Commerce.com, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in “Risk Factors.” See “Special Note Regarding Forward-Looking Statements.” Investors and others should note that we announce material financial information to our investors using our investor relations website (investors.bigcommerce.com), SEC filings, press releases, public conference calls and webcasts. We intend to use our investor relations website as a means of disclosing information about our business, our financial condition and results of operations and other matters and for complying with our disclosure obligations under Regulation FD. The information we post on our investor relations website, including information contained in investor presentations, may be deemed material. Accordingly, investors should monitor our investor relations website, in addition to following our press releases, SEC filings and public conference calls and webcasts. Overview BigCommerce is leading a new era of ecommerce. Our SaaS platform simplifies the creation of online stores by delivering a unique combination of ease-of-use, enterprise functionality, composability and flexibility. We allow merchants to build their ecommerce solution their way with the flexibility to fit their unique business and product offerings. We power both our customers’ branded ecommerce stores and their cross-channel connections to popular online marketplaces, social networks, and offline point of sale systems. Our strategy is to provide the world’s best combination of freedom of choice and flexibility in a multi-tenant SaaS platform. We describe this strategy as “Open SaaS.” As of March 31, 2024 we served 5,970 accounts with at least one unique enterprise plan subscription or an enterprise-level feed management subscription (collectively "enterprise accounts"). These accounts may have more than one Enterprise plan or a combination of Enterprise plans and Essentials plans. We provide a comprehensive platform for launching and scaling an ecommerce operation, including store design, catalog management, hosting, checkout, order management, reporting, and pre-integration into third-party services like payments, shipping, and accounting. All of our stores run on a single code base and share a global, multi-tenant architecture purpose built for security, high performance, and innovation. Our platform serves stores in a wide variety of sizes, product categories, and purchase types, including B2C and B2B. We offer access to our platform on a subscription basis. We serve customers with subscription plans tailored to their size and feature needs. For our larger customers, our Enterprise plan offers our full feature set at a subscription price tailored to each business. For SMBs, we offer three retail plans: Standard, Plus, and Pro, priced at $29, $79, and $299 per month (our "Essentials" plans) when pre-paid annually, or $39, $105, and $399 per month (our "Essentials plans"), when paid monthly, respectively. Our Essentials plans include GMV thresholds with programmatic upgrades built in as merchants exceed each plan’s threshold. Our differentiated Open SaaS technology approach combines the flexibility and customization potential of open source software with the performance, security, usability, and value benefits of multi-tenant SaaS. This combination helps businesses turn digital transformation into competitive advantage. While some software conglomerate providers attempt to lock customers into their proprietary suites, we focus on the configurability and flexibility of our open platform, enabling each business to optimize their ecommerce approach based on their specific needs. Partners are essential to our open strategy. We believe we possess one of the deepest and broadest ecosystems of integrated technology solutions in the ecommerce industry. We strategically partner with, rather than compete against, the leading providers in adjacent categories, including payments, shipping, point of sale, content management system, customer relationship management, and enterprise resource planning. We focus our research and development investments in our core product to create a best-of-breed ecommerce platform and co-market and co-sell with our strategic technology partners to our mutual prospects and customers. As a result, we earn high-margin revenue share from a subset of our strategic technology partners, which complements the high gross margin of our core ecommerce platform. Our business has achieved significant growth since our inception. We plan to continue to invest in our “Open SaaS” strategy, building new partnerships and continuing to develop a platform that offers best-of-breed functionality with the cost-effectiveness of multi-tenant SaaS. As we work to develop and deliver this platform for our customers, we will also invest and grow our business by acquiring additional customers to our platform, growing our revenue with existing customers, cross-selling owned and partner solutions to existing customers, expanding our presence in new markets and geographies, and considering targeted acquisitions that can enhance our service to customers. 25 Table of Content Key factors affecting our performance Our operational and financial results have been, and will continue to be, affected by a number of factors that present significant opportunities as well as risks and challenges, including those discussed below and elsewhere in this quarterly report and in our Annual Report on Form 10-K, particularly in Part I, Item 1A, “Risk Factors.” The key factors discussed below impacted our 2023 results or are anticipated to impact our future results . “Go-to-Market” Strategy BigCommerce was originally founded to serve the needs of small business customers. We have radically improved our product and service capabilities on behalf of the complex needs of midmarket and enterprise businesses, and we have successfully moved our customer base up-market as a result. We plan to continue our focus on enterprise businesses and we describe examples of advancements taken by us below. We reorganized our business teams and leadership structure to introduce clear and unified end to end ownership of the customer. Sales, customer success, marketing, and our business development teams have congruent and clear targets that unify their efforts around customer success and growth. In the fourth quarter of 2023 we centralized end to end customer success ownership under our Company President. Our Company President now oversees all go-to-market efforts across the business, including the platform product, Feedonomics, and partner and services revenue. New customer acquisition remains a priority, but it is now balanced with a strong focus on customer retention, satisfaction, and growth. This advancement includes a greater focus on portfolio cross-sell of Feedonomics and partner solutions. We made a commitment to drive revenue growth and we are beginning to see progress in the first quarter since initiating many of the advancements discussed above. First quarter of fiscal 2024 net retention rates improved versus the prior quarter, and we continue to focus on customer success and growth. Macroeconomic environment and customer spend Consumer spending remains resilient across our major markets, though aggregate ecommerce is growing at lower rates than during the pandemic. We are encouraged overall by the underlying consumption signals that we are seeing in our business. As described above, we are making progress in our go to market transformation. We continue to see longer sales cycle times relative to the pandemic and elevated scrutiny on platform investment spending. We believe sales cycle times and platform investment spending will improve, and we are transforming our go-to-market capabilities to capitalize on that improvement. Business metrics We review the following business metrics to measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions. Increases or decreases in our business metrics may not correspond with increases or decreases in our revenue. As an example, some of our business metrics include annual revenue run-rate ("ARR"), subscription annual revenue run-rate ("Subscription ARR") , average revenue per account, lifetime value ("LTV") to customer acquisition costs ("CAC") and others are calculated as of the end of the last month of the reporting period. Annual revenue run-rate We calculate ARR at the end of each month as the sum of: (1) contractual monthly recurring revenue at the end of the period, which includes platform subscription fees, invoiced growth adjustments, product feed management subscription fees, recurring professional services revenue, and other recurring revenue, multiplied by twelve to prospectively annualize recurring revenue, and (2) the sum of the trailing twelve-month non-recurring and variable revenue, which includes one-time partner integrations, one-time fees, payments revenue share, and any other revenue that is non-recurring and variable. Subscription annual revenue run-rate We calculate Subscription ARR at the end of each month as the sum of contractual monthly recurring revenue at the end of the period, which includes platform subscription fees, invoiced growth adjustments, product feed management subscription fees, recurring professional services revenue, and other recurring revenue, multiplied by twelve to prospectively annualize recurring revenue. Average revenue per account We calculate average revenue per account (“ARPA”) at the end of a period by including customer-billed revenue and an allocation of partner and services revenue, where applicable. We bill customers for subscription solutions and professional services, and we 26 Table of Content include both in ARPA for the reported period. For example, ARPA as of March 31, 2024, includes all subscription solutions and professional services billed between January 1, 2024, and March 31, 2024. We allocate partner revenue, where applicable, primarily based on each customer’s share of GMV processed through that partner’s solution. Partner revenue that is not directly linked to customer usage of a partner’s solution is allocated based on each customer’s share of total platform GMV. Each account’s partner revenue allocation is calculated by taking the account’s trailing twelve-month partner revenue, then dividing by twelve to create a monthly average to apply to the applicable period in order to normalize ARPA for seasonality. Enterprise Account metrics To measure the effectiveness of our ability to execute against our growth strategy, particularly within the mid-market and enterprise lines of business, we calculate ARR attributable to Enterprise Accounts. The chart below illustrates certain of our key business metrics as of the periods ended: March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 ARR (in thousands) $ 340,147 $ 336,541 $ 332,245 $ 331,103 $ 316,688 Subscription ARR (in thousands) $ 258,566 $ 256,412 $ 256,518 $ 255,552 $ 243,527 Enterprise Account metrics: Number of Enterprise Accounts 5,970 5,994 5,951 5,929 5,828 ARR attributable to Enterprise Accounts (in thousands) $ 248,236 $ 245,100 $ 240,602 $ 236,386 $ 228,805 ARR attributable to Enterprise Accounts as a percentage of ARR 73 73 72 71 72 ARPA $ 41,581 $ 40,981 $ 40,431 $ 39,870 $ 39,260 Lifetime value to customer acquisition costs We measure the efficiency of new customer acquisition by comparing the lifetime value of newly-acquired customers to the customer acquisition costs of the associated time period to get an “LTV:CAC ratio.” We calculate LTV as gross profit from new sales during the four quarters of any given year divided by the estimated future subscription churn rate. Net revenue retention We use net revenue retention (“NRR”) to evaluate our ability to maintain and expand our revenue with our account base of enterprise customers exceeding the ACV threshold over time. The total billings and allocated partner revenue, where applicable, for the measured period are divided by the total billings and allocated partner revenue for such accounts, corresponding to the period one year prior. An NRR greater than 100 percent implies positive net revenue retention. This methodology includes stores added to or subtracted from an account’s subscription during the previous twelve months. It also includes changes to subscription and partner and services revenue billings, and revenue reductions from stores or accounts that leave the platform during the previous one-year period. Net new accounts added after the previous one-year period are excluded from our NRR calculations. NRR for enterprise accounts was 100 percent and 111 percent for the years ended December 31, 2023 and 2022, respectively. We update our reported NRR at the end of each fiscal year and do not report quarterly changes in NRR. Components of results of operations Revenue We generate revenue from two sources: (1) subscription solutions revenue and (2) partner and services revenue. Subscription solutions revenue consists primarily of platform subscription fees from plans and recurring professional services. Subscription solutions are charged monthly, quarterly, or annually for our customers to sell their products and process transactions on our platform. Subscription solutions are generally charged per online store and are based on the store’s subscription plan. Our Enterprise plan contracts are generally for a fixed term of 12 to 36 months and are non-cancelable. In the first half of 2023, we implemented a new pricing strategy that provided enterprise merchants a discount for a period of time from their contractual monthly fee. Prior to this new strategy, certain enterprise agreements contain promotional periods. Under both models, merchants have full access to the functionality of our platform upon contract execution, and revenue is recognized ratably over the contract life. Our retail plans are generally month-to-month contracts. Monthly subscription fees for Enterprise plans are adjusted if a customer’s GMV or orders processed are outside of specified plan thresholds on a trailing twelve-month basis. Fixed monthly fees and any transaction charges related to subscription solutions are recognized as revenue in the month they are earned. 27 Table of Content Through Feedonomics, we provide feed management solutions under service contracts which are generally one year or less and, in many cases, month-to-month. These service types may be sold stand-alone or as part of a multi-service bundle (e.g. both marketplaces and advertising) and are billed monthly in arrears. We generate partner revenue from our technology application ecosystem. Customers tailor their stores to meet their feature needs by integrating applications developed by our strategic technology partners. We enter into contracts with our strategic technology partners that are generally for one year or longer. We generate revenue from these contracts in three ways: (1) revenue-sharing arrangements, (2) technology integrations, and (3) partner marketing and promotion. We recognize revenue on a net basis from revenue-sharing arrangements when the underlying transaction occurs. We also generate revenue from non-recurring professional services that we provide to complement the capabilities of our customers and their agency partners. Our services help improve customers’ time-to-market and the success of their businesses using BigCommerce. Our non-recurring services include education packages, launch services, solutions architecting, implementation consulting, and catalog transfer services. Cost of revenue Cost of revenue consists primarily of: (1) personnel-related costs (including stock-based compensation expense and associated payroll costs) for our customer success teams, (2) costs that are directly related to hosting and maintaining our platform, (3) fees for processing customer payments such as credit card processing charges, (4) personnel and other costs related to feed management, and (5) allocated costs, such as, depreciation, technology and facility costs. We expect that cost of revenue will increase in absolute dollars, but may fluctuate as a percentage of total revenue from period to period. As a result of our growth plans and integration of our previously acquired businesses, we have incurred expenses for equity and amortization of purchased intangibles. Sales and marketing Sales and marketing expenses consist primarily of: (1) personnel-related expenses (including stock-based compensation expense and associated payroll costs), (2) sales commissions, (3) marketing programs, (4) travel-related expenses, and (5) allocated overhead sales and support costs such as technology and facility costs. We focus our sales and marketing efforts on creating sales leads and establishing and promoting our brand. We plan to increase our investment in sales and marketing by executing our go-to-market strategy globally and building our brand awareness. Incremental sales commissions for new customer contracts are deferred and amortized ratably over the estimated period of our relationship with such customers. We expect our sales and marketing expenses will increase in absolute dollars, but will decrease as a percentage of total revenue over time. Research and development Research and development expenses consist primarily of personnel-related expenses (including stock-based compensation expense and associated payroll costs) incurred in maintaining and developing enhancements to our ecommerce platform and allocated overhead costs. Software development costs associated with internal use software which are incurred during the application development phase and meet other requirements are capitalized. We believe delivering new functionality is critical to attracting new customers and enhancing the success of existing customers. We expect to continue to make investments in research and development. We expect our research and development expenses to increase in absolute dollars, but decrease as a percentage of total revenue over time, as we continue to leverage engineers in other low-cost international locations. General and administrative General and administrative expenses consist primarily of: (1) personnel-related expenses (including stock-based compensation expense and associated payroll costs) for finance, legal and compliance, and human resources, (2) external professional services, and (3) allocated overhead costs, such as technology and facility costs. We expect our general and administrative expenses to increase in absolute dollars but will decrease as a percent of revenue. Acquisition related expenses Acquisition related expenses consists of cash payments for third-party acquisition costs and other acquisition related expenses, including contingent compensation arrangements entered into in connection with acquisitions. 28 Table of Content Amortization of intangible assets Amortization of intangible assets consist of amortization of acquired intangible assets which were recognized as a result of business combinations and are being amortized over their expected useful life. Interest income Interest income is earned on our cash, cash equivalents and marketable securities. Interest expense Interest expense consists primarily of the interest expense from the amortization of the debt issuance costs and coupon interest attributable to our convertible note issued in 2021, as well as interest associated with a financing agreement entered into in the first half of 2023. Other income (expense) Other income (expense) primarily consists of loss from share issuance related to the Bundle acquisition and foreign currency translation adjustments. Provision for income taxes Our Provision for income taxes consists primarily of deferred income taxes associated with amortization of tax deductible goodwill and current income taxes related to certain foreign and state jurisdictions in which we conduct business. For U.S. federal income tax purposes and in certain foreign and state jurisdictions, we have NOL carryforwards. The foreign jurisdictions in which we operate have different statutory tax rates than those of the United States. Additionally, certain of our foreign earnings may also be currently taxable in the United States. Accordingly, our effective tax rate will vary depending on the relative proportion of foreign to domestic income, use of foreign tax credits, changes in the valuation of our deferred tax assets and liabilities, applicability of any valuation allowances, and changes in tax laws in jurisdictions in which we operate. Results of operations The following table summarizes our historical consolidated statement of operations data. The period-to-period comparison of operating results is not necessarily indicative of results for future periods. For the three months ended March 31, 2024 2023 Revenue $ 80,360 $ 71,757 Cost of revenue (1) 18,439 17,446 Gross profit 61,921 54,311 Operating expenses: (1) Sales and marketing 32,432 34,052 Research and development 19,988 20,845 General and administrative 14,929 16,494 Acquisition related expenses 333 4,125 Restructuring charges 0 420 Amortization of intangible assets 2,467 2,033 Total operating expenses 70,149 77,969 Loss from operations (8,228 ) (23,658 ) Interest income 3,178 2,426 Interest expense (720 ) (722 ) Other income (expense) (332 ) 31 Loss before provision for income taxes (6,102 ) (21,923 ) Provision for income taxes (290 ) (197 ) Net loss $ (6,392 ) $ (22,120 ) 29 Table of Content (1) Amounts include stock-based compensation expense and associated payroll tax costs, as follows: Three months ended March 31, 2024 2023 (in thousands) Cost of revenue $ 656 $ 1,189 Sales and marketing 1,867 2,867 Research and development 3,476 3,503 General and administrative 2,592 3,079 Revenue by geographic region The composition of our revenue by geographic region during the three months ended March 31, 2024 and March 31, 2023 were as follows: Three months ended March 31, Change 2024 2023 Amount Percent (dollars in thousands) Revenue Americas – U.S. $ 61,138 $ 54,809 $ 6,329 11.5 % Americas – other (1) 3,776 3,351 425 12.7 EMEA 9,192 7,983 1,209 15.1 APAC 6,254 5,614 640 11.4 Total Revenue $ 80,360 $ 71,757 $ 8,603 12.0 % (1) Americas-other revenue includes revenue from North and South America, other than the U.S. Comparison of the three months ended March 31, 2024 and March 31, 2023 Revenue The following table presents the components of our revenue for each of the periods indicated: Three months ended March 31, Change 2024 2023 Amount Percent (dollars in thousands) Revenue Subscription solutions $ 60,959 $ 53,808 $ 7,151 13.3 % Partner and services 19,401 17,949 1,452 8.1 Total revenue $ 80,360 $ 71,757 $ 8,603 12.0 % Total revenue increased $8.6 million, or 12.0 percent, to $80.4 million for the three months ended March 31, 2024, from $71.8 million for the three months ended March 31, 2023, as a result of increases in both subscription solutions and partner and services revenue. Subscription solutions revenue increased $7.2 million, or 13.3 percent, to $61.0 million for the three months ended March 31, 2024, from $53.8 million for the three months ended March 31, 2023, primarily due to increases in enterprise, mid-market, and Feedonomics activity. Partner and services revenue increased $1.5 million, or 8.1 percent, to $19.4 million for the three months ended March 31, 2024, from $17.9 million for the three months ended March 31, 2023, primarily as a result of increases in revenue share activity offset by decreases in stand ready and integration activity. Cost of revenue, gross profit, and gross margin Three months ended March 31, Change 2024 2023 Amount Percent (dollars in thousands) Cost of revenue $ 18,439 $ 17,446 $ 993 5.7 % Gross profit 61,921 54,311 7,610 14.0 Gross margin percentage 77.1 75.7 30 Table of Content Cost of revenue increased $1.0 million, or 5.7 percent, to $18.4 million for the three months ended March 31, 2024, from $17.4 million for the three months ended March 31, 2023, primarily as a result of higher software costs and processing fees of $1.1 million and decreased spend of $0.3 million in salaries and shared-based compensation driven by decreases in headcount from the 2023 Restructure. Gross margin increased to 77.1 percent from 75.7 percent, primarily as a result of cost cutting measures from the 2023 Restructure. Operating income (expenses) Sales and marketing Three months ended March 31, Change 2024 2023 Amount Percent (dollars in thousands) Sales and marketing $ 32,432 $ 34,052 $ (1,620 ) (4.8 ) % Percentage of revenue 40.4 % 47.5 % Sales and marketing expenses decreased $1.6 million, or (4.8) percent, to $32.4 million for the three months ended March 31, 2024 from $34.1 million for the three months ended March 31, 2023, primarily due to decreased salaries of $1.8 million and share-based compensation driven by cost cutting measures from the 2023 Restructure. As a percentage of total revenue, sales and marketing expenses decreased to 40.4 percent from 47.5 percent, primarily as a result of cost cutting measures from the 2023 Restructure. Research and development Three months ended March 31, Change 2024 2023 Amount Percent (dollars in thousands) Research and development $ 19,988 $ 20,845 $ (857 ) (4.1 ) % Percentage of revenue 24.9 29.0 Research and development decreased $0.9 million, or (4.1) percent, to $20.0 million for the three months ended March 31, 2024 from $20.8 million for the three months ended March 31, 2023, due to the cost cutting measures from the 2023 Restructure. As a percentage of total revenue, research and development expenses decreased to 24.9 percent from 29.0 percent, primarily as a result of cost cutting measures from the 2023 Restructure. General and administrative Three months ended March 31, Change 2024 2023 Amount Percent (dollars in thousands) General and administrative $ 14,929 $ 16,494 $ (1,565 ) (9.5 ) % Percentage of revenue 18.6 23.0 General and administrative expenses decreased $1.6 million, or (9.5)% percent , to $14.9 million for the three months ended March 31, 2024 from $16.5 million for the three months ended March 31, 2023, primarily due to decreased bad debt expense of $0.3 million due to focus on collection efforts, decreased spend of $0.7 million in salaries and share-based compensation driven by cost cutting measures from the 2023 Restructure, and decreased insurance expense of $0.4 million as a result of improved renewal rates. As a percentage of total revenue, general and administrative expenses decreased to 18.6 percent from 23.0 percent, primarily as a result of cost cutting measures from the 2023 Restructure. Acquisition related expenses Acquisition related expense decreased $3.8 million, or (91.9) percent, to $0.3 million for the three months ended March 31, 2024, from $4.1 million for the three months ended March 31, 2023. Acquisition costs related to Feedonomics were recognized through Q3 2023, which was the second anniversary date of the acquisition. The remaining acquisition expenses are recognized on other transactions that occurred, while the prior years balance included costs related to the Feedonomics acquisition. 31 Table of Content Restructuring charges Restructuring charges were $0.0 million for the three months ended March 31, 2024, and $0.4 million for the three months ended March 31, 2023. Interest income Interest income increased $0.8 million, or 31.0 percent, to $3.2 million for the three months ended March 31, 2024, from $2.4 million for the three months ended March 31, 2023. This increase was primarily a result of investment income reinvested at higher interest rates for our cash, cash equivalents and marketable securities. Interest expense Interest expense was $0.7 million and $0.7 million for the three months ended March 31, 2024 and 2023, respectively, and was related to our outstanding debt. Liquidity and capital resources We are committed to healthy cash flow generation and cash management, and continue to evaluate all of our spending to look for opportunities to drive improvements in cash flow. Our improvements in internal systems and controls, together with discipline around accounts receivable and collections has led to improvements in working capital and accounts receivable. Our operational short-term liquidity needs primarily include working capital for sales and marketing, research and development, and continued innovation. Our future capital requirements will depend on many factors, including our growth rate, levels of revenue, the expansion of sales and marketing activities, market acceptance of our platform, the results of business initiatives, the timing of new product introductions, the continued impact of the inflation on the global economy, our business, financial condition, and results of operations. We believe that our existing cash and cash equivalents and our cash flows from operating activities will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months. In the future, we may attempt to raise additional capital through the sale of additional equity or debt financing. In the future, we will continue to work with our customer base to move billings from monthly to annually in efforts to better manage cash flow and reduce churn. Additionally, we may attempt to restructure our debt financing. From time to time, we may seek to repurchase, redeem or otherwise retire our convertible notes through cash repurchases and/or exchanges for equity securities, in open market repurchases, privately negotiated transactions, tender offers or otherwise. Such repurchases, redemptions or other transactions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material. We do not have any material off-balance sheet arrangements that we expect would materially affect our liquidity and capital resources. Cash flows The following table sets forth a summary of our cash flows for the periods indicated. Three months ended March 31, 2024 2023 (in thousands) Net cash used in operating activities $ (3,417 ) $ (20,836 ) Net cash used in investing activities (6,931 ) (9,677 ) Net cash used in financing activities (485 ) (330 ) Net decrease in cash, cash equivalents and restricted cash $ (10,833 ) $ (30,843 ) As of March 31, 2024, we had $62.0 million in cash, cash equivalents, and restricted cash, an increase of $0.2 million compared to $62.2 million as of March 31, 2023. Cash and cash equivalents consist of highly-liquid investments with original maturities of less than three months. Our restricted cash balance of $1.1 million and $1.1 million at March 31, 2024 and 2023 respectively, consists of security deposits for future chargebacks and amounts on deposit with certain financial institutions. Our marketable securities balance of $204.3 million and $221.3 million at March 31, 2024 and 2023 respectively, consists of investments in corporate and US treasury securities . We maintain cash account balances in excess of Federal Deposit Insurance Corporation (FDIC) insured limits. Operating activities 32 Table of Content Net cash used in operating activities for the three months ended March 31, 2024 and 2023 was $3.4 million and $20.8 million, respectively. This consisted primarily of our net losses adjusted for certain non-cash items including depreciation, stock-based compensation, debt discount amortization, amortization of intangible assets, bad debt expense, and the effect of changes in working capital. Investing activities Net cash used in investing activities during the three months ended March 31, 2024 and 2023 was $6.9 million and ($9.7) million, respectively. In the three months ended March 31, 2024, this consists primarily of the sale and maturity of marketable securities of $29.4 million offset by the purchase of property and equipment of $0.8 million and the purchase of marketable securities of $35.5 million. In the three months ended March 31, 2023, this consists primarily of the purchases of marketable securities of $48.0 million and the purchases of property and equipment of $1.1 million offset by the maturity of marketable securities of $39.4 million. Financing activities Net cash used in financing activities during the three months ended March 31, 2024 and 2023 was $0.5 million and $0.3 million, respectively. In the three months ended March 31, 2024, this was attributable to proceeds from exercise of stock options of $0.1 million offset by withholdings from the issuance of shares of common stock pursuant to the exercise of stock options and vesting of restricted stock units of $1.3 million and repayments of debt of $0.1 million. In the three months ended March 31, 2023, this was attributable to withholdings from the issuance of shares of common stock pursuant to the exercise of stock options of $0.3 million Indebtedness 2021 Convertible senior notes In September 2021, we issued $345.0 million principal amount of 0.25 percent Convertible Senior Notes due 2026 (the “Notes”). The Notes were issued pursuant to, and are governed by, an indenture (the “Convertible Notes Indenture”), dated as of September 14, 2021, between us and U.S. Bank National Association, as trustee. The Notes are our senior, unsecured obligations and are (i) equal in right of payment with our future senior, unsecured indebtedness; (ii) senior in right of payment to our future indebtedness that is expressly subordinated to the Notes in right of payment; (iii) effectively subordinated to our future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all future indebtedness and other liabilities, including trade payables, and (to the extent we are not a holder thereof) preferred equity, if any, of our subsidiaries. The Notes accrue interest at a rate of 0.25 percent per annum, payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2022. The Notes will mature on October 1, 2026, unless earlier repurchased, redeemed or converted. Before July 1, 2026, noteholders have the right to convert their Notes only upon the occurrence of certain events. From and after July 1, 2026, noteholders may convert their Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. We will settle conversions by paying or delivering, as applicable, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. The initial conversion rate was 13.6783 shares of common stock per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $73.11 per share of common stock. The conversion rate and conversion price are subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Convertible Notes Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time. We may not redeem the Notes at our option at any time before October 7, 2024. The Notes will be redeemable, in whole or in part (subject to the “Partial Redemption Limitation” (as defined in the Convertible Notes Indenture)), at our option at any time, and from time to time, on or after October 7, 2024 and on or before the 25th scheduled trading day immediately before the maturity date, but only if the last reported sale price per share of our common stock exceeds 130 percent of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date we send the related redemption notice; and (ii) the trading day immediately before the date we send such notice. The redemption price will be a cash amount equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, calling any Note for redemption will constitute a Make-Whole Fundamental Change with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption. Pursuant to the Partial Redemption Limitation, we may not elect to redeem less than all of the outstanding Notes unless at least $150.0 million aggregate principal amount of Notes are outstanding and not subject to redemption as of the time we send the related redemption notice. If certain corporate events that constitute a “Fundamental Change” (as defined in the Convertible Notes Indenture) occur, then, subject to a limited exception for certain cash mergers, noteholders may require us to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the 33 Table of Content fundamental change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving us and certain de-listing events with respect to our common stock. The Notes have customary provisions relating to the occurrence of “Events of Default” (as defined in the Convertible Notes Indenture), which include the following: (i) certain payment defaults on the Notes (which, in the case of a default in the payment of interest on the Notes, will be subject to a 30-day cure period); (ii) our failure to send certain notices under the Notes Indenture within specified periods of time; (iii) our failure to comply with certain covenants in the Notes Indenture relating to our ability to consolidate with or merge with or into, or sell, lease or otherwise transfer, in one transaction or a series of transactions, all or substantially all of the assets of us and our subsidiaries, taken as a whole, to another person; (iv) a default by us in our other obligations or agreements under the Convertible Notes Indenture or the Notes if such default is not cured or waived within 60 days after notice is given in accordance with the Convertible Notes Indenture; (v) certain defaults by us or any of our significant subsidiaries with respect to indebtedness for borrowed money of at least $65.0 million; and (vi) certain events of bankruptcy, insolvency and reorganization involving us or any of our significant subsidiaries. If an Event of Default involving bankruptcy, insolvency or reorganization events with respect to us (and not solely with respect to a significant subsidiary of us) occurs, then the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding will immediately become due and payable without any further action or notice by any person. If any other Event of Default occurs and is continuing, then, the trustee, by notice to us, or noteholders of at least 25 percent of the aggregate principal amount of Notes then outstanding, by notice to us and the trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding to become due and payable immediately. However, notwithstanding the foregoing, we may elect, at our option, that the sole remedy for an Event of Default relating to certain failures by us to comply with certain reporting covenants in the Notes Indenture consists exclusively of the right of the noteholders to receive special interest on the Notes for up to 180 days at a specified rate per annum not exceeding 0.50 percent on the principal amount of the Notes. Off-balance sheet arrangements We did not have any off-balance sheet arrangements as of March 31, 2024 or as of December 31, 2023. Critical accounting policies and estimates Our condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. We also make estimates and assumptions on the reported revenue generated and reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our Annual Report on Form 10-K for the year ended December 31, 2023. Recent accounting pronouncements A discussion of recent accounting pronouncements is included in Note 2 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. 34 Item 3. Quantitative and Qualitati ve Disclosures About Market Risk. Interest rate risk Our cash, cash equivalents and restricted cash, consist primarily of interest-bearing accounts. Such interest-earning instruments carry a degree of interest rate risk. To minimize interest rate risk in the future, we intend to maintain our portfolio of cash equivalents in a variety of investment-grade securities, which may include commercial paper, money market funds, and government and non-government debt securities. Because of the short-term maturities of our cash, cash equivalents, restricted cash, and marketable securities, we do not believe that an increase in market rates would have any significant negative impact on the realized value of our investments. An immediate increase or decrease in interest rates of 100 basis points at March 31, 2024 could result in a $2 million market value reduction or increase of the same amount. Foreign currency exchange risk All of our revenue and a majority of our expense and capital purchasing activities for the three months ended March 31, 2024 were transacted in U.S. dollars. As we expand our sales and operations internationally, we will be more exposed to changes in foreign exchange rates. Our international revenue is currently collected in U.S. dollars. In the future, as we expand into additional international jurisdictions, we expect that our international sales will be primarily denominated in U.S. dollars. If we decide in the future to denominate international sales in currencies other than the U.S. dollar, unfavorable movement in the exchange rates between the U.S. dollar and the currencies in which we conduct foreign sales could have an adverse impact on our revenue. A portion of our operating expenses are incurred outside the United States and are denominated in foreign currencies, which are subject to fluctuations due to changes in foreign currency exchange rates. In particular, in our Mexico, Australia and UK-based operations, we pay payroll and other expenses in Mexican pesos, Australian dollars and British pounds sterling, respectively. Our operating results and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. However, we believe that the exposure to foreign currency fluctuation from operating expenses is relatively small at this time as the related costs do not constitute a significant portion of our total expenses. We currently do not hedge foreign currency exposure. We may in the future hedge our foreign currency exposure and may use currency forward contracts, currency options, and/or other common derivative financial instruments to reduce foreign currency risk. It is difficult to predict the effect future hedging activities would have on our operating results. Credit risk Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents, restricted cash, and accounts receivable. Our investment policy limits investments to high credit quality securities issued by the U.S. government, U.S. government-sponsored agencies, and highly rated corporate securities, subject to certain concentration limits and restrictions on maturities. Our cash and cash equivalents and restricted cash are held by financial institutions that management believes are of high credit quality. Amounts on deposit may at times exceed FDIC insured limits. We have not experienced any losses on our deposits of cash and cash equivalents, and accounts are monitored by management to mitigate risk. We are exposed to credit risk in the event of default by the financial institutions holding our cash and cash equivalents or an event of default by the issuers of the corporate debt securities we hold.