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 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 20
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, 2022and 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:
21 -------------------------------------------------------------------------------- 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 $ 50,132Cost of revenue (9,009) (7,113) (17,830) (13,529) Gross profit $ 24,529 $ 19,120 $ 47,658 $ 36,603Gross margin 73 % 73 % 73 % 73 % Onboarding: Revenue $ 319 $ 1,034 $ 581 $ 2,072Cost 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 $ 1,525Cost 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 22
-------------------------------------------------------------------------------- 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, 2022from 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, 2022and 2021, and the six month periods ended June 30, 2022and 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 23
-------------------------------------------------------------------------------- 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 2021when 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, 20222021
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. 24
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.
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
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 $ 53,729Net 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 26
-------------------------------------------------------------------------------- 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)______________
(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
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, 2022and 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 27
-------------------------------------------------------------------------------- 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.
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 28
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 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, 2022is 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 29
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 $ 53,729Cost 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)
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 $ 279Sales 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$
See Note 10 to the unaudited condensed consolidated financial statements for more details on stock-based compensation.
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
Revenue Three Months Ended June 30, Change 2022 2021 Amount Percentage (dollars in thousands) Revenue
$ 34,930 $ 28,061 $ 6,86924 % Revenue increased by $6.9 millionor 24% for the three months ended June 30, 2022compared to the three months ended June 30, 2021. Of the total increase, approximately $6.4 millionor 94% was attributable to new customers acquired subsequent to June 30, 2021, and 6% or $0.5 millionwas 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 $ 1,72614 % Gross margin 61 % 57 %
The increase in cost of sales is mainly explained by an increase in personnel costs of
31 -------------------------------------------------------------------------------- growth of our customer base, including cloud infrastructure costs and fees paid to application providers. These increases were partially offset by a
$0.8 milliondecrease 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 $ 2,02914 % The increase in sales and marketing expenses was primarily attributable to an increase of $1.7 millionin 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 millionin 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 $ 4,01453 % The increase in general and administrative expenses was primarily due to a $1.5 millionincrease in legal fees and $1.2 millionin personnel-related expenses, including a $0.8 millionincrease associated with upper management hires and merit increases. Additionally, we experienced a $0.4 millionincrease in dues and subscriptions costs, and a $0.8 millionincrease 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 -------------------------------------------------------------------------------- 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
Revenue Six Months Ended June 30, Change 2022 2021 Amount Percentage (dollars in thousands) Revenue
$ 68,202 $ 53,729 $ 14,47327 % Revenue increased by $14.5 millionor 27% for the six months ended June 30, 2022compared to the six months ended June 30, 2021. Of the total increase, approximately $11.9 millionor 82% was attributable to new customer locations acquired subsequent to June 30, 2021, and approximately $2.6 millionor 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 $ 4,67720 % Gross margin 60 % 58 % The increase in cost of revenue was due primarily to an increase of $3.4 millionin personnel related costs, particularly related to merit increases and new hires, and a $2.0 millionincrease 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 millionincrease in allocated overhead costs, and a $0.4 millionincrease in dues and subscription costs. These increases were partially offset by a $1.6 milliondecrease 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 $ 6,51325 % The increase in sales and marketing expenses was primarily attributable to an increase of $5.2 millionin personnel-related expenses driven by compensation plan adjustments and increased stock-based 33
compensation. We also saw a
Research and Development Six Months Ended June 30, Change 2022 2021 Amount Percentage (dollars in thousands) Research and Development
$ 14,632 $ 13,707 $ 9257 % The increase in research and development expenses was due primarily to an increase of $0.7 millionin personnel-related costs driven by higher headcount directly engaged in developing new product offerings, and a $0.3 millionincrease 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 $ 7,61556 % The increase in general and administrative expenses was primarily due to a $2.7 millionincrease in personnel related expenses, including a $1.5 millionincrease in payroll costs from new hires and merit increases, and a $0.9 millionincrease in stock-based compensation. Associated with our IPO and the related costs of being a public company, we saw a $1.5 millionincrease in legal fees, a $1.2 millionincrease in accounting and other professional services costs, and a $0.8 millionincrease 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 millionas of June 30, 2022and 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
Our primary sources of cash were cash held in the form of deposits with financial institutions and cash equivalents consisting of highly liquid investments in money market securities of
A substantial source of our cash provided by operating activities is our deferred revenue, which is included on our consolidated balance sheets as a liability. Deferred revenue consists of the unearned portion of billed fees for our subscriptions, which is recorded as revenue over the subscription term. We had
$32.3 millionof 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
Net cash used in investing activities (1,599)
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 millionadjusted for non-cash charges of $22.1 million, partially offset by net cash inflows of $0.6 millionprovided by changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were a $2.8 millionincrease in deferred revenue due to our prepay arrangements with our customers, a $2.0 millionincrease in accrued liabilities, and a $1.7 milliondecrease in prepaid expenses and other assets. These amounts were partially offset by a $5.3 millionincrease to contract acquisition costs, comprising mainly sales commissions earned on bookings, and a $1.0 milliondecrease 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 millionprovided by changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were a $6.1 millionincrease in deferred customer acquisition costs, comprising mainly sales commissions earned on bookings, and a $2.5 millionincrease 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 millionincrease in deferred revenue due to our prepay arrangements with our customers, a $2.0 millionincrease 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, 2022was $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, 2021was $4.5 million, due to furniture, equipment and leasehold improvements of $3.4 millionfor our new corporate headquarters, 35
which we occupied from the first quarter of 2021. Additional investing cash flow activities included personnel costs capitalized as internal use software development of
Cash used in financing activities for the six months ended
June 30, 2022was $4.2 million, primarily as a result of principal payments on finance lease obligations of $4.5 million, and $0.4 millionpaid 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, 2021was $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
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
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
December 31, 2020and through August 2021, we carried a $4.0 millionnote 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 $111,111plus interest. Along with the note payable, Silicon Valley Bankprovided us with a $10.0 millionrevolving line of credit, bearing interest at the greater of prime rate plus 0.5% and 5.25%. As of December 31, 2020and through August 2021, we had not taken any advances on the line of credit and the full $10.0 millionwas 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 millionto $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 millionnote payable was converted to a deemed advance on the line of credit. In connection with this transaction, we drew down an additional $6.0 millionfrom 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 millionbeginning 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 millionin liquidity, meaning unencumbered cash plus available borrowing on the line of credit, and that we meet specified minimum 36 -------------------------------------------------------------------------------- levels of EBITDA, as adjusted for stock-based compensation and changes in our deferred revenue. As of June 30, 2022, $10.0 millionwas 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
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 billionin annual revenue, we have more than $700.0 millionin 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 billionof non-convertible debt securities over a three-year period. 37
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