Xometry, Inc. (XMTR) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Overview
Xometry Inc. (“Xometry”, “Company”, “our” or “we”) was incorporated in the State of Delaware in May 2013. Xometry uses 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 customers 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 customers. Xometry's corporate headquarters is located in Derwood, Maryland.
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.
We are a leading AI-enabled digital manufacturing marketplace for manufacturing, 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 empowers sellers of manufacturing services to grow their businesses.
We define “buyers” as individuals who have placed an order to purchase 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 “sellers” 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 seller services, including our digital marketing services, data services, financial services or supplies.
Our revenue is primarily generated by the sale of part(s) and assemblies to our customers. The sellers on our platform offer a diversified mix of manufacturing processes. These manufacturing processes include CNC manufacturing, sheet metal manufacturing, 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, injection molding, urethane casting, 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, Automotive, Consumer Goods, Industrial, Robotics, Government, and Education.
In addition, in mid-2020 we launched a suite of financial products and services to help our sellers better manage cash flow at all stages of job production from which we have generated a marginal amount of revenue to date. Our financial services products, such as Xometry Pay, enable sellers to stabilize and enhance their cash flows, supply discounts that allow sellers to lower their operating costs, and resource management tools to optimize their businesses. In 2021, we acquired Thomas and FactoryFour, expanding our basket of seller services to include digital marketing and data solutions and SaaS based solutions to help sellers optimize their productivity.
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 sellers 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 sellers 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 sellers.
On July 2, 2021, we closed our initial public offering (“IPO”), in which we issued and sold 7,906,250 shares of our Class A common stock at an initial offering price of $44.00 per share. We received net proceeds of approximately $325.3 million from the IPO after deducting underwriting discounts and commissions of $22.6 million, and we incurred approximately $3.7 million of other offering costs.
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Upon the closing of the IPO on July 2, 2021, 8,665,797 shares of outstanding common stock were reclassified into Class A common stock, 27,758,941 shares of outstanding convertible preferred stock were converted into Class A common stock, and 2,676,154 shares of Class A common stock were exchanged by our co-founders for an equivalent number of shares of Class B common stock pursuant to the terms of the exchange agreement.
Also on July 2, 2021, the Company reserved 402,658 shares of its Class A common stock, representing 1% of the Company's fully diluted capitalization as of the date of approval by our board of directors, for charitable contributions to non-profit organizations. These shares will be issued over the next five years, in an amount not to exceed 20% of the initial reserve amount per calendar year. During 2021, the Company donated 40,266 shares of Class A common stock to a donor advised fund and recognized an expense associated with the charitable contribution of approximately $2.2 million which is recorded in general and administrative expense in the Consolidated Statements of Operations and Comprehensive Loss.
On November 1, 2021, the Company acquired certain assets and liabilities from Big Blue Saw LLC ("Big Blue Saw"), subject to an Asset Purchase Agreement for total consideration of $2.5 million. The total consideration includes cash consideration at closing of $1.25 million, $250,000 of Class A common stock at closing and contingent consideration up to $1.0 million. Big Blue Saw extends our marketplace capabilities in water jet and laser cutting.
On November 5, 2021, the Company acquired certain assets and liabilities from Fusiform, Inc. (d.b.a FactoryFour), subject to an Asset Purchase Agreement for total consideration of $6.3 million. The total consideration includes cash consideration at closing of $1.9 million, $1.9 million of Class A common stock at closing and contingent consideration up to $2.5 million. FactoryFour will provide a SaaS based solution to help manufacturers in the Xometry marketplace improve lead times and make strong, data-driven decisions through real-time production tracking.
On December 7, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Thomas Publishing Company, a New York corporation (“Thomas”), NAASOM Merger Sub Inc., a Delaware corporation and wholly owned subsidiary of the Company (“Merger Sub”), and Shareholder Representative Services LLC, as the shareholders’ representative thereunder. Pursuant to the Merger Agreement, Merger Sub merged with and into Thomas, with Thomas continuing as the surviving corporation and becoming a wholly owned subsidiary of the Company (the “Acquisition”), effective December 9, 2021. The aggregate consideration payable in exchange for all of the outstanding equity interests of Thomas was $300 million subject to customary adjustments as set forth in the Merger Agreement, payable in cash and shares of the Company’s Class A common stock. The Company paid approximately $198.5 million of cash and issued 2,073,422 shares of the Company’s Class A common stock to holders of Thomas shares. The acquisition of Thomas is expected to rapidly expand Xometry’s buyer and seller base, significantly enhancing Xometry’s global digital marketplace for manufacturers. Xometry also expects to leverage Thomas’ marketing and data services to deliver an unmatched suite of end-to-end services for sellers with additional financial services and digital marketing products.
On February 4, 2022, the Company completed a private offering of $250 million aggregate principal amount of 1.00% Convertible Senior Notes due 2027 (the “Initial Notes”). The Initial Notes were issued pursuant to an indenture, dated February 4, 2022 (the “Indenture”), between the Company and U.S. Bank Trust Company, National Association, as trustee.
On February 10, 2022, the Company issued an additional $37.5 million aggregate principal amount of its 1.00% Convertible Senior Notes due 2027 (the “Additional Notes”) to the initial purchasers named in the purchase agreement. The issuance of the Additional Notes was pursuant to the initial purchasers’ exercise in full of their 13-day option to purchase Additional Notes granted in the original offering of $250 million aggregate principal amount of 1.00% Convertible Senior Notes due 2027. The proceeds from the Initial Notes and the Additional Notes (collectively referred to as the “Notes”) are expected to be used for working capital and other general corporate purposes. The Company may also use a portion of the net proceeds for acquisitions of, or strategic investments in, complementary businesses, products, services, or technologies. However, the Company does not have agreements or commitments with respect to any such acquisition or strategic investment at this time. The Notes are general unsecured obligations of the Company and will mature on February 1, 2027, unless earlier converted, redeemed or repurchased. Interest on the Notes will accrue at a rate of 1.00% per year from February 4, 2022 and will be payable semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2022.
In connection with the Notes offering, the Company received net cash proceeds of approximately $278.9 million, after deducting the initial purchasers discounts and commissions.
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Factors Affecting Our Performance
Continued Growth in Our Broad Base of Sellers
We must maintain and grow our broad selection of sellers and add to our diverse array of manufacturing processes in order to continue to grow our business and maximize the efficiency of our network. We rely on our network of sellers to provide the sophisticated manufacturing processes that we offer to our buyers. We believe the value proposition for sellers, in particular increasing utilization of their manufacturing operations, is compelling. If we fail to attract new sellers to our platform and retain existing sellers, the attractiveness of our platform to buyers would decrease and we would not be able to grow our revenue. In order to increase our efficiency, we intend to continue to expand our large and growing network of sellers. The number of active sellers, which we define as sellers that have used our platform at least once during the last twelve months to manufacture a product or buy tools or supplies, has grown 43% from 1,410 for the year ended December 31, 2020 to 2,010 for the year ended December 31, 2021. As we add to our seller base, our AI-driven pricing becomes more competitive, and therefore more attractive to buyers, leading to higher revenue and improved margins. However, if we do not efficiently price the manufacturing opportunities on our platform, our revenue and margins could be adversely impacted.
Investments in Technology and Expansion of Our Platform
We have invested, and intend to continue to invest, in developing technology, tools, features, and products that provide targeted and useful solutions for our buyers and sellers. We intend to continue to invest in our AI and machine learning technologies in order to continuously improve the speed and accuracy of our pricing and placement activity. We also continue to invest in our services-oriented architecture and cloud infrastructure to support scalability. Any investments we make in these areas will occur before we recognize benefits, if any, from the investments. Further, the effectiveness of these efforts may be difficult to measure. If we are unable to continue to improve our platform, the efficiency of our platform may be impaired, and our revenue and gross profit may be adversely impacted.
Expansion of Our Offering of Seller Financial Products and Services
In 2019, we launched seller services, beginning with Xometry Supplies in the U.S., which enables our sellers to access experienced suppliers who sell competitively priced goods from leading brands. In mid-2020, we launched a suite of financial products and services to help our sellers manage cash flow at all stages of job production. These services help sellers manage their business more efficiently, even on jobs that they source outside of our platform. In December 2021, we acquired Thomas which significantly expanded our seller services to including marketing and data services for our sellers. Our suite of marketing and data services provided by Thomas help sellers grow and more efficiently run their business. We offer sellers a full slate of marketing services, including website building, search-engine optimization ("SEO") and targeted advertising to buyers, which are resources that will help them further grow their business. In November 2021, we acquired FactoryFour a cloud-based manufacturing execution system. We plan on providing this order management system to our seller community which allows shops and shop owners to digitize and automate their operations so they can focus on growing their business. In addition to being able to manage existing orders, the software is designed to integrate seamlessly with the AI-driven Xometry Marketplace and with the Thomasnet.com platform, giving suppliers a one-stop view into all of their orders. Our revenue from our seller services offerings has not been a material driver of our overall revenue to date; however, we expect revenue from seller services to grow over time including marketing and advertising services from Thomas. We believe that increased revenue from seller services will have a favorable impact on our gross margin.
Expansion of Our International Operations
In 2019, we launched Xometry in Europe. We believe there is significant opportunity in the global manufacturing ecosystem for our marketplace. With operations throughout the majority of the contiguous United States and customers in Europe and Asia, we have established footholds in major markets around the world. We will continue to dedicate sales and marketing resources to develop our seller networks and attract buyers to our marketplace in other regions. We may not recognize benefits from these investments, and we may not effectively manage additional risks relating to operating outside the United States, including increased operational and regulatory risks.
COVID-19 Pandemic
The on-going COVID-19 pandemic has globally resulted in loss of life, business closures impacting our buyers and sellers. Even after the COVID-19 pandemic subsides, it may have a continued and lasting impact on the global economy, including our business. Future shelter-in-place orders and similar regulations impact the ability of our buyers and sellers to operate their businesses. Any limitations on or disruptions or closures of buyers’ and sellers’ businesses could adversely affect our business.
The COVID-19 pandemic to date has not significantly adversely impacted the growth of our business. We believe the COVID-19 pandemic has validated our platform, highlighting the need for resilient supply chains, and reshaping the way buyers source their manufacturing needs.
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Key Operational and Business Metrics
In addition to the measures presented in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we use the following key operational and business metrics to help us evaluate our 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 28,130 as of December 31, 2021, up 49% from 18,846 as of December 31, 2020. The key drivers of Active Buyer growth are continued account and buyer engagement and the success of our strategy to attract new buyers.
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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 December 31, 2021, 95% 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.
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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 701 as of December 31, 2021, up 80% from 389 as of December 31, 2020.
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss), adjusted to exclude interest expense, interest and dividend income and other expense, depreciation and amortization, stock-based compensation expense, charitable contributions, transaction costs, income from an unconsolidated joint venture and impairment charges. 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 year ended December 31, 2021, Adjusted EBITDA declined to $(39.8) million, compared to Adjusted EBITDA of $(23.5) million in 2020. For the year ended December 31, 2021, Adjusted EBITDA increased to (18.2)% of revenue, as compared to (16.6)% of revenue in 2020, driven primarily by higher operating expense as we continue to scale our business.
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Adjusted EBITDA is a non-GAAP financial measure that we use, in addition to our GAAP financial measures, to evaluate our business. We have included Adjusted EBITDA in this filing because it is a key measure used by our management to evaluate our operating performance. Accordingly, we believe that Adjusted EBITDA provides 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 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 should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| Net loss | $ | (61,381 | ) | $ | (31,085 | ) | ||
| Addback (deduct) | ||||||||
| Interest expense, interest and dividend income and other expenses | 2,736 | 1,869 | ||||||
| Depreciation and amortization | 3,596 | 3,120 | ||||||
| Stock based compensation expense | 7,395 | 1,006 | ||||||
| Charitable contribution of common stock | 2,242 | — | ||||||
| Transaction costs | 5,696 | — | ||||||
| Income from unconsolidated joint venture | (41 | ) | — | |||||
| Impairment of goodwill and intangibles | — | 1,592 | ||||||
| Adjusted EBITDA | $ | (39,757 | ) | $ | (23,498 | ) |
Components of Results of Operations
Revenue
Our revenue is primarily comprised of sales to buyers through our platform. Buyers purchase specialized CNC manufacturing, sheet metal manufacturing, 3D printing, injection molding, urethane casting, finishing services. Buyer purchases range from rapid prototyping of single parts to high-volume production on our marketplace. These products are primarily manufactured by our network of sellers. We also derive a portion of our revenue from our offerings to sellers, which includes seller services which includes marketing and advertising services, SaaS based solutions and financial products. In 2022 and going forward, we expect a significant portion of our revenue to be derived from our seller services which includes Thomas.
Cost of Revenue
Cost of revenue primarily consists of the cost to us of the products that are manufactured or produced by us or our sellers 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 add sellers to our Xometry platform and are able to expand our network liquidity effect, we expect cost of revenue to decline as a percent of revenue over time.
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 seller network and the efficiency of our pricing and will be benefited by increasing the use of existing seller services and the variety of seller 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, 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.
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Operations and Support
Operations and support expenses are the costs we incur in support of the customers and sellers on our platform which are provided by phone, email and chat for purposes of resolving customer and seller 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 customer and seller service. 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.
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 professional service fees, public company costs, charitable contributions and certain depreciation and amortization expense. It also includes compensation expenses, including stock-based compensation expenses, for executive, finance, legal and other administrative personnel. 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 (Expense) Income
Interest Expense
Interest expense consists of interest incurred on our outstanding borrowings under our outstanding debt facility. In 2020, we amended our term loan agreement, increasing the principal by $4.0 million for total borrowings of $15.0 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” On July 9, 2021, we repaid our $15.0 million term loan.
Interest and Dividend Income
Interest and dividend income consists of interest on our cash and cash equivalents and dividend income from our investments.
Other Expenses
Other expenses consist primarily of unrealized losses, losses on the extinguishment of debt and other expenses.
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Income from Unconsolidated Joint Venture
Income from unconsolidated joint venture is income attributable to use from a joint venture of which we hold a 50% ownership interest.
Results of Operations
The following is our discussion of the consolidated results of operations for the year ended December 31, 2021 as compared to the year ended December 31, 2020.
The following table sets forth our statement of operations data for the years indicated:
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Revenue | $ | 218,336 | $ | 141,406 | ||||
| Cost of revenue | 161,195 | 108,120 | ||||||
| Gross profit | 57,141 | 33,286 | ||||||
| Operating expenses: | ||||||||
| Sales and marketing | 39,422 | 22,567 | ||||||
| Operations and support | 23,683 | 14,111 | ||||||
| Product development | 17,780 | 12,186 | ||||||
| General and administrative | 34,942 | 12,046 | ||||||
| Impairment of goodwill and intangible assets | — | 1,592 | ||||||
| Total operating expenses | 115,827 | 62,502 | ||||||
| Loss from operations | (58,686 | ) | (29,216 | ) | ||||
| Other (expenses) income: | ||||||||
| Interest expense | (852 | ) | (1,089 | ) | ||||
| Interest and dividend income | 982 | — | ||||||
| Other expenses | (2,866 | ) | (780 | ) | ||||
| Income from unconsolidated joint venture | 41 | — | ||||||
| Total other expenses | (2,695 | ) | (1,869 | ) | ||||
| Net loss | (61,381 | ) | (31,085 | ) | ||||
| Deemed dividend to preferred stockholders | — | (8,801 | ) | |||||
| Net loss attributable to noncontrolling interest | 2 | — | ||||||
| Net loss attributable to common stockholders | $ | (61,379 | ) | $ | (39,886 | ) |
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The following table sets forth our statement of operations data expressed as a percentage of total revenue for the years indicated:
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Revenue | 100.0 | % | 100.0 | % | ||||
| Cost of revenue | 73.8 | % | 76.5 | % | ||||
| Gross profit | 26.2 | % | 23.5 | % | ||||
| Operating expenses: | ||||||||
| Sales and marketing | 18.1 | % | 16.0 | % | ||||
| Operations and support | 10.8 | % | 10.0 | % | ||||
| Product development | 8.1 | % | 8.6 | % | ||||
| General and administrative | 16.0 | % | 8.5 | % | ||||
| Impairment of goodwill and intangible assets | 0.0 | % | 1.1 | % | ||||
| Total operating expenses | 53.0 | % | 44.2 | % | ||||
| Loss from operations | (26.8 | )% | (20.7 | )% | ||||
| Other (expenses) income: | ||||||||
| Interest expense | (0.4 | )% | (0.8 | )% | ||||
| Interest and dividend income | 0.4 | % | — | % | ||||
| Other expenses | (1.3 | )% | (0.6 | )% | ||||
| Income from unconsolidated joint venture | — | % | — | % | ||||
| Total other expenses | (1.3 | )% | (1.4 | )% | ||||
| Net loss | (28.1 | )% | (22.1 | )% | ||||
| Deemed dividend to preferred stockholders | — | % | (6.2 | )% | ||||
| Net loss attributable to noncontrolling interest | — | % | — | % | ||||
| Net loss attributable to common stockholders | (28.1 | )% | (28.3 | )% |
Comparison of the Years Ended December 31, 2021 and 2020
Revenue
Total revenue increased $76.9 million, or 54%, from $141.4 million for the year ended December 31, 2020 to $218.3 million for year ended December 31, 2021. This increase was primarily the result of a 49% increase in active buyers resulting from investment in sales and marketing, as well as existing buyers increasing their spend on the platform from the prior year.
Total revenue from our U.S. and International operating segments for the years ended December 31, 2021 and 2020, was $202.0 million and $138.3 million, respectively, for the U.S., and $16.3 million and $3.1 million, respectively, for International.
Cost of Revenue
Total cost of revenue increased $53.1 million, or 49%, from $108.1 million for the year ended December 31, 2020 to $161.2 million for the year ended December 31, 2021. This increase was primarily the result of an increase in payments to sellers on our platform due to the growth in our buyer base and increased activity by existing accounts on our marketplace.
Gross Profit and Margin
Gross profit increased $23.9 million, or 72%, from $33.3 million for the year ended December 31, 2020 to $57.1 million for the year ended December 31, 2021. The increase in gross profit was due primarily to the increase in revenue described above.
Gross margin increased to 26.2% for the year ended December 31, 2021 from 23.5% for the year ended December 31, 2020. Our AI-driven platform pricing has become more efficient due to the increased number of orders, improving the data set and thus making our pricing decisions more accurate. Additionally, we continue to grow our active sellers resulting in a lower cost of revenue.
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Operating Expenses
Sales and Marketing
Sales and marketing expense increased $16.9 million, or 75%, from $22.6 million for the year ended December 31, 2020 to $39.4 million for the year ended December 31, 2021, a result of continued investment to drive revenue growth, additional employees and increased compensation-related expenses including stock based compensation primarily related to options granted in 2021, as compared to the prior year. As a percent of total revenue, sales and marketing expenses increased to 18% for the year ended December 31, 2021 from 16% for the year ended December 31, 2020.
For the years ended December 31, 2021 and 2020, stock based compensation expense recorded in sales and marketing was $1.2 million and $0.2 million, respectively. Excluding stock based compensation, sales and marketing would be 17.5% and 15.8% of revenue as of December 31, 2021 and 2020, respectively.
Operations and Support
Operations and support increased $9.6 million, or 68%, from $14.1 million for the year ended December 31, 2020 to $23.7 million for the year ended December 31, 2021, primarily as a result of additional employees hired to support the growth of buyer and seller activity on our platform, and increased stock based compensation expense primarily related to options granted in 2021, as compared to the prior year. As a percent of total revenue, operations and support expenses remained relatively flat at approximately 10% for the years ended December 31, 2021 and 2020.
For the years ended December 31, 2021 and 2020, stock based compensation expense recorded in operations and support was $2.7 million and $0.3 million, respectively. Excluding stock based compensation, operations and support would be 9.6% and 9.8% of revenue as of December 31, 2021 and 2020, respectively.
Product Development
Product development expense increased $5.6 million, or 46%, from $12.2 million for the year ended December 31, 2020 to $17.8 million for the year ended December 31, 2021, a result of additional employees and increased stock based compensation expense primarily related to options granted in 2021, as compared to the prior year. As a percent of total revenue, product development expenses decreased to 8% for the year ended December 31, 2021 from 9% for the year ended December 31, 2020.
For the years ended December 31, 2021 and 2020, stock based compensation expense recorded in product development was $1.7 million and $0.4 million, respectively. Excluding stock based compensation, product development would be 7.3% and 8.4% of revenue as of December 31, 2021 and 2020, respectively.
General and Administrative
General and administrative expense increased $22.9 million, or 190%, from $12.0 million for the year ended December 31, 2020 to $34.9 million for the year ended December 31, 2021, primarily as a result of an increase in compensation-related expenses, including stock based compensation, additional legal, accounting and finance headcount and third party expenses due to becoming a public company in July 2021, as well as additional overhead expenses to support the growth of our business operations. During 2021, the Company also made charitable contributions of $2.2 million and incurred transaction costs of $5.7 million resulting from the acquisition of Big Blue Saw, FactoryFour and Thomas. As a percent of total revenue, general and administrative expenses increased to 16% for year ended December 31, 2021 from 9% for the year ended December 31, 2020.
For the years ended December 31, 2021 and 2020, stock based compensation expense recorded in general and administrative was $1.8 million and $0.2 million, respectively. Excluding stock based compensation, general and administrative would be 15.2% and 8.4% of revenue as of December 31, 2021 and 2020, respectively.
Other (Expenses) Income
Interest Expense
Interest expense decreased by $0.2 million, or 22%, from $1.1 million for the year ended December 31, 2020 to $0.9 million for the year ended December 31, 2021, as a result of repaying our outstanding borrowings under our term loan in July 2021.
Interest and dividend income
Interest and dividend income increased by $1.0 million, primarily as a result of interest and dividend on marketable securities in 2021.
Other Expenses
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Other expenses increased by $2.1 million, or 267%, from $0.8 million for the year ended December 31, 2020 to $2.9 million for the year ended December 31, 2021, as a result of a $0.3 million loss on extinguishment of debt from the repayment of the term loan in July 2021, $1.9 million of unrealized loss on marketable securities and $0.7 million of other expenses.
Additional Segment Considerations
Total segment loss from our U.S. operating segment for the year ended December 31, 2021 and 2020, was $51.2 million and $22.1 million, respectively. Total segment loss from our International operating segment for the year ended December 31, 2021 and 2020, was $10.2 million and $9.0 million, respectively.
Liquidity and Capital Resources
We have financed our operations primarily through sales of our equity securities, convertible debt securities and borrowings under our term loan facility. As of December 31, 2021, our cash and cash equivalents, and marketable securities totaled $116.7 million, compared with $59.9 million as of December 31, 2020. We believe our existing cash and cash equivalents will be sufficient to support our working capital and capital expenditure requirements for at least the next twelve months. 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.
On July 2, 2021, we closed our planned initial public offering ("IPO"), in which we issued and sold 7,906,250 shares of our Class A common stock. The initial offering price was $44.00 per share. We received net proceeds of approximately $325.3 million from the IPO after deducting underwriting discounts and commissions of $22.6 million. The Company also incurred approximately $3.7 million of other offering costs in connection with its IPO. In August 2021, we invested approximately $266.6 million of proceeds from our IPO in marketable securities. We consider marketable securities as available for use in current operations, and therefore classify these securities as current assets on the Consolidated Balance Sheets. As of December 31, 2021, the Company held $30.5 million of marketable securities. In February 2022, we issued $287.5 million aggregate principal amount of 1.00% Convertible Senior Notes due 2027.
Our capital expenditures consist primarily of internal-use software costs, manufacturing equipment, computers and peripheral equipment, furniture and fixtures and leasehold improvements and patents.
Cash Flows
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Net cash (used in) operating activities | $ | (68,571 | ) | $ | (22,049 | ) | ||
| Net cash (used in) provided by investing activities | (212,748 | ) | 6,670 | |||||
| Net cash provided by financing activities | 307,768 | 35,261 |
Operating Activities
For the year ended December 31, 2021, net cash used in operating activities was $68.6 million, primarily due to a net loss of $(61.4) million adjusted for non-cash charges of $16.5 million and a net decrease in our operating assets and liabilities of $23.6 million. The non-cash adjustments primarily relate to stock-based compensation of $7.4 million, depreciation and amortization of $3.6 million, donated common stock of $2.2 million and unrealized loss on marketable securities of $2.0 million. The net decrease in operating assets and liabilities is primarily driven by an increase in accounts receivable of $11.1 million and prepaid expenses of $4.0 million and a decrease in accrued expenses of $12.0 million and contract liabilities of $1.6 million. These decreases are partially offset by increases in accounts payable of $5.2 million.
For the year ended December 31, 2020, net cash used in operating activities was $22.0 million, primarily due to a net loss of $(31.1) million adjusted for non-cash charges of $7.1 million offset by a net increase in our operating assets and liabilities of $2.0 million. The non-cash adjustments primarily relate to stock-based compensation of $1.0 million, impairment of goodwill and intangible assets of $1.6 million, reduction in carrying amount of right of use asset of $1.0 million and depreciation and amortization of $3.1 million. The net increase in operating assets and liabilities is primarily driven by an increase in accrued expenses of $8.6 million. This increase is offset by a decrease in accounts receivable of $2.1 million, accounts payable of $2.4 million and lease liabilities of $1.0 million.
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Investing Activities
Cash used by investing activities was $212.7 million during the year ended December 31, 2021 primarily due to three business acquisitions completed during 2021 for an aggregate of $174.6 million and the purchase of $267.5 million of marketable securities offset by proceeds from the issuance of $235.0 million of marketable securities.
Cash provided in investing activities was $6.7 million during the year ended December 31, 2020, primarily due to $28.6 million from the settlement of short-term investments partially offset by the purchase of short-term investments of $17.7 million.
Financing Activities
Cash provided by financing activities was $307.8 million during the year ended December 31, 2021, primarily from the proceeds of our initial public offering of $325.3 million, partially offset by the repayment of term-loan of $16.1 million.
Cash provided by financing activities was $35.3 million during the year ended December 31, 2020, reflecting $39.6 million of proceeds from the issuance of convertible preferred stock, net of cost and $4.0 million of proceeds from the term loan facility, partially offset by an $8.8 million deemed dividend to certain preferred stockholders.
Critical Accounting Estimates
Our discussion and analysis of financial condition and results of operations are based upon our financial statements included elsewhere in this Annual Report on Form 10-K. The preparation of our financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from those estimates.
Our critical accounting estimates are those that materially affect our financial statements and involve difficult, subjective or complex judgments by management. A thorough understanding of these critical accounting estimates is essential when reviewing our financial statements. We believe that the critical accounting estimates listed below are the most difficult management decisions as they involve the use of significant estimates and assumptions as described above. Historically, our assumptions, judgments and estimates relative to our critical accounting estimates have not differed materially from actual results.
Business Combinations
During the fourth quarter of 2021, we acquired three businesses that we accounted for as business combinations. Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired and liabilities assumed. We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date as well as the useful lives of those acquired intangible assets. Examples of critical estimates in valuing certain of the intangible assets and goodwill acquired include but are not limited to future (i) expected cash flows from acquired customer relationships, (ii) attrition, (iii) gross profit and (iv) discount rate. To the extent our estimates and assumptions change during the measurement period, the fair value of the acquired intangible asset and goodwill could change materially.
Emerging Growth Company Status
We qualify as an “emerging growth company” pursuant to the provisions of the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation, and stockholder advisory votes on golden parachute compensation.
The JOBS Act also permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to “opt-in” to this extended transition period for complying with new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that comply with such new or revised accounting standards on a non-delayed basis.
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