```markdown [PART I. FINANCIAL INFORMATION](index=5&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This part presents the unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations [Item 1. Financial Statements (Unaudited)](index=5&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents the unaudited condensed consolidated financial statements for Weave Communications, Inc., including balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, along with detailed notes [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section presents the company's financial position, detailing assets, liabilities, and equity at specific dates | ASSETS | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $118,358 | $135,996 | | Accounts receivable | $3,653 | $3,059 | | Deferred contract acquisition costs, net (current) | $9,391 | $8,931 | | Prepaid expenses and other current assets | $4,886 | $6,461 | | **Total current assets** | **$136,288** | **$154,447** | | Property and equipment, net | $10,929 | $24,502 | | Operating lease right-of-use assets | $45,740 | — | | Finance lease right-of-use assets | $10,612 | — | | Deferred contract acquisition costs, net (non-current) | $7,810 | $7,873 | | Other non-current assets | $1,161 | $663 | | **TOTAL ASSETS** | **$212,540** | **$187,485** | | **LIABILITIES AND STOCKHOLDERS' EQUITY** | | | | Accounts payable | $3,398 | $4,061 | | Accrued liabilities | $15,773 | $12,250 | | Deferred revenue | $32,722 | $29,511 | | Current portion of operating lease liabilities | $5,149 | — | | Current portion of finance lease liabilities | $7,718 | $8,485 | | Current portion of long-term debt | $10,000 | — | | **Total current liabilities** | **$74,760** | **$54,307** | | Deferred rent | — | $4,319 | | Operating lease liabilities, less current portion | $45,964 | — | | Finance lease liabilities, less current portion | $5,290 | $6,558 | | Long-term debt | — | $10,000 | | **Total liabilities** | **$126,014** | **$75,184** | | Total stockholders' equity | $86,526 | $112,301 | | **TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY** | **$212,540** | **$187,485** | - **Total assets increased** from **$187.5 million** at December 31, 2021, to **$212.5 million** at September 30, 2022, **primarily due to** the recognition of operating and finance lease right-of-use assets[14](index=14&type=chunk) - **Total liabilities significantly increased** from **$75.2 million** to **$126.0 million**, **driven by** the recognition of operating lease liabilities and the reclassification of long-term debt to current[14](index=14&type=chunk) - Stockholders' equity **decreased** from **$112.3 million** to **$86.5 million**, **mainly due to** accumulated deficit from net losses[14](index=14&type=chunk) [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This section details the company's revenues, expenses, and net loss over specific periods, reflecting operational performance | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $36,230 | $30,302 | $104,432 | $84,031 | | Cost of revenue | $13,023 | $12,868 | $40,525 | $35,693 | | Gross profit | $23,207 | $17,434 | $63,907 | $48,338 | | Total operating expenses | $35,065 | $31,335 | $103,865 | $85,082 | | Loss from operations | $(11,858) | $(13,901) | $(39,958) | $(36,744) | | Net loss | $(11,818) | $(14,220) | $(40,471) | $(37,622) | | Net loss per share - basic and diluted | $(0.18) | $(1.03) | $(0.62) | $(2.97) | - Revenue **increased** by **20%** YoY for the three months ended September 30, 2022, and by **24%** YoY for the nine months ended September 30, 2022[17](index=17&type=chunk) - Gross profit **increased** by **33%** YoY for the three months and **32%** YoY for the nine months, indicating **improved** efficiency[17](index=17&type=chunk) - Net loss **decreased** for the three months ended September 30, 2022, compared to the prior year, but **increased** for the nine months, reflecting ongoing investments and operational costs[17](index=17&type=chunk) [Condensed Consolidated Statements of Comprehensive Loss](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Loss) This section presents the company's net loss and other comprehensive income/loss components, showing total comprehensive loss | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(11,818) | $(14,220) | $(40,471) | $(37,622) | | Change in foreign currency translation, net of tax | $(110) | $(7) | $(97) | $(15) | | **Total comprehensive loss** | **$(11,928)** | **$(14,227)** | **$(40,568)** | **$(37,637)** | - **Total comprehensive loss** for the three months ended September 30, 2022, was **$(11.9) million**, an **improvement** from **$(14.2) million** in the prior year, **primarily driven by** a **reduced** net loss[19](index=19&type=chunk) - Foreign currency translation adjustments contributed a minor loss of **$(110) thousand** for the three months ended September 30, 2022[19](index=19&type=chunk) [Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Redeemable%20Convertible%20Preferred%20Stock%20and%20Stockholders'%20Equity%20(Deficit)) This section outlines changes in stockholders' equity, including net loss, stock-based compensation, and share issuances | Item | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Balance - June 30, 2022 | $91,988 | N/A | | Issuance of common shares from stock option exercises | $286 | $979 | | Issuance of common shares from employee stock purchase plan | $858 | $858 | | Stock-based compensation | $5,322 | $13,227 | | Foreign currency translation adjustments, net of tax | $(110) | $(97) | | Net loss | $(11,818) | $(40,471) | | Balance - September 30, 2022 | $86,526 | $86,526 | - **Total stockholders' equity decreased** from **$112.3 million** at December 31, 2021, to **$86.5 million** at September 30, 2022, **primarily due to** the net loss of **$40.5 million** for the nine-month period[24](index=24&type=chunk) - Stock-based compensation **significantly contributed** to additional paid-in capital, **totaling $13.2 million** for the nine months ended September 30, 2022[24](index=24&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section summarizes cash inflows and outflows from operating, investing, and financing activities, indicating liquidity | Cash Flow Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(9,925) | $(10,317) | | Net cash used in investing activities | $(2,185) | $(7,659) | | Net cash provided by (used in) financing activities | $(5,528) | $2,669 | | **NET DECREASE IN CASH AND CASH EQUIVALENTS** | **$(17,638)** | **$(15,307)** | | Cash and cash equivalents, beginning of period | $135,996 | $55,698 | | Cash and cash equivalents, end of period | $118,358 | $40,391 | - Net cash used in operating activities slightly **decreased** from **$(10.3) million** in 2021 to **$(9.9) million** in 2022 for the nine-month period[26](index=26&type=chunk) - Investing activities used less cash in 2022 (**$(2.2) million**) compared to 2021 (**$(7.7) million**), **mainly due to reduced** purchases of property and equipment[26](index=26&type=chunk) - Financing activities **shifted** from providing **$2.7 million** in 2021 to using **$5.5 million** in 2022, **primarily due to** principal payments on finance leases and IPO-related costs[26](index=26&type=chunk) [Notes to the Condensed Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations of the company's accounting policies, significant estimates, and financial statement items - The Company operates as a single segment, providing an integrated communications platform combining software and VoIP services[30](index=30&type=chunk)[33](index=33&type=chunk) - The Company has incurred accumulated losses of **$222.4 million** as of September 30, 2022, but believes existing cash and credit line will cover operating needs for at least 12 months[37](index=37&type=chunk)[38](index=38&type=chunk) - Revenue is **primarily derived** from subscription services, recognized over the contract term, with payment processing and onboarding services also contributing[40](index=40&type=chunk)[43](index=43&type=chunk)[44](index=44&type=chunk)[45](index=45&type=chunk) - The Company adopted Topic 842 (Leases) on January 1, 2022, recognizing **$52.8 million** in operating lease liabilities and **$48.5 million** in right-of-use assets[54](index=54&type=chunk)[55](index=55&type=chunk) - Stock-based compensation expense **totaled $5.3 million** for the three months and **$13.2 million** for the nine months ended September 30, 2022, **increasing** from prior periods[87](index=87&type=chunk) - A subsequent event in November 2022 involved a one-time repricing of **1.16 million** stock options, expected to result in approximately **$1.1 million** in incremental stock-based compensation expense[105](index=105&type=chunk)[106](index=106&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides an overview of Weave Communications, Inc.'s financial condition and operational performance, highlighting revenue growth, profitability trends, and key factors influencing the business [Overview](index=26&type=section&id=Overview) This section introduces the company's business model, product offerings, and market positioning as a communications platform for SMBs - Weave is a leading all-in-one customer communications and engagement software platform for small and medium-sized businesses (SMBs)[110](index=110&type=chunk) - The platform offers a comprehensive suite of services including phone, scheduling, text reminders, client reviews, payments, and email marketing campaigns[111](index=111&type=chunk) - The company has expanded its product offerings to include analytics (2019), payments (2019), and forms (2021), and diversified beyond dentistry and optometry into verticals like home services[112](index=112&type=chunk)[113](index=113&type=chunk) [Supplemental Financial Information — Disaggregated Revenue and Cost of Revenue](index=27&type=section&id=Supplemental%20Financial%20Information%20%E2%80%94%20Disaggregated%20Revenue%20and%20Cost%20of%20Revenue) This section disaggregates revenue and cost of revenue by category, providing insights into profitability drivers - Recurring subscription and payment processing revenues constituted **95%** of **total** revenue for the three months ended September 30, 2022, and **96%** for the nine months ended September 30, 2022[115](index=115&type=chunk) - Onboarding services and phone hardware are considered customer acquisition tools, often resulting in negative gross profit **due to** competitive pricing and associated costs[116](index=116&type=chunk) | Category | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | **Subscription and payment processing:** | | | | | | Revenue | $34,943 | $28,377 | $100,431 | $78,509 | | Cost of revenue | $(8,544) | $(7,523) | $(26,374) | $(21,052) | | Gross profit | $26,399 | $20,854 | $74,057 | $57,457 | | Gross margin | 76% | 73% | 74% | 73% | | **Onboarding:** | | | | | | Revenue | $278 | $1,016 | $859 | $3,088 | | Cost of revenue | $(2,431) | $(3,055) | $(7,519) | $(8,048) | | Gross profit | $(2,153) | $(2,039) | $(6,660) | $(4,960) | | Gross margin | (774)% | (201)% | (775)% | (161)% | | **Hardware:** | | | | | | Revenue | $1,009 | $909 | $3,142 | $2,434 | | Cost of revenue | $(2,048) | $(2,290) | $(6,632) | $(6,593) | | Gross profit | $(1,039) | $(1,381) | $(3,490) | $(4,159) | | Gross margin | (103)% | (152)% | (111)% | (171)% | [Factors Affecting Our Performance](index=28&type=section&id=Factors%20Affecting%20Our%20Performance) This section discusses key internal and external factors influencing the company's financial performance and growth trajectory - Key performance drivers include attracting new customers, retaining and expanding within the existing customer base, adding new products, and expanding into new industry verticals[119](index=119&type=chunk) - Dollar-based net retention rate **decreased** to **101%** at September 30, 2022, from **104%** at September 30, 2021, reflecting an anticipated decline after initial Weave Payments rollout[122](index=122&type=chunk) - Subscription and payment processing gross margin **improved** to **76%** for the three months and **74%** for the nine months ended September 30, 2022, from **73%** in both prior periods, indicating better customer retention and cost management[123](index=123&type=chunk) [Business Update Regarding COVID-19](index=29&type=section&id=Business%20Update%20Regarding%20COVID-19) This section provides an update on the impact of the COVID-19 pandemic on the company's operations, customer acquisition, and future outlook - The COVID-19 pandemic initially slowed new customer acquisition in H1 2020 but **improved** through 2021, with no material negative impact on revenue or non-renewals through September 30, 2022[126](index=126&type=chunk) - Lead generation activities faced headwinds **due to** canceled trade shows, **shifting** focus to inbound/outbound channels, which drove substantial customer growth[126](index=126&type=chunk)[127](index=127&type=chunk) - The spread of the Omicron variant in December 2021 caused unexpected challenges in sales and installation, and future variants could impact customer demand and subscription renewals[128](index=128&type=chunk) [Key Business Metrics](index=30&type=section&id=Key%20Business%20Metrics) This section presents crucial operational metrics such as retention rates, offering insights into customer engagement and business health | Metric | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Dollar-based net retention rate | 101% | 104% | | Dollar-based gross retention rate | 94% | 93% | - Dollar-based net retention rate (NRR) **decreased** to **101%** at September 30, 2022, from **104%** at September 30, 2021, reflecting changes in revenue from existing customer locations[130](index=130&type=chunk)[131](index=131&type=chunk) - Dollar-based gross retention rate (GRR) **improved** to **94%** at September 30, 2022, from **93%** at September 30, 2021, indicating better customer retention despite terminations[130](index=130&type=chunk)[133](index=133&type=chunk) [Non-GAAP Financial Measures](index=31&type=section&id=Non-GAAP%20Financial%20Measures) This section defines and reconciles non-GAAP financial measures like Free Cash Flow and Adjusted EBITDA, used to assess underlying performance - Free cash flow is defined as net cash used in operating activities minus purchases of property and equipment and capitalized internal-use software costs, serving as a liquidity indicator[136](index=136&type=chunk) - Adjusted EBITDA is defined as earnings before interest, taxes, depreciation (excluding phone hardware), amortization, and stock-based compensation, used to measure operational performance[137](index=137&type=chunk) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net cash used in operating activities | $(4,023) | $(3,274) | $(9,925) | $(10,317) | | Free cash flow | $(4,618) | $(6,389) | $(12,119) | $(17,976) | | Free cash flow margin | (13)% | (21)% | (12)% | (21)% | | Net loss | $(11,818) | $(14,220) | $(40,471) | $(37,622) | | Adjusted EBITDA | $(5,155) | $(9,092) | $(23,302) | $(23,591) | - Free cash flow margin **improved** from **(21)%** to **(13)%** for the three months and from **(21)%** to **(12)%** for the nine months ended September 30, 2022, indicating **reduced** cash consumption[135](index=135&type=chunk)[140](index=140&type=chunk) - Adjusted EBITDA **improved significantly** for both periods, from **$(9.1) million** to **$(5.2) million** for the three months and from **$(23.6) million** to **$(23.3) million** for the nine months ended September 30, 2022[135](index=135&type=chunk)[141](index=141&type=chunk) [Components of Results of Operations](index=33&type=section&id=Components%20of%20Results%20of%20Operations) This section details the primary components of revenue, cost of revenue, and operating expenses, explaining their drivers and composition - Revenue is **primarily** from recurring subscription fees for software and phone services, with **41%** of customers electing annual prepayments as of September 30, 2022[143](index=143&type=chunk) - Cost of revenue includes data center, cloud infrastructure, payment processing, amortization of phone hardware, and personnel-related expenses for onboarding and customer support[147](index=147&type=chunk) - Operating expenses (sales & marketing, R&D, G&A) are **significantly impacted** by personnel costs, including salaries, benefits, bonuses, stock-based compensation and sales commissions[150](index=150&type=chunk)[152](index=152&type=chunk) - The recent Option Repricing is expected to result in an additional **$1.1 million** stock-based compensation charge over **2.5** years, **increasing** operating expenses[151](index=151&type=chunk) [Results of Operations](index=35&type=section&id=Results%20of%20Operations) This section analyzes the company's financial results, including revenue, gross profit, and operating expenses, for the reported periods | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $36,230 | $30,302 | $104,432 | $84,031 | | Cost of revenue | $13,023 | $12,868 | $40,525 | $35,693 | | Gross profit | $23,207 | $17,434 | $63,907 | $48,338 | | Sales and marketing | $16,292 | $16,021 | $49,259 | $42,475 | | Research and development | $7,897 | $6,183 | $22,529 | $19,890 | | General and administrative | $10,876 | $9,131 | $32,077 | $22,717 | | Loss from operations | $(11,858) | $(13,901) | $(39,958) | $(36,744) | | Net loss | $(11,818) | $(14,220) | $(40,471) | $(37,622) | - Revenue **increased** by **$5.9 million** (**20%**) for the three months and **$20.4 million** (**24%**) for the nine months ended September 30, 2022, **primarily driven by** new customer acquisitions[165](index=165&type=chunk)[174](index=174&type=chunk) - Gross margin **improved** to **64%** (3 months) and **61%** (9 months) in 2022 from **58%** in 2021, **due to** favorable customer mix with depreciated phone hardware and **reduced** third-party costs[166](index=166&type=chunk)[167](index=167&type=chunk)[175](index=175&type=chunk)[177](index=177&type=chunk) - General and administrative expenses **increased significantly** by **19%** (3 months) and **41%** (9 months) **due to** higher insurance premiums, payroll, executive stock-based compensation, and professional fees related to being a public company[170](index=170&type=chunk)[180](index=180&type=chunk) [Liquidity and Capital Resources](index=41&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses the company's ability to meet short-term and long-term obligations, detailing cash position and financing arrangements - The Company's **primary** liquidity sources are cash and cash equivalents (**$118.4 million** as of September 30, 2022) and a revolving line of credit[184](index=184&type=chunk) - Deferred revenue, representing unearned subscription fees, was **$32.7 million** as of September 30, 2022, contributing substantially to operating cash flows[185](index=185&type=chunk) - Net cash used in operating activities was **$(9.9) million** for the nine months ended September 30, 2022, an **improvement** from **$(10.3) million** in the prior year[186](index=186&type=chunk)[187](index=187&type=chunk) - Cash used in investing activities **decreased significantly** from **$(7.7) million** in 2021 to **$(2.2) million** in 2022, **mainly due to reduced** property and equipment purchases[186](index=186&type=chunk)[190](index=190&type=chunk)[191](index=191&type=chunk) - Financing activities **shifted** from providing **$2.7 million** in 2021 to using **$5.5 million** in 2022, **primarily due to** finance lease payments and IPO-related costs[186](index=186&type=chunk)[192](index=192&type=chunk)[193](index=193&type=chunk) [Contractual Obligations and Commitments](index=42&type=section&id=Contractual%20Obligations%20and%20Commitments) This section outlines the company's significant contractual obligations and commitments, including lease liabilities and credit facilities - The Company acquired **$4.7 million** in additional right-of-use assets through new finance lease obligations during the nine months ended September 30, 2022[194](index=194&type=chunk) - The revolving line of credit with Silicon Valley Bank was **increased** to **$50.0 million** in August 2021, with **$10.0 million** outstanding as of September 30, 2022, and the Company was in compliance with all covenants[198](index=198&type=chunk) - The loan agreement includes restrictive covenants and financial covenants, such as maintaining a minimum **$20.0 million** in liquidity if unrestricted cash at SVB is below **$100.0 million**[198](index=198&type=chunk) [Critical Accounting Policies and Estimates](index=43&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section highlights the accounting policies and estimates requiring significant judgment, which could impact reported financial results - **Significant** estimates are made in financial statements, including valuation allowance against deferred tax assets, recoverability of long-lived assets, and fair value of stock-based compensation[34](index=34&type=chunk) - No material changes to critical accounting policies and estimates were reported compared to the 2021 Annual Report on Form 10-K, except for lease accounting[200](index=200&type=chunk) [Recently Adopted Accounting Pronouncements](index=43&type=section&id=Recently%20Adopted%20Accounting%20Pronouncements) This section describes the impact of newly adopted accounting standards on the company's financial statements and reporting practices - On January 1, 2022, the Company adopted ASU 2016-02, Leases (Topic 842), requiring lessees to recognize operating lease ROU assets and corresponding lease liabilities on the balance sheet[201](index=201&type=chunk) [Emerging Growth Company Status](index=44&type=section&id=Emerging%20Growth%20Company%20Status) This section explains the company's status as an emerging growth company and its implications for financial reporting and compliance - Weave is an "emerging growth company" under the JOBS Act, allowing it to delay adoption of new accounting pronouncements applicable to public companies until they apply to private companies[204](index=204&type=chunk) - This election means the Company's financial statements may not be comparable to other public companies that comply with earlier effective dates for new accounting standards[204](index=204&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=44&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section states that the Company's exposure to market risk, including interest rate and foreign currency risks, has not materially changed since December 31, 2021 - Market risk exposure, including interest rates and foreign currency, remained materially unchanged as of September 30, 2022, compared to December 31, 2021[205](index=205&type=chunk) [Item 4. Controls and Procedures](index=44&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the Company's disclosure controls and procedures were not effective as of September 30, 2022, due to previously identified material weaknesses in internal control over financial reporting [Evaluation of Disclosure Controls and Procedures](index=44&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting - Management, including the CEO and CFO, concluded that disclosure controls and procedures were not effective as of September 30, 2022[206](index=206&type=chunk) - The ineffectiveness is attributed to material weaknesses in internal control over financial reporting[206](index=206&type=chunk) [Previously Reported Material Weaknesses in Internal Control Over Financial Reporting](index=44&type=section&id=Previously%20Reported%20Material%20Weaknesses%20in%20Internal%20Control%20Over%20Financial%20Reporting) This section details previously identified material weaknesses in internal control over financial reporting, including insufficient personnel and ineffective controls - Material weaknesses identified include an ineffective control environment **due to** insufficient personnel with appropriate accounting and internal controls knowledge[208](index=208&type=chunk) - This led to ineffective controls in timely identification, assessment, and recognition of complex transactions, such as capitalization of contract costs and valuation of stock options[208](index=208&type=chunk) - These weaknesses resulted in misstatements in cost of revenue, deferred contract acquisition costs, stock-based compensation, and additional paid-in capital, which were corrected[208](index=208&type=chunk) [Ongoing Remediation Efforts](index=45&type=section&id=Ongoing%20Remediation%20Efforts) This section describes the company's ongoing efforts to remediate identified material weaknesses in internal control over financial reporting - Remediation measures include hiring additional finance and accounting personnel, engaging external consultants for complex accounting matters, and seeking external advisors for control design and documentation[209](index=209&type=chunk)[211](index=211&type=chunk) - Substantial progress has been made, but the material weaknesses were not fully remediated as of the report date, pending complete testing and evaluation[209](index=209&type=chunk) [Changes in Internal Control over Financial Reporting](index=45&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) This section reports on any changes in internal control over financial reporting during the period - No changes in internal control over financial reporting materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting during the period[212](index=212&type=chunk) [PART II. OTHER INFORMATION](index=46&type=section&id=PART%20II.%20OTHER%20INFORMATION) This part includes legal proceedings, risk factors, and exhibits, providing additional context beyond financial statements [Item 1. Legal Proceedings](index=46&type=section&id=Item%201.%20Legal%20Proceedings) The Company is not currently involved in any legal proceedings that are anticipated to significantly impact its financial condition, results of operations, or liquidity - No current legal proceedings are expected to materially impact the Company's financial condition, results of operations, or liquidity[102](index=102&type=chunk)[214](index=214&type=chunk) - The Company may face future claims, including intellectual property infringement, which could be costly and divert management resources[214](index=214&type=chunk) [Item 1A. Risk Factors](index=46&type=section&id=Item%201A.%20Risk%20Factors) This section outlines significant risks that could adversely affect the Company's business, financial condition, and operating results, including operational, regulatory, and financial risks [Risk Factors Summary](index=46&type=section&id=Risk%20Factors%20Summary) This section provides a concise overview of the primary risks that could adversely affect the company's business and financial performance - The Company has a history of losses and may not achieve or sustain profitability[217](index=217&type=chunk) - Rapid growth may not be indicative of future growth and poses challenges in managing operations[217](index=217&type=chunk) - Failure to attract new customers, retain existing ones, or increase platform usage would harm the business[217](index=217&type=chunk) - The business is susceptible to risks associated with serving SMBs and the impact of the COVID-19 pandemic[217](index=217&type=chunk) - Quarterly results may fluctuate, and failure to meet expectations could lead to stock price decline[217](index=217&type=chunk) [Risks Related to our Business and our Industry](index=47&type=section&id=Risks%20Related%20to%20our%20Business%20and%20our%20Industry) This section details risks inherent to the company's business model and the industry, including growth management, competition, and operational dependencies - The COVID-19 pandemic continues to adversely impact SMBs, leading to slowdowns in customer acquisition and potential delays in sales/implementation cycles[218](index=218&type=chunk)[220](index=220&type=chunk)[221](index=221&type=chunk) - The Company's rapid growth may not be sustainable, and challenges in managing this growth could negatively affect financial performance[224](index=224&type=chunk)[227](index=227&type=chunk)[232](index=232&type=chunk) - Dependence on attracting and retaining SMB customers, who are susceptible to economic downturns and have higher churn rates, is a critical risk[228](index=228&type=chunk)[230](index=230&type=chunk)[234](index=234&type=chunk) - Intense competition from existing point solutions and larger competitors, along with the need to continuously develop new products and enhance the platform, poses a **significant** challenge[254](index=254&type=chunk)[259](index=259&type=chunk)[264](index=264&type=chunk) - Reliance on single-source suppliers for hardware (Yealink) and payment processing (Stripe) creates vulnerability to disruptions, price increases, and supply chain constraints[271](index=271&type=chunk)[273](index=273&type=chunk)[279](index=279&type=chunk) - Breaches of applications, networks, or systems (including GCP) could lead to data loss, reputational damage, and **significant** liabilities[275](index=275&type=chunk)[277](index=277&type=chunk) [Risks Related to Governmental Regulation](index=68&type=section&id=Risks%20Related%20to%20Governmental%20Regulation) This section outlines risks associated with compliance with various governmental regulations, including telecommunications, data protection, and privacy laws - As a VoIP provider, the Company is subject to FCC and other regulations, and changes could increase costs, require service modifications, or lead to enforcement actions[336](index=336&type=chunk) - Efforts to combat robo-calling and caller ID spoofing (e.g., STIR/SHAKEN framework) could harm the business if calls are blocked or not properly authenticated, especially for cross-border calls[339](index=339&type=chunk)[341](index=341&type=chunk) - Compliance with laws like CAN-SPAM Act and TCPA for commercial emails and text messages is critical; violations by the Company or its customers could lead to penalties and reputational damage[344](index=344&type=chunk)[345](index=345&type=chunk) - Emergency and E-911 calling services expose the Company to **significant** liability if calls are delayed, misrouted, or uncompleted **due to** incorrect location information or technical failures[351](index=351&type=chunk)[352](index=352&type=chunk)[356](index=356&type=chunk) - Processing customer and employee personal information subjects the Company to stringent and evolving Data Protection Laws (e.g., HIPAA, CCPA, CPRA), with non-compliance risking fines, litigation, and reputational harm[357](index=357&type=chunk)[361](index=361&type=chunk)[365](index=365&type=chunk)[368](index=368&type=chunk) [Risks Related to Intellectual Property](index=80&type=section&id=Risks%20Related%20to%20Intellectual%20Property) This section addresses risks concerning the protection of intellectual property and potential infringement claims from third parties - Failure to protect intellectual property rights (trademarks, copyrights, trade secrets) could impair the Company's ability to safeguard its technology and brand, potentially leading to misappropriation or litigation[372](index=372&type=chunk)[373](index=373&type=chunk) - The Company faces risks of intellectual property infringement claims from competitors or third parties, which could result in substantial costs, diversion of management, and unfavorable settlements or judgments[374](index=374&type=chunk)[375](index=375&type=chunk) - Use of "open source" and third-party software could impose unanticipated conditions, expose the Company to litigation for non-compliance with licenses, or require disclosure of proprietary code[377](index=377&type=chunk) [Risks Related to Tax Matters](index=82&type=section&id=Risks%20Related%20to%20Tax%20Matters) This section discusses risks related to tax laws, potential tax liabilities, and limitations on the utilization of net operating losses - **Significant** judgments and estimates in income tax provision mean changes in tax laws or successful challenges by authorities could lead to additional tax liabilities[380](index=380&type=chunk)[381](index=381&type=chunk) - The Company may be required to collect additional sales, value-added, or similar taxes in more jurisdictions, **increasing** costs for customers and potentially affecting results of operations[382](index=382&type=chunk)[383](index=383&type=chunk) - The ability to use net operating losses (NOLs) to offset future taxable income may be limited by Section 382 of the Internal Revenue Code or other regulatory changes, **increasing** future tax obligations[385](index=385&type=chunk)[386](index=386&type=chunk) [Risks Related to Accounting Matters](index=84&type=section&id=Risks%20Related%20to%20Accounting%20Matters) This section highlights risks stemming from material weaknesses in internal control over financial reporting and the impact of accounting estimates - Material weaknesses in internal control over financial reporting persist, stemming from insufficient accounting personnel and ineffective controls over complex transactions, risking misstatements[387](index=387&type=chunk)[388](index=388&type=chunk) - Ongoing remediation efforts, including hiring and external consulting, are costly and time-consuming, and there's no guarantee they will fully remediate the weaknesses or prevent future ones[390](index=390&type=chunk)[391](index=391&type=chunk)[392](index=392&type=chunk) - Failure to maintain effective disclosure controls and internal control over financial reporting could harm investor confidence, lead to stock price decline, and result in regulatory sanctions[395](index=395&type=chunk) - Incorrect estimates or judgments in critical accounting policies, such as revenue recognition and stock-based compensation, could adversely affect reported results[397](index=397&type=chunk) [Risks Related to Ownership of our Common Stock](index=87&type=section&id=Risks%20Related%20to%20Ownership%20of%20our%20Common%20Stock) This section covers risks associated with the company's common stock, including market volatility, dilution, and concentrated ownership - The market price of common stock is highly volatile and can fluctuate **significantly due to** various factors, including overall market performance, company projections, and competitive actions[402](index=402&type=chunk) - Future equity issuances, including those under incentive plans or for acquisitions, could dilute existing stockholders' ownership[405](index=405&type=chunk) - Sales of substantial amounts of common stock by existing holders, particularly directors and executive officers, could cause the market price to decline[406](index=406&type=chunk) - Concentration of share ownership (**68.5%** by executive officers, directors, and **5%**+ holders) limits other stockholders' ability to influence corporate matters[411](index=411&type=chunk) - As an emerging growth company, reliance on **reduced** reporting requirements may make common stock less attractive to some investors[412](index=412&type=chunk) - The Company does not intend to pay dividends in the foreseeable future, requiring investors to rely on stock price appreciation for gains[413](index=413&type=chunk) [General Risks](index=92&type=section&id=General%20Risks) This section addresses broad risks such as legal proceedings, economic conditions, natural disasters, and the effectiveness of risk management strategies - Legal proceedings or claims, even if unmeritorious, could be costly, time-consuming, divert management attention, and harm the Company's reputation[423](index=423&type=chunk) - Unfavorable industry or global economic conditions, including inflation, geopolitical conflicts, and supply chain shortages, could **reduce** demand for products and adversely affect financial performance[425](index=425&type=chunk) - The business is exposed to risks from natural disasters, pandemics, power disruptions, cyberattacks, and terrorism, which could interrupt operations and lead to data loss[426](index=426&type=chunk)[427](index=427&type=chunk)[428](index=428&type=chunk) - Risk management strategies may not be fully effective in mitigating all types of risk, especially with new services or market expansions, potentially leading to uninsured liabilities or reputational harm[429](index=429&type=chunk)[430](index=430&type=chunk) [Item 6. Exhibits](index=95&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including employment agreements, CEO and CFO certifications, and financial statements formatted in Inline XBRL - Exhibits include Amended and Restated Employment Agreement for Brett White and First Amendment to Employment Agreement for Roy Banks[432](index=432&type=chunk) - CEO and CFO certifications pursuant to Rule 13a-14(a) of the Securities Exchange Act are filed[432](index=432&type=chunk) - Financial statements are provided in Inline XBRL format, including Condensed Consolidated Balance Sheets, Statements of Operations, Comprehensive Loss, Stockholders' Equity, and Cash Flows[432](index=432&type=chunk) [Signatures](index=96&type=section&id=Signatures) This section confirms the official signing of the report by authorized company executives - The report is signed by Brett White, Chief Executive Officer and Director, and Alan Taylor, Chief Financial Officer[438](index=438&type=chunk) - The signing date for the report is November 10, 2022[438](index=438&type=chunk) ```

Financial Data and Key Metrics Changes - Total revenue for Q3 2022 reached $36.2 million, representing a year-over-year growth of 20% [10][33] - Non-GAAP gross profit improved by 33% year-over-year, with a gross margin increase of 660 basis points to 64.6% from 58% [11][36] - Non-GAAP operating loss decreased by 34% to $6.5 million, with an operating loss margin improvement from negative 32.8% to negative 18% [11][40] - Adjusted EBITDA loss improved by $3.9 million year-over-year, with an EBITDA loss margin of 14.2% compared to 30% a year ago [41] Business Line Data and Key Metrics Changes - Subscription and payments revenue increased by $6.6 million with only a $2.4 million increase in operating expenses [12][38] - Net revenue retention rate was 101%, while gross revenue retention rate remained stable at 94% [34] Market Data and Key Metrics Changes - The company noted a recovery in in-person industry events, which are expected to contribute positively to sales [15][61] - The transition to a new sales model has led to improved sales performance, including reduced sales team attrition and lower customer acquisition costs [16][17] Company Strategy and Development Direction - The company is focused on enhancing customer experience, building a scalable foundation for profitable growth, and improving operational efficiencies [9][28] - There is a commitment to technology enhancements to address the needs of small and medium healthcare businesses, including new features like Online Scheduling and Phone Reporting Analytics [18][20] - The company is transitioning to an in-house Digital Forms product, which is expected to improve margins despite a temporary revenue impact [44] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the future, citing a resilient customer base and positive indicators in sales performance [28][29] - The company anticipates continued margin improvements and is focused on achieving cash flow breakeven and profitability [41][49] Other Important Information - The company was recognized as a certified Great Place to Work for the fourth consecutive year, highlighting its strong culture and employee engagement [26] - A virtual user conference was hosted to enhance customer engagement and showcase platform enhancements [24] Q&A Session Summary Question: How has traction been in multi-location practices? - Management confirmed positive traction and the establishment of a dedicated go-to-market team for multi-location practices [51][53] Question: Will there be continued hiring throughout the year? - Management indicated a focus on improving sales productivity and hiring where talent is available, not limited to Utah [54][55] Question: How should revenue growth be sequenced in the coming quarters? - Management noted that while the transition to in-house forms may impact top-line revenue temporarily, margin improvements are expected [58] Question: What is the trend in customer churn? - Customer churn remained within normal ranges, with a gross revenue retention rate of 94% [69] Question: What are the observations regarding customer responses in the macro environment? - Management noted that sales cycles have elongated slightly, but customer retention and pricing remain stable [71][72]

PART I [Item 1. Financial Statements (Unaudited)](index=5&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents Weave Communications, Inc.'s unaudited condensed consolidated financial statements and comprehensive notes for the interim period [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The condensed consolidated balance sheets show a significant increase in total assets from $187.5 million at December 31, 2021, to $218.8 million at June 30, 2022, primarily driven by the recognition of operating lease right-of-use assets | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :--------------------------------- | :----------------------------- | :------------------------------- | | Total current assets | $140,660 | $154,447 | | Total non-current assets | $76,867 | $33,038 | | **TOTAL ASSETS** | **$218,827** | **$187,485** | | Total current liabilities | $63,880 | $54,307 | | Total non-current liabilities | $62,959 | $20,877 | | **Total liabilities** | **$126,839** | **$75,184** | | Total stockholders' equity | $91,988 | $112,301 | | **TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY** | **$218,827** | **$187,485** | [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) The company reported increased revenue for both the three and six months ended June 30, 2022, compared to the prior year, but also experienced higher net losses | Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $34,930 | $28,061 | $68,202 | $53,729 | | Cost of revenue | $13,749 | $12,023 | $27,502 | $22,825 | | Gross profit | $21,181 | $16,038 | $40,700 | $30,904 | | Total operating expenses | $35,772 | $30,172 | $68,800 | $53,747 | | Loss from operations | $(14,591) | $(14,134) | $(28,100) | $(22,843) | | Net loss | $(14,815) | $(14,419) | $(28,653) | $(23,402) | | Net loss per share (basic and diluted) | $(0.23) | $(1.12) | $(0.44) | $(1.93) | [Condensed Consolidated Statements of Comprehensive Loss](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Loss) The company reported a total comprehensive loss of $14.86 million for the three months ended June 30, 2022, and $28.64 million for the six months ended June 30, 2022, slightly higher than the net loss due to foreign currency translation adjustments | Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(14,815) | $(14,419) | $(28,653) | $(23,402) | | Change in foreign currency translation, net of tax | $(41) | $(7) | $13 | $(8) | | Total comprehensive loss | $(14,856) | $(14,426) | $(28,640) | $(23,410) | [Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Redeemable%20Convertible%20Preferred%20Stock%20and%20Stockholders'%20Equity%20(Deficit)) Stockholders' equity decreased from $112.3 million at December 31, 2021, to $92.0 million at June 30, 2022, primarily due to the net loss incurred during the period, partially offset by stock-based compensation and proceeds from stock option exercises | Metric (in thousands) | June 30, 2022 | December 31, 2021 | | :-------------------- | :------------ | :---------------- | | Additional paid-in capital | $302,557 | $294,230 | | Accumulated deficit | $(210,551) | $(181,898) | | Total stockholders' equity | $91,988 | $112,301 | - Common shares outstanding increased from **64,324,628** at December 31, 2021, to **65,010,719** at June 30, 2022, mainly due to stock option exercises[14](index=14&type=chunk)[22](index=22&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=11&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) The company experienced a net decrease in cash and cash equivalents for the six months ended June 30, 2022, primarily driven by cash used in operating and financing activities, partially offset by lower cash used in investing activities compared to the prior year | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :----------------------------- | :----------------------------- | | 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) | | Net decrease in cash and cash equivalents | $(11,668) | $(13,202) | | Cash and cash equivalents, end of period | $124,328 | $42,496 | [Notes to the Condensed Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) These notes detail the company's accounting policies, revenue recognition, fair value measurements, and other key financial statement components [1. Description of the Business](index=12&type=section&id=1.%20Description%20of%20the%20Business) Weave Communications, Inc. provides an integrated communications platform combining software communication and analysis tools with VoIP phone services, primarily through subscriptions - Weave Communications, Inc. sells subscriptions for its integrated communications platform, which combines software communication and analysis tools with Voice over Internet Protocol (VoIP) phone services[26](index=26&type=chunk) [2. Basis of Presentation and Summary of Significant Accounting Policies](index=12&type=section&id=2.%20Basis%20of%20Presentation%20and%20Summary%20of%20Significant%20Accounting%20Policies) The financial statements are unaudited and prepared in accordance with U.S. GAAP for interim reporting, with the company operating as a single segment and adopting ASU No. 2016-02, Leases (Topic 842), on January 1, 2022 - The company adopted Topic 842 (Leases) on January 1, 2022, using a modified retrospective approach, resulting in the recognition of **$52.8 million** in operating lease liabilities and **$48.5 million** in operating right-of-use assets[50](index=50&type=chunk) - As of June 30, 2022, the company had an accumulated deficit of **$210.6 million** and has historically generated negative cash flows from operations[33](index=33&type=chunk) - The company expects to adopt ASU 2016-13 (Credit Losses) on January 1, 2023, and is currently evaluating its impact[53](index=53&type=chunk) [3. Revenue](index=16&type=section&id=3.%20Revenue) Revenue is primarily derived from recurring subscription services and payment processing, with non-recurring revenue from onboarding and phone hardware leases | Revenue Category (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Subscription and payment processing | $33,538 | $26,233 | $65,488 | $50,132 | | Onboarding | $319 | $1,034 | $581 | $2,072 | | Phone hardware lease | $1,073 | $794 | $2,133 | $1,525 | | **Total revenue** | **$34,930** | **$28,061** | **$68,202** | **$53,729** | - Amortization expense for capitalized contract acquisition and fulfillment costs was **$2.8 million** and **$5.4 million** for the three and six months ended June 30, 2022, respectively[56](index=56&type=chunk) [4. Fair Value Measurements](index=17&type=section&id=4.%20Fair%20Value%20Measurements) The company's financial instruments measured at fair value on a recurring basis primarily consist of money market funds, categorized as Level 1, totaling $101.1 million as of June 30, 2022 | Fair Value Category | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :------------------ | :--------------------------- | :------------------------------- | | Level 1 (Money market fund) | $101,099 | $118,962 | | Level 2 | — | — | | Level 3 | — | — | | **Total** | **$101,099** | **$118,962** | - The fair value of debt was **$10.5 million** as of June 30, 2022 (Level 2)[59](index=59&type=chunk) [5. Property and Equipment](index=17&type=section&id=5.%20Property%20and%20Equipment) Net property and equipment decreased significantly from $24.5 million at December 31, 2021, to $11.4 million at June 30, 2022, primarily due to the reclassification of phone hardware to finance right-of-use assets upon adoption of ASC 842 | Property and Equipment (in thousands) | June 30, 2022 | December 31, 2021 | | :------------------------------------ | :------------ | :---------------- | | Office equipment | $4,946 | $4,729 | | Office furniture | $5,810 | $5,588 | | Leasehold improvements | $2,615 | $2,496 | | Capitalized internal-use software | $4,274 | $3,533 | | Phone hardware | — | $26,034 | | Payment terminals | $1,985 | $1,581 | | **Property and equipment, net** | **$11,427** | **$24,502** | - Depreciation and amortization expense on property and equipment (excluding operating ROU assets) was **$3.4 million** and **$6.8 million** for the three and six months ended June 30, 2022, respectively[61](index=61&type=chunk) [6. Accrued Liabilities](index=18&type=section&id=6.%20Accrued%20Liabilities) Accrued liabilities increased to $14.1 million at June 30, 2022, from $12.3 million at December 31, 2021, mainly due to higher payroll-related accruals and employee stock purchase plan liability | Accrued Liabilities (in thousands) | June 30, 2022 | December 31, 2021 | | :--------------------------------- | :------------ | :---------------- | | Payroll-related accruals | $9,314 | $8,434 | | Sales and telecom taxes | $1,801 | $1,508 | | Employee stock purchase plan liability | $1,121 | $256 | | Third-party commissions | $442 | $440 | | Other | $1,464 | $1,612 | | **Total** | **$14,142** | **$12,250** | [7. Leases](index=18&type=section&id=7.%20Leases) The company has both operating and finance lease arrangements, with lease expenses, weighted-average lease terms, and discount rates detailed following the adoption of ASC 842 | Lease Expense (in thousands) | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | | :--------------------------- | :------------------------------- | :----------------------------- | | Finance lease expense | $2,413 | $4,850 | | Operating lease expense | $1,417 | $2,834 | | Short-term lease expense | $9 | $18 | | **Total lease expense** | **$3,839** | **$7,702** | - As of June 30, 2022, the weighted-average remaining lease term for finance leases was **1.7 years** with a **6.9%** discount rate, and for operating leases, it was **10.6 years** with a **3.9%** discount rate[65](index=65&type=chunk) Future Minimum Lease Payments | Future Minimum Lease Payments (in thousands) | Operating Leases (June 30, 2022) | Finance Leases (June 30, 2022) | | :------------------------------------------- | :------------------------------- | :----------------------------- | | Remaining 2022 | $2,559 | $5,020 | | 2023 | $5,404 | $6,007 | | 2024 | $5,539 | $3,295 | | 2025 | $5,677 | $609 | | 2026 | $5,819 | — | | Thereafter | $38,666 | — | | **Total** | **$63,664** | **$14,931** | | Less imputed interest | $(11,834) | $(1,024) | | **Present value of obligations** | **$51,830** | **$13,907** | [8. Income Taxes](index=22&type=section&id=8.%20Income%20Taxes) The company reported income tax expense of $18.6 thousand and $51.1 thousand for the three and six months ended June 30, 2022, respectively, with a full valuation allowance maintained against all U.S. deferred tax assets due to historical losses | Income Tax Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income tax expense | $19 | $0 | $51 | $0 | | Effective tax rate | (0.1255)% | 0% | (0.1785)% | 0% | - The company maintains a full valuation allowance against all U.S. deferred tax assets due to a history of U.S. tax losses[76](index=76&type=chunk) [9. Long-Term Debt](index=22&type=section&id=9.%20Long-Term%20Debt) The company has a $50.0 million revolving line of credit with Silicon Valley Bank, with $10.0 million outstanding as of June 30, 2022, and was in compliance with all financial covenants | Long-Term Debt (in thousands) | June 30, 2022 | December 31, 2021 | | :---------------------------- | :------------ | :---------------- | | Line of credit | $10,000 | $10,000 | | **Total** | **$10,000** | **$10,000** | - The revolving line of credit with Silicon Valley Bank has a maximum borrowing capacity of **$50.0 million**, with **$40.0 million** available as of June 30, 2022[33](index=33&type=chunk)[78](index=78&type=chunk) - The company was in compliance with all debt covenants as of June 30, 2022, which include maintaining minimum liquidity and specified EBITDA levels[79](index=79&type=chunk) [10. Stockholders' Equity](index=23&type=section&id=10.%20Stockholders'%20Equity) Stock-based compensation expense for the three and six months ended June 30, 2022, was $4.48 million and $7.91 million, respectively, under the 2021 Equity Incentive Plan | Stock-Based Compensation (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | 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** | **$4,480** | **$5,269** | **$7,905** | **$7,093** | - Unrecognized stock-based compensation expense for stock options was **$21.2 million** as of June 30, 2022, with a weighted-average vesting period of **2.42 years**[86](index=86&type=chunk) - Unrecognized stock-based compensation expense for RSUs was **$29.4 million** as of June 30, 2022, with a weighted-average period of **2.70 years**[90](index=90&type=chunk) [11. Related Party Transactions](index=25&type=section&id=11.%20Related%20Party%20Transactions) No related-party transactions occurred during the six months ended June 30, 2022, and 2021 - No related-party transactions occurred during the six months ended June 30, 2022, and 2021[93](index=93&type=chunk) [12. Commitments and Contingencies](index=25&type=section&id=12.%20Commitments%20and%20Contingencies) The company is not involved in any legal proceedings anticipated to significantly impact its financial condition and enters into standard indemnification arrangements in the ordinary course of business - The company is not currently a party to any legal proceedings that would have a material adverse effect on its financial condition, results of operations, or liquidity[94](index=94&type=chunk) - The maximum potential amount of future payments under indemnification agreements is not determinable, but the company has not incurred costs related to these agreements to date[95](index=95&type=chunk) [13. Net Loss Per Share](index=25&type=section&id=13.%20Net%20Loss%20Per%20Share) The basic and diluted net loss per share attributable to common stockholders was $(0.23) and $(0.44) for the three and six months ended June 30, 2022, respectively | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss attributable to common stockholders | $(14,815) | $(14,976) | $(28,653) | $(24,508) | | Weighted-average common shares outstanding | 64,963,045 | 13,373,712 | 64,774,428 | 12,708,522 | | Net loss per share, basic and diluted | $(0.23) | $(1.12) | $(0.44) | $(1.93) | - As of June 30, 2022, **11,875,365** potential common shares (options, ESPP shares, RSUs) were excluded from diluted EPS calculation due to their antidilutive effect[97](index=97&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial condition, operational results, revenue drivers, and liquidity, including non-GAAP measures [Overview](index=26&type=section&id=Overview) Weave is a leading all-in-one customer communications and engagement software platform for small and medium-sized businesses (SMBs), offering integrated solutions to streamline operations and enhance customer interactions - Weave provides an all-in-one cloud-based software platform for SMBs, integrating communications (phone, email, text), customer engagement (scheduling, reminders, reviews), and payments[100](index=100&type=chunk)[102](index=102&type=chunk) - The company has expanded its product offerings to include analytics (2019), payments (2019), and forms (2021), and has grown beyond dentistry and optometry into other verticals like home services[103](index=103&type=chunk) [Supplemental Financial Information — Disaggregated Revenue and Cost of Revenue](index=27&type=section&id=Supplemental%20Financial%20Information%20%E2%80%94%20Disaggregated%20Revenue%20and%20Cost%20of%20Revenue) The company disaggregates revenue and cost of revenue into recurring (subscription and payment processing) and non-recurring (onboarding and phone hardware lease) categories, with recurring revenues constituting a significant majority | Category (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :---------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | **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 | $(2,238) | $(2,237) | $(4,584) | $(4,303) | | Gross profit | $(1,165) | $(1,443) | $(2,451) | $(2,778) | | Gross margin | (109)% | (182)% | (115)% | (182)% | - Recurring revenues (subscription and payment processing) accounted for **95%** of total revenue for the three months ended June 30, 2022, and **93%** for the six months ended June 30, 2022[105](index=105&type=chunk) - Onboarding and hardware services are used as customer acquisition tools, often resulting in negative gross profit due to competitive pricing and associated costs[106](index=106&type=chunk) [Factors Affecting Our Performance](index=28&type=section&id=Factors%20Affecting%20Our%20Performance) The company's performance is driven by its ability to attract and retain customers, expand within the customer base, introduce new products, and enter new industry verticals - Key performance drivers include attracting new customers, retaining and expanding within the existing customer base, adding new products, and expanding into new industry verticals[109](index=109&type=chunk) - The dollar-based net retention rate decreased to **102%** at June 30, 2022, from **104%** at June 30, 2021, reflecting an anticipated decline after the initial successful rollout of Weave Payments[112](index=112&type=chunk) - The company aims to expand its customer base among medium-sized businesses and into adjacent markets like home services, leveraging its flexible platform and repeatable playbook for vertical expansion[110](index=110&type=chunk)[115](index=115&type=chunk) [Business Update Regarding COVID-19](index=29&type=section&id=Business%20Update%20Regarding%20COVID-19) The COVID-19 pandemic initially slowed new customer acquisition in early 2020 but improved through 2021, intensifying communications challenges for SMBs, though it did not materially impact revenue or renewals - COVID-19 initially slowed new customer acquisition in H1 2020 but improved through 2021, intensifying communications challenges for SMBs[116](index=116&type=chunk) - The pandemic did not have a negative material impact on revenue or non-renewals of subscriptions in 2020, 2021, or H1 2022[116](index=116&type=chunk) - Lead generation activities faced headwinds due to cancelled/postponed trade shows, but the company shifted focus to inbound/outbound channels, driving growth in customer locations and revenue[117](index=117&type=chunk) [Key Business Metrics](index=30&type=section&id=Key%20Business%20Metrics) The company monitors Dollar-Based Net Retention Rate (NRR) and Dollar-Based Gross Retention Rate (GRR) to assess customer retention and revenue growth from its customer base | Metric | June 30, 2022 | June 30, 2021 | | :-------------------------- | :------------ | :------------ | | Dollar-based net retention rate | 102% | 104% | | Dollar-based gross retention rate | 94% | 92% | - NRR measures the ability to retain and grow revenue from existing customer locations, including churn, contraction, expansion, and pricing changes[121](index=121&type=chunk) - GRR measures the ability to retain customers by focusing on revenue reductions from terminations, excluding revenue expansion or new customer additions[123](index=123&type=chunk) [Non-GAAP Financial Measures](index=31&type=section&id=Non-GAAP%20Financial%20Measures) The company uses non-GAAP financial measures, including Free Cash Flow, Free Cash Flow Margin, and Adjusted EBITDA, to provide additional insights into its liquidity and operating performance | Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Free cash flow | $(2,422) | $(3,994) | $(7,501) | $(11,587) | | Free cash flow margin | (7)% | (14)% | (11)% | (22)% | | Adjusted EBITDA | $(9,025) | $(8,313) | $(18,148) | $(14,499) | - Free cash flow is defined as net cash used in operating activities minus purchases of property and equipment and capitalized internal-use software costs[126](index=126&type=chunk) - Adjusted EBITDA excludes interest expense, taxes, depreciation (excluding phone hardware), amortization (capitalized internal-use software), and stock-based compensation expense[127](index=127&type=chunk)[131](index=131&type=chunk)[132](index=132&type=chunk) [Components of Results of Operations](index=33&type=section&id=Components%20of%20Results%20of%20Operations) This section details the composition of revenue, cost of revenue, and operating expenses, with revenue primarily from recurring subscriptions and expectations for operating expenses to decrease as a percentage of revenue over time - Revenue is primarily generated from recurring subscription fees (software and phone services) and embedded lease revenue on hardware, with **41%** of customers electing annual prepayments as of June 30, 2022[133](index=133&type=chunk) - Cost of revenue includes data center/cloud infrastructure, payment processing, amortization of finance lease ROU assets on phone hardware, application provider fees, voice/messaging fees, and internal-use software amortization[137](index=137&type=chunk) - Operating expenses (sales & marketing, R&D, G&A) are expected to increase in absolute dollars but decrease as a percentage of revenue over time, driven by investments in growth and public company costs[142](index=142&type=chunk)[144](index=144&type=chunk)[147](index=147&type=chunk) [Results of Operations](index=35&type=section&id=Results%20of%20Operations) The company experienced significant revenue growth for both the three and six months ended June 30, 2022, driven by new customer acquisition, but higher operating expenses led to increased net losses | Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Change (Amount) | Change (Percentage) | | :-------------------- | :------------------------------- | :------------------------------- | :-------------- | :------------------ | | Revenue | $34,930 | $28,061 | $6,869 | 24% | | Cost of revenue | $13,749 | $12,023 | $1,726 | 14% | | Gross margin | 61% | 57% | 4 pp | | | Sales and marketing | $16,747 | $14,718 | $2,029 | 14% | | Research and development | $7,428 | $7,871 | $(443) | (6)% | | General and administrative | $11,597 | $7,583 | $4,014 | 53% | | Interest expense and other income, net | $205 | $285 | $(80) | (28)% | | Metric (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | Change (Amount) | Change (Percentage) | | :-------------------- | :----------------------------- | :----------------------------- | :-------------- | :------------------ | | Revenue | $68,202 | $53,729 | $14,473 | 27% | | Cost of revenue | $27,502 | $22,825 | $4,677 | 20% | | Gross margin | 60% | 58% | 2 pp | | | Sales and marketing | $32,967 | $26,454 | $6,513 | 25% | | Research and development | $14,632 | $13,707 | $925 | 7% | | General and administrative | $21,201 | $13,586 | $7,615 | 56% | | Interest expense and other income, net | $502 | $559 | $(57) | (10)% | - Revenue increase for the three months ended June 30, 2022, was **94%** attributable to new customers and **6%** to existing customers[155](index=155&type=chunk) - General and administrative expenses increased significantly due to higher legal fees, personnel-related expenses (including upper management hires), dues and subscriptions, and D&O insurance premiums[160](index=160&type=chunk)[170](index=170&type=chunk) [Liquidity and Capital Resources](index=40&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity is supported by $124.3 million in cash and cash equivalents as of June 30, 2022, and an available $40.0 million under its revolving line of credit - Principal sources of liquidity are cash and cash equivalents (**$124.3 million** as of June 30, 2022) and available borrowings under the revolving line of credit (**$40.0 million**)[173](index=173&type=chunk)[33](index=33&type=chunk) | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :----------------------------- | :----------------------------- | | 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) | - Cash used in operating activities for the six months ended June 30, 2022, was **$5.9 million**, primarily due to net loss offset by non-cash charges and changes in operating assets/liabilities[176](index=176&type=chunk) - Cash used in financing activities for the six months ended June 30, 2022, was **$4.2 million**, mainly from principal payments on finance leases (**$4.5 million**) and IPO-related costs (**$0.4 million**), partially offset by stock option exercises (**$0.7 million**)[181](index=181&type=chunk) [Critical Accounting Policies and Estimates](index=43&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) The preparation of financial statements requires significant estimates and assumptions, particularly for revenue recognition and stock-based compensation, with the company adopting ASU 2016-02 (Leases) on January 1, 2022 - Significant estimates are made for revenue recognition and stock-based compensation, including the fair value of common stock[188](index=188&type=chunk)[391](index=391&type=chunk) - The company adopted ASU 2016-02, Leases (Topic 842), on January 1, 2022, which updates financial reporting requirements for leasing arrangements[190](index=190&type=chunk) [Emerging Growth Company Status](index=43&type=section&id=Emerging%20Growth%20Company%20Status) As an 'emerging growth company' under the JOBS Act, Weave has elected to use the extended transition period for complying with new or revised accounting standards - Weave is an 'emerging growth company' and has elected to use the extended transition period for complying with new or revised accounting standards[192](index=192&type=chunk)[405](index=405&type=chunk) - This election means the company's financial statements may not be comparable to those of other public companies that comply with public company effective dates[192](index=192&type=chunk)[405](index=405&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=44&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's exposure to market risk, including interest rates and foreign currency rates, has not materially changed since December 31, 2021 - The company's market risk exposure, including interest rates and foreign currency rates, has not materially changed since December 31, 2021[194](index=194&type=chunk) [Item 4. Controls and Procedures](index=44&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were not effective as of June 30, 2022, due to previously reported material weaknesses in internal control over financial reporting - Disclosure controls and procedures were not effective as of June 30, 2022, due to material weaknesses in internal control over financial reporting[195](index=195&type=chunk) - Material weaknesses include an insufficient complement of personnel with appropriate internal controls and accounting knowledge, and ineffective controls related to timely identification, assessment, and recognition of complex transactions (e.g., contract capitalization, stock option valuation)[197](index=197&type=chunk) - The remediation plan involves hiring additional finance and accounting personnel, engaging external consultants, and providing ongoing training[199](index=199&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=45&type=section&id=Item%201.%20Legal%20Proceedings) The company is not currently a party to any legal proceedings that would have a material adverse effect on its business, results of operations, financial condition, or cash flows - The company is not involved in any legal proceedings that are anticipated to significantly impact its financial condition, results of operations, or liquidity[203](index=203&type=chunk) [Item 1A. Risk Factors](index=46&type=section&id=Item%201A.%20Risk%20Factors) This section details significant risks to the company's business, including profitability, growth management, competition, and regulatory compliance [Risk Factors Summary](index=46&type=section&id=Risk%20Factors%20Summary) Key risks include historical losses, growth management challenges, customer acquisition, competition, and internal control weaknesses - Key risks include a history of losses, challenges in managing rapid growth, dependence on attracting and retaining customers, intense competition, and the impact of the COVID-19 pandemic[206](index=206&type=chunk) - Other significant risks involve maintaining and enhancing the brand, evolving market for the platform, developing new products, cybersecurity breaches, and identified material weaknesses in internal control over financial reporting[206](index=206&type=chunk)[207](index=207&type=chunk) [Risks Related to our Business and our Industry](index=47&type=section&id=Risks%20Related%20to%20our%20Business%20and%20our%20Industry) Risks include the ongoing impact of COVID-19 on SMBs and sales activities, the challenge of sustaining rapid growth, the critical need to attract and retain customers, and the inherent risks of serving SMBs - The COVID-19 pandemic continues to adversely impact SMBs, leading to slowdowns in new customer acquisition and challenges in sales and installation activities[209](index=209&type=chunk) - The company's rapid growth may not be indicative of future growth, and sustaining it requires effective pricing, product expansion, customer retention, and successful market penetration[214](index=214&type=chunk)[215](index=215&type=chunk) - Reliance on single-source suppliers for critical hardware (Yealink phones) and payment processing (Stripe) poses risks of supply disruption, price increases, and service interruptions[265](index=265&type=chunk)[272](index=272&type=chunk) - Breaches of applications, networks, or systems (including GCP) could compromise data, damage reputation, and expose the company to liability, requiring significant security investments[267](index=267&type=chunk)[269](index=269&type=chunk)[270](index=270&type=chunk) [Risks Related to Governmental Regulation](index=66&type=section&id=Risks%20Related%20to%20Governmental%20Regulation) The company is subject to extensive and evolving regulations for VoIP services, commercial emails, and SMS text messages, which can increase costs, limit service offerings, and expose it to liabilities - As a VoIP provider, the company is subject to FCC regulations and state/local requirements, with potential for increased common carrier regulation and compliance costs[328](index=328&type=chunk)[329](index=329&type=chunk)[331](index=331&type=chunk) - Compliance with STIR/SHAKEN caller ID authentication framework is required, and failure to authenticate calls could lead to calls being blocked or flagged, making services less desirable[332](index=332&type=chunk)[335](index=335&type=chunk) - The company processes business and personal information, subjecting it to HIPAA, CCPA, CPRA, and other Data Protection Laws, with non-compliance risking civil liability, fines, and reputational damage[349](index=349&type=chunk)[350](index=350&type=chunk)[351](index=351&type=chunk)[358](index=358&type=chunk) - Misuse of the platform by customers for spam, phishing, or illegal activities could damage the company's reputation and expose it to litigation and regulatory enforcement under laws like TCPA and CAN-SPAM Act[337](index=337&type=chunk)[339](index=339&type=chunk) [Risks Related to Intellectual Property](index=79&type=section&id=Risks%20Related%20to%20Intellectual%20Property) The company's success relies on protecting its intellectual property (IP) through trademarks, copyrights, and trade secrets, with risks of infringement claims and challenges from open-source software use - Failure to protect or enforce intellectual property rights could impair the company's ability to protect its technology and brand, leading to misappropriation by third parties[364](index=364&type=chunk)[366](index=366&type=chunk) - The company faces risks of intellectual property infringement claims from competitors or other entities, which could result in costly litigation, unfavorable settlements, or the need to redesign products[367](index=367&type=chunk) - Use of open-source and third-party software may impose unanticipated conditions or restrictions, expose the company to claims of non-compliance with licenses, and present security risks[370](index=370&type=chunk)[372](index=372&type=chunk) [Risks Related to Tax Matters](index=82&type=section&id=Risks%20Related%20to%20Tax%20Matters) The company faces risks from potential additional income tax liabilities due to changes in tax laws or challenges from tax authorities, and its ability to use Net Operating Losses (NOLs) may be limited - The company may incur additional income tax liabilities if tax laws change, are clarified to its detriment, or if tax authorities successfully challenge its tax positions[374](index=374&type=chunk) - There is a risk of being required to collect additional sales, value-added, or similar taxes in more jurisdictions, which could increase customer costs and adversely affect results of operations[375](index=375&type=chunk) - The ability to use NOL carryforwards (**$169.1 million** federal, **$113.1 million** state as of Dec 31, 2021) may be limited by Section 382 of the Code or similar state provisions due to ownership changes[379](index=379&type=chunk) [Risks Related to Accounting Matters](index=83&type=section&id=Risks%20Related%20to%20Accounting%20Matters) The company has identified material weaknesses in internal control over financial reporting, primarily due to insufficient accounting personnel and ineffective controls over complex transactions, with ongoing remediation efforts - Material weaknesses in internal control over financial reporting persist, stemming from insufficient accounting personnel and ineffective controls over complex transactions[381](index=381&type=chunk)[382](index=382&type=chunk) - Remediation efforts are ongoing, involving hiring, external consultants, and training, but are time-consuming and costly, with no guarantee of full remediation or prevention of future weaknesses[383](index=383&type=chunk)[385](index=385&type=chunk)[386](index=386&type=chunk) - Incorrect estimates or judgments in critical accounting policies (e.g., revenue recognition, stock-based compensation) could adversely affect results of operations[391](index=391&type=chunk) [Risks Related to Ownership of our Common Stock](index=86&type=section&id=Risks%20Related%20to%20Ownership%20of%20our%20Common%20Stock) The company's stock price may be volatile, future equity issuances could dilute existing stockholders, and concentrated ownership may limit other stockholders' influence - The market price of common stock is subject to significant volatility due to factors like overall market performance, company projections, competition, and regulatory changes[396](index=396&type=chunk)[397](index=397&type=chunk) - Future equity issuances under incentive plans or for acquisitions could dilute existing stockholders' ownership[399](index=399&type=chunk) - Concentrated ownership (**69.4%** by executive officers, directors, and principal stockholders as of June 30, 2022) limits other stockholders' ability to influence corporate matters[403](index=403&type=chunk) - The company does not intend to pay dividends for the foreseeable future, requiring investors to rely on stock price appreciation for returns[406](index=406&type=chunk) [General Risks](index=92&type=section&id=General%20Risks) General risks include costly legal proceedings, adverse impacts from unfavorable industry or global economic conditions, and business interruptions from natural disasters, pandemics, or man-made problems - Legal proceedings, even if unmeritorious, can be costly, time-consuming, and harm the company's reputation[417](index=417&type=chunk) - Unfavorable conditions in the industry or global economy, such as economic inflation or geopolitical conflicts, could reduce demand for products and adversely affect financial results[418](index=418&type=chunk) - The business is exposed to risks from natural disasters, pandemics (like COVID-19), power disruptions, computer viruses, and terrorism, which could interrupt operations and lead to data loss[419](index=419&type=chunk)[421](index=421&type=chunk)[422](index=422&type=chunk) [Item 6. Exhibits](index=94&type=section&id=Item%206.%20Exhibits) This section lists the documents filed as exhibits to the Quarterly Report on Form 10-Q, including separation and employment agreements, CEO/CFO certifications, and XBRL financial statements - Exhibits include Separation Agreement, Employment Agreement, CEO/CFO Certifications, and financial statements formatted in Inline XBRL[426](index=426&type=chunk) [Signatures](index=95&type=section&id=Signatures) The report is duly signed on behalf of Weave Communications, Inc. by its Chief Executive Officer, Roy Banks, and Chief Financial Officer, Alan Taylor, as of August 12, 2022 - The report was signed by Roy Banks, Chief Executive Officer, and Alan Taylor, Chief Financial Officer, on August 12, 2022[432](index=432&type=chunk)

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements) Q1 2022 unaudited financials report 30% revenue growth to $33.3 million, a widened net loss of $13.8 million, and total assets of $226.2 million [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets increased to $226.2 million by March 31, 2022, primarily due to ASC 842 adoption, while cash and cash equivalents decreased to $128.9 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $128,900 | $135,996 | | Total current assets | $146,187 | $154,447 | | Total assets | $226,200 | $187,485 | | Total current liabilities | $59,604 | $54,307 | | Total liabilities | $123,699 | $75,184 | | Total stockholders' equity | $102,501 | $112,301 | - The significant increase in non-current assets and liabilities is primarily due to the adoption of lease accounting standard ASC 842 on January 1, 2022, resulting in the recognition of operating lease right-of-use assets and corresponding liabilities[13](index=13&type=chunk)[46](index=46&type=chunk) [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Q1 2022 revenue grew 30% to $33.3 million, but net loss widened to $13.8 million due to a 40% increase in operating expenses Statement of Operations Summary (in thousands) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Revenue | $33,272 | $25,668 | | Gross Profit | $19,519 | $14,866 | | Total Operating Expenses | $33,028 | $23,575 | | Loss from Operations | $(13,509) | $(8,709) | | Net Loss | $(13,838) | $(8,983) | | Net Loss per Share | $(0.21) | $(0.79) | [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Q1 2022 saw net cash used in operating activities improve to $4.2 million, with overall cash and cash equivalents decreasing by $7.1 million Cash Flow Summary (in thousands) | Activity | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(4,171) | $(5,272) | | Net cash used in investing activities | $(908) | $(2,321) | | Net cash used in financing activities | $(2,017) | $(1,569) | | **Net decrease in cash** | **$(7,096)** | **$(9,162)** | [Notes to the Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) Notes detail accounting policies, ASC 842 adoption, disaggregated revenue, a $50 million credit line, and $3.4 million in stock-based compensation - The company adopted lease accounting standard ASC 842 on January 1, 2022, using the modified retrospective approach, resulting in the recognition of cumulative operating lease liabilities of **$52.8 million** and operating right-of-use assets of **$48.5 million**[46](index=46&type=chunk) Disaggregated Revenue (in thousands) | Revenue Source | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Subscription and payment processing | $31,950 | $23,899 | | Onboarding | $262 | $1,038 | | Phone hardware lease | $1,060 | $731 | | **Total revenue** | **$33,272** | **$25,668** | - The company has a **$50 million** revolving line of credit with Silicon Valley Bank, with **$10 million** outstanding as of March 31, 2022, subject to financial covenants if unrestricted cash falls below **$100 million**[71](index=71&type=chunk)[72](index=72&type=chunk) - Total stock-based compensation expense was **$3.4 million** for Q1 2022, up from **$1.8 million** in Q1 2021, with **$21.6 million** of unrecognized expense related to RSUs as of March 31, 2022[74](index=74&type=chunk)[82](index=82&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=23&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q1 2022 performance, highlighting 30% revenue growth, improved retention rates, increased net loss, and strong liquidity - Weave's business model focuses on an all-in-one customer communication and engagement software platform for small and medium-sized businesses (SMBs), expanding into new verticals like home services[92](index=92&type=chunk)[95](index=95&type=chunk) Key Business Metrics | Metric | March 31, 2022 | March 31, 2021 | | :--- | :--- | :--- | | Dollar-based net retention rate | 103% | 102% | | Dollar-based gross retention rate | 94% | 92% | Non-GAAP Financial Measures (in thousands) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Free cash flow | $(5,079) | $(7,593) | | Free cash flow margin | (15)% | (30)% | | Adjusted EBITDA | $(9,123) | $(6,335) | [Results of Operations](index=32&type=section&id=Results%20of%20Operations) Q1 2022 revenue grew 30% to $33.3 million, primarily from new customers, while operating expenses increased 40% due to higher personnel and public company costs - Revenue grew by **$7.6 million (30%)** year-over-year, with approximately **$7.0 million (92%)** of the increase attributable to new customers acquired after March 31, 2021[145](index=145&type=chunk)[146](index=146&type=chunk) - Sales and marketing expenses increased by **38%** to **$16.2 million**, primarily due to a **$3.4 million** increase in personnel-related expenses from higher headcount[148](index=148&type=chunk) - General and administrative expenses saw the largest percentage increase (**60%**) to **$9.6 million**, driven by higher personnel costs, a **$0.8 million** increase in liability insurance, and a **$0.7 million** increase in professional fees following the IPO[150](index=150&type=chunk)[151](index=151&type=chunk) [Liquidity and Capital Resources](index=35&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity with $128.9 million in cash, financed by equity and subscriptions, and expects sufficient funds for the next 12 months - The company had an accumulated deficit of **$195.7 million** and cash and cash equivalents of **$128.9 million** as of March 31, 2022[154](index=154&type=chunk)[155](index=155&type=chunk) - Net cash used in operating activities for Q1 2022 was **$4.2 million**, an improvement from **$5.3 million** in Q1 2021, primarily driven by the net loss of **$13.8 million** offset by non-cash charges and working capital changes[159](index=159&type=chunk)[160](index=160&type=chunk)[161](index=161&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=38&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Market risk exposure, including interest rate and foreign currency risks, remains materially unchanged since December 31, 2021 - There have been no material changes in the company's exposure to market risk, including interest rate and foreign currency risks, since the end of the previous fiscal year[177](index=177&type=chunk) [Controls and Procedures](index=38&type=section&id=Item%204.%20Controls%20and%20Procedures) Disclosure controls were ineffective as of March 31, 2022, due to ongoing material weaknesses in internal financial reporting, with a remediation plan in progress - Management concluded that disclosure controls and procedures were not effective as of March 31, 2022, due to ongoing material weaknesses in internal control over financial reporting[179](index=179&type=chunk) - The material weaknesses include not maintaining an effective control environment with sufficient accounting personnel and not maintaining effective controls for complex transactions like capitalization of contract costs and stock option valuation[181](index=181&type=chunk) - A remediation plan is in progress, which involves hiring more finance and accounting staff, using external consultants for complex accounting matters, and providing ongoing training[182](index=182&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=40&type=section&id=Item%201.%20Legal%20Proceedings) No material legal proceedings are currently anticipated to adversely affect the company's business or financial condition - As of the report date, Weave is not involved in any legal proceedings anticipated to have a significant impact on its financial condition or operations[187](index=187&type=chunk) [Risk Factors](index=40&type=section&id=Item%201A.%20Risk%20Factors) Key risks include historical losses, SMB customer reliance, COVID-19 impact, competition, system security, third-party dependencies, and regulatory compliance - The company has a history of net losses, including **$13.8 million** for Q1 2022, and may not achieve or sustain profitability in the future as it continues to invest in growth[211](index=211&type=chunk) - The business is subject to risks associated with serving Small and Medium-sized Businesses (SMBs), which have higher failure rates and are more susceptible to economic downturns[208](index=208&type=chunk) - The ongoing COVID-19 pandemic could continue to adversely impact the business by causing a slowdown in new customer acquisition, reduced customer demand, and delayed sales cycles[192](index=192&type=chunk)[193](index=193&type=chunk)[194](index=194&type=chunk) - Material weaknesses in internal control over financial reporting have been identified and are being remediated, with failure to maintain effective controls potentially resulting in material misstatements of financial statements[357](index=357&type=chunk)[358](index=358&type=chunk) - The company is subject to extensive government regulation, including FCC rules for VoIP services, TCPA for messaging, and data privacy laws like HIPAA, which expose it to compliance costs and potential liability[306](index=306&type=chunk)[315](index=315&type=chunk)[327](index=327&type=chunk) [Exhibits](index=89&type=section&id=Item%206.%20Exhibits) The exhibits section lists filed documents, including employment agreements, compensation policies, and CEO/CFO certifications - The exhibits filed with the report include management compensation plans, employment agreements, and certifications by the CEO and CFO as required by the Sarbanes-Oxley Act[401](index=401&type=chunk)

Financial Data and Key Metrics Changes - Total revenue in Q1 2022 grew 30% year-over-year to reach $33.3 million, exceeding guidance [8][25][26] - Non-GAAP gross margin improved to 59.1% from 57.4% in Q4 2021 [25][30] - Non-GAAP operating loss was $10.1 million, better than projected, with an operating margin of negative 30.3% [9][32] - Non-GAAP net loss was $10.4 million, or $0.16 per share, compared to a loss of $7.2 million or $0.59 per share a year ago [34] Business Line Data and Key Metrics Changes - The payments solution contributed to a net revenue retention rate of 103%, up from 102% in Q1 2021 [26][27] - Gross revenue retention rate remained strong at 94%, consistent with previous quarters [27] - The company saw increased adoption of its payments offerings, with 20% to 25% adoption at the point of sale for new locations [78] Market Data and Key Metrics Changes - The company continues to focus on core verticals: dental, optometry, and veterinary, where penetration is less than 10% [10][43] - The IT channel partner program expanded to over 250 partners, enhancing customer acquisition opportunities [14][70] Company Strategy and Development Direction - The company is focused on deepening penetration in core specialty healthcare verticals to capitalize on growth opportunities [11][43] - Changes in go-to-market strategies aim to improve sales efficiency and productivity, with a focus on digital marketing [12][40] - The company is optimistic about the future, with plans to enhance its operational capabilities and expand its leadership team [22][24] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the recovery of in-person events but remains cautious about returning to pre-pandemic levels [52] - The company is addressing labor market challenges by enhancing its employer brand and expanding its talent acquisition efforts, including opening an office in India [56][63] - Management expects to see benefits from recent changes in sales and marketing strategies in the second half of the year [41] Other Important Information - The company raised its full-year revenue guidance to $139 million to $142 million, reflecting a $2.5 million increase compared to previous expectations [37] - The company reported a free cash flow usage of $5.1 million, an improvement of $2.5 million compared to the prior year [35] Q&A Session Summary Question: Update on sales and marketing organization changes - Management is encouraged by early progress and expects benefits to materialize in the second half of the year [40][41] Question: Vertical expansion strategy - The focus remains on core verticals with less than 10% penetration, while still servicing home services customers [43] Question: Customer account updates - Customer count is disclosed annually, but growth continues [48] Question: Pricing increases acceptance - Price increases have been well accepted with no significant churn [49] Question: Recovery of in-person events - Cautious optimism about the return of live events, with a commitment to digital marketing efforts [52][53] Question: Hiring and talent retention environment - Labor market challenges persist, but the company is recognized as an employer of choice [56] Question: Attracting new talent - Changes in the go-to-market strategy and competitive wages have improved talent acquisition [61][63] Question: Dental service organization initiatives - Onboarding schedules are in line with customer needs, with expectations to onboard most locations by year-end [65] Question: Payments adoption tracking - Payments adoption is increasing, with efforts to drive awareness and upsell opportunities [78] Question: Vet integrations and lead generation - Both proactive and reactive strategies are being employed to leverage integrations for customer acquisition [80]

Financial Performance - Revenue for the year ended December 31, 2021, was $115.9 million, up from $79.9 million in 2020 and $45.7 million in 2019, indicating significant growth[85]. - The company incurred net losses of $51.7 million, $40.4 million, and $32.1 million in 2021, 2020, and 2019, respectively, with an accumulated deficit of $181.9 million as of December 31, 2021[99]. - The company expects its revenue growth rate to decline over time, which may hinder its ability to achieve and sustain profitability[100]. - Revenue from Weave Payments is dependent on customer usage, and failure to increase this usage could adversely affect financial performance[164]. - The revenue from Weave Payments varies based on payment volume and economic conditions, making it difficult to predict future revenue accurately[165]. Customer Acquisition and Retention - Customer locations under subscription increased to 23,831 as of December 31, 2021, compared to 18,539 in 2020 and 13,084 in 2019[85]. - The company experienced a slowdown in new customer acquisition beginning in the first half of 2020 due to the COVID-19 pandemic, particularly affecting small and medium-sized businesses (SMBs)[80]. - A majority of customers pay subscriptions on a monthly basis, with an increasing percentage opting for annual payments, but there is no contractual obligation for renewals[90]. - The company aims to increase adoption of additional products by existing customers, which is critical for revenue growth[92]. - Customer service and support are critical for onboarding and retaining customers, and any failure in this area could harm business relationships[131][133]. Market Expansion and Competition - The company has expanded operations internationally, launching sales operations in Canada in 2020 and establishing engineering and administrative operations in India in 2021[85]. - The company is targeting medium-sized businesses for sales of subscriptions, which may incur higher costs and longer sales cycles[98]. - The company aims to expand into new vertical markets, such as home services, which requires additional investments in marketing and product development[112][113]. - The market is highly competitive with low barriers to entry, and the company faces competition from existing point solutions and larger competitors with greater resources[121][126]. - Key competitive factors include platform breadth, ease of use, industry-specific capabilities, and pricing, which are critical for maintaining market position[123]. Operational Challenges - The company faces challenges in managing rapid growth, including high employee turnover, particularly in customer service and sales[85]. - The company anticipates increased marketing expenditures as it seeks to attract new customers, which may not result in immediate revenue recognition[118]. - The company has transitioned to a new installation model relying on third-party independent contractors, which may impact customer satisfaction and sales if not managed properly[167]. - The company faces intense competition for skilled employees, which may impact its ability to manage business effectively and develop its platform[182]. Regulatory and Compliance Risks - The company is subject to various regulatory requirements, including compliance with FCC regulations, which may increase costs and affect business operations[195]. - The company must comply with the STIR/SHAKEN caller ID authentication framework by June 30, 2022, to avoid regulatory enforcement actions[199]. - The company is subject to various data protection laws, including HIPAA, which mandates strict privacy and security standards for handling protected health information (PHI)[216]. - Non-compliance with HIPAA could result in civil penalties and substantial compliance costs for the company[217]. - The company faces potential liabilities due to unauthorized use of its platform for illegal activities, which could damage its reputation and lead to litigation[205]. Financial and Capital Structure - As of December 31, 2021, the company had $10.0 million outstanding under its loan and security agreement with Silicon Valley Bank[194]. - The loan agreement requires the company to maintain a consolidated minimum liquidity of $20 million if total unrestricted cash falls below $100 million[194]. - The company may require additional capital for growth, which might not be available on favorable terms, potentially affecting its ability to respond to business opportunities[275]. - The company has never declared or paid cash dividends and does not intend to do so in the foreseeable future, focusing instead on retaining earnings for business development[274]. Internal Controls and Governance - The company identified material weaknesses in internal control over financial reporting, which could lead to material misstatements in financial statements[244]. - Remediation efforts for identified material weaknesses include hiring additional finance personnel and engaging external consultants for complex accounting matters[247]. - The effectiveness of internal controls will be assessed as of December 31, 2022, with ongoing evaluations required thereafter[251]. - The company has limited experience managing a public company, which may divert attention from day-to-day operations[190]. Technology and Cybersecurity - Cybersecurity threats are increasing, and breaches could compromise business operations and customer trust, necessitating ongoing investments in security[140][141]. - The company relies on third-party hardware and software, making it vulnerable to supply chain constraints and potential disruptions[138]. - Integration with third-party applications is crucial, and any disruption in interoperability could negatively impact the company's platform and services[136]. - The company heavily relies on Google Cloud Platform (GCP) for its operations, and any disruption could materially affect business and financial results[154].

Financial Data and Key Metrics Changes - For the full year 2021, total revenue reached $115.9 million, up 45% year-over-year, driven by the addition of 5,292 net new customer locations, totaling 23,831 locations [10][28] - In Q4 2021, total revenue was $31.8 million, representing a 34% year-over-year increase [11][32] - The dollar-based net revenue retention rate was 130%, slightly up from 2020, indicating strong expansion within existing customer accounts [28] - Gross margin in Q4 declined to 57.4% from 58.4% year-over-year due to increased support organization costs [34] - Total operating expenses for Q4 were $28.9 million, a 35% increase year-over-year, aligned with higher revenue levels [35] Business Line Data and Key Metrics Changes - The company continues to focus on small and medium-sized businesses, particularly in the healthcare sector, which has shown resilience during the pandemic [9] - The Weave payment solution processed over $1 billion in payment volume since its launch in early 2020, indicating strong adoption [13] - The company expanded its offerings in the home services vertical, which is a new market opportunity [12][19] Market Data and Key Metrics Changes - The healthcare sector, particularly dental, optometry, and veterinary markets, remains a core focus, with significant growth opportunities identified [17][19] - The company is under 10% penetrated in each of its core markets, suggesting substantial room for growth [66] Company Strategy and Development Direction - The company aims to enhance its sales and marketing processes under the leadership of a newly appointed Chief Revenue Officer and Chief Marketing Officer [16][22] - A focus on maximizing opportunities within core verticals is emphasized, with plans to improve platform functionality and customer experience [18][19] - The company is adapting its go-to-market strategy to optimize lead generation and reduce customer acquisition costs [21][22] Management's Comments on Operating Environment and Future Outlook - Management acknowledged ongoing macroeconomic uncertainties, including the impact of the Omicron variant and inflationary pressures, which have affected sales and onboarding efforts [30][38] - The company anticipates that revenue growth will lag behind strategic initiatives in the first half of 2022, with expectations for renewed momentum in the latter half of the year [26][38] - Management remains optimistic about the company's competitive position and market share growth potential in core verticals [26][39] Other Important Information - The company completed its IPO in November 2021, raising $111.6 million, which enhances its financial flexibility [29][37] - Adjusted EBITDA for Q4 was negative $9.7 million, compared to negative $7 million in the prior year [36] Q&A Session Summary Question: Can you provide insights on the payments business and its performance? - Management expressed excitement about the payments solution, highlighting the recent hiring of a new payment sales leader to drive adoption and processing volume [44][45] Question: Is there a particular vertical that is more conservative in the guidance? - Management indicated that the cautious outlook is broadly applicable across all verticals, with no specific vertical being more impacted than others [46] Question: What are the customer behavior trends observed recently? - Management noted that the Omicron variant affected onboarding and sales, as customers faced staffing challenges, impacting the ability to coordinate installations [50][51] Question: What specific changes are being made to the go-to-market strategy? - The company has simplified its sales motion and reduced reliance on sales development representatives, transitioning to a full-cycle account executive model [54][55] Question: How is the company addressing sales force turnover? - Management acknowledged higher-than-anticipated turnover, attributing it to competition for talent and changes in the sales model, but remains optimistic about recruitment efforts [106][107]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________ FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2021 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number: 001-40998 Weave Communications, Inc. Delaware 26-3302902 (State or other jurisdiction of (I.R.S. Empl ...