weav-20230331

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, 2023

☐ 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 incorporation or organization)			(I.R.S. Employer 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 share

WEAV

New 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 May 8, 2023, the registrant had 66,721,116 shares of common stock, par value $0.00001 per share, outstanding.

WEAVE COMMUNICATIONS, INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2023

TABLE OF CONTENTS


		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Comprehensive Loss	3
	Condensed Consolidated Statements of Stockholders’ Equity	4
	Condensed Consolidated Statements of Cash Flows	6
	Notes to the Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	36

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	38

Item 6.	Exhibits	84

	Signatures	85

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 that are subject to the safe harbors created under the Securities Act of 1933, as amended, (the “Securities Act”) and the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). 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 and in our other filings with the Securities and Exchange Commission. 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 ongoing impacts of the COVID-19 pandemic and increasing inflation and interest rates;

•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 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.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we do not intend to update any of these forward-looking statements after the date of this Quarterly Report on Form 10-Q or to conform these statements to actual results or revised expectations. In this report, unless otherwise specified or the context otherwise requires, “Weave,” “we,” “us,” and “our” refer to Weave Communications, Inc. and its wholly owned subsidiaries Weave Communications Canada, Inc. and Weave Communications India Private Limited.

You should read this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

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, 2023		December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	56,081	$	61,997
Short-term investments	56,530		51,340
Accounts receivable, net	3,051		3,296
Deferred contract costs, net	10,129		9,881
Prepaid expenses and other current assets	5,815		6,374
Total current assets	131,606		132,888

Non-current assets:
Property and equipment, net	10,621		10,773
Operating lease right-of-use assets	44,211		45,110
Finance lease right-of-use assets	10,578		10,589
Deferred contract costs, net, less current portion	8,134		8,146
Other non-current assets	868		843
TOTAL ASSETS	$	206,018	$	208,349

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	4,151	$	3,793
Accrued liabilities	14,798		13,636
Deferred revenue	34,598		34,136

Current portion of operating lease liabilities	3,735		3,662
Current portion of finance lease liabilities	7,038		6,992
Current portion of long-term debt	—		10,000
Total current liabilities	64,320		72,219

Non-current liabilities:


Operating lease liabilities, less current portion	45,980		46,914
Finance lease liabilities, less current portion	5,919		5,997
Long-term debt	10,000		—
Total liabilities	126,219		125,130

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, 2023 and December 31, 2022	—		—
Common stock, $0.00001 par value per share; 500,000,000 shares authorized as of March 31, 2023 and December 31, 2022; 66,337,452 and 65,739,053 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively	—		—
Additional paid-in capital	319,339		314,884
Accumulated deficit	(239,495)		(231,636)
Accumulated other comprehensive loss	(45)		(29)
Total stockholders' equity	79,799		83,219
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	206,018	$	208,349

See accompanying notes to these unaudited condensed consolidated financial statements

WEAVE COMMUNICATIONS, INC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)


	Three Months Ended March 31,
	2023		2022
Revenue	$	39,565	$	33,272
Cost of revenue	13,031		13,753
Gross profit	26,534		19,519

Operating expenses:
Sales and marketing	17,218		16,220
Research and development	7,694		7,204
General and administrative	10,140		9,604
Total operating expenses	35,052		33,028
Loss from operations	(8,518)		(13,509)

Other income (expense):
Interest expense	(472)		(293)
Other income (expense), net	1,151		(4)
Loss before income taxes	(7,839)		(13,806)
Provision for income taxes	(20)		(32)
Net loss	$	(7,859)	$	(13,838)


Net loss per share attributable to common stockholders - basic and diluted	$	(0.12)	$	(0.21)
Weighted-average common shares outstanding - basic and diluted	65,954,521		64,583,714

See accompanying notes to these unaudited condensed consolidated financial statements

WEAVE COMMUNICATIONS, INC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)


	Three Months Ended March 31,
	2023		2022
Net loss	$	(7,859)	$	(13,838)
Other comprehensive loss
Change in foreign currency translation, net of tax	(34)		54
Net unrealized gains on investments, net of tax	18		—
Total comprehensive loss	$	(7,875)	$	(13,784)

See accompanying notes to these unaudited condensed consolidated financial statements

WEAVE COMMUNICATIONS, INC

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

(unaudited)


		Three Months Ended March 31, 2023
									Accumulated
					Additional				Other		Total
	Common Stock		Paid-in		Accumulated		Comprehensive		Stockholders'
		Shares	Amount		Capital		Deficit		(Loss) Income		Equity
BALANCE - December 31, 2022		65,739,053	$	—	$	314,884	$	(231,636)	$	(29)	$	83,219
Issuance of common shares from stock option exercises		41,175	—		73		—		—		73
Issuance of common shares from the employee stock purchase plan		134,336	—		622		—		—		622

Vesting of restricted stock units		586,640	—		—		—		—		—
Common stock withheld related to net settlement of equity awards		(163,752)	—		(753)		—		—		(753)
Stock-based compensation		—	—		4,513		—		—		4,513
Foreign currency translation adjustments, net of tax		—	—		—		—		(34)		(34)
Net unrealized gain on investments		—	—		—		—		18		18
Net loss		—	—		—		(7,859)		—		(7,859)
BALANCE - March 31, 2023		66,337,452	$	—	$	319,339	$	(239,495)	$	(45)	$	79,799

See accompanying notes to these unaudited condensed consolidated financial statements

WEAVE COMMUNICATIONS, INC

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

(unaudited)


		Three Months Ended March 31, 2022
									Accumulated
			Additional				Other		Total
	Common Stock		Paid-in		Accumulated		Comprehensive		Stockholders'
		Shares	Amount		Capital		Deficit		(Loss) Income		Equity
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

See accompanying notes to these unaudited condensed consolidated financial statements

WEAVE COMMUNICATIONS, INC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Three Months Ended March 31,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(7,859)	$	(13,838)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation and amortization	3,045		3,375
Amortization of operating right-of-use assets	938		908
Provision for losses on accounts receivable	422		150
Amortization of deferred contract costs	2,976		2,640

Loss on disposal of assets	3		—
Stock-based compensation	4,513		3,425
Net accretion of discounts on short-term investments	(687)		—
Changes in operating assets and liabilities:
Accounts receivable	(177)		12
Deferred contract costs	(3,212)		(2,409)
Prepaid expenses and other assets	534		950
Accounts payable	355		148
Accrued liabilities	1,162		69
Operating lease liabilities	(900)		(332)
Deferred revenue	428		731

Net cash provided by (used in) operating activities	1,541		(4,171)


CASH FLOWS FROM INVESTING ACTIVITIES
Maturities of short-term investments	13,000		—
Purchases of short-term investments	(17,485)		—

Purchases of property and equipment	(620)		(541)
Capitalized internal-use software costs	(334)		(367)
Net cash used in investing activities	(5,439)		(908)

CASH FLOWS FROM FINANCING ACTIVITIES

Principal payments on finance leases	(1,960)		(2,176)
Proceeds from stock option exercises	73		559
Payments for taxes related to net share settlement of equity awards	(753)		—



Paid offering costs	—		(400)
Proceeds from the employee stock purchase plan	622		—
Net cash used in financing activities	(2,018)		(2,017)

NET DECREASE IN CASH AND CASH EQUIVALENTS	(5,916)		(7,096)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	61,997		135,996
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	56,081	$	128,900




SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest	$	472	$	293
Cash paid during the period for income taxes	$	20	$	32
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Equipment purchases financed with accounts payable	$	3	$	20
Finance lease liabilities arising from obtaining finance lease right-of-use assets	$	1,928	$	2,027
Operating lease liabilities arising from obtaining operating lease right-of-use assets	$	154	$	—

Unrealized gain on short-term investments	$	18	$	—

See accompanying notes to these unaudited condensed consolidated financial statements

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 unaudited condensed 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 U.S. GAAP. 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, 2022.

The accompanying interim condensed consolidated balance sheets, statements of operations, comprehensive loss, statements stockholders' equity, 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 unaudited 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 unaudited 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 in the Company’s financial statements include the valuation allowance against deferred tax assets, allowance for credit losses, recoverability of long-lived assets, fair value of stock-based compensation, amortization period of deferred contract 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

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, 2023 and December 31, 2022. As of March 31, 2023 and December 31, 2022 the Company did not have any restricted cash.

Liquidity and Capital Resources

The Company has incurred losses and, with the exception of the first quarter of 2023, has generated negative cash flows from operations since inception. As of March 31, 2023 the Company had an accumulated deficit of $239.5 million. The Company has partially funded its operations through cash flows generated by the sale of subscriptions to the Company’s platform. In November 2021, the Company completed its initial public offering, which generated additional net proceeds of $107.5 million. As of March 31, 2023 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, cash equivalents, short-term investments, borrowing capacity under its 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, 2023 unaudited condensed consolidated financial statements. As a result of the Company’s growth plans, the Company may experience losses and negative cash flows from operations in the future.

Short-Term Investments

The Company determines the appropriate classification of its investments at the time of purchase. As the Company views these securities as available to support current operations, it accounts for these debt securities as available-for-sale and classifies them as current assets on its consolidated balance sheets. These securities are recorded at estimated fair value. Unrealized gains and losses for available-for-sale securities are included in accumulated other comprehensive income (loss). The Company periodically evaluates its investments to assess whether those with unrealized loss positions are other-than-temporarily impaired. The Company considers impairments to be other than temporary if they are related to deterioration in credit risk or if it is more likely than not that the Company will sell the securities before the recovery of their cost basis. If the Company does not intend to sell a security and it is not more likely than not that it will be required to sell the security before recovery, the unrealized loss is separated into an amount representing the credit loss, which is recognized in other income (expense), net, and the amount related to all other factors, which is recorded in accumulated other comprehensive income (loss).

Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in other income (expense), net in the consolidated statements of operations. Realized gains and losses for the three months ended March 31, 2023 were not material.

Advertising Expense

Advertising costs are expensed as incurred. For the three months ended March 31, 2023 and 2022, the Company recorded advertising expense of $1.9 million and $1.5 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 recognizes revenue when control of these services is 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; and

•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 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 several card-not-present modalities, including “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.

The Company offers remote installation services as part of the onboarding process, wherein the Company can install pre-configured applications on customer hardware which allow remote access to Weave’s cloud solution. Customers may also choose to engage directly with one of several preferred third-party providers to perform on-site installation services. 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, 2023, approximately $0.5 million of 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 this $0.5 million does not begin until April 2023, this amount is not recorded in deferred revenue as of March 31, 2023. The Company expects to recognize revenue on these remaining performance obligations over the next 4 months.

In addition to providing VoIP phone and software services, the Company provides phone hardware to its customers as part of the subscription. 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. Title of the phones does not transfer to the customer at any point. If a customer were to cancel at any time, the phones are returned to the Company. For customers subscribed prior to August 2021, the Company allowed customers to include up to 10 phones without adjustment to the subscription base price and title of the phones transfers to the customer after 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. For the three months ended March 31, 2023 and 2022 the Company recorded $1.1 million and $1.1 million, respectively, in lease revenues associated with the phone hardware.

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 does not accrue to the benefit of the Company. Phones that are returned are refurbished and placed into service.

Deferred Contract Costs

In accordance with ASC-340, the Company capitalizes incremental costs of obtaining and fulfilling a contract, provided the Company expects to recover those costs. The capitalized amounts mainly consist of sales commissions paid to the Company’s direct sales force. Capitalized costs also include:

•Commissions to sales management for achieving incremental sales quota;

•The associated payroll taxes and fringe benefit costs associated with the payments to the Company’s employees;

•One-time commissions paid to partners; and

•One-time registration fees assessed by mobile carriers.

These costs are recorded as deferred contract acquisition and fulfillment costs on the consolidated balance sheet. Amortization of deferred contract acquisition costs related to commissions, and the associated taxes and fringe benefit costs, are included in sales and marketing expense. Deferred contract acquisition costs related to one-time commissions paid to partners are included in cost of revenue. Deferred contract fulfillment costs related to one-time registration fees paid to mobile carriers are included in cost of revenue. These expenses are amortized on a straight-line basis over the average period of consumer benefit, 3 years. In arriving at this average period of benefit, the Company evaluated both qualitative and quantitative factors which included the anticipated customer life, historical customer life, and the useful life of the Company’s product offerings.

Monthly commensurate revenue share fees paid to partners are expensed as incurred as their estimated period of benefit does not extend beyond 12 months and they therefore fall under the practical expedient which allows these costs to be expensed as incurred.

Accounting Pronouncements Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which 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. 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.

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. The Company adopted Topic 326 as of January 1, 2023, which did not materially impact the unaudited condensed consolidated financial statements.

Accounting Pronouncements Pending Adoption

As an “emerging growth company,” the Jumpstart Our Business Startups Act (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.

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

For the three months ended March 31, 2023 and 2022, the Company recognized revenue of $16.7 million and $15.1 million, respectively, that were included in the corresponding deferred revenue balance at the beginning of the period.

Deferred Contract Costs

As discussed in Note 2, the Company capitalizes incremental costs of obtaining and fulfilling a contract. Amortization expense related to these costs was $3.0 million and $2.6 million for the three months ended March 31, 2023 and 2022, 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 months ended March 31, 2023 and 2022:


	Three Months Ended March 31,
	2023		2022
Subscription and payment processing	$	37,692	$	31,950
Onboarding	784		262
Hardware (embedded lease)	1,089		1,060
Total revenue	$	39,565	$	33,272

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 year ended March 31, 2023 (in thousands):


	Level 1		Level 2		Level 3		Total
Cash equivalents
Money market funds	$	46,257	$	—	$	—	$	46,257

Short-term investments
US government and agency securities	20,212		16,170		—		36,382
Commercial paper	—		20,147		—		20,147
Total	$	66,469	$	36,317	$	—	$	102,786

The following table summarizes the assets measured at fair value on a recurring basis by level within the fair value hierarchy for the year ended December 31, 2022 (in thousands):


	Level 1		Level 2		Level 3		Total
Cash equivalents
Money market funds	$	41,213	$	—	$	—	$	41,213
Commercial paper	—		8,980		—		8,980
Short-term investments
US government and agency securities	24,944		11,663		—		36,607
Commercial paper	—		14,733		—		14,733
Total	$	66,157	$	35,376	$	—	$	101,533

The following table summarizes the Company's short-term investments on the consolidated balance sheets as of March 31, 2023 and December 31, 2022 (in thousands):


	March 31, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Short-term investments
US government and agency securities	$	36,353	$	32	$	(2)	$	36,383
Commercial paper	20,147		—		—		20,147
Total	$	56,500	$	32	$	(2)	$	56,530



	December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Short-term investments
US government and agency securities	$	36,595	$	18	$	(6)	$	36,607
Commercial paper	14,733		—		—		14,733
Total	$	51,328	$	18	$	(6)	$	51,340

The following table summarizes the Company’s cash and cash equivalents on the consolidated balance sheets as of March 31, 2023 and December 31, 2022 (in thousands):


	March 31, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Cash	$	9,824	$	—	$	—	$	9,824
Cash equivalents
Money market funds	46,257		—		—		46,257

Total	$	56,081	$	—	$	—	$	56,081



	December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Cash	$	11,804	$	—	$	—	$	11,804
Cash equivalents
Money market funds	41,213		—		—		41,213
Commercial paper	8,980		—		—		8,980
Total	$	61,997	$	—	$	—	$	61,997

As of March 31, 2023, the weighted-average remaining contractual maturities of available for sale securities was approximately 5 months.

No available-for-sale securities held as of March 31, 2023 have been in a continuous unrealized loss position for more than 12 months. As of March 31, 2023, unrealized losses on available-for-sale securities are not attributed to credit risk and are considered temporary. The Company believes it is more likely than not that investments in an unrealized loss position will be held until maturity or the cost basis of the investment will be recovered. The Company believes it has no other-than-temporary impairments on its securities as it does not intend to sell these securities and does not believe it is more likely than not that it will be required to sell these securities before the recovery of their amortized cost basis. To date, the Company has not recorded any impairment charges on securities related to other-than-temporary declines in fair value. The Company’s cash equivalents and short-term investments are due within one year from the balance sheet date.

For the three months ended March 31, 2023, both unrealized holding gains and losses are immaterial and the resulting net unrealized holding gain has been included in accumulated other comprehensive

income. For the three months ended March 31, 2022, there were no unrealized holding gains or losses recorded in accumulated other comprehensive income.

As of March 31, 2023 and December 31, 2022 the fair value of debt was $11.9 million and $10.4 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, 2023		December 31, 2022
Office equipment	$	5,189	$	5,146
Office furniture	6,404		5,763
Leasehold improvements	2,622		2,615
Fixed assets not placed in service	—		318
Capitalized internal-use software	5,162		4,828

Payment terminals	2,631		2,389
Property and equipment, gross	22,008		21,059
Less accumulated depreciation and amortization	(11,387)		(10,286)
Property and equipment, net	$	10,621	$	10,773

Depreciation and amortization expense on property and equipment (excluding amortization on operating ROU assets) was $3.0 million and $3.4 million for the three months ended March 31, 2023 and 2022, respectively. Of this expense, $1.9 million and $2.4 million for the three months ended March 31, 2023 and 2022, respectively, was related to phone hardware finance ROU assets (see also Note 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 $0.2 million for the three months ended March 31, 2023 and 2022, respectively, which has been included in the cost of revenue in the statements of operations. Capitalized implementation amortization expense was zero and $0.1 million for the March 31, 2023 and 2022, 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, 2023		December 31, 2022
Payroll-related accruals	$	10,048	$	8,747
Sales and telecom taxes	2,824		2,811
Employee stock purchase plan liability	250		570
Third-party commissions	477		456

Other	1,199		1,052
Total	$	14,798	$	13,636

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, 2023 and 2022 (in thousands, except terms and rates):


	Three Months Ended March 31, 2023			Three Months Ended March 31, 2022
Lease expense
Finance lease expense:
Amortization of right-of-use assets	$	1,939		$	2,233
Interest on lease liabilities	273			204
Operating lease expense	1,423			1,417
Short-term lease expense	6			9
Total lease expense	$	3,641		$	3,863

Supplemental cash flow information
Finance leases:
Operating cash outflow from finance leases	$	273		$	204
Financing cash outflow from finance leases	$	1,960		$	2,176
Finance lease liabilities arising from obtaining finance lease right-of-use assets	$	1,928		$	2,027
Operating leases:
Operating cash outflow from operating leases	$	1,385		$	841
Operating lease liabilities arising from obtaining operating lease right-of-use assets	$	154		$	—

Other information as of March 31, 2023
Finance leases:
Weighted-average remaining lease term (years)	2.0
Weighted-average discount rate lease term	9.1		%
Operating leases:
Weighted-average remaining lease term (years)	9.8
Weighted-average discount rate lease term	3.9		%

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 January 2024 to January 2033. Though the Company is considering renewal options on its leases nearing expiration, the Company has not recognized any renewal options as part of the current lease term as it is not reasonably certain that it will exercise its option as of March 31, 2023. 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 non-lease 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 $1.4 million for the three months ended March 31, 2023 and 2022, respectively.

Future maturities of remaining lease payments included in the measurement of operating lease as of March 31, 2023 are as follows (in thousands):


Years ending December 31,
Remaining 2023	$	4,188
2024	5,574
2025	5,701
2026	5,843
2027	5,989
Thereafter	32,834
Total	60,129
Less imputed interest	(10,414)
Present value of operating lease obligations	$	49,715

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, 2023 and 2022, the Company recorded lease revenues associated with phone hardware of $1.1 million and $1.1 million, respectively.

Finance leases

The Company is the lessee in all of its finance lease arrangements. The Company finances its purchases of phone hardware through lease agreements classified as finance leases. As of March 31, 2023 the Company had 104 executed and active lease agreements, respectively, for phone hardware. These agreements require monthly payments ranging from approximately $64 to $21,975 and have maturity dates ranging from April 2023 to February 2026. As of March 31, 2023, the gross value of phone hardware acquired under these capital leases approximated $22.3 million. Amortization expense on finance-leased phone hardware was $1.9 million and $2.2 million for the three months ended March 31, 2023 and 2022, 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, 2023 were as follows (in thousands):


Years ending December 31,
Remaining 2023	$	6,132
2024	5,228
2025	2,718
2026	292
2027	—
Thereafter	—
Total	14,370
Less amounts representing interest	(1,413)
Present value of finance lease obligations	$	12,957

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. The Company reported provision for income taxes of $19.9 thousand and $32.5 thousand for the March 31, 2023 and 2022, respectively, which resulted in an effective tax rate of (0.3)% and (0.2)%, 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.Current and Long-Term Debt

In August 2021, the Company established a revolving line of credit with Silicon Valley Bank with total borrowing capacity up to $50.0 million, subject to reduction should the Company fail to meet certain expectations for recurring revenue and customer retention (the “August 2021 Agreement”). Amounts outstanding on the line will accrue interest at the greater of prime rate plus 0.25% and 3.50%. The Company is required to pay an annual fee of $0.1 million beginning on the effective date of the August 2021 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. The August 2021 Agreement requires that, at any time, if total unrestricted cash and cash equivalents held at Silicon Valley Bank plus short-term investments 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 the Company must meet specified minimum levels of EBITDA, as adjusted for stock-based compensation and changes in its deferred revenue. The Company was in compliance with all debt covenants for the year ended December 31, 2022, and for three months ended March 31, 2023. As of March 31, 2023, the total outstanding balance on the line of credit was $10.0 million. In April 2023, the Company amended the revolving line of credit agreement with Silicon Valley Bank, now a division of First-Citizens Bank & Trust Company (successor by purchase to the Federal Deposit Insurance Corporation as receiver for Silicon Valley Bridge Bank, N.A. (as successor to Silicon Valley Bank)) (“SVB”), which amended certain terms of the August 2021 Agreement, including but not limited to, (i) extending the maturity date from August 2023 to August 2025 and (ii) setting EBITDA financial covenants of the Company for the 2023 fiscal year. As the Company had the ability and intent to refinance the line of credit on a long-term basis as of March 31, 2023, the balance is reflected as a long-term liability on the balance sheet as of March 31, 2023.

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, as well as expenses related to secondary sales of shares of Company common stock,

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,
	2023		2022
Cost of revenue	$	213	$	148
Sales and marketing	964		697
Research and development	930		552
General and administrative	2,406		2,028
Total	$	4,513	$	3,425

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 initial public offering (“IPO”), the Company adopted the 2021 Equity Incentive Plan (the “2021 EIP” and, together with the 2015 EIP, the “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 9.0 million 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 2023 and 2022, respectively, the board reserved an additional 3.3 million and 3.2 million common shares for future issuance under the 2021 EIP. These plans are collectively referred to herein as the “EIP.”

In March 2023 the Company adopted the 2022 Inducement Equity Incentive Plan and reserved an additional 7.0 million shares of common stock for future issuance.

Stock-based compensation expense related to the EIP was $4.4 million and $3.3 million for the three months ended March 31, 2023 and 2022, respectively.

Stock Options

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 1,843,763 and 3,605,233 as of March 31, 2023 and 2022, respectively.

Unrecognized stock-based compensation expense as of March 31, 2023 and 2022 was $7.5 million and $29.1 million, respectively. Stock-based compensation expense is recognized on a straight-line basis over the remaining weighted-average vesting periods. As of March 31, 2023 and 2022 the weighted-average vesting periods approximated 1.3 years and 2.7 years, respectively.

Stock option activity was as follows:


	Number of Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2022	4,185,876	$	6.32	5.03	$	3,470
Exercisable as of December 31, 2022	3,060,997	$	6.47	3.87	$	3,286

Granted	—	$	—


Exercised	(41,175)	$	1.76
Forfeited and expired	(230,775)	$	6.16
Outstanding as of March 31, 2023	3,913,926	$	6.38	4.38	$	3,928
Exercisable as of March 31, 2023	3,101,573	$	6.43	3.42	$	3,744

The aggregate intrinsic value of options exercised was $0.1 million for the three months ended March 31, 2023. 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 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 yields 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

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, 2023, there was $32.1 million of unrecognized stock-based compensation expense related to outstanding RSUs which is expected to be recognized over a weighted-average period of 2.2 years.

Restricted Stock Unit activity was as follows:


	Number of Shares	Weighted Average Grant Date Fair Value
Outstanding as of December 31, 2022	8,278,361	$	5.51

Granted	57,137	$	5.38
Vested	(586,640)	$	6.43
Canceled	(291,799)	$	5.77
Outstanding as of March 31, 2023	7,457,059	$	5.42

The total fair value of RSUs that vested during the three months ended March 31, 2023 was $2.8 million. A portion of these RSUs were net settled such that the Company withheld shares with a value equivalent to the employees’ obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The Company withheld 163,752 shares, which was based on the value of the RSUs on their respective vesting dates as determined by the Company’s closing stock price. Total payments for the employees’ tax obligations to taxing authorities was $0.8 million for the three months ended March 31, 2023. Prior to 2023, the Company had not net-settled vesting RSUs.

Employee Stock Purchase Plan

In October 2021, the Company adopted the Employee Stock Purchase Plan (“ESPP”) in which eligible employees may contribute up to 50% of their base compensation to purchase shares of common stock at a price equal to 85% of the lower of (1) the fair market value of a share of the Company’s common stock at the beginning of the offering period and (2) the fair market value of a share of the Company’s common stock on the purchase date. No participant may purchase more than 2,500 shares during any offering period. As of March 31, 2023 and December 31, 2022, 2,600,637 and 1,943,246 shares were reserved for issuance, and 299,683 and 165,347 shares, respectively, of common stock had been issued under the ESPP. The number of shares available for issuance under the ESPP may be increased on the first day of each fiscal year by an amount to be determined by the board of directors.

Except for the initial offering period, the 2021 ESPP provides for six-month offering periods beginning February 16 and August 16 of each year, and the last day of each offering period is the purchase date for that period. The initial offering period began on December 1, 2021 and ended on August 15, 2022 and consists of one purchase period, which is the last day of the offering period.

During the three months ended March 31, 2023 and 2022, the Company recognized $0.1 million and $0.1 million of stock-based compensation expense related to the ESPP. As of March 31, 2023 and December 31, 2022, $0.3 million and $0.6 million in accrued ESPP employee payroll contributions are included within accrued liabilities on the consolidated balance sheets, respectively. As of March 31, 2023, total unrecognized compensation costs related to the ESPP was $0.2 million, which will be amortized over the remaining offering period through August 15, 2023.

Repurchase of Common Shares

No share repurchases took place during the three months ended March 31, 2023 and 2022.

11. Related Party Transactions

There were no related-party transactions during the three months ended March 31, 2023 and 2022.

12.Commitments and Contingencies

Legal Matters

As of March 31, 2023 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, 2023 and 2022 (in thousands, except share and per share amounts):


	Three Months Ended March 31,
	2023		2022
Numerator:
Net loss	$	(7,859)	$	(13,838)


Denominator:
Weighted-average common shares outstanding - basic and diluted	65,954,521		64,583,714
Net loss per share
Net loss per share, basic and diluted	$	(0.12)	$	(0.21)

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, 2023	March 31, 2022
Options to purchase common stock	3,913,926	6,629,106


Number of shares issuable from ESPP	192,551	430,504
Restricted stock units	7,457,059	3,319,969
Total	11,563,536	10,379,579

14. Subsequent Events

The Company entered into a Sublease Agreement commencing April 2023 (the “Sublease”). The Sublease is for the third floor of the office space currently occupied by the Company in Lehi, Utah. The initial term of the Sublease expires in March 2026, and the sublessee has two renewal options of three years each. The Company will receive monthly sublease payments of approximately $0.1 million, resulting in $0.7 million total sublease income for 2023. Sublease payments escalate by 3.0% annually on the anniversary of the agreement.

In April 2023, the Company amended its revolving line of credit agreement with SVB, which amended certain terms of the August 2021 Agreement, including but not limited to, (i) extending the maturity date from August 2023 to August 2025, and (ii) setting EBITDA financial covenants of the Company for the 2023 fiscal year. No other terms of the agreement were modified with the amendment.

In April 2023, the Company granted 2,056,200 RSUs with a combined grant date fair value of $10.2 million. These grants have a three-year vesting schedule with 33% cliff vesting in March 2024 with the remaining 67% vesting quarterly over the following two years.

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 Quarterly Report on Form 10-Q, 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 (“SMBs”). We are creating a world where SMB entrepreneurs can utilize state-of-the-art technology to transform how they attract, communicate and engage customers, grow their business and realize their dreams. Our platform enables entrepreneurs to maximize the value of their customer interactions and minimize the time and effort spent on manual or mundane tasks. In a similar way to how the smartphone has transformed the manner in which we live our daily lives, our platform changes the way SMBs manage their businesses.

We have democratized powerful communications and engagement capabilities previously only available to enterprises, made them intuitive and easy to use and put them in one place – always within reach of the SMB. Our cloud-based software platform streamlines the day-to-day operations of running a small business. We offer an all-in-one platform spanning all forms of communications and customer engagement ranging from answering phones, to scheduling appointments, to sending text reminders, to requesting client reviews, to collecting payments, to sending email marketing campaigns. We bring small businesses and the people they serve closer together by unifying, modernizing and personalizing all customer interactions. Our platform helps improve communications, attract more customers, keep customers engaged and increase overall retention.

Since our founding in 2011, we have evolved our platform, innovating and improving the products and integrations we provide for small businesses. We have expanded our product offering from a suite of integrated phone, email and text solutions to include analytics in 2019, payments in 2019, forms in 2021, and buy-now-pay-later in 2022, 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 veterinary and specialized healthcare.

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 92% and 95% of our revenue for the three months ended March 31, 2023 and 2022, respectively. In addition, we provide recurring payment processing services through Weave Payments and derive revenue on transactions between our customers that utilize Weave Payments and their end consumers.

We also derive revenue associated with non-recurring installation fees for onboarding customers and from embedded leases on phone hardware. We utilize our onboarding services and phone hardware as customer acquisition tools and price them competitively to lower the barriers to entry for new customers adopting our platform. As a result, the variable cost associated with providing phone hardware and onboarding assistance has historically exceeded the related revenue, resulting in negative gross profit for each. The revenue and related costs associated with onboarding new customers are typically non-recurring, and are primarily associated with the initial setup of a customer’s software and phone system. Revenue on phone hardware provided to our customers, deemed embedded lease revenue, is recognized over the related subscription period. The associated costs, which primarily represent depreciation expense on phones financed under capital lease arrangements, are incurred over the useful lives of the phones. We consider the net costs of onboarding and hardware, in addition to our sales and marketing activities, to be core elements of our customer acquisition approach.

The table below sets forth 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:


	Three Months Ended March 31,
	2023			2022

	(dollars in thousands)
Subscription and payment processing:
Revenue	$	37,692		$	31,950
Cost of revenue	(8,978)			(8,821)
Gross profit	$	28,714		$	23,129
Gross margin	76		%	72		%

Onboarding:
Revenue	$	784		$	262
Cost of revenue	(2,125)			(2,586)
Gross profit	$	(1,341)		$	(2,324)
Gross margin	(171)		%	(887)		%

Hardware:
Revenue	$	1,089		$	1,060
Cost of revenue(1)	(1,928)			(2,346)
Gross profit(1)	$	(839)		$	(1,286)
Gross margin	(77)		%	(121)		%

______________

(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, direct mail, 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 have 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, with a particular focus on our core specialty healthcare verticals. 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, our ability to effectively enhance our platform by developing new applications and features and addressing additional use cases, and our ability to leverage and scale our core sales efforts and marketing capabilities to increase our penetration into our core specialty healthcare verticals. The deployment of the Weave phone system at each of our customers increases stickiness and customer loyalty. Historically, our subscriptions have provided our new customers with immediate access to the majority of our products and functionality. However, we have added additional add-on products in recent years, such as Weave Payments, which we are increasingly successful at cross-selling to our customer base. 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 76% and 72% for the three periods ended March 31, 2023 and 2022, respectively.

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 businesses, particularly in our core specialty healthcare verticals. The depth of our platform’s functionality is dependent upon both our internally-developed technology and our platform partnerships and integrations. 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 SMBs 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. Entering a new industry vertical includes establishing key partnerships as well as identifying, evaluating, developing and launching a platform solution with vertical-specific functionality that is integrated 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 diversifies our end-market exposure and creates a flywheel effect.

Key Business Metrics

In addition to our financial information that is presented in accordance with the generally accepted accounting principles in the United States (“U.S. GAAP”), 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,
	2023		2022
Dollar-based net retention rate	97	%	103	%
Dollar-based gross retention rate	93	%	94	%

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.

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 Base Locations that were under subscription in 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.

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. The majority of these subscription arrangements have contractual terms of month-to-month, with a small minority portion having contractual terms of 1-3 years. Subscription and hardware fees are prepaid and customers may elect to be billed monthly or annually, with the majority of our revenue coming from those that elect to be billed monthly. To incentivize annual payments, we may offer pricing concessions that apply ratably over the twelve-month subscription plan. As of March 31, 2023, approximately 40% of customer locations elected annual prepayments (approximately 41% as of March 31, 2022). 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 90% and 92% for the three months ended March 31, 2023 and 2022, 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 several card-not-present modalities, including “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. Our customers may 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.

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.

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 and aging 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 to our software, phone, and payments services 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 and to the extent in-person events and conferences continue to return to pre-pandemic levels of activity, we expect that our sales and

marketing expenses will continue to increase compared to 2022. As a percentage of revenue, we anticipate sales and marketing expenses to decrease in 2023 as compared to 2022, and we expect these expenses to continue to decrease as a percentage 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 remain fairly consistent or slightly 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.

We have incurred and will continue to incur additional expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and the listing standards of the NYSE, and increased expenses for insurance, investor relations and fees for 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 (Expense), Net

Other income consists primarily of interest income earned on our cash and cash equivalents and short term investments.

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,
	2023		2022

	(in thousands)
Revenue	$	39,565	$	33,272
Cost of revenue (1)	13,031		13,753
Gross profit	26,534		19,519

Operating expenses:
Sales and marketing (1)	17,218		16,220