What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-13 compared with 2022-03-09 · 99 added, 95 removed, 378 unchanged (34% of the section changed)

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Our actual results could differ materially from these forward-looking statements as a result of many factors, including those discussed in the sections titled “Risk Factors” and “Note Regarding Forward-Looking Statements.”

A discussion regarding our financial condition and results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Prospectus, which was filed with the SEC pursuant to Rule 424(b)(4) on March 25, 2021 which is hereby incorporated by reference herein.

A discussion regarding our financial condition and results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K filed on March 9, 2022, which is hereby incorporated by reference herein.

Overview of Our Business and History

At Cricut, our mission is to help people lead creative lives.

We have designed and built a creativity platform that enables our engaged and loyal community of over 6.4 million users to turn ideas into professional-looking handmade goods.

We have designed and built a creativity platform that enables our engaged and loyal community of nearly 7.9 million users to turn ideas into professional-looking handmade goods.

With our highly versatile connected machines, design apps and accessories and materials, our users create everything from personalized birthday cards, mugs and T-shirts to large-scale interior decorations.

Our users’ journeys typically begin with the purchase of a connected machine.

We currently sell a portfolio of connected machines that cut, write, score and create other decorative effects using a wide variety of materials including paper, vinyl, leather and more.

We currently sell a portfolio of connected machines that cut, write, score and create other decorative effects using a wide variety of materials including paper, vinyl, iron-on vinyl, pens, and more.

Our connected machines are designed for a wide range of uses and are available at a variety of price points (MSRP by machine family as of December 31, 2022):

• Cricut Joy for personalization on-the-go, $179.99 MSRP

• Cricut Explore for cutting, writing and scoring, $249.99 - $299.99 MSRP

• Cricut Maker for cutting, writing, scoring and adding decorative effects to a wider range of materials, $399.99 MSRP

• Cricut Joy for personalization, organization, and customization, $179.00 MSRP

• Cricut Explore family for cutting, writing and scoring, $249.00 - $319.00 MSRP

• Cricut Maker family for cutting, writing, scoring and adding decorative effects to a wider range of materials, $399.00 - $429.00 MSRP

Our software integrates our connected machines and design apps, allowing our users to create and share seamlessly.

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Cricut Access Premium includes all of the benefits of Cricut Access as well as additional discounts and preferred shipping and is billed annually for $119.88 per year.

As of December 31, 2021, we had over 2.0 million Paid Subscribers to Cricut Access and Cricut Access Premium.

As of December 31, 2022, we had 2.6 million Paid Subscribers to Cricut Access and Cricut Access Premium.

We sell a broad range of accessories and materials that bring our users’ designs to life, from advanced tools like heat presses to Cricut-branded rulers, scoring tools, pens, paper and iron-on vinyl, all designed to work seamlessly with our connected machines.

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We sell our connected machines and accessories and materials through our brick-and-mortar and online retail partners, as well as through our website at cricut.com.

Our partners include Amazon, Hobby Lobby, HSN, Jo-Ann, Michaels, Target, Walmart and many others.

Our partners include Amazon, Hobby Lobby, HSN, Jo-Ann,

Michaels, Target, Walmart and many others.

We also sell our products, including subscriptions to Cricut Access and Cricut Access Premium, on cricut.com.

In both 2019 and 2020, 52%, and in 2021, 50% of our revenue

was generated through brick-and-mortar sales.

In both 2019 and 2020, 48%, and in 2021, 50% of our revenue was generated through online channels.

In 2020, 2021, and 2022, 52%, 50%, and 41% of our revenue was generated through brick-and-mortar sales, respectively.

In 2020, 2021, and 2022, 48%, 50%, and 59% of our revenue was generated through online channels, respectively.

For the years ended December 31, 2020, 2021 and 2022, we generated:

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Our business model thrives because our products unlock creativity, which then in turn drives the engagement of our users.

Our 6.4 million users’ journeys typically begin with the purchase of a connected machine and expand across our family of products as users harness the power of our platform.

Our nearly 7.9 million users’ journeys typically begin with the purchase of a connected machine and expand across our family of products as users harness the power of our platform.

Our business model is characterized by strong engagement and diversified sales across product categories.

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We believe we are in the early stages of our growth and that we have a significant untapped opportunity in the United States and Canada, as well as globally.

Our 6.4 million users represent approximately 5% of our total SAM which includes the United States, Canada, and our four leading international markets of Australia, France, Germany and the United Kingdom.

Our nearly 7.9 million users represent approximately 6% of our total SAM which includes the United States, Canada, and our four leading international markets of Australia, France, Germany and the United Kingdom.

We have been able to efficiently acquire new users and drive sales of our products because of the powerful network effects of our community.

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See the section titled “—Key Business Metrics” for the definition of Percentage of Users Creating in Trailing 90 Days and for information regarding that metric over the last three years.

As of December 31, 2021, 60% of our 6.4 million users created on their connected machines in the last 90 days.

As of December 31, 2022, 51% of our nearly 7.9 million users created on their connected machines in the last 90 days.

User engagement has been relatively consistent over time, demonstrating how our platform becomes a regular part of the creative lives of our users.

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2020 2021 2022

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Users (in Thousands) 2,803 3,274 3,681 4,323 4,939 5,373 5,732 6,409 6,904 7,192 7,457 7,893

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See the section titled “—Key Business Metrics” for the definition of Paid Subscribers and for information regarding that metric over the last three years.

As of December 31, 2021, we had over 2.0 million Paid Subscribers, representing 56% year-over-year growth.

As of December 31, 2022, we had 2.6 million Paid Subscribers, representing 28% year-over-year growth.

As of December 31, 2022, approximately 33% of our users were also Paid Subscribers.

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Accessories and Materials ARPU $25.40 $32.23 $29.41 $40.76 $29.45 $26.67 $18.79 $28.66 $17.67 $11.45 $7.61 $13.99

We review Subscription ARPU and Accessories and Material ARPU as an indicator of the monetization of the journey of our users.

The number of Paid Subscribers for the third quarter of 2022 has been updated since previous filings to reflect an immaterial correction.

We review Subscription ARPU and Accessories and Materials ARPU as an indicator of the monetization of the journey of our users.

Connected Machine revenue fluctuates as we introduce new connected machines at various price points and as the mix of connected machines purchased changes.

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It is therefore important that users find our products intuitive and easy to use.

As users create on their connected machines, they are more likely to

purchase subscriptions and accessories and materials.

As users create on their connected machines, they are more likely to purchase subscriptions and accessories and materials.

Historically we find that our users continue to be engaged over time.

As of December 31, 2021, 81% of our 6.4 million users created on their connected machines in the last 365 days.

As of December 31, 2022, 74% of our nearly 7.9 million users created on their connected machines in the last 365 days.

This durable relationship is motivated by new software and products that we launch to expand the capabilities of existing connected machines as well as through the inspiration derived from our large and passionate community.

If our users engage with their connected machines less over time, the overall growth in our business may slow.

Scaling our Product Offerings

We have historically enjoyed strong demand for our products, driving methodical growth.

Scaling our Hardware and Software Product Offerings

We have historically enjoyed strong demand for our products, both physical and digital, driving methodical growth.

Our growth depends in part on our ability to design and introduce new products and enhance existing products that meet the preferences of our users.

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We must continue to build relationships with strong third-party suppliers, contract manufacturers and third-party logistics companies and continue to diversify our supply chain to improve operational results.

We manage our inventory levels to account for the complexity of our supply chain, resulting in significant working capital risks and elevated obsolescence risks.

We manage our inventory levels to account for the complexity of our supply chain, resulting in a variety of risks.

Driving Innovation

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We have a strong focus on the unit economics of each of our products and consistency in how we operate the business.

Our investments to date have been critical to our success and have allowed us to reach 6.4 million users as of December 31, 2021 and launch more than 3,000 SKUs since the launch of our first connected machine.

Our investments to date have been critical to our success and have allowed us to reach nearly 7.9 million users as of December 31, 2022 and launch more than 6,000 SKUs since the launch of our first connected machine.

We will continue to prioritize our investments in technology innovation including software and hardware development, content and accessories and materials.

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Our expenses may also increase as we hire additional personnel and continue to attract technical talent.

While we expect to continue or increase our spending in these investments in the future, we cannot be certain they will result in the growth of our number of users or increase engagement with existing users.

While we expect to continue or increase our investments on these items in the future, we cannot be certain they will result in the growth of our number of users or increase engagement with existing users.

Growing Internationally

Expanding internationally, including by entering new geographic markets and increasing our sales in markets that we have already entered, requires us to invest in sales and marketing, distribution partnerships, infrastructure and personnel.

Our international growth will depend on our ability to create brand awareness, attract

new users, develop retail and distribution partnerships and sell connected machines, subscriptions and accessories and materials.

Our international growth will depend on our ability to create brand awareness, attract new users, develop retail and distribution partnerships and sell connected machines, subscriptions and accessories and materials.

Our international expansion has resulted in, and will continue to result in, increased costs and is subject to a variety of risks, including content localization, multilingual customer support, potentially complex delivery logistics and compliance with foreign laws and regulations.

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Additionally, sales of accessories and materials typically rise and fall with seasonal holiday crafting periods.

The seasonality patterns experienced in 2020 and 2021 are not representative of our typical historical patterns due to the unique aspects of the pandemic.

The yearly seasonality patterns experienced in 2020, 2021, and 2022 are not representative of our typical historical patterns due to the unique aspects of the pandemic and condition of the global economy.

For example, we experienced unusually high demand in the first and second quarters of 2021, which is inconsistent with normal seasonality patterns.

As the impact of the pandemic on behaviors abate, we expect to return to a more normal seasonality pattern.

In 2022, we experienced a deceleration of sales post-Q1 due to the global economic slowdown which drove a deviation from our typically expected seasonality.

As the impact of the pandemic and global economy challenges on behaviors abate, we expect to return to a more normal seasonality pattern.

As we continue to grow internationally, we expect we may experience seasonality in additional markets, which may differ from the seasonality experienced in the United States.

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This metric is a key indicator of our engagement with users, which helps drive sales of subscriptions and accessories and materials.

We began tracking this metric in July 2019 and therefore do not have information for the full year 2019 or for any prior periods.

There are certain limitations associated with this metric.

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We generate Accessories and Materials revenue from sales of ancillary products, such as Cricut EasyPress, Cricut Mug Press, hand tools, machine replacement tools and blades, project materials such as vinyl and iron-on and sales of à la carte digital content purchases, including fonts, images and projects.

Accessories and Materials revenue is recognized for sales of such items, net of sales discounts, incentives and returns.

Accessories and Materials revenue is recognized for sales of such items, net of sales discounts, incentives and returns and includes amounts allocated to the material right for discounts on materials and accessories available only to paid subscribers.

Accessories and Materials revenue is recognized at the point in time when control is transferred, which is either upon shipment or delivery to the customer in accordance with the terms of each customer contract.

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Cost of revenue related to Connected Machines 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.

We expect our cost of revenue related to Connected Machines as a percentage of revenue to fluctuate in the near term as we address global supply chain challenges created by the COVID-19 pandemic and continue to invest in the growth of our business and decrease over the long term as we drive greater scale and efficiency in our business.

We expect our cost of revenue related to Connected Machines as a percentage of revenue to fluctuate in the near term as we continue selling though end of life machines, address global supply chain challenges and continue to invest in the growth of our business and decrease over the long term as we drive greater scale and efficiency in our business.

Subscriptions

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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.

We expect our cost of revenue related to Accessories and Materials as a percentage of revenue to fluctuate in the near term as we address global supply chain challenges created by the COVID-19 pandemic and continue to invest in the growth of our business and decrease over the long term as we drive greater scale and efficiency in our business.

We expect our cost of revenue related to Accessories and Materials as a percentage of revenue to fluctuate in the near term as we address global supply chain challenges and continue to invest in the growth of our business and decrease over the long term as we drive greater scale and efficiency in our business.

Operating Expenses

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Research and development expenses consist primarily of costs associated with the development of our connected machines, software and accessories and materials, including personnel-related expenses for engineering, product development and quality assurance, as well as prototype costs, service fees incurred by contracting with vendors and allocated overhead.

We expect our research and development expenses to grow in the near term as we begin developing and investing in more new products to support growth further into the future.

Longer term, we expect research and development expense to increase as a percentage of revenue to levels somewhat higher than recent historical levels.

We expect our research and development expenses to fluctuate in the near term as we refine our product roadmaps.

Longer term, we expect research and development expense to return to our long-term expected range of 7-8% as a percentage of revenue.

Sales and Marketing

Sales and marketing expenses consist primarily of the advertising and marketing of our products, third-party payment processing fees, personnel-related expenses, including salaries and bonuses, benefits and stock-based compensation expense, as well as sales incentives, professional services, promotional items, and allocated overhead costs.

We expect our sales and marketing expenses as a percentage of revenue to fluctuate in the near and long term as we expand internationally and launch new products.

We expect our sales and marketing expenses as a percentage of revenue to fluctuate in the near term.

Longer term, we expect sales and marketing expense to return to our long-term expected range of 8-10% as a percentage of revenue.

General and Administrative

General and administrative expenses consist of personnel-related expenses for our finance, legal, human resources and administrative personnel, including salaries and bonuses, benefits and stock-based compensation expense, as well as the costs of professional services, any allocated overhead, information technology and other administrative expenses.

We expect our general and administrative expenses as a percentage of revenue to increase in the near term as we expand our operations and incur expenses required of a public company, and to decline over the long term as we drive greater scale and efficiency in our business.

Other Expense, Net

Other expense, net consists primarily of interest expense associated with our debt financing arrangements and amortization of debt issuance costs.

We expect our general and administrative expenses as a percentage of revenue to increase in the near term as we expand our operations, invest in systems enhancements, and incur expenses required of a public company.

Longer term, we expect general and administrative expense to return to our long-term expected range of 3-4% as a percentage of revenue.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest expense associated with our debt financing arrangements and amortization of debt issuance costs.

Provision for Income Taxes

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Results of Operations

The following tables set forth the components of our audited consolidated statements of operations for each of the periods presented and as a percentage of our revenue for those periods.

The period-to-period comparison of results of operations is not necessarily indicative of results of future periods.

The following table is presented in thousands:

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Income from operations 79,953 192,405 200,513

Other expense, net (32) (1,320) (3,293)

Other income (expense), net 2,028 (32) (1,320)

Income before provision for income taxes 81,981 192,373 199,193

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Total revenue $ 886,296 $ (419,931) (32) % $ 1,306,227 $ 347,197 36 % $ 959,030

Connected Machines revenue increased by $131.5 million, or 32%, to $548.2 million for the year ended December 31, 2021 from $416.7 million for the year ended December 31, 2020.

The increase was primarily driven by growth in the number of Connected Machines sold during the period, including sales of Explore 3 and Maker 3, which launched in June 2021.

Connected Machines revenue decreased by $295.6 million, or 54%, to $252.6 million for the year ended December 31, 2022 from $548.2 million for the year ended December 31, 2021.

The decrease was primarily driven by a decline in the number of Connected Machines sold during the period, across all product families, due to higher channel inventory entering the year which resulted in lower retail demand as well as reduced direct-to-consumer demand.

Subscriptions revenue increased by $66.5 million, or 32%, to $272.3 million for the year ended December 31, 2022 from $205.9 million for the year ended December 31, 2021.

The increase was primarily driven by an increase in the number of Paid Subscribers which increased by 56% from 1.3 million as of December 31, 2020 to 2.0 million as of December 31, 2021.

Accessories and Materials revenue increased by $121.2 million, or 28%, to $552.2 million for the year ended December 31, 2021 from $431.0 million for the year ended December 31, 2020.

The increase was primarily driven by growth in unit sales of Accessories and Materials during the period, particularly growth in units of EasyPress, Mug Press, which launched in March 2021, and project materials.

The increase was primarily driven by growth of 28% in the number of Paid Subscribers from 2.0 million as of December 31, 2021 to 2.6 million as of December 31, 2022.

Accessories and Materials revenue decreased by $190.8 million, or 35%, to $361.4 million for the year ended December 31, 2022 from $552.2 million for the year ended December 31, 2021.

The decrease was primarily driven by a decline in unit sales of Project Materials, due in part to increased competition, a decline in unit sales of EasyPress and Mug Press, as well as an increase in sales incentives.

The decrease was partially offset by increased revenue from Autopress and Hat Press which launched in 2022.

Cost of Revenue, Gross Profit and Gross Margin

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Accessories and materials 26 % 38 % 39 %

Years Ended December 31, 2021 and 2020

Connected Machines cost of revenue increased by $132.1 million, or 38%, to $484.0 million for the year ended December 31, 2021 from $351.9 million for the year ended December 31, 2020.

The increase was primarily driven by growth in the number of Connected Machines sold during the year ended December 31, 2021 compared to the year ended December 31, 2020.

Connected Machines cost of revenue decreased by $239.8 million, or 50%, to $244.3 million for the year ended December 31, 2022 from $484.0 million for the year ended December 31, 2021.

The decrease was primarily driven by a decline in the gross margin percentage, and the number of Connected Machines sold across all product families during the year ended December 31, 2022 compared to the year ended December 31, 2021.

Gross margin for Connected Machines decreased to 3% for the year ended December 31, 2022 from 12% for the year ended December 31, 2021.

Gross margin decreased due to higher promotions, sales incentives, and freight costs due to global supply chain challenges as a percentage of revenue.

Subscriptions cost of revenue increased $8.8 million, or 67%, to $22.0 million for the year ended December 31, 2021 from $13.1 million for the year ended December 31, 2020.

The increase was primarily driven by an increase in hosting fees to support our growing number of subscribers along with increases in amortization of capitalized software development costs, and digital content costs.

Gross margin decreased due to higher handling and inventoriable costs, inventory procurement costs, and warranty expense as a percentage of revenue.

Subscriptions cost of revenue increased by $4.4 million, or 20%, to $26.4 million for the year ended December 31, 2022 from $22.0 million for the year ended December 31, 2021.

The increase was primarily driven by an increase in amortization of capitalized software development costs.

Gross margin for Subscriptions increased to 90% for the year ended December 31, 2022 from 89% for the year ended December 31, 2021.

Gross margin increased due to lower amortization of capitalized software development costs as a percentage of subscriptions revenue.

Accessories and Materials cost of revenue increased by $81.2 million, or 31%, to $342.8 million for the year ended December 31, 2021 from $261.6 million for the year ended December 31, 2020.

The increase was primarily driven by growth in the units of project materials, Mug Press, and EasyPress sold during the period.

Gross margin increased due to lower hosting costs as a percentage of subscriptions revenue partially offset by increased discounts offered with subscriptions which slightly decreased overall subscription revenue.

Accessories and Materials cost of revenue decreased by $77.0 million, or 22%, to $265.8 million for the year ended December 31, 2022 from $342.8 million for the year ended December 31, 2021.

The decrease was primarily driven by a decline in unit sales of Accessories and Materials during the period, particularly for units of Project Materials, EasyPress, and Mug Press.

The decrease was partially offset by an increase in units sold of Autopress and Hat Press which launched in 2022.

Gross margin for Accessories and Materials decreased to 26% for the year ended December 31, 2022 from 38% for the year ended December 31, 2021.

Gross margin decreased primarily due to higher freight costs due to global supply chain challenges.

Gross margin decreased primarily due to higher promotions, handling and inventoriable costs, and freight cost as a percentage of revenue.

Operating Expenses

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As a percentage of total revenue 9 % 6 % 4 %

Research and development expenses increased by $40.9 million, or 105%, to $79.8 million for the year ended December 31, 2021 from $38.9 million for the year ended December 31, 2020.

The increase was primarily due to a $13.7 million increase in product development expenses for future products, a $12.5 million increase in stock-based compensation expense, and a $11.2 million increase in payroll-expenses due to increases in research and development personnel.

Research and development expenses decreased by $2.9 million, or 4%, to $76.9 million for the year ended December 31, 2022 from $79.8 million for the year ended December 31, 2021.

The decrease was primarily due to a $7.4 million decrease in product development expenses for future products, partially offset by increases in personnel-related expenses and stock-based compensation expense.

Sales and Marketing

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As a percentage of total revenue 15 % 10 % 7%

Sales and marketing expenses increased by $70.6 million, or 112%, to $134.0 million for the year ended December 31, 2021 from $63.3 million for the year ended December 31, 2020.

The increase was primarily due to a $32.6 million increase in advertising and other marketing costs, a $15.4 million increase in payment processing fees, a $9.0 million increase in stock-based compensation expense, and a $7.9 million increase in payroll-related expenses due to more sales and marketing personnel.

Sales and marketing expenses decreased by $3.6 million, or 3%, to $130.4 million for the year ended December 31, 2022 from $134.0 million for the year ended December 31, 2021.

The decrease was primarily due to a $15.5 million decrease in advertising and other marketing costs, partially offset by increases in payment processing fees, personnel-related expenses, and software subscriptions.

General and Administrative

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General and administrative expenses increased by $11.4 million, or 22%, to $62.6 million for the year ended December 31, 2022 from $51.3 million for the year ended December 31, 2021.

The increase was primarily due to a $6.9 million increase in stock-based compensation, a $5.0 million increase in payroll-related expenses due to increases in personnel, and a $3.6 million increase in professional services.

Other Expense, Net

The increase was primarily due to a $3.1 million increase in personnel-related expenses, a $2.6 million impairment of unused equipment (see Note 2), and increases in stock-based compensation, software subscriptions, and professional services.

Other Income (Expense), Net

Years Ended December 31,

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(dollars in thousands)

Other expense, net $ (32) $ 1,288 (98) % $ (1,320) $ 1,973 (60) % $ (3,293)

Other expense, net changed by $1.3 million, or (98)%, to expense of $32 thousand for the year ended December 31, 2021 from a net expense of $1.3 million for the year ended December 31, 2020.

The change was primarily due to a decrease in interest expense as we repaid all outstanding borrowings in September 2020 and had no outstanding borrowings during the year ended December 31, 2021.

Other income (expense), net $ 2,028 $ 2,060 (6,438) % $ (32) $ 1,288 (98) % $ (1,320)

Other income (expense), net changed by $2.1 million, or 6,438%, to income of $2.0 million for the year ended December 31, 2022 from a net expense of $32.0 thousand for the year ended December 31, 2021.

The change was primarily due to interest and other income from marketable securities we invested in during 2022.

Provision for Income Taxes

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Provision for income taxes $ 21,315 $ (30,585) (59) % $ 51,900 $ 7,285 16 % $ 44,615

Provision for income taxes increased by $7.3 million, or 16%, to $51.9 million for the year ended December 31, 2021 from $44.6 million for the year ended December 31, 2020.

Provision for income taxes decreased by $30.6 million, or 59%, to $21.3 million for the year ended December 31, 2022 from $51.9 million for the year ended December 31, 2021.

This represents an effective tax rate of 26.0% and 27.0% for the years ended December 31, 2022 and 2021, respectively.

The increase in the tax rate is due mainly to the allocation of sales in states with high tax rates and nexus in additional states for 2020.

Additionally, we recorded a reduction to the deferred tax asset related to stock-based compensation as a result of Section 162(m) rules which are now applicable.

The decrease in the tax rate is due mainly to an increase in tax credits specifically related to Research and Development.

Liquidity and Capital Resources

Our operations during the periods presented have been financed primarily through cash flow from operating activities, borrowings under credit facilities and the net proceeds from our initial public offering in March of 2021.

Our operations during the periods presented have been financed primarily through cash flows from operating activities and the net proceeds from our initial public offering in March of 2021.

We believe our balances of cash and cash equivalents, which totaled $224.9 million as of December 31, 2022, along with forecasted cash expected to be generated by ongoing operations and $300.0 million in available borrowings on our credit facility (see Note 9) will be sufficient to satisfy our cash requirements over the next 12 months and beyond.

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Actual inventory purchases will vary based on current and forecasted demand for our products.

Payments to third-part logistics companies are largely variable and are primarily driven by inventory levels and receiving and shipping activity levels.

Payments to third-party logistics companies are largely variable and are primarily driven by inventory levels and receiving and shipping activity levels.

As of December 31, 2022, we had fixed lease payment obligations of $20.5 million, with $6.0 million payable within 12 months primarily for corporate and other office space.

See Note 14 of the notes to our consolidated financial statements for additional information.

Stock Repurchase Program

On July 19, 2022 , our Board of Directors authorized a share repurchase program to repurchase up to $50 million of its outstanding Class A common stock.

During the twelve months ended December 31, 2022, we repurchased and retired 2,349,581 shares of our Class A common stock for $18.5 million under this authorization.

On December 21, 2022, we declared a special dividend of $0.35 per share payable on February 15, 2023 to shareholder of record as of February 1, 2023.

As part of the dividend, and pursuant to the underlying award agreements, holders of restricted stock units (“RSUs”) will receive a dividend equivalent of $0.35 per RSU in the form of additional RSUs.

As a result, we expect to pay a total of $76.9 million in cash dividends, of which $75.3 million was paid on February 15, 2023 while the remainder will be paid upon vesting of the restricted shares.

Year Ended December 31,

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(in thousands)

Net cash flows (used in) provided by operating activities

Net cash flows provided by (used in) operating activities

$ 117,683 $ (104,949) $ 248,227

Net cash flows used in investing activities (107,869) (35,786) (21,842)

Net cash flows provided (used in) by financing activities

Net cash flows (used in) provided by financing activities

(26,247) 260,244 (110,915)

Operating Activities

The change in net cash flows from operating activities for the year ended December 31, 2021 compared to year ended December 31, 2020 is primarily due to increased cash used to rebuild depleted inventories and fund higher inventory levels to mitigate global supply chain challenges as well as cash used to pay down accounts payable.

These cash uses were partially offset by a smaller increase in accounts receivable in 2021 compared to 2020.

The change in net cash flows from operating activities for the year ended December 31, 2022 compared to year ended December 31, 2021 is primarily due to more cash used in 2021 to fund higher inventory levels to mitigate global supply chain challenges.

This resulted in higher inventory balances as the Company entered 2022, resulting in a reduction of inventory purchases during 2022.

A reduction in accounts receivable in 2022 compared to 2021 due to the collection of 2021 accounts receivable balances resulted in higher cash flows.

These cash increases were partially offset by a larger decrease in payable balances with inventory vendors in 2022 compared to 2021, due to repayment of 2021 payable balances with inventory vendors.

Investing Activities

The change in net cash flows from investing activities for the year ended December 31, 2021 compared to year ended December 31, 2020 was due to increased property and equipment acquisition and capitalized software development costs.

The change in net cash flows from investing activities for the year ended December 31, 2022 compared to year ended December 31, 2021 was due to investments in marketable securities.

Financing Activities

The change in net cash flows from financing activities for the year ended December 31, 2021 compared to year ended December 31, 2020 was primarily due to proceeds of $262.0 million received from our IPO, net of underwriter discounts and offering costs compared to net outflows during 2020 due to a cash dividend and payments on the line of credit and term loan.

Critical Accounting Policies and Estimates

The change in net cash flows from financing activities for the year ended December 31, 2022 compared to year ended December 31, 2021 was primarily due to proceeds of $262.0 million received from our IPO during 2021 partially offset by repurchases of common stock during 2022.

Critical Accounting Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles (“GAAP”).

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Actual results may differ from these estimates under different assumptions or conditions.

The critical accounting policies that reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements include those

described in Note 2 of the notes to our consolidated financial statements in the section titled “—Summary of Significant Accounting Policies” in Item 8 of this Annual Report on Form 10-K.

The critical accounting policies that reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements include those described in Note 2 of the notes to our consolidated financial statements in the section titled “—Summary of Significant Accounting Policies” in Item 8 of this Annual Report on Form 10-K.

During the past three fiscal years, we have not made any material changes to the accounting methodologies used to assess the areas discussed below, unless noted otherwise.

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Stock-based compensation

Stock-based compensation costs are recognized 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.

Forfeitures are accounted for as they occur.

Stock-based compensation recognized over the service period is based on the grant date fair value of equity classified awards and is based on the fair value of liability classified at each reporting date through settlement.

Stock-based compensation is based on the grant date fair value of equity classified awards and is based on the fair value of liability classified awards at each reporting date through settlement.

Through the date of our corporate reorganization in March 2021 (“Corporate Reorganization”), Cricut Holdings had granted to certain of our employees common incentive units (“CIUs”), options to purchase zero-strike price incentive units, and incentive unit equivalents (phantom units).

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The fair value of incentive unit equivalents which also had a market condition, was estimated using a Geometric Brownian Motion Stock Path Monte Carlo Simulation, or Monte Carlo Simulation.

The determination of the grant date fair value of the awards issued was affected by a number of variables, including the fair value of Cricut Holdings’ units, the expected unit price volatility over the expected life of the awards, the expected term of the award, risk-free interest rates, the expected dividend yield of Cricut Holdings’ units and the likelihood of termination.

The determination of the grant date fair value of awards issued is affected by a number of variables, including the fair value of the underlying share, the expected term of each award and the expected price volatility over the expected term of each award.

Prior to our Corporate Reorganization and IPO, significant estimation was required for these inputs.

We performed valuations of the underlying units of Cricut Holdings using various valuation methods including combinations of income and market approaches with input from management.

We derived our volatility from the average historical stock volatilities of peer public companies over a period equivalent to the expected term of the awards.

We estimated the expected term based on the expected time to a liquidation event or other transaction that would result in settlement of the award.

The risk-free interest rate was based on the U.S.

Treasury yield curve in effect at the time of grant.

Expected dividend yield was 0.0% as Cricut Holdings has not paid and does not anticipate paying dividends on its common units other than a one-time dividend paid in September 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.

At the time of our Corporate Reorganization, all outstanding awards were settled or modified as described in Note 11 of the notes to our consolidated financial statements.

After our Corporate Reorganization and initial public offering in March 2021, we estimate the fair value of stock-based awards based on the observable fair value of our common stock, the risk-free interest rate, volatility based upon a blended average of historical stock volatilities of peer companies and historical volatility of our stock price over a period equal to the expected term of the awards, and our expected dividend yield.

At the time of our Corporate Reorganization in 2021, all outstanding awards were settled or modified as described in Note 12 of the notes to our consolidated financial statements.

After our Corporate Reorganization and initial public offering in March 2021, we estimate the fair value of stock-based awards based on the observable fair value of our common stock, the risk-free interest rate, volatility based upon the historical volatility of the Company's stock price or a blended average of historical stock volatilities of peer companies and historical volatility of our stock price over a period equal to the expected term of the awards, and our expected dividend yield.

The recognition of stock-based compensation for awards with performance based vesting conditions, including our performance-based restricted stock units (“PRSU”) awards, is dependent on whether it is probable that the performance based vesting conditions will be met.

As of December 31, 2022, we determined it is not probable that the performance conditions will be met.

Unrecognized stock-based compensation associated with unvested PRSU awards was $146.8 million as of December 31, 2022.

Qualitative and Quantitative Disclosures About Market Risk

Interest Rate Risk

We were primarily exposed to changes in interest rates with respect to our cost of borrowing under our Revolving Credit Loan and Term Loan.

We monitor our cost of borrowing, taking into account our funding requirements and our expectations for interest rates in the future.

We were primarily exposed to changes in interest rates with respect to our cost of borrowing under our New Credit Agreement.

We monitor our cost of borrowing, taking into account our funding requirements and our

expectations for interest rates in the future.

To date, we have not been exposed, nor do we anticipate being exposed to material risks due to changes in interest rates.

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Foreign currency translation adjustments are accounted for as a component of accumulated other comprehensive income (loss) within stockholders’ equity.

Gains or losses due to transactions in foreign currencies are included in general and administrative operating expenses in our consolidated statements of operations.

As the impact of foreign currency exchange rates was not material to results of operations during 2020, 2021 and 2022, we have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency becomes more significant.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis