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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-Q
☑    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
or
☐    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 001-40998
Weave Communications, Inc.
(Exact name of registrant as specified in its charter)

Delaware    26-3302902
(State or other jurisdiction of    (I.R.S. Employer
incorporation or organization)     Identification Number)        
1331 West Powell Way
Lehi, Utah 84043
(Address of principal executive offices, including zip code)
(866) 439-2826
(Registrant's telephone number, including area code)
__________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:Trading symbol:Name of each exchange on which registered:
Common stock, par value $0.00001 per shareWEAVNew York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑   No  ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☑  No  ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer☑Smaller reporting company
☐
Emerging growth company☑
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No  ☑
As of April 30, 2022, the registrant had 64,929,474 shares of common stock, par value $0.00001 per share, outstanding.


WEAVE COMMUNICATIONS, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2022
TABLE OF CONTENTS






Page
PART I.
Item 1.
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 6.


Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations, financial position, market size and opportunity, our business strategy and plans, the factors affecting our performance and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “expect,” “objective,” “plan,” “potential,” “seek,” “grow,” “target,” “if” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the section titled “Risk Factors” listed under Part II, Item 1A of this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
•our expectations regarding our results of operations, including gross margin, financial condition and cash flows;
•our expectations regarding the development and expansion of our business;
•anticipated trends, challenges and opportunities in our business and in the markets in which we operate;
•the impact of the COVID-19 pandemic;
•our ability to expand our customer base and expand sales to existing customers;
•our ability to expand into new vertical markets and additional countries;
•the impact of competition in our industry and innovation by our competitors;
•our ability to anticipate and address the evolution of technology and the technological needs of our customers, to roll out upgrades to our existing platform and to develop new and enhanced products to meet the needs of our customers;
•the impact of our corporate culture and our ability to retain and hire necessary employees and staff our operations appropriately;
•our ability to remediate the material weaknesses in our internal control over financial reporting;
•our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally;
•our ability to maintain, protect and enhance our intellectual property; and
•the increased expenses associated with being a public company.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
WEAVE COMMUNICATIONS, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
March 31, 2022December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents$128,900 $135,996 
Accounts receivable2,897 3,059 
Deferred contract acquisition costs, net8,967 8,931 
Prepaid expenses5,423 6,461 
Total current assets146,187 154,447 
Non-current assets:
Property and equipment, net11,868 24,502 
Operating lease right-of-use assets47,574 — 
Finance lease right-of-use assets12,214 — 
Deferred contract acquisition costs, net, less current portion7,606 7,873 
Other non-current assets751 663 
TOTAL ASSETS$226,200 $187,485 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $4,229 $4,061 
Accrued liabilities11,919 12,250 
Deferred revenue30,188 29,511 
Current portion of operating lease liabilities4,941 — 
Current portion of finance lease liabilities8,327 8,485 
Total current liabilities 59,604 54,307 
Non-current liabilities:
Deferred rent— 4,319 
Operating lease liabilities, less current portion47,528 — 
Finance lease liabilities, less current portion6,567 6,558 
Long-term debt10,000 10,000 
Total liabilities123,699 75,184 
COMMITMENTS AND CONTINGENCIES (Note 12)
Stockholders' equity:
Preferred stock, $0.00001 par value per share; 10,000,000 shares authorized, zero shares issued and outstanding as of March 31, 2022 and December 31, 2021
— — 
Common stock, $0.00001 par value per share; 500,000,000 shares authorized as of March 31, 2022 and December 31, 2021; 64,889,304 and 64,324,628 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively
— — 
Additional paid-in capital298,214 294,230 
Accumulated deficit(195,736)(181,898)
Accumulated other comprehensive (loss) income23 (31)
Total stockholders' equity102,501 112,301 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$226,200 $187,485 
See accompanying notes to these unaudited condensed consolidated financial statements
1

WEAVE COMMUNICATIONS, INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)


Three Months Ended March 31,
20222021
Revenue$33,272 $25,668 
Cost of revenue13,753 10,802 
Gross profit19,519 14,866 
Operating expenses:
Sales and marketing16,220 11,736 
Research and development7,204 5,836 
General and administrative9,604 6,003 
Total operating expenses33,028 23,575 
Loss from operations(13,509)(8,709)
Other income (expense):
Interest expense(293)(280)
Other income (expense)(4)6 
Loss before income taxes(13,806)(8,983)
Provision for income taxes(32)— 
Net loss$(13,838)$(8,983)
Less: cumulative dividends on redeemable convertible preferred stock— (549)
Net loss attributable to common stockholders$(13,838)$(9,532)
Net loss per share attributable to common stockholders - basic and diluted$(0.21)$(0.79)
Weighted-average common shares outstanding - basic and diluted64,583,714 12,035,941 
See accompanying notes to these unaudited condensed consolidated financial statements
2


WEAVE COMMUNICATIONS, INC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)

Three Months Ended March 31,
20222021
Net loss$(13,838)$(8,983)
Other comprehensive income (loss)
Change in foreign currency translation, net of tax54 (1)
Total comprehensive loss$(13,784)$(8,984)
See accompanying notes to these unaudited condensed consolidated financial statements
3


WEAVE COMMUNICATIONS, INC
CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share amounts)
(unaudited)





Three Months Ended March 31,2022
Accumulated
AdditionalOtherTotal
Preferred StockCommon StockPaid-inAccumulatedComprehensiveStockholders'
SharesAmountSharesAmountCapitalDeficit(Loss) IncomeEquity
BALANCE - December 31, 2021— $— 64,324,628 $— $294,230 $(181,898)$(31)$112,301 
Issuance of common shares from stock option exercises— — 564,083 — 559 — — 559 
Vesting of restricted stock units— — 593 — — — — — 
Stock-based compensation— — — — 3,425 — — 3,425 
Foreign currency translation adjustments, net of tax— — — — — — 54 54 
Net loss— — — — — (13,838)— (13,838)
BALANCE - March 31, 2022— $— 64,889,304 $— $298,214 $(195,736)$23 $102,501 

Three Months Ended March 31,2021
Accumulated
Redeemable ConvertibleAdditionalOtherTotal
Preferred StockCommon StockPaid-inAccumulatedComprehensiveStockholders'
SharesAmountSharesAmountCapitalDeficit(Loss) IncomeDeficit
BALANCE - December 31, 202043,836,109 $151,938 11,882,286 $— $16,261 $(130,208)$2 $(113,945)
Issuance of common shares from stock option exercises— — 947,305 — 248 — — 248 
Stock-based compensation— — — — 1,824 — — 1,824 
Foreign currency translation adjustments, net of tax— — — — — — (1)(1)
Net loss— — — — — (8,983)— (8,983)
BALANCE - March 31, 202143,836,109 $151,938 12,829,591 $— $18,333 $(139,191)$1 $(120,857)
See accompanying notes to these unaudited condensed consolidated financial statements
4


WEAVE COMMUNICATIONS, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)



Three Months Ended March 31,
20222021
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss$(13,838)$(8,983)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization3,375 2,635 
Amortization of operating right-of-use assets908 — 
Provision for losses on accounts receivable150 23 
Amortization of contract acquisition costs2,640 2,115 
Stock-based compensation3,425 1,824 
Changes in operating assets and liabilities:
Accounts receivable12 (2,120)
Contract acquisition costs(2,409)(2,647)
Prepaid expenses and other assets950 222 
Accounts payable148 (197)
Accrued liabilities69 (390)
Operating lease liabilities(332)— 
Deferred revenue731 1,459 
Deferred rent— 787 
Net cash used in operating activities(4,171)(5,272)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment(541)(1,782)
Capitalized internal-use software costs(367)(539)
Net cash used in investing activities(908)(2,321)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on finance leases(2,176)(1,817)
Proceeds from stock option exercises559 248 
Paid offering costs(400)— 
Net cash used in financing activities(2,017)(1,569)
NET DECREASE IN CASH AND CASH EQUIVALENTS(7,096)(9,162)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD135,996 55,698 
CASH AND CASH EQUIVALENTS, END OF PERIOD$128,900 $46,536 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest$293 $280 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment purchases financed with accounts payable$20 $36 
Finance lease liabilities arising from obtaining finance lease right-of-use assets$2,027 $2,940 
See accompanying notes to these unaudited condensed consolidated financial statements
5


WEAVE COMMUNICATIONS, INC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.Description of the Business
Weave Communications, Inc. (the “Company”) sells subscriptions for its integrated communications platform, which combines software communication and analysis tools with voice over internet protocol (“VoIP”) phone services. The Company was incorporated in the state of Delaware in October 2015 and its corporate headquarters are located in Lehi, UT.
2.Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of Weave Communications, Inc. and its wholly owned subsidiaries Weave Communications Canada, Inc. and Weave Communications India Private Limited (collectively “Weave” or the “Company”). Intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
The accompanying interim condensed consolidated balance sheets, statements of operations, comprehensive loss, statements of redeemable convertible preferred stock and stockholders' equity (deficit), statements of cash flows and accompanying notes are unaudited. These unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial condition, its operations and cash flows for the periods presented. The historical results are not necessarily indicative of future results, and the results of operations are not necessarily indicative of the results to be expected for the full year or any other period.
Segments
The Company operates as one operating and reportable segment. The Company’s chief operating decision maker (“CODM”) evaluates reporting operations and financial information on a consolidated basis for the purposes of making operating decisions, assessing financial performance and allocating resources.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amount of sales and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates included in the Company’s financial statements include the valuation allowance against deferred tax assets, recoverability of long-lived assets, fair value of stock-based compensation, amortization period of deferred contract acquisition costs, the incremental borrowing rate used in determining the value of right-of-use assets and lease liabilities, and useful lives for depreciable assets.
Cash and Cash Equivalents
6


Cash consists of deposits in financial institutions. Cash equivalents consist of highly liquid investments in money market securities with an original maturity of 90 days or less. The fair value of cash equivalents approximated their carrying value as of March 31, 2022 and December 31, 2021. As of March 31, 2022 and December 31, 2021 the Company did not have any restricted cash.
Liquidity and Capital Resources
The Company has incurred losses and generated negative cash flows from operations since inception. As of March 31, 2022 the Company had an accumulated deficit of $195.7 million. The Company has partially funded its operations through cash flows generated by sales of its product offerings, and as of March 31, 2022 the Company has completed several rounds of equity financing as a private company with total net proceeds approximating $159.0 million. In November 2021, the Company completed its initial public offering, which generated an additional net proceeds of $111.6 million. As of March 31, 2022 the Company had outstanding borrowings under its revolving line of credit of $10.0 million and $40.0 million in available borrowings.
The Company believes its existing cash and cash equivalents, amounts available under our revolving line of credit, and cash flows provided by sales of product offerings will be sufficient to meet operating cash flow requirements for at least twelve months from the date of issuance of the March 31, 2022 condensed consolidated financial statements. As a result of the Company’s growth plans, the Company expects that losses and negative cash flows from operations may continue in the foreseeable future.
Advertising Expense
Advertising costs are expensed as incurred. For the three months ended March 31, 2022 and 2021, the Company recorded advertising expense of $1.5 million and $1.3 million, respectively. Advertising costs are included in sales and marketing expenses in the condensed consolidated statements of operations.
Revenue Recognition
The Company derives substantially all revenue from subscription services by providing customers access to its platform.
The Company adopted the provisions of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, (referred to collectively as "ASC 606") effective January 1, 2019 using the modified retrospective method. Following the adoption of ASC 606, the Company recognizes revenue when control of these services are transferred to customers in an amount that reflects consideration to which the Company expects to be entitled in exchange for those services, net of tax. Revenue recognition is determined from the following steps:
•Identification of a contract with a customer;
•Identification of the performance obligations in the contract;
•Determination of the transaction price;
•Allocation of the transaction price to the performance obligations within the contract;
•Recognition of revenue when, or as, performance obligations are satisfied.
The Company recognizes revenue as follows:
Subscriptions revenue (software and phone service) is generated from fees that provide customers access to one or more of the Company’s software applications and related services. These arrangements generally have contractual terms of month to month. Arrangements with customers do not provide the customer with the right to take possession of the Company’s software at any time. Instead, customers are
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granted continuous access to the services over the contractual period. The Company transfers control of services evenly over the contractual period. Accordingly, the consideration related to subscriptions is recognized over time on a straight-line basis over the contract term beginning on the date the Company’s service is made available to the customer.
The Company also provides payment processing/collection services and receives a revenue share from a third-party payment facilitator on transactions between Weave customers that utilize the Weave 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 the Company acts as an agent in these arrangements, revenue from payments services is recorded net of transaction processing fees and revenue is recognized as the performance obligation is performed each time transactions are processed.
Previously, as part of the onboarding process, the customer could request the Company install pre-configured applications on hardware which allow remote access to Weave's cloud solution. In addition, the customer could request the Company install phone hardware at the customer’s location. Whereas the Company continues to provide remote installation services, the in-office installation program was phased out during the third and fourth quarters of 2021. Whether performed remotely or in office, the Company considers onboarding/installation a separate performance obligation, and recognizes revenue at the time the installation services are complete.
With the exception of payments services and installation revenue, customers are billed in advance and they may elect to be billed on a monthly or annual basis. The Company records contract liabilities to deferred revenue when cash payments are received, or billings are due in advance of revenue recognition from services. Deferred revenue is recognized as revenue when, or as, the performance obligations are satisfied. Software and phone service revenue is recognized net of discounts in the statements of operations. The Company does not consider discounts variable consideration as they are stated on each agreement and not subject to contingencies or variability. The Company collects sales and communications taxes from its customers. In the statement of operations, amounts collected from taxes are excluded from the reported revenue amounts.
The Company elected to apply the practical expedient to not disclose the transaction price allocated to remaining performance obligations for contracts with a contract term of one year or less. As of March 31, 2022 and December 31, 2021, approximately $2.1 million and $2.2 million, respectively, in revenue is expected to be recognized from remaining performance obligations for contracts with original performance obligations that exceed one year. As the right to invoice for the remaining $2.1 million does not begin until April 2022, this amount is not recorded in deferred revenue as of March 31, 2022 . The Company expects to recognize revenue on these remaining performance obligations over the next 16 months.
In addition to providing VoIP phone and software services, the Company provides phone hardware to its customers as part of the subscription. Title of the phones does not transfer to the customer until 36 months of subscription have occurred. If a customer were to cancel at any time prior to completion of the 36-month period, the phones are returned to the Company. The Company allows customers to include up to 10 phones without adjustment to the subscription base price. Effective for new sales beginning August 2021, the Company modified sales terms so that title to the phones is no longer given to the customer free of charge at the end of the 36-month period; instead, the phones remain an asset of the Company, as the phones are leased to the customer. The Company allows customers to include up to 5 phones without adjustment to the subscription base price. In such arrangements, the Company is deemed the lessor and the arrangement is an operating lease per guidance provided in ASC 842.
As a lessor, future minimum lease payments may vary due to customer agreements being month to month and the fact that subscription payments are allocated based on the fair value of all services provided to the customer. With phones being deployed to customers for their useful life, residual value
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does not accrue to the benefit of the Company. Phones that are returned are refurbished and placed into service.
Accounting Pronouncements Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. For all leases with a term greater than twelve months, the new standard also requires lessees to recognize a right-of-use (“ROU”) asset and a corresponding lease liability on their consolidated balance sheets. Upon adoption, lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements or they may record the amount in the year in which the ASU is adopted. The accounting applied by a lessor is largely unchanged from that applied under previous Topic 840. For example, the vast majority of operating leases should remain classified as operating leases, and lessors should continue to recognize lease income for those leases on a generally straight-line basis over the lease term.
On January 1, 2022, the Company adopted Topic 842 using the modified retrospective approach with the effective date as of the date of initial application. Consequently, results for the three months ended March 31, 2022 are presented under Topic 842. Prior period amounts were not adjusted and continue to be reported in accordance with previous lease guidance under ASC Topic 840, Leases. The Company elected the package of practical expedients permitted under the transition guidance, which allows an entity to carryforward certain conclusions for leases that commenced prior to the effective date, including the determination of whether an existing contract contains a lease, the classification of the lease, and the accounting for initial direct costs. In addition, the Company elected the practical expedient that allows lessees the option to account for lease and non lease components together as a single component for all classes of underlying assets. The Company performed evaluations of its contracts to ensure compliance with the new guidance of Topic 842. Upon adoption, the Company recognized cumulative operating lease liabilities of $52.8 million offset by a write off in deferred rent of $4.3 million and operating right-of-use assets of $48.5 million. Capital lease obligations of $15.0 million existing as of December 31, 2021 were renamed finance lease liabilities, and the related $12.4 million in assets that were reported within property and equipment, net, as of December 31, 2021 were reclassified as finance right-of-use assets as of the adoption date.
Accounting Pronouncements Pending Adoption
As an “emerging growth company,” the Jumpstart Our Business Startups Act, or the JOBS Act, allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has elected to use the adoption dates applicable to private companies. As a result, the Company’s financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, and includes the Company's accounts receivable, certain financial instruments and contract assets. ASU 2016-13 results in more timely recognition of credit losses. For non-public companies, adoption is required for fiscal years beginning after December 15, 2022, including interim periods within fiscal years beginning after December 15, 2022. As a result, the Company expects to adopt the standard as of January 1, 2023 and is currently evaluating the expected impact of adoption on the financial statements.
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3.Revenue
The Company accounts for revenue in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts With Customers for all periods presented. See Note 2 for a description of the Company’s revenue recognition accounting policy.
Contract Balances
The Company recognized revenue that was included in the corresponding deferred revenue balance at the beginning of the period of $15.1 million and $11.1 million for the three months ended March 31, 2022 and 2021, respectively.
Costs to Obtain a Contract
As discussed in Note 2, the Company capitalizes incremental costs of obtaining a contract. Amortization expense related to these costs were $2.6 million and $2.1 million for the three months ended March 31, 2022 and 2021, respectively.
Disaggregation of Revenues
Revenue has been disaggregated into recurring and non-recurring categories to identify revenue and costs of revenue that are one-time in nature from those that are term-based and renewable.
The table below outlines revenue for our recurring subscription (software and phone services) and payment processing services, as well as for our onboarding services, and phone hardware (in thousands) for the three and nine months ended March 31, 2022 and March 31, 2021:
Three Months Ended March 31,
20222021
Subscription and payment processing$31,950 $23,899 
Onboarding262 1,038 
Phone hardware lease1,060 731 
Total revenue$33,272 $25,668 
4.Fair Value Measurements
Financial instruments recorded at fair value in the financial statements are categorized as follows:
•Level 1: Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
•Level 2: Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3: Unobservable inputs reflecting management's assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
The following table summarizes the assets measured at fair value on a recurring basis by level within the fair value hierarchy for the periods presented (in thousands):
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March 31, 2022December 31, 2021
Level 1
Money market fund$108,160 $118,962 
Level 2— — 
Level 3— — 
Total$108,160 $118,962 
As of March 31, 2022 and December 31, 2021 the fair value of debt was $10.5 million and $10.6 million, respectively (Level 2). The carrying amounts of certain financial instruments, including accounts receivable, accounts payable, and accrued liabilities approximate fair value due to their short-term maturities and are excluded from the fair value tables above.
5.Property and Equipment
Property and equipment consisted of the following for the periods presented (in thousands):
March 31, 2022December 31, 2021
Office equipment$4,860 $4,729 
Office furniture5,719 5,588 
Leasehold improvements2,606 2,496 
Fixed assets not placed in service23 118 
Capitalized internal-use software3,963 3,533 
Phone hardware— 26,034 
Payment terminals1,783 1,581 
Property and equipment, gross18,954 44,079 
Less accumulated depreciation and amortization(7,086)(19,577)
Property and equipment, net$11,868 $24,502 
Depreciation and amortization expense on property and equipment (excluding amortization on operating ROU assets) was $3.4 million and $2.6 million for the three months ended March 31, 2022 and 2021, respectively. Of this expense, $2.4 million and $2.1 million for the three months ended March 31, 2022 and 2021, respectively, was related to phone hardware finance ROU assets (see also footnote 7) and data center equipment which has been included in cost of revenue in the statements of operations. Note that these finance ROU assets were reported as “phone hardware” prior to January 1, 2022. Capitalized internal-use software amortization expense was $0.3 million and $0.1 million for the three months ended March 31, 2022 and 2021, respectively, which has been included in the cost of revenue in the statements of operations. Capitalized implementation amortization expense was $0.1 million and $0.0 for the three months ended March 31, 2022 and 2021, respectively, which has been included in operating expense in the statements of operations.
6.Accrued Liabilities
Accrued liabilities consisted of the following for the periods presented (in thousands):
March 31, 2022December 31, 2021
Payroll-related accruals$7,695 $8,434 
Sales and telecom taxes1,569 1,508 
Employee stock purchase plan liability843 256 
Third-party commissions431 440 
Other1,381 1,612 
Total$11,919 $12,250 
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7.Leases
The Company has lease arrangements, both as a lessor and a lessee, and makes assumptions and judgments when assessing contracts for lease components, determining lease classifications and calculating right-of-use asset and lease liability values. These assumptions and judgements may include the useful lives and fair values of the leased assets, the implicit rate underlying the Company’s leases, the Company’s incremental borrowing rate or the Company’s intent to exercise or not exercise options available in lease contracts.
Lease expense and other information consisted of the following for the three months ended March 31, 2022 (in thousands, except terms and rates):
Lease expense
Finance lease expense:
Amortization of right-of-use assets$2,233 
Interest on lease liabilities204 
Operating lease expense1,417 
Short-term lease expense9 
Total lease expense$3,863 
Other information
Finance leases:
Operating cash outflow from finance leases$204 
Financing cash outflow from finance leases$2,176 
Finance lease liabilities arising from obtaining finance lease right-of-use assets$2,027 
Weighted-average remaining lease term (years)1.7
Weighted-average discount rate lease term6.3 %
Operating leases:
Operating cash outflow from operating leases$841 
Weighted-average remaining lease term (years)10.8
Weighted-average discount rate lease term3.9 %
Operating leases
The Company as the Lessee
The Company leases office space for its headquarters and advertising space under non-cancelable operating lease agreements. These leases have expirations ranging from November 2022 to January 2033. The Company has not recognized any renewal options as part of the lease term as it they are not reasonably certain of exercise as of March 31, 2022. The rates implicit in the Company’s operating leases are not readily determinable thus the Company uses its incremental borrowing rate to calculate the present value of the lease liabilities. The incremental borrowing rate is the rate incurred to borrow on a collateralized basis, and is based on the Company’s secured line of credit, which may be adjusted for the specific terms and collateral of the lease. The operating lease agreements do not contain any residual value guarantees or other restrictions or covenants that would cause the Company to incur additional significant financial obligations. These office space lease agreements contain non-lease components, which represent charges for common area maintenance, taxes and utilities. The Company has elected the practical expedient on not separating lease components from nonlease components.
The Company has other leases for office space with terms less than twelve months from contract inception and no options to purchase the underlying asset. These agreements are accounted for as short-term leases in accordance with ASC 842-20-25-2.
Total rent expense for office space leases was $1.4 million and $1.2 million for the three months ended March 31, 2022 and 2021, respectively. Note that rent expense amounts for periods prior to 2022 are reported under ASC 840.
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Future maturities of remaining lease payments included in the measurement of operating lease as of March 31, 2022 are as follows (in thousands):
Years ending December 31,
Remaining 2022$3,701 
20235,404 
20245,539 
20255,677 
20265,819 
Thereafter38,667 
Total64,807 
Less imputed interest12,338 
Present value of operating lease obligations$52,469 
As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, the following table summarizes summarizes the future minimum lease payments related to operating leases as of December 31, 2021 under ASC 840 (in thousands):
Years ending December 31,
2022$4,407 
20235,404 
20245,539 
20255,677 
20265,819 
Thereafter38,666 
Total$65,512 
The Company as the Lessor
As discussed in the Revenue Recognition accounting policy, the Company provides varying quantities of phone hardware to customers without adjustments to the base subscription price. The Company is deemed a lessor in these arrangements. For the three months ended March 31, 2022 and March 31, 2021, the Company recorded $1.1 million and $0.7 million, respectively, in lease revenues associated with the phone hardware.
Finance leases
The Company is the lessee in all of its finance lease arrangements. In June 2016, the Company began financing its purchases of phone hardware through lease agreements classified as finance leases. As of March 31, 2022 the Company had 96 executed and active lease agreements, respectively, for phone hardware. These agreements require monthly payments ranging from approximately $140 to $21,975 and have maturity dates ranging from April 2022 to March 2025. As of March 31, 2022, the gross value of phone hardware acquired under these capital leases approximated $26 million. For the three months ended March 31, 2022 and 2021, amortization expense on finance-leased phone hardware was $2.2 million and $2.0 million, respectively, which is included in the depreciation expense referenced in Note 5.
Future minimum lease payments for the Company’s finance leases as of March 31, 2022 were as follows (in thousands):
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Years ending December 31,
Remaining 2022$7,315 
20235,437 
20242,862 
2025251 
2026— 
Thereafter— 
Total15,865 
Less amounts representing interest(971)
Present value of finance lease obligations$14,894 
8.Income Taxes
The Company computes its year-to-date provision for income taxes by applying the estimated annual effective tax rate to year-to-date pretax income or loss and adjusts the provision for discrete tax items recorded in the period. For the three months ended March 31, 2022 and 2021 the Company reported income tax expense of $32 thousand and zero, respectively, which resulted in an effective tax rate of (0.2352)% and zero percent, respectively. The provision for income taxes varied from the tax computed at the U.S. federal statutory income tax rate of 21% for the periods presented primarily due to changes in the Company’s valuation allowance, state and foreign taxes, and the tax effects of stock-based compensation.
The Company is subject to income tax in the U.S. as well as other tax jurisdictions in which the Company operates. The Company’s U.S. operations have resulted in losses, and as such, the Company maintains a valuation allowance against all U.S. deferred tax assets. While the Company believes its current valuation allowance is appropriate, the Company assesses the need for an adjustment to the valuation allowance on a quarterly basis. The assessment is based on all available positive and negative evidence including past results of operations, forecasted earnings, tax planning strategies, and all sources of future taxable income. In the event the Company determines that it will be able to realize all or part of its net deferred tax assets in the future, all or part of the valuation allowance will be released in the period in which the Company makes such determination. The release of all or part of the valuation allowance against deferred tax assets may cause greater volatility in the effective tax rate in the periods in which it is released.
9.Long-Term Debt
Prior to August of 2021, the Company held a $4.0 million note payable and a revolving line of credit with Silicon Valley Bank. The note required interest only payments through September 2021, followed by 36 principal payments of $0.1 million plus interest (maturity in February 2024). The revolving line of credit had a maximum borrowing capacity of $10.0 million.
In August of 2021, the Company amended the agreement with Silicon Valley Bank to increase the revolving line of credit from $10.0 million to $50.0 million. The total borrowing capacity is subject to reduction should the Company fail to meet certain expectations 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 the agreement, the $4.0 million note payable was converted to a deemed advance on the line of credit and was deemed a debt modification. In connection with this transaction, the Company drew down an additional $6.0 million from the line of credit resulting in a total outstanding balance of $10.0 million. The Company is required to pay an annual fee of $0.1 million beginning on the effective date of the agreement, and continuing on the anniversary of the effective date as well as a quarterly unused line fee of 0.15% per annum of the available borrowing amount should the outstanding principal balance drop below $10.0 million (calculated based on the number of days and based on the average available borrowing amount). The line of credit is collateralized by substantially all of our assets. Under the terms of this amendment, the loan and security agreement requires that, at any time, if total
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unrestricted cash and cash equivalents held at Silicon Valley Bank is less than $100.0 million, the Company must at all times thereafter maintain a consolidated minimum $20.0 million in liquidity, meaning unencumbered cash plus available borrowing on the line of credit, and that the Company meet specified minimum levels of EBITDA, as adjusted for stock-based compensation and changes in our deferred revenue. The Company was in compliance with all debt covenants as of and for the periods ended March 31, 2022 and December 31, 2021. The balance on the line of credit is due on August 4, 2023.
The Company’s long-term debt consisted of the following (in thousands):
March 31, 2022December 31, 2021
Line of credit10,000 10,000 
Total$10,000 $10,000 
10.Stockholders’ Equity
Stock-Based Compensation Expense
Stock-based compensation expense, consisting of service-based expense related to the equity incentive plan, including expense from stock options and restricted stock units, and the employee stock purchase plan was classified as follows in the accompanying condensed consolidated statements of operations for each of the periods presented (in thousands):
Three Months Ended March 31,
20222021
Cost of revenue$148 $69 
Sales and marketing662 132 
Research and development552 396 
General and administrative2,063 1,227 
Total$3,425 $1,824 
For the three months ended March 31, 2022 and 2021, there were no secondary stock transactions that resulted in stock-based compensation expense.
Equity Incentive Plan
During 2016, the Company adopted the 2015 Equity Incentive Plan (the “2015 EIP”) under which common stock options could be issued for employee awards and the Company began issuing stock options under this plan in 2016.
In November 2021 in connection with the IPO, the Company adopted the 2021 Equity Incentive Plan (the “2021 EIP”) under which the Company could issue stock options or restricted stock units (RSUs) as awards. Upon adoption of the 2021 EIP, the 2015 EIP plan was terminated. All options issued and outstanding or available for issuance under the 2015 EIP were absorbed into the 2021 EIP. Along with the absorbed 2015 EIP options, the Company reserved an additional 9,000,000 shares of common stock for future issuance under the 2021 EIP, with scheduled annual increases to the reserve for amounts to be determined by the Board, subject to a maximum amount. In the first quarter of 2022, the board reserved an additional 3.2 million common shares for future issuance under the 2021 EIP.
These 2015 and 2021 plans are collectively referred to herein as the “EIP”. Stock-based compensation expense related to the EIP was $3.4 million and $1.8 million for the three months ended March 31, 2022 and 2021
Stock options
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Most options have a four-year vesting schedule with a one-year cliff and are classified as incentive stock options (ISOs). Some options have been granted in lieu of bonuses and have expedited two- or three-year vesting schedules. All awards vest based on service conditions.
Options with accelerated vesting clauses, should there be a change in Company control, were 3,605,233 and 2,628,528 as of March 31, 2022 and March 31, 2021, respectively.
Unrecognized stock-based compensation expense as of March 31, 2022 and March 31, 2021 was $29.1 million and $26.7 million, respectively. Stock-based compensation expense is recognized on a straight-line basis over the remaining weighted-average vesting periods. As of March 31, 2022 and March 31, 2021 the weighted-average vesting periods approximated 2.72 years and 3.48 years, respectively.
Stock option activity was as follows for the three months ended March 31, 2022 :
Number of OptionsWeighted Average Exercise PriceWeighted Average Remaining Contractual Life (years)Aggregate Intrinsic Value
(in thousands)
Outstanding as of December 31, 20217,574,136 $8.60 8.35$52,257 
Exercisable as of December 31, 20212,719,252 $3.44 7.03$31,929 
Granted— — 
Exercised(564,083)$1.65 
Forfeited and expired(380,947)$12.07 
Outstanding as of March 31, 20226,629,106 $8.99 7.81$8,815 
Exercisable as of March 31, 20222,665,039 $5.45 6.30$6,975 
The aggregate intrinsic value of options exercised was $3.8 million for the three months ended March 31, 2022. The intrinsic value represents the excess of the estimated fair value of the Company's common stock on the date of exercise over the exercise price of each option.
Stock-based compensation expense is measured at the grant date based on the estimated fair value of the award. The fair value of the awards is fixed at grant date and amortized over the remaining service period. The Company uses the Black-Scholes model to estimate the value of its stock options issued under the EIP. Prior to the Company’s IPO, the common stock fair values used in the models were based on the most recent 409(a) valuation as of the option grant date. Management reviews option grants and determines whether further valuation adjustments are appropriate based on recent company performance and/or changes in market conditions. The volatility assumed in the estimate was based on publicly traded companies in the same industry and considers the expected term calculated by the Company. The expected term of the options was derived from a simplified method which estimates the term based on an averaging of the vesting period and contractual term of the option grant. The risk-free rate utilized was the average of the five- and seven-year U.S. Treasury yield as the estimated expected term for options approximates 6 years. The Company has no plans to declare dividends in the foreseeable future.
Restricted Stock Units
Restricted stock units (“RSUs”) granted under the Plan vest and settle upon the satisfaction of a service-based condition. The service based condition for these awards is generally satisfied over three or four years. 171,075 RSUs have a four-year vesting schedule with 25% cliff vesting one year from grant date and the remaining 75% vesting monthly over the remaining three years. The remaining RSUs that have been issued have a three-year vesting schedule with 33% vesting one year from grant date and the remaining 67% vesting quarterly over the remaining two years.
As of March 31, 2022, there was $21.6 million of unrecognized stock-based compensation expense related to outstanding RSUs which is expected to be recognized over a weighted-average period of 3.0 years.
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Restricted Stock Unit activity was as follows for the three months ended March 31, 2022:
Number of SharesWeighted Average Grant Date Fair Value
Outstanding as of December 31, 2021171,075 $18.50 
Granted3,183,398 6.24
Vested(593)9.08
Canceled(33,911)16.02
Outstanding as of March 31, 20223,319,969 $6.77 
Repurchase of Common Shares
No share repurchases took place during the three months ended March 31, 2022 and 2021.
11.Related Party Transactions
There were no related-party transactions during three months ended March 31, 2022 or March 31, 2021.
12.Commitments and Contingencies
Legal Matters
As of March 31, 2022 and through the issuance date of these condensed consolidated financial statements, the Company is not involved in any legal proceedings the outcomes of which are anticipated to significantly impact the Company’s financial condition, results of operations, or liquidity.
Indemnification
The Company enters into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, the Company indemnifies, holds harmless and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, in connection with any trade secret, copyright, patent or other intellectual property infringement claims brought by any third party against such indemnified party with respect to licensed technology. The term of these indemnification agreements is generally perpetual any time after the execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable because it involves claims that may be made against the Company in the future but have not yet been made. To date, the Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements.
13. Net Loss Per Share
The following tables present the calculation of basic and diluted net loss per share for the three months ended March 31, 2022 and 2021 (in thousands, except share and per share amounts):
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Three Months Ended March 31,
20222021
Numerator:
Net loss$(13,838)$(8,983)
Less: cumulative dividends on redeemable convertible preferred stock— (549)
Net loss attributable to common stock holders - basic and diluted$(13,838)$(9,532)
Denominator:
Weighted-average common shares outstanding - basic and diluted64,583,714 12,035,941 
Net loss per share
Net loss per share, basic and diluted$(0.21)$(0.79)
The following outstanding potential common shares were excluded from the computation of diluted net loss per share attributable to common stockholders as of the end of the periods presented because their inclusion would have been antidilutive:
March 31, 2022March 31, 2021
Options to purchase common stock6,629,106 8,835,391 
Redeemable convertible preferred stock— 43,836,109 
Warrants— 107,000 
Number of shares issuable from ESPP430,504 — 
Restricted stock units3,319,969 — 
10,379,579 52,778,500 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 Quarterly Report on Form 10-Q. 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 specified or the context otherwise requires, “Weave,” “we,” “us,” and “our” refer to Weave Communications, Inc. and its consolidated subsidiaries.
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
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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.
Supplemental 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 95% and 93% of our revenue for the three months ended March 31, 2022 and 2021, 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 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 sets for our revenue and associated cost of revenue for our recurring subscription and payment processing services, as well as for our onboarding services, and phone hardware:
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Three Months Ended March 31,
20222021
(dollars in thousands)
Subscription and payment processing:
Revenue$31,950 $23,899 
Cost of revenue(8,821)(6,416)
Gross profit$23,129 $17,483 
Gross margin72 %73 %
Onboarding:
Revenue$262 $1,038 
Cost of revenue(2,586)(2,320)
Gross profit$(2,324)$(1,282)
Gross margin(887)%(124)%
Hardware:
Revenue$1,060 $731 
Cost of revenue(1)
(2,346)(2,066)
Gross profit(1)
$(1,286)$(1,335)
Gross margin(121)%(183)%
______________
(1)    Cost of revenue related to hardware represents depreciation of phone hardware over a 3-year useful life.

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.
Retain and Expand Within 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 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
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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. Our dollar-based net retention rate increased to 103% at March 31, 2022 from 102% at March 31, 2021, which we believe 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 72% and 73% for the three months ended March 31, 2022 and 2021.
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 to New Industry 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 improvement in the pace of new customer acquisition 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, 2021, or the first quarter of 2022, 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 March 31, 2022, we have experienced headwinds in our lead generation activities due to COVID-19-related cancellation or postponement of
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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 since the pandemic began, and we continue to experience some of these headwinds, 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. The impact of existing variants and any future 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 decreased 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 Metrics
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.
March 31,
20222021
Dollar-based net retention rate103 %102 %
Dollar-based gross retention rate94 %92 %
Dollar-Based Net Retention Rate
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 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.
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Dollar-Based Gross Retention Rate
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.
Three Months Ended March 31,
20222021
(dollars in thousands)
Net cash used in operating activities$(4,171)$(5,272)
Net cash used in investing activities$(908)$(2,321)
Net cash provided by (used in) financing activities$(2,017)$(1,569)
Free cash flow$(5,079)$(7,593)
Net cash used in operating activities as a percentage of revenue(13)%(21)%
Free cash flow margin(15)%(30)%
Net loss$(13,838)$(8,983)
Adjusted EBITDA$(9,123)$(6,335)
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
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 stock-based compensation expense, a non-cash item. We believe that adjusted EBITDA provides
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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.
Limitations 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 stock-based compensation expense. Therefore, adjusted EBITDA does not reflect the non-cash impact of stock-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
Three Months Ended March 31,
20222021
(dollars in thousands)
Revenue$33,272 $25,668 
Net cash used in operating activities$(4,171)$(5,272)
Less: Purchase of property and equipment(541)(1,782)
Less: Capitalized internal-use software(367)(539)
Free cash flow$(5,079)$(7,593)
Net cash used in investing activities$(908)$(2,321)
Net cash used in financing activities$(2,017)$(1,569)
Net cash used in operating activities as a percentage of revenue(13)%(21)%
Free cash flow margin(15)%(30)%
Adjusted EBITDA
Three Months Ended March 31,
20222021
(dollars in thousands)
Net loss$(13,838)$(8,983)
Interest on outstanding debt293 280 
Tax expense (benefit)32 — 
Depreciation(1)
685 430 
Amortization(2)
280 114 
Stock-based compensation3,425 1,824 
Adjusted EBITDA$(9,123)$(6,335)
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______________
(1)    Does not include depreciation/amortization on finance lease right-of-use assets on phone hardware provided to our customers.
(2)    Represents amortization of capitalized internal-use software costs.

Components of Results of Operations
Revenue
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. These subscription arrangements have contractual terms of month to month. 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 March 31, 2022, approximately 41% of customer locations elected annual prepayments (approximately 42% as of March 31, 2021). 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, excluding Weave Payments and hardware, accounted for 92% and 90% for the three months ended March 31, 2022 and 2021, respectively.
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.
Cost of Revenue
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, amortization of finance lease right-of-use assets on 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 stock-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.
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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 stock-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.
Operating Expenses
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, stock-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 stock-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, stock-based compensation and costs associated with technology tools used by our engineers.
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) in November 2021, we have incurred and expect to continue to incur additional expenses to operate as a public company, including costs to comply with the
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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.
Interest Expense
Interest expense results primarily from interest payments on our borrowings and interest on finance lease obligations. Interest on borrowings is based on a floating per annum rate at specified percentages above the prime rate. Interest on finance leases initiated prior to January 1, 2022 is based on our incremental borrowing rate at the time the agreements were initiated. On January 1, 2022, we adopted the new accounting guidance required by ASC 842 and the interest on all finance leases initiated going forward is based on the rate implicit within the lease agreement.
Other Income
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.
Results of Operations
The following table sets forth our consolidated statements of operations data for the periods indicated:
Three Months Ended March 31,
20222021
(in thousands)
Revenue$33,272 $25,668 
Cost of revenue (1)13,753 10,802 
Gross profit19,519 14,866 
Operating expenses:
Sales and marketing (1)16,220 11,736 
Research and development (1)7,204 5,836 
General and administrative (1)9,604 6,003 
Total operating expenses33,028 23,575 
Loss from operations(13,509)(8,709)
Other income (expense):
Interest expense(293)(280)
Other income (expense)(4)6 
Loss before income taxes(13,806)(8,983)
Provision for income taxes(32)— 
Net loss$(13,838)$(8,983)
______________
(1)Includes stock-based compensation expense as follows:
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Three Months Ended March 31,
20222021
(in thousands)
Cost of revenue$148 $69 
Sales and marketing662 132 
Research and development552 396 
General and administrative2,063 1,227 
Total stock-based compensation$3,425 $1,824 
See Note 10 of the Unaudited Condensed Consolidated Financial Statements for further details on stock-based compensation.
The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue for the periods indicated:
Three Months Ended March 31,
20222021
(percentage of total revenue)
Revenue100 %100 %
Cost of revenue41 42 
Gross profit59 58 
Operating expenses:
Sales and marketing49 46 
Research and development22 23 
General and administrative29 23 
Total operating expenses99 92 
Loss from operations(41)(34)
Other income (expense):
Interest expense(1)(1)
Other income (expense)— — 
Loss before income taxes(41)(35)
Provision for income taxes— — 
Net loss(42)%(35)%
Comparison of the Three Months Ended March 31, 2022 to March 31, 2021
Revenue
Three Months Ended March 31,Change
20222021AmountPercentage
(dollars in thousands)
Revenue$33,272 $25,668 $7,604 30 %
Revenue increased by $7.6 million or 30% for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. Of the total increase, approximately $7.0 million or 92% was
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attributable to new customers acquired subsequent to March 31, 2021, and 8% or $0.6 million was attributable to existing customers under subscription as of March 31, 2021.
Cost of Revenue and Gross Margin
Three Months Ended March 31,Change
20222021AmountPercentage
(dollars in thousands)
Cost of revenue$13,753 $10,802 $2,951 27 %
Gross margin59 %58 %
The dollar amount increase in cost of revenue was primarily due to an increase of $1.3 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 $1.6 million as a result of increased support and onboarding headcount needed to support the growth of our business and related infrastructure.
Sales and Marketing
Three Months Ended March 31,Change
20222021AmountPercentage
(dollars in thousands)
Sales and marketing$16,220 $11,736 $4,484 38 %
The increase in sales and marketing expenses was primarily attributable to an increase of $3.4 million in personnel-related expenses driven by increased headcount, and a $0.5 million increase in trade show attendance costs including travel expenses.
Research and Development
Three Months Ended March 31,Change
20222021AmountPercentage
(dollars in thousands)
Research and development$7,204 $5,836 $1,368 23 %
The dollar amount increase in research and development expenses was primarily due to an increase of $1.2 million in personnel-related costs driven by higher headcount directly engaged in enhancing our platform infrastructure and developing new product offerings.
General and Administrative
Three Months Ended March 31,Change
20222021AmountPercentage
(dollars in thousands)
General and administrative$9,604 $6,003 $3,601 60 %
The dollar amount increase in general and administrative expenses was primarily due to increases of $1.5 million in personnel-related expenses, including a $0.8 million increase in stock-based compensation expense. Additionally, as a result of our IPO in November 2021 and the increased cost of operating as a
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publicly-traded company, we had an $0.8 million increase in liability insurance expense and a $0.7 million increase in professional fees, in each case compared to the three months ended March 31, 2021.
Interest Expense and Other Income, Net
Three Months Ended March 31,Change
20222021AmountPercentage
(dollars in thousands)
Interest expense and other income, net$297 $274 $23 8 %
The increase is due to additional interest expense related to an increased number of phone hardware finance lease agreements.
Provision for Income Taxes
We have assessed our ability to realize our deferred tax assets and have recorded a valuation allowance against such assets to the extent that, based on the weight of all available evidence, it is more likely than not that all or a portion of the deferred tax assets will not be realized. In assessing the likelihood of future realization of our deferred tax assets, we placed significant weight on our history of generating U.S. tax losses, including in 2020. As a result, we have a full valuation allowance against our net deferred tax assets, including NOL carryforwards. We expect to maintain a full valuation allowance for the foreseeable future.
Liquidity 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 $195.7 million as of March 31, 2022 and negative cash flows from operating activities for the period then ended. 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 principal sources of liquidity were cash held as deposits in financial institutions and cash equivalents consisting of highly liquid investments in money market securities of $128.9 million as of March 31, 2022.
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 $30.2 million of deferred revenue recorded as a current liability as of March 31, 2022. This deferred revenue will be recognized as revenue when all of the revenue recognition criteria are met.
We assess our liquidity primarily through our cash on hand as well as the projected timing of billings under contract with our paying customers and related collection cycles. We believe our current cash, cash equivalents, marketable securities and amounts available under our senior secured credit facility will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.
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The following table shows a summary of our cash flows for the periods presented:
Three Months Ended March 31,
20222021
(dollars in thousands)
Net cash used in operating activities$(4,171)$(5,272)
Net cash used in investing activities(908)(2,321)
Net cash used in financing activities(2,017)(1,569)
Operating Activities
For the three months ended March 31, 2022, cash used in operating activities was $4.2 million, primarily consisting of our net loss of $13.8 million adjusted for non-cash charges of $10.5 million, and net cash outflows of $0.8 million million provided by changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were a $2.4 million increase in deferred customer acquisition costs, comprising mainly sales commissions earned on bookings, and a $0.3 million decrease in operating lease liabilities. These amounts were partially offset by a decrease in prepaid expenses of $1.0 million, and a $0.7 million increase in deferred revenue due to our prepay arrangements with our customers.
For the three months ended March 31, 2021, cash used in operating activities was $5.3 million, primarily consisting of our net loss of $9.0 million, adjusted for non-cash charges of $6.6 million, and net cash outflows of $2.9 million provided by changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were a $2.6 million increase in deferred customer acquisition costs, comprising mainly sales commissions earned on bookings, and a $2.1 million increase in accounts receivable due to an increase in customers and revenue and complications with our credit card processor. These amounts were partially offset by a $1.5 million increase in deferred revenue due to our prepay arrangements with our customers, and a $0.8 million increase in deferred rent.
Investing Activities
Cash used in investing activities for the three months ended March 31, 2022 was $0.9 million, primarily due to furniture and equipment additions of $0.5 million. Additional investing cash flow activities included personnel-related costs capitalized as internal-use software development of $0.4 million.
Cash used in investing activities for the three months ended March 31, 2021 was $2.3 million, due to furniture, equipment and leasehold improvements of $1.8 million for our new corporate headquarters, which we occupied beginning in the first quarter of 2021. Additional investing cash flow activities included personnel-related costs capitalized as internal-use software development of $0.5 million.
Financing Activities
Cash used in financing activities for the three months ended March 31, 2022 was $2.0 million, primarily as a result of principal payments on finance lease obligations of $2.2 million, and $0.4 million paid in IPO-related costs. These outflows were partially offset by cash proceeds from employee stock option exercises of $0.6 million.
Cash used in financing activities for the three months ended March 31, 2021 was $1.6 million, primarily as a result of principal payments on finance lease obligations of $1.8 million, partially offset by cash proceeds from employee stock option exercises of $0.2 million.
Contractual Obligations and Commitments
During the three months ended March 31, 2022, we acquired $2.0 million of additional right of use assets through new finance lease obligations.
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Other than these new finance lease obligations, there have been no material changes to our contractual obligations from those described in our Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Indemnifications
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 March 31, 2022.
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 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 stock-based compensation and changes in our deferred revenue. As of March 31, 2022, $10.0 million was outstanding on the line of credit and we were in compliance with all loan covenants.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and 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. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.
See Recently Adopted Accounting Pronouncements below for significant changes to our lease accounting policies and see our significant accounting policies discussed in Note 2, “ Basis of Presentation and Summary of Significant Accounting Policies,” in the Company’s notes to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q. Other than the changes to lease
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accounting policies, there have been no material changes to our critical accounting policies and estimates as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
Recently Adopted Accounting Pronouncements
On January 1, 2022, we adopted ASU 2016-02, Leases (Topic 842), which updates the requirements related to financial reporting for leasing arrangements, including requiring lessees to recognize an operating lease with a term greater than one year on their consolidated balance sheets as a right-of-use (“ROU”) asset and corresponding lease liability, measured at the present value of the lease payments.
See the sections titled “Basis of Presentation and Summary of Significant Accounting Policies—Accounting Pronouncements Recently Adopted” and “—Accounting Pronouncements Pending Adoption” in Note 2 to our condensed 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 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
As of March 31, 2022, our exposure to market risk has not changed materially since December 31, 2021. For more information on financial market risks related to changes in interest rates and foreign currency rates, reference is made to Item 7A. Quantitative and Qualitative Disclosures About Market Risk contained in Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 23, 2022.
Item 4.   Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing
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similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2022 due to the material weaknesses in our internal control over financial reporting described below.
Previously Reported Material Weaknesses in Internal Control Over Financial Reporting
As previously reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, in connection with the preparation and audit of our consolidated financial statements, material weaknesses were identified in internal control over financial reporting as of December 31, 2020, which continued to exist as of March 31, 2022. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
We did not design and maintain an effective control environment commensurate with our accounting and financial reporting requirements. Specifically, we did not maintain a sufficient complement of personnel with an appropriate degree of internal controls and accounting knowledge, experience and training to appropriately analyze, record, review and disclose accounting impacts of the application of US GAAP within the consolidated financial statements to more complex transactions and commensurate with our accounting and financial reporting requirements. This material weakness contributed to the following additional material weakness:    
•We did not maintain effective controls related to the timely identification, understanding, assessment, application of accounting requirements, and recognition of certain complex transactions related to the determination of the capitalization of costs to fulfill a contract and the valuation of common stock options.