Weave munications(WEAV) - 2022 Q3 - Quarterly Report

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)