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, P.C. ; Salt Lake City, Utah ; PCAOB ID# 243 ) 82 Consolidated Balance Sheets 85 Consolidated Statements of Operations and Comprehensive Income 86 Consolidated Statements of Stockholders’ Equity 87 Consolidated Statements of Cash Flows 88 Notes to Consolidated Financial Statements 90 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, 2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 5, 2024 expressed an unqualified opinion thereon. 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. 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 Rebate Liabilities As described in Notes 2 and 8 to the consolidated financial statements, the Company recognizes revenue for physical goods at the net sales price, which includes certain estimates for variable consideration related to customer rebates with certain retail partners. These estimates are based on the Company’s incentive program experience, historical and projected sales data and current contractual terms. The reserves for variable consideration related to customer rebates are recorded as a liability in the consolidated balance sheets and totaled approximately $30 million as of December 31, 2023. While a portion of this liability is based on contractual terms and does not require estimation, certain customer rebates are estimated at period end due to the nature of the rebates. 82 Table of Contents We identified the auditing of projected sales data used in estimating variable consideration related to the customer rebate liabilities as a critical audit matter. Auditing the projected sales data involved especially challenging auditor judgment due to the nature and extent of audit effort required to address this matter. The primary procedures we performed to address this critical audit matter included: • Evaluating the projected sales data for reasonableness by comparing with subsequent customer claims activities, actual sales data, as well as approved program terms for a sample of period end liabilities. • Assessing management’s ability to accurately determine projected sales data used in calculating customer rebates by performing a retrospective review for a sample of customer rebates. /s/ BDO USA, P.C. We have served as the Company's auditor since 2012. Salt Lake City, Utah March 5, 2024 83 Table of Contents Report of Independent Registered Public Accounting Firm Stockholders and Board of Directors Cricut, Inc. South Jordan, Utah Opinion on Internal Control over Financial Reporting We have audited Cricut, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, 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, 2023, and the related notes and our report dated March 5, 2024 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ BDO USA, P.C. Salt Lake City, Utah March 5, 2024 84 Table of Contents Cricut, Inc. Consolidated Balance Sheets (in thousands, except share and per share amounts) As of December 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 142,187 $ 224,943 Marketable securities 102,952 74,256 Accounts receivable, net 111,247 136,539 Inventories 244,469 351,682 Prepaid expenses and other current assets 19,114 23,842 Total current assets 619,969 811,262 Property and equipment, net 47,614 63,407 Operating lease right-of-use assets 12,353 17,078 Intangible assets, net — 760 Deferred tax assets 34,823 23,819 Other assets 35,363 33,301 Total assets $ 750,122 $ 949,627 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 76,860 $ 63,195 Accrued expenses and other current liabilities 71,933 69,775 Deferred revenue, current portion 40,304 34,869 Operating lease liabilities, current portion 5,230 5,436 Dividends payable, current portion 2,137 80,781 Total current liabilities 196,464 254,056 Operating lease liabilities, net of current portion 8,938 13,935 Deferred revenue, net of current portion 2,931 3,789 Other non-current liabilities 6,916 5,112 Total liabilities 215,249 276,892 Commitments and contingencies (Note 13) Stockholders’ equity: Preferred stock, par value $ 0.001 per share, 100,000,000 shares authorized, and no shares issued and outstanding as of December 31, 2023 and December 31, 2022. — — Common stock, par value $ 0.001 per share, 1,250,000,000 shares authorized as of December 31, 2023, 217,915,713 and 219,656,587 shares issued and outstanding as of December 31, 2023 and 2022, respectively. 218 220 Additional paid-in capital 505,864 672,990 Retained earnings 28,514 — Accumulated other comprehensive income (loss) 277 ( 475 ) Total stockholders’ equity 534,873 672,735 Total liabilities and stockholders’ equity $ 750,122 $ 949,627 See accompanying notes to these consolidated financial statements. 85 Table of Contents Cricut, Inc. Consolidated Statements of Operations and Comprehensive Income (in thousands, except share and per share amounts) Year Ended December 31, 2023 2022 2021 Revenue: Connected machines $ 198,312 $ 252,563 $ 548,205 Subscriptions 303,989 272,344 205,858 Accessories and materials 262,846 361,389 552,164 Total revenue 765,147 886,296 1,306,227 Cost of revenue: Connected machines 172,571 244,260 484,025 Subscriptions 32,346 26,375 21,961 Accessories and materials 216,937 265,768 342,791 Total cost of revenue 421,854 536,403 848,777 Gross profit 343,293 349,893 457,450 Operating expenses: Research and development 65,048 76,914 79,814 Sales and marketing 123,169 130,379 133,963 General and administrative 85,091 62,647 51,268 Total operating expenses 273,308 269,940 265,045 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 2,145 508 85 Total other income (expense), net 9,798 2,028 ( 32 ) Income before provision for income taxes 79,783 81,981 192,373 Provision for income taxes 26,147 21,315 51,900 Net income $ 53,636 $ 60,666 $ 140,473 Other comprehensive income (loss): Change in net unrealized gains (losses) on marketable securities, net of tax 711 ( 300 ) — Change in foreign currency translation adjustment 41 ( 120 ) ( 64 ) Comprehensive income $ 54,388 $ 60,246 $ 140,409 Earnings per share, basic $ 0.25 $ 0.28 $ 0.67 Earnings per share, diluted $ 0.24 $ 0.28 $ 0.64 Weighted-average common shares outstanding, basic 216,892,525 214,458,284 208,833,827 Weighted-average common shares outstanding, diluted 219,722,063 220,588,789 219,776,069 See accompanying notes to these consolidated financial statements. 86 Table of Contents Cricut, Inc. Consolidated Statements of Stockholders’ Equity (in thousands, except share amounts) Common Stock Additional Paid-In Capital Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount 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 Net income — — — 60,666 — 60,666 Issuance of common stock upon vesting or exercise of stock-based awards, net of withholding tax 620,611 — ( 6,815 ) — — ( 6,815 ) Forfeiture of unvested common stock ( 528,002 ) — — — — — Repurchases of common stock ( 2,349,581 ) ( 2 ) ( 18,578 ) — — ( 18,580 ) Dividends declared — — ( 64,314 ) ( 17,106 ) — ( 81,420 ) Stock-based compensation — — 45,342 — — 45,342 Compensatory units repurchased — — ( 14 ) — — ( 14 ) Other comprehensive loss — — — — ( 420 ) ( 420 ) Balance as of December 31, 2022 219,656,587 $ 220 $ 672,990 $ — $ ( 475 ) $ 672,735 Net income — — — 53,636 — $ 53,636 Issuance of common stock upon vesting or exercise of stock-based awards, net of withholding tax 1,125,568 1 ( 6,853 ) — — $ ( 6,852 ) Forfeiture of unvested common stock and dividend equivalents ( 317,549 ) — 403 — — $ 403 Repurchases of common stock ( 2,548,893 ) ( 3 ) ( 20,329 ) — — $ ( 20,332 ) Dividends declared and dividend equivalents issued — — ( 190,333 ) ( 25,122 ) — $ ( 215,455 ) Stock-based compensation — — 49,986 — — $ 49,986 Other comprehensive income — — — — 752 $ 752 Balance as of December 31, 2023 217,915,713 $ 218 $ 505,864 $ 28,514 $ 277 $ 534,873 See accompanying notes to these consolidated financial statements. 87 Table of Contents Cricut, Inc. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2023 2022 2021 Cash flows from operating activities: Net income $ 53,636 $ 60,666 $ 140,473 Adjustments to reconcile net income to net cash and cash equivalents provided by (used in) operating activities: Depreciation and amortization (including amortization of debt issuance costs) 30,039 26,957 19,388 Bad debt expense 1,720 ( 64 ) 1,096 Impairments 9,953 2,922 — Stock-based compensation 47,326 41,121 38,074 Deferred income tax ( 11,238 ) ( 20,461 ) ( 135 ) Non-cash lease expense 4,987 4,845 4,186 Provision for inventory obsolescence 26,330 11,466 5,070 Unrealized foreign currency (gain) loss 88 ( 1,040 ) — Other ( 2,143 ) ( 440 ) ( 2 ) Changes in operating assets and liabilities: Accounts receivable 23,500 63,696 ( 37,673 ) Inventories 78,376 63,085 ( 207,978 ) Prepaid expenses and other current assets 4,204 8,807 ( 27,942 ) Other assets 869 ( 51 ) ( 934 ) Accounts payable 13,535 ( 139,845 ) ( 46,667 ) Accrued expenses and other current liabilities and other non-current liabilities 7,761 ( 2,137 ) 3,639 Operating lease liabilities ( 5,423 ) ( 5,096 ) ( 4,672 ) Deferred revenue 4,577 3,252 9,128 Net cash and cash equivalents provided by (used in) operating activities 288,097 117,683 ( 104,949 ) Cash flows from investing activities: Purchase of marketable securities ( 63,451 ) ( 180,112 ) — Proceeds from maturities of marketable securities 38,390 21,393 — Proceeds from sales of marketable securities — 84,621 — Purchases of property and equipment, including capitalized software development costs ( 23,717 ) ( 33,771 ) ( 35,786 ) Net cash and cash equivalents used in investing activities ( 48,778 ) ( 107,869 ) ( 35,786 ) Cash flows from financing activities: Proceeds from capital contributions — — 200 Proceeds from issuance of common stock upon initial public offering, net of offering costs — — 262,007 Repurchases of common stock ( 20,332 ) ( 18,580 ) — Proceeds from exercise of stock options 383 31 272 Employee tax withholding payments on stock-based awards ( 8,106 ) ( 6,384 ) ( 2,017 ) Payments for debt issuance costs — ( 1,300 ) — Cash dividend ( 294,130 ) — — Other financing activities, net — ( 14 ) ( 218 ) Net cash and cash equivalents provided by (used in) financing activities ( 322,185 ) ( 26,247 ) 260,244 Effect of exchange rate on changes on cash and cash equivalents 110 ( 221 ) ( 127 ) Net (decrease) increase in cash and cash equivalents ( 82,756 ) ( 16,654 ) 119,382 Cash and cash equivalents at beginning of period 224,943 241,597 122,215 Cash and cash equivalents at end of period $ 142,187 $ 224,943 $ 241,597 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ — $ — $ 14 Cash paid during the period for income taxes $ 24,072 $ 28,916 $ 81,132 See accompanying notes to these consolidated financial statements. 88 Table of Contents Cricut, Inc. Consolidated Statements of Cash Flows (continued) (in thousands) Year Ended December 31, 2023 2022 2021 Supplemental disclosures of non-cash investing and financing activities: Right-of-use assets obtained in exchange for new operating lease liabilities $ 280 $ 4,285 $ 6,805 Property and equipment included in accounts payable and accrued expenses and other current liabilities $ 2,824 $ 4,410 $ 3,355 Tax withholdings on stock-based awards included in accrued expenses and other current liabilities $ 451 $ 1,324 $ 860 Stock-based compensation capitalized for software development costs $ 1,960 $ 2,321 $ 1,607 Reclassification of liability awards to equity upon modification $ — $ — $ 10,784 Leasehold improvements acquired through tenant allowances $ — $ 859 $ — Dividends declared but unpaid $ 2,342 $ 81,420 $ — See accompanying notes to these consolidated financial statements. 89 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 were 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 19 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 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. 90 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 12. 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”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”). 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 customer rebates and product returns. Other estimates include the warranty reserve, allowance for credit losses, 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 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. Foreign Currency Transactions The Company translates assets and liabilities of foreign subsidiaries from functional currencies into United States dollars (“USD”) at exchange rates in effect at the balance sheet dates, and related revenues and expenses are translated into USD at average exchange rates in effect during each period. Net foreign currency gains and losses resulting from the translation of assets and liabilities of foreign operations into USD are reported as a separate component of other comprehensive income in the consolidated statements of comprehensive income. Realized and unrealized foreign currency transaction gains and losses included in net income are recorded primarily within general and administrative expenses. Foreign currency transaction losses totaled $ 1.3 million, $ 1.0 million, and $ 0.9 million for the years ended December 31, 2023, 2022, and 2021, respectively. 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 unrealized gains and losses on marketable securities as well as foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency. 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. 91 Table of Contents Marketable Securities The Company designates investments in debt securities as available-for-sale. Available-for-sale debt securities with original maturities of three months or less from the date of purchase are classified within cash and cash equivalents. Available-for-sale debt securities with original maturities longer than three months are available to fund current operations and are classified as marketable securities, within current assets on the consolidated balance sheets. Available-for-sale debt securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity, net of tax. Realized gains and losses on the sale of marketable securities are determined using the average cost method on a first-in, first-out basis and recorded in total other income (expense), net in the consolidated statements of operations and comprehensive income. The available-for-sale debt securities are subject to a periodic impairment review. For investments in an unrealized loss position, the Company writes down the amortized cost basis of the investment if it is more likely than not that the Company will be required or will intend to sell the investment before recovery of its amortized cost basis. For investments not likely to be sold before recovery of the amortized cost basis, the Company determines whether a credit loss exists by considering information about the collectability of the instrument, current market conditions, and reasonable and supportable forecasts of economic conditions. The Company recognizes an allowance for credit losses up to the amount of the unrealized loss when appropriate. Allowances for credit losses and write-downs are recognized in total other income (expense), net, and unrealized losses not related to credit losses are recognized in accumulated other comprehensive income (loss). There are no allowances for credit losses recorded for the periods presented. As of December 31, 2023, the Company’s available-for-sale debt securities were in an unrealized gain position. As of December 31, 2022, the gross unrealized losses on available-for-sale debt securities are related to market interest rate changes and not attributable to credit. 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. As of January 1, 2021, the Company had an accounts receivable balance of $ 199.5 million. Accounts receivable consist of the following: December 31, 2023 2022 (in thousands) Trade accounts receivable $ 100,070 $ 128,437 Credit card and other receivables 13,127 8,550 Less: allowance for credit losses ( 1,950 ) ( 448 ) Total accounts receivable, net $ 111,247 $ 136,539 The following table summarizes changes in the allowance for credit losses: December 31, 2023 2022 (in thousands) Beginning balance $ ( 448 ) $ ( 1,454 ) Provision for expected losses ( 1,720 ) 64 Write-offs 218 942 Ending balance $ ( 1,950 ) $ ( 448 ) 92 Table of Contents 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, 2023 and 2022 were fully insured up to $250,000 per depositor at each financial institution. Balances held at the institutions may significantly exceed federally insured limits. Financial instruments, which potentially subject the Company to concentrations of credit risk, include 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, 2023 and 2022 were as follows: December 31, 2023 2022 Customer A 26 % 22 % Customer B 11 % 12 % Customer C 17 % * Customer D 12 % * * Accounts Receivable was less than 10% As of December 31, 2023 and 2022, no customers accounted for more than 10% of revenue. As of December 31, 2021, three customers accounted for equal to or greater than 10% of total revenue, totaling 10 %, 11 % and 14 %, respectively. 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 years ended December 31, 2023, 2022, and 2021, the Company’s top two vendors accounted for approximately 59 %, 61 %, and 76 % of total finished goods purchases, respectively. Inventories Inventories (current and non-current), which consist of finished goods and raw materials, 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. As needed, we complete strategic and market beneficial purchases of critical raw materials that are used in our core production process (such as microchips) in quantities that exceed anticipated consumption within our 93 Table of Contents normal operating cycle, which is 12 months. We classify such raw materials that we do not expect to consume within our normal operating cycle as non-current within Other assets. 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 Accounting Standards Codification (“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. 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 Leasehold improvements Shorter of lease term or remaining life of the asset Cloud Computing Arrangement Implementation Costs The Company incurs costs to implement cloud computing arrangements that are hosted by third-party vendors. Implementation costs incurred during the application development stage are capitalized until the software is ready for its intended use. The costs are then amortized on a straight-line basis over the term of the associated hosting arrangement and are recognized primarily as general and administrative expense within the consolidated statements of operations. To date, these costs primarily relate to new website hosting services. During the years ended December 31, 2023, 2022, and 2021, the Company recorded amortization expense of $ 1.0 million, $ 0.7 million, and $ 0.1 million respectively, for these implementation costs. Gross capitalized costs were $ 2.2 million and $ 2.2 million as of December 31, 2023 and 2022, respectively, with accumulated amortization of $ 1.8 million and $ 0.8 million, respectively. Capitalized costs are reported as a component of other assets on the Company's consolidated balance sheets. Leases 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 94 Table of Contents 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 13. Debt Issuance Costs Costs incurred and paid to the lender or third parties for the revolver credit facility are recorded as other assets and amortized over the term of the revolver using the straight-line method. 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, 2023, 2022, and 2021, the Company recorded no impairments relating to amortized intangible assets. During the years ended December 31, 2023 and 2022, the Company recorded an impairment charge of $ 10.0 million and $ 2.9 million, respectively, primarily related to computer software and software development costs and manufacturing tools and equipment from products that the Company no longer plans to commercialize. These impairment charges were recorded primarily within general and administrative expense in the consolidated statements of operations. During the year ended December 31, 2021, the Company recorded no impairments of property and equipment. See Note 6. Fair Value of Financial Instruments The Company’s financial instruments include cash and cash equivalents, marketable securities, accounts receivable, and accounts payable. At December 31, 2023, and 2022, 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. 95 Table of Contents • 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. 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, are 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 as of December 31, 2023 and 2022. Money market funds are highly liquid investments and are actively traded. The pricing information for these assets is 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. Marketable securities which include U.S. Treasury securities are valued using observable inputs from similar assets, or from observable data in markets that are not active; these assets are classified as Level 2 of the fair value hierarchy. There were no transfers between Levels 1, 2 or 3 for any of the periods presented. There were no liabilities measured at fair value on a recurring basis as of December 31, 2023 and December 31, 2022 other than liability classified stock-based awards discussed in Note 12. 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. Stock-based awards subject to conditions other than service conditions are considered contingently issuable shares and are included in basic EPS based on the number of awards that would be issuable if the reporting date were the end of the contingency period. 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; 96 Table of Contents • 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 customer rebates 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 of the goods as activities to fulfill the promise to transfer the good. All incremental costs of obtaining a contract with a customer are expensed as incurred if the expected amortization period of the asset that would have been recognized is one year or less. The Company does not have any material contract cost assets. 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, Cricut Maker and Cricut Venture machine architectures. Payment by traditional brick-and-mortar retail partners, including their online channels, is due under customary fixed payment terms. 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. 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 the hardware, software, unspecified future upgrades, enhancements and cloud-based services are considered distinct performance obligations 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 related to sales of connected machines and the allocation of the transaction price to each of those performance obligations. The Company estimates SSP for performance obligations that are not sold separately, which include the connected machines and related software, unspecified future upgrades and enhancements 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. 97 Table of Contents Subscriptions The Company’s paid subscription services relate to Cricut Access and Cricut Access Premium which provide users access to images, fonts and projects. The paid subscription is separate from our free of charge service to provide unspecified future upgrades and enhancements related to the essential software and access to the Company’s cloud-based services as described 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 other than allocations to customer options that were determined to be material rights related to incremental discounts on purchases of physical products that paid subscribers receive. The transaction price is allocated between the subscription and material right based on the relative standalone selling prices of the subscription and material right. Revenue related to the material right is recognized as accessories and materials revenue upon redemption or expiration of the material right. 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 by traditional brick-and-mortar retail partners, including their online channels, is due under customary fixed payment terms. Payment for sale of accessories and materials through the online channel at cricut.com is collected at point of sale in advance of shipping the products. Cost of Revenue Connected Machines 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. 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 at times includes certain contractual discounts or 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. The Company estimates certain customer rebates using either 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. 98 Table of Contents 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. Changes in the reserve for sales refunds were as follows: December 31, 2023 2022 (in thousands) Balance at beginning of period $ 7,273 $ 7,826 Additions that reduced net revenue 9,757 18,977 Deductions from reserves for current year returns ( 13,763 ) ( 19,530 ) Balance at end of period $ 3,267 $ 7,273 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, 2023 2022 (in thousands) Balance at beginning of period $ 2,484 $ 2,398 Additions charged to cost of revenue 4,163 8,146 Repairs and replacement costs incurred ( 4,835 ) ( 8,060 ) Balance at end of period $ 1,812 $ 2,484 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. 99 Table of Contents 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, 2023, 2022 and 2021, interest or penalties related to income tax matters included in the provision for income taxes have not been material. Sales Taxes 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, 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 stock option awards with time-based or performance-based vesting provisions using the Black-Scholes method. For restricted stock units, the fair value is based on the closing price of our common stock on the grant date. 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 the historical volatility of the Company's stock price or 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 special dividends declared in 2020, 2022 and 2023, and the Company does not expect to pay regular dividends in the future. See Note 11 for further discussion of the Company’s dividends. Likelihood of termination for the Monte Carlo Simulation was estimated based upon both historical turnover and anticipated turnover based upon Company or market pressures. Prior to the Corporate Reorganization in March 2021, 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 prior to the Corporate Reorganization in March 2021 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 100 Table of Contents 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. 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, 2023, 2022 and 2021 was $ 32.2 million, $ 34.2 million, and $ 45.1 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 Pronouncements In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant expenses, and is effective for fiscal years beginning after December 15, 2023 on a retrospective basis. The Company is currently evaluating the impact of this standard on the consolidated financial statements. In December, 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . This ASU establishes new income tax disclosure requirements in addition to modifying and eliminating certain existing requirements. Under the new guidance, entities must consistently categorize and provide greater disaggregation of information in the rate reconciliation. They must also further disaggregate income taxes paid. Public business entities must apply the ASU’s guidance to annual periods beginning after December 15, 2024 (2025 for calendar-year-end Public business entities). The Company is currently evaluating the impact of this standard on the consolidated financial statements. 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 from the sale of a connected machine to the unspecified upgrades and enhancements and the Company’s cloud-based services. Contract costs consist of amounts paid to obtain contracts with customers in connection with sales of subscriptions through third-party apps. Contract costs are amortized over the subscription term. During the twelve months ended December 31, 2023, the Company capitalized $ 1.7 million of contract costs, and as of December 31, 2023 the unamortized balance was $ 0.9 million, included in prepaid and other current assets on our consolidated balance sheets. There were no capitalized costs during the year ended December 31, 2022. The Company has recognized no contract assets for any of the periods presented. The following table summarizes the changes in the deferred revenue balance for the periods indicated: 101 Table of Contents December 31, 2023 2022 2021 (in thousands) Deferred revenue, beginning of period $ 38,658 $ 35,405 $ 26,276 Recognition of revenue for amounts included in beginning of period deferred revenue ( 34,869 ) ( 30,547 ) ( 23,518 ) Revenue deferred, net of revenue recognized on contracts in the respective period 39,446 33,800 32,647 Deferred revenue, end of period $ 43,235 $ 38,658 $ 35,405 As of December 31, 2023, 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, 2023: Year Ended December 31, 2024 2025 2026 Total (in thousands) Revenue expected to be recognized $ 40,304 $ 2,171 $ 760 $ 43,235 The Company’s revenue from contracts with customers disaggregated by major product lines, excluding sales-based taxes, are included in Note 19. Revenue recognized during the years ended December 31, 2023, 2022, and 2021, related to performance obligations satisfied or partially satisfied in prior periods was $ 3.2 million, $ 1.7 million and $ 2.3 million, respectively. The following table presents the total revenue by geography based on the ship-to address for the periods indicated: Year Ended December 31, 2023 2022 2021 (in thousands) North America $ 609,933 $ 743,962 $ 1,157,679 International 155,214 142,334 148,548 Total revenue $ 765,147 $ 886,296 $ 1,306,227 North America revenue consists of revenues from the United States and Canada. United States represents 95 %, 95 %, and 96 % of North America revenue for the years ended December 31, 2023, 2022, and 2021, respectively. 102 Table of Contents 4. Cash, Cash Equivalents, and Financial Instruments The following table shows the Company’s cash, cash equivalents, and marketable securities by significant investment category as of December 31, 2023: As of December 31, 2023 Adjusted Cost Allowance for Credit Losses Total Unrealized Gains Total Unrealized Losses Fair Value Cash and Cash Equivalents Marketable Securities (in thousands) Cash $ 44,809 $ — $ — $ — $ 44,809 $ 44,809 $ — Level 1: Money market funds 97,378 — — — 97,378 97,378 — Subtotal 97,378 — — — 97,378 97,378 — Level 2: U.S. treasury securities 102,411 — 541 — 102,952 — 102,952 Subtotal 102,411 — 541 — 102,952 — 102,952 Total $ 244,598 $ — $ 541 $ — $ 245,139 $ 142,187 $ 102,952 The following table shows the Company’s cash, cash equivalents, and marketable securities by significant investment category as of December 31, 2022: As of December 31, 2022 Adjusted Cost Allowance for Credit Losses Total Unrealized Gains Total Unrealized Losses Fair Value Cash and Cash Equivalents Marketable Securities (in thousands) Cash $ 155,459 $ — $ — $ — $ 155,459 $ 155,459 $ — Level 1: Money market funds 69,484 — — — 69,484 69,484 — Subtotal 69,484 — — — 69,484 69,484 — Level 2: U.S. treasury securities 74,659 — — ( 403 ) 74,256 — 74,256 Subtotal 74,659 — — ( 403 ) 74,256 — 74,256 Total $ 299,602 $ — $ — $ ( 403 ) $ 299,199 $ 224,943 $ 74,256 Marketable securities held as of December 31, 2023 generally mature over the next 9 months. The Company evaluates whether the decline in fair value of the available-for-sale securities below their amortized cost basis is related to credit losses or other factors. Based on this evaluation, we determined that unrealized losses of the above securities were primarily attributable to changes in interest rates and non credit-related factors. Accordingly, we determined that an allowance for credit losses was unnecessary as of December 31, 2022 . 103 Table of Contents 5. Inventories Inventories are comprised of the following: December 31, 2023 2022 (in thousands) Raw materials $ 44,935 $ 40,911 Finished goods 286,988 368,644 Total inventories $ 331,923 $ 409,555 Less: reserves ( 54,416 ) ( 28,087 ) Total inventories, net $ 277,507 $ 381,468 Inventories current $ 244,469 $ 351,682 Inventories non-current (included in Other assets) $ 33,038 $ 29,786 As of the years ended December 31, 2023 and 2022, the Company had $ 0.1 million and $ 4.5 million in finished goods for connected machines that were undergoing rework prior to being in a sellable condition. The Company’s recorded inventory reserves as of December 31, 2023 consisted of $ 4.6 million related to excess connected machine inventory that the Company does not expect to sell, $ 46.5 million related to excess accessories and materials inventory, and $ 3.3 million related to raw material components. Amounts charged to the reserve account are recorded primarily in cost of revenues. 6. Property and Equipment The composition of property and equipment is as follows: December 31, 2023 2022 (in thousands) Computer software, software development costs and equipment $ 106,602 $ 86,929 Furniture and fixtures 2,928 2,941 Leasehold improvements 5,070 5,057 Manufacturing tools and equipment 34,350 35,396 Assets under construction 1,504 13,134 Total cost of property and equipment 150,454 143,457 Less: accumulated depreciation ( 102,840 ) ( 80,050 ) Property and equipment, net $ 47,614 $ 63,407 During the twelve months ended December 31, 2023, the Company recorded an impairment charge of $ 10.0 million, including $ 4.2 million for computer software and software development costs and $ 5.8 million for manufacturing tools and equipment from products the Company no longer plans to commercialize. These impairment charges were recorded primarily within general and administrative expense in the consolidated statements of operations. Total depreciation and amortization expense for the years ended December 31, 2023, 2022 and 2021 was $ 29.0 million, $ 25.9 million and $ 18.3 million, respectively. Amortization of computer software, software development costs and equipment for the years ended December 31, 2023, 2022 and 2021 was $ 20.1 million, $ 16.8 million and $ 12.2 million, respectively. Property and equipment, along with all other Company assets are pledged as collateral on the Credit Agreement (see Note 9). 104 Table of Contents 7. Intangible Assets, Net The following is a summary of the Company’s intangible assets: December 31, 2023 Gross Carrying Amount Accumulated Amortization and Impairment Net (in thousands) Trade names and trademarks $ 42,301 $ ( 42,301 ) $ — Total intangible asset $ 42,301 $ ( 42,301 ) $ — December 31, 2022 Gross Carrying Amount Accumulated Amortization and Impairment Net (in thousands) Trade names and trademarks $ 42,301 $ ( 41,541 ) $ 760 Total intangible asset $ 42,301 $ ( 41,541 ) $ 760 The Company’s trade names and trademarks have useful lives ranging from 11 to 15 years. Amortization was expensed on a straight-line basis for all intangible assets, as this was the Company’s best estimate of the period of economic benefit. Amortization expense of intangible assets totaled $ 0.8 million for each of the years ended December 31, 2023, 2022 and 2021, respectively. 8. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following: December 31, 2023 2022 (in thousands) Customer rebates $ 30,479 $ 35,552 Other accrued liabilities and other current liabilities 41,454 34,223 Total accrued expenses $ 71,933 $ 69,775 9. Revolving Credit Facility 2020 Credit Agreement In September 2020, the Company entered into a credit agreement ( the “2020 Credit Agreement”) with JPMorgan Chase Bank, N.A., Citibank, N.A. and Origin Bank. The 2020 Credit Agreement provided for a three-year asset-based senior secured revolving credit facility of up to $ 150.0 million, maturing on September 4, 2023. The amount that could be borrowed under the 2020 Credit Agreement was 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 was determined according to certain percentages of eligible accounts receivable and eligible inventory, subject to reserves determined by the administrative agent. As disclosed below, the 2020 Credit Agreement was replaced on August 4, 2022. At that time, no amount was outstanding under the 2020 Credit Agreement, available borrowings were $ 150.0 million, and the Company was in compliance with all financial and non-financial debt covenants. 2022 Credit Agreement On August 4, 2022, the Company entered into a credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A, Citigroup N.A., PNC Bank, N.A., KeyBank, N.A., and other parties. The Credit Agreement 105 Table of Contents replaced the Company’s prior asset-based Credit Agreement with JPMorgan Chase Bank, N.A., Citigroup N.A., and Origin Bank. The Credit Agreement provides for a five-year revolving credit facility (the “Credit Facility”) of up to $ 300.0 million, maturing on August 4, 2027. In addition, during the term of the Credit Agreement, the Company may increase the aggregate amount of the Credit Facility by up to an additional $ 150.0 million, (for maximum aggregate lender commitments of up to $ 450.0 million), subject to customary conditions under the Credit Agreement, including obtaining a consent from participating lenders (or another lender, if applicable) to such increase. The Credit Facility may be used to issue letters of credit and for other business purposes, including working capital needs. The current unused fee rate is 0.175 % on per annum basis. The Company accounted for the Credit Agreement as a modification of the 2020 Credit Agreement in accordance with ASC 470-50 Modification and Extinguishments . In connection with the Credit Agreement, the Company incurred and capitalized $ 1.3 million of debt issuance costs in addition to $ 0.3 million of existing unamortized debt issuance costs with the 2020 Credit Agreement which remained deferred, resulting a total deferral of debt issuance costs of $ 1.6 million as of the date of the Credit Agreement. As of December 31, 2023 and 2022, total unamortized debt issuance costs were $ 1.2 million and $ 1.5 million, respectively. The Credit Agreement is collateralized by substantially all of the Company’s assets and contains affirmative and negative covenants, representations and warranties, events of default and other terms customary for loans of this nature. In particular, the Credit Agreement will not permit the leverage ratio to be greater than 3.0 to 1.0, measured on the last day of any fiscal quarter. In addition, the Credit Agreement will not permit the interest coverage ratio to be less than 3.0 to 1.0, for any period of four consecutive quarters, measured on the last day of any fiscal quarter. Management has determined that the Company was in compliance with all financial and non-financial debt covenants as of December 31, 2023. As of December 31, 2023, no amount was outstanding under the Credit Agreement and available borrowings were $ 300.0 million Generally, borrowings under the Credit Agreement bear interest at a rate based on an alternative base rate (“ABR”), plus, in each case, an applicable margin. The applicable margin will range from (a) borrowings bearing interest at the ABR 2.00 %, and (b) borrowings bearing interest at the Adjusted Term Secured Overnight Financing Rate, the Adjusted Australian Dollar Rate, the Adjusted Canadian Dollar Offered Rate or the Adjusted New Zealand Dollar Rate, as applicable for the interest period in effect for such borrowing plus the applicable rate. 10. Income Taxes The Company’s income before income taxes of $ 79.8 million, $ 82.0 million, and $ 192.4 million during the years ended December 31, 2023, 2022, and 2021, respectively, consisted of $ 78.4 million, $ 81.0 million, and $ 191.5 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, 2023 2022 2021 Income tax provision at statutory rate 21.0 % 21.0 % 21.0 % State taxes, net 4.8 5.6 4.7 Stock-based compensation 8.2 7.1 2.1 Foreign derived intangible income deduction ( 2.5 ) ( 3.2 ) ( 1.4 ) Tax credits ( 5.0 ) ( 8.7 ) ( 2.9 ) Return to provision adjustments 1.4 1.5 2.3 Uncertain tax positions 2.6 — — Other 2.3 2.7 1.2 Total provision for income taxes 32.8 % 26.0 % 27.0 % 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 106 Table of Contents 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, 2023 2022 (in thousands) Deferred tax assets: Inventories $ 10,888 $ 5,694 Lease liability 3,434 4,799 Accounts receivable 481 115 Sales refund liability 806 1,866 Deferred revenue 723 972 Stock-based compensation 6,724 5,903 Amortization 212 36 Capitalized research expenditures 18,434 15,567 Net operating loss carryforwards 86 122 Capital loss carryforwards 110 114 Tax credits 2,937 2,286 Other 1,459 1,145 Total deferred tax assets 46,294 38,619 Deferred tax liabilities: Depreciation and amortization ( 8,483 ) ( 10,587 ) ROU lease asset ( 2,988 ) ( 4,213 ) Total deferred tax liabilities ( 11,471 ) ( 14,800 ) Net deferred tax assets $ 34,823 $ 23,819 Year Ended December 31, 2023 2022 2021 (in thousands) Current: Federal $ 32,140 $ 29,741 $ 44,093 State 4,695 11,928 7,780 Foreign 549 107 162 Total current 37,384 41,776 52,035 Deferred: Federal ( 9,561 ) ( 15,169 ) ( 23 ) State ( 1,713 ) ( 5,316 ) ( 137 ) Foreign 37 24 25 Total deferred ( 11,237 ) ( 20,461 ) ( 135 ) Income tax provision $ 26,147 $ 21,315 $ 51,900 There are immaterial foreign net operating loss carryforwards set to expire in 2026. The Company establishes valuation allowances if it is more likely than not that deferred tax assets will not be realized. The Company believes that it 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, 2023 and 2022. As of December 31, 2023, the Company has not recorded incremental income taxes for outside basis differences in our investments in foreign subsidiaries, as these amounts continue to be indefinitely reinvested in foreign operations. The undistributed earnings of the Company’s foreign subsidiaries that meet the indefinite reversal criteria amounted to $ 1.1 million. 107 Table of Contents As of December 31, 2023, 2022, and 2021, $ 7.8 million, $ 4.1 million and $ 2.8 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, 2023 and 2022, resulted primarily from research and development credits, foreign derived intangible income differences and inventory basis differences. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows: Year Ended December 31, 2023 2022 2021 (in thousands) Unrecognized tax benefits at beginning of year $ 3,988 $ 2,379 $ 3,318 Reductions based on prior year tax positions ( 159 ) ( 227 ) — Additions based on prior year tax provisions 2,691 296 593 Additions based on current year tax provisions 996 1,787 1,431 Reductions due to tax authorities’ settlements — — ( 2,824 ) Reductions due to expirations of statutes of limitation ( 368 ) ( 247 ) ( 139 ) Unrecognized tax benefits at end of year $ 7,148 $ 3,988 $ 2,379 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, 2023 and 2022, 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. 11. 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, 2023, 9,214,127 shares of Class B common stock were converted to Class A common stock. As of December 31, 2023, 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 51,414,599 shares of Class A common stock and 166,501,114 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. Stock Repurchase Program On July 19, 2022, the Company’s Board of Directors approved a common stock repurchase program under which the Company may repurchase shares of its outstanding Class A common stock up to an aggregate transactional value of $ 50 million, depending on the Company’s continuing analysis of market, financial, and other factors. The share repurchase program may be suspended or discontinued at any time and does not have a predetermined expiration date. During the years ended December 31, 2023 and 2022, the Company repurchased and retired 2,548,893 and 2,349,581 shares of our Class A common stock, respectively, for $ 20.3 million and $ 18.5 million, respectively, under this program. Dividends 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 108 Table of Contents $ 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 received 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 prior to any subsequent forfeitures. 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. Dividends payable includes dividends declared but not yet paid and prior dividends on unvested shares of Class A common stock payable upon future vesting. $ 0.2 million of the cash dividend is classified as non-current and presented in other non-current liabilities on the consolidated balance sheets due to vesting conditions. 12. 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, 2023 2022 2021 (in thousands) Equity-classified awards Restricted stock units $ 41,094 $ 32,442 $ 14,149 Stock options 2,388 3,579 6,406 Class B common stock 6,504 9,321 15,200 Liability-classified awards 44 ( 54 ) 6,447 Total stock-based compensation $ 50,030 $ 45,288 $ 42,202 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, 2023 2022 2021 (in thousands) Cost of revenue Connected machines $ 700 $ 288 $ 34 Subscriptions 926 443 219 Accessories and materials 805 199 — Total cost of revenue 2,431 930 253 Research and development 18,169 17,713 15,782 Sales and marketing 12,740 12,603 13,814 General and administrative 13,986 9,875 8,225 Total stock-based compensation expense $ 47,326 $ 41,121 $ 38,074 Capitalized for software development costs 1,960 2,321 1,607 Capitalized to inventory 744 1,846 2,521 Total stock-based compensation $ 50,030 $ 45,288 $ 42,202 As of December 31, 2023, there was $ 94.2 million of unrecognized stock-based compensation cost related to service-based awards, which is expected to be recognized over a weighted-average period of 2.3 years. The total unrecognized compensation expense related to unvested PRSUs that are not probable of vesting was 109 Table of Contents $ 157.8 million as of December 31, 2023. The tax benefit from stock-based compensation cost during the years ended December 31, 2023, 2022 and 2021, was $ 9.3 million, $ 8.2 million, and $ 5.8 million, respectively. Corporate Reorganization and Stock-Based Compensation Modifications In connection with the Corporate Reorganization in 2021, 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. 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 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 began recognizing the incremental compensation cost of $ 14.5 million beginning in March 2021 over the vesting term, 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. 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. Outstanding restricted stock units and performance units are entitled to dividend equivalents in the form of additional unvested restricted stock units or unvested performance units equal in value to the amount of any declared dividend based on the closing price of the Company’s class A stock on the dividend payment date. Dividend equivalents are forfeited if the underlying award does not vest. As of December 31, 2023, 41,467,020 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. 110 Table of Contents 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, 2022 6,364,022 $ 18.06 Granted 4,342,919 $ 10.42 Dividend equivalent grants 594,486 $ — Vested ( 1,997,154 ) $ 18.77 Forfeited/cancelled ( 410,442 ) $ 14.49 Outstanding at December 31, 2023 8,893,831 $ 14.38 The total fair value of RSUs vested as of the vesting dates during the years ended December 31, 2023, 2022 and 2021, was $ 17.1 million, $ 13.0 million, and $ 6.1 million, respectively. In 2022, the Company granted PRSUs under the 2021 Equity Incentive Plan to certain employees that represent shares potentially issuable in the future. The PRSUs 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, at any point during the 5.0 years performance period, subject to employees remaining with the Company through the vesting date. Adjusted earnings per share means GAAP net income adjusted to exclude income tax expenses, as well as stock-based compensation expense and payroll tax expense specifically related to the PRSU awards. A summary of the Company’s PRSU activity under the 2021 Equity Incentive Plan is as follows: Number of PRSUs (a) Weighted- Average Grant Date Fair Value (per share) Outstanding at December 31, 2022 6,295,000 $ 23.32 Dividend equivalent grants 710,033 $ — Forfeited / cancelled ( 239,032 ) $ 23.37 Outstanding at December 31, 2023 6,766,001 $ 23.32 a. Represents the maximum number of PRSUs assuming all performance targets are achieved. The expense recognized each period for these PRSUs is primarily dependent upon the Company’s estimate of the probability of achieving the performance targets during the performance period. At December 31, 2023, the Company determined it was not probable any performance conditions would be achieved, so no stock-based compensation has been recorded for these PRSUs during the years ended December 31, 2023 and 2022. 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. 111 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, 2022 3,142,911 $ 20.00 4.6 $ — Forfeited/cancelled ( 143,826 ) 20.00 Outstanding and expected to vest at December 31, 2023 2,999,085 $ 18.65 3.5 $ — Vested and exercisable at December 31, 2023 2,526,813 $ 18.65 3.4 $ — For the years ended December 31, 2023 and 2022, no options were granted and the total intrinsic value of options exercised was immaterial. The weighted-average grant date fair value of options granted during the year ended December 31, 2021 was $ 8.79 per share and the total intrinsic value of options exercised was $ 0.1 million. The Company used the following weighted-average assumptions in determining the grant date fair value of options granted: 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. If the base price exceeds the Company’s stock price on the vesting date, the stock-based award is considered cancelled. 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, 2023, the total recognized liability for the unvested awards was not material. 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, 2022 4,846 $ 15.87 $ 86 Granted 3,500 $ — Vested ( 2,173 ) $ — Forfeited/cancelled — $ — Outstanding at December 31, 2023 6,173 $ 11.52 $ 38 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. Dividends declared on unvested Class B common stock are subject to vesting 112 Table of Contents and are forfeited if the underlying stock does not vest. Activity related to Class B common stock subject to future vesting for the year ended December 31, 2023 is as follows: Number of Unvested Shares Weighted- Average Grant Date Fair Value (per share) Outstanding at December 31, 2022 4,655,214 $ 20.00 Vested ( 2,680,986 ) $ 20.00 Forfeited / Cancelled ( 317,549 ) $ 20.00 Outstanding at December 31, 2023 1,656,679 $ 20.00 The total fair value of Class B common stock vested as of the vesting dates during the years ended December 31, 2023, 2022 and 2021, was $ 27.1 million, $ 73.9 million, and $ 69.7 million, respectively. 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, 2022 358,000 $ 9.04 2.8 $ 82 Exercised ( 40,575 ) $ 9.04 Forfeited / Cancelled ( 58,000 ) $ 8.80 Outstanding at December 31, 2023 259,425 $ 7.69 1.9 $ — Vested at December 31, 2023 259,425 $ 7.69 1.9 $ — 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 — % 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, 2023, 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. 113 Table of Contents Incentive Unit Plan Prior to the Corporate Reorganization which occurred in 2021, the Company’s former parent, Cricut Holdings, had 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. Upon the Corporate Reorganization Cricut Holdings, was liquidated and all outstanding awards were settled or modified as described above. 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 are 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. Accordingly, no CIUs were granted during the years ended December 31, 2023 and 2022. The weighted-average grant date fair value of equity classified incentive units granted during the year ended December 31, 2021 was $ 9.06 . The total intrinsic value of equity classified incentive units exercised during the year ended December 31, 2021 was nil . The total fair value of equity classified incentive units vested during the year ended December 31, 2021 was $ 3.2 million. 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 units on the date of the grant as all CIUs had no participation threshold. 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. The weighted-average grant date fair value of options granted during the year ended December 31, 2021 was $ 4.45 per share, and were estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the periods indicated: Years Ended December 31. 2021 Fair value of common unit $ 8.99 Expected life (in years) 5.0 Expected volatility 50.9 % Risk-free rate 0.6 % Expected dividend yield — % Liability Classified Incentive Unit Equivalents Prior to the Corporate Reorganization which occurred in 2021, 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 the former parent Company and required cash 114 Table of Contents 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 and through the Corporate Reorganization in 2021, 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 in the Corporate Reorganization all outstanding awards were settled or modified as described above. The weighted-average grant date fair value of liability classified incentive units granted during the year ended December 31, 2021 was $ 8.19 . 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. 13. Commitments and Contingencies Litigation The Company is subject to certain outside claims and litigation, as well as regulatory disputes, audits, government inquiries and other proceedings, 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. Self-Insurance Liabilities Starting in 2022, the Company began to self-insure for certain employee medical benefits. The recorded liabilities for self-insured risks are calculated using actuarial methods and are not discounted. The liabilities include amounts for actual claims and claims incurred but not reported. Actual experience, including claim frequency and severity as well as health care inflation, could result in actual liabilities being more or less than the amounts currently recorded. As of December 31, 2023 and 2022 we have accrued $ 0.8 million and $ 0.7 million, respectively, for employee medical claims. Such amounts are included in accrued expenses and other current liabilities on our consolidated balance sheets. 14. Leases The Company leases office space with original lease terms ranging from 1 to 6 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 also leased additional space at its corporate headquarters which commenced in January of 2022 under the same terms as its existing lease. 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 years ended December 31, 2023, 2022 and 2021, the Company incurred operating lease costs of $ 5.4 million, $ 5.5 million and $ 4.7 million, respectively, and variable lease costs of $ 0.4 million, $ 0.5 million and $ 0.5 million, respectively. Cash paid for amounts included in the measurement of operating lease liabilities for the years ended December 31, 2023, 2022 and 2021 was $ 5.9 million, $ 5.8 million and $ 5.1 million, respectively, 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, 2023, the maturities of the Company's operating lease liabilities were as follows: Operating Leases (in thousands) 2024 $ 5,566 2025 4,351 2026 3,899 2027 967 Total lease payments $ 14,783 Less: imputed interest $ ( 615 ) Present value of operating lease liabilities $ 14,168 Operating lease liabilities, current $ 5,230 Operating lease liabilities, non-current $ 8,938 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, 2023 As of December 31, 2022 Weighted-average remaining lease term of operating leases 2.9 years 3.7 years Weighted-average discount rate of operating leases 2.5 % 2.6 % 15. Related Party Transactions For the year ended December 31, 2021 the Company received $ 0.2 million 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. For the years ended December 31, 2023 and 2022, the Company received zero capital contributions. The Company has an active common stock repurchase program that allows for the repurchase of common stock in the open market or in private transactions as described in Note 11. On August 24, 2022 the Company repurchased and retired 250,000 shares of its Class A common stock from a previous executive at a price per share at the market price of $ 6.47 in a private transaction for a total of $ 1.6 million. 16. Restructuring During the year ended December 31, 2023, the Company undertook a restructuring plan to improve efficiency and streamline operations. The Company recognized $ 1.2 million of severance costs which was primarily settled within the three months ended March 31, 2023. Of this amount, $ 0.7 million, $ 0.3 million, and $ 0.2 million, were recorded within research and development, selling and marketing, and general and administrative expense, respectively. 17. 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 $ 2.5 million during both the years ended December 31, 2023 and 2022, respectively, and $ 2.4 million in the year ended December 31, 2021. 116 Table of Contents 18. Net Income Per Share The computation of net income per share is as follows: Year Ended December 31, 2023 2022 2021 (in thousands, except share and per share amounts) Basic earnings per share: Net income $ 53,636 $ 60,666 $ 140,473 Shares used in computation: Weighted-average common shares outstanding, basic 216,892,525 214,458,284 208,833,827 Earnings per share, basic $ 0.25 $ 0.28 $ 0.67 Diluted earnings per share: Net income $ 53,636 $ 60,666 $ 140,473 Shares used in computation: Weighted-average common shares outstanding, basic 216,892,525 214,458,284 208,833,827 Weighted-average effect of potentially dilutive securities: Unvested common stock subject to forfeiture 1,840,180 5,621,136 9,132,579 Employee stock options 48,889 23,100 717,772 Restricted stock units 940,469 486,269 1,073,093 Underwriters’ option to purchase additional shares — — 18,798 Diluted weighted-average common shares outstanding 219,722,063 220,588,789 219,776,069 Diluted earnings per share $ 0.24 $ 0.28 $ 0.64 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, 2023 2022 2021 Employee stock options 2,999,085 3,142,911 — Restricted stock units 4,435,957 5,742,284 786,500 Unvested Class B common stock subject to forfeiture 415,402 831,952 — 19. 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 the years ended December 31, 2023 and 2022, long-lived assets located outside the United States, primarily located in Malaysia and China, were $ 8.7 million and $ 20.3 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 portion of revenue allocated to 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 EasyPress, Cricut Mug Press, and Cricut Autopress . There are no 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, 2023 2022 2021 (in thousands) Connected Machines: Revenue $ 198,312 $ 252,563 $ 548,205 Cost of revenue 172,571 244,260 484,025 Gross profit $ 25,741 $ 8,303 $ 64,180 Subscriptions: Revenue $ 303,989 $ 272,344 $ 205,858 Cost of revenue 32,346 26,375 21,961 Gross profit $ 271,643 $ 245,969 $ 183,897 Accessories and Materials: Revenue $ 262,846 $ 361,389 $ 552,164 Cost of revenue 216,937 265,768 342,791 Gross profit $ 45,909 $ 95,621 $ 209,373 Consolidated: Revenue $ 765,147 $ 886,296 $ 1,306,227 Cost of revenue 421,854 536,403 848,777 Gross profit $ 343,293 $ 349,893 $ 457,450 20. Subsequent Events In January 2024, the Company revised its operating segments to reflect changes in the way the CODM manages and evaluates the business. Effective in the first quarter ending March 31, 2024, the Company will reduce its reportable segments to two : one Platform segment and one Products segment which combines our Connected Machines and Accessories and Materials businesses. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures None.