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Home›Gross substitutes›WEAVE COMMUNICATIONS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

WEAVE COMMUNICATIONS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

By Brian Baize
March 23, 2022
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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 the U.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 the U.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 Weave Communications, Inc. and its consolidated subsidiaries.

We have omitted the management's discussion and analysis of financial condition
and results of operations for the year ended December 31, 2020 compared to the
year ended ended December 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 the SEC on November 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

On November 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.

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As part of the IPO, the 43,836,109 outstanding convertible redeemable preferred shares with a book value of $151.9 million converted into a total of 43,836,109 common shares.

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 ended December 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:

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                                                        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 of December 31, 2021, we had more
than 22,000 customers in the United States and Canada, 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

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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. Through December 31, 2021, we have experienced headwinds in
our lead generation

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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 in the 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 throughout the 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 $13,084based on net retention rate

              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

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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 in the 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

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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) %


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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 of December 31, 2021 and December
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 ended December 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.

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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.

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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, in November 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 on November 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.

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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.

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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 December 31, 2021 and December 31, 2020

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  %


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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
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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 $0.1 million due to the start of operations in a new foreign jurisdiction during the year ended December 31, 2021. We expect income tax expense to increase as our international subsidiaries grow over the long term.

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 of December 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 $136.0 million from December 31, 2021.

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 of
December 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.

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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 ended December 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 ended December 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 ended December 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 ended December 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 ended December 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.

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Cash flows used in investing activities for the year ended December 31, 2019 has been $2.5 millionresulting primarily from employee equipment purchases.

Fundraising activities

Cash provided by financing activities for the year ended December 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 December 31, 2020 has been $5.2 millionprimarily due to principal payments on capital lease obligations, partially offset by cash proceeds from the exercise of employee stock options.

Cash provided by financing activities for the year ended December 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 the Silicon 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 of December 31, 2021.

Silicon Valley Bank Credit Facility

As of December 31, 2020 and through August 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 through September 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 of December 31, 2020 and through August 2021, we had not taken any
advances on the line of credit and the full $10 million was available for
borrowing.

In August 2021, we amended our agreement with Silicon 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 of December 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.

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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 effective November 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.

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