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

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 indicated or the context requires, “Weave”, “we”, “us” and “our” means Weave Communications, Inc. and its consolidated subsidiaries.

Insight

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

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how the smartphone has transformed the way we live our daily lives, our platform is changing the way SMEs run their businesses.

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

Since our founding in 2011, we have evolved our platform, innovating and
improving the products and integrations we provide for small businesses. We have
expanded our product offering from a suite of integrated phone, email and text
solutions to include analytics in 2019, payments in 2019 and forms in 2021,
among other capabilities launched in those years. Through investments in product
development and integrations, we have expanded beyond dentistry and optometry to
other verticals, such as home services.

Additional financial information – Disaggregated revenue and cost of revenue

To supplement our discussion of our consolidated results of operations, we have
separated our revenue and cost of revenue into recurring and non-recurring
categories to disaggregate revenue and costs of revenue that are one-time in
nature from those that are term-based and renewable.

We generate revenue primarily from recurring subscription fees charged to access
our software platform and phone services, including recurring hardware fees.
These recurring revenues accounted for 95% and 93% of our revenue for the three
month and six month periods ended June 30, 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 outlines our revenue and associated revenue cost for our recurring subscription and payment processing services, as well as our onboarding services and telephony hardware:

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                                         Three Months Ended June 30,                   Six Months Ended June 30,
                                          2022                   2021                  2022                  2021

                                                                  (dollars in thousands)
Subscription and payment
processing:
Revenue                             $      33,538           $    26,233          $     65,488           $    50,132
Cost of revenue                            (9,009)               (7,113)              (17,830)              (13,529)
Gross profit                        $      24,529           $    19,120          $     47,658           $    36,603
Gross margin                                   73   %                73  %                 73   %                73  %

Onboarding:
Revenue                             $         319           $     1,034          $        581           $     2,072
Cost of revenue                            (2,502)               (2,673)               (5,088)               (4,993)
Gross profit                        $      (2,183)          $    (1,639)         $     (4,507)          $    (2,921)
Gross margin                                 (684)  %              (159) %               (776)  %              (141) %

Hardware:
Revenue                             $       1,073           $       794          $      2,133           $     1,525
Cost of revenue(1)                         (2,238)               (2,237)               (4,584)               (4,303)
Gross profit(1)                     $      (1,165)          $    (1,443)         $     (2,451)          $    (2,778)
Gross margin                                 (109)  %              (182) %               (115)  %              (182) %


______________

(1) The cost of equipment revenue represents the amortization of telephone equipment over a useful life of 3 years.

Factors affecting our performance

Our historical financial performance has been, and we expect our financial
performance in the future to be, driven by our ability to attract new customers,
retain and expand within our customer base, add new products and expand into new
industry verticals.

Attract New Customers

Our ability to attract new customers is dependent upon a number of factors,
including the effectiveness of our pricing and products, the sum total of the
features and pricing of the alternative point solution patchwork, the
effectiveness of our marketing efforts, the effectiveness of our channel
partners in selling and marketing our platform and the growth of the market for
SMB communications and engagement. Sustaining our growth requires continued
adoption of our platform by new customers. We aim to add new customers through a
combination of unpaid channels, such as recommendations and word of mouth, and
paid channels, such as digital marketing, professional events, brand marketing
and our teams of sales representatives. Historically, our go-to-market strategy
focused on increasing the number of locations with most of our customers having
a single location; however, we recently introduced multi-office functionality to
our platform to allow us to better service organizations with multiple
locations. In addition to pursuing continued customer growth among small
businesses, we intend to pursue opportunities to expand our customer base among
medium-sized businesses, 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 grow our customer base

Our ability to retain and increase revenue within our existing customer base is
dependent upon a number of factors, including customer satisfaction with our
platform and support, the sum total of the 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

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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 decreased to 102% at
June 30, 2022 from 104% at June 30, 2021, reflecting an anticipated decline as
compared to the successful Weave Payments initial product rollout and upsell
efforts we experienced continuing into the first half of 2021. We intend to
continue to invest in enhancing awareness of our platform, creating additional
use cases and developing more products, features and functionality.

Customer retention also impacts our future financial performance given its
potential to drive improved gross margin. The initial onboarding costs as well
as the cost of hardware, which is depreciated over three years, represent
substantial cost of revenue elements during the first few years of a customer's
life. We believe our disaggregated revenue and cost of revenue financial data,
particularly our subscription and payment processing gross margin, provide
insight into the impact of customer retention on overall gross margin
improvement. Our subscription and payment processing gross margin was 73% for
the three month periods ended June 30, 2022 and 2021, and the six month periods
ended June 30, 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 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. We
expect our future success in winning new clients to be partially driven by our
ability to continue to develop and deliver new, innovative products to small
businesses in a timely manner.

Expand into new verticals

We believe we have built a flexible platform that encompasses the majority of
the functionality needed for communications and engagement across industry
verticals, and we have developed a repeatable playbook for assessing new
industry verticals and building the remaining "last mile" of vertical-specific
functionality. Entering a new industry vertical includes identifying,
evaluating, developing and launching the new offering. We create functionality
specific to the new industry vertical and then integrate that functionality with
the primary systems of record in that vertical. We started in dental and have
since successfully expanded to optometry and veterinary, among other areas. In
the near term, while we intend to continue to grow within our core vertical
markets, we are focused on additional expansion opportunities. We believe
expansion into adjacent markets, such as home services, diversifies our
end-market exposure and creates a flywheel effect.

Business update regarding COVID-19

The COVID-19 pandemic has had a disproportionate adverse impact on SMBs as
compared to larger companies. This resulted in an initial slowdown in new
customer acquisition during the first half of 2020. However, we experienced
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 half 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 underwent a reduction
of force of approximately 9% of our total workforce, but since those
terminations we resumed hiring and we continue to hire to accommodate the growth
and operational needs of our business. Through March 2022, we experienced
headwinds in our lead generation activities due to COVID-19 precautions as trade
shows

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and conferences,channels we have historically utilized as part of our
go-to-market strategy, were cancelled, postponed, or shifted to virtual-only
experiences. We have seen some of these trade shows and conferences return to
in-person events in the second quarter of 2022, but they have not returned to
the quantity and attendance levels seen pre-pandemic. 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 continues
to have an adverse impact on our customers and their clients and a
disproportionate adverse impact on SMBs generally as compared to larger
companies, as it did beginning in December 2021 when we experienced unexpected
challenges with our sales and installation activities due to the impact of the
spread of the Omicron variant of the disease. 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 COVID-19 and its 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 indicators

In addition to our generally accepted accounting principles in the United States
("U.S. 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.

                                          June 30,
                                      2022        2021

Net dollar retention rate 102% 104% Gross dollar retention rate 94% 92%

Net retention rate in dollars

We believe our dollar-based net retention rate ("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 ("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 (the "Base
Locations") that were active in a particular month (the "Base Month"). We then
divide AMR for the Base Locations in the same month of the subsequent year (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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Gross retention rate in dollars

We believe our dollar-based gross retention rate ("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 ("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 U.S. 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 U.S. 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 U.S. GAAP. See below for a description of these non-GAAP financial measures
and their limitations as an analytical tool.

                                         Three Months Ended June 30,                     Six Months Ended June 30,
                                          2022                   2021                  2022                      2021

                                                                    (dollars in thousands)
Net cash used in operating
activities                          $      (1,731)          $    (1,771)         $     (5,902)              $    (7,043)
Net cash used in investing
activities                          $        (691)          $    (2,223)         $     (1,599)              $    (4,544)
Net cash provided used in financing
activities                          $      (2,150)          $       (46)         $     (4,167)              $    (1,615)
Free cash flow                      $      (2,422)          $    (3,994)         $     (7,501)              $   (11,587)
Net cash used in operating
activities as a percentage of
revenue                                        (5)  %                (6) %                 (9)  %                   (13) %
Free cash flow margin                          (7)  %               (14) %                (11)  %                   (22) %
Net loss                            $     (14,815)          $   (14,419)         $    (28,653)              $   (23,402)
Adjusted EBITDA                     $      (9,025)          $    (8,313)         $    (18,148)              $   (14,499)

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 the depreciation of operating capital assets and does not include the depreciation of telephone equipment provided to our customers. We also adjust EBITDA to exclude stock-based compensation expense, a non-cash item. We believe that Adjusted EBITDA provides

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consistency and comparability of management and investors with our past financial performance and facilitates comparisons of operations from period to period. In addition, management uses adjusted EBITDA to measure our financial and operational performance and to prepare our budgets.

Limits and Reconciliation of Non-GAAP Financial Measures

Non-GAAP financial measures have limitations as analytical tools and should not
be considered in isolation or as substitutes for financial information presented
under U.S. GAAP. There are a number of limitations related to the use of
non-GAAP financial measures versus comparable financial measures determined
under U.S. 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 U.S. GAAP financial measures and the reconciliations of
these non-GAAP financial measures to their most directly comparable U.S. 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 June 30,                     Six Months Ended June 30,
                                          2022                   2021                  2022                       2021

                                                                    (dollars in thousands)
Revenue                             $      34,930           $    28,061          $     68,202                $    53,729

Net cash used in operating
activities                          $      (1,731)          $    (1,771)         $     (5,902)               $    (7,043)
Less: Purchase of property and
equipment                                    (380)               (1,656)                 (921)                    (3,438)
Less: Capitalized internal-use
software                                     (311)                 (567)                 (678)                    (1,106)
Free cash flow                      $      (2,422)          $    (3,994)         $     (7,501)               $   (11,587)
Net cash used in investing
activities                          $        (691)          $    (2,223)         $     (1,599)               $    (4,544)
Net cash used in financing
activities                          $      (2,150)          $       (46)         $     (4,167)               $    (1,615)
Net cash used in operating
activities as a percentage of
revenue                                        (5)  %                (6) %                 (9)  %                    (13) %
Free cash flow margin                          (7)  %               (14) %                (11)  %                    (22) %


Adjusted EBITDA

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                                            Three Months Ended June 30,                   Six Months Ended June 30,
                                             2022                   2021                  2022                   2021

                                                                     (dollars in thousands)
Net loss                               $      (14,815)         $   (14,419)         $      (28,653)         $   (23,402)
Interest on outstanding debt                      332                  293                     625                  573
Tax expense (benefit)                              19                    -                      51                    -
Depreciation(1)                                   673                  430                   1,358                  963
Amortization(2)                                   286                  114                     566                  274
Stock-based compensation                        4,480                5,269                   7,905                7,093
Adjusted EBITDA                        $       (9,025)         $    (8,313)         $      (18,148)         $   (14,499)


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(1) Does not include allocations to amortization of rights of use under finance leases on telephone equipment made available to our customers. (2) Represents the amortization of capitalized costs of software for internal use.

Components of operating results

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 June 30, 2022, approximately 41% of
customer locations elected annual prepayments (approximately 43% as of June 30,
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 June 30, 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 (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
second half 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

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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.

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.

Functionnary costs

Our operating expenses consist of sales and marketing, research and development,
and general and administrative expenses. Personnel costs are the most
significant component of operating expenses and consist of salaries, benefits,
bonuses, 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 continue to return, we will
experience an increase in marketing expenses. Despite these expected increases,
as a percentage of revenue, we anticipate sales and marketing expenses will
slightly decrease in 2022 as compared to 2021, and will further 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

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income over time. In addition, research and development costs qualifying 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 in November 2021 ("IPO"), we have
incurred and expect to continue to incur additional expenses to operate as a
public company, including costs to comply with the rules and regulations
applicable to companies listed on a national securities exchange, costs related
to compliance and reporting obligations, and increased expenses for insurance,
investor relations, and professional services. We expect that our general and
administrative expenses will increase in absolute dollars as our business grows
but will decrease as a percentage of our revenue over time.

Interest charges

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

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The following table sets forth our Consolidated Statements of Income data for the periods indicated:

                                               Three Months Ended June 30,                   Six Months Ended June 30,
                                                2022                   2021                  2022                   2021

                                                                            (in thousands)
Revenue                                   $       34,930          $    28,061          $       68,202          $    53,729
Cost of revenue (1)                               13,749               12,023                  27,502               22,825
Gross profit                                      21,181               16,038                  40,700               30,904

Operating expenses:
Sales and marketing (1)                           16,747               14,718                  32,967               26,454
Research and development (1)                       7,428                7,871                  14,632               13,707
General and administrative (1)                    11,597                7,583                  21,201               13,586
Total operating expenses                          35,772               30,172                  68,800               53,747
Loss from operations                             (14,591)             (14,134)                (28,100)             (22,843)

Other income (expense):
Interest expense                                    (332)                (293)                   (625)                (573)
Other income (expense)                               127                    8                     123                   14
Loss before income taxes                         (14,796)            

(14,419) $(28,602) $(23,402)
Provision for income taxes

                           (19)                   -          $          (51)         $         -
Net loss                                  $      (14,815)         $   (14,419)         $      (28,653)         $   (23,402)


______________

(1)Includes stock-based compensation expense as follows:

                                              Three Months Ended June 30,                   Six Months Ended June 30,
                                               2022                   2021                  2022                  2021

                                                                           (in thousands)
Cost of revenue                          $          176          $       210          $         324          $       279
Sales and marketing                                 790                  679                  1,452                  811
Research and development                          1,078                2,020                  1,630                2,416
General and administrative                        2,436                2,360                  4,499                3,587
Total stock-based compensation           $        4,480          $     

5,269 $7,905 $7,093

See Note 10 to the unaudited condensed consolidated financial statements for more details on stock-based compensation.

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The following table sets forth data from our Consolidated Statements of Income expressed as a percentage of sales for the periods indicated:

                                                    Three Months Ended June 30,                      Six Months Ended June 30,
                                                   2022                    2021                    2022                    2021

                                                                           (percentage of total revenue)
Revenue                                                 100  %                  100  %                  100  %                  100  %
Cost of revenue                                          39                      43                      40                      42
Gross profit                                             61                      57                      60                      58

Operating expenses:
Sales and marketing                                      48                      52                      48                      49
Research and development                                 21                      28                      21                      26
General and administrative                               33                      27                      31                      25
Total operating expenses                                102                     108                     101                     100
Loss from operations                                    (42)                    (50)                    (41)                    (43)

Other income (expense):
Interest expense                                         (1)                     (1)                     (1)                     (1)
Other income (expense)                                    -                       -                       -                       -
Loss before income taxes                                (42)                    (51)                    (42)                    (44)
Provision for income taxes                                -                       -                       -                       -
Net loss                                                (42) %                  (51) %                  (42) %                  (44) %

Comparison of the three months ended June 30, 2022 and 2021

Revenue

                   Three Months Ended June 30,                    Change
                       2022                   2021        Amount       Percentage

                     (dollars in thousands)
Revenue     $       34,930                 $ 28,061      $ 6,869             24  %


Revenue increased by $6.9 million or 24% for the three months ended June 30,
2022 compared to the three months ended June 30, 2021. Of the total increase,
approximately $6.4 million or 94% was attributable to new customers acquired
subsequent to June 30, 2021, and 6% or $0.5 million was attributable to existing
customers under subscription as of June 30, 2021.

Revenue Cost and Gross Margin

                         Three Months Ended June 30,                    Change
                        2022                       2021         Amount       Percentage

                           (dollars in thousands)
Cost of revenue   $      13,749                 $ 12,023       $ 1,726             14  %
Gross margin                 61   %                   57  %

The increase in cost of sales is mainly explained by an increase in personnel costs of $1.8 million due to the increased support and integration workforce required to support the growth of our business and related infrastructure, and an increase in $0.7 million in direct costs to support customer usage and

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growth of our customer base, including cloud infrastructure costs and fees paid
to application providers. These increases were partially offset by a $0.8
million decrease in fees paid to third-party independent contractors resulting
from the phase out of the Installation Program.

Sales and Marketing

                               Three Months Ended June 30,                    Change
                                   2022                   2021        Amount       Percentage

                                 (dollars in thousands)
Sales and marketing     $       16,747                 $ 14,718      $ 2,029             14  %


The increase in sales and marketing expenses was primarily attributable to an
increase of $1.7 million in personnel-related expenses driven by compensation
plan adjustments.

Research and development

                                  Three Months Ended June 30,                     Change
                                       2022                   2021        Amount      Percentage

                                     (dollars in thousands)
Research and development   $        7,428                   $ 7,871      $ (443)            (6) %


The dollar amount decrease in research and development expenses was primarily
due to a decrease of $0.5 million in personnel-related costs driven by decreased
headcount directly engaged in enhancing our platform infrastructure and
developing new product offerings.

General and Administrative

                                     Three Months Ended June 30,                     Change
                                          2022                   2021        Amount       Percentage

                                        (dollars in thousands)
General and administrative    $        11,597                  $ 7,583      $ 4,014             53  %


The increase in general and administrative expenses was primarily due to a $1.5
million increase in legal fees and $1.2 million in personnel-related expenses,
including a $0.8 million increase associated with upper management hires and
merit increases. Additionally, we experienced a $0.4 million increase in dues
and subscriptions costs, and a $0.8 million increase related to directors and
officers insurance premiums.

Interest expense and other income, net

                                       Three Months Ended June 30,                                Change
                                        2022                   2021                Amount                  Percentage

                                          (dollars in thousands)
Interest expense and other
income, net                       $          205          $       285          $        (80)                         (28) %

The decrease in interest expense and other income is attributable to the additional income generated by our investments in money market securities resulting from an increase in liquidity from our IPO and the increase in interest rates.

Provision for income taxes

We have assessed our ability to realize our deferred tax assets and have recorded a valuation allowance on these assets to the extent that, given the weight of all available evidence, it is more

                                       32


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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.

Comparison of the six months ended June 30, 2022 and 2021

Revenue

                             Six Months Ended June 30,                     Change
                                 2022                 2021         Amount       Percentage
                               (dollars in thousands)
           Revenue     $      68,202               $ 53,729      $ 14,473             27  %


Revenue increased by $14.5 million or 27% for the six months ended June 30, 2022
compared to the six months ended June 30, 2021. Of the total increase,
approximately $11.9 million or 82% was attributable to new customer locations
acquired subsequent to June 30, 2021, and approximately $2.6 million or 18% was
attributable to existing customer locations under subscription as of June 30,
2021.

Revenue Cost and Gross Margin

                                 Six Months Ended June 30,                    Change
                                 2022                    2021         Amount       Percentage
                                   (dollars in thousands)
         Cost of revenue   $     27,502               $ 22,825       $ 4,677             20  %
         Gross margin                60   %                 58  %


The increase in cost of revenue was due primarily to an increase of $3.4 million
in personnel related costs, particularly related to merit increases and new
hires, and a $2.0 million increase in direct costs to support customer usage and
growth of our customer base, including cloud infrastructure costs and fees paid
to application providers. We also saw a $0.4 million increase in allocated
overhead costs, and a $0.4 million increase in dues and subscription costs.
These increases were partially offset by a $1.6 million decrease in fees paid to
third-party independent contractors resulting from the phase out of the
Installation Program.

Sales and Marketing

                                    Six Months Ended June 30,                    Change
                                        2022                 2021        Amount       Percentage
                                      (dollars in thousands)
      Sales and marketing     $      32,967               $ 26,454      $ 6,513             25  %


The increase in sales and marketing expenses was primarily attributable to an
increase of $5.2 million in personnel-related expenses driven by compensation
plan adjustments and increased stock-based

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compensation. We also saw a $0.2 million the increase in advertising costs and a
$0.2 million increase in partner commissions.

Research and Development

                                      Six Months Ended June 30,                    Change
                                          2022                 2021        Amount      Percentage
                                        (dollars in thousands)
     Research and Development   $      14,632               $ 13,707      $  925              7  %


The increase in research and development expenses was due primarily to an
increase of $0.7 million in personnel-related costs driven by higher headcount
directly engaged in developing new product offerings, and a $0.3 million
increase in allocated overhead as a result of increased overall costs to support
the growth of our business and related infrastructure.

General and Administrative

                                    Six Months Ended June 30,                    Change
                                        2022                 2021        Amount       Percentage
                                      (dollars in thousands)
General and administrative    $      21,201               $ 13,586      $ 7,615             56  %


The increase in general and administrative expenses was primarily due to a $2.7
million increase in personnel related expenses, including a $1.5 million
increase in payroll costs from new hires and merit increases, and a $0.9 million
increase in stock-based compensation. Associated with our IPO and the related
costs of being a public company, we saw a $1.5 million increase in legal fees, a
$1.2 million increase in accounting and other professional services costs, and a
$0.8 million increase in insurance expense resulting from our directors and
officers liability policy. Additionally, dues and subscription expenses
increased by $0.6 million.

Interest expense and other income, net

                                        Six Months Ended June 30,                                Change
                                        2022                  2021                Amount                  Percentage
                                         (dollars in thousands)
Interest expense and other
income, net                       $         502          $       559          $        (57)                         (10) %


The change in other expense/income is due to additional income generated from
our investments in money market securities resulting from an increase in cash
from our IPO and increased interest rates.

Cash and capital resources

Since inception, we have financed operations primarily through the net proceeds
we have received from the sales of our preferred stock, cash generated from the
sale of subscriptions to our platform, and our bank borrowings. We have
generated losses from our operations as reflected in our accumulated deficit of
$210.6 million as of June 30, 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.

                                       34

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Our primary sources of cash were cash held in the form of deposits with financial institutions and cash equivalents consisting of highly liquid investments in money market securities of $124.3 million of the June 30, 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 $32.3 million of deferred revenue recorded as a current liability as of
June 30, 2022. This deferred revenue will be recognized as revenue when all of
the revenue recognition criteria are met.

We assess our liquidity primarily based on our cash on hand as well as the expected timing of billings under the contract with our paying customers and related collection cycles. We estimate that 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.

The following table shows a summary of our cash flows for the periods presented:

                                                Six Months Ended June 30,
                                                    2022                 2021

                                                  (dollars in thousands)
Net cash used in operating activities     $      (5,902)              $ 

(7,043)

Net cash used in investing activities            (1,599)                

(4,544)

Net cash used in financing activities            (4,167)                (1,615)


Operating Activities

For the six months ended June 30, 2022, cash used in operating activities was
$5.9 million, primarily consisting of our net loss of $28.7 million adjusted for
non-cash charges of $22.1 million, partially offset by net cash inflows of $0.6
million provided by changes in our operating assets and liabilities. The main
drivers of the changes in operating assets and liabilities were a $2.8 million
increase in deferred revenue due to our prepay arrangements with our customers,
a $2.0 million increase in accrued liabilities, and a $1.7 million decrease in
prepaid expenses and other assets. These amounts were partially offset by a $5.3
million increase to contract acquisition costs, comprising mainly sales
commissions earned on bookings, and a $1.0 million decrease to operating lease
liabilities.

For the six months ended June 30, 2021, cash used in operating activities was
$7.0 million, primarily consisting of our net loss of $23.4 million, adjusted
for non-cash charges of $17.1 million, and net cash outflows of $0.8 million
provided by changes in our operating assets and liabilities. The main drivers of
the changes in operating assets and liabilities were a $6.1 million increase in
deferred customer acquisition costs, comprising mainly sales commissions earned
on bookings, and a $2.5 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 $4.1 million increase in
deferred revenue due to our prepay arrangements with our customers, a $2.0
million increase in deferred rent, and an increase in accrued liabilities $1.2
million.

Investing Activities

Cash used in investing activities for the six months ended June 30, 2022 was
$1.6 million, primarily due to furniture and equipment additions of $0.9
million. Additional investing cash flow activities included personnel-related
costs capitalized as internal-use software development of $0.7 million.

Cash used in investing activities for the six months ended June 30, 2021 was
$4.5 million, due to furniture, equipment and leasehold improvements of $3.4
million for our new corporate headquarters,

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which we occupied from the first quarter of 2021. Additional investing cash flow activities included personnel costs capitalized as internal use software development of $1.1 million.

Fundraising activities

Cash used in financing activities for the six months ended June 30, 2022 was
$4.2 million, primarily as a result of principal payments on finance lease
obligations of $4.5 million, and $0.4 million paid in IPO-related costs. These
outflows were partially offset by cash proceeds from employee stock option
exercises of $0.7 million.

Cash used in financing activities for the six months ended June 30, 2021 was
$1.6 million, primarily as a result of principal payments on finance lease
obligations of $3.7 million, partially offset by cash proceeds from employee
stock option exercises of $2.1 million.

Contractual obligations and commitments

In the six months ended June 30, 2022we acquired $3.3 million additional right-of-use assets through new finance lease obligations.

Other than these new finance lease obligations, there have been no material changes in our contractual obligations from those described in our company’s annual report on Form 10-K for the year ended December 31, 2021.

Compensation

Certain of our agreements with partners, resellers and customers include
provisions for indemnification against liabilities should our platform
contribute to a data compromise, particularly a compromise of protected health
information ("PHI"). 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
June 30, 2022.

Silicon Valley Bank Credit Facility

As of December 31, 2020 and through August 2021, we carried a $4.0 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 $10.0 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 $10.0 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 $10.0 million to $50.0 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 $4.0 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 $10.0 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. This amended agreement includes financial covenants requiring that, at
any time, if our total unrestricted cash and cash equivalents at SVB is less
than $100.0 million, we 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 we meet specified minimum

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levels of EBITDA, as adjusted for stock-based compensation and changes in our
deferred revenue. As of June 30, 2022, $10.0 million was outstanding on the line
of credit and we were in compliance with all loan covenants.

Significant 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. 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 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 entitled “Basis of Presentation and Summary of Significant Accounting Policies – Recently Adopted Accounting Pronouncements” and “- Accounting Pronouncements Pending Adoption” in Note 2 of 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 Act (the "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.

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