What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-06 compared with 2023-03-13 · 99 added, 71 removed, 406 unchanged (30% 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, 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.

A discussion regarding our financial condition and results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 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 13, 2023, 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 nearly 7.9 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 over 8.9 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.

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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, 2023):

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

• Cricut Joy family for personalization, organization, and customization, $149.00 - $199.00 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

• Cricut Venture for cutting, writing, and scoring large-format projects at professional speeds, $999.00 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, 2022, we had 2.6 million Paid Subscribers to Cricut Access and Cricut Access Premium.

As of December 31, 2023, we had nearly 2.8 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.

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

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 over 8.9 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 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.

Our over 8.9 million users represent approximately 7% 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, 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.

As of December 31, 2023, 44% of our over 8.9 million users created on their connected machines in the last 90 days.

The table below shows the Percentage of Users Creating in Trailing 90 Days for the periods indicated.

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Percentage of Users Creating in Trailing 90 Days 62% 59% 56% 60% 54% 51% 48% 51% 45% 43% 42% 44%

Many of our users choose to pay for our subscription offerings which include a subscription to images, fonts and projects as well as other member benefits, including exclusive software features and functionality, discounts, priority Cricut Member Care, and, in the case of Cricut Access Premium, preferred shipping.

By subscribing to our offerings, users have access to a curated and growing design library of over 300,000 images, thousands of ready-to-make projects and hundreds of fonts.

priority Cricut Member Care, and, in the case of Cricut Access Premium, preferred shipping.

By subscribing to our offerings, users have access to a curated and growing design library of over 750 thousand images, thousands of ready-to-make projects and hundreds of fonts.

We believe that the number of Paid Subscribers is an indicator of the depth of our users’ engagement.

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

As of December 31, 2023, we had nearly 2.8 million Paid Subscribers, representing 6% year-over-year growth.

As of December 31, 2023, approximately 31% of our users were also Paid Subscribers.

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Accessories and Materials ARPU $29.45 $26.67 $18.79 $28.66 $17.67 $11.45 $7.61 $13.99 $8.93 $7.71 $5.75 $8.80

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.

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An important part of our success is driven by engagement of our users, as well as our ability to sell additional products to our users after their first connected machine purchase.

Our users are engaged when they create with connected machines, design apps and accessories and materials.

Our users are engaged when they create with

connected machines, design apps and accessories and materials.

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

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

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

As of December 31, 2023, 66% of our over 8.9 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.

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Our ability to grow depends largely on the ability of these third-party companies to scale with us, provide high quality services and deliver components and finished products on time and at reasonable costs.

While we are working to diversify our supply chain, some of our third-party suppliers and manufacturers are sole-source suppliers, including one manufacturer for the majority of our connected machines.

We primarily rely on two contract manufacturers to build the majority of our connected machines.

For a limited number of our products, which collectively constitute a small portion of our revenue, a particular contract manufacturer is the sole source of the finished product.

Our concentration of suppliers could lead to supply shortages, long lead times for components and supply changes.

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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 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.

Our investments to date have been critical to our success and have allowed us to reach over 8.9 million users as of December 31, 2023 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 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.

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

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The yearly seasonality patterns experienced in 2021, 2022, and 2023 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.

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.

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Percentage of Users Creating in Trailing 90 Days 44 % 51 % 60 %

Number of Users Creating in Trailing 90 Days 3,932 4,050 3,828

Paid Subscribers (in thousands) 2,770 2,609 2,037

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Connected Machines

We generate Connected Machines revenue from sales of our portfolio of connected machines, currently consisting of machines in three product families, Cricut Maker, which includes Maker and Maker 3, Cricut Explore, which includes Explore Air 2 and Explore 3, and Cricut Joy, net of sales discounts, incentives and returns.

We generate Connected Machines revenue from sales of our portfolio of connected machines, currently consisting of machines in four product families, Cricut Maker, which includes Maker and Maker 3, Cricut Explore, which includes Explore Air 2 and Explore 3, Cricut Joy, which includes Joy and Joy Xtra, and Cricut Venture, net of sales discounts, incentives and returns.

Connected Machines 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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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 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 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 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.

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 through 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

Cost of revenue related to Subscriptions consists primarily of hosting fees, digital content costs, amortization of capitalized software development costs and software maintenance costs.

We expect our cost of revenue related to Subscriptions as a percentage of revenue to fluctuate in the near term as we expand our content offerings, including localized content for international target markets, and decrease over time as we drive greater scale and efficiency in our business.

We expect our cost of revenue related to Subscriptions as a percentage of revenue to fluctuate in the near term and long term as we expand our content and software feature offerings, including localized content for international target markets.

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.

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.

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

Operating Expenses

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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.

We produced gross savings in research and development of approximately $4.6 million during 2023 as a result of the January 2023 restructuring plan.

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.

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 customer rebates, 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 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.

We produced gross savings in sales and marketing of approximately $1.1 million during 2023 as a result of the January 2023 restructuring plan.

General and Administrative

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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.

We produced gross savings in general and administrative of approximately $1.0 million during 2023 as a result of the January 2023 restructuring plan.

Other Income (Expense)

Other income (expense) consists primarily of interest income from our investments in marketable securities, offset by interest expense associated with our debt financing arrangements and amortization of debt issuance costs.

Provision for Income Taxes

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We have not recorded a valuation allowance against our deferred tax assets as we have concluded that it is more likely than not that the deferred tax assets will be realized.

We do not record a U.S.

deferred tax liability for the excess of the book basis over the tax basis of our investments in foreign corporations to the extent that the basis difference results from earnings that meet the indefinite reversal criteria.

These criteria are met if the foreign subsidiary has been invested, or will invest, the undistributed earnings indefinitely.

The decision as to the amount of undistributed earnings that we intend to maintain in non-U.S.

subsidiaries considers items including, but not limited to, forecasts and budgets of financial needs of cash for working capital, liquidity plans, and capital improvement programs.

We also evaluate our expected cash requirements in the United States.

Other factors that can influence that determination are local restrictions on remittances (for example, in some countries a central bank application and approval are required in order for our local country subsidiary to pay a dividend), economic stability and asset risk.

See Note 10 to our audited consolidated financial statements.

The Organization for Economic Co-operation and Development (“OECD”) Pillar Two Model Rules (“Pillar Two”) for a global 15% minimum tax are in the process of being adopted in a number of jurisdictions in which we operate.

Pillar Two is expected to be applicable to us beginning January 1, 2024 if our revenues exceed €750 million.

The only jurisdiction where the top-up tax would be applicable is Switzerland and the estimated tax is not expected to be material.

Results of Operations

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Income from operations 69,985 79,953 192,405

Other income (expense):

Interest income 7,976 1,809 181

Interest expense (323) (289) (298)

Other income (expense) 2,145 508 85

Other income (expense), net 9,798 2,028 (32)

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2023 $ % 2022 $ % 2021

(dollars in thousands)

(in thousands)

Connected machines $ 198,312 $ (54,251) (21) % $ 252,563 $ (295,642) (54) % $ 548,205

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Connected Machines revenue decreased by $54.3 million, or 21%, to $198.3 million for the year ended December 31, 2023 from $252.6 million for the year ended December 31, 2022.

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.

The decrease was primarily driven by a decline in the number of Connected Machines sold during the period, particularly Maker and Air 2 units.

The decrease was offset partially by increased sales of Explore 3 and sales of Joy Xtra, which launched in September 2023.

Subscriptions revenue increased by $31.6 million, or 12%, to $304.0 million for the year ended December 31, 2023 from $272.3 million for the year ended December 31, 2022.

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.

The increase was primarily driven by growth of 6% in the number of Paid Subscribers from 2.6 million as of December 31, 2022 to nearly 2.8 million as of December 31, 2023.

Accessories and Materials revenue decreased by $98.5 million, or 27%, to $262.8 million for the year ended December 31, 2023 from $361.4 million for the year ended December 31, 2022.

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.

The decrease was primarily driven by a decline in unit sales of project materials and extensions products.

Cost of Revenue, Gross Profit and Gross Margin

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Connected Machines cost of revenue decreased by $71.7 million, or 29%, to $172.6 million for the year ended December 31, 2023 from $244.3 million for the year ended December 31, 2022.

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 handling and inventoriable costs, inventory procurement costs, and warranty expense as a percentage of revenue.

The decrease was primarily driven by a decline in the number of Connected Machines sold during the year, particularly Maker and Air 2 units, offset partially by sales of Joy Xtra, which launched in September 2023, and increased sales of Explore 3.

Gross margin for Connected Machines increased to 13% for the year ended December 31, 2023 from 3% for the year ended December 31, 2022.

The increase was primarily related to improved product mix and less promotional activity, offset partially by increased warehousing and operations c osts as a percentage of revenue.

Subscriptions cost of revenue increased by $6.0 million, or 23%, to $32.3 million for the year ended December 31, 2023 from $26.4 million for the year ended December 31, 2022.

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

The increase was primarily driven by an increase in amortization of capitalized software development costs and increased external digital content costs.

Gross margin for Subscriptions decreased to 89% for the year ended December 31, 2023 from 90% for the year ended December 31, 2022.

The decrease was primarily driven by an increase in amortization of capitalized software development costs and external digital content costs.

Accessories and Materials cost of revenue decreased by $48.8 million, or 18%, to $216.9 million for the year ended December 31, 2023 from $265.8 million for the year ended December 31, 2022.

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.

The decrease was primarily driven by a decline in unit sales of Accessories and Materials during the period, particularly for units of project materials and extensions products.

The decrease was partially offset by inventory write-downs attributed to extensions products and project materials.

Gross margin for Accessories and Materials decreased to 17% for the year ended December 31, 2023 from 26% for the year ended December 31, 2022.

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

Gross margin decreased primarily due to inventory write-downs of e xtensions products and p roject materials, and increased warehousing and operations costs as a percentage of revenue.

The decline was partially offset by more favorable costs per unit.

Operating Expenses

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Research and development expenses decreased by $11.9 million, or 15%, to $65.0 million for the year ended December 31, 2023 from $76.9 million for the year ended December 31, 2022.

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.

The decrease was primarily due to a $9.4 million decrease in product development expense for future products and a $3.5 million decrease in personnel-related expense, partially offset by increases in professional services expense.

Sales and Marketing

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Sales and marketing expenses decreased by $7.2 million, or 6%, to $123.2 million for the year ended December 31, 2023 from $130.4 million for the year ended December 31, 2022.

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.

The decrease was primarily due to a $2.6 million decrease in advertising and other marketing expense, a $1.7 million decrease in personnel-related expense, a $1.3 million decrease in professional services expense, and a $1.1 million decrease in software subscriptions expense.

General and Administrative

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General and administrative expenses increased by $22.4 million, or 36%, to $85.1 million for the year ended December 31, 2023 from $62.6 million for the year ended December 31, 2022.

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

The increase was primarily due to a $13.0 million impairment of unused equipment, software, and inventory (see Note 2), a $4.1 million increase in stock-based compensation, a $2.4 million increase in professional services expense, a $1.7 million increase in bad debt expense, and a $1.7 million increase in software subscriptions expense.

Other Income (Expense)

Years Ended December 31,

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(dollars in thousands)

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.

Other income (expense) $ 9,798 $ 7,770 383 % $ 2,028 $ 2,060 (6438) % $ (32)

Other income (expense) increased by $7.8 million, or 383%, to a net income of $9.8 million for the year ended December 31, 2023 from a net income of $2.0 million for the year ended December 31, 2022.

The change was primarily related to interest from marketable securities due to more favorable rates.

Provision for Income Taxes

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Provision for income taxes $ 26,147 $ 4,832 23 % $ 21,315 $ (30,585) (59) % $ 51,900

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.

Provision for income taxes increased by $4.8 million, or 23%, to $26.1 million for the year ended December 31, 2023 from $21.3 million for the year ended December 31, 2022.

This represents an effective tax rate of 32.8% and 26.0% for the years ended December 31, 2023 and 2022, respectively.

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

The increase in the tax rate is due mainly to a decrease in tax credits specifically related to Research and Development and an increase in uncertain tax positions related to prior years foreign-derived intangible income.

Liquidity and Capital Resources

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The sale of additional equity would result in additional dilution to our stockholders.

The incurrence of debt financing would result in debt service obligations, and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations.

The incurrence of debt financing would result in debt service obligations, and the instruments governing such debt could provide for operating and financing covenants that would restrict our

There can be no assurances that we will be able to raise additional capital.

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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.

During the twelve months ended December 31, 2023, we repurchased and retired 2,548,893 shares of our Class A common stock for $20.3 million under this program.

On May 18, 2023, the Company declared a special dividend of $1.00 per share on its Class A and Class B common stock, payable on July 17, 2023 to shareholders of record as of July 3, 2023.

As part of the dividend, and pursuant to the underlying award agreements, holders of restricted stock units (“RSUs”) and performance-based restricted stock units (“PRSUs”) received dividend equivalents of $1.00 per unit in the form of additional RSUs or PRSUs subject to the same vesting conditions as the original awards.

The aggregate dividend of $234.6 million was to be satisfied in cash of $219.8 million payable to holders of Class A and Class B common stock with the remaining $14.8 million satisfied on the payment date in the form of dividend equivalents to RSU or PRSU holders prior to any subsequent forfeitures.

On December 21, 2022, the Company declared a special dividend of $0.35 per share on its Class A and Class B common stock, payable on February 15, 2023 to shareholders of record as of February 1, 2023.

As part of the dividend, and pursuant to the underlying award agreements, holders of RSU and PRSUs will receive a dividend equivalent of $0.35 per unit in the form of additional RSUs or PRSUs subject to the same vesting conditions as the original awards.

The aggregate dividend of $81.4 million was to be satisfied in cash of $76.9 million payable to holders of Class A and Class B common stock with the remaining $4.5 million satisfied on the payment date in the form of dividend equivalents to RSU or PRSU holders.

During the twelve months ended December 31, 2023, an aggregate of $294.1 million was paid in cash, and $19.2 million was satisfied in the form of dividend equivalents to RSU or PRSU holders.

Year Ended December 31,

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Operating Activities

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.

The change in net cash flows from operating activities for the year ended December 31, 2023 compared to year ended December 31, 2022 is primarily due to lower inventory purchases during 2023 due to higher beginning inventory balances combined with softening of consumer demand.

In addition, we experienced a smaller decrease in payable balances with inventory vendors in 2023 compared to 2022, due to fewer purchases in 2023.

These increases were partially offset by a reduction in cash received from accounts receivable in 2023 compared to 2022.

Investing Activities

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.

The change in net cash flows from investing activities for the year ended December 31, 2023 compared to year ended December 31, 2022 was primarily due to fewer purchases of marketable securities during 2023.

Financing Activities

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.

The change in net cash flows from financing activities for the year ended December 31, 2023 compared to year ended December 31, 2022 was primarily due to the payment of special dividends during 2023.

Critical Accounting Estimates

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The promotional programs include advertising allowances, volume and growth incentives, business development, product damage allowances and point-of-sale support.

Sales incentives are considered to be variable consideration, which we estimate using the expected value method or most likely amount, based upon the nature of the incentive.

Customer rebates are considered to be variable consideration, which we estimate 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 we record a related customer rebate liability in our consolidated balance sheets at the date of the transaction.

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While management believes estimated amounts are reasonable, actual results may vary from our estimates due to uncertainty regarding forecasted volume, product damage claims, or qualifying activities by our customers.

Inventories consist of finished goods and raw materials, which we purchase from contract manufacturers.

We value our inventory at the lower of average cost or net realizable value.

When our expectations indicate that average cost of inventory may exceed its net realizable value, we write-down our inventory to establish a new cost basis.

We also periodically assess the value of our on-hand inventory for potential excess and/or obsolete inventory and when necessary, will write-down the value to account for estimated excess and/or obsolete inventory.

We determine excess or obsolete inventory based on market conditions, age of inventory, an estimate of the future demand for our products within a specified time horizon, generally the greater of 24 months or remaining life of the product, and product life cycle status.

Inventory write-downs are recorded as a component of cost of revenue in our consolidated statements of operations and comprehensive income.

If actual demand is lower than our estimated demand, we could be required to write-down the value of additional inventory, which would have a negative effect on our gross profit.

Stock-based compensation

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Interest Rate Risk

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.

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

A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.

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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