Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed in Part II, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2022. Our historical results are not necessarily indicative of the results that may be expected in the future and our current quarterly results are not necessarily indicative of the results expected for the full year or any other period.
Overview
Xometry, Inc. (“Xometry”, “Company”, “our” or “we”) was incorporated in the State of Delaware in May 2013. Xometry is a global online marketplace connecting buyers with suppliers of manufacturing services, transforming one of the largest industries in the world. We use our proprietary technology to create a marketplace that enables buyers to efficiently source manufactured parts and assemblies, and empower suppliers of manufacturing services to grow their businesses. Xometry's corporate headquarters is located in North Bethesda, Maryland.
Our AI-enabled technology platform is powered by proprietary machine learning algorithms and a dataset, resulting in a sophisticated marketplace for manufacturing. As a result, buyers can procure the products they want on demand and suppliers can source new manufacturing opportunities that match their specific capabilities and capacity. Interactions on our platform provide rich data insights that allow us to continuously improve our AI models and create new products and services, fueling powerful network effects as we scale.
We use proprietary technology to enable product designers, engineers, buyers, and supply chain professionals to instantly access the capacity of a global network of manufacturing facilities. The Company’s platform makes it possible for buyers to quickly receive pricing, expected lead times, manufacturability feedback and place orders on the Company’s platform. The network allows the Company to provide high volumes of unique parts, including custom components and aftermarket parts for its buyers.
Our mission is to accelerate innovation by providing real time, equitable access to global manufacturing capacity and demand. Our vision is to drive efficiency, sustainability and innovation for industries worldwide by lowering the barriers to entry to the manufacturing ecosystem.
Our business benefits from a virtuous network liquidity effect, because adding buyers to our platform generates greater demand on our marketplace which in turn attracts more suppliers to the platform, allowing us to rapidly scale and increase the number of manufacturing processes offered on our platform. In order to continue to meet the needs of buyers and remain highly competitive, we expect to continue to add suppliers to our platform that have new and innovative manufacturing processes. Thus, our platform is unbounded by the in-house manufacturing capacity and processes of our current suppliers.
We define “buyers” as individuals who have placed an order to purchase on-demand parts or assemblies on our marketplace. Our buyers include engineers, product designers, procurement and supply chain personnel, inventors and business owners from businesses of a variety of sizes, ranging from self-funded start-ups to Fortune 100 companies. We define “accounts” as an individual entity, such as a sole proprietor with a single buyer or corporate entities with multiple buyers, having purchased at least one part on our marketplace. We define “suppliers” as individuals or businesses who have been approved by us to either manufacture a product on our platform for a buyer or have utilized our supplier services, including our financial services or the purchase of supplies.
The majority of our revenue is derived from the sale of part(s) and assemblies to our customers on our marketplace, which we refer to as marketplace revenue. The suppliers on our platform offer a diversified mix of manufacturing processes. These manufacturing processes include computer numerical control (“CNC”) manufacturing, sheet metal forming, sheet cutting, 3D printing (including fused deposition modeling, direct metal laser sintering, PolyJet, stereolithography, selective laser sintering, binder jetting, carbon digital light synthesis and multi jet fusion), die casting, stamping, injection molding, urethane casting, tube cutting, tube bending, as well as finishing services, rapid prototyping and high-volume production. We enable buyers to source these processes to meet complex and specific design and order needs across several industries, including Defense, Aerospace, Healthcare, Consumer Goods, Robotics, Government, Education, Automotive, Consumer Goods, and Industrial.
We empower suppliers to grow their manufacturing businesses and improve machine uptime by providing access to an extensive, diverse base of buyers. We also offer suppliers supporting products and services to meet their unique needs. Our suite of supplier services includes a cloud-based manufacturing execution system (“Workcenter”), access to competitively priced tools, materials and supplies from leading brands and financial service products to stabilize and enhance cash flow. In addition, we offer suppliers digital marketing and data solutions and SaaS based solutions to help suppliers optimize their productivity.
Our supplier services revenue primarily includes the sale of marketing services which includes advertising and to a lesser extent, supplies and financial service products that help our customers better manage cash flow at all stages of job production. Our financial services products, such as Xometry Pay, enable suppliers to stabilize and enhance their cash flows, supply discounts that
20
allow suppliers to lower their operating costs, and resource management tools to optimize their businesses. In 2021, we acquired Thomas Publishing Company (“Thomas”) and Fusiform, Inc. (d/b/a FactoryFour) (“FactoryFour”), expanding our basket of supplier services to include marketing and advertising services and to a lesser extent SaaS based solutions to help suppliers optimize their productivity. Our revenue from Thomas is primarily advertising revenue.
On January 2, 2023, the Company acquired Tridi Teknoloj A.S. (“Tridi”) located in Istanbul, Turkey pursuant to a Share Purchase Agreement. The acquisition of Tridi extends our marketplace capabilities in Europe and provides us access to the Turkish market.
Unfavorable conditions in the economy both in the United States and abroad may negatively affect the growth of our business and our results of operations. For example, macroeconomic events, including rising inflation, the U.S. Federal Reserve raising interest rates, disruptions in access to bank deposits or lending commitments due to bank failures, the Russia-Ukraine war and the COVID-19 pandemic, have led to economic uncertainty globally. Historically, during periods of economic uncertainty and downturns, businesses may slow spending on information technology and manufacturing, which may impact our business and our customers’ businesses.
The effect of macroeconomic conditions may not be fully reflected in our results of operations until future periods. If, however, economic uncertainty increases or the global economy worsens, our business, financial condition and results of operations may be harmed. For further discussion of the potential impacts of macroeconomic events on our business, financial condition, and operating results.
21
Key Marketplace Operational and Business Metrics
In addition to the measures presented in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, we use the following key operational and business metrics to help us evaluate our marketplace business, measure our performance, identify trends affecting our business, formulate business plans and develop forecasts, and make strategic decisions:
Active Buyers
We define Active Buyers as the number of buyers who have made at least one purchase on our marketplace during the last twelve months. An increase or decrease in the number of Active Buyers is a key indicator of our ability to attract, retain and engage buyers on our platform.
Active Buyers has consistently grown over time. The number of Active Buyers on our platform reached 44,716 as of March 31, 2023, up 46% from 30,683 as of March 31, 2022. The key drivers of Active Buyer growth are continued account and buyer engagement and the success of our strategy to attract new buyers.
22
Percentage of Revenue from Existing Accounts
We define an existing account as an account where at least one buyer has made a purchase on our marketplace. We believe the efficiency and transparency of our business model leads to increasing account stickiness and spend over time. Buyers can utilize our marketplace for both one-off and recurring manufacturing opportunities. For example, a buyer may choose to utilize our marketplace’s CNC manufacturing processes to manufacture a discrete component for a prototype, and then may choose to later use our marketplace to mass produce that same component. A buyer may also recommend our marketplace to other engineers within their organizations who are designing other products and who may use an entirely different set of manufacturing processes, deepening our reach and stickiness with an account.
For the quarter ended March 31, 2023, 96% of our revenue was generated from existing accounts. We believe the repeat purchase activity from existing accounts reflects the underlying strength of our business and provides us with substantial revenue visibility and predictability.
23
Accounts with Last Twelve-Month Spend of At Least $50,000
Accounts with Last Twelve-Month, or LTM, Spend of At Least $50,000 means an account that has spent at least $50,000 on our marketplace in the most recent twelve-month period. We view the acquisition of an account as a foundation for the addition of long-term buyers to our marketplace. Once an account joins our platform, we aim to expand the relationship and increase engagement and spending activities from that account over time. The number of accounts with LTM Spend of at least $50,000 on our platform reached 1,109 as of March 31, 2023, up 40% from 790 as of March 30, 2022.
Active Paying Suppliers
We define Active Paying Suppliers as individuals or businesses who have purchased one or more of our supplier services, including digital marketing services, data services, financial services or supplies on our platforms during the last twelve months. An increase or decrease in the number of Active Paying Suppliers is a key indicator of our ability to engage suppliers on our platform.
Active Paying Suppliers has consistently grown over time. The number of Active Paying Suppliers on our platform reached 7,621 as of March 31, 2023, up 11% from 6,872 as of March 31, 2022. The key drivers of Active Paying Suppliers are continued supplier engagement and the success of our strategy to attract new suppliers.
Adjusted EBITDA
We define Adjusted EBITDA as net loss, adjusted for interest expense, interest and dividend income and other expenses, income tax provision (benefit), and certain other non-cash or non-recurring items impacting net loss from time to time, principally comprised of depreciation and amortization, amortization of lease intangible, stock-based compensation, charitable contributions of common stock, income from an unconsolidated joint venture, impairment of assets, restructuring charges and acquisition and other adjustments not reflective of the Company's ongoing business, such as adjustments related to purchase accounting, the revaluation of
24
contingent consideration and transaction costs. Adjusted EBITDA is a performance measure that we use to assess our operating performance and the operating leverage in our business. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA for a period by revenue for the same period.
For the three months ended March 31, 2023, Adjusted EBITDA loss decreased to $(11.8) million, as compared to Adjusted EBITDA loss of $(12.7) million for the same quarter in 2022. For the quarter ended March 31, 2023, Adjusted EBITDA Margin decreased to (11)% of revenue, as compared to (15)% of revenue for the same quarter in 2022, driven primarily by increased operating efficiencies as we continue to grow our revenue and margins faster than our expenses.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Net loss |
|
$ |
(18,343 |
) |
|
$ |
(19,995 |
) |
Add (deduct) |
|
|
|
|
|
|
Interest expense, interest and dividend income and other expenses |
|
|
(1,514 |
) |
|
|
1,635 |
|
Depreciation and amortization |
|
|
2,566 |
|
|
|
1,799 |
|
Amortization of lease intangible |
|
|
333 |
|
|
|
333 |
|
Income tax provision (benefit) |
|
|
136 |
|
|
|
(559 |
) |
Stock based compensation |
|
|
4,694 |
|
|
|
3,456 |
|
Acquisition and other |
|
|
30 |
|
|
|
639 |
|
Charitable contribution of common stock |
|
|
370 |
|
|
|
— |
|
Income from unconsolidated joint venture |
|
|
(66 |
) |
|
|
(34 |
) |
Impairment of assets |
|
|
27 |
|
|
|
— |
|
Adjusted EBITDA |
|
$ |
(11,767 |
) |
|
$ |
(12,726 |
) |
Non-GAAP Net Loss
We define Non-GAAP net loss, as net loss adjusted for depreciation and amortization, stock-based compensation expense, amortization of lease intangible, amortization of deferred costs on convertible notes, losses on marketable securities, loss on sale of property and equipment, charitable contributions of common stock, impairment of assets, restructuring charges and acquisition and other adjustments not reflective of the Company's ongoing business, such as adjustments related to purchase accounting, the revaluation of contingent consideration and transaction costs.
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Non-GAAP Net Loss: |
|
|
|
|
|
|
Net loss |
|
$ |
(18,343 |
) |
|
$ |
(19,995 |
) |
Add (deduct): |
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,566 |
|
|
|
1,799 |
|
Stock-based compensation |
|
|
4,694 |
|
|
|
3,456 |
|
Amortization of lease intangible |
|
|
333 |
|
|
|
333 |
|
Amortization of deferred costs on convertible notes |
|
|
466 |
|
|
|
312 |
|
Loss on marketable securities |
|
|
— |
|
|
|
858 |
|
Acquisition and other |
|
|
30 |
|
|
|
639 |
|
Loss on sale of property and equipment |
|
|
91 |
|
|
|
— |
|
Charitable contribution of common stock |
|
|
370 |
|
|
|
— |
|
Impairment of assets |
|
|
27 |
|
|
|
— |
|
Non-GAAP Net Loss |
|
$ |
(9,766 |
) |
|
$ |
(12,598 |
) |
25
For the three months ended March 31, 2023, Non-GAAP net loss decreased to $(9.8) million, as compared to Non-GAAP net loss of $(12.6) million for the same quarter in 2022. For the quarter ended March 31, 2023, Non-GAAP net loss decreased to (9)% of revenue, as compared to (15)% of revenue for the same quarter in 2022.
Adjusted EBITDA and Non-GAAP net loss are non-GAAP financial measures that we use, in addition to our GAAP financial measures, to evaluate our business. We have included Adjusted EBITDA and Non-GAAP net loss in this filing because they are key measures used by our management to evaluate our operating performance. Accordingly, we believe that Adjusted EBITDA and Non-GAAP net loss provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team and board of directors. Our calculation of Adjusted EBITDA and Non-GAAP net loss may differ from similarly titled non-GAAP measures, if any, reported by our peer companies and therefore may not serve as an accurate basis of comparison among companies. Adjusted EBITDA and Non-GAAP net loss should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.
Components of Results of Operations
Revenue
Our marketplace revenue is primarily comprised of sales to customers through our platform. Buyers purchase specialized CNC manufacturing, sheet metal manufacturing, 3D printing, injection molding, urethane casting, tube cutting, tube bending and finishing services. Customer purchases range from rapid prototyping of single parts to high-volume production on our marketplace. These products are primarily manufactured by our network of suppliers.
Supplier services revenue includes the sale of marketing and advertising services, and to a lesser extent the sale of supplies, financial service products and SaaS based solutions.
Cost of Revenue
Marketplace cost of revenue primarily consists of the cost to us of the products that are manufactured or produced by us or our suppliers for delivery to buyers on our platform, internal and external production costs, shipping costs and certain internal depreciation. We expect cost of revenue to increase in absolute dollars to the extent our revenue increases and transaction volume increases. As we grow and add suppliers to our platform, we are able to improve our pricing efficiency, we expect cost of revenue to decline as a percentage of revenue over time.
Cost of revenue for supplier services primarily consists of internal and external production costs and website hosting.
Gross Profit
Gross profit, or revenue less cost of revenue, is primarily affected by the growth of our revenue. Our gross profit margin is primarily affected by liquidity of our suppliers’ network and the efficiency of our pricing and will be benefited by increasing the use of existing supplier services and the variety of supplier services offerings over time.
Operating Expenses
Our operating expenses consist of sales and marketing, operations and support, product development and general and administrative functions.
Sales and Marketing
Sales and marketing expenses are expensed as incurred and include the costs of our digital marketing strategies, branding costs and other advertising costs, certain depreciation and amortization expense, contract acquisition costs and compensation expenses, including stock-based compensation, to our sales and marketing employees. We intend to continue to invest in our sales and marketing capabilities in the future to continue to increase our brand awareness, add new accounts and further penetrate existing accounts. We expect sales and marketing expense to increase in absolute dollars in the future as we grow our business, though in the near-term sales and marketing expenses may fluctuate from period-to-period based on the timing of our investments in our sales and marketing functions as these investments may vary in scope and scale over future periods.
Operations and Support
Operations and support expenses are the costs we incur in support of the buyers and suppliers on our platform which are provided by phone, email and chat for purposes of resolving buyer and suppliers related matters. These costs primarily consist of compensation expenses of the support staff, including stock-based compensation, certain depreciation and amortization expense and software costs used in delivering buyer and suppliers services. We expect operations and support expense to increase in absolute dollars in the future, though in the near-term operations and support expenses may fluctuate from period-to-period based on total revenue levels and the timing of our investments in our operations and support functions as these investments may vary in scope and scale over future periods.
26
Product Development
Product development costs which are not eligible for capitalization are expensed as incurred. This account also includes compensation expenses, including stock-based compensation expenses to our employees performing these functions and certain depreciation and amortization expense. We expect product development expense to increase in absolute dollars in the future, though in the near-term product development expenses may fluctuate from period-to-period based on total revenue levels and the timing of our investments in our product development functions as these investments may vary in scope and scale over future periods.
General and Administrative
General and administrative expenses primarily consist of compensation expenses, including stock-based compensation expenses, for executive, finance, legal and other administrative personnel, professional service fees and certain depreciation and amortization expense. We expect our general and administrative expenses to increase. We expect to incur additional general and administrative expenses as a result of operating as a public company, including as a result of increased legal, accounting, and directors’ and officers’ insurance expenses.
Other (Expenses) Income
Interest Expense
Interest expense consists of interest incurred on our outstanding borrowings under our outstanding convertible notes or other borrowings.
Interest and Dividend Income
Interest and dividend income consists of interest and dividends on our cash, cash equivalents and marketable securities.
Other Income (Expenses)
Other income (expenses) consist primarily of realized and/or unrealized losses and other expenses.
Income from Unconsolidated Joint Venture
Income from unconsolidated joint venture consists of our share of the joint venture's income.
27
Results of Operations
Comparison of the Three Months Ended March 31, 2023 and 2022
The following table sets forth our unaudited statements of operations data for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(in thousands) |
|
Revenue |
|
$ |
105,326 |
|
|
$ |
83,671 |
|
Cost of revenue |
|
|
65,957 |
|
|
|
50,732 |
|
Gross profit |
|
|
39,369 |
|
|
|
32,939 |
|
Operating expenses: |
|
|
|
|
|
|
Sales and marketing |
|
|
22,439 |
|
|
|
19,285 |
|
Operations and support |
|
|
12,608 |
|
|
|
12,358 |
|
Product development |
|
|
8,125 |
|
|
|
7,290 |
|
General and administrative |
|
|
15,957 |
|
|
|
12,959 |
|
Impairment of assets |
|
|
27 |
|
|
|
— |
|
Total operating expenses |
|
|
59,156 |
|
|
|
51,892 |
|
Loss from operations |
|
|
(19,787 |
) |
|
|
(18,953 |
) |
Other (expenses) income: |
|
|
|
|
|
|
Interest expense |
|
|
(1,198 |
) |
|
|
(769 |
) |
Interest and dividend income |
|
|
2,695 |
|
|
|
96 |
|
Other income (expenses) |
|
|
17 |
|
|
|
(962 |
) |
Income from unconsolidated joint venture |
|
|
66 |
|
|
|
34 |
|
Total other income (expenses) |
|
|
1,580 |
|
|
|
(1,601 |
) |
Loss before income taxes |
|
|
(18,207 |
) |
|
|
(20,554 |
) |
(Provision) benefit for income taxes |
|
|
(136 |
) |
|
|
559 |
|
Net loss |
|
|
(18,343 |
) |
|
|
(19,995 |
) |
Net income attributable to noncontrolling interest |
|
|
1 |
|
|
|
17 |
|
Net loss attributable to common stockholders |
|
$ |
(18,344 |
) |
|
$ |
(20,012 |
) |
28
The following table sets forth our unaudited statements of operations data expressed as a percentage of total revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
|
|
|
|
|
Revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenue |
|
|
62.6 |
% |
|
|
60.6 |
% |
Gross profit |
|
|
37.4 |
% |
|
|
39.4 |
% |
Operating expenses: |
|
|
|
|
|
|
Sales and marketing |
|
|
21.3 |
% |
|
|
23.0 |
% |
Operations and support |
|
|
12.0 |
% |
|
|
14.8 |
% |
Product development |
|
|
7.7 |
% |
|
|
8.7 |
% |
General and administrative |
|
|
15.2 |
% |
|
|
15.5 |
% |
Impairment of assets |
|
|
— |
% |
|
|
— |
% |
Total operating expenses |
|
|
56.2 |
% |
|
|
62.0 |
% |
Loss from operations |
|
|
(18.8 |
)% |
|
|
(22.6 |
)% |
Other (expenses) income: |
|
|
|
|
|
|
Interest expense |
|
|
(1.1 |
)% |
|
|
(0.9 |
)% |
Interest and dividend income |
|
|
2.6 |
% |
|
|
0.1 |
% |
Other income (expenses) |
|
|
— |
% |
|
|
(1.1 |
)% |
Income from unconsolidated joint venture |
|
|
0.1 |
% |
|
|
— |
% |
Total other income (expenses) |
|
|
1.6 |
% |
|
|
(1.9 |
)% |
Loss before income taxes |
|
|
(17.2 |
)% |
|
|
(24.5 |
)% |
(Provision) benefit for income taxes |
|
|
(0.1 |
)% |
|
|
0.7 |
% |
Net loss attributable to common stockholders |
|
|
(17.3 |
)% |
|
|
(23.8 |
)% |
Net income attributable to noncontrolling interest |
|
|
— |
% |
|
|
— |
% |
Net loss attributable to common stockholders |
|
|
(17.3 |
)% |
|
|
(23.8 |
)% |
The following tables present our disaggregated revenue and cost of revenue. Revenue from our marketplace primarily reflects the sales of parts and assemblies on our platform. Revenue from supplier services primarily includes the sale of advertising and to a lesser extent supplies, financial service products and SaaS products.
Revenue and cost of revenue is presented in the following tables for the three months ended March 31, 2023 and 2022 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
|
|
|
|
2023 |
|
|
2022 |
|
Marketplace |
|
|
|
|
|
|
Revenue |
|
$ |
86,680 |
|
|
$ |
64,415 |
|
Cost of revenue |
|
|
61,747 |
|
|
|
46,741 |
|
Gross Profit |
|
$ |
24,933 |
|
|
$ |
17,674 |
|
|
|
|
|
|
|
|
Supplier services |
|
|
|
|
|
|
Revenue |
|
$ |
18,646 |
|
|
$ |
19,256 |
|
Cost of revenue |
|
|
4,210 |
|
|
|
3,991 |
|
Gross Profit |
|
$ |
14,436 |
|
|
$ |
15,265 |
|
Revenue
Total revenue increased $21.7 million, or 26%, from $83.7 million for the three months ended March 31, 2022 to $105.3 million for the three months ended March 31, 2023. This growth was a result of an increase in marketplace revenue, partially offset by a decrease in supplier services revenue. Total revenue from marketplace and supplier services for the three months ended March 31, 2023 was $86.7 million and $18.6 million, respectively, as compared to $64.4 million and $19.3 million, respectively for the three months ended March 31, 2022. Marketplace revenue increased $22.3 million, or 35% from $64.4 million for the three months ended March 31, 2022 to $86.7 million for the three months ended March 31, 2023. The increase in marketplace revenue was primarily due increased buyers activity on the platform for the three months ended March 31, 2023, as compared to the prior year period.
29
Supplier services revenue decreased $0.6 million, or 3% from $19.3 million for the three months ended March 31, 2022 to $18.6 million for the three months ended March 31, 2023.
Total revenue for the three months ended March 31, 2023 and 2022, was $93.9 million and $77.2 million, respectively, for the U.S. operating segment, and $11.4 million and $6.5 million, respectively, for the International operating segment.
Cost of Revenue
Total cost of revenue increased $15.2 million, or 30%, from $50.7 million for the three months ended March 31, 2022 to $66.0 million for the three months ended March 31, 2023. This increase was primarily the result of an increase in marketplace cost of revenue and to a lesser extent an increase in supplier services costs of revenue. Total cost of revenue from marketplace and supplier services for the three months ended March 31, 2023 was $61.7 million and $4.2 million, respectively, as compared to $46.7 million and $4.0 million, respectively for the three months ended March 31, 2022.
Marketplace cost of revenue was driven by increased payments to suppliers on our platform due to order growth and increased activity on our marketplace.
Gross Profit and Margin
Gross profit increased $6.4 million, or 20%, from $32.9 million for the three months ended March 31, 2022 to $39.4 million for the three months ended March 31, 2023. The increase in gross profit was primarily due to increases in revenue from marketplace and improved marketplace gross margins as compared to the prior year period.
Gross margin for marketplace was 28.8% for the three months ended March 31, 2023, as compared to 27.4% for the three months ended March 31, 2022. The improvement over the prior year period was due in part to our AI-driven platform and increasing supplier selection. Pricing has become more efficient due to the increased number of orders over time, improving the data set and thus making our pricing decisions more accurate. Additionally, we continue to grow our active suppliers resulting in more competition for buyers’ orders and therefore a lower cost of revenue. Gross margin for our supplier services was 77.4% for the three months ended March 31, 2023, as compared to 79.3% for the three months ended March 31, 2022. The decline in gross margin for supplier services is primarily due to lower gross margin on the sale of supplies.
Operating Expenses
Sales and Marketing
Sales and marketing expense increased $3.2 million, or 16%, from $19.3 million for the three months ended March 31, 2022 to $22.4 million for the three months ended March 31, 2023, primarily due to additional sales employees and compensation costs including stock-based compensation, increases in marketing and advertising spend, commissions and consulting expense. As a percent of total revenue, sales and marketing expenses decreased to 21.3% for the three months ended March 31, 2023 from 23.0% for the three months ended March 31, 2022.
Operations and Support
Operations and support increased $0.3 million, or 2%, from $12.4 million for the three months ended March 31, 2022 to $12.6 million for the three months ended March 31, 2023, primarily due to hiring of additional operations and support employees and their compensation costs including stock-based compensation, partly offset by lower consulting expenses. As a percent of total revenue, operations and support expenses decreased to 12.0% for the three months ended March 31, 2023 from 14.8% for the three months ended March 31, 2022.
Product Development
Product development expense increased $0.8 million, or 11%, from $7.3 million for the three months ended March 31, 2022 to $8.1 million for the three months ended March 31, 2023, primarily as result of increases in depreciation expense related to developed software assets, hiring additional product development employees and their compensation, including stock-based compensation and additional software costs. As a percent of total revenue, product development expenses decreased to 7.7% for the three months ended March 31, 2023 from 8.7% for the three months ended March 31, 2022.
General and Administrative
General and administrative expense increased $3.0 million, or 23%, from $13.0 million for the three months ended March 31, 2022 to $16.0 million for the three months ended March 31, 2023. The primary driver of the increase was due to higher professional fees related to accounting and legal services of which approximately $0.8 million was associated with Sarbanes-Oxley Act implementation. In addition, we incurred higher software and maintenance costs, consulting expenses, stock-based compensation expense and facilities costs. We also donated $0.4 million of Class A common stock to our donor advised fund and had lower acquisition and other related costs. These increases were partially offset by a reduction in payroll related costs due to the reduction in
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force that occurred in January 2023 and lower acquisition related costs. As a percent of total revenue, general and administrative expenses decreased to 15.2% for the for the three months ended March 31, 2023 from 15.5% for the three months ended March 31, 2022.
Other (Expenses) Income
Interest Expense
Interest expense increased by $0.4 million, or 56%, from $0.8 million for the three months ended March 31, 2022 to $1.2 million for the three months ended March 31, 2023, primarily as a result of the interest on the 2027 convertible notes issued in February 2022.
Interest and Dividend Income
Interest and dividend income increased by $2.6 million, or 2,707%, from $0.1 million for the three months ended March 31, 2022 to $2.7 million for the three months ended March 31, 2023, primarily due to dividend income from our marketable securities.
Other Income (Expenses)
Other income (expenses) changed by $1.0 million, or 102%, from $(1.0) million for the three months ended March 31, 2022 to $17,000 for the three months ended March 31, 2023, as a result of decreased losses on our marketable securities.
Income from Unconsolidated Joint Venture
Income from unconsolidated joint venture increased $32,000 due to our 50% interest in Industrial Media, LLC.
Additional Segment Considerations
Total segment loss from our U.S. operating segment for the three months ended March 31, 2023 and 2022, was $12.9 million and $16.3 million, respectively. Total segment loss from our International operating segment for the three months ended March 31, 2023 and 2022, was $5.4 million and $3.7 million, respectively.
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Liquidity and Capital Resources
General
We have financed our operations primarily through sales of our equity securities and borrowings under our convertible notes. As of March 31, 2023, our cash and cash equivalents and marketable securities totaled $296.2 million. We believe our existing cash and cash equivalents and marketable securities will be sufficient to support our working capital and capital expenditure requirements for at least the next twelve months and over the long-term. We believe we will meet our longer-term expected future cash requirements primarily from a combination of cash flow from operating activities and available cash and cash equivalents and marketable securities. We may also engage in equity or debt financings to secure additional funds. Our future capital requirements will depend on many factors, including our revenue growth rate, receivable and payable cycles, the timing and extent of investments in product development, sales and marketing, operations and support and general and administrative expenses.
Our capital expenditures consist primarily of internal-use software costs, manufacturing equipment, computers and peripheral equipment, furniture and fixtures and leasehold improvements and patents.
Convertible Notes due 2027
In February 2022, we entered into a purchase agreement with certain counterparties for the sale of an aggregate of $287.5 million principal amount of convertible senior notes due in 2027 (the “2027 Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The 2027 Notes consisted of a $250 million initial placement and an over-allotment option that provided the initial purchasers of the 2027 Notes with the option to purchase an additional $37.5 million aggregate principal amount of the 2027 Notes, which was fully exercised. The 2027 Notes were issued pursuant to an indenture dated February 4, 2022. The net proceeds from the issuance of the 2027 Notes were $278.2 million, net of debt issuance costs. The debt issuance costs are amortized to interest expense using the effective interest rate method.
The 2027 Notes are unsecured obligations which bear regular interest at 1% per annum and for which the principal balance will not accrete. Interest payment are due on February 1 and August 1 of each year the Notes remain outstanding. The 2027 Notes will mature on February 1, 2027 unless repurchased, redeemed, or converted in accordance with their terms prior to such date.
The 2027 Notes are convertible into cash, shares of our Class A common stock, or a combination of cash and shares of our Class A common stock, at our election, at an initial conversion rate of 17.8213 shares of Class A common stock per $1,000 principal amount of 2027 Notes, which is equivalent to an initial conversion price of approximately $56.11 per share of our Class A common stock. The conversion rate is subject to customary adjustments for certain events as described in the indenture governing the 2027 Notes.
We may redeem for cash all or any portion of the 2027 Notes, at our option, on or after February 5, 2025 if the last reported sale price of our Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days at a redemption price equal to 100% of the principal amount of the 2027 Notes to be redeemed, plus accrued and unpaid interest or additional interest, if any.
Holders of the 2027 Notes may convert all or a portion of their 2027 Notes at their option prior to November 1, 2026, in multiples of $1,000 principal amounts, only under the following circumstances:
•if the last reported sale price of our Class A common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than or equal to 130% of the applicable conversion price of the 2027 Notes on each such trading day;
•during the five-business day period after any ten consecutive trading day period in which the trading price per $1,000 principal amount of the 2027 Notes for each day of that ten consecutive trading day period was less than 98% of the product of the last reported sale price of our Class A common stock and the applicable conversion rate of the 2027 Notes;
•on a notice of redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, in which case we may be required to increase the conversion rate for the 2027 Notes so surrendered for conversion in connection with such redemption notice; or
•on the occurrence of specified corporate events.
On or after November 1, 2026, the 2027 Notes are convertible at any time until the close of business on the second scheduled trading day immediately preceding the maturity date.
Holders of the 2027 Notes who convert the 2027 Notes in connection with a make-whole fundamental change, as defined in the indenture governing the 2027 Notes, or in connection with a redemption are entitled to an increase in the conversion rate. Additionally, in the event of a fundamental change, holders of the 2027 Notes may require us to repurchase all or a portion of the 2027 Notes at a price equal to 100% of the principal amount of 2027 Notes, plus any accrued and unpaid special interest, if any.
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We accounted for the issuance of the 2027 Notes as a single liability measured at its amortized cost, as no other embedded features require bifurcation and recognition as derivatives.
As of March 31, 2023, the 2027 Notes have a carrying value of $280.4 million with an effective annual interest rate of 1.6%.
Cash Flows
The following table presents a summary of our cash flows from operating, investing, and financing activities for the three months ended March 31, 2023 and 2022.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(in thousands) |
|
Net cash used in operating activities |
|
$ |
(16,455 |
) |
|
$ |
(24,259 |
) |
Net cash used in investing activities |
|
|
(10,000 |
) |
|
|
(282,465 |
) |
Net cash provided by financing activities |
|
|
483 |
|
|
|
279,460 |
|
Operating Activities
For the three months ended March 31, 2023, net cash used in operating activities was $16.5 million, primarily due to a net loss of $(18.3) million adjusted for non-cash charges of $10.1 million and a net decrease in our operating assets and liabilities of $(8.2) million. The non-cash adjustments primarily relate to stock-based compensation of $4.7 million, depreciation and amortization of $2.6 million, and $1.9 million of reduction to our right of use lease assets. The net decrease in operating assets and liabilities is primarily driven by an increase in accounts receivable of $2.8 million, an increase in other assets of $3.7 million, and a decrease in accrued expenses of $2.1 million. These decreases were offset by an increase in contract liabilities of $1.4 million.
For the three months ended March 31, 2022, net cash used in operating activities was $24.3 million, primarily due to a net loss of $(20.0) million adjusted for non-cash charges of $8.1 million and a net decrease in our operating assets and liabilities of $(12.4) million. The non-cash adjustments primarily relate to stock-based compensation of $3.5 million, depreciation and amortization of $1.8 million, $0.9 unrealized loss on marketable securities, and $1.8 million of reduction to our right of use lease assets. The net decrease in operating assets and liabilities is primarily driven by an increase in accounts receivable of $6.1 million, a $1.8 million increase other assets, a decrease in accounts payable of $2.8 million and accrued expenses of $2.8 million. These decreases are partially offset by an increase in contract liabilities of $2.1 million.
Investing Activities
For the three months ended March 31, 2023, net cash used in investing activities was $10.0 million, primarily due to the purchase of property and equipment (which includes internal-use software development costs) of $4.2 million, $3.3 million for the acquisition of Tridi and $2.7 million for the purchase of marketable securities.
Cash used in investing activities was $282.5 million during the three months ended March 31, 2022, primarily due to the purchase of marketable securities of $280.1 million and $2.5 million for purchases of property and equipment (which includes internal-use software development costs).
Financing Activities
For the three months ended March 31, 2023, net cash provided by financing activities was $0.5 million, all relating to proceeds from the exercise of stock options.
Cash provided by financing activities was $279.5 million during the three months ended March 31, 2022, reflecting $287.5 million of proceeds from the issuance of the 2027 convertible senior notes. These inflows were offset by $9.3 million of convertible note costs incurred in connection with these notes.
Critical Accounting Estimates
Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. For additional information about our critical accounting policies and estimates, see the disclosure included in our Annual Report on Form 10-K as well as Note 2 – Basis of Presentation and Summary of Significant Accounting Policies in the notes to the condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.
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Recent Accounting Pronouncements
For a description of our recently adopted accounting pronouncements and recently issued accounting standards not yet adopted, see Note 2 – Basis of Presentation and Summary of Significant Accounting Policies in the notes to the condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.