisfied for these RSUs on November 9, 2021, the Company recognized a cumulative one-time stock-based compensation expense for the service period satisfied prior to this date. All remaining stock-based compensation for these awards will be recognized over the remaining service period using the accelerated graded method. The service period of these awards is the RSU vesting term of eight years.
The Company granted RSUs in November 2021 to its Non-Employee Directors, which is comprised solely of the Company's Audit Committee members, in connection with each member's initial appointment to the Board of directors and consummation of the IPO. All RSUs granted to Non-Employee Directors settle in shares of Class A common stock and are recognized on a straight-line basis over the requisite service period of the award, which is generally the initial RSU grant vesting term of three years. Subsequent to the initial RSUs granted, the Company will grant RSUs to Non-Employee Directors on an annual basis at each annual stockholders' meeting that will vest upon the earlier of the satisfaction of a service condition or a performance condition, which is considered a change in control event. These annual RSU grants will be recognized on a straight-line basis over the requisite service period of the award, which is one year. Furthermore, RSUs will be granted to Non-Employee Directors on a quarterly basis as a retainer for their services, which vest only upon the satisfaction of a service condition. These annual RSU grants will be recognized on a straight-line basis over the requisite service period of the award, which is three months. The Company measures all RSUs granted to Non-Employee Directors based on the fair value of the underlying common stock on the grant date, which is determined by the closing price, on the date of the grant, of its Class A common stock, which is traded on the Nasdaq Global Select Market. With the exception of the RSUs granted to Non-Employee Directors in November 2021, there were no other RSUs granted to Non-Employee Directors during the years ended December 31, 2022 and 2021.
Forfeitures are recorded as they occur for all RSUs. Refer to Note 9 for further detail over stock-based compensation and the stock incentive plans of the Company.
Employee Stock Option Exercise Cash Bonus
In June 2021 for the Company's named executive officers and in July 2021 for all other employees, the Company determined it would pay a cash bonus to each of its employees in a value that approximated the cost of each employee exercising 45% of their total stock options issued, limited by the total stock options outstanding as of June 15, 2021, including the tax withholding applicable to each employee. The Company included both vested and unvested stock options outstanding and held by each existing employee as of June 15, 2021 in determining the cash bonus paid to each employee.
In addition to using the exercise cost of the stock options through June 15, 2021, the Company relied on an estimate to determine the tax withholding that could be applicable to each employee based on if they were to exercise the stock options. In order to determine this estimate, the Company relied on third-party tax consultants that reviewed a number of assumptions provided by management, including the applicable taxable income to the employee as a result of the cash bonus in 2021 and the spread of the fair value of the options based on the latest independent third-party common stock valuation as of
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June 15, 2021 and the exercise price of the same options applicable to each employee. No employee was obligated to use the cash bonus to exercise their outstanding stock options.
During the years ended December 31, 2022 and 2020, the Company recorded no bonus expenses related to the employee stock option exercise cash bonus and no bonus expenses related to the employee stock option exercise cash bonus for the Company's named executive officers. During the year ended December 31, 2021, the Company recorded bonus expenses related to the employee stock option exercise cash bonus of $48.4 million. All bonuses were fully paid to employees during the year ended December 31, 2021. Of the total bonus expenses related to the employee stock option exercise cash bonus during the year ended December 31, 2021, the bonus expense for the Company's named executive officers was $7.9 million.
Employee stock option exercise cash bonus is included in the following components of expenses on the accompanying Consolidated Statements of Operations (in thousands):
Year ended December 31,
Cost of revenue, net $ 13,708
Research and development 8,550
General and administrative 21,174
Sales and marketing 4,984
Employee cash bonuses capitalized as internally developed software costs were $1.5 million for the year ended December 31, 2021.
Employee and Employee-Related Expenses
Allocating employee and employee-related expenses, which consist of contractor costs, employee salary and wages, stock-based compensation and travel and other employee-related costs, to their appropriate financial statement line items on the Consolidated Statements of Operations, requires the Company to make estimates and judgments as a result of a generalist model and organizational structure. The Company bases the estimates for allocating employee and employee related expenses on internal productivity and team management tools. Management reviews the estimates each reporting period to evaluate the amounts allocated to Cost of revenue, net, Research and development, General and administrative, and Sales and marketing on the Consolidated Statements of Operations.
Cost of Revenue, Net
Cost of revenue, net primarily consists of expenses related to hosting the Company’s service, including the costs of data center capacity, credit card processing fees, third-party software license fees, outsourcing costs to support customer service and outsourcing costs to support and process our patented scanning technology SmartScan, net of consideration from a vendor for monetizing Expensify Card activities. This consideration, net of credit card processing fees paid to the vendor, is included as a reduction to cost of revenue of $6.2 million, $2.9 million, and $1.0 million for the years ended December 31, 2022, 2021, and 2020, respectively. Additional costs include amortization expense on capitalized software development costs and personnel-related expenses, including stock-based compensation, cash bonuses and employee costs attributable to supporting our customers and maintenance of our platform.
Research and Development
Research and development expenses consist primarily of personnel-related expenses, including stock-based compensation, incurred in the planning and preliminary project stage and post-implementation
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Notes to Consolidated Financial Statements
stage of new products or enhancing existing products or services. We capitalize certain software development costs that are attributable to developing or adding significant functionality to our internal-use software during the application development stage of the projects. All research and development expenses, excluding capitalized software development costs, are expensed as incurred.
General and Administrative
General and administrative expenses primarily consist of personnel-related expenses, including stock-based compensation, for any employee time allocated to administrative functions, including finance and accounting, legal and human resources. In addition to personnel-related expenses, general and administrative expenses consist of rent, utilities, depreciation on property and equipment, amortization of operating and finance lease right-of-use assets and external professional services, including accounting, audit, tax, finance, legal and compliance, human resources and information technology. General and administrative expenses are expensed as incurred.
Sales and Marketing
Sales and marketing primarily consist of personnel-related expenses, including stock-based compensation, advertising expenses, branding and public relations expenses and referral fees for strategic partners and other benefits that the Company provides to its referral and affiliate partners. The Company expenses the costs of sales and marketing, including promotional expenses, as incurred. Advertising costs were $30.9 million, $15.6 million, and $3.4 million for the years ended December 31, 2022, 2021, and 2020, respectively.
Income Taxes
The Company is subject to income taxes in the U.S. and several foreign jurisdictions. The Company records a (provision for) benefit from income taxes utilizing the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities, as well as net operating losses ("NOL") and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not expected to be realized.
The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. The Company classifies any liabilities for unrecognized tax benefits as current to the extent that the Company anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes.
In January 2018, the Financial Accounting Standards Board ("FASB") released guidance on the accounting for tax on the global intangible low-taxed income ("GILTI") provisions of the Tax Cuts and Jobs Act ("TCJA"). The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or treating any taxes on GILTI inclusions as period cost are both acceptable methods subject to an accounting policy election. The Company has elected to treat any potential GILTI inclusions as a period cost.
The Company's provision for income taxes does not include provisions for foreign withholding taxes associated with the repatriation of undistributed earnings of certain foreign subsidiaries that the Company intends to reinvest indefinitely in its foreign subsidiaries.
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Notes to Consolidated Financial Statements
On December 27, 2020, the U.S. president signed into law the Consolidated Appropriations Act of 2021, which includes further COVID-19 economic relief and extension of certain expiring tax provisions. The relief package had no material impact to the Company’s tax positions.
On August 16, 2022, the U.S president signed into law the Inflation Reduction Act of 2022 ("IRA"). The IRA established a corporate alternative minimum tax for certain corporations and a share repurchase excise tax. These changes are effective for tax years beginning after December 31, 2022. As of December 31, 2022, the Company has determined that neither the IRA nor changes to income tax laws or regulations in other jurisdictions are expected to have a significant impact on income tax expense. Refer to Note 10 for further discussion.
Net Loss Per Share Attributable to Common Stockholders
The Company computes net loss per share attributable to common stockholders using the two-class method required by ASC 260, Earnings per Share, for participating securities. All series of the Company's previously outstanding convertible preferred stock were participating securities as the holders of such stock were entitled to receive stated noncumulative dividends when and if declared and then they could participate on a pari passu basis in the event that a dividend was paid on common stock. The holders of previously outstanding convertible preferred stock did not have a contractual obligation to share in the Company’s losses. The undistributed earnings were allocated between common stock and participating securities as if all earnings had been distributed during the period presented.
Basic net loss per share attributable to common stockholders is computed by dividing net loss for the period by the weighted-average number of outstanding shares of common stock during the period, less weighted-average shares subject to repurchase. Diluted net loss per share attributable to common stockholders is computed by dividing net loss for the period by the weighted-average number of outstanding shares of common stock and, when dilutive, potential shares of common stock outstanding during the period using the more dilutive of the treasury stock method or if-converted method, as applicable. The dilutive effect of previously outstanding participating securities is calculated using the more dilutive of the treasury method or the two-class method. For periods in which the Company reports net losses, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, because potentially dilutive common shares are anti-dilutive.
Share Repurchases
When common stock is repurchased for retirement, the Company's policy is to allocate the excess of the repurchase price over the par value of shares acquired to both accumulated deficit and additional paid in capital. The Company estimates the additional paid in capital carrying value per common stock by dividing the additional paid in capital balance from our most recent quarterly financial statements preceding the repurchase by the number of common shares issued and outstanding from our most recent quarterly financial statements preceding the retirement date. The calculated additional paid in capital carrying value per share is then applied to the number of shares to be retired to determine the portion to be allocated to additional paid in capital.
Segment Reporting
The Company operates as one reportable segment because its chief operating decision maker, a committee that consists of the chief executive officer, the chief financial officer, and the chief operating officer, reviews the Company’s financial information on a consolidated basis for purposes of making decisions regarding allocating resources and assessing performance. Substantially all long-lived assets are located in the United States.
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The table below provides the Company’s total revenue by geographic area (in thousands). No other individual country outside of the United States accounted for more than 10% of total revenue.
Year ended December 31,
Revenue by Customers' Geographic Locations
Emerging Growth Company Status
Based on the closing share price and market value of the Company's common stock held by non-affiliates as of June 30, 2022, the Company was deemed to be a large-accelerated filer effective December 31, 2022. As a result, on December 31, 2022, the Company no longer qualified as an emerging growth company (“EGC”) under the Jumpstart Our Business Startups Act (“JOBS Act”). The previous EGC status allowed the Company an extended transition period to adopt new or revised accounting pronouncements until such pronouncements were applicable to private companies. The effect of the loss of EGC status and impact on the adoption of new accounting pronouncements is discussed further below.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments, with subsequent ASUs issued that clarify the guidance (collectively, "Topic 326"). Topic 326 requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its “lifetime expected credit losses" using a forward-looking approach and to record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. Topic 326 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities.
As a result of no longer qualifying as an EGC as of December 31, 2022, the Company was required to adopt Topic 326 retroactive to January 1, 2022. The Company is not required to amend quarterly filings issued subsequent to January 1, 2022 in which the Company filed under the legacy credit loss guidance of ASC Topic 310. As such, this Annual Report on Form 10-K for the annual period ending December 31, 2022 is the first period under which the Company reports credit loss estimates in accordance with Topic 326. The adoption of Topic 326 did not have a material impact on the Company's financial position or results of operations, as of, and for the year ended, December 31, 2022.
NOTE 3 – CAPITALIZED SOFTWARE, NET
Capitalized software, net consisted of the following (in thousands):
As of December 31,
Capitalized software development costs $ 14,052 $ 10,966
Less: accumulated amortization (7,171) (4,607)
Capitalized software, net $ 6,881 $ 6,359
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Notes to Consolidated Financial Statements
Amortization expense related to capitalized software development costs is recorded in Cost of revenue, net on the Consolidated Statements of Operations. Amortization expense for the years ended December 31, 2022, 2021, and 2020 was $2.6 million, $2.3 million, and $1.0 million, respectively.
NOTE 4 – PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following (in thousands):
As of December 31,
Computers and equipment $ 178 $ 311
Less: accumulated depreciation (7,527) (5,984)
Depreciation expense related to property and equipment is recorded in General and administrative on the Consolidated Statements of Operations. Depreciation expense related to property and equipment for the years ended December 31, 2022, 2021, and 2020 was $2.0 million, $2.1 million, and $1.4 million, respectively.
NOTE 5 – LEASES
The Company has operating leases for corporate offices and finance leases for data center equipment. The operating and finance leases have remaining lease terms of less than one year. The operating and finance leases contain options to extend or terminate the lease. However, these were not included in the original lease terms of the operating leases as the Company is not reasonably certain to exercise these options.
During the years ended December 31, 2022 and 2021, the Company did not enter into any new finance lease agreements to finance the acquisition of new property and equipment. There were no new operating lease agreements entered into during the years ended December 31, 2022 and 2021.
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The components of lease cost reflected on the Consolidated Statements of Operations were as follows (in thousands):
Year ended December 31,
Finance lease cost:
Interest on lease liabilities 22 42 39
Other information related to leases was as follows (in thousands, except as noted within):
As of December 31,
Weighted-average remaining lease term (in years):
Weighted-average discount rate:
Supplemental cash flow information related to leases was as follows (in thousands):
Year ended December 31,
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ (790) $ (880) $ (961)
Operating cash flows from finance leases $ (22) $ (42) $ (39)
Financing cash flows from finance leases $ (793) $ (774) $ (808)
ROU assets obtained in exchange for finance lease liabilities $ — $ — $ 1,260
To calculate the ROU assets and liabilities, the Company uses the discount rate implicit in lease agreements when available. When the implicit discount rates are not readily determinable, the Company uses the incremental borrowing rate. The Company determines the incremental borrowing rate using interest rates from the Company's secured borrowings after taking into consideration the nature of the debt, such as borrowings collateralized by the exact building in the lease, and payment structure, including frequency and number of payments in the agreement.
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Expensify, Inc.
Notes to Consolidated Financial Statements
Maturities of lease liabilities as of December 31, 2022 were as follows (in thousands):
Finance leases Operating leases
For the year ending:
Thereafter — —
Total future lease payments 476 332
Less: imputed interest (4) (4)