Cricut, Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm ( BDO USA, LLP ; Salt Lake City, Utah ; PCAOB ID# 243 ) 82 Consolidated Balance Sheets 84 Consolidated Statements of Operations and Comprehensive Income 85 Consolidated Statements of Stockholders’ Equity 86 Consolidated Statements of Ca sh Flows 87 Notes to Consolidated Financial Statements 89 81 Table of Contents Report of Independent Registered Public Accounting Firm Stockholders and Board of Directors Cricut, Inc. South Jordan, Utah Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Cricut, Inc. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 , in conformity with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in 2021 due to the adoption of Accounting Standards Codification (“ASC”) Topic 842, Leases . Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Variable Consideration Related to Customer Rebates As described in Note 2 to the consolidated financial statements, the Company recognizes revenue at the net sales price, which includes certain estimates for variable consideration related to customer rebates. The reserves for variable consideration related to customer rebates are recorded as a liability in the consolidated balance sheets and totaled $37 million as of December 31, 2021. While a portion of this liability is based on contractual amounts and does 82 Table of Contents not require estimation, certain customer rebate programs are estimates at period end due to the nature of the incentives or expected and yet-to-be announced incentive programs that apply to current period revenue transactions. We identified the auditing of certain estimated variable consideration related to customer rebate amounts as a critical audit matter. Specifically, estimated variable consideration for certain customer rebates reflects management's evaluation of contractual terms, historical experience and assumptions over projected sales data and additional incentives expected to be granted. Auditing these estimates involved especially challenging and complex auditor judgment due to the level of uncertainty involved in management’s subjective assumptions regarding the expected realization of these various programs. The primary procedures we performed to address this critical audit matter included: • Assessing the completeness of estimated customer rebate listings with the Company’s internal sales personnel. • Developing an expectation for estimated variable consideration and liabilities related to customer rebates using sales data, rebate percentages per contractual agreements and historical claims data and comparing to actual results. • Assessing the current and historical accuracy of management’s estimates by comparing customer rebate liabilities to actual settlements made in subsequent periods and for a selection of liabilities, evaluating whether the Company considered relevant information, including agreements with customers, historical data, and economic conditions. • Performing a search for unrecorded customer rebate liabilities at period end by inspecting significant subsequent claims activity. /s/ BDO USA, LLP We have served as the Company's auditor since 2012. Salt Lake City, Utah March 8, 2022 83 Table of Contents Cricut, Inc. Consolidated Balance Sheets (in thousands, except share and per share amounts) As of December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 241,597 $ 122,215 Accounts receivable, net 199,508 162,931 Inventories 454,174 248,745 Prepaid expenses and other current assets 32,820 4,916 Total current assets 928,099 538,807 Property and equipment, net 53,261 33,441 Operating lease right-of-use assets 17,653 — Intangible assets, net 1,520 2,280 Deferred tax assets 3,255 3,119 Other assets 2,462 3,753 Total assets $ 1,006,250 $ 581,400 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 204,714 $ 251,658 Accrued expenses and other current liabilities 69,351 71,324 Deferred revenue, current portion 30,547 23,518 Operating lease liabilities, current portion 3,755 — Total current liabilities 308,367 346,500 Operating lease liabilities, net of current portion 15,780 — Deferred revenue, net of current portion 4,858 2,758 Other non-current liabilities 3,269 3,217 Total liabilities 332,274 352,475 Commitments and contingencies (Note 12) Stockholders’ equity: Preferred stock, par value $ 0.001 per share, 100,000,000 shares authorized, no shares issued and outstanding as of December 31, 2021. No shares issued, authorized or outstanding as of December 31, 2020. — — Common stock, par value $ 0.001 per share, 1,250,000,000 shares authorized as of December 31, 2021, 221,913,559 shares issued and outstanding as of December 31, 2021; 257,058,262 shares authorized as of December 31, 2020, 208,116,104 shares issued and outstanding as of December 31, 2020. 222 208 Additional paid-in capital 717,369 412,741 Accumulated deficit ( 43,560 ) ( 184,033 ) Accumulated other comprehensive income (loss) ( 55 ) 9 Total stockholders’ equity 673,976 228,925 Total liabilities and stockholders’ equity $ 1,006,250 $ 581,400 See accompanying notes to these consolidated financial statements. 84 Table of Contents Cricut, Inc. Consolidated Statements of Operations and Comprehensive Income (in thousands, except share and per share amounts) Year Ended December 31, 2021 2020 2019 Revenue: Connected machines $ 548,205 $ 416,714 $ 198,144 Subscriptions 205,858 111,337 53,829 Accessories and materials 552,164 430,979 234,581 Total revenue 1,306,227 959,030 486,554 Cost of revenue: Connected machines 484,025 351,898 176,894 Subscriptions 21,961 13,125 8,827 Accessories and materials 342,791 261,633 158,483 Total cost of revenue 848,777 626,656 344,204 Gross profit 457,450 332,374 142,350 Operating expenses: Research and development 79,814 38,930 26,674 Sales and marketing 133,963 63,329 40,110 General and administrative 51,268 29,602 22,005 Total operating expenses 265,045 131,861 88,789 Income from operations 192,405 200,513 53,561 Total other expense, net ( 32 ) ( 1,320 ) ( 3,293 ) Income before provision for income taxes 192,373 199,193 50,268 Provision for income taxes 51,900 44,615 11,057 Net income $ 140,473 $ 154,578 $ 39,211 Other comprehensive income (loss): Change in foreign currency translation adjustment, net of tax ( 64 ) 37 ( 28 ) Comprehensive income 140,409 154,615 39,183 Earnings per share, basic $ 0.67 $ 0.74 $ 0.19 Earnings per share, diluted $ 0.64 $ 0.74 $ 0.19 Weighted-average common shares outstanding, basic 208,833,827 208,116,104 208,116,104 Weighted-average common shares outstanding, diluted 219,776,069 208,116,104 208,116,104 See accompanying notes to these consolidated financial statements. 85 Table of Contents Cricut, Inc. Consolidated Statements of Stockholders’ Equity (in thousands, except share amounts) Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance as of December 31, 2018 208,116,104 $ 208 $ 457,380 $ ( 377,822 ) $ — $ 79,766 Net Income — — — 39,211 — 39,211 Capital contributions — — 1,296 — — 1,296 Stock-based compensation — — 1,625 — — 1,625 Compensatory units repurchased — — ( 728 ) — — ( 728 ) Other comprehensive loss — — — — ( 28 ) ( 28 ) Balance as of December 31, 2019 208,116,104 $ 208 $ 459,573 $ ( 338,611 ) $ ( 28 ) $ 121,142 Net income — — — 154,578 — 154,578 Capital contributions — — 2,452 — — 2,452 Stock-based compensation — — 4,956 — — 4,956 Compensatory units repurchased — — ( 3,038 ) — — ( 3,038 ) Cash dividend — — ( 51,202 ) — — ( 51,202 ) Other comprehensive income — — — — 37 37 Balance as of December 31, 2020 208,116,104 $ 208 $ 412,741 $ ( 184,033 ) $ 9 $ 228,925 Net income — — — 140,473 — 140,473 Capital contributions — — 200 — — 200 Initial public offering, net of offering costs 14,218,815 14 260,675 — — 260,689 Issuance of common stock upon vesting or exercise of stock-based awards, net of withholding tax 121,014 — ( 2,606 ) — — ( 2,606 ) Forfeiture of unvested common stock ( 541,850 ) — — — — — Repurchase upon Corporate Reorganization ( 524 ) — ( 10 ) — — ( 10 ) Extinguishment of liability awards to equity — — 10,784 — — 10,784 Stock-based compensation — — 35,755 — — 35,755 Compensatory units repurchased — — ( 170 ) — — ( 170 ) Other comprehensive loss — — — — ( 64 ) ( 64 ) Balance as of December 31, 2021 221,913,559 $ 222 $ 717,369 $ ( 43,560 ) $ ( 55 ) $ 673,976 See accompanying notes to these consolidated financial statements. 86 Table of Contents Cricut, Inc. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2021 2020 2019 Cash flows from operating activities: Net income $ 140,473 $ 154,578 $ 39,211 Adjustments to reconcile net income to net cash and cash equivalents (used in) provided by operating activities: Depreciation and amortization (including amortization of debt issuance costs) 19,388 14,116 9,178 Impairment of trade name — — 747 Stock-based compensation 38,074 9,484 1,845 Deferred income tax ( 135 ) ( 2,463 ) ( 1,257 ) Non-cash lease expense 4,186 — — (Gain) loss on disposal of property and equipment ( 2 ) — 16 Provision for inventory obsolescence 5,070 2,802 5,193 Provision for doubtful accounts 1,096 128 699 Loss on extinguishment of debt — 162 — Changes in operating assets and liabilities: Accounts receivable ( 37,673 ) ( 97,625 ) ( 4,876 ) Inventories ( 207,978 ) ( 37,979 ) ( 73,233 ) Prepaid expenses and other current assets ( 27,942 ) ( 2,991 ) 4,550 Other assets ( 934 ) ( 450 ) ( 79 ) Accounts payable ( 46,667 ) 157,023 10,340 Accrued expenses and other current liabilities and other non-current liabilities 3,639 39,732 7,454 Operating lease liabilities ( 4,672 ) — — Deferred revenue 9,128 11,710 4,073 Net cash and cash equivalents (used in) provided by operating activities ( 104,949 ) 248,227 3,861 Cash flows from investing activities: Acquisitions of property and equipment, including capitalized software development costs ( 35,786 ) ( 21,842 ) ( 14,095 ) Net cash and cash equivalents used in investing activities ( 35,786 ) ( 21,842 ) ( 14,095 ) Cash flows from financing activities: Proceeds from capital contributions 200 1,088 1,296 Proceeds from issuance of common stock upon initial public offering, net of offering costs 262,007 — — Repurchase of compensatory units ( 170 ) ( 3,038 ) ( 728 ) Proceeds from exercise of stock options 272 — — Employee tax withholding payments on stock-based awards ( 2,017 ) — — Payments on term loan — ( 22,917 ) ( 4,417 ) Drawdowns on revolving loan — 228,269 502,730 Payments on revolving loan — ( 260,862 ) ( 487,755 ) Payments on capital leases — ( 81 ) ( 127 ) Payments for debt issuance costs — ( 854 ) ( 103 ) Cash dividend — ( 51,202 ) — Other financing activities, net ( 48 ) ( 1,318 ) — Net cash and cash equivalents (used in) provided by financing activities 260,244 ( 110,915 ) 10,896 Effect of exchange rate on changes on cash and cash equivalents ( 127 ) 92 ( 25 ) Net increase in cash and cash equivalents 119,382 115,562 637 Cash and cash equivalents at beginning of period 122,215 6,653 6,016 Cash and cash equivalents at end of period $ 241,597 $ 122,215 $ 6,653 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 14 $ 1,306 $ 3,301 Cash paid during the period for income taxes $ 81,132 $ 42,315 $ 6,652 See accompanying notes to these consolidated financial statements. 87 Table of Contents Cricut, Inc. Consolidated Statements of Cash Flows (continued) (in thousands) Year Ended December 31, 2021 2020 2019 Supplemental disclosures of non-cash investing and financing activities: Right-of-use assets obtained in exchange for new operating lease liabilities $ 6,805 $ — $ — Refinance of credit facility $ — $ — $ 11,667 Property and equipment included in accounts payable and accrued expenses and other current liabilities $ 3,355 $ 2,585 $ 4,245 Tax withholdings on stock-based awards included in accrued expenses and other current liabilities $ 860 $ — $ — Stock-based compensation capitalized for software development costs $ 1,607 $ 253 $ 85 Deferred offering costs in accounts payable and accrued expenses and other current liabilities $ — $ 623 $ — Reclassification of liability awards to equity upon modification $ 10,784 $ — $ — Leasehold improvements acquired through tenant allowances $ — $ 936 $ — Purchased unit equivalents issued in settlement of bonus $ — $ 1,364 $ — See accompanying notes to these consolidated financial statements. 88 Table of Contents Cricut, Inc. Notes to Consolidated Financial Statements 1. Description of Business and Basis of Presentation Nature of Business Cricut, Inc. (“Cricut” or the “Company”) is a designer and marketer of a creativity platform that enables users to turn ideas into professional-looking handmade goods. Using the Company’s versatile connected machines, design apps and accessories and materials, users create everything from personalized birthday cards, mugs and T-shirts to large-scale interior decorations. The Company’s connected machines and related accessories and materials and subscription services are primarily marketed under the Cricut brand in the United States, as well as Europe and other countries of the world. Headquartered in South Jordan, Utah, the Company is an innovator in its industry, focused on bringing innovative technology (automation and consumerization of industrial tools) to the craft, DIY and home décor categories. The Company’s consolidated financial statements include the operations of its wholly owned subsidiaries, which are located throughout Europe and in the Asia-Pacific region. The Company designs, markets and distributes the Cricut family of products, including connected machines, design apps and accessories and materials. In addition, Cricut sells a broad line of images, fonts and projects for purchase à la carte. On September 2, 2020, Cricut converted from a Utah corporation to a Delaware corporation. In connection with such conversion, each share of Class A common stock, par value $ 0.01 , of the Utah corporation was exchanged for one share of common stock of the Delaware corporation, par value $ 0.001 . On March 11, 2021, the Company filed an Amended and Restated Certificate of Incorporation to effect a 64.2645654 -for-1 forward stock split of its outstanding common stock. The par value per share was not adjusted as a result of the forward stock split. All authorized, issued and outstanding shares of common stock, additional paid in capital and the related per share amounts contained in the consolidated financial statements have been retroactively adjusted to reflect the forward stock split for all prior periods presented. The Company organizes its business into the following three reportable segments: Connected Machines, Subscriptions and Accessories and Materials. See Note 17 for further discussion of the Company’s segment reporting structure. Initial Public Offering and Corporate Reorganization The Company’s registration statement on Form S-1 related to its initial public offering (“IPO”) was declared effective on March 24, 2021 by the Securities and Exchange Commission (“SEC”), and the Company’s Class A common stock began trading on the Nasdaq Global Select Market on March 25, 202 1. On March 29, 2021, the Company closed its IPO, in which the Company sold 13,250,000 shares of Class A common stock and the selling stockholders sold an additional 2,064,903 shares of Class A common stock at a price to the public of $ 20.00 per share. The Company received aggregate net proceeds of $ 242.7 million after deducting offering costs, underwriting discounts and commissions of $ 22.3 million. On April 28, 2021, the Company sold an additional 968,815 shares of Class A common stock and the selling stockholders sold an additional 150,984 shares of Class A common stock pursuant to the partial exercise of the underwriters’ option to purchase additional shares which generated net proceeds of $ 18.0 million after deducting for underwriting discounts and commissions of $ 1.4 million. Immediately prior to the IPO, the Company engaged in a series of related Corporate Reorganization transactions as follows: • Cricut, Inc. filed an amended and restated certificate of incorporation; and • Cricut Holdings, LLC, or Cricut Holdings, dissolved and liquidated in accordance with the terms and conditions of its then existing limited liability company agreement, pursuant to which the holders of existing units in Cricut Holdings (including holders of purchased units, incentive units, zero strike price incentive units, certain phantom units and options), or the Existing Unitholders, received 100 % of the capital stock of Cricut, Inc., its sole asset, at the time of the liquidation with a value implied by the initial public offering price of the shares of Class A common stock to be sold in this offering. Cricut Holdings ceased to exist following this transaction. 89 Table of Contents In connection with the Corporate Reorganization the outstanding stock-based compensation awards issued by Cricut Holdings were modified or settled as described in Note 11 below. Upon filing the amended and restated certificate of incorporation, all of the Company’s historical Common Stock converted to Class B common stock. Shares of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to five votes per share and is convertible at any time into one share of Class A common stock. Basis of Presentation and Consolidation The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). Certain prior year reported amounts have been reclassified to conform with the current period presentation. These reclassifications did not have a material impact on the Company's consolidated financial statements or related footnotes. The consolidated financial statements include the accounts of Cricut, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. 2. Summary of Significant Accounting Policies Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. For revenue recognition, examples of estimates and judgments include: determining the nature and timing of satisfaction of performance obligations, determining the standalone selling price (“SSP”) of performance obligations, estimating variable consideration such as sales incentives and product returns. Other estimates include the warranty reserve, allowance for doubtful accounts, inventory reserve, intangible assets and other long-lived assets valuation, legal contingencies, stock-based compensation, income taxes, deferred tax assets valuation and developed software, among others. These estimates and assumptions are based on the Company’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including any effects of the ongoing pandemic and the economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. Actual results could differ from these estimates. Comprehensive Income Comprehensive income consists of two components: net income and other comprehensive income (loss). Other comprehensive income (loss) refers to net gains and losses that are recorded as an element of stockholders’ equity but are excluded from net income. The Company’s other comprehensive income (loss) consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency. Realized and unrealized foreign currency transaction gains and losses included in net income are recorded within operating expenses. Foreign currency transaction gains (losses) totaled $( 0.9 ) million, $( 0.3 ) million, and $ 0.2 million for the years ended December 31, 2021, 2020, and 2019, respectively. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents include money market funds and are stated at fair value. The Company also classifies amounts in transit from payment processors for credit card and debit card transactions as cash equivalents. 90 Table of Contents Accounts Receivable Accounts receivable are recorded at original invoice amounts less estimates for credit losses. Management determines the allowance for credit losses by specifically identifying troubled accounts and by using historical write off experience, adjusted for current market conditions and reasonable supportable forecasts of future economic conditions, applied to an aging of all other accounts. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. Accounts receivable consist of the following: December 31, 2021 2020 (in thousands) Trade accounts receivable $ 194,757 $ 161,070 Other receivables 6,205 2,218 Less: Allowance for doubtful accounts ( 1,454 ) ( 357 ) Total accounts receivable, net $ 199,508 $ 162,931 The movements in the allowance for credit losses were not material for any of the periods presented. Concentration of Credit Risk The Company maintains cash and cash equivalents in deposit accounts at financial institutions that, at times, may significantly exceed federally insured limits. Historically, the Company has not experienced any losses related to such accounts. The Company’s non-interest bearing cash balances at December 31, 2021 and 2020 were fully insured up to $250,000 per depositor at each financial institution, and the Company’s non-interest bearing cash balances may significantly exceed federally insured limits. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of trade receivables. In the normal course of business, the Company provides credit terms to its customers. Accordingly, the Company performs ongoing credit evaluations of its customers, generally does not require collateral and considers the credit risk profile of the customer from which the receivable is due in further evaluating collection risk. The Company maintains allowances for possible losses which, when realized, have been within the range of management’s expectations. If one or more of the Company’s significant customers were to become insolvent or were otherwise unable to pay for product purchased, it would have a material adverse effect on the Company’s financial condition and results of consolidated operations. Customers that accounted for 10% or greater of accounts receivable, net as of December 31, 2021 and 2020 were as follows: December 31, 2021 2020 Customer A 23 % 21 % Customer B * 16 % Customer C 12 % 22 % Customer D * 10 % * Accounts receivable was less than 10%. 91 Table of Contents Customers with revenue equal to or greater than 10% of total revenue for the periods indicated were as follows: Year Ended December 31, 2021 2020 2019 Customer A 11 % * 12 % Customer B * 11 % 11 % Customer C 10 % 14 % * Customer D 14 % 14 % 21 % * Revenue was less than 10%. The revenue from these customers is associated with the Connected Machines and Accessories and Materials segments. Supplier Concentration The Company relies on third parties for the supply and manufacture of its products, as well as third-party logistics providers. In instances where these parties fail to perform their obligations, the Company may be unable to find alternative suppliers or satisfactorily deliver its products to its customers on time, if at all. Substantially all of the Company’s products are manufactured by outsourcing partners that are located primarily in Asia. We rely on single source, or a small number of suppliers. For the year ended December 31, 2021, the Company’s top two vendors accounted for approximately 76 % of total finished goods purchases. For the year ended December 31, 2020, the Company’s top two vendors accounted for approximately 73 % of total finished goods purchases. For the year ended December 31, 2019, the Company’s top three vendors accounted for approximately 84 % of total finished goods purchases. Inventories Inventories, which primarily consist of finished goods, are valued at the lower of average cost or net realizable value. Net realizable value is defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Assessments to value the inventory at the lower of the average cost to purchase the inventory, or the net realizable value of the inventory, are based upon assumptions about future demand, physical deterioration, changes in price levels and market conditions. As a result of the Company’s assessments, when the net realizable value of inventory is less than the carrying value, the inventory cost is written down to the net realizable value and the write down is recorded as a charge to cost of revenue. Inventories include indirect acquisition and production costs that are incurred to bring the inventories to their present condition and location. Inventories are recorded net of reserves for obsolescence. Once established, the original cost of the inventory less the related inventory reserve represents the new cost basis of such products. Property and Equipment Property and equipment are stated at cost, less accumulated depreciation and amortization. Major additions and improvements are capitalized, while minor repairs and maintenance costs are expensed when incurred. Manufacturing tools include tools and molds used in the production process. Expenditures for tools and molds are capitalized and depreciated over the estimated useful lives of the assets. We capitalize certain software development costs in the application development stage in accordance with ASC 350-40, “Accounting for Costs of Computer Software Developed or Obtained for Internal Use” and upon the establishment of technological feasibility for a product in accordance with ASC 985-20, “Software to Be Sold, Leased or Otherwise Marketed. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the consolidated statements of operations. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the related assets. 92 Table of Contents The Company uses the following estimated useful lives: Computer software, software development costs and equipment 3 - 5 years Furniture and fixtures 5 - 7 years Manufacturing tools and equipment 3 - 5 years Vehicles 5 years Leasehold improvements Shorter of lease term or remaining life of the asset Leases As described in “ Recently adopted accounting standards” below, the Company adopted ASC 842, Leases (“ASC 842”) effective January 1, 2021. Under ASC 842, the Company determines if an arrangement is or contains a lease at inception by assessing whether the arrangement contains an identified asset and whether it has the right to control the identified asset. Right-of-use (ROU) assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Lease liabilities are recognized at the lease commencement date based on the present value of future lease payments over the lease term. ROU assets are based on the measurement of the lease liability and also include any lease payments made prior to or on lease commencement and exclude lease incentives and initial direct costs incurred, as applicable. As the implicit rate in the Company's leases is generally unknown, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future lease payments. The Company gives consideration to its credit risk, term of the lease, total lease payments and adjusts for the impacts of collateral, as necessary, when calculating its incremental borrowing rates. The Company evaluates renewal options at lease inception and on an ongoing basis, and includes renewal options that it is reasonably certain to exercise in its expected lease terms when classifying leases and measuring lease liabilities. Lease costs for the Company's operating leases are recognized on a straight-line basis within operating expenses and cost of revenue over the reasonably assured lease term. The Company has elected to not separate lease and non-lease components for leases of office space and, as a result, accounts for any lease and non-lease components for office space as a single lease component, to the extent they are fixed. Non-lease components that are not fixed are expensed as incurred as variable lease payments. The Company’s office leases typically include non-lease components such as common-area maintenance costs. The Company has also elected to not apply the recognition requirement to any leases within its existing classes of assets with a term of 12 months or less. Legal Contingencies Liabilities for legal contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. If a loss is reasonably possible and the loss or range of loss can be reasonably estimated, the Company discloses the possible loss or states that such an estimate cannot be made. See Note 12. Debt Issuance Costs Third-party costs incurred to obtain debt financing are capitalized and amortized using the effective interest method over the life of the debt instruments. Costs incurred by the lender and paid by the Company for term debt are recorded as a reduction of the debt proceeds (debt discount) and are amortized to interest expense (see Note 8). Costs incurred by the lender and paid by the Company for the revolver debt are recorded as other assets and amortized over the term of the revolver using the straight-line method. 93 Table of Contents Deferred Offering Costs The Company recorded deferred offering costs of $ 1.9 million as other assets on the consolidated balance sheet as of December 31, 2020 and consist of costs incurred in connection with the Company’s IPO, including legal, accounting, printing and other IPO-related costs. Upon completion of the IPO, these deferred offering costs were reclassified to stockholders’ equity and recorded against the proceeds from the offering. Impairment of Long-lived Assets The Company assesses potential impairments to its long-lived assets, including intangible assets subject to amortization, on an annual basis or when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. The Company regularly evaluates whether events or circumstances have occurred that indicate possible impairment and relies on a number of factors, including results of operations, business plans, economic projections and anticipated future cash flows. An impairment loss is recognized when the carrying amount of the long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to the consolidated statement of operations. During the years ended December 31, 2021, 2020, the Company recorded no impairments relating to amortized intangible assets. During the year ended December 31, 2019, the Company recorded $ 0.7 million in impairment within sales and marketing expense on the Company’s consolidated statements of operations relating to its amortized intangible assets (see Note 6). During the years ended December 31, 2021, 2020 and 2019, the Company recorded no impairments for certain property and equipment (see Note 5). Fair Value of Financial Instruments The Company’s financial instruments include cash and cash equivalents, accounts receivable, and accounts payable. At December 31, 2021, and 2020, the carrying amounts of cash, accounts receivable, and accounts payable approximate fair values because of the short-term nature of these instruments. Fair Value Measurement The Company measures at fair value certain of its financial and non-financial assets and liabilities by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. Fair value is affected by a number of factors, including the type of asset or liability, the characteristics specific to the asset or liability and the state of the marketplace including the existence and transparency of transactions between market participants. The Company estimates fair value for the assets and liabilities measured and reported at fair value on a recurring or non-recurring basis by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. • Level I – Quoted prices are available in active markets for identical assets and liabilities as of the reporting date. • Level II – Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable, such as interest rate and yield curves and market-corroborated inputs). Pricing inputs are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. • Level III – Pricing inputs are unobservable for the assets and liabilities and includes situations where there is little, if any, market activity for the assets and liabilities. The inputs into the determination of fair value require significant management judgment or estimation. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. 94 Table of Contents The Company’s non-financial assets and liabilities, which include intangible assets and property and equipment, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur such that a non-financial instrument is required to be evaluated for impairment, based upon a comparison of the non-financial instrument’s fair value to its carrying value, an impairment is recorded to reduce the carrying value to the fair value, if the carrying value exceeds the fair value. The inputs for fair value calculations of intangible assets and property and equipment, would be based on Level 3 inputs as data used for such fair value calculations would be based on discounted cash flows that are not observable from the market, directly or indirectly. The key variables that drive the discounted cash flow analysis are estimated revenue growth rates, levels of profitability, the terminal value growth rate assumptions and the weighted average cost of capital rate applied, among others. No long-lived assets were measured at fair value on a recurring basis, and financial instruments measured at fair value on a recurring basis were not material at each of December 31, 2021 and 2020. Money market funds are highly liquid investments and are actively traded. The pricing information for the Company’s money market funds are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy. There were no transfers between Levels 1, 2 or 3 for any of the periods presented. As of December 31, 2021 and December 31, 2020, the Company held $ 197.8 million and $ 106.0 million in money market funds, respectively, with no unrealized gains or losses. Earnings Per Share Earnings per share is computed using the two-class method required for multiple classes of common stock and participating securities. The rights, including the liquidation and dividend rights and sharing of losses, of the Class A common stock and Class B common stock are identical, other than voting rights. As the liquidation and dividend rights and sharing of profits are identical, the undistributed earnings are allocated on a proportionate basis and the resulting net income per share will, therefore, be the same for both Class A and Class B common stock on an individual or combined basis. Basic earnings per share is computed using the weighted-average number of outstanding shares of common stock during the period. Diluted earnings per share is computed using the weighted-average number of outstanding shares of common stock and, when dilutive, potential shares of common stock outstanding during the period are determined under the treasury stock method. Revenue Recognition The Company derives the majority of its revenue from the sale of connected machines, digital content subscriptions and accessories and materials. The Company markets and sells its products to customers, which include brick-and-mortar and online retail partners as well as users that purchase from the Company’s website at cricut.com. The Company determines revenue recognition through the following steps: • Identification of the contract, or contracts, with a customer; • Identification of the performance obligations in the contract; • Determination of the transaction price; • Allocation of the transaction price to the performance obligations in the contract; and • Recognition of revenue when, or as, the Company satisfies a performance obligation. Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Revenue is recorded at the net sales price, which includes estimates of variable consideration such as product returns, volume rebates and sales incentives or discounts. The estimates of variable consideration are based on historical return experience, historical and projected sales data and current contract terms. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenue. The Company accounts for shipping and handling activities performed after a customer obtains control 95 Table of Contents of the goods as activities to fulfill the promise to transfer the good. The Company does not incur significant costs to obtain contracts with customers. The following describes the nature of the Company’s primary types of revenue and the revenue recognition policies and significant payment terms as they pertain to the types of transactions with its customers. Connected Machines Connected machines include the Cricut Joy, Cricut Explore and Cricut Maker machine architectures. Payment for sale of products online through the online channel at cricut.com is collected at point of sale in advance of shipping the products. Payment by traditional brick-and-mortar retail partners, including their online channels, is due under customary fixed payment terms. The Company’s contracts with customers for a connected machine contain multiple promises that include hardware, software, unspecified future upgrades and enhancements related to the software and access to the Company’s cloud-based services. Determining whether products and services are considered distinct performance obligations that should be accounted for separately requires significant judgment. The Company’s software used to design, cut and complete projects can be accessed offline or with the cloud-based services at no charge. When accessed with the cloud-based services, users are also able to sync projects across various devices. The connected machines are not able to function without the software, inclusive of firmware and the downloadable software. Together the hardware and software are inputs into providing the essential functionality of the connected machines and are accounted for as a single performance obligation. Revenue is recognized for the single performance obligation of hardware with essential software at a point-in-time when control is transferred, which is either upon shipment or delivery of goods, in accordance with the terms of each contract with the customer. The promise to provide the customer with unspecified future upgrades and enhancements related to the essential software and the promise to provide access to the Company’s cloud-based services are both distinct performance obligations that provide incremental benefits to the connected machines and are recognized using a time-based output measure over the service period as the customer consumes the benefit of the service each day. The Company estimates the service period since it is not contractually stated. In developing the estimated period of providing future services, the Company considers past history, plans to continue to provide services, expected technological developments, obsolescence, competition and other factors. The estimated service period may change in the future in response to competition, technology developments and the Company’s business strategy. Judgment is required to determine the SSP for each distinct performance obligation. The Company allocates revenue to each performance obligation based on their relative SSP. The Company estimates SSP for items that are not sold separately, which include the connected machines and related software, unspecified software upgrades and cloud-based services using information that may include the range of prices for the bundle of products and services and the cost of providing the products or services plus a reasonable margin. In developing SSP estimates, the Company also considers the nature of the products and services and the expected level of future services. SSP of the hardware and essential software reflects the Company’s best estimate of the selling price if it was sold regularly on a standalone basis and comprises the majority of the contract value. Subscriptions The Company’s paid subscription services relate to Cricut Access and Cricut Access Premium which provide users access to images, fonts and projects, which is in addition to the free service of unspecified future upgrades and enhancements related to the essential software and access to the Company’s cloud-based services noted above. The paid subscription services are offered on a month-to-month or annual basis. Payments for subscription services are due month-to-month or annually in advance. Cricut Access and Cricut Access Premium are generally sold in standalone contracts and reallocations are not required. Revenue related to subscriptions is recognized ratably over the length of the subscription using a time-based output measure as the customer consumes the benefit of the service each day. Accessories and Materials The Company also sells accessories and materials (both physical and digital) which generally consist of a single performance obligation and reallocations are not required. Revenue from accessories and materials is recognized at a point-in-time when control is transferred, either upon shipment or delivery of goods, in accordance with the terms of each contract with the customer, or in the case of digital goods, at a point-in-time when the goods are made available to the customer. Payment for sale of accessories and materials through the online channel at 96 Table of Contents cricut.com is collected at point of sale in advance of shipping the products. Payment by traditional brick-and-mortar retail partners, including their online channels, is due under customary fixed payment terms. Cost of Revenue Connected Machines Cost of revenue related to Connected Machines consists of product costs, including costs of contract manufacturers for production, inspecting and packaging, shipping, receiving, handling, warehousing and fulfillment, duties and other applicable importing costs, warranty replacement, excess and obsolete inventory write-downs, tooling and equipment depreciation and royalties. Subscriptions Cost of revenue related to Subscriptions consists primarily of hosting fees, digital content costs, amortization of capitalized software development costs and software maintenance costs. Accessories and Materials Costs of revenue related to Accessories and Materials consists of product costs, including costs of components, costs of contract manufacturers for production, inspecting and packaging, shipping, receiving, handling, warehousing and fulfillment, duties and other applicable importing costs, warranty replacement, excess and obsolete inventory write-downs, tooling and equipment depreciation and royalties. Customer Rebates The Company recognizes revenue at the net sales price, which includes certain estimates for variable consideration related to customer rebates with our key brick-and-mortar and online retail partners. These promotional programs are designed to enhance the sale of the Company’s products and consist of incentives to the Company’s customers. The promotional programs include advertising and product damage allowances, volume/growth and business development incentives and point-of-sale support. Sales incentives are considered to be variable consideration, which the Company estimates using the expected value method or most likely amount, based upon the nature of the incentive. Sales are reduced by the cost of these promotional and rebate programs and the Company records a related customer rebate liability in its consolidated balance sheets at the date of the transaction. Certain customer rebate programs are estimates at period end due to the nature of the incentives or expected and yet-to-be announced incentive programs that apply to current period revenue transactions. These estimates are based on the Company’s incentive program experience, historical and projected sales data and current contractual terms. The remaining portion of this liability is based on contractual amounts and does not require estimation. In limited cases where the customer rebate is specifically for co-operative marketing or advertising campaigns, the Company classifies these expenditures as selling and marketing expenses only if they meet the criteria of being a distinct good or service, are distinct within the context of the contract and the fair value is readily estimable. Sales Refund Liability The Company provides its customers a limited right of return with the sale of its products. The Company estimates sales returns and records reserves at the time the related sales are recorded based on historical data and current economic trends. Actual sales returns could differ from these estimates. The Company regularly assesses and adjusts the estimate of accrued sales returns by updating the return rates for actual trends and projected costs. The Company classifies the estimated sales returns as a current liability as they are expected to be paid out in less than one year using the expected-value method. The estimated sales returns are recorded as a reduction of revenue at the time of sale and recorded as a liability on the consolidated balance sheets. At the same time this is recorded, a right of recovery asset is also recorded within inventory. 97 Table of Contents Changes in the reserve for sales refunds were as follows: December 31, 2021 2020 (in thousands) Balance at beginning of period $ 3,515 $ 941 Additions that reduced net revenue 15,889 8,664 Deductions from reserves for current year returns ( 11,578 ) ( 6,090 ) Balance at end of period $ 7,826 $ 3,515 Warranty Reserves The Company provides an assurance-type limited warranty on most of the products sold. The estimated warranty costs, which are expensed at the time of sale and included in cost of revenue, are based on the results of product testing, industry and historical trends and warranty claim rates incurred and are adjusted for any current or expected trends as appropriate. Actual warranty claim costs could differ from these estimates. The Company regularly assesses and adjusts the estimate of accrued warranty claims by updating claims rates for actual trends and projected claim costs. Changes in the reserve for product warranties were as follows: December 31, 2021 2020 (in thousands) Warranty reserve, beginning of period $ 1,284 $ 633 Additions charged to cost of revenue 7,261 2,683 Repairs and replacements ( 6,147 ) ( 2,032 ) Warranty reserve, end of period $ 2,398 $ 1,284 Income Taxes The Company uses the asset and liability method of accounting for income taxes. The Company recognizes deferred tax liabilities and assets for the expected future income tax consequences of events that have been recognized in the Company’s consolidated financial statements. As such, deferred tax assets and liabilities are determined based on temporary differences between the financial carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. On a periodic basis, the Company assesses the probability that its deferred tax assets, if any, will be recovered. If after evaluating all of the positive and negative evidence, a conclusion is made that it is more likely than not that some portion or all of the deferred tax assets will not be recovered, a valuation allowance is provided by a charge to tax expense to reserve the portion of the deferred tax assets which are not expected to be realized. Under literature related to uncertain tax provisions, the Company reviews its filing positions for all open tax years in all U.S. federal and state jurisdictions where the Company is required to file. The Company recognizes a liability for each uncertain tax position at the amount estimated to be required to settle the issues. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. For the years ended December 31, 2021, 2020 and 2019, interest or penalties related to income tax matters included in the provision for income taxes have not been material. Sales Taxes South Dakota v. Wayfair is a U.S. Supreme Court case that was decided on June 21, 2018 that nullified the physical presence precedent established by Quill Corp. v North Dakota in 1992. The overarching effect of the Wayfair case was that state governments were given the power to impose sales tax on the shipment of goods to customers located within their state boundary even if the seller did not have a physical presence within the state. As such, the Company is required by certain governmental authorities to collect sales taxes on certain transactions. The Company currently collects and reports on sales tax in all states in which it does business. However, the application of existing, 98 Table of Contents new or revised taxes on our business, in particular, sales taxes, VAT and similar taxes would likely increase the cost of doing business online and decrease the attractiveness of selling products over the Internet. The application of these taxes on our business could also create significant increases in internal costs necessary to capture data and collect and remit taxes. There have been, and will continue to be, substantial ongoing costs associated with complying with the various indirect tax requirements in the numerous markets in which we conduct or will conduct business. The Company conducts ongoing analysis on state sales tax nexus regulations to determine where collection is necessary. The Company accounts for sales taxes as part of accrued expenses and excludes them from revenue. Stock-Based and Stock-Equivalent Compensation The Company records compensation expense for all stock-based awards granted based on the fair value of the award at the time of the grant. Stock-based compensation costs are recognized as expense over the requisite service period, which is generally the vesting period, on a straight-line basis for awards with only a service condition. The graded vesting method is used for awards that have service and other conditions. For awards subject to performance vesting conditions, expense is recognized for the awards if it is probable the performance conditions will be met. Forfeitures are accounted for as they occur. The Company estimates the fair value of awards with time-based or performance-based vesting provisions using the Black-Scholes method. The fair value of awards subject to market conditions prior to the Corporate Reorganization was estimated using a Monte Carlo Simulation. The determination of the grant date fair value of the awards issued is affected by a number of variables, including the fair value of the underlying shares or units, the expected price volatility over the expected life of the awards, the expected term of the award, risk-free interest rates, the expected dividend yield of the underlying shares or units and the likelihood of termination. The Company has limited publicly available stock information and therefore, used the historical volatility of the stock price of similar publicly traded peer companies prior to its IPO in March 2021, and a blended average of average historical stock volatilities of peer companies and historical volatility of the Company's stock price for valuations subsequent to the IPO. The Company estimates the expected term using the simplified method for “plain vanilla” stock option awards or based on the expected time to a liquidation event or other transaction that would result in settlement of other awards. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield is 0.0 % as the Company does not anticipate paying dividends, and the Company and its former parent, Cricut Holdings, have not paid dividends other than a one-time dividend paid in 2020. Likelihood of termination for the Monte Carlo Simulation is estimated based upon both historical turnover and anticipated turnover based upon Company or market pressures. Prior to the Corporate Reorganization, the Company’s former parent Cricut Holdings issued stock-based awards to employees of the Company. As the awards were issued by Cricut Holdings, the Company recorded a capital contribution from Cricut Holdings commensurate with the amount of compensation expense recognized in relation to the awards. Incentive unit equivalents (phantom units) granted by Cricut Holdings to the Company’s employees entitled the recipient to future compensation based upon satisfaction of service conditions and were liability classified. The amount of compensation was determined by the change in the underlying value of Cricut Holdings common units. Since the awards also had a market condition, the Company recorded stock-based compensation expense over the requisite service period using the graded vesting method. The incentive unit equivalent awards were recorded at fair value and re-measured at fair value at each reporting period during the period from the date of grant through the settlement date. The impact of fair value re-measurement was recognized as compensation cost over the requisite service period. Common Unit Valuations Fair value of the underlying common units of Cricut Holdings was historically determined by Cricut Holdings’ Board of Managers (“Board of Managers”) on the date of grant for all awards granted. In the absence of a public trading market, the Board of Managers, with input from management, exercised significant judgment and consider numerous objective and subjective factors to determine the fair value of Cricut Holdings’ common units as of the date of each award grant, including: • relevant precedent transactions involving Cricut Holdings’ capital units; • Cricut Holdings’ actual consolidated operating and financial performance; 99 Table of Contents • current business conditions and projections; • Cricut Holdings’ stage of development; • the likelihood and timing of achieving a liquidity event, such as an initial public offering, given prevailing market conditions; • any adjustment necessary to recognize a lack of marketability of the common units; • the market performance of comparable publicly traded companies; and • U.S. and global capital market conditions. In addition, Cricut Holdings’ Board of Managers considered the independent valuations completed by a third-party valuation consultant. The valuations of Cricut Holdings’ common units were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Shipping and Handling Revenue and Expenses Shipping and handling revenue for orders placed by customers is recognized at the time of the sale. Shipping and handling expenses incurred by the Company related to these sales are considered fulfillment costs and reported as costs of revenue at the time of the sale. Advertising Costs The Company incurs advertising costs associated with print, digital and other related broadcast advertisements. Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2021, 2020 and 2019 was $ 45.1 million, $ 15.5 million, and $ 4.2 million respectively. Advertising costs include expenditures for shared advertising costs that the Company incurs under its co-operative advertising programs to the extent the fair value of the distinct good or service can reasonably be estimated. Research and Development (“R&D”) R&D expense consists of costs associated primarily with engineering, product development, quality assurance, service fees incurred by contracting with vendors and allocated overhead costs. R&D costs are expensed as incurred. Recently Issued Accounting Standards Recently adopted accounting standards In February 2016 the FASB issued ASU 2016-02, Leases (“ASU 2016-02” or “Topic 842”). ASU 2016-02 amends a number of aspects of lease accounting, including requiring lessees to recognize leases with a term greater than one year as a right-of-use asset and corresponding liability, measured at the present value of the lease payments. On January 1, 2021, the Company adopted Topic 842 using the modified retrospective approach. Results for the twelve months ended December 31, 2021 are presented under Topic 842. No prior period amounts were adjusted and continue to be reported in accordance with previous lease guidance, ASC Topic 840, Leases. The new standard provides a number of optional practical expedients in transition. The Company elected the practical expedients to not reassess its prior conclusions about lease identification under the new standard, to not reassess lease classification, to not reassess initial direct costs, and to use hindsight in determining the lease term and in assessing impairment of the Company's right-of-use assets. 100 Table of Contents The impact of the adoption of Topic 842 on the accompanying consolidated balance sheet as of January 1, 2021 was as follows: As reported December 31, 2020 Adjustments due to the adoption of Topic 842 As adjusted January 1, 2021 (in thousands) Assets: Operating lease right-of-use assets $ — $ 15,036 $ 15,036 Prepaid expenses and other current assets: — Prepaid rent 9 ( 9 ) — Liabilities: Accounts payable and accrued liabilities Operating lease liabilities - current — 3,918 3,918 Deferred rent 2,376 ( 2,376 ) — Operating lease liabilities - non-current $ — $ 13,485 $ 13,485 The adjustments due to the adoption of Topic 842 related to the recognition of operating lease right-of-use assets and operating lease liabilities for the existing operating leases. The adoption of the new standard did not have an impact on the Company's beginning equity, statement of operations or cash flows. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses” (Topic 326). ASU 2016-13 modifies the measurement of expected credit losses of certain financial instruments, requiring entities to estimate an expected lifetime credit loss on financial assets. For available-for-sale debt securities in unrealized loss positions, ASU 2016-13 requires allowances to be recorded instead of reducing the amortized cost of the investment. ASU 2016-13 became effective on January 1, 2021. The adoption of ASU 2016-13 did not have a material impact on the Company’s consolidated financial statements and related disclosures. In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes” (Topic 740). ASU 2019-12 removes certain exceptions for investments, intraperiod allocations and interim calculations and adds guidance to reduce complexity in accounting for income taxes. The Company adopted this standard effective January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s consolidated financial statements and related disclosures. In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40) – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset and which costs to expense. The Company adopted this standard on a prospective basis effective January 1, 2021. During the year ended December 31, 2021, the Company capitalized $ 1.4 million of implementation costs under this standard primarily related to the implementation of additional accounting and financial reporting tools. These costs are recorded within other assets in the consolidated balance sheets and amortized on a straight-line basis over the term of the associated hosting arrangement. Amortization of implementation costs during the year ended December 31, 2021 was not significant. 3. Revenue and Deferred Revenue Deferred revenue relates to performance obligations for which payments have been received from the customer prior to revenue recognition. Deferred revenue primarily consists of deferred subscription-based services. Deferred revenue also includes amounts allocated to the unspecified upgrades and enhancements and the Company’s cloud-based services. The Company had no material contract assets. 101 Table of Contents The following table summarizes the changes in the deferred revenue balance for the periods indicated: December 31, 2021 2020 (in thousands) Deferred revenue, beginning of period $ 26,276 $ 14,566 Recognition of revenue included in beginning of period deferred revenue ( 23,518 ) ( 13,188 ) Revenue deferred, net of revenue recognized on contracts in the respective period 32,647 24,898 Deferred revenue, end of period $ 35,405 $ 26,276 As of December 31, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was equal to the deferred revenue balance. The Company expects the following recognition of deferred revenue as of December 31, 2021: Year Ended December 31, 2022 2023 2024 Total (in thousands) Revenue expected to be recognized $ 30,547 $ 3,564 $ 1,294 $ 35,405 The Company’s revenue from contracts with customers disaggregated by major product lines, excluding sales-based taxes, are included in Note 17. Revenue recognized during the year ended December 31, 2021 related to performance obligations satisfied or partially satisfied in prior periods was $ 2.3 million. The following table presents the total revenue by geography based on the ship-to address for the periods indicated: Year Ended December 31, 2021 2020 2019 (in thousands) North America $ 1,157,679 $ 888,266 $ 469,110 International 148,548 70,764 17,444 Total revenue $ 1,306,227 $ 959,030 $ 486,554 North America revenue consists of revenues from the United States and Canada. United States represents 96 %, 98 %, and 98 % of North America revenue for the years ended December 31, 2021, 2020, and 2019, respectively. 4. Inventories Inventories of finished goods are comprised of the following: December 31, 2021 2020 (in thousands) Raw Materials $ 20,187 $ 714 Finished goods 433,987 248,031 Total Inventories $ 454,174 $ 248,745 102 Table of Contents 5. Property and Equipment The composition of property and equipment is as follows: December 31, 2021 2020 (in thousands) Computer software, software development costs and equipment $ 70,663 $ 50,242 Furniture and fixtures 5,243 5,184 Leasehold improvements 4,018 3,587 Manufacturing tools and equipment 29,753 15,563 Vehicles — 22 Assets under construction 9,118 7,702 Total cost of property and equipment 118,795 82,300 Less: accumulated depreciation ( 65,534 ) ( 48,859 ) Property and equipment, net $ 53,261 $ 33,441 Depreciation expense for the years ended December 31, 2021, 2020 and 2019 was $ 18.3 million, $ 13.2 million and $ 8.3 million, respectively. Property and equipment, along with all other Company assets, including inventory, are pledged as collateral on the revolving credit facility (see Note 8). 6. Intangible Assets, Net The following is a summary of the Company’s intangible assets in the consolidated balance sheets: December 31, 2021 Gross Carrying Amount Accumulated Amortization and Impairment Net (in thousands) Trade names and trademarks $ 42,301 $ ( 40,781 ) $ 1,520 Total intangible asset $ 42,301 $ ( 40,781 ) $ 1,520 December 31, 2020 Gross Carrying Amount Accumulated Amortization and Impairment Net (in thousands) Trade names and trademarks $ 42,301 $ ( 40,021 ) $ 2,280 Total intangible asset $ 42,301 $ ( 40,021 ) $ 2,280 The Company’s trade names and trademarks have useful lives ranging from 11 to 15 years. Amortization is expensed on a straight-line basis for all intangible assets, as this is the Company’s best estimate of the period of economic benefit to be received. The Company performed an evaluation of its intangible assets and determined there was an impairment of $ 0.7 million during the years ended December 31, 2019, associated with a product trade name which is no longer in use. These impairment charges were recognized within sales and marketing expense on the Company’s consolidated statements of operations. Amortization expense of intangible assets totaled $ 0.8 million for each of the years ended December 31, 2021, 2020 and 2019, respectively. 103 Table of Contents As of December 31, 2021, estimated future amortization of intangible assets is as follows: Amount (in thousands) 2022 $ 760 2023 760 Total $ 1,520 7. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following: December 31, 2021 2020 (in thousands) Sales incentives and rebates $ 36,969 $ 30,295 Other accrued liabilities and other current liabilities 32,382 41,029 Total accrued expenses $ 69,351 $ 71,324 8. Revolving Credit Facility 2020 Credit Agreement In September 2020, the Company entered into the Credit Agreement with JPMorgan Chase Bank, N.A., Citibank, N.A. and Origin Bank. The Credit Agreement replaces the prior amended credit agreement with Origin Bank. The Credit Agreement provides for a three-year asset-based senior secured revolving credit facility of up to $ 150.0 million, maturing on September 4, 2023. During the term of the Credit Agreement, the Company may increase the aggregate amount of the credit facility by up to an additional $ 200.0 million, (for maximum aggregate lender commitments of up to $ 350.0 million), subject to the satisfaction of certain conditions under the Credit Agreement, including obtaining the consent of the administrative agent and an increased commitment from existing or new lenders. The credit facility may be used to issue letters of credit and for other business purposes, including working capital needs. The amount that can be borrowed under the Credit Agreement is limited to the lesser of (a) the borrowing base minus the aggregate revolving exposure or (b) aggregate lender commitments at any given time. The borrowing base is determined according to certain percentages of eligible accounts receivable and eligible inventory (which may be valued at average cost, market value or net orderly liquidation value), subject to reserves determined by the administrative agent. At any time that the Company’s borrowing base is less than the aggregate lender commitments, the Company can only borrow revolving loans up to the amount of the Company’s borrowing base and not in the full amount of the aggregate lender commitments. As of December 31, 2021, no amount was outstanding under the Credit Agreement and available borrowings were $ 150.0 million. Generally, borrowings under the Credit Agreement bear interest at a rate based on LIBOR (“Adjusted LIBO rate”) or an alternative base rate (“ABR”), plus, in each case, an applicable margin. The applicable margin will range from (a) with respect to borrowings bearing interest at the ABR, 1.50 % to 2.00 %, and (b) with respect to borrowings bearing interest at the ABR (i) if the “REVLIBOR30 Screen Rate” (as defined in the Credit Agreement) is available for such period, 1.50 % to 2.00 %, or (ii) otherwise, 0.00 % to 0.50 %, in each case for the previous clauses (a) and (b), based on our “Fixed Charge Coverage Ratio” as defined in the Credit Agreement. The Credit Agreement contains financial covenants during the initial year of the agreement, requiring the Company to maintain a fixed charge coverage ratio of at least 1.0 to 1.0, measured monthly on a trailing 12 month basis. The Company is also subject to this covenant in future periods if the available commitment is less than the greater of $ 15.0 million and 10 % of total commitment made by all lenders. Management has determined that the Company was in compliance with all financial and non-financial debt covenants as of December 31, 2021. 104 Table of Contents 9. Income Taxes The Company’s income before income taxes of $ 192.4 million, $ 199.2 million, and $ 50.3 million during the years ended December 31, 2021, 2020, and 2019, respectively, consisted of $ 191.5 million, $ 199.7 million, and $ 50.2 million of income earned in the United States. The remaining amount was earned in foreign jurisdictions. The reconciliation of income tax computed at the U.S. federal statutory tax rate to our effective income tax rate is as follows: Year Ended December 31, 2021 2020 2019 Income tax provision at statutory rate 21.0 % 21.0 % 21.0 % State taxes, net 4.7 2.2 2.4 Stock-based compensation 2.1 0.8 0.7 Foreign derived intangible income deduction ( 1.4 ) ( 0.7 ) — Tax credits ( 2.9 ) ( 1.1 ) ( 2.8 ) Return to provision adjustments 2.3 ( 0.1 ) 0.3 Other 1.2 0.3 0.4 Total provision for income taxes 27.0 % 22.4 % 22.0 % Differences between the Company’s effective tax rate and the statutory tax rate relate primarily to state income taxes, stock-based compensation, tax credits and changes in unrecognized tax benefits during the period.Deferred taxes reflect the net tax effects of the temporary differences between the carrying amount of assets and liabilities for financial reporting and the amount used for income tax purposes. Significant components of the Company’s net deferred tax assets are comprised of the following: December 31, 2021 2020 (in thousands) Deferred tax assets: Inventories $ 3,387 $ 4,092 Deferred rent — 370 Lease liability 5,068 — Accounts receivable 372 83 Sales refund liability 2,002 816 Deferred revenue 1,243 640 Stock-based compensation 4,668 394 Amortization 149 182 Net operating loss carryforwards 146 171 Tax credits 1,003 1,064 Other 853 1,449 Total deferred tax assets 18,891 9,261 Deferred tax liabilities: Depreciation and amortization ( 11,215 ) ( 6,142 ) ROU lease asset ( 4,421 ) — Total deferred tax liabilities ( 15,636 ) ( 6,142 ) Net deferred tax assets $ 3,255 $ 3,119 105 Table of Contents Year Ended December 31, 2021 2020 2019 (in thousands) Current: Federal $ 44,093 $ 41,900 $ 11,070 State 7,780 5,132 1,244 Foreign 162 ( 125 ) — Total current 52,035 46,907 12,314 Deferred: Federal ( 23 ) ( 2,492 ) ( 1,535 ) State ( 137 ) 200 278 Foreign 25 — — Total deferred ( 135 ) ( 2,292 ) ( 1,257 ) Income tax provision $ 51,900 $ 44,615 $ 11,057 There are immaterial foreign net operating loss carryforwards set to expire in 2025. The Company establishes valuation allowances if it is more likely than not that deferred tax assets will not be realized. We believe that we will generate sufficient future taxable income to realize the net operating loss deferred tax asset and other net deferred tax assets recorded in our consolidated financial statements. Accordingly, the Company has not recorded a valuation allowance against net deferred tax assets for the years ended December 31, 2021 and 2020. As of December 31, 2021, 2020, and 2019, $ 2.8 million, $ 1.4 million and $ 1.8 million, respectively, of unrecognized tax benefits would affect our effective tax rate if recognized. The total balance of unrecognized gross tax benefits for the years ended December 31, 2021 and 2020, resulting primarily from research and development credits, fixed asset and inventory basis differences were as follows: Year Ended December 31, 2021 2020 (in thousands) Unrecognized tax benefits at beginning of year $ 3,318 $ 3,989 Reductions based on prior year tax positions — ( 1,481 ) Additions based on prior year tax provisions 593 132 Additions based on current year tax provisions 1,431 678 Reductions due to tax authorities’ settlements ( 2,824 ) — Reductions due to expirations of statutes of limitation ( 139 ) — Unrecognized tax benefits at end of year $ 2,379 $ 3,318 The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. For the years ended December 31, 2021 and 2020, interest or penalties related to income tax matters included in the provision for income taxes have not been material. In January 2021, the IRS completed its examination of the Company’s 2017 tax year. No material adjustments resulted from this examination. The Company is subject to U.S. federal and state income tax examination for tax years 2016 and forward. 106 Table of Contents 10. Capital Structure In connection with the Corporate Reorganization prior to the IPO, the Company filed an amended and restated certification of incorporation which authorized 100,000,000 shares of preferred stock, par value $ 0.001 per share, and 1,250,000,000 shares of common stock, par value $ 0.001 per share, which was divided between two series Class A common stock and Class B common stock. All previously outstanding common stock was reclassified as Class B common stock. During the year ended December 31, 2021, 23,838,863 shares of Class B common stock were converted to Class A common stock. As of December 31, 2021, the Company had 1,000,000,000 shares of Class A common stock and 250,000,000 shares of Class B common stock authorized and 37,886,660 shares of Class A common stock and 184,026,899 shares of Class B common stock issued and outstanding. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to five votes per share and is convertible at any time into one share of Class A common stock. 11. Stock-Based Compensation Stock-based Compensation Cost The following table shows the stock-based compensation cost by award type for the periods indicated: Year Ended December 31, 2021 2020 2019 (in thousands) Equity-classified awards $ 35,755 $ 4,956 $ 1,625 Liability-classified awards 6,447 5,161 305 Total stock-based compensation $ 42,202 $ 10,117 $ 1,930 The following table sets forth the total stock-based compensation cost included in the Company’s consolidated statements of operations and comprehensive income or capitalized to assets for the periods indicated: Year Ended December 31, 2021 2020 2019 (in thousands) Cost of revenue Connected machines $ 34 $ 7 $ 2 Subscriptions 219 31 11 Accessories and materials — — — Total cost of revenue 253 38 13 Research and development 15,782 3,332 881 Sales and marketing 13,814 4,794 623 General and administrative 8,225 1,320 328 Total stock-based compensation expense $ 38,074 $ 9,484 $ 1,845 Capitalized for software development costs $ 1,607 $ 253 $ 85 Capitalized to inventory $ 2,521 $ 380 $ — Total stock-based compensation $ 42,202 $ 10,117 $ 1,930 As of December 31, 2021, there was $ 125.8 million of unrecognized stock-based compensation cost related to stock-based awards which is expected to be recognized over a weighted-average period of 3.2 years. Corporate Reorganization and Stock-Based Compensation Modifications In connection with the Corporate Reorganization, all outstanding awards issued under the Incentive Unit Plan discussed below were modified by exchanging the outstanding awards of Cricut Holdings for awards of the Company. All service based vesting conditions were unaffected by the modification. As described below, the vesting conditions were modified for certain awards which previously had both service and market based vesting conditions. 107 Table of Contents All vested equity classified awards were settled in shares of the Company’s Class B common stock previously held by Cricut Holdings. Unvested equity classified awards were converted to unvested shares of the Company’s Class B common stock subject to future vesting, or in the case of options were converted into options to purchase the Company’s Class B common stock. All vested liability classified awards converted into either shares of Class B common stock to the extent permitted in each applicable jurisdiction or settled in cash. All unvested liability classified awards converted into restricted stock units (“RSUs”) under the 2021 Equity Incentive Plan that will vest into shares of Class A common stock of Cricut, Inc. to the extent permitted in each applicable jurisdiction or into restricted stock unit equivalents which will be settled in cash upon vesting as described below. In connection with the Corporate Reorganization and modification, the Company granted options under the 2021 Equity Incentive Plan to certain employees. The number of options was calculated based on the number of outstanding incentive units or incentive unit equivalents prior to the modification and the participation threshold of such awards. The vesting terms of the options are also based on the vesting terms of the original award. Therefore, the Company considered the exchange of the original award for the unvested shares or RSUs plus the options to be a single modification and will recognize the incremental compensation cost of $ 14.5 million over the vesting term. Of this amount, the Company recognized $ 5.8 million during the year ended December 31, 2021 including a cumulative adjustment in March 2021 to recognize the incremental compensation cost associated with historical vesting. As part of the modification of outstanding awards in connection with the Corporate Reorganization, awards issued under the Incentive Unit Plan which included both service and market conditions were modified to remove the market vesting condition and to increase the participation threshold of the award to the price specified in the former market condition. In total, 3.0 million, 3.0 million, 1.0 million and 1.0 million awards which previously had a participation threshold of $ 2.00 , $ 2.00 , $ 5.00 and $ 5.00 per share, respectively, were modified to have a participation threshold of $ 3.00 , $ 4.00 , $ 6.00 and $ 7.00 per share, respectively. Incremental compensation cost associated with these awards is included in the total incremental compensation cost associated with the issuance of additional options to employees described above as this change was part of a single modification. These modifications are shown as cancellations under the Incentive Unit Plan and as grants under the activity summarized below. 2021 Equity Incentive Plan In March 2021, the Company’s 2021 Equity Incentive Plan became effective. The 2021 Equity Incentive Plan provides for the grant of incentive stock options to employees and for the grant of nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to our employees, directors and consultants and our parent and subsidiary corporations’ employees and consultants. As of December 31, 2021, 20,800,000 shares of Class A common stock were reserved for issuance under this plan including shares reserved for previously granted awards discussed below as well as shares reserved for issuance of future awards under the plan. A summary of the Company’s RSU activity under the 2021 Equity Incentive Plan is as follows: Number of RSUs Weighted- Average Grant Date Fair Value (per share) Outstanding at December 31, 2020 — $ — Granted 5,021,833 $ 23.69 Vested ( 224,752 ) $ 20.00 Forfeited/cancelled ( 123,250 ) $ 24.68 Outstanding at December 31, 2021 4,673,831 $ 23.84 Options under the 2021 Equity Incentive Plan have a contractual term of 10 years. The exercise price of an incentive stock option and non-qualified stock option shall not be less than 100 % of the fair market value of the shares on the date of grant. 108 Table of Contents A summary of the Company’s stock option activity under the 2021 Equity Incentive Plan is as follows: Number of Options Weighted- Average Exercise Price Weighted- Average Remaining Term (Years) Aggregate Intrinsic Value (in thousands) Outstanding at December 31, 2020 — $ — Granted 3,419,359 20.00 Exercised ( 13,592 ) 20.00 Forfeited/cancelled ( 145,410 ) 20.00 Outstanding at December 31, 2021 3,260,357 $ 20.00 5.8 $ 6,814 Vested and exercisable at December 31, 2021 1,379,702 $ 20.00 5.1 $ 2,884 For the year ended December 31, 2021, the total intrinsic value of options exercised was $ 0.1 million. The weighted-average grant date fair value of options granted under the 2021 Equity Incentive Plan during the year ended December 31, 2021 was $ 8.79 per share based on the following weighted-average assumptions: Year Ended December 31, 2021 Expected volatility 51.6 % Risk-free interest rate 0.8 % Expected term (in years) 4.9 Expected dividend — % In connection with the Corporate Reorganization, certain employees received restricted stock unit equivalents (“RSU equivalents”). Upon vesting, these awards are settled for a cash payment equal to the intrinsic value of the award on the date of the Corporate Reorganization plus the difference between the Company’s stock price on the vesting date less the base price specified at the time of the grant. Due to the cash settlement feature, these awards are liability classified awards and require initial and subsequent measurement at fair value. As of December 31, 2021, the total recognized liability for these awards was $ 0.9 million which was included in accrued expenses and other current liabilities per the Company’s consolidated balance sheets. A summary of the RSU equivalent activity under the 2021 Equity Incentive Plan is as follows: Number of RSU Equivalents Weighted- Average Base Price Aggregate Intrinsic Value (in thousands) Outstanding at December 31, 2020 — Granted 94,304 20.00 Vested ( 13,227 ) $ 20.00 $ 436 Outstanding at December 31, 2021 81,077 $ 20.00 $ 1,231 109 Table of Contents The weighted-average fair value of RSU equivalents granted under the 2021 Equity Incentive Plan during the year ended December 31, 2021 was $ 7.57 per share based on the following weighted-average assumptions: Year Ended December 31, 2021 Expected volatility 80.5 % Risk-free interest rate 0.4 % Expected term (in years) 1.0 Expected dividend — % Unvested Class B Common Stock The Company’s unvested Class B common stock resulted from the Corporate Reorganization and is not part of the 2021 Equity Incentive Plan. Activity related to Class B common stock subject to future vesting for the year ended December 31, 2021 is as follows: Number of Unvested Shares Weighted- Average Grant Date Fair Value (per share) Outstanding at December 31, 2020 — Granted 14,037,505 $ 20.00 Vested ( 2,643,782 ) $ 20.00 Forfeited / Cancelled ( 538,864 ) $ 20.00 Outstanding at December 31, 2021 10,854,859 $ 20.00 Options to Purchase Class B Common Stock The Company’s options to purchase Class B common stock resulted from the Corporate Reorganization and are not part of the 2021 Equity Incentive Plan. A summary of the Company stock option activity for the options to purchase shares of Class B common stock is as follows: Number of Options Weighted- Average Exercise Price Weighted- Average Remaining Term (Years) Aggregate Intrinsic Value (in thousands) Outstanding at December 31, 2020 — Granted 522,000 $ 9.04 Forfeited / Cancelled ( 88,000 ) $ 9.04 Outstanding at December 31, 2021 434,000 $ 9.04 3.9 $ 5,664 Vested at December 31, 2021 — $ — N/A $ — The weighted-average grant date fair value of options to purchase Class B common stock during the year ended December 31, 2021 was $ 13.42 per share based on the following weighted-average assumptions: Year Ended December 31, 2021 Expected volatility 51.4 % Risk-free interest rate 0.8 % Expected term (in years) 5.5 Expected dividend — % 110 Table of Contents 2021 Employee Stock Purchase Plan In March 2021, the Company’s 2021 Employee Stock Purchase Plan (“2021 ESPP”) became effective. Subject to any limitations contained therein, the 2021 ESPP allows eligible employees to contribute, through payroll deductions, up to 15 % of their eligible compensation to purchase the Company’s Class A common stock at a discounted price per share. As of December 31, 2021, 4,000,000 shares of our Class A common stock were available for sale under the 2021 ESPP. No offerings have been authorized to date by the administrator under the 2021 ESPP. If the administrator authorizes an offering period under the 2021 ESPP, the administrator will establish the duration of offering periods and purchase periods, including the starting and ending dates of offering periods and purchase periods, provided that no offering period may have a duration exceeding 27 months. Incentive Unit Plan The Company’s former parent, Cricut Holdings, authorized an Incentive Unit Compensation Plan (the “IU Plan”) that allowed for issuances of common incentive units (“CIUs”). The participation threshold of the awards granted under the IU Plan was typically equal to the fair market value of Cricut Holdings’ membership units at the date of the grant, except zero strike price incentive unit awards which have no participation threshold. Except as noted below, all awards issued under the IU Plan only had service-based conditions. Per unit amounts in the activity below are based on the value of Cricut Holdings’ units. Equity Classified Units The Company’s former parent, Cricut Holdings, granted CIUs to employees of the Company. These awards vested 25 % annually over four years of service. The Company’s former parent also granted a performance-based incentive unit, which is discussed later. These awards are collectively referred to as equity classified incentive units. Once vested, all equity classified incentive units remained outstanding until the liquidation of Cricut Holdings or until repurchased by Cricut Holdings. Upon the liquidation of Cricut Holdings all outstanding awards were settled or modified as described above. A summary of the equity classified incentive units activity for the year ended December 31, 2021 is as follows: Equity Incentive Units Weighted- Average Participation Threshold Aggregate Intrinsic Value (in thousands) Outstanding at December 31, 2020 93,371,324 $ 0.97 $ 600,316 Granted 1,548,223 $ — Exercised — $ — Forfeited ( 82,500 ) $ 1.29 Cancelled upon Corporate Reorganization ( 94,837,047 ) $ 0.95 Outstanding at December 31, 2021 — $ — $ — Vested at December 31, 2021 — $ — $ — 111 Table of Contents The following table summarizes the unvested equity classified incentive units activity for the year ended December 31, 2021: Number of Awards Weighted- Average Grant Date Fair Value Per Unit Unvested at December 31, 2020 37,116,025 $ 0.74 Granted 1,548,223 $ 9.06 Vested ( 7,123,673 ) $ 0.40 Forfeited ( 82,500 ) $ 0.79 Cancelled upon Corporate Reorganization ( 31,458,075 ) $ 1.23 Unvested at December 31, 2021 — $ — The weighted-average grant date fair value of equity classified incentive units granted during the years ended December 31, 2021, 2020 and 2019 was $ 9.06 , $ 1.27 and $ 0.28 , respectively. The total intrinsic value of equity classified incentive units exercised during the years ended December 31, 2021, 2020 and 2019 was nil , $ 2.8 million and $ 0.3 million, respectively. The total fair value of equity classified incentive units vested during the years ended December 31, 2021, 2020 and 2019 was $ 3.2 million, $ 3.1 million and $ 0.4 million, respectively. The grant date fair value of CIUs granted during the year ended December 31, 2021 was equal to the estimated fair value of Cricut Holdings’ common unit on the date of the grant as all CIUs had no participation threshold. The fair value of CIUs granted during the years ended December 31, 2020 and 2019 was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions: Year Ended December 31, 2020 2019 Fair value of common unit $ 2.77 $ 0.80 Expected life (in years) 3.2 3.5 Expected volatility 50.0 % 42.9 % Risk-free rate 0.6 % 2.3 % Expected dividend yield — % — % During the year ended December 31, 2020, the Company issued service and market-based incentive units to an employee under the Plan. The recipient was awarded three million incentive equity units comprised of three distinct tranches each containing one million units. The first tranche was subject to service conditions wherein vesting of the award is ratable over four years . The second and third tranches were subject to the same service vesting conditions as tranche one; however, they were also subject to a market vesting condition wherein the fair value of the Cricut Holdings common units was required to exceed a determined price threshold for two consecutive board meetings or for 100 out of 120 consecutive trading days if the Company became public traded. In the absence of a public trading market, the fair value of a common unit was derived through a valuation technique allowed under ASC 718. The determined price thresholds were $ 6.00 and $ 7.00 for the second and third tranches, respectively. In the event of a change in control, all unvested units immediately vest subject to the recipient being employed through the date of the event and any applicable price thresholds being met at the time of the change in control. In the event the recipient was terminated for cause, all incentive units, whether unvested or vested are immediately forfeited. The incentive units represented a net profits interest and only pay out upon the occurrence of a liquidation event such as a change in control transaction. In addition, the units did not participate until the sum of distributions and capital appreciation of the common units from the date of grant of the incentive units equaled $ 5.00 per unit. 112 Table of Contents On the date of grant, the Company determined the fair value of this award to be $ 2.3 million based upon a Monte Carlo Simulation. The significant assumptions used in the Monte Carlo Simulation were as follows: Fair value of common unit $ 2.95 Participation Threshold $ 5.00 Expected volatility 51.12 % Risk-free rate 0.24 % Timing of liquidity event 2 - 6 years Fair value thresholds $ 6.00 - 7.00 Likelihood of termination 10.0 % As described above, in connection with the Corporate Reorganization, these incentive equity units were modified to remove the market vesting condition and to increase the participation threshold to the applicable fair value threshold. The modified awards were then converted into shares of the Company’s class B common stock subject to the same service vesting conditions. Equity Classified Options The Company’s former parent, Cricut Holdings, granted employees of the Company options to purchase zero strike price incentive units. These options generally vested on a cliff basis upon completion of the service period specified for each award. All outstanding options of Cricut Holdings were exchanged for options to purchase class B common stock of Cricut Inc. in connection with the Corporate Reorganization. A summary of option activity for the year ended December 31, 2021 is as follows: Number of Options Weighted- Average Exercise Price Aggregate Intrinsic Value (in thousands) Outstanding at December 31, 2020 1,140,000 $ 4.52 $ 3,283 Granted 27,027 $ 7.40 Exercised ( 27,027 ) $ 7.40 $ 52 Forfeited ( 84,000 ) $ 4.52 Cancelled upon Corporate Reorganization ( 1,056,000 ) $ 4.52 Outstanding at December 31, 2021 — $ — $ — Vested at December 31, 2021 — $ — $ — The grant date fair value of options was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the periods indicated: Year Ended December 31, 2021 2020 Fair value of common unit $ 8.99 $ 6.24 Expected life (in years) 5.0 3.5 Expected volatility 50.9 % 52.5 % Risk-free rate 0.6 % 0.3 % Expected dividend yield — % — % Liability Classified Incentive Unit Equivalents The Company’s former parent issued incentive unit equivalents (phantom units) to various employees under the Incentive Unit Plan. The incentive unit equivalents paid out upon the occurrence of a liquidation event such as a change in control transaction. In addition, the units did not participate until the sum of distributions and capital appreciation of the common units from the date of grant of the incentive units equaled a specified participation threshold per unit. The incentive unit equivalents did not represent any kind of legal equity interest in the Company or 113 Table of Contents the former parent Company and required cash settlement. Accordingly, the incentive unit equivalent awards were accounted for as liability classified awards and required initial and subsequent measurement at fair value. Initially, during the year ended December 31, 2020, these awards generally vested 12.5 % annually for each of the first four years of service and 50 % after the fifth year of service. Following the amendment of these awards in January 2020, these awards vested 25 % annually over four years of service. All liability classified incentive units had indefinite contract terms and, once vested, remained outstanding until liquidation of Cricut Holdings or until repurchased by Cricut Holdings. Upon the liquidation of Cricut Holdings all outstanding awards were settled or modified as described above. A summary of the liability classified incentive unit equivalents activity for the year ended December 31, 2021 is as follows: Liability Incentive Equivalents Weighted- Average Participation Threshold Aggregate Intrinsic Value (in thousands) Outstanding at December 31, 2020 2,851,516 $ 2.13 $ 15,017 Granted 320,000 Forfeited ( 4,000 ) Cancelled upon Corporate Reorganization ( 3,167,516 ) $ 1.92 Outstanding at December 31, 2021 — $ — $ — Exercisable at December 31, 2021 — $ — $ — Vested and expected to vest at December 31, 2021 — $ — $ — The following table summarizes the unvested liability classified incentive unit equivalents activity for the year ended December 31, 2021: Number of Awards Weighted- Average Grant Date Fair Value Per Unit Unvested at December 31, 2020 2,851,516 $ 1.74 Granted 320,000 $ 8.19 Forfeited ( 4,000 ) $ 6.58 Cancelled upon Corporate Reorganization ( 3,167,516 ) $ 2.39 Unvested at December 31, 2021 — $ — The weighted-average grant date fair value of liability classified incentive units granted during the years ended December 31, 2021, 2020 and 2019 was $ 8.19 , $ 2.01 and $ 1.01 , respectively The Company estimated the fair value of liability classified incentive units at each reporting period using the Monte Carlo Simulation. The significant assumptions used in the Monte Carlo Simulation for the periods indicated were as follows: Year Ended December 31, 2020 2019 Fair value of common units $ 7.40 $ 1.85 Expected life (in years) 0.3 - 5 years 3 - 5 years Expected Volatility 51.1 % 40.2 % Risk-free rate 0.2 % 1.6 % Expected dividend yield — % — % Likelihood of termination 10.0 % 10.0 % 114 Table of Contents For the year end December 31, 2021, the Company estimated the fair value of liability classified incentive unit equivalents upon the modification or settlement as part of the Corporate Reorganization based on the estimated fair value of the awards received to settle the liability. The cumulative adjustment upon settlement or modification is included in stock-based compensation related to liability awards above. Liability classified incentive unit equivalents were included in accrued expenses and other current liabilities per the Company’s consolidated balance sheets and the rollforward of this liability is as follows (in thousands): (in thousands) Balance at December 31, 2018 $ 25 Stock-based compensation during year 305 Purchased unit equivalents during year 30 Balance at December 31, 2019 $ 360 Stock-based compensation during year 5,161 Purchased unit equivalents during year 181 Balance at December 31, 2020 $ 5,702 Stock-based compensation during period 6,041 Settlement or modification of awards ( 11,743 ) Balance at December 31, 2021 $ — 12. Commitments and Contingencies Litigation The Company is subject to certain outside claims and litigation arising in the ordinary course of business. Management is not aware of any contingencies which it believes will have a material effect on its financial position, results of operations or liquidity. 13. Leases The Company leases office space with lease terms ranging from 1 to 10 years. These leases require monthly lease payments that may be subject to annual increases throughout the lease term. Certain of these leases also include renewal options at the election of the Company to renew or extend the lease. In December 2021, the Company amended its operating lease for its corporate headquarters in South Jordan, Utah to extend the term through March 2027 and to reduce the annual rent rate for future periods. As a result of this amendment, the Company remeasured the associated operating lease liability and right-of-use asset for this lease. The Company will also lease additional space at its corporate headquarters commencing in January of 2022 under the same terms as its existing lease. Lease obligations for the additional space total $ 4.1 million and are excluded from future maturities disclosed below. The Company has determined its leases should be classified as operating leases. Variable lease costs are comprised primarily of the Company's proportionate share of operating expenses, property taxes, and insurance and are classified as lease cost due to the Company's election to not separate lease and non-lease components. For the year ended December 31, 2021, the Company incurred operating lease costs of $ 4.7 million and variable lease costs of $ 0.5 million. Cash paid for amounts included in the measurement of operating lease liabilities for the year ended December 31, 2021 was $ 5.1 million and was included in net cash used in operating activities in the Company's consolidated statements of cash flows. 115 Table of Contents As of December 31, 2021, the maturities of the Company's operating lease liabilities were as follows: Operating Leases (in thousands) 2022 $ 4,305 2023 4,896 2024 4,619 2025 3,437 2026 2,960 Thereafter 748 Total lease payments $ 20,965 Less: imputed interest $ ( 1,430 ) Present value of operating lease liabilities $ 19,535 Operating lease liabilities, current $ 3,755 Operating lease liabilities, non-current $ 15,780 As of December 31, 2021, the weighted average remaining operating lease term and the weighted average discount rate used to determine the operating lease liability were as follows: As of December 31, 2021 Weighted-average remaining lease term of operating leases 4.6 years Weighted-average discount rate of operating leases 3.1 % Rent expense totaled $ 4.0 million and $ 4.2 million for the years ended December 31, 2020 and 2019, respectively. 14. Related Party Transactions For the years ended December 31, 2021, 2020 and 2019 the Company received $ 0.2 million, $ 2.5 million and $ 1.3 million, respectively, of capital contributions from Cricut Holdings, as a result of additional common units issued by Cricut Holdings at the estimated fair value of the underlying units. The equity offering was purchased by a subset of then current common unit holders of Cricut Holdings and employees of the Company. 15. Employee Benefit Plan The Company sponsors a 401(k) plan for the benefit of its employees who have attained at least 18 Years of age. The Company matches 50 % of the first 12 % of an employee’s salary contributed to the plan on the first day of the month following their hire date. The Company contributed $ 2.4 million and $ 1.1 million years ended December 31, 2021 and 2020, respectively. 116 Table of Contents 16. Net Income Per Share The computation of net income per share is as follows: Year Ended December 31, 2021 2020 2019 (in thousands, except share and per share amounts) Basic earnings per share: Net income $ 140,473 $ 154,578 $ 39,211 Shares used in computation: Weighted-average common shares outstanding, basic 208,833,827 208,116,104 208,116,104 Earnings per share, basic $ 0.67 $ 0.74 $ 0.19 Diluted earnings per share: Net income $ 140,473 $ 154,578 $ 39,211 Shares used in computation: Weighted-average common shares outstanding, basic 208,833,827 208,116,104 208,116,104 Weighted-average effect of potentially dilutive securities: Unvested common stock subject to forfeiture 9,132,579 — — Employee stock options 717,772 — — Restricted stock units 1,073,093 — — Underwriters’ option to purchase additional shares 18,798 — — Diluted weighted-average common shares outstanding 219,776,069 208,116,104 208,116,104 Diluted earnings per share $ 0.64 $ 0.74 $ 0.19 The following potentially dilutive shares were excluded from the computation of diluted earnings per share for the periods presented because including them would have had an anti-dilutive effect: Year Ended December 31, 2021 2020 2019 Restricted stock units 786,500 — — 17. Segment Information The Company applies ASC Topic 280, Segment Reporting, in determining reportable segments for its financial statement disclosure. The Company’s operating segments are generally organized by the type of product or service offered. Similar operating segments have been aggregated into three reportable segments: Connected Machines, Subscriptions and Accessories and Materials. Segment information is presented in the same manner that the Company’s Chief Operating Decision Maker (“CODM”) reviews the results of operations in assessing performance and allocating resources. The CODM reviews revenue and gross profit for each of the reportable segments. Gross profit is defined as revenue less cost of revenue incurred by the segment. The Company does not allocate assets at the reportable segment level as these are managed on an entity wide group basis. As of December 31, 2021, long-lived assets located outside the United States, primarily located in Malaysia and China, were $ 13.5 million. The Connected Machines segment derives revenue from the sale of its connected machine hardware and related essential software. The Subscriptions segment derives revenue primarily from monthly and annual subscription fees and a minimal amount of revenue allocated to the unspecified future upgrades and enhancements related to the essential software and access to the Company’s cloud-based services. The Accessories and Materials segment primarily consists of craft, DIY, home décor products and heat presses including the Cricut Mug Press and Cricut EasyPress. There are no internal revenue transactions between the Company’s segments. 117 Table of Contents Key financial performance measures of the segments including revenue, cost of revenue and gross profit are as follows: Year Ended December 31, 2021 2020 2019 (in thousands) Connected Machines: Revenue $ 548,205 $ 416,714 $ 198,144 Cost of revenue 484,025 351,898 176,894 Gross profit $ 64,180 $ 64,816 $ 21,250 Subscriptions: Revenue $ 205,858 $ 111,337 $ 53,829 Cost of revenue 21,961 13,125 8,827 Gross profit $ 183,897 $ 98,212 $ 45,002 Accessories and Materials: Revenue $ 552,164 $ 430,979 $ 234,581 Cost of revenue 342,791 261,633 158,483 Gross profit $ 209,373 $ 169,346 $ 76,098 Consolidated: Revenue $ 1,306,227 $ 959,030 $ 486,554 Cost of revenue 848,777 626,656 344,204 Gross profit $ 457,450 $ 332,374 $ 142,350 18. Subsequent Events On January 7, 2022, the Company granted 6,615,000 RSUs to employees and directors of the Company under the 2021 Equity Incentive Plan which vest in two equal tranches subject to the Company achieving cumulative adjusted earnings per share over eight quarters of $ 4.93 share and $ 6.16 per share, respectively. 118 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures None. 119 Table of Contents