# Xometry, Inc. (XMTR) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Xometry, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1657573/000095017023008494/xmtr-20221231.htm
Accession: 0000950170-23-008494
Filing date: 2023-03-16
Report date: 2022-12-31
Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub.
Confidence: high

Company profile: /company/XMTR/
All MD&A years: /company/XMTR/mda/
Previous year: /company/XMTR/mda/fy2021/ (FY 2021)
Next year: /company/XMTR/mda/fy2023/ (FY 2023)

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.

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 and 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, 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 advertising and marketing services 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 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 advertising and marketing services and to a lesser extent SaaS based solutions to help suppliers optimize their productivity. Our revenue from Thomas is primarily advertising revenue.

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During 2022, we launched the Industrial Buying Engine™ (“IBE”), which helps customers source and purchase from the more than 500,000 suppliers on Thomasnet.com. The IBE digitizes the old and time-consuming request-for-quote process and allows buyer and suppliers to transact on Thomasnet. In addition, through IBE buyers can receive instant quotes from Xometry. We also introduced Workcenter which gives suppliers a one-stop view into all of their Xometry and non-Xometry work. A cloud-based manufacturing execution system, Workcenter brings the job board and financial services into one, easy-to-use platform. With Workcenter, shop owners can build and manage workflows for all their projects, including those from non-Xometry customers, and also quote new projects from Xometry and Thomas.

Factors Affecting Our Performance

Continued Growth in Active Buyers

We must maintain and grow our Active Buyer base and grow our wallet share with existing 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. We intend to continue investing in acquiring new buyers through traditional paid sales and marketing techniques as well as leveraging our organic referral network to drive awareness and build trust. The number of Active Buyers on our platform reached 40,664 as of December 31, 2022, up 45% from 28,130 as of December 31, 2021. Once we acquire a buyer, we seek to expand the breadth and scale of the services sold to that buyer and leverage the relationship to gain additional buyers within an account through a combination of product offerings, customer relationship marketing, sales and account management. We remain focused on increasing wallet share with our existing buyers through a number of deliberate strategies. With each positive experience and the expansion of our manufacturing processes by acquiring new supplier capabilities we will continue building our buyers’ spend and opportunities on our marketplace.

Continued Growth in Our Broad Base of Suppliers

We must maintain and grow our broad selection of suppliers 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 suppliers to provide the sophisticated manufacturing processes that we offer to our buyers. We believe the value proposition for suppliers, in particular increasing utilization of their manufacturing operations, is compelling. If we fail to attract new suppliers to our platform and retain existing suppliers, 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 suppliers. The number of active suppliers, which we define as suppliers that have used our platform at least once during the last twelve months to manufacture a product or buy tools or supplies, has grown 22% from 2,010 for the year ended December 31, 2021 to 2,447 for the year ended December 31, 2022. As we add to our supplier 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 suppliers. 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 Financial Products and Services

In 2019, we launched supplier services, beginning with Xometry Supplies in the U.S., which enables our suppliers 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 suppliers manage cash flow at all stages of job production. These services help suppliers 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 supplier services to including marketing and data services for our suppliers. Our suite of marketing and data services provided by Thomas help suppliers grow and more efficiently run their business. We offer suppliers 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 supplier 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 platform, giving suppliers a one-stop view into all of their orders. We expect revenue from supplier services to grow over time and have a favorable impact on our gross margin.

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Expansion of Our International Operations

In 2019, we launched Xometry in Europe, followed by Xometry Asia in 2022 and Xometry United Kingdom in 2023. 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. As we have expanded our physical presence, we have also added new language functionality to our platform to reach a wider customer base. These new languages include the following: German, French, Italian, Mandarin, Spanish, Polish, Dutch, Norwegian, Swedish and Finnish. We will continue to dedicate sales and marketing resources to develop our supplier 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.

Macroeconomic Conditions

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 the COVID-19 pandemic, rising inflation, the U.S. Federal Reserve raising interest rates and the Russia-Ukraine war, 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, see the section titled “Risk Factors.”

December 2022 Restructuring

In December 2022, we initiated a restructuring action to help manage our operating expenses by reducing our workforce by approximately 6%. The workforce reduction focused on realigning our staffing levels to help us meet the current and future objectives of our business. For the year ended December 31, 2022, we incurred $1.5 million for employee termination costs related to this restructuring. The majority of these costs will be paid by the Company in the first quarter of 2023. We expect the reduction in workforce will reduce operating expenses by approximately $8.0 million on a full year basis. Refer to Note 12, Debt Commitments and Contingencies—Restructuring to of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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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 40,664 as of December 31, 2022, up 45% from 28,130 as of December 31, 2021. 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, 2022, 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.

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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 1,027 as of December 31, 2022, up 47% from 701 as of December 31, 2021.

Adjusted EBITDA

We define Adjusted EBITDA as net loss, adjusted for interest expense, interest and dividend income and other expenses, income tax benefit, and certain other non-cash or non-recurring items impacting net loss from time to time, principally comprised of depreciation and amortization, stock-based compensation, charitable contributions of common stock, income from an unconsolidated joint venture, impairment charges, 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. 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.

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For the year ended December 31, 2022, Adjusted EBITDA increased to $(41.8) million, compared to Adjusted EBITDA of $(39.8) million in 2021. For the year ended December 31, 2022, Adjusted EBITDA decreased to (11.0)% of revenue, as compared to (18.2)% of revenue in 2021, driven primarily by increased operating efficiencies as we continue to scale our business.

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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 charges, 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.

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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.

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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 SaaS based solutions, the sale of supplies and financial service products.

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.

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

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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 convertible notes or other borrowings. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

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 realized and/or unrealized losses, losses on the extinguishment of debt and other expenses.

Income from Unconsolidated Joint Venture

Income from unconsolidated joint venture consists of our share of the joint venture's income.

Results of Operations

The following is our discussion of the consolidated results of operations for the year ended December 31, 2022 as compared to the year ended December 31, 2021.

A discussion of the consolidated results of operations for the year ended December 31, 2021 as compared to the year ended December 31, 2020 has been omitted from this Annual Report on Form 10-K, but may be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 18, 2022, which is available free of charge on the SEC's website at www.sec.gov and on our investor relations website at investors.xometry.com.

The following table sets forth our statement of operations data for the years indicated:

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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:

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[[/GREPCENT_TABLE]]

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 year ended December 31, 2022 (in thousands, amounts for the year ended December 31, 2021, were not considered material):

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[[/GREPCENT_TABLE]]

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Comparison of the Years Ended December 31, 2022 and 2021

Revenue

Total revenue increased $162.7 million, or 75%, from $218.3 million for the year ended December 31, 2021 to $381.1 million for the year ended December 31, 2022. This growth was primarily a result of an increase in marketplace revenue and an increase in supplier services revenue due to our acquisition of Thomas. Total revenue from marketplace and supplier services for the year ended December 31, 2022 was $303.1 million and $77.9 million, respectively. The marketplace increase was primarily the result of increases in active buyers resulting from investments in sales and marketing, as well as existing buyers increasing their spend on the platform for the year ended December 31, 2022, as compared to the prior year. Supplier services revenue growth was driven primarily by our acquisition of Thomas in December 2021.

Total revenue from our U.S. and International operating segments for the years ended December 31, 2022 and 2021, was $347.8 million and $202.0 million, respectively, for the U.S., and $33.2 million and $16.3 million, respectively, for International.

Cost of Revenue

Total cost of revenue increased $72.3 million, or 45%, from $161.2 million for the year ended December 31, 2021 to $233.5 million for the year ended December 31, 2022. This increase was primarily the result of an increase in marketplace cost of revenue and increase in supplier service costs of revenue due to our acquisition of Thomas. Total cost of revenue from marketplace and supplier services for the year ended December 31, 2022 was $216.3 million and $17.2 million, respectively.

Marketplace cost of revenue was driven by increased payments to suppliers on our platform due to the growth in our buyer base and increased activity by existing accounts on our marketplace. Our supplier services cost of revenue increased primarily as a result of our acquisition of Thomas in December 2021.

Gross Profit and Margin

Gross profit increased $90.4 million, or 158%, from $57.1 million for the year ended December 31, 2021 to $147.6 million for the year ended December 31, 2022. The increase in gross profit was primarily due to the acquisition of Thomas, increases in revenue from marketplace and improved marketplace gross margin as compared to the prior year period.

Gross margin for marketplace was 28.6% for the year ended December 31, 2022 which was an improvement over the prior year in part due to our AI-driven platform. 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 78.0% for the year ended December 31, 2022 primarily due to our acquisition of Thomas.

Operating Expenses

Sales and Marketing

Sales and marketing expense increased $43.8 million, or 111%, from $39.4 million for year ended December 31, 2021 to $83.2 million for the year ended December 31, 2022, primarily as a result our acquisition of Thomas in December 2021, increases in marketing and advertising spend, additional sales employees and their compensation costs including stock-based compensation, consulting expenses and software and maintenance costs for the sales and marketing department. As a percent of total revenue, sales and marketing expenses increased to 21.8% for the year ended December 31, 2022 from 18.1% for the year ended December 31, 2021.

During the year ended December 31, 2022, $0.5 million of restructuring charge is recorded in sales and marketing.

Operations and Support

Operations and support increased $24.9 million, or 105%, from $23.7 million for the year ended December 31, 2021 to $48.6 million for the year ended December 31, 2022, primarily as a result of our acquisition of Thomas in December 2021, hiring of additional operations and support employees and their compensation costs including stock-based compensation, and consulting expenses. As a percent of total revenue, operations and support expenses increased to 12.7% for the year ended December 31, 2022 from 10.8% for the year ended December 31, 2021.

During the year ended December 31, 2022, $0.4 million of restructuring charge is recorded in operations and support.

Product Development

Product development expense increased $13.2 million, or 74%, from $17.8 million for the year ended December 31, 2021 to $31.0 million for the year ended December 31, 2022, primarily as result of our acquisition of Thomas in December 2021, hiring additional development employees and their compensation costs including stock-based compensation, consulting and software and

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maintenance expenses. As a percent of total revenue, product development remained flat at 8.1% for the year ended December 31, 2022 and 2021.

During the year ended December 31, 2022, $0.5 million of restructuring charge is recorded in product development.

General and Administrative

General and administrative expense increased $23.1 million, or 66%, from $34.9 million for the year ended December 31, 2021 to $58.0 million for the year ended December 31, 2022. The primary driver of the increase was due to our acquisition of Thomas in December 2021. Our general and administrative expenses increased due to higher compensation and stock-based compensation due to new administrative employees. Additionally, we incurred higher public company costs for insurance, legal and accounting services. We had higher expenses for software and maintenance, insurance costs, card processing fees, bad debt expense and facilities costs offset by lower acquisition costs that were related to fourth quarter 2021 business combinations. As a percent of total revenue, general and administrative expenses decreased to 15.2% for the for the year ended December 31, 2022 from 16.0% for the year ended December 31, 2021.

During the year ended December 31, 2022, $0.2 million of restructuring charge is recorded in general and administrative.

Impairment of assets

Impairment of assets of $0.8 million related to incomplete software projects that were abandoned, furniture, fixtures and equipment and/or other assets to be disposed of during the year ended December 31, 2022. No impairments were recorded on our long-lived assets during the years ended December 31, 2021.

During the year ended December 31, 2022, $0.5 million of our impairments were recorded in our U.S. reporting segment, and $0.3 million of our impairments were recorded in our International reporting segment.

Other (Expenses) Income

Interest Expense

Interest expense increased by $3.6 million, or 419%, from $0.9 million for the year ended December 31, 2021 to $4.4 million for the year ended December 31, 2022, 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 $3.1 million, or 319%, from $1.0 million for the year ended December 31, 2021 to $4.1 million for the year ended December 31, 2022, primarily due to dividend income from our marketable securities and cash accounts.

Other Expenses

Other expenses decreased by $0.7 million, or 24%, from $2.9 million for the year ended December 31, 2021 to $2.2 million for the year ended December 31, 2022, primarily due to a reduction of $0.3 million loss on debt extinguishment recognized in 2021, a $0.1 million reduction in losses on marketable securities and a reduction in other miscellaneous taxes.

Income from Unconsolidated Joint Venture

Income from unconsolidated joint venture increased $0.5 million due to our acquisition of a 50% interest in Industrial Media, LLC in connection with our acquisition of Thomas on December 9, 2021. This joint venture is in our U.S. operating segment.

Provision for Income Taxes

Provision for income taxes increased by $36,000 due to income taxes resulting from our acquisition of Thomas.

Additional Segment Considerations

Total segment loss from our U.S. operating segment for the year ended December 31, 2022 and 2021, was $58.8 million and $51.2 million, respectively. Total segment loss from our International operating segment for the year ended December 31, 2022 and 2021, was $17.3 million and $10.1 million, respectively.

Total segment interest expense from our U.S. operating segment for the year ended December 31, 2022 and 2021, was $4.4 million and $0.7 million, respectively. Total segment interest expense from our International operating segment for the year ended December 31, 2022 and 2021, was $22,000 and $0.1 million, respectively.

Total segment interest income from our U.S. operating segment for the year ended December 31, 2022 and 2021, was $4.1 million and $1.0 million, respectively. Total segment interest income from our International operating segment for the year ended December 31, 2022 and 2021, was $19,000 and zero, respectively.

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Subsequent Event

On January 2, 2023, the Company acquired 100% of the equity of Tridi Teknoloj A.S. ("Tridi") located in Istanbul, Turkey subject to an Share Purchase Agreement. The acquisition of Tridi extended our marketplace capabilities in Europe by opening a vast array of affordable suppliers. Tridi operates an online marketplace for manufacturing with the ability to serve all of Europe within a 24-hour turn around period. The Company accounted for the acquisition as a business combination. The aggregate non-contingent portion of the purchase price was approximately $3.8 million. In addition, the purchase price includes a contingent consideration arrangement to the former owners of Tridi up to a maximum amount of $1.25 million (undiscounted) in Class A common shares in two installments on the first and second anniversary of the acquisition and is based on the achievement of certain revenue targets. During the year ended December 31, 2022, the Company recognized approximately $0.3 million of acquisition costs which are recorded in general and administrative expenses on our Consolidated Statements of Operations and Comprehensive Loss.

Liquidity and Capital Resources

We have financed our operations primarily through sales of our equity securities and borrowings under our convertible notes. As of December 31, 2022, our cash and cash equivalents and marketable securities totaled $319.4 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. 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

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•
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.

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 December 31, 2022, the 2027 Notes have a carrying value of $279.9 million with an effective annual interest rate of 1.6%.

Cash Flows

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Operating Activities

For the year ended December 31, 2022, net cash used in operating activities was $62.6 million, primarily due to a net loss of $(76.0) million adjusted for non-cash charges of $42.9 million and a net decrease in our operating assets and liabilities of $29.5 million. The non-cash adjustments primarily relate to stock-based compensation of $19.2 million, depreciation and amortization of $7.8 million, $7.2 million reduction to our right of use lease assets, donated common stock of $2.3 million, losses on marketable securities of $1.9 million, $1.7 million of amortization of deferred costs on convertible notes and a $1.5 million restructuring charge. The net decrease in operating assets and liabilities is primarily driven by an increase in accounts receivable of $16.9 million primarily due to our continued growth, a $7.0 million increase in other assets, a $1.6 million increase in prepaid expenses and a $5.7 million decrease in lease liabilities.

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 losses 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.

Investing Activities

Cash used by investing activities was $238.6 million during the year ended December 31, 2022, primarily due to the purchase of $284.1 million of marketable securities with proceeds from the 2027 Notes issuance and $13.7 million of purchases of property and equipment offset by proceeds of $58.9 million from the sale of marketable securities.

Cash used in 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 sale of $235.0 million of marketable securities.

Financing Activities

Cash provided by financing activities was $281.0 million during the year ended December 31, 2022, primarily resulting from $287.5 million of proceeds from the issuance of the 2027 Notes and $3.7 million of proceeds from the exercise of stock options, partially offset by $9.3 million of issuance costs in connection with the issuance of the 2027 Notes.

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.

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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.

Valuation of Goodwill and Intangible Assets

Goodwill has indefinite useful life and is not amortized. Goodwill is tested for impairment at least annually on the first day of the fourth quarter, or more frequently if impairment indicators are present. Intangible assets with finite lives are amortized over their estimated useful lives and tested for impairment if indicators are present.

Goodwill

Our annual impairment assessment of goodwill is generally performed using a qualitative approach to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Performance of the qualitative impairment assessment requires judgment in identifying and considering the significance of relevant events and circumstances including external factors such as macroeconomic and industry conditions and the legal and regulatory environment, as well as entity-specific factors such as actual and planned financial performance, that could impact the fair value of our reporting units.

If the results of the annual qualitative assessment conclude that it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, or if interim indicators of impairment are identified, a quantitative impairment test is performed.

A quantitative impairment test involves comparing the fair value of a reporting unit with its carrying value. If the fair value is less than the carrying value, an impairment loss is recorded for an amount equal to the excess of the carrying value over the fair value. For goodwill, the impairment loss is limited to the amount of the respective reporting unit’s allocated goodwill. Determination of the fair value of a reporting unit is subjective in nature and involves the use of significant estimates and assumptions including consideration of external factors such as macroeconomic and industry conditions and the legal and regulatory environment, as well as entity-specific factors such as actual and planned financial performance. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and the amount of any such charge. Estimates of fair value are primarily determined using discounted cash flows and recent transactions. These approaches use significant estimates and assumptions, including projected future cash flows, discount rates, growth rates, margins and determination of appropriate market comparisons. It is possible that our conclusions regarding impairment of goodwill could change in future periods if, for example, our businesses do not perform as projected or overall economic conditions in future periods vary from current assumptions.

Our annual goodwill impairment test was performed as of October 1, 2022 using a qualitative assessment, the results of which indicated that it is more likely than not that the fair values of our reporting units exceeded their carrying values. No goodwill asset impairment charges were recorded as a result of our annual impairment test during the year ended December 31, 2022.

Intangibles assets

Most of our identifiable intangible assets were recognized as part of business combinations we executed in prior periods. Our identifiable intangible assets are considered definite life intangible assets and are primarily comprised of customer and vendor relationships, database, developed technology, trade names, and patents. Definite life intangible assets are amortized using the straight-line method over their estimated period of useful life.

Our determination of the fair value of the intangible assets acquired involves the use of significant estimates and assumptions. Refer to our the “Business Combinations” disclosure below. We believe that the fair value assigned to the assets acquired and liabilities assumed are based on reasonable assumptions and estimates that a market participant would have use. Should current conditions differ from management’s estimates at the time of the acquisition, including changes in future revenue, growth rates and margins, or changes in market factors outside of our control, such as discount rates could result in a material write-downs of our intangible assets, which would adversely affect our operating results.

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We monitor events and changes in circumstances that could indicate carrying amounts of intangible assets may not be recoverable. We review the carrying amounts of our intangible assets for potential impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment indicators may include any significant changes in the manner of our use of the assets or the strategy of our overall business, certain restructuring initiatives, significant negative industry or economic trends and significant decline in our share price for a sustained period.

When such events or changes in circumstances occur, we compare the carrying amounts of the asset or assets groups with their respective estimated undiscounted future cash flows. If the asset or assets group are determined to be impaired, an impairment charge is recorded in the amount by which the carrying amount of the asset or assets group exceed their fair value.

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.

Recent Accounting Pronouncements

For information on recently issued accounting pronouncements, see Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.