UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-Q
___________________________________
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2024
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from _______ to _______
Commission File Number 001-41043
___________________________________
___________________________________
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
| (Address of Principal Executive Offices) | (Zip Code) | ||||
(971 ) 365-3939
Registrant’s telephone number, including area code
___________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | x | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
The registrant had outstanding 77,155,951 shares of Class A common stock, par value of $0.0001 per share, 4,209,827 shares of LT10 common stock, par value $0.0001 per share, and 7,597,099 shares of LT50 common stock, par value $0.0001 per share, as of November 4, 2024.
Table of Contents
Page | ||||||||
Item 1. | ||||||||
Item 2. | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
Item 1. | ||||||||
Item 1A. | ||||||||
Item 2. | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
Item 5. | ||||||||
Item 6. | ||||||||
i
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future financial condition, future operations, projected costs, prospects, plans, objectives of management and expected market growth, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “shall,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” “goal,” “objective,” “seeks,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. There are a number of risks, uncertainties, and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Such risks, uncertainties and other important factors include, among others:
•our expectations regarding our financial performance and future operating performance;
•our ability to attract and retain members, expand usage of our platform, sell subscriptions to our platform and convert individuals and organizations into paying customers;
•the timing and success of new features, integrations, capabilities and enhancements by us, or by competitors to their products, or any other changes in the competitive landscape of our market;
•the amount and timing of operating expenses and capital expenditures that we may incur to maintain and expand our business and operations to remain competitive;
•the sufficiency of our cash, cash equivalents and investments to meet our liquidity needs;
•our ability to make required payments under and to comply with the various requirements of our current and future indebtedness;
•our cash flows, the prevailing stock prices, general economic and market conditions and other considerations that could affect the specific timing, price and size of repurchases under our stock repurchase program or our ability to fund any stock repurchases;
•geopolitical tensions, including the war in Ukraine and the conflict in Israel, Gaza and surrounding areas;
•the impact of inflation on us and our members;
•our borrowing costs have and may continue to increase as a result of increases in interest rates;
•our ability to effectively manage our exposure to fluctuations in foreign currency exchange rates;
•the size of our addressable markets, market share and market trends;
•anticipated trends, developments and challenges in our industry, business and the highly competitive markets in which we operate;
•any adverse impact on our business operations as a result of using artificial intelligence or other machine learning technologies in our services;
•our expectations regarding our income tax liabilities and the adequacy of our reserves;
•our ability to effectively manage our growth and expand our infrastructure and maintain our corporate culture;
•our ability to identify, recruit and retain skilled personnel, including key members of senior management;
ii
•the safety, affordability and convenience of our platform and our offerings;
•our ability to successfully defend litigation brought against us;
•our ability to successfully identify, manage and integrate any existing and potential acquisitions of businesses, talent, technologies or intellectual property;
•general economic conditions in either domestic or international markets, and geopolitical uncertainty and instability, including as a result of the 2024 United States presidential election;
•our ability to protect against security incidents, technical difficulties, or interruptions to our platform;
•our ability to maintain, protect and enhance our intellectual property; and
•the other risks and uncertainties identified under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations, estimates, forecasts and projections about future events and trends that we believe may affect our business, results of operations, financial condition and prospects. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report on Form 10-Q, we cannot guarantee that the future results, levels of activity, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur at all. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2023, and any subsequent filings, as well as those identified in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and you are cautioned not to unduly rely upon these statements. Unless otherwise indicated or unless the context requires otherwise, all references in this document to “Expensify,” the “Company,” “we,” “us,” “our” or similar references are to Expensify, Inc. and its consolidated subsidiaries. Capitalized terms used and not defined above are defined elsewhere within this Quarterly Report on Form 10-Q.
iii
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements
| 1 | ||
Expensify, Inc.
Condensed Consolidated Balance Sheets
(unaudited, in thousands, except share data)
| As of September 30, | As of December 31, | ||||||||||
| 2024 | 2023 | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Settlement assets, net | |||||||||||
| Prepaid expenses | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Capitalized software, net | |||||||||||
| Property and equipment, net | |||||||||||
| Lease right-of-use assets | |||||||||||
| Deferred tax assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and stockholders' equity | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses and other liabilities | |||||||||||
| Borrowings under line of credit | |||||||||||
| Current portion of long-term debt, net of original issue discount and debt issuance costs | |||||||||||
| Lease liabilities, current | |||||||||||
| Settlement liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Lease liabilities, non-current | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 4) | |||||||||||
| Stockholders' equity: | |||||||||||
Preferred stock, par value $ | |||||||||||
Common stock, par value $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||
| See accompanying notes to Condensed Consolidated Financial Statements. | |||||
2 | |||||
Expensify, Inc.
Condensed Consolidated Statements of Operations
(unaudited, in thousands, except share and per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue, net | |||||||||||||||||||||||
| Gross margin | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
Income (loss) from operations | ( | ( | ( | ||||||||||||||||||||
| Other income (expenses), net | ( | ( | ( | ||||||||||||||||||||
| Income (loss) before income taxes | ( | ( | ( | ||||||||||||||||||||
| (Provision for) benefit from income taxes | ( | ( | ( | ||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share: | |||||||||||||||||||||||
| Basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted average shares of common stock used to compute net loss per share: | |||||||||||||||||||||||
| Basic and diluted | |||||||||||||||||||||||
| See accompanying notes to Condensed Consolidated Financial Statements. | |||||
| 3 | |||||
Expensify, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(unaudited, in thousands, except share data)
| Preferred stock | Common stock | Additional paid-in capital | Accumulated deficit | Total stockholders' equity | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||
| Three months ended September 30, 2024 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock on exercise of stock options | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Vesting of early exercised stock options | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock units | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Repurchases of early exercised stock options | — | — | ( | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock under Matching Plan | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with restricted stock units vesting | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| See accompanying notes to Condensed Consolidated Financial Statements. | ||
4 | ||
Expensify, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(unaudited, in thousands, except share data)
| Preferred stock | Common stock | Additional paid-in capital | Accumulated deficit | Total stockholders' equity | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||
| Three months ended September 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Vesting of early exercised stock options | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock units | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Repurchases of early exercised stock options | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock under Matching Plan | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with restricted stock units vesting | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Shares withheld from common stock issued to pay employee payroll taxes | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| See accompanying notes to Condensed Consolidated Financial Statements. | ||
5 | ||
Expensify, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(unaudited, in thousands, except share data)
| Preferred stock | Common stock | Additional paid-in capital | Accumulated deficit | Total stockholders' equity | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||
| Nine months ended September 30, 2024 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock on exercise of stock options | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Vesting of early exercised stock options | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock units | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Repurchases of early exercised stock options | — | — | ( | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock under Matching Plan | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with restricted stock units vesting | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| See accompanying notes to Condensed Consolidated Financial Statements. | ||
6 | ||
Expensify, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(unaudited, in thousands, except share data)
| Preferred stock | Common stock | Additional paid-in capital | Accumulated deficit | Total stockholders' equity | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||
| Nine months ended September 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Vesting of early exercised stock options | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock units | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Repurchase of early exercised stock options | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock under Matching Plan | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with restricted stock units vesting | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Shares withheld from common stock issued to pay employee payroll taxes | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||
Repurchase and retirement of common stock | — | — | ( | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| See accompanying notes to Condensed Consolidated Financial Statements. | ||
7 | ||
Expensify, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
| Nine Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Reduction of operating lease right-of-use assets | |||||||||||
| Loss on impairment, receivables and sale or disposal of equipment | |||||||||||
| Stock-based compensation expense | |||||||||||
| Amortization of original issue discount and debt issuance costs | |||||||||||
| Deferred tax assets | ( | ( | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable, net | |||||||||||
| Settlement assets, net | ( | ( | |||||||||
| Prepaid expenses | |||||||||||
| Other current assets | ( | ||||||||||
| Other assets | ( | ( | |||||||||
| Accounts payable | ( | ||||||||||
| Accrued expenses and other liabilities | ( | ||||||||||
| Operating lease liabilities | ( | ||||||||||
| Settlement liabilities | |||||||||||
| Other liabilities | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | ( | ||||||||||
| Software development costs | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Principal payments of finance leases | ( | ( | |||||||||
| Principal payments of outstanding debt | ( | ( | |||||||||
| Payments for debt issuance costs | ( | ||||||||||
| Repurchases of early exercised stock options | ( | ( | |||||||||
| Proceeds from common stock purchased under Matching Plan | |||||||||||
| Proceeds from issuance of common stock on exercise of stock options | |||||||||||
| Payments for employee taxes withheld from stock-based awards | ( | ||||||||||
| Repurchase and retirement of common stock | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net decrease in cash and cash equivalents and restricted cash | ( | ( | |||||||||
| Cash and cash equivalents and restricted cash, beginning of period | |||||||||||
| Cash and cash equivalents and restricted cash, end of period | $ | $ | |||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for income taxes | $ | $ | |||||||||
| Noncash investing and financing items: | |||||||||||
| Stock-based compensation capitalized as software development costs | $ | $ | |||||||||
| Purchases of property and equipment and capitalized software in accounts payable and accrued expenses | $ | $ | |||||||||
| Right-of-use assets acquired through operating leases | $ | $ | |||||||||
| Right-of-use assets acquired through finance leases | $ | $ | |||||||||
| Reconciliation of cash and cash equivalents and restricted cash to the Condensed Consolidated Balance Sheets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash included in other current assets | |||||||||||
| Restricted cash included in settlement assets, net | |||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
| See accompanying notes to Condensed Consolidated Financial Statements. | |||||
8 | |||||
NOTE 1 – GENERAL INFORMATION
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 license arrangements and offers unique pricing options for small and medium-sized businesses ("SMBs") and enterprises on a per-active-member basis.
Expensify also offers an Expensify charge card (the "Expensify Card"), which is primarily distributed to corporate customers in the United States ("U.S.") who 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.
As of September 30, 2024, the Expensify Card consisted of two card programs operating concurrently. Under the original Expensify Card program launched in 2020 (the “Legacy Card Program”), Expensify has an agreement with the payment processor, Marqeta, Inc. ("Marqeta"), and relies on Marqeta to manage the relationship with the issuing bank, Sutton Bank, and the card network, Visa, in authorizing and settling transactions. In October 2023, Expensify augmented the Expensify Card program by entering into an agreement with a new issuing bank, The Bancorp Bank, N.A. ("Bancorp"), to issue Expensify Cards to customers and authorize and settle transactions on the Visa card network (the “Updated Card Program”). The Updated Card Program launched in February 2024 and all new Expensify Cards issued subsequent to the launch of the Updated Card Program operate under that program.
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Expensify, its wholly-owned subsidiaries, and Expensify.org (collectively, the "Company") and have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and the applicable rules and regulations of the Securities and Exchange Commission ("SEC") for interim reporting in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP have been condensed or omitted pursuant to such SEC rules. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2023 ("2023 Annual Report").
All intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments that are necessary for the fair presentation of the Company's financial position, results of operations, equity, and cash flows for the periods presented.
Results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024 or for any other future annual or interim period.
9 | ||
Use of Estimates
The preparation of condensed 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during 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 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.
Estimates and assumptions by management affect the Company’s classification of employee and employee-related expenses, the useful lives and recoverability of long-lived assets and deferred contract acquisition costs, income taxes, capitalization of internal-use software costs, stock-based compensation and the Company's incremental borrowing rate utilized to measure its lease right-of-use ("ROU") assets and lease liabilities.
Updates to Significant Accounting Policies
The Company’s significant accounting policies are discussed in Note 2 of the 2023 Annual Report. Since the date the 2023 Annual Report was filed with the SEC, there have been no material changes to the Company's significant accounting policies, including the adoption status of recent accounting pronouncements.
Reclassification of Prior Period Presentation
Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of financial position, operations and cash flows.
NOTE 2 - REVENUE AND CERTAIN STATEMENT OF OPERATIONS COMPONENTS
The table below provides the Company's total revenue by geographic region based on the currency of the subscription (in thousands). No other individual country outside of the United States accounted for more than 10% of total revenue.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| United States | $ | $ | $ | $ | |||||||||||||||||||
| All other locations | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
No individual customer represented more than 10% of the Company’s total revenue during the three and nine months ended September 30, 2024 and 2023.
10 | ||
Cashback Rewards
The Company offers a cashback rewards program to all Expensify Card customers based on volume of Expensify Card transactions and Software as a Service ("SaaS") subscription tier. Cashback rewards are earned on a monthly basis and are applied against outstanding customer receivables or paid out the following month. The Company considers the cashback payments to customers as consideration payable to a customer and it is recorded as a reduction to Revenue within the Condensed Consolidated Statements of Operations. Cashback rewards were $2.3 million and $1.8 million for the three months ended September 30, 2024 and 2023, respectively. Cashback rewards were $6.4 million and $4.8 million for the nine months ended September 30, 2024 and 2023, respectively.
Interchange
The Company generates revenue from the authorization and settlement of Expensify Card transactions under the Updated Card Program. The Company is contractually entitled to all interchange generated on Expensify Card transactions based on its agreement with the issuing bank and such funds are held as restricted cash within Other current assets until released by the issuing bank. Under the Updated Card Program, the Company is the principal in the transaction (i.e. the Company controls the services) and recognizes interchange as revenue on a gross basis within Revenue on the accompanying Condensed Consolidated Statements of Operations. Interchange revenue was $3.7 million and $4.2 million for the three and nine months ended September 30, 2024, respectively.
Consideration From a Vendor, Net
The Company receives consideration from a vendor for monetizing Expensify Card activities under the Legacy Card Program. This consideration, net of credit card processing fees paid to the vendor, is included as a reduction to Cost of revenue, net within the Condensed Consolidated Statements of Operations. Consideration from a vendor, net was $0.8 million and $2.8 million for the three months ended September 30, 2024 and 2023, respectively. Consideration from a vendor, net was $7.1 million and $7.3 million for the nine months ended September 30, 2024 and 2023, respectively.
11 | ||
NOTE 3 - CERTAIN BALANCE SHEET COMPONENTS
Other Current Assets
Other current assets consisted of the following (in thousands):
| As of September 30, | As of December 31, | ||||||||||
| 2024 | 2023 | ||||||||||
| Expensify Card posted collateral for funds held for customers | $ | $ | |||||||||
| Expensify.org restricted cash | |||||||||||
Earned interchange restricted cash | |||||||||||
| Cash in transit for funds held for customers | |||||||||||
| Deferred contract acquisition costs | |||||||||||
| Income tax receivable | |||||||||||
Other restricted cash | |||||||||||
| Expensify Payments LLC restricted cash | |||||||||||
| Other | |||||||||||
| Other current assets | $ | $ | |||||||||
Capitalized Software, Net
Capitalized software, net consisted of the following (in thousands):
| As of September 30, | As of December 31, | ||||||||||
| 2024 | 2023 | ||||||||||
| Capitalized software development costs | $ | $ | |||||||||
| Less: accumulated amortization | ( | ( | |||||||||
| Capitalized software, net | $ | $ | |||||||||
Amortization expense related to capitalized software development costs is recorded in Cost of revenue, net on the Condensed Consolidated Statements of Operations. Amortization expense was $1.6 million and $0.8 million for the three months ended September 30, 2024 and 2023, respectively. Amortization expense was $4.1 million and $2.3 million for the nine months ended September 30, 2024 and 2023, respectively.
12 | ||
Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
| As of September 30, | As of December 31, | ||||||||||
| 2024 | 2023 | ||||||||||
| Computers and equipment | $ | $ | |||||||||
| Furniture and fixtures | |||||||||||
| Leasehold improvements | |||||||||||
| Commercial building | |||||||||||
| Land | |||||||||||
| Construction in progress | |||||||||||
| Total property and equipment | |||||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
Depreciation expense related to property and equipment is recorded in General and administrative, Sales and marketing, and Other income (expenses), net on the Condensed Consolidated Statements of Operations. Depreciation expense related to property and equipment was $0.1 million and $0.2 million for the three months ended September 30, 2024 and 2023, respectively. Depreciation expense related to property and equipment was $0.6 million and $1.1 million for the nine months ended September 30, 2024 and 2023, respectively.
13 | ||
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following (in thousands):
| As of September 30, | As of December 31, | ||||||||||
| 2024 | 2023 | ||||||||||
| Sales, payroll and other taxes payable | $ | $ | |||||||||
| Professional fees | |||||||||||
| Partner payouts and advertising fees | |||||||||||
| Cashback rewards | |||||||||||
Matching Plan payroll liability | |||||||||||
| Income taxes payable | |||||||||||
| Restricted common stock liability for early stock option exercises | |||||||||||
| Credit card processing fees | |||||||||||
| Accrued expense reports | |||||||||||
| Commissions payable | |||||||||||
| Hosting and license fees | |||||||||||
| Interest payable | |||||||||||
| Other | |||||||||||
| Accrued expenses and other liabilities | $ | $ | |||||||||
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Finance and Operating Lease Arrangements
The Company did not enter into any new lease agreements during the nine months ended September 30, 2024. The components of lease cost reflected in the Condensed Consolidated Statements of Operations for all leases were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Finance lease cost: | |||||||||||||||||||||||
| Amortization of ROU assets | $ | $ | $ | $ | |||||||||||||||||||
| Interest on lease liabilities | |||||||||||||||||||||||
| Total finance lease cost | |||||||||||||||||||||||
| Operating lease cost | |||||||||||||||||||||||
| Total lease cost | $ | $ | $ | $ | |||||||||||||||||||
14 | ||
Other information related to leases was as follows (in thousands, except as noted within):
| As of September 30, | As of December 31, | ||||||||||
| 2024 | 2023 | ||||||||||
| $ | $ | ||||||||||
| $ | $ | ||||||||||
| Weighted average remaining lease term (in years): | |||||||||||
| Finance leases | |||||||||||
| Operating leases | |||||||||||
| Weighted average discount rate: | |||||||||||
| Finance leases | % | % | |||||||||
| Operating leases | % | % | |||||||||
Supplemental cash flow information related to leases was as follows (in thousands):
| Nine months ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | ( | $ | ( | |||||||
| Operating cash flows from finance leases | $ | ( | $ | ( | |||||||
| Financing cash flows from finance leases | $ | ( | $ | ( | |||||||
Maturities of lease liabilities as of September 30, 2024 were as follows (in thousands):
| For the year ending: | Finance leases | Operating leases | |||||||||
| Remainder of 2024 | $ | $ | |||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
| 2027 | |||||||||||
| 2028 | |||||||||||
| Thereafter | |||||||||||
| Total future lease payments | |||||||||||
| Less: imputed interest | ( | ( | |||||||||
| ( | ( | ||||||||||
| $ | $ | ||||||||||
15 | ||
Amortizing Term Mortgage
In August 2019, the Company entered into an $8.3 million amortizing term mortgage agreement with Canadian Imperial Bank of Commerce ("CIBC") for the Company's commercial building located in Portland, Oregon. The agreement required principal and interest payments to be made each month over a five-year period. Interest accrued at a fixed rate of 5.00 % per year until August 2024, at which point the remaining outstanding principal balance on the amortizing term mortgage was due in full. The borrowings were secured by the building. The outstanding balance of the amortizing term mortgage was $7.7 million as of December 31, 2023. The then-outstanding balance of $7.6 million and an immaterial amount of accrued interest on the amortizing term mortgage were repaid in full on August 29, 2024.
Loan and Security Agreement
In September 2021, the Company amended and restated its loan and security agreement with CIBC (the "2021 Amended Loan and Security Agreement") which consisted of a $45.0 million initial term loan, the option to enter into an additional $30.0 million delayed term loan that expired in March 2023, and a monthly revolving line of credit of $25.0 million. Under the 2021 Amended Loan and Security Agreement, the initial term loan of $45.0 million was payable over a 60-month period with principal and accrued interest payments due each quarter, commencing on September 30, 2021. The 2021 Amended Loan and Security Agreement amortized in equal quarterly installments of $0.1 million through September 30, 2024, $0.2 million beginning October 1, 2024 and $0.6 million beginning October 1, 2025, with any remaining principal balance due and payable on maturity in September 2026. The amounts borrowed accrued interest at the bank’s reference rate plus 2.25 % beginning on September 30, 2021 and continued on a quarterly basis through maturity of the term loan. The borrowings were secured by substantially all the Company’s assets. The then-outstanding balance of $36.0 million and $0.1 million of accrued interest on the term loan were repaid in full on October 12, 2023.
In February 2024, the Company entered into a Second Amended and Restated Loan and Security Agreement (as amended by the First Amendment described below, and as may be further amended from time to time, the "2024 Amended Loan and Security Agreement") with CIBC. The 2024 Amended Loan and Security Agreement amends and restates the 2021 Amended Loan and Security Agreement, to extend the maturity date of the revolving line of credit from September 2024 to September 2025, remove certain provisions related to the term loan that was repaid in full in October 2023 and make certain changes to the positive and negative covenants intended to better align with the operations of the Company. The 2024 Amended Loan and Security Agreement continues to provide for a $25.0 million revolving credit facility. Borrowings under the revolving line of credit accrue interest at CIBC’s reference rate plus 1.00 % (9.00 % as of September 30, 2024) and are secured by substantially all of the Company's assets. In May 2024, the Company entered into a First Amendment to the 2024 Amended Loan and Security Agreement, which amended the covenant restricting the amount of repurchases of common stock to allow for certain additional repurchase activity and provided a waiver for the Company's non-compliance during prior periods with the previous version of such covenant.
The Company incurred an immaterial amount of costs in connection with entering into the 2024 Amended Loan and Security Agreement. These debt issuance costs are reflected as a deferred asset within Other current assets on the Condensed Consolidated Balance Sheets and are being amortized to interest expense on a straight-line basis over the term of the agreement. As of September 30, 2024, the unamortized debt issuance costs included within Other current assets was immaterial.
On April 24, 2024, the Company entered into an irrevocable standby letter of credit (the "Letter of Credit") issued under the 2024 Amended Loan and Security Agreement to reduce cash collateral requirements in connection with the Updated Card Program. The Letter of Credit was issued in the amount of $1.0 million for the benefit of Bancorp and expires on March 20, 2025. No amounts have been drawn on the Letter of Credit as of September 30, 2024.
16 | ||
Upon repayment of the amortizing term mortgage on August 29, 2024, the Company entered into a Second Amendment to the 2024 Amended Loan and Security Agreement, which permits the Company's wholly-owned subsidiary, 401 SW 5th Ave LLC, to remain an excluded subsidiary provided that the subsidiary does not engage in any operations or activities except to maintain legal existence and ownership of the real property or any related activities thereto, does not hold assets other than real estate assets, and does not incur any indebtedness except for intercompany liabilities permitted under the agreement or grant any liens.
As of December 31, 2023, there were $15.0 million of borrowings under the revolving line of credit. The then-outstanding balance of $15.0 million and an immaterial amount of accrued interest on the revolving line of credit were repaid in full on July 10, 2024. As of September 30, 2024, there was $24.0 million of capacity available for additional borrowings.
As of September 30, 2024, the Company was in compliance with all debt covenants.
Defined Contribution Plans
The Company sponsors a U.S. 401(k) defined contribution plan for all eligible employees who elect to participate. The Company is permitted to make discretionary profit sharing and 401(k) matching contributions as defined in the plan and as approved by the Board of Directors. Effective January 1, 2018, the Company matches up to 4.50 % of each participant’s eligible compensation. No 0.2 0.6 million and $0.7 million for the nine months ended September 30, 2024 and 2023, respectively.
Legal
From time to time in the normal course of business, the Company may be involved in claims, proceedings and litigation. In the case of any litigation, the Company records a provision for a liability when management believes that it is both probable that a liability has been incurred, and the amount of the loss can be reasonably estimated. The Company reviews such provisions at least quarterly and adjusts such provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.
17 | ||
NOTE 5 - STOCK INCENTIVE PLANS
2009 and 2019 Stock Plans
In 2009, the Board of Directors approved the 2009 Stock Plan ("2009 Stock Plan"). As amended in 2015, the 2009 Stock Plan permitted the Company to grant up to 16,495,150 shares of common stock. In January 2018, the Company increased the number of shares of common stock reserved under the 2009 Stock Plan by 535,130 shares to 17,030,280 shares. In April 2019, the Board of Directors approved the adoption of the 2019 Stock Plan ("2019 Stock Plan", and together with the 2009 Stock Plan, "Stock Plans"). The 2019 Stock Plan permitted the Company to grant up to 8,173,970 additional shares, increasing the overall common stock reserved for grant under the Stock Plans to 25,204,250 shares. In September 2021, the Board of Directors approved the grant of 8,679,380 restricted stock units under the 2019 Stock Plan, covering an aggregate of 4,339,690 16,856,770
Following the completion of the initial public offering of the Company’s Class A common stock ("IPO"), the Company did not and does not intend to make any further grants under the Stock Plans. However, the Stock Plans will continue to govern the terms and conditions of the outstanding awards granted under the Stock Plans. Upon the expiration, forfeiture, cancellation, withholding of shares upon exercise or settlement of an award to satisfy the exercise price or tax withholding, or repurchase of any shares of Class A common stock underlying outstanding stock-based awards granted under the 2009 Stock Plan or of Class A or LT50 common stock underlying outstanding stock-based awards granted under the 2019 Stock Plan, an equal number of shares of Class A common stock will become available for grant under the 2021 Incentive Award Plan ("2021 Plan") and the Company's 2021 Stock Purchase and Matching Plan ("Matching Plan" and together with the 2021 Plan, "2021 Incentive Plans").
2021 Incentive Plans
In November 2021, the Board of Directors adopted, and its stockholders approved, the 2021 Incentive Plans, which both became effective immediately before the effectiveness of the IPO Registration Statement and use a combined share reserve. Under the 2021 Incentive Plans, 11,676,932 shares of Class A common stock were initially reserved for issuance pursuant to a variety of stock-based awards, including incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock units ("RSUs"), and other forms of equity and cash compensation under the 2021 Plan and purchase rights and matching awards under the Matching Plan. The number of shares initially reserved for issuance or transfer pursuant to awards under the 2021 Incentive Plans will be increased upon the expiration, forfeiture, cancellation, withholding of shares upon exercise or settlement of an award to satisfy the exercise price or tax withholding, or repurchase of any shares of Class A common stock underlying outstanding stock-based awards granted under the 2009 Stock Plan or of Class A or LT50 common stock underlying outstanding stock-based awards granted under the 2019 Stock Plan. The number of shares of Class A common stock reserved and available for issuance under the 2021 Incentive Plans as of September 30, 2024 and December 31, 2023 was 22,814,452 shares and 19,712,910 shares, respectively. The number of shares will automatically increase each subsequent January 1 through January 1, 2031, by the lesser of (A) 6 % of the aggregate number of shares of all classes of common stock outstanding on the immediately preceding calendar year end, or (B) such lesser number of shares as determined by the Company’s Board of Directors or compensation committee; provided, however, that no more than 87,576,990 shares of Class A common stock may be issued upon the exercise of incentive stock options.
18 | ||
Matching Plan
The Matching Plan operates using consecutive three-month offering periods that commenced on March 15, 2022. Employees, consultants and directors (collectively, "Service Providers") of the Company can participate in the Matching Plan by electing to contribute compensation through payroll deductions or from fee payments or may be granted discretionary awards under the Matching Plan. On the last day of the offering period the contributions made during the offering period are used to purchase shares of Class A common stock.
The price at which Class A common stock is purchased under the Matching Plan equals the average of the high and low trading price of a share of Class A common stock as of the last trading day of the offering period. At the end of each offering period, the Company may provide a discretionary match up to 1/10 of a share of Class A common stock for each share of Class A common stock purchased by or issued to a Service Provider under the Matching Plan that is retained through the end of the applicable offering period. No fractional shares will be issued by the Company. The Company will round to the nearest full share for shares purchased by a Service Provider as well as any matched shares issued to a Service Provider under the Matching Plan. The match rate applicable to each offering period shall be limited to 1.50 % of the shares of any class of capital stock outstanding as of the exercise date applicable to such offering period. The Company estimates the fair value of matched shares provided under the Matching Plan using the closing stock price on the date of grant. The Company recognizes stock-based compensation expense related to the matched shares pursuant to its Matching Plan on a straight-line basis over the applicable three-month offering period.
Service Providers who participated in the Matching Plan for the offering period ended September 14, 2024 purchased a total of 370,122 Class A common shares, based on a purchase price of $2.42 , resulting in gross cash proceeds to the Company of $0.9 million.
Service Providers who participated in the Matching Plan for the offering period ended September 14, 2023 purchased a total of 275,210 Class A common shares, based on a purchase price of $3.84 , resulting in gross cash proceeds to the Company of $1.1 million.
For the offering period ended September 14, 2024, the Company elected to match each share of Class A common stock purchased or issued under the Matching Plan with 1/20 of a share of Class A common stock. The Company granted a total of 176,449 shares of Class A common stock as a matching contribution under the Matching Plan with no shares withheld for taxes, during the three months ended September 30, 2024. The Company granted a total of 443,671 shares of Class A common stock as a matching contribution under the Matching Plan with no shares withheld for taxes, during the nine months ended September 30, 2024.
For the offering period ended September 14, 2023, the Company elected to match each share of Class A common stock purchased or issued under the Matching Plan with 1/20 of a share of Class A common stock. The Company granted a total of 35,732 shares of Class A common stock as a matching contribution under the Matching Plan, net of a total of 9,054 shares withheld for taxes, during the three months ended September 30, 2023. The Company granted a total of 72,578 shares of Class A common stock as a matching contribution under the Matching Plan, net of a total of 15,871 shares withheld for taxes, during the nine months ended September 30, 2023.
19 | ||
The Company has made discretionary contributions under the Matching Plan to eligible Service Providers. The Company granted a total of 365,074 shares of Class A common stock as discretionary contributions under the Matching Plan with no shares withheld for taxes, during the three months ended September 30, 2024. The Company granted a total of 1,300,451 shares of Class A common stock as discretionary contributions under the Matching Plan with no shares withheld for taxes, during the nine months ended September 30, 2024.
The Company granted a total of 299,713 shares of Class A common stock as discretionary contributions under the Matching Plan, net of a total of 29,020 shares withheld for taxes, during the three months ended September 30, 2023. The Company granted a total of 375,024 shares of Class A common stock as discretionary contributions under the Matching Plan, net of a total of 64,411 shares withheld for taxes, during the nine months ended September 30, 2023.
Restricted Stock Units
On September 24, 2021, under the 2019 Stock Plan, the Company approved the grant of Class A and LT50 common stock RSUs to Service Providers effective November 9, 2021, the date the Company amended its Certificate of Incorporation, to include, among other things, LT50 common stock. RSUs granted to Service Providers on November 9, 2021 that were approved in September 2021 vest upon the satisfaction of both a performance and service condition. The performance condition was satisfied immediately prior to the effectiveness of the IPO Registration Statement. The service condition is satisfied over eight years with 1/8 of the grant having vested on September 15, 2022 and quarterly vesting of 1/32 of the grant every December 15, March 15, June 15 and September 15 (each, a "Specified Quarterly Date") thereafter until fully vested, in each case subject to continued service to the Company. All RSUs granted to Service Providers after the IPO, under the 2021 Plan, have a service condition only, which is satisfied over eight years from the vesting commencement date corresponding to one of the Specified Quarterly Dates nearest the date of grant, with 1/8 of each grant vesting on the first anniversary of the vesting commencement date and 1/32 of each grant vesting in equal quarterly installments thereafter until fully vested, in each case, subject to continued service to the Company.
Pursuant to the Company's Non-Employee Director Compensation Program, which was adopted under the 2021 Incentive Plans, the Company granted 230,064 Class A common stock RSUs for the nine months ended September 30, 2024. A total of 62,676 Class A common RSUs vested during the nine months ended September 30, 2024 related to previously-granted RSU awards as the quarterly service conditions were satisfied.
20 | ||
During the nine months ended September 30, 2024, RSU activity for Service Providers and non-employee directors was as follows:
| Class A Common Stock | LT50 Common Stock | Weighted average grant date fair value per share | |||||||||||||||
Outstanding at December 31, 2023 | $ | ||||||||||||||||
| RSUs granted | $ | ||||||||||||||||
| RSUs vested | ( | ( | $ | ||||||||||||||
| RSUs cancelled/forfeited/expired | ( | ( | $ | ||||||||||||||
Outstanding at September 30, 2024 | $ | ||||||||||||||||
As of September 30, 2024, there was $109.4 million of unamortized stock-based compensation cost related to unvested RSUs, which is expected to be recognized over the remaining weighted average life of 4.69 years. As of December 31, 2023, there was $153.4 million of unamortized stock-based compensation cost related to unvested RSUs, which was expected to be recognized over the remaining weighted average life of 5.37 years.
Stock Options
The Stock Plans and the 2021 Plan provide for the grant of incentive and nonstatutory stock options to Service Providers. Under the Stock Plans and the 2021 Plan, the exercise price of incentive stock options must be equal to at least 110 % of the fair market value of the common stock on the grant date for a “ten-percent holder” or 100 % of the fair market value of the common stock on the grant date for any other participant. The exercise price of nonstatutory options granted must be equal to at least 100 % of the fair market value of the Company’s common stock on the date of grant.
The Company has only granted options under the Stock Plans. Options typically vest over four years and are exercisable at any time after the grant date, provided that Service Providers exercising unvested options receive restricted common stock that is subject to repurchase at the original exercise price upon termination of service. The repurchase right lapses in accordance with the vesting schedule of the exercised option. Early exercises of options prior to vesting are not deemed to be substantive exercises for accounting purposes and accordingly, amounts received for early exercises of unvested options are recorded as a liability. These repurchase terms are considered to be a forfeiture provision and do not result in variable accounting. There was an immaterial
As of September 30, 2024 and December 31, 2023, there were 155,400 and 393,251 shares subject to repurchase, respectively, related to unvested stock options that had been early exercised. As of September 30, 2024 and December 31, 2023, the Company recorded a liability related to shares subject to repurchase of $0.2 million and $0.6 million, respectively, which is included within Accrued expenses and other liabilities in the accompanying Condensed Consolidated Balance Sheets. These amounts are reclassified to Common stock and Additional paid-in capital as the underlying shares vest.
21 | ||
A summary of the Company's stock option activity was as follows:
| Shares | Weighted average exercise price per share | Weighted average remaining contractual life (in years) | |||||||||||||||
Outstanding at December 31, 2023 | $ | ||||||||||||||||
| Options exercised | ( | $ | |||||||||||||||
| Options cancelled/forfeited/expired | ( | $ | |||||||||||||||
Outstanding at September 30, 2024 | $ | ||||||||||||||||
Exercisable at September 30, 2024 | $ | ||||||||||||||||
The total pretax intrinsic value of options outstanding at September 30, 2024 and December 31, 2023 was $5.9 million and $8.9 million, respectively. The total pretax intrinsic value of options exercisable at September 30, 2024 was $5.9 million. The intrinsic value is the difference between the estimated fair market value of the Company’s common stock at the date of exercise and the exercise price for in-the-money options.
As of September 30, 2024, there was $1.7 million of unrecognized stock-based compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 0.40 years. As of December 31, 2023, there was $4.1 million of unrecognized stock-based compensation cost related to unvested stock options, which was expected to be recognized over a weighted average period of 0.75 years.
Cash received from option exercises and purchases of shares under the Stock Plans for both the nine months ended September 30, 2024 and 2023 was $0.3 million and $0.2 million, respectively.
Stock-Based Compensation
The following table summarizes the stock-based compensation recognized for options granted under the 2009 Stock Plan, options and RSUs granted under the 2019 Stock Plan, RSUs granted under the 2021 Plan and matching and discretionary shares issued under the Matching Plan (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Matching Plan shares | $ | $ | $ | $ | |||||||||||||||||||
| Restricted stock units | |||||||||||||||||||||||
Stock options | |||||||||||||||||||||||
Total stock-based compensation | |||||||||||||||||||||||
| Less: stock-based compensation capitalized as software development costs | ( | ( | ( | ( | |||||||||||||||||||
Total stock-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
22 | ||
Stock-based compensation expense is allocated based on the cost center to which the award holder spent time during the reported periods. Stock-based compensation expense is included in the following components of expenses on the accompanying Condensed Consolidated Statements of Operations (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Cost of revenue, net | $ | $ | $ | $ | |||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
Total stock-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
NOTE 6 - INCOME TAXES
For the three and nine months ended September 30, 2024, the Company prepared its interim tax provision by applying a year-to-date effective tax rate, which the Company believes results in the best estimate of the annual effective tax rate.
The Company recorded a provision for income taxes of $2.7 million and a benefit from income taxes of $0.3 million for the three months ended September 30, 2024 and 2023, respectively, which resulted in effective tax rates of 568.7 % and 1.6 %, respectively.
The Company recorded a provision for income taxes of $6.4 million and $1.9 million for the nine months ended September 30, 2024 and 2023, respectively, which resulted in effective tax rates of (277.2 )% and (6.0 )%, respectively.
The principal reasons for the difference between the statutory rate and the effective rate for 2024 were primarily due to non-deductible stock-based compensation and the change in valuation allowance. The principal reasons for the difference between the statutory rate and the effective rate for 2023 were primarily due to non-deductible stock-based compensation, the change in valuation allowance, and Section 162(m) of the Internal Revenue Code ("IRC") compensation limitations.
The Company follows the provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes. ASC 740-10 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of uncertain tax positions that have been taken or expected to be taken on a tax return. As of September 30, 2024 and December 31, 2023, the Company recorded an uncertain tax position liability of $1.9 million and $1.5 million, respectively, within Other liabilities on the Condensed Consolidated Balance Sheets. This liability includes $0.3 million and an immaterial amount of interest and penalties as of September 30, 2024 and December 31, 2023, respectively.
The Company has received notice from the Internal Revenue Service ("IRS") that an examination of the Company's 2021 federal tax return will commence in Q4 2024.
23 | ||
NOTE 7 - NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share data):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Numerator | |||||||||||||||||||||||
| Net loss, basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Denominator | |||||||||||||||||||||||
| Weighted average shares of common stock used to compute net loss per share, basic and diluted | |||||||||||||||||||||||
| Net loss per share, basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The rights, including the liquidation and dividend rights, of the holders of Class A, LT10 and LT50 common stock are identical, except with respect to voting, conversion and transfer rights. Each share of Class A common stock is entitled to one vote per share, each share of LT10 common stock is entitled to ten votes per share and each share of LT50 common stock is entitled to 50 votes per share. Each share of LT10 and LT50 common stock is convertible into one share of Class A common stock voluntarily at the option of the holder after the satisfaction of certain requirements, which includes a ten-month notice period for LT10 common stock and a 50 -month notice period for LT50 common stock to convert to Class A common stock, or automatically upon certain events. The Class A common stock has no conversion rights. As the liquidation and dividend rights are identical for Class A, LT10 and LT50 common stock, the undistributed earnings are allocated on a proportional basis based on the number of weighted average shares within each class of common stock during the period and the resulting net loss per share attributable to common stockholders will be the same for the Class A, LT10 and LT50 common stock on an individual or combined basis.
The following potentially dilutive shares were not included in the calculation of diluted shares outstanding as the effect would have been anti-dilutive:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
Weighted average stock options | |||||||||||||||||||||||
| Matching shares | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
24 | ||
NOTE 8 - EQUITY
On May 10, 2022, the Executive Committee of the Board of Directors 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 its discretion without prior notice.
During the three and nine months ended September 30, 2024, the Company repurchased 645,938 1.5 2.34 39.5 million remaining under the share repurchase authorization, not including amounts used for net share settlement of vested equity incentive awards.
During the three months ended September 30, 2023, the Company did not repurchase any shares of Class A common stock under the 2022 Share Repurchase Program. During the nine months ended September 30, 2023, the Company repurchased 504,493 shares of Class A common stock under the 2022 Share Repurchase Program, at a total cost to the Company of $3.0 million.
NOTE 9 - RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 2024 and 2023, Expensify, Inc. made no contributions and contributed $0.2 million, respectively, to Expensify.org, a nonprofit benefit organization established by the Company. There were no commitments from Expensify, Inc. that remained open for contribution as of September 30, 2024 and December 31, 2023.
25 | ||
Item 2. 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 in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023 ("2023 Annual Report"). This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Part I, Item 1A. "Risk Factors" in our 2023 Annual Report and included elsewhere in this Quarterly Report on Form 10-Q. See "Special Note Regarding Forward-Looking Statements."
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 15 million members to our community and processed and automated 1.7 billion expense transactions on our platform as of September 30, 2024, freeing people to spend less time managing expenses and more time doing the things they love. For the quarter ended September 30, 2024, an average of 684,000 paid members across an average of 46,300 companies and over 200 countries and territories used Expensify to make money easy.
RECENT DEVELOPMENTS
Since 2020, when we launched the Expensify Card, it has operated under one card program (the “Legacy Card Program”). In February 2024, we launched a new card program (the "Updated Card Program"). The Legacy Card Program operates under an agreement with the payment processor, Marqeta, Inc. ("Marqeta"), and relies on Marqeta to manage the relationship with the issuing bank, Sutton Bank, and the card network, Visa, in authorizing and settling transactions. The Updated Card Program operates under an agreement with a new issuing bank, The Bancorp Bank, N.A. ("Bancorp"), to issue Expensify Cards to customers and authorize and settle transactions on the Visa card network.
All new Expensify Cards issued subsequent to the launch of the Updated Card Program will operate under such program. Our transition of cardholders from the Legacy Card Program to the Updated Card Program has commenced, with a significant portion of card users migrated as of September 30, 2024. We currently expect full completion of this transition by December 31, 2024.
26 | ||
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 (i) month-to-month and can be terminated by either party without penalty at any time or (ii) 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. 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 for customers 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 offer a cashback rewards program to all customers based on volume of Expensify Card transactions and Software as a Service ("SaaS") subscription tier. Cashback rewards are earned on a monthly basis and are applied against outstanding customer receivables or are paid out the following month. We consider our cashback rewards as consideration payable to a customer, and they are recorded as contra revenue within Revenue on the Condensed Consolidated Statements of Operations. Cashback rewards applied against outstanding customer receivables are reflected as a reduction to Accounts receivable, net on the Condensed Consolidated Balance Sheets. Cashback rewards liability is recorded within Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets. 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.
As of September 30, 2024, the Expensify Card consisted of two card programs operating concurrently: the Legacy Card Program and the Updated Card Program. All new Expensify Cards issued subsequent to the launch of the Updated Card Program operate under that program.
Under the Updated Card Program, we generate revenue from the authorization and settlement of Expensify Card transactions and are contractually entitled to all interchange generated on Expensify Card transactions based on our agreement with the issuing bank. Under the Updated Card Program, we are the principal in the transaction (i.e. we control the services) and recognize interchange as revenue on a gross basis within Revenue on the accompanying Condensed Consolidated Statements of Operations. Interchange revenue was $3.7 million and $4.2 million for the three and nine months ended September 30, 2024, respectively.
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 our patented scanning technology SmartScan, 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.
27 | ||
Consideration from a vendor is related to the Expensify Card under the Legacy Card Program, where we use a third-party vendor to issue Expensify Cards and process the related transactions. 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 (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 under the Legacy Card Program. Instead, the net of the Expensify interchange amount and vendor fees are paid to us, which we record as "Consideration from a vendor, net," a contra expense in Cost of revenue, net on the Condensed Consolidated Statements of Operations. The following summarizes these various amounts for each of the periods presented:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Expensify interchange amount | $ | 876 | $ | 3,090 | $ | 7,932 | $ | 8,008 | |||||||||||||||
| Vendor fees | (78) | (281) | (805) | (724) | |||||||||||||||||||
| Consideration from a vendor, net | $ | 798 | $ | 2,809 | $ | 7,127 | $ | 7,284 | |||||||||||||||
OPERATING EXPENSES
Research and Development
Research and development expenses consist primarily of personnel-related expenses, including stock-based compensation, and external contributor costs 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.
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 right-of-use assets, information technology and external professional services, including finance and accounting, audit, tax, legal and compliance, and human resources.
Sales and Marketing
Sales and marketing expenses primarily consist of personnel-related expenses, including stock-based compensation, advertising expenses, depreciation on property and equipment, outsourcing costs for sales and product demos, branding and public relations expenses and referral fees for strategic partners and other benefits that we provide to our referral and affiliate partners.
28 | ||
Other Income (Expenses), Net
Other income (expenses), net, consists of the results of operations of our Fifth & Harvey, LLC subsidiary, which holds title to and manages operations of the operating lease for lots in Portland, Oregon that are currently used to host multiple portable food vendors open to the general public, as well as interest income, realized gains and losses on foreign currency transactions, foreign currency remeasurement, and interest paid under our credit facilities with Canadian Imperial Bank of Commerce ("CIBC").
Provision for 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.
29 | ||
Results of Operations
The results of operations presented below should be reviewed in conjunction with the condensed consolidated financial statements and notes included elsewhere in this Quarterly Report on Form 10-Q.
The following table sets forth our results of operations for each of the periods presented:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| (in thousands, except percentages, share and per share data) | |||||||||||||||||||||||
| Revenue | $ | 35,409 | $ | 36,494 | $ | 102,232 | $ | 115,479 | |||||||||||||||
Cost of revenue, net(1) | 17,145 | 17,680 | 46,091 | 50,380 | |||||||||||||||||||
| Gross margin | 18,264 | 18,814 | 56,141 | 65,099 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
Research and development(1) | 5,618 | 6,607 | 17,936 | 17,119 | |||||||||||||||||||
General and administrative(1) | 9,084 | 14,245 | 29,760 | 38,386 | |||||||||||||||||||
Sales and marketing(1) | 3,274 | 12,860 | 9,730 | 36,757 | |||||||||||||||||||
| Total operating expenses | 17,976 | 33,712 | 57,426 | 92,262 | |||||||||||||||||||
Income (loss) from operations | 288 | (14,898) | (1,285) | (27,163) | |||||||||||||||||||
| Other income (expenses), net | 181 | (2,375) | (1,033) | (5,158) | |||||||||||||||||||
| Income (loss) before income taxes | 469 | (17,273) | (2,318) | (32,321) | |||||||||||||||||||
| (Provision for) benefit from income taxes | (2,667) | 270 | (6,425) | (1,931) | |||||||||||||||||||
| Net loss | $ | (2,198) | $ | (17,003) | $ | (8,743) | $ | (34,252) | |||||||||||||||
| Net loss per share: | |||||||||||||||||||||||
| Basic and diluted | $ | (0.02) | $ | (0.21) | $ | (0.10) | $ | (0.42) | |||||||||||||||
| Weighted average shares of common stock used to compute net loss per share: | |||||||||||||||||||||||
| Basic and diluted | 88,177,739 | 82,469,190 | 86,643,209 | 82,085,508 | |||||||||||||||||||
| Net loss margin | (6) | % | (47) | % | (9) | % | (30) | % | |||||||||||||||
(1)Includes stock-based compensation expense as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Cost of revenue, net | $ | 2,843 | $ | 3,312 | $ | 8,661 | $ | 10,218 | |||||||||||||||
| Research and development | 2,530 | 2,901 | 8,424 | 7,562 | |||||||||||||||||||
| General and administrative | 1,560 | 2,532 | 4,965 | 7,552 | |||||||||||||||||||
| Sales and marketing | 697 | 1,522 | 1,485 | 5,280 | |||||||||||||||||||
| Stock-based compensation expense | $ | 7,630 | $ | 10,267 | $ | 23,535 | $ | 30,612 | |||||||||||||||
30 | ||
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
Revenue
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Amount | % | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Revenue | $ | 35,409 | $ | 36,494 | $ | (1,085) | (3) | % | |||||||||||||||
Revenue decreased by $1.1 million, or 3%, for the three months ended September 30, 2024 compared to the same period in 2023, primarily due to (i) a decrease in billable activity across our user base, including a decrease in pay-per-use billable activity which has a higher average fee per member than our annual members, and (ii) an increase in contra revenue related to cashback payments driven by the increased adoption and spend captured from members using the Expensify Card. These decreases were partially offset by an increase in interchange revenue driven primarily by a shift in cardholder spend from the Legacy Card Program to the Updated Card Program.
Cost of Revenue, Net and Gross Margin
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Amount | % | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Cost of revenue, net | $ | 17,145 | $ | 17,680 | $ | (535) | (3) | % | |||||||||||||||
| Gross margin | $ | 18,264 | $ | 18,814 | $ | (550) | (3) | % | |||||||||||||||
| Gross margin % | 52 | % | 52 | % | |||||||||||||||||||
Cost of revenue, net decreased by $0.5 million, or 3%, for the three months ended September 30, 2024 compared to the same period in 2023. Cost of revenue, net decreased primarily due to a decrease in total employee and employee related expenses subject to allocation. This was partially offset by a decrease in Consideration from a vendor, net driven primarily by a shift in cardholder spend from the Legacy Card Program to the Updated Card Program.
Gross margin remained consistent at 52% for both the three months ended September 30, 2024 and 2023.
OPERATING EXPENSES
Research and Development
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Amount | % | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Research and development | $ | 5,618 | $ | 6,607 | $ | (989) | (15) | % | |||||||||||||||
Research and development expenses decreased by $1.0 million, or 15%, for the three months ended September 30, 2024 compared to the same period in 2023, primarily due to a decrease in total employee and employee related expenses subject to allocation, partially offset by an increase in time spent on project initiatives and new product features.
31 | ||
General and Administrative
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Amount | % | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| General and administrative | $ | 9,084 | $ | 14,245 | $ | (5,161) | (36) | % | |||||||||||||||
General and administrative expenses decreased by $5.2 million, or 36%, for the three months ended September 30, 2024 compared to the same period in 2023, primarily due to (i) a decrease in total employee and employee related expenses subject to allocation, (ii) a decrease in settlement losses, and (iii) a decrease in business insurance expense.
Sales and Marketing
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Amount | % | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Sales and marketing | $ | 3,274 | $ | 12,860 | $ | (9,586) | (75) | % | |||||||||||||||
Sales and marketing expenses decreased by $9.6 million, or 75%, for the three months ended September 30, 2024 compared to the same period in 2023, primarily due to (i) a decrease in advertising spend, (ii) a decrease in outsourcing activities related to sales and product demos, (iii) a decrease in total employee and employee related expenses subject to allocation and a decrease in time spent on sales and marketing activities, and (iv) a decrease in marketing event spend.
Other income (expenses), net
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Amount | % | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Other income (expenses), net | $ | 181 | $ | (2,375) | $ | 2,556 | (108) | % | |||||||||||||||
Other income (expenses), net decreased by $2.6 million, or 108%, for the three months ended September 30, 2024 compared to the same period in 2023, primarily due to a decrease in interest expense incurred due to the repayments of the term loan component of the 2021 Amended Loan and Security Agreement (as defined below), the revolving line of credit and the amortizing term mortgage.
32 | ||
Provision for Income Taxes
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Amount | % | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| (Provision for) benefit from income taxes | $ | (2,667) | $ | 270 | $ | (2,937) | (1088) | % | |||||||||||||||
We recorded a provision for income taxes of $2.7 million during the three months ended September 30, 2024 compared to a benefit from income taxes of $0.3 million for the same period in 2023.
During the three months ended September 30, 2024 and 2023, our effective income tax rate was 568.7% and 1.6%, respectively. The effective income tax rate differs from the statutory rate in 2024 and 2023 primarily due to non-deductible stock-based compensation, Section 162(m) of the Internal Revenue Code ("IRC") compensation limitations, and the change in valuation allowance.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2024 and 2023
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Amount | % | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Revenue | $ | 102,232 | $ | 115,479 | $ | (13,247) | (11) | % | |||||||||||||||
Revenue decreased by $13.2 million, or 11%, for the nine months ended September 30, 2024 compared to the same period in 2023, primarily due to (i) a decrease in billable activity across our user base, including a decrease in pay-per-use billable activity which has a higher average fee per member than our annual members, and (ii) an increase in contra revenue related to cashback payments driven by the increased adoption and spend captured from members using the Expensify Card. These decreases were partially offset by an increase in interchange revenue driven primarily by a shift in cardholder spend from the Legacy Card Program to the Updated Card Program.
Cost of Revenue, Net and Gross Margin
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Amount | % | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Cost of revenue, net | $ | 46,091 | $ | 50,380 | $ | (4,289) | (9) | % | |||||||||||||||
| Gross margin | $ | 56,141 | $ | 65,099 | $ | (8,958) | (14) | % | |||||||||||||||
| Gross margin % | 55 | % | 56 | % | |||||||||||||||||||
Cost of revenue, net decreased by $4.3 million, or 9%, for the nine months ended September 30, 2024 compared to the same period in 2023. Cost of revenue, net decreased primarily due to (i) a decrease in total employee and employee related expenses subject to allocation, and (ii) a decrease in outsourcing activities related to maintaining our platform. These were partially offset by a decrease in Consideration from a vendor, net driven primarily by a shift in cardholder spend from the Legacy Card Program to the Updated Card Program.
Gross margin decreased to 55% for the nine months ended September 30, 2024 compared to 56% in the same period in 2023 due to the factors described in the preceding paragraphs for Revenue and Cost of revenue, net.
33 | ||
Research and Development
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Amount | % | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Research and development | $ | 17,936 | $ | 17,119 | $ | 817 | 5 | % | |||||||||||||||
Research and development expenses increased by $0.8 million, or 5%, for the nine months ended September 30, 2024 compared to the same period in 2023, primarily due to an increase in employee time spent on project initiatives and new product features, partially offset by a decrease in total employee and employee related expenses subject to allocation.
General and Administrative
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Amount | % | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| General and administrative | $ | 29,760 | $ | 38,386 | $ | (8,626) | (22) | % | |||||||||||||||
General and administrative expenses decreased by $8.6 million, or 22%, for the nine months ended September 30, 2024 compared to the same period in 2023, primarily due to (i) a decrease in total employee and employee related expenses subject to allocation, (ii) a decrease in settlement losses, and (iii) a decrease in business insurance expense.
Sales and Marketing
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Amount | % | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Sales and marketing | $ | 9,730 | $ | 36,757 | $ | (27,027) | (74) | % | |||||||||||||||
Sales and marketing expenses decreased by $27.0 million, or 74%, for the nine months ended September 30, 2024 compared to the same period in 2023, primarily due to (i) a decrease in outsourcing activities related to sales and product demos, (ii) a decrease in total employee and employee related expenses subject to allocation and a decrease in time spent on sales and marketing activities, (iii) a decrease in advertising spend, and (iv) a decrease in marketing event spend.
Other income (expenses), net
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Amount | % | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Other income (expenses), net | $ | (1,033) | $ | (5,158) | $ | 4,125 | (80) | % | |||||||||||||||
Other income (expenses), net decreased by $4.1 million, or 80%, for the nine months ended September 30, 2024 compared to the same period in 2023, primarily due to a decrease in interest expense incurred due to the repayments of the term loan component of the 2021 Amended Loan and Security Agreement (as defined below), the revolving line of credit and the amortizing term mortgage.
34 | ||
Provision for Income Taxes
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Amount | % | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Provision for income taxes | $ | (6,425) | $ | (1,931) | $ | (4,494) | 233 | % | |||||||||||||||
We recorded a provision for income taxes of $6.4 million during the nine months ended September 30, 2024 compared to a provision for income taxes of $1.9 million for the same period in 2023.
Our effective income tax rate was (277.2)% and (6.0)% during the nine months ended September 30, 2024 and 2023, respectively. The effective income tax rate differs from the statutory rate in 2024 primarily due to non-deductible stock-based compensation and the change in valuation allowance. The effective income tax rate differs from the statutory rate in 2023 primarily due to non-deductible stock-based compensation, the change in valuation allowance, and Section 162(m) of the IRC compensation limitations.
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
We believe that our ability to increase the number of paid members on our platform will drive our success as a business. Our customers 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 small and medium businesses ("SMBs") or sole proprietors with only one employee, the business owner may also be the only paid member.
The following table sets forth the average number of paid members for each of the periods presented (in thousands):
| Three Months Ended | Paid members | |||||||
September 30, 2024 | 684 | |||||||
September 30, 2023 | 719 | |||||||
35 | ||
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, other income (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 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.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Adjusted EBITDA | $ | 9,676 | $ | (3,549) | $ | 26,982 | $ | 7,320 | |||||||||||||||
| Adjusted EBITDA margin | 27 | % | (10) | % | 26 | % | 6 | % | |||||||||||||||
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. 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 expense, which is not considered indicative of the core operating performance of our business.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
Non-GAAP net income (loss) | $ | 5,432 | $ | (6,736) | $ | 14,792 | $ | (3,640) | |||||||||||||||
Non-GAAP net income (loss) margin | 15 | % | (18) | % | 14 | % | (3) | % | |||||||||||||||
36 | ||
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.
Adjusted EBITDA and Adjusted EBITDA Margin
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Net loss | $ | (2,198) | $ | (17,003) | $ | (8,743) | $ | (34,252) | |||||||||||||||
| Net loss margin | (6) | % | (47) | % | (9) | % | (30) | % | |||||||||||||||
| Add: | |||||||||||||||||||||||
| Provision for (benefit from) income taxes | 2,667 | (270) | 6,425 | 1,931 | |||||||||||||||||||
| Other (income) expenses, net | (181) | 2,375 | 1,033 | 5,158 | |||||||||||||||||||
| Depreciation and amortization | 1,758 | 1,082 | 4,732 | 3,871 | |||||||||||||||||||
| Stock-based compensation expense | 7,630 | 10,267 | 23,535 | 30,612 | |||||||||||||||||||
| Adjusted EBITDA | $ | 9,676 | $ | (3,549) | $ | 26,982 | $ | 7,320 | |||||||||||||||
| Adjusted EBITDA margin | 27 | % | (10) | % | 26 | % | 6 | % | |||||||||||||||
Non-GAAP Net Income and Non-GAAP Net Income Margin
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Net loss | $ | (2,198) | $ | (17,003) | $ | (8,743) | $ | (34,252) | |||||||||||||||
| Net loss margin | (6) | % | (47) | % | (9) | % | (30) | % | |||||||||||||||
| Add: | |||||||||||||||||||||||
| Stock-based compensation expense | 7,630 | 10,267 | 23,535 | 30,612 | |||||||||||||||||||
Non-GAAP net income (loss) | $ | 5,432 | $ | (6,736) | $ | 14,792 | $ | (3,640) | |||||||||||||||
Non-GAAP net income (loss) margin | 15 | % | (18) | % | 14 | % | (3) | % | |||||||||||||||
37 | ||
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 September 30, 2024, we had $39.2 million in cash and cash equivalents, with no outstanding indebtedness and $24.0 million of capacity available for additional borrowings under the revolving line of credit.
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 for the foreseeable future.
CASH FLOWS
The following table summarizes our cash flows for the periods indicated:
| Nine Months Ended September 30, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| (in thousands) | ||||||||||||||
| Net cash provided by operating activities | $ | 16,475 | $ | 2,102 | ||||||||||
| Net cash used in investing activities | (6,699) | (4,833) | ||||||||||||
| Net cash used in financing activities | (21,180) | (10,371) | ||||||||||||
| Net decrease in cash and cash equivalents and restricted cash | $ | (11,404) | $ | (13,102) | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $16.5 million for the nine months ended September 30, 2024 compared to $2.1 million for the same period in 2023. The increase was primarily due to a decrease in marketing event and advertising spend, and a decrease in outsourcing activities related to sales and product demos, partially offset by a decrease in revenue.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities was $6.7 million for the nine months ended September 30, 2024, primarily consisting of software development costs.
Net cash used in investing activities increased for the nine months ended September 30, 2024 compared to the same period in 2023, primarily due to an increase in employee and external contributor software development costs.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used in financing activities was $21.2 million for the nine months ended September 30, 2024, primarily consisting of the repayment of the revolving line of credit and the amortizing term mortgage, and the repurchase and retirement of common stock, which was partially offset by proceeds from common stock purchased under the Matching Plan.
During the nine months ended September 30, 2023, net cash used in financing activities primarily consisted of principal payments on the term loan, the repurchase and retirement of common stock, and payments for employees taxes withheld from stock-based awards, which was partially offset by proceeds from common stock purchased under the Matching Plan.
38 | ||
CREDIT FACILITIES
Amortizing Term Mortgage
In August 2019, we entered into an $8.3 million amortizing term mortgage agreement with Canadian Imperial Bank of Commerce ("CIBC") for our commercial building located in Portland, Oregon. The agreement required principal and interest payments due each month over a five-year period. Interest accrued at a fixed rate of 5.00% per year until August 2024, at which point the remaining outstanding principal balance on the amortizing term mortgage was due in full. The borrowings were secured by the building. On August 29, 2024, we repaid in full the then-outstanding balance of $7.6 million and an immaterial amount of accrued interest on the amortizing term mortgage and terminated the associated mortgage agreement with CIBC and secured promissory note. See Note 4 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further information.
Loan and Security Agreement
In September 2021, we amended and restated our loan and security agreement with CIBC (the "2021 Amended Loan and Security Agreement") which consisted of a $45.0 million initial term loan, the option to enter into an additional $30.0 million delayed term loan that expired in March 2023, and a monthly revolving line of credit of $25.0 million. Under the 2021 Amended Loan and Security Agreement, the initial term loan of $45.0 million was payable over a 60-month period with principal and accrued interest payments due each quarter, commencing on September 30, 2021. The 2021 Amended Term Loan and Security Agreement amortized in equal quarterly installments of $0.1 million through September 30, 2024, $0.2 million beginning October 1, 2024 and $0.6 million beginning October 1, 2025, with any remaining principal balance due and payable on maturity in September 2026. The amounts borrowed accrued interest at the bank’s reference rate plus 2.25% beginning on September 30, 2021 and continued on a quarterly basis through maturity of the term loan. The borrowings were secured by substantially all our assets. The then-outstanding balance of $36.0 million and $0.1 million of accrued interest on the term loan were repaid in full on October 12, 2023.
In February 2024, we entered into a Second Amended and Restated Loan and Security Agreement (as amended by the First Amendment described below, and as may be further amended from time to time, the "2024 Amended Loan and Security Agreement") with CIBC. The 2024 Amended Loan and Security Agreement amends and restates the 2021 Amended Loan and Security Agreement, to extend the maturity date of the revolving line of credit from September 2024 to September 2025, remove certain provisions related to the term loan that was repaid in full in October 2023, and make certain changes to the positive and negative covenants intended to better align with our operations. The 2024 Amended Loan and Security Agreement continues to provide for a $25.0 million revolving credit facility. Borrowings under the revolving line of credit accrue interest at CIBC’s reference rate plus 1.00% (9.00% as of September 30, 2024) and are secured by substantially all our assets. In May 2024, we entered into a First Amendment to the 2024 Amended Loan and Security Agreement, which amended the covenant restricting the amount of repurchases of common stock to allow for certain additional repurchase activity and provided a waiver for our non-compliance during prior periods with the previous version of such covenant.
We incurred an immaterial amount of costs in connection with entering into the 2024 Amended Loan and Security Agreement. These debt issuance costs are reflected as a deferred asset within Other current assets on the Condensed Consolidated Balance Sheets and are being amortized to interest expense on a straight-line basis over the term of the agreement. As of September 30, 2024, the unamortized debt issuance costs included within Other current assets was immaterial.
On April 24, 2024, we entered into an irrevocable standby letter of credit (the "Letter of Credit") issued under the 2024 Amended Loan and Security Agreement to reduce cash collateral requirements in connection with the Updated Card Program. The Letter of Credit was issued in the amount of $1.0 million for the benefit of Bancorp and expires on March 20, 2025. No amounts have been drawn on the Letter of Credit as of September 30, 2024.
39 | ||
On August 29, 2024, we entered into a Second Amendment to the 2024 Amended Loan and Security Agreement, described below.
The then-outstanding balance of $15.0 million and an immaterial amount of accrued interest on the revolving line of credit were repaid in full on July 10, 2024. See Note 4 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further information.
Certain Covenants
We are subject to customary covenants under the 2024 Amended Loan and Security Agreement, 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 liquidity ratio, as defined in the 2024 Amended Loan and Security Agreement, tested each quarter, of not less than 1.10 to 1.00 from the quarter ending March 31, 2024, not less than 1.20 to 1.00 from the quarter ending June 30, 2024 and each quarter thereafter, and a total EBITDA net leverage ratio, as defined in the 2024 Amended Loan and Security Agreement, tested each quarter, of not less than 2.50 to 1.00 from the quarter ended March 31, 2025 and each quarter thereafter.
Upon full repayment of the amortizing term mortgage on August 29, 2024, we entered into a Second Amendment to the 2024 Amended Loan and Security Agreement, which permits our wholly-owned subsidiary, 401 SW 5th Ave LLC, to remain an excluded subsidiary provided that the subsidiary does not engage in any operations or activities except to maintain legal existence and ownership of the real property or any related activities thereto, does not hold assets other than real estate assets, and does not incur any indebtedness except for intercompany liabilities permitted under the agreement or grant any liens.
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 September 30, 2024, we were in compliance with all debt covenants.
Contractual Obligations and Commitments
As of September 30, 2024, there have been no material changes in our contractual obligations and commitments as disclosed in our 2023 Annual Report.
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 Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Changes in Stockholders’ Equity, or Condensed Consolidated Statements of Cash Flows.
40 | ||
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 condensed consolidated financial statements included elsewhere herein have been prepared in accordance with GAAP. The preparation of our condensed consolidated 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.
There have been no material changes to our critical accounting policies and estimates as compared to those described in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2023 Annual Report.
Recent Accounting Pronouncements
See Note 1 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for recently issued accounting pronouncements not yet adopted as of the date of this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our market risk from the disclosure included under Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in our 2023 Annual Report.
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act")), as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures, and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms. Based on such evaluation, our chief executive officer and chief financial officer have concluded that as of September 30, 2024, our disclosure controls and procedures were effective at a reasonable assurance level.
41 | ||
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
LIMITATIONS OF EFFECTIVENESS OF CONTROLS AND PROCEDURES
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
42 | ||
Part II - Other Information
Item 1. Legal Proceedings
On November 29, 2023, a putative securities class action (the “Putative Class Action”) was filed in the United States District Court for the District of Oregon captioned Wilhite v. Expensify, Inc., et al., Case No. 3:23-cv-01784-JR, naming us, two of our executive officers and two of our former directors as defendants (collectively, the "Defendants"). The lawsuit is purportedly brought on behalf of all those who purchase or acquired our stock pursuant or traceable to our initial public offering (“IPO”). The complaint alleges claims under Sections 11 and 15 of the Securities Act of 1933 based on allegedly false or misleading statements in the offering documents filed in connection with our IPO. The lawsuit seeks unspecified damages and other relief. On January 29, 2024, three shareholders moved to be appointed lead plaintiff in the Putative Class Action. The court appointed a lead plaintiff and lead counsel on March 11, 2024. Pursuant to the parties' stipulation, the lead plaintiff's amended complaint was filed May 10, 2024, naming six of our current board members as additional defendants (together with the Defendants, the "Amended Defendants"). Amended Defendants' motion to dismiss the amended complaint was filed on July 9, 2024. The lead plaintiff's opposition was filed September 6, 2024, and the Amended Defendants' reply was filed October 18, 2024. The court has not yet scheduled a hearing on the Amended Defendants' motion to dismiss. The Amended Defendants deny the allegations of wrongdoing and will continue to vigorously defend against the claims in the Putative Class Action.
On May 10, 2024, a shareholder derivative lawsuit (the "Derivative Action") was filed in the United States District Court for the District of Oregon captioned O'Halloran v. Barrett et al., Case No. 3:24-cv-00775, naming us, all of our current board members and executive officers and two of our former directors as defendants (collectively, the "Derivative Defendants"). On August 14, 2024, the Court stayed the Derivative Action pending resolution of any and all motion(s) to dismiss the Putative Class Action. The case remains stayed. The Derivative Defendants deny the allegations of wrongdoing and will continue to vigorously defend against the claims in the Derivative Action.
In addition to the matters described above, from time to time, we are involved in various legal proceedings arising from the normal course of business activities. We are not presently a party to any litigation the outcome of which, we believe, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows or financial condition. We have received, and may in the future continue to receive, claims from third parties asserting, among other things, infringement of their intellectual property rights. Defending such proceedings is costly and can impose a significant burden on management and employees. We may receive unfavorable preliminary or interim rulings in the course of litigation, and there can be no assurances that favorable final outcomes will be obtained. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
Item 1A. Risk Factors
Except to the extent updated below or previously updated, or to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors (including, without limitation, the matters discussed in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operation”), there have been no material changes to the risk factors set forth in Part I, Item IA. "Risk Factors" of our 2023 Annual Report. You should carefully read and consider the risks and uncertainties, together with all of the other information included in the 2023 Annual Report and this Quarterly Report on Form 10-Q, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our condensed consolidated financial statements and related notes, and other documents that we file with the SEC.
43 | ||
We use third-party artificial intelligence technologies in our business, and the deployment, use, and maintenance of these technologies involve technological and legal risks.
We use third-party artificial intelligence (“AI”), machine learning, and automated decision-making technologies (collectively, “AI Technologies”) throughout our business, and are making significant investments in this area.
For example we use AI Technologies to optimize our internal processes, including analyzing and processing receipts and drafting personalized marketing communications.
We expect that increased investment will be required in the future to continuously improve our use of AI Technologies. As with many technological innovations, there are significant risks involved in developing, maintaining and deploying these technologies and there can be no assurance that the usage of or our investments in such technologies will always enhance our products or services or be beneficial to our business, including our efficiency or profitability.
In particular, if the models underlying our AI Technologies are: incorrectly implemented; reliant on incomplete, inadequate, inaccurate, biased or otherwise poor quality data; used without sufficient oversight and governance to ensure their responsible use; and/or adversely impacted by unforeseen defects, technical challenges, cybersecurity threats or material performance issues, the performance of our products, services and business, as well as our reputation, could suffer or we could incur liability resulting from the violation of laws or contracts to which we are a party or civil claims.
We use third-party AI Technologies and infrastructure which may pose operational and data security risks.
We use AI Technologies licensed from third parties, such as OpenAI, in our technologies and our ability to continue to use such technologies at the scale we need may be dependent on access to OpenAI’s software and infrastructure. While we believe that there are alternative third-party AI Technologies which would be suitable, we cannot control the availability or pricing of such third-party AI Technologies, especially in a highly competitive environment, and we may be unable to negotiate favorable economic terms with the applicable providers. If any such third-party AI Technologies become incompatible with our solutions or unavailable for use, or if the providers of such models unfavorably change the terms on which their AI Technologies are offered or terminate their relationship with us, our solutions may become less appealing to our customers and our business will be harmed. In addition, to the extent any third-party AI Technologies are used as a hosted service, any disruption, outage, or loss of information through such hosted services could disrupt our operations or solutions, damage our reputation, cause a loss of confidence in our solutions, or result in legal claims or proceedings, for which we may be unable to recover damages from the affected provider.
Additionally, our reliance on third-party AI Technologies, such as those licensed from OpenAI, involves certain data and security risks. While we seek to obtain contractual commitments from the applicable providers that prohibit the use of our data to train or refine their AI models, we may not be able to implement technical measures to prevent such providers from doing so in contravention to their contractual obligations.
The use of generative AI Technologies may produce inaccurate or infringing content, leading to reputational damage and legal challenges.
There is a risk that generative AI Technologies could produce inaccurate or misleading content or other discriminatory or unexpected results or behaviors, such as hallucinatory behavior that can generate irrelevant, nonsensical, or factually incorrect results, all of which could harm our reputation, business, or customer relationships. While we take measures designed to ensure the accuracy of such AI generated content and to monitor for potential inaccuracies, those measures may not always be successful, and in some cases, we may need to rely on end users to report such inaccuracies.\
44 | ||
The regulatory framework governing the use of AI Technologies is rapidly evolving, and we cannot predict how future legislation and regulation will impact our ability to offer products or services that we develop which leverage AI Technologies.
The regulatory framework for AI Technologies is rapidly evolving as many federal, state and foreign government bodies and agencies have introduced or are currently considering additional laws and regulations. Additionally, existing laws and regulations may be interpreted in ways that would affect the operation of our AI Technologies. As a result, implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future, and we cannot yet determine the impact future laws, regulations, standards, or market perception of their requirements may have on our business and may not always be able to anticipate how to respond to these laws or regulations.
Already, certain existing legal regimes (e.g., relating to data privacy) regulate certain aspects of AI Technologies, and new laws regulating AI Technologies have been enacted in China and are expected to enter into force in the United States and the EU in 2024. In the United States, the Biden administration issued a broad Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence (the “2023 AI Order”), that sets out principles intended to guide AI design and deployment for the public and private sector and signals the increase in governmental involvement and regulation over AI Technologies. The 2023 AI Order instructed several other federal agencies to promulgate additional regulations within specific timeframes regarding the use and development of AI Technologies. Already agencies such as the Department of Commerce and the Federal Trade Commission have issued proposed rules governing the use and development of AI Technologies. Additional legislation related to AI Technologies has also been introduced at the federal level and is advancing at the state level. In September 2024, California enacted seventeen new bills that further regulate use of AI Technologies and provide consumers with additional protections around companies’ use of AI Technologies, such as requiring companies to disclose certain uses of generative AI. These new bills may affect how we use AI Technologies in our business. For example, AB 1008 amends the CCPA to clarify that AI Technologies can generate output that is considered personal information, which would mean that California consumers have a right to request that such personal information generated by AI Technologies be deleted or corrected, pursuant to their rights under the CCPA. Such additional regulations may impact our ability to develop, use and commercialize AI Technologies in the future.
In Europe, on August 1, 2024, the EU Artificial Intelligence Act (the “EU AI Act”) entered into force, and establishes a comprehensive, risk-based governance framework for AI in the EU market. The majority of the substantive requirements will apply from August 2, 2026. The EU AI Act applies to companies that develop, use and/or provide AI in the EU and includes requirements around transparency, conformity assessments and monitoring, risk assessments, human oversight, security, accuracy, general purpose AI and foundation models, and fines for breach of up to 7% of worldwide annual turnover. In addition, on September 28, 2022, the European Commission proposed two Directives seeking to establish a harmonized civil liability regime for AI in the EU. Once fully applicable, the EU AI Act and the Liability Directives will have a material impact on the way AI is regulated in the EU. Further, in Europe we are subject to the European Union General Data Protection Regulation (the “GDPR”), which regulates our use of personal data for automated decision making that results in a legal or similarly significant effect on an individual, and provides rights to individuals in respect of that automated decision making. Recent case law from the Court of Justice of the European Union (“CJEU”) has taken an expansive view of the scope of the GDPR’s requirements around automated decision making and introduced uncertainty in the interpretation of these rules. The EU AI Act, together with developing guidance and/or decisions in this area, may affect our use of AI Technologies and our ability to provide, improve or commercialize our services, require additional compliance measures and changes to our operations and processes, result in increased compliance costs and potential increases in civil claims against us, and could adversely affect our business, operations and financial condition.
It is possible that further new laws and regulations will be adopted in the United States and in other non-U.S. jurisdictions, or that existing laws and regulations, including competition and antitrust laws, may be interpreted in ways that would limit our ability to use AI Technologies for our business, or require us to
45 | ||
change the way we use AI Technologies in a manner that negatively affects the performance of our products, services, and business and the way in which we use AI Technologies. We may need to expend resources to adjust our products or services in certain jurisdictions if the laws, regulations, or decisions are not consistent across jurisdictions. Further, the cost to comply with such laws, regulations, or decisions and/or guidance interpreting existing laws, could be significant and would increase our operating expenses (such as by imposing additional reporting obligations regarding our use of AI Technologies). Such an increase in operating expenses, as well as any actual or perceived failure to comply with such laws and regulations, could adversely affect our business, financial condition and results of operations.
46 | ||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth information regarding our purchases of shares of Class A common stock during the three months ended September 30, 2024.
| Total number of shares purchased | Weighted average price paid per share | Total number of shares purchased as part of publicly announced programs | Maximum number (or approximate dollar value) of shares that may yet be purchased under the program(1) | ||||||||||||||||||||
| July 1 - 31, 2024 | — | $ | — | — | $ | 41,000,003 | |||||||||||||||||
| August 1 - 31, 2024 | 645,938 | $ | 2.34 | 645,938 | $ | 39,490,003 | |||||||||||||||||
| September 1 - 30, 2024 | — | $ | — | — | $ | 39,490,003 | |||||||||||||||||
Three months ended September 30, 2024 | 645,938 | 645,938 | |||||||||||||||||||||
(1)On May 12, 2022, we announced the approval of a share repurchase program with authorization to purchase up to $50.0 million of our Class A common stock at management’s discretion. The repurchase program does not have an expiration date, does not obligate us to repurchase any specific number of shares and may be modified, suspended or terminated at any time at our discretion. At September 30, 2024, we had approximately $39.5 million remaining under the share repurchase authorization, not including amounts used for net share settlement of vested equity incentive awards.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
47 | ||
Item 5. Other Information
Insider Trading Arrangements
Trading Arrangement | |||||||||||||||||||||||||||||||||||
Action | Date | Rule 10b5-1(1) | Non-Rule 10b5-1(2) | Total Shares to be Sold | Expiration Date | ||||||||||||||||||||||||||||||
X | |||||||||||||||||||||||||||||||||||
X | |||||||||||||||||||||||||||||||||||
X | |||||||||||||||||||||||||||||||||||
(1)Intended to satisfy the affirmative defense of Rule 10b5-1(c).
(2)Not intended to satisfy the affirmative defense of Rule 10b5-1(c).
(3)The trading plan provides for the sale of up to 67,992 shares and terminates upon the earlier of (i) December 20, 2026 or (ii) the aggregate sale of 67,992 shares under the trading plan.
(4)The actual number of shares sold under the trading plan will depend on the current share price when sales occur, this estimation is based on the closing share price on August 14, 2024, the date the plan was terminated.
(5)The actual number of shares sold under the trading plan will depend on the current share price when sales occur, this estimation is based on the closing share price on October 28, 2024.
Certificate of Retirement
On November 7, 2024 the Company filed a Certificate of Retirement with the Secretary of State of the State of Delaware to retire 2,520 shares of LT50 common stock, par value $0.0001 per share, of the Company (“LT50 Common Stock”). All 2,520 shares of LT50 Common Stock were converted into 2,520 shares of Class A common stock, par value $0.0001 per share, of the Company (the “Class A Common Stock”), in connection in connection with the forfeiture to the Company of unvested LT50 Common Stock. The Company’s Amended and Restated Certificate of Incorporation requires that any shares of LT50 Common Stock that are converted into shares of Class A Common Stock be retired and may not be reissued.
Effective upon filing, the Certificate of Retirement amended the Amended and Restated Certificate of Incorporation of the Company to reduce the total authorized number of shares of capital stock of the Company by 2,520 shares. The total number of authorized shares of the Company is now 1,056,838,311, such shares consisting of 1,000,000,000 shares designated Class A Common Stock, 21,871,197 shares designated LT10 Common Stock, 24,967,114 shares designated LT50 Common Stock, each with a par value of $0.0001 per share, of the Company, and 10,000,000 shares designated preferred stock, par value $0.0001 per share, of the Company.
48 | ||
Item 6. Exhibits
| Incorporated by Reference | |||||||||||||||||||||||
| Exhibit No. | Name | Form | File No. | Exhibit | Filing Date | ||||||||||||||||||
3.1* | |||||||||||||||||||||||
| 3.2 | 8-K | 001-41043 | 3.2 | November 15, 2021 | |||||||||||||||||||
10.1* | |||||||||||||||||||||||
31.1* | |||||||||||||||||||||||
31.2* | |||||||||||||||||||||||
32.1** | |||||||||||||||||||||||
32.2** | |||||||||||||||||||||||
101.INS* | Inline XBRL Instance Document. | ||||||||||||||||||||||
101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | ||||||||||||||||||||||
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | ||||||||||||||||||||||
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | ||||||||||||||||||||||
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkable Document. | ||||||||||||||||||||||
104* | Cover Page Interactive Data File (embedded within the Inline XBRL document). | ||||||||||||||||||||||
| * | Filed herewith. | |||||||||||||
| ** | Furnished herewith. The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are deemed furnished and not filed with the SEC and are not to be incorporated by reference into any filing of the Company under the Securities Act or the Exchange Act, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing. | |||||||||||||
49 | ||
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
EXPENSIFY, INC. | |||||||||||
Date: November 8, 2024 | By: | /s/ David Barrett | |||||||||
David Barrett | |||||||||||
President and Chief Executive Officer | |||||||||||
(Principal Executive Officer) | |||||||||||
Date: November 8, 2024 | By: | /s/ Ryan Schaffer | |||||||||
| Ryan Schaffer | |||||||||||
| Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||