WEAVE COMMUNICATIONS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Readers are cautioned that these forward-looking statements are subject to risks, uncertainties, and assumptions that are difficult to predict, including the continuing impact of COVID-19 on our business, results of operations and financial condition and our and theU.S. government or regulator's further responses to it, and the impact of COVID-19 on our business, results of operations and financial condition and our and theU.S. government's response to it, and those identified above, under "Part I, Item 1A. Risk Factors," and elsewhere herein. Therefore, our actual results could differ materially from those discussed in the forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.
In this annual report, unless otherwise indicated or the context requires, “Weave”, “we”, “us” and “our” means
We have omitted the management's discussion and analysis of financial condition and results of operations for the year endedDecember 31, 2020 compared to the year ended endedDecember 31, 2019 as it would be redundant to the discussion previously included in Management's Discussion and Analysis of Financial Condition and Result of Operations within our Prospectus, which was declared effective by theSEC onNovember 10, 2021 .
Overview
Weave is a leading all-in-one customer communications and engagement software platform for small and medium-sized businesses. We are creating a world where SMB entrepreneurs can utilize state-of-the-art technology to transform how they attract, communicate and engage customers, grow their business and realize their dreams. Our platform enables entrepreneurs to maximize the value of their customer interactions and minimize the time and effort spent on manual or mundane tasks. In a similar way to how the smartphone has transformed the manner in which we live our daily lives, our platform changes the way SMBs manage their businesses. We have democratized powerful communications and engagement capabilities previously only available to enterprises, made them intuitive and easy to use and put them in one place - always within reach of the SMB. Our cloud-based software platform streamlines the day-to-day operations of running a small business. We offer an all-in-one platform spanning all forms of communications and customer engagement ranging from answering phones, to scheduling appointments, to sending text reminders, to requesting client reviews, to collecting payments, to sending email marketing campaigns. We bring small businesses and the people they serve closer together by unifying, modernizing and personalizing all customer interactions. Our platform helps improve communications, attract more customers, keep customers engaged and increase overall retention. Since our founding in 2011, we have evolved our platform, innovating and improving the products and integrations we provide for small businesses. We have expanded our product offering from a suite of integrated phone, email and text solutions to include analytics in 2019, payments in 2019 and forms in 2021, among other capabilities launched in those years. Through investments in product development and integrations, we have expanded beyond dentistry and optometry to other verticals, such as home services, as we pursue our vertical "domino" growth strategy.
Initial public offering
OnNovember 15, 2021 , we completed our IPO for the sale of 5,000,000 shares of our common stock,$0.00001 par value per share at an offering price of$24.00 per share, pursuant to our Prospectus. We received aggregate proceeds of$111.6 million from our IPO after deducting underwriting discounts and commissions. 70 --------------------------------------------------------------------------------
As part of the IPO, the 43,836,109 outstanding convertible redeemable preferred shares with a book value of
See footnote 13 in the consolidated financial statements for more details on additional stock-based compensation elements, including the 2021 stock incentive plan, the stock purchase plan for employees and restricted stock units, which were adopted/issued in connection with the IPO.
Additional financial information – Disaggregated revenue and cost of revenue
To supplement our discussion of our consolidated results of operations, we have separated our revenue and cost of revenue into recurring and non-recurring categories to disaggregate revenue and costs of revenue that are one-time in nature from those that are term-based and renewable. We generate revenue primarily from recurring subscription fees charged to access our software platform and phone services, including recurring hardware fees. These recurring revenues accounted for 94%, 95% and 98% of our revenue for the years endedDecember 31, 2021 , 2020 and 2019, respectively. respectively. In addition, we provide recurring payment processing services through Weave Payments and derive revenue on transactions between our customers that utilize Weave Payments and their end consumers. We also derive revenue associated with non-recurring installation fees for onboarding customers and from embedded leases on phone hardware. We utilize our onboarding services and phone hardware as customer acquisition tools and price them competitively to lower the barriers to entry for new customers adopting our platform. As a result, the variable cost associated with providing phone hardware and onboarding assistance has historically exceeded the related revenue, resulting in negative gross profit for each. The revenue and related costs associated with onboarding new customers are typically non-recurring, and are primarily associated with the initial setup of a customer's software and phone system. Revenue on phone hardware provided to our customers, deemed embedded lease revenue, is recognized over the related subscription period. The associated costs, which primarily represent depreciation expense on phones financed under capital lease arrangements, are incurred over the useful lives of the phones. We consider the net costs of onboarding and hardware, in addition to our sales and marketing activities, to be core elements of our customer acquisition approach.
The table below outlines our revenue and associated revenue cost for our recurring subscription and payment processing services, as well as our onboarding services and telephony hardware:
71 --------------------------------------------------------------------------------
Year Ended December 31,
2021 2020 2019
(dollars in thousands)
Subscription and payment processing:
Revenue $ 108,841 $ 74,182 $ 42,838
Cost of revenue 29,452 19,595 10,171
Gross profit $ 79,389 $ 54,587 $ 32,667
Gross margin 73 % 74 % 76 %
Onboarding:
Revenue $ 3,687 $ 3,095 $ 745
Cost of revenue 10,942 7,691 3,803
Gross profit $ (7,255) $ (4,596) $ (3,058)
Gross margin (197) % (149) % (411) %
Hardware:
Revenue $ 3,343 $ 2,619 $ 2,163
Cost of revenue(1) 8,978 7,163 4,546
Gross profit(1) $ (5,635) $ (4,544) $ (2,383)
Gross margin (169) % (174) % (110) %
______________
(1) The cost of equipment revenue represents the amortization of telephone equipment over a useful life of 3 years.
Factors affecting our performance
Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to attract new customers, retain and expand within our customer base, add new products and expand into new industry verticals. Attract New Customers Our ability to attract new customers is dependent upon a number of factors, including the effectiveness of our pricing and products, the sum total of the features and pricing of the alternative point solution patchwork, the effectiveness of our marketing efforts, the effectiveness of our channel partners in selling and marketing our platform and the growth of the market for SMB communications and engagement. Sustaining our growth requires continued adoption of our platform by new customers. We aim to add new customers through a combination of unpaid channels, such as recommendations and word of mouth, and paid channels, such as digital marketing, professional events, brand marketing and our teams of sales representatives. Historically, our go-to-market strategy focused on increasing the number of locations with most of our customers having a single location; however, we recently introduced multi-office functionality to our platform to allow us to better service organizations with multiple locations. In addition to pursuing continued customer growth among small businesses, we intend to pursue opportunities to expand our customer base among medium-sized businesses. Our ability to expand among medium-sized businesses will depend upon our ability to successfully sell our platform to multi-location organizations and effectively retain them. As ofDecember 31, 2021 , we had more than 22,000 customers inthe United States andCanada , spanning organizations across our end markets, and 23,831 customer locations under subscription.
Retain and grow our customer base
Our ability to retain and increase revenue within our existing customer base is
dependent upon a number of factors, including customer satisfaction with our
platform and support, the sum total of the
72
--------------------------------------------------------------------------------
features and pricing of the alternative point solution patchwork and our ability
to effectively enhance our platform by developing new applications and features
and addressing additional use cases. The deployment of the Weave phone system at
each of our customers increases stickiness and customer loyalty. Historically,
our subscriptions have provided our new customers with immediate access to the
majority of our products and functionality. However, we have added additional
add-on products in recent years, such as Weave Payments, which we have begun to
successfully cross-sell to our customer base. We believe our increasing
dollar-based net retention rate over the periods presented demonstrates the
effectiveness of this strategy. We intend to continue to invest in enhancing
awareness of our platform, creating additional use cases and developing more
products, features and functionality.
Customer retention also impacts our future financial performance given its
potential to drive improved gross margin. The initial onboarding costs as well
as the cost of hardware, which is depreciated over three years, represent
substantial cost of revenue elements during the first few years of a customer's
life. We believe our disaggregated revenue and cost of revenue financial data,
particularly our subscription and payment processing gross margin, provide
insight into the impact of customer retention on overall gross margin
improvement. Our subscription and payment processing gross margin was 73%,74%
and 76% for the years ended December 31, 2021 , 2020 and 2019.
Add new products
We continue to add new products and functionality to our platform, broadening our use cases and applicability for different customers. Our ability to cohesively deliver a deep product suite with as little friction as possible to customers is a key determinant of winning new customers. In short, our ability to add new SMB customers is dependent on the features and functionality we add to our platform for small business. The depth of our platform's functionality is dependent upon both our internally-developed technology and our platform partnerships. We expect our future success in winning new clients to be partially driven by our ability to continue to develop and deliver new, innovative products to small businesses in a timely manner.
Expand into new verticals
We believe we have built a flexible platform that encompasses the majority of the functionality needed for communications and engagement across industry verticals, and we have developed a repeatable playbook for assessing new industry verticals and building the remaining "last mile" of vertical-specific functionality. Entering a new industry vertical includes identifying, evaluating, developing and launching the new offering. We create functionality specific to the new industry vertical and then integrate that functionality with the primary systems of record in that vertical. We started in dental and have since successfully expanded to optometry and veterinary, among other areas. In the near term, while we intend to continue to grow within our core vertical markets, we are focused on additional expansion opportunities. We believe expansion into adjacent markets, such as home services, diversifies our end-market exposure and creates a flywheel effect.
Business update regarding COVID-19
The COVID-19 pandemic has had a disproportionate adverse impact on SMBs as compared to larger companies. This resulted in an initial slowdown in new customer acquisition during the first half of 2020. However, we experienced a recovery and return to growth in subsequent periods through 2021, which we believe was aided by the meaningful ways in which the pandemic impacted our customers and intensified their communications and engagement challenges. Given the nature of our business, the COVID-19 pandemic did not have a negative material impact on our revenue and results of operations. We did not experience a material number of non-renewals of subscriptions during 2020 or 2021, nor any material declines in revenue associated with potential declines in our customers' revenues. Out of an abundance of caution, in mid 2020 we did undergo a reduction of force of approximately 9% of our total workforce, but we are now hiring and we have continued to increase our headcount, period-over-period since those terminations. ThroughDecember 31, 2021 , we have experienced headwinds in our lead generation 73 -------------------------------------------------------------------------------- activities due to COVID-19-related cancellation or postponement of trade shows and conferences, which are channels we have historically utilized as part of our go-to-market strategy. While we believe these headwinds have negatively impacted our growth rates throughout 2020 and 2021, we have shifted our lead-generation activities to increase our focus on inbound and outbound channels which has driven substantial growth in customer locations under subscription and revenue over the same periods. Despite widespread vaccination efforts inthe United States , COVID-19 could still have an adverse impact on our customers and their clients. For example, the Omicron variant, which appears to be the most transmissible variant to date, has spread throughoutthe United States . The impact of the Omicron variant and additional variants cannot be predicted at this time, and could depend on numerous factors, including vaccination rates among the population, the effectiveness of COVID-19 vaccines against these variants and the response by governmental bodies and regulators. As a result, we could experience reduced customer demand and willingness to enter into or renew subscriptions with us. We may also experience impact from delayed sales and implementation cycles, including customers and prospective customers delaying contract signing or subscription
Key business indicators
In addition to our GAAP financial information, we review several operating and
financial metrics, including the following key metrics to evaluate our business,
measure our performance, identify trends affecting our business, formulate
business plans and make strategic decisions.
December 31,
2021 2020
2019
Number of locations (end of period) 23,831 18,539
103 % 102 % 97 % Dollar-based gross retention rate 94 % 91 % 93 % Number of Customer Locations We believe the number of customer locations for each year provides us an indicator of our market penetration, the growth of our business and our potential future business opportunities. We measure locations as the total number of customer locations under subscription active on the Weave platform as of the end of each month. A single organization or customer with multiple divisions, segments, offices or subsidiaries is counted as multiple locations if they have entered into subscriptions for each location. We believe quarter to quarter changes in the number of customer locations do not provide meaningful information because they tend to overstate positive or negative trends in our business. Accordingly, we plan to only disclose this information on an annual basis in our annual reports on Form 10-K and our annual and fourth quarter earnings releases.
Net retention rate in dollars
We believe our dollar-based net retention rate, or NRR, provides insight into
our ability to retain and grow revenue from our customer locations, as well as
their potential long-term value to us. For retention rate calculations, we use
adjusted monthly revenue, or AMR, which is calculated for each location as the
sum of (i) the subscription component of revenue for each month and (ii) the
average of the trailing-three-month recurring payments revenue. Since payments
revenue represents the revenue we recognize on payment processing volume, which
is reported net of transaction processing fees, we believe the three-month
average appropriately adjusts for short-term fluctuations in transaction volume.
To calculate our NRR, we first identify the cohort of locations, or the Base
Locations, that were active in a particular month, or the Base Month. We then
divide AMR for the Base Locations in the same month of the subsequent year, or
the Comparison Month, by AMR in the Base Month to derive a monthly NRR. AMR in
the Comparison Month includes the impact of any churn, revenue contraction,
revenue expansion, and pricing changes, and by definition does not include any
new customer locations under subscription added
74
--------------------------------------------------------------------------------
between the Base Month and Comparison Month. We derive our annual NRR as of any
date by taking a weighted average of the monthly net retention rates over the
trailing twelve months prior to such date.
Gross retention rate in dollars
We believe our dollar-based gross retention rate, or GRR, provides insight into our ability to retain our customers, allowing us to evaluate whether the platform is addressing customer needs. To calculate our GRR, we first identify the cohort of locations, or the Base Locations, that were under subscription in a particular month, or the Base Month. We then calculate the effect of reductions in revenue from customer location terminations by measuring the amount of AMR in the Base Month for Base Locations still under subscription twelve months subsequent to the Base Month, or Remaining AMR. We then divide Remaining AMR for the Base Locations by AMR in the Base Month for the Base Locations to derive a monthly gross retention rate. We calculate GRR as of any date by taking a weighted average of the monthly gross retention rates over the trailing twelve months prior to such date. GRR reflects the effect of customer locations that terminate their subscriptions, but does not reflect changes in revenue due to revenue expansion, revenue contraction, or addition of new customer locations.
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared in conformity with generally accepted accounting principles inthe United States , or GAAP, we use free cash flow, free cash flow margin and Adjusted EBITDA, which are non-GAAP financial measures, to enhance the understanding of our GAAP financial measures, evaluate growth trends, establish budgets and assess operating performance. These non-GAAP financial measures should not be considered by the reader as substitutes for, or superior to, the financial statements and financial information prepared in accordance with GAAP. See below for a description of these non-GAAP financial measures and their limitations as an analytical tool. Year Ended December 31, 2021 2020 2019 (dollars in thousands) Net cash used in operating activities$ (20,373) $ (15,518) $ (22,069) Net cash used in investing activities$ (9,809) $ (3,859) $ (2,469) Net cash provided by (used in) financing activities$ 110,480 $ (5,150) $ 64,995 Free cash flow$ (30,182) $ (19,377) $ (24,538) Net cash used in operating activities as a percentage of revenue (18) % (19) % (48) % Free cash flow margin (26) % (24) % (54) % Net loss$ (51,690) $ (40,421) $ (32,060) Adjusted EBITDA$ (33,271) $ (25,592) $ (28,778)
Free Cash Flow and Free Cash Flow Margin
We define free cash flow as net cash used in operating activities, less purchases of property and equipment and capitalized internal-use software costs, and free cash flow margin as free cash flow as a percentage of revenue. We believe that free cash flow and free cash flow margin are useful indicators of liquidity that provide useful information to management and investors, even if negative, as they provide information about the amount of cash consumed by our combined operating and investing activities. For example, as free cash flow has been negative, we have needed to access cash reserves or other sources of capital for these investments.
Adjusted EBITDA
75 -------------------------------------------------------------------------------- EBITDA is defined as earnings before interest expense, provision for taxes, depreciation, and amortization. Our depreciation adjustment includes depreciation on operating fixed assets and does not include depreciation on phone hardware provided to our customers. We further adjust EBITDA to exclude equity-based compensation expense, a non-cash item. We believe that adjusted EBITDA provides management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations. Additionally, management uses adjusted EBITDA to measure our financial and operational performance and prepare our budgets.
Limits and Reconciliation 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, the non-GAAP financial information presented above may be determined or calculated differently by other companies and may not be directly comparable to that of other companies. In addition, free cash flow does not reflect our future contractual commitments and the total increase or decrease of our cash balance for a given period. Further, Adjusted EBITDA excludes some costs, namely, non-cash equity-based compensation expense. Therefore, adjusted EBITDA does not reflect the non-cash impact of equity-based compensation expense or working capital needs, that will continue for the foreseeable future. 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.
Free Cash Flow and Free Cash Flow Margin
Year Ended December 31,
2021 2020 2019
(dollars in thousands)
Revenue $ 115,871 $ 79,896 $ 45,746
Net cash used in operating activities $ (20,373) $ (15,518) $ (22,069)
Less: Purchase of property and equipment (7,376) (2,759) (2,469)
Less: Capitalized internal-use software (2,433) (1,100) -
Free cash flow $ (30,182) $ (19,377) $ (24,538)
Net cash used in investing activities $ (9,809) $ (3,859) $ (2,469)
Net cash provided by (used in) financing
activities $ 110,480 $ (5,150) $ 64,995
Net cash used in operating activities as a
percentage of revenue (18) % (19) % (48) %
Free cash flow margin (26) % (24) % (54) %
76
--------------------------------------------------------------------------------
Adjusted EBITDA
Year Ended December 31,
2021 2020 2019
(dollars in thousands)
Net loss $ (51,690) $ (40,421) $ (32,060)
Interest on outstanding debt 1,184 1,097 811
Tax expense (benefit) 60 - -
Depreciation(1) 2,269 1,611 1,076
Amortization(2) 815 508 -
Equity-based compensation 14,091 11,613 1,395
Adjusted EBITDA $ (33,271) $ (25,592) $ (28,778)
______________
(1) Does not include the amortization of telephone equipment supplied to our customers. (2) Represents the amortization of capitalized costs of software for internal use.
Components of operating results
Income
We generate revenue primarily from recurring subscription fees charged to access our software and phone services platform, and recurring embedded lease revenue on hardware provided to customers. The majority of these subscription arrangements have contractual terms of month to month, with a small minority portion having contractual terms of 1-3 years. Subscription and hardware fees are prepaid and customers may elect to be billed monthly or annually, with the majority of our revenue coming from those that elect to be billed monthly. To incentivize annual payments, we offer pricing concessions that apply ratably over the twelve-month subscription plan. As ofDecember 31, 2021 andDecember 31, 2020 , approximately 42% of customer locations elected annual prepayments. Subscription revenue is recognized ratably over the term of the subscription agreement. Amounts billed in excess of revenue recognized are deferred. Recurring revenue on subscriptions and hardware, excluding Weave Payments, accounted for 94%, 95% and 98% of total revenue for the years endedDecember 31, 2021 , 2020 and 2019. In addition, we provide payment processing services and receive a revenue share from a third-party payment facilitator on transactions between our customers that utilize our payments platform and their end consumers. These payment transactions are generally for services rendered at customers' business location via credit card terminals or through "Text-to-Pay" functionality. As we act as an agent in these arrangements, revenue from payments services is recorded net of transaction processing fees and is recognized when the payment transactions occur. We also collect non-recurring installation fees for onboarding customers, the revenue for which is recognized upon completion of the installation. In the first quarter of 2020, we launched a nationwide installation program, or the Installation Program, and began encouraging all new customers to use an on-site technician to configure phone hardware, install our platform software and assist with network upgrades recommended to optimize platform performance. While the Installation Program increased our revenue in 2020, it also increased our onboarding costs substantially. This program was phased out during the third and fourth quarters of 2021, resulting in limited impact to revenue and cost of revenue. Following this change, our customers now directly engage with third-party independent contractors to configure hardware, install the software and assist with upgrades, for which we do not derive any revenue. We may also collect installation or activation fees for the onboarding services provided by our employees. 77 --------------------------------------------------------------------------------
Revenue cost
Cost of revenue consists of costs related to providing our platform to customers and costs to support our customers. Direct costs associated with providing our platform include data center and cloud infrastructure costs, payment processing costs, depreciation of phone hardware provided to customers, fees to application providers, voice connectivity and messaging fees and amortization of internal-use software development costs. Indirect costs included in costs of revenue include fees paid to third-party independent contractors as part of the Installation Program and personnel-related expenses, such as salaries, benefits, bonuses, and equity-based compensation expense, of our onboarding and customer support staff. Cost of revenue also includes an allocation of overhead costs for facilities and shared IT-related expenses, including depreciation expense. The launch of the Installation Program in the first quarter of 2020 resulted in a substantial increase in onboarding costs. Prior to launching this program, our employees provided limited installation assistance remotely from our corporate headquarters. As we acquire new customers and existing customers increase their use of our cloud-based platform, we expect that the dollar amount of our cost of revenue will continue to increase. However, our cost of revenue has been and will continue to be affected by a number of factors including increased regulatory fees on texting and phone calls, the number of phones provided to customers, our equity-based compensation expense, and the timing of the amortization of internal-use software development costs, which could cause it to fluctuate as a percentage of revenue in future periods.
Functionnary costs
Our operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, equity-based compensation and sales commissions. Operating expenses also include allocated overhead costs for facilities and shared IT-related expenses, including depreciation expense.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related expenses associated with our sales and marketing staff, including salaries, benefits, bonuses and equity-based compensation. Sales commissions paid on new subscriptions are deferred and amortized over the expected period of benefit which is determined to be three years. Marketing expenses consist of lead generating and other advertising activities, such as our Business Growth Summit and the costs of traveling to and attending trade shows. We expect that our sales and marketing expenses will increase and continue to be our largest operating expense for the foreseeable future as we grow our business. As in-person events and conferences return to activity, we will experience an increase in marketing expenses. As a percentage of revenue, we anticipate sales and marketing expenses to be relatively consistent in 2022 as compared to 2021, but we expect these expenses to decrease as a percent of revenue over time.
Research and development
Research and development expenses include software development costs that are
not eligible for capitalization and support our efforts to ensure the
reliability, availability and scalability of our solutions. Our platform is
software-driven, and its research and development teams employ software
engineers in the continuous testing, certification and support of our platform
and products. Accordingly, the majority of our research and development expenses
result from employee-related costs, including salaries, benefits, bonuses,
equity-based compensation and costs associated with technology tools used by our
engineers.
78
--------------------------------------------------------------------------------
We expect that our research and development expenses will increase as our
business grows, particularly as we incur additional costs related to continued
investments in our platform and products. However, we expect that our research
and development expenses will decrease as a percentage of our revenue over time.
In addition, research and development expenses that qualify as internal-use
software development costs are capitalized, and the amount capitalized may
fluctuate significantly from period to period.
General and administrative
General and administrative expenses consist primarily of personnel-related expenses for our finance, legal, human resources, facilities, and administrative personnel, including salaries, benefits, bonuses, and stock-based compensation. General and administrative expenses also include external legal, accounting, and other professional services fees, software and subscription services dedicated for use by our general and administrative functions, insurance and other corporate expenses. As a result of our initial public offering (IPO), we have incurred and expect to continue to incur additional expenses to operate as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations, and increased expenses for insurance, investor relations, and professional services. We expect that our general and administrative expenses will increase in absolute dollars as our business grows but will decrease as a percentage of our revenue over time. In addition, inNovember 2021 , our compensation committee approved, contingent upon the completion of this offering, the grant of a total of 171,075 restricted stock units to employees at an estimated preliminary aggregate fair value of approximately$3.2 million . These employees are all considered part of our general and administrative function. The grant date fair value is based on the number of RSUs multiplied by the close price onNovember 12, 2021 , the date on which the related S-8 was filed.
Interest charges
Interest expense results primarily from interest payments on our borrowings and interest on capital lease obligations. Interest on borrowings is based on a floating per annum rate at specified percentages above the prime rate. Interest on capital leases is based on our incremental borrowing rate at the time the agreements are initiated. Other Income (Expense), Net
Other income consists primarily of interest income earned on our cash and cash equivalents.
Provision for (benefit from) income taxes
Provision for income taxes consists primarily of income taxes related to foreign
and state jurisdictions in which we conduct business. Because of the uncertainty
of the realization of the deferred tax assets, we have a full valuation
allowance for domestic net deferred tax assets, including net operating loss
carryforwards.
79
--------------------------------------------------------------------------------
Operating results
The following table sets forth our consolidated statements of operations data
for the periods indicated:
Year Ended December 31,
2021 2020 2019
(in thousands)
Revenue $ 115,871 $ 79,896 $ 45,746
Cost of revenue (1) 49,372 34,449 18,520
Gross profit 66,499 45,447 27,226
Operating expenses:
Sales and marketing (1) 58,244 39,258 31,726
Research and development (1) 27,009 19,967 14,407
General and administrative (1) 31,637 25,793 13,016
Total operating expenses 116,890 85,018 59,149
Loss from operations (50,391) (39,571) (31,923)
Other income (expense):
Interest expense (1,184) (1,097) (811)
Other income (expense), net (55) 247 674
Loss before income taxes (51,630) (40,421) (32,060)
Provision for income taxes (60) - -
Net loss $ (51,690) $ (40,421) $ (32,060)
______________
(1)Includes stock-based compensation expense as follows:
Year Ended December 31,
2021 2020 2019
(in thousands)
Cost of revenue 526 282 36
Sales and marketing 1,962 544 323
Research and development 3,545 1,442 274
General and administrative 8,058 9,345 762
Total equity-based compensation 14,091 11,613 1,395
Equity-based compensation expense for the years ended December 31, 2021 , 2020
and 2019 included $3.4 million , $7.3 million , and $- million, respectively, of
compensation expense related to amounts paid in excess of the estimated fair
value of the common stock in secondary sales of common stock. See Note 13 for
further details.
80
--------------------------------------------------------------------------------
The following table sets forth data from our Consolidated Statements of Income expressed as a percentage of sales for the periods indicated:
Year Ended December 31,
2021 2020 2019
(percentage of total revenue)
Revenue 100 % 100 % 100 %
Cost of revenue 43 43 40
Gross profit 57 57 60
Operating expenses:
Sales and marketing 50 49 69
Research and development 23 25 31
General and administrative 27 32 28
Total operating expenses 101 106 129
Loss from operations (43) (50) (70)
Other income (expense):
Interest expense (1) (1) (2)
Other income (expense), net - - 1
Loss before income taxes (45) (51) (70)
Provision for income taxes - - -
Net loss (45) % (51) % (70) %
Comparison of the years ended
Revenue
Year Ended December 31, Change
2021 2020 Amount Percentage
(dollars in thousands)
Revenue $ 115,871 $ 79,896 $ 35,975 45 %
Revenue increased by $36.0 million or 45% for the year ended December 31, 2021
compared to the year ended December 31, 2020 . Of the total increase,
approximately $18.8 million or 52%, was attributable to new customer locations
acquired during the year ended December 31, 2021 , and $17.2 million , or 48%, was
attributable to existing customer locations under subscription as of December
31, 2020 . Customer locations totaled 23,831 as of December 31, 2021 . This growth
represents a 29% increase over the 18,539 locations we had as of December 31,
2020 .
Revenue Cost and Gross Margin
Year Ended December 31, Change
2021 2020 Amount Percentage
(dollars in thousands)
Cost of revenue 49,372 34,449 $ 14,923 43 %
Revenue $ 115,871 $ 79,896
Gross margin 57 % 0.57 57 %
81
-------------------------------------------------------------------------------- The dollar amount increase in cost of revenue was primarily due to an increase of$8.2 million in direct costs to support customer usage and growth of our customer base, including cloud infrastructure costs and fees paid to application providers, and a personnel-related cost increase of$6.7 million as a result of increased support and onboarding headcount needed to support the growth of our business and related infrastructure. Gross margin has stayed consistent year over year. While we have seen a decrease in third-party installation costs later in the year from phasing our nationwide install program, we have also seen increased costs in voice connectivity and messaging fees and we have also accelerated customer support headcount hiring to better address anticipated customer growth. Sales and Marketing Year Ended December 31, Change 2021 2020 Amount Percentage (dollars in thousands) Sales and marketing$ 58,244 $ 39,258 $ 18,986 48 % The increase in sales and marketing expenses was primarily attributable to an increase of$11.4 million in personnel-related expenses driven by increased headcount,$4.4 million increase in advertising costs particularly due to increased digital lead generation efforts, and a$1.4 million increase in allocated overhead as a result of increased overall costs to support the growth of our business and related infrastructure. Research and Development Year Ended December 31, Change 2021 2020 Amount Percentage (dollars in thousands) Research and development$ 27,009 $ 19,967 $ 7,042 35 % The dollar amount increase in research and development expenses was due primarily to an increase of$6.8 million in personnel-related costs driven by higher headcount directly engaged in developing new product offerings,$0.8 million in allocated overhead as a result of increased overall costs to support the growth of our business and related infrastructure. These cost increases were partially offset by$1.0 million additional software development costs capitalized in 2021 compared to 2020.
General and administrative
Year Ended December 31, Change
2021 2020 Amount Percentage
(dollars in thousands)
General and administrative $ 31,637 $ 25,793 $ 5,844 23 %
The dollar amount increase in general and administrative expenses was primarily
due to increases of $2.4 million in personnel-related expenses driven by
increased headcount, $1.7 million in computer and office supplies, including
software subscription costs. Related to our initial public offering, we also saw
an
82
--------------------------------------------------------------------------------
increase of $0.4 million in professional fees, which included accounting and
legal fees not considered direct offering costs related to our IPO, and a $0.5
million increase in liability insurance expense.
Other Income (Expense), Net
Year Ended December 31, Change
2021 2020 Amount Percentage
(dollars in thousands)
Other income (expense), net $ 1,239 $ 850 $ 389 46 %
The increase is due to additional interest expense related to an increased number of telephone equipment capital leases.
Provision for Income Taxes
Year Ended December 31, Change
2021 2020 Amount Percentage
(dollars in thousands)
Provision for income taxes $ 60 $ - $ 60 100 %
Increase in provision for income taxes
Cash and capital resources
Since inception, we have financed operations primarily through the net proceeds we have received from the sales of our preferred stock, cash generated from the sale of subscriptions to our platform, and our bank borrowings. We have generated losses from our operations as reflected in our accumulated deficit of$181.9 million as ofDecember 31, 2021 and negative cash flows from operating activities for the 2021, 2020 and 2019 fiscal years. Our future capital requirements will depend on many factors, including revenue growth and costs incurred to support customer usage and growth in our customer base, increased research and development expenses to support the growth of our business and related infrastructure, and increased general and administrative expenses to support being a publicly traded company. We expect our operating cash flows to further improve as we increase our operational efficiency and experience economies of scale.
Our primary sources of cash were cash held in the form of deposits with financial institutions and cash equivalents consisting of highly liquid investments in money market securities of
A substantial source of our cash provided by operating activities is our deferred revenue, which is included on our consolidated balance sheets as a liability. Deferred revenue consists of the unearned portion of billed fees for our subscriptions, which is recorded as revenue over the subscription term. We had$29.5 million of deferred revenue recorded as a current liability as ofDecember 31, 2021 . This deferred revenue will be recognized as revenue when all of the revenue recognition criteria are met. We assess our liquidity primarily through our cash on hand as well as the projected timing of billings under contract with our paying customers and related collection cycles. We believe our current cash, cash equivalents, marketable securities and amounts available under our senior secured term loan facility will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. 83 -------------------------------------------------------------------------------- The following table shows a summary of our cash flows for the periods presented: Year Ended December 31, 2021 2020 2019 (in thousands) Net cash used in operating activities$ (20,373) $ (15,518) $ (22,069) Net cash used in investing activities (9,809)
(3,859) (2,469) Net cash provided by (used in) financing activities 110,480 (5,150) 64,995
Operating Activities For the year endedDecember 31, 2021 , cash used in operating activities was$20.4 million , primarily consisting of our net loss of$51.7 million adjusted for non-cash charges of$36.0 million , and net cash outflows of$4.7 million provided by changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were a$12.8 million increase in deferred customer acquisition costs, comprising mainly sales commissions earned on bookings; and an increase in prepaid expenses of$4.1 million . These amounts were partially offset by a$6.6 million increase in deferred revenue due to our prepay arrangements with our customers, an increase in accounts payable and accrued liabilities of$2.1 million , and an increase in deferred rent of$4.3 million . For the year endedDecember 31, 2020 , cash used in operating activities was$15.5 million , primarily consisting of our net loss of$40.4 million , adjusted for non-cash charges of$28.2 million , and net cash outflows of$3.3 million provided by changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were a$9.7 million increase in deferred customer acquisition costs, comprising mainly sales commissions earned on bookings, a$0.7 million increase in prepaid expenses and a$0.6 million increase in accounts receivable due to an increase in customers and revenue. These amounts were partially offset by a$6.7 million increase in deferred revenue due to our prepay arrangements with our customers, particularly those with annual billing, and a$0.8 million increase in accrued liabilities due to increased headcount and unremitted payroll taxes related to the Coronavirus Aid, Relief, and Economic Security (CARES) Act. For the year endedDecember 31, 2019 , cash used in operating activities was$22.1 million , primarily consisting of our net loss of$32.1 million , adjusted for non-cash charges of$11.0 million and net cash outflows of$1.1 million provided by changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were a$8.9 million increase in deferred customer acquisition costs, a$1.8 million increase in accounts receivable due to an increase in customers, revenue and the number of declined credit card transactions, and a$1.1 million increase in prepaid expenses. These amounts were partially offset by a$7.9 million increase in deferred revenue due to our prepay arrangements with our customers, particularly with those with annual billing, a$1.9 million increase in accounts payable, and a$1.1 million increase in accrued liabilities due to increased headcount.
Investing activities
Cash used in investing activities for the year endedDecember 31, 2021 was$9.8 million , primarily due to furniture, equipment and leasehold improvements of$7.4 million , primarily attributable to furnishing and building out our new corporate headquarters, which we occupied beginning the first quarter of 2021. Additional investing cash flow activities included personnel-related costs capitalized as internal-use software development of$2.4 million . Cash used in investing activities for the year endedDecember 31, 2020 was$3.9 million , primarily due to furniture, equipment and leasehold improvements on our new corporate headquarters. Additional investing cash flow activities included purchases of employee equipment and personnel-related costs capitalized as internal-use software development. 84 --------------------------------------------------------------------------------
Cash flows used in investing activities for the year ended
Fundraising activities
Cash provided by financing activities for the year endedDecember 31, 2021 was$110.5 million , primarily due to cash proceeds from our IPO, which resulted in$117.6 million proceeds to the Company, net of underwriter commissions and paid offering costs. We also received$4.2 million from employee stock option exercises and net proceeds from our line of credit of$6.0 million . These cash inflows were partially offset by payments on capital lease obligations of$7.9 million .
Cash used in financing activities for the year ended
Cash provided by financing activities for the year endedDecember 31, 2019 was$65.0 million , primarily as a result of proceeds from the issuance of Series D preferred shares and employee stock option exercises, partially offset by principal payments on capital lease obligations.
Contractual obligations and commitments
Refer to the Notes to the Consolidated Financial Statements in Part II, Section 8 of this Annual Report on Form 10-K for further details on contractual obligations.
Our principal commitments consist of obligations under theSilicon Valley Bank Credit Facility (discussed below and within Note 11), operating leases for office space (Note 9), capital leases for phone equipment for our solution (Note 10), as well as non-cancellable purchase commitments (Note 9).
Compensation
Certain of our agreements with partners, resellers and customers include provisions for indemnification against liabilities should our platform contribute to a data compromise, particularly a compromise of protected health information. We have not incurred any costs as a result of such indemnification obligations historically and have not accrued any liabilities related to such obligations in our consolidated financial statements as ofDecember 31, 2021 .
Silicon Valley Bank Credit Facility
As ofDecember 31, 2020 and throughAugust 2021 , we carried a$4 million note payable, which bears interest at the greater of prime rate plus 0.75% and 5.50%. The note payable required interest-only payments throughSeptember 2021 , followed by 36 monthly principal payments of$111,111 plus interest. Along with the note payable,Silicon Valley Bank provided us with a$10 million revolving line of credit, bearing interest at the greater of prime rate plus 0.5% and 5.25%. As ofDecember 31, 2020 and throughAugust 2021 , we had not taken any advances on the line of credit and the full$10 million was available for borrowing. InAugust 2021 , we amended our agreement withSilicon Valley Bank ("SVB") to increase the revolving line of credit from$10 million to$50 million . The total borrowing capacity is subject to reduction should we fail to meet certain metrics for recurring revenue and customer retention. Amounts outstanding on the line will accrue interest at the greater of prime rate plus 0.25% and 3.5%. As part of our agreement with SVB, the$4 million note payable was converted to a deemed advance on the line of credit. In connection with this transaction, we drew down an additional$6.0 million from the line of credit resulting in a total outstanding balance of$10.0 million . We are required to pay an annual fee of$0.13 million beginning on the effective date of the agreement, and continuing on the anniversary of the effective date. We are also required to pay a quarterly unused line fee of 0.15% per annum of the available borrowing amount should the outstanding principal balance drop below$10 million (calculated based on the number of days and based on the average available borrowing amount). The line of credit is collateralized by 85 -------------------------------------------------------------------------------- substantially all of our assets. This amended agreement includes financial covenants requiring that, at any time, if our total unrestricted cash and cash equivalents at SVB is less than$100 million , we must at all times thereafter maintain a consolidated minimum$20 million in liquidity, meaning unencumbered cash plus available borrowing on the line of credit, and that we meet specified minimum levels of EBITDA, as adjusted for equity-based compensation and changes in our deferred revenue. As ofDecember 31, 2021 ,$10.0 million was outstanding on the line of credit and we were in compliance with all loan covenants.
Off-balance sheet arrangements
We did not have during the periods presented, 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.
Significant Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. We believe that of our significant accounting policies, which are described in Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition, results of operations, and cash flows.
Revenue recognition
We recognize revenue in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606) for all periods presented.
Revenue recognition is determined from the following steps:
•Identification of a contract with a customer;
•Identification of performance obligations in the contract;
• Determination of the transaction price
• Allocation of the transaction price to the performance obligations within the contract; and
• Recognition of revenue when or as performance obligations are met.
Our primary source of revenue is month-to-month subscription arrangements.
Subscription revenue is generated from fees that provide customers access to one
or more of our software applications and phone services. Arrangements with
customers do not provide the customer with the right to take possession of our
software at any time. Instead, customers are granted continuous access to the
services over the contractual period. Accordingly, the fixed consideration
related to subscriptions is recognized over time on a straight-line basis over
the contract term beginning on the date our service is made available to the
customer.
86
--------------------------------------------------------------------------------
We consider telephone service and software installations to be a separate performance obligation. All fees collected from customers related to the installation are recognized as revenue when the installation is complete.
For our payments product, we act as an agent between our customers and a payment facilitator. As a result, the related revenue is recorded net of transaction processing fees and is recognized when the payment transactions occur.
Deferred contract acquisition costs
Deferred contract acquisition costs are incremental costs that are associated with acquiring customer contracts and consist primarily of sales commissions and the associated payroll taxes and certain referral fees paid to independent third-parties. The costs incurred upon the execution of the contracts are primarily deferred and amortized over an expected benefit period, which we estimate to be three years. Significant judgement is used to determine the expected benefit period by taking into consideration the Company's technology life cycle and an estimated customer relationship period, including expected contract renewals. There have been no changes to this estimated period of benefit during the reporting period.
Share-based compensation
We issue stock options and restricted stock units (RSUs) to employees, consultants, and directors, and stock purchase rights granted under the Employee Stock Purchase Plan (ESPP) to employees based on their estimated fair value on the date of the grant. For stock options and ESPP, the fair value is estimated using the Black-Scholes option-pricing model, and equity-based compensation is recognized in the consolidated statements of operations using the straight-line attribution method. The fair value of RSUs is based on the closing market price of our common stock on the date of the grant. We recognize equity-based compensation expense over the requisite service period, which is the vesting period of the respective awards. Forfeitures are accounted for when they occur. Prior to our IPO, the fair value of our common stock on the date of the grant was determined based on independent third-party valuations as there was no public market. Our first RSU grants were made effectiveNovember 12, 2021 in connection with the IPO and, as such, prior to the IPO we had not recognized equity-based compensation on RSUs.
Changes in assumptions, which are subjective and generally require significant analysis and judgment to develop, may materially impact the valuation of our stock awards and the amount of stock-based compensation expense. counted.
Recently Adopted Accounting Pronouncements
See the sections entitled “Basis of presentation and summary of significant accounting policies – Accounting pronouncements adopted” and “- Accounting pronouncements not yet adopted” in note 2 of our consolidated financial statements for more information.
Emerging Growth Company Status
We are an "emerging growth company", as defined in the Jumpstart Our Business
Startups (JOBS) Act, and we may take advantage of certain exemptions from
various reporting requirements that are applicable to other public companies
that are not "emerging growth companies." We may take advantage of these
exemptions until we are no longer an "emerging growth company." Section 107 of
the JOBS Act provides that an "emerging growth company" can take advantage of
the extended transition period afforded by the JOBS Act for the implementation
of new or revised accounting standards. We have elected to use the extended
transition period for complying with new or revised accounting standards and as
a result of this election, our financial statements may not be comparable to
companies that comply with public company effective dates. We may take advantage
of these exemptions up until the last day of the
87
————————————————– ——————————
fiscal year following the fifth anniversary of this offering or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than$1.07 billion in annual revenue, we have more than$700.0 million in market value of our stock held by non-affiliates (and we have been a public company for at least 12 months and have filed one annual report on Form 10-K) or we issue more than$1.0 billion of non-convertible debt securities over a three-year period.
© Edgar Online, source