The following discussion and analysis of our financial condition and results of
operations should be read together with our interim condensed consolidated
financial statements and related notes and other financial information appearing
elsewhere in this Quarterly Report on Form 10-Q and our final prospectus or
Prospectus dated March 24, 2021 and filed with the U.S Securities and Exchange
Commission, or the SEC, pursuant to Rule 424(b) under the Securities Act of
1933, as amended, or the Securities Act, on March 25, 2021. This discussion and
analysis contains forward-looking statements that involve risks, uncertainties
and assumptions. Our actual results could differ materially from these
forward-looking statements as a result of many factors, including those
discussed in the sections titled "Risk Factors" and "Special Note Regarding
Forward-Looking Statements."
Overview of Our Business and History
At Cricut, our mission is to help people lead creative lives. We have designed
and built a creativity platform that enables our engaged and loyal community of
over 5.7 million users to turn ideas into professional-looking handmade goods.
With our highly versatile connected machines, design apps and accessories and
materials, our users create everything from personalized birthday cards, mugs
and T-shirts to large-scale interior decorations.
Our users' journeys typically begin with the purchase of a connected machine. We
currently sell a portfolio of connected machines that cut, write, score and
create other decorative effects using a wide variety of materials including
paper, vinyl, leather and more. Our connected machines are designed for a wide
range of uses and are available at a variety of price points (MSRP by machine
family as of September 30, 2021):
•Cricut Joy for personalization on-the-go, $179.99 MSRP
•Cricut Explore for cutting, writing and scoring, $249.99 - $299.99 MSRP
•Cricut Maker for cutting, writing, scoring and adding decorative effects to a
wider range of materials, $399.99 MSRP
Our software integrates our connected machines and design apps, allowing our
users to create and share seamlessly. Our software is cloud-based, meaning that
users can access and work on their projects anywhere, at any time, across
desktops or mobile devices. Users can leverage the full power of our platform by
using our connected machines together with our free design apps, in-app
purchases and subscription offerings to design and complete projects. All users
can access a select number of free images, fonts and projects from our design
apps or upload their own. In addition, we offer a wider selection of images,
fonts and projects for purchase à la carte, including licensed content from
partners with well-known brands and characters, like major motion picture
studios. We also have two subscription offerings: Cricut Access and Cricut
Access Premium. Cricut Access provides a subscription to images, fonts and
projects as well as other member benefits, such as discounts and priority Cricut
Member Care. Cricut Access Premium includes all of the benefits of Cricut Access
as well as additional discounts and preferred shipping. As of September 30,
2021, we had 1.8 million Paid Subscribers to Cricut Access and Cricut Access
Premium.
We sell a broad range of accessories and materials that bring our users' designs
to life, from advanced tools like heat presses to Cricut-branded rulers, scoring
tools, pens, paper and iron-on vinyl, all designed to work seamlessly with our
connected machines. Designing and completing projects drives repeat purchases of
Cricut-branded accessories and materials.
We design and develop our software and hardware products, and we work with
third-party contract manufacturers to source components and finished goods and
with third-party logistics companies to warehouse and distribute our products.
We sell our connected machines and accessories and materials through our
brick-and-mortar and online retail partners, as well as through our website at
cricut.com. Our partners include Amazon, Hobby Lobby, HSN, Jo-Ann, Michaels,
Target, Walmart and many others. We also sell our products, including
subscriptions to Cricut Access and Cricut Access Premium, on cricut.com.
For the three months ended September 30, 2021 and 2020, we generated:
•Total revenue of $260.1 million and $209.0 million, respectively, representing
24% year-over-year growth
•Net income of $30.0 million and $45.2 million, respectively, representing 34%
year-over-year decline
•EBITDA of $42.7 million and $61.0 million, respectively, representing 30%
year-over-year decline

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For the nine months ended September 30, 2021 and 2020, we generated:
•Total revenue of $918.4 million and $588.1 million, respectively, representing
56% year-over-year growth
•Net income of $128.5 million and $93.1 million, respectively, representing 38%
year-over-year growth
•EBITDA of $179.9 million and $130.9 million, respectively, representing 37%
year-over-year growth
On March 29, 2021, we completed an initial public offering ("IPO"), in which we
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. We received aggregate net proceeds of $242.7 million
after deducting offering costs, underwriting discounts and commissions of $22.3
million. On April 28, 2021, we 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.
Key Business Metrics and Non-GAAP Financial Measures
In addition to the measures presented in our interim condensed consolidated
financial statements, we use the following key metrics to evaluate our business,
measure our performance, identify trends and make strategic decisions.
                                                                       

Three Months Ended September 30,


                                                                        2021                      2020
Users (in thousands)                                                        5,732                    3,681
Percentage of Users Creating in Trailing 90 Days                               56  %                    63  %
Paid Subscribers (in thousands)                                             1,814                    1,164


                                              Three Months Ended September 30,
                                                     2021                       2020
    Subscription ARPU                $            9.60                        $  8.97
    Accessories and Materials ARPU   $           18.79                        $ 29.41
    EBITDA (in millions)             $            42.7                        $  61.0

Users


We define a User as a registered user of at least one registered connected
machine as of the end of a period. One user may own multiple registered
connected machines but is only counted once if that user registers those
connected machines by using the same email address. If possession of a connected
machine is transferred to a new owner and registered by that new owner, the new
owner is added to the total user count and the prior owner is removed from the
total user count if the prior owner does not own any other registered connected
machines. User count is a key indicator of the health of our business, because
changes in the number of users reflects changes in connected machine sales and
represents opportunities for us to drive additional sales of subscriptions and
accessories and materials. There are certain limitations associated with this
metric. For example, this metric does not capture whether a User is active in
using a connected machine and does not indicate whether a User is purchasing
subscriptions or accessories and materials. We compensate for these limitations
by also reviewing other metrics that capture portions of this information,
including the metrics below.
Percentage of Users Creating in Trailing 90 Days
We define the Percentage of Users Creating in Trailing 90 Days as the percentage
of users who have used a connected machine for any activity, such as cutting,
writing or any other activity enabled by our connected machines, in the past 90
days. This metric is a key indicator of our engagement with users, which helps
drive sales of subscriptions and accessories and materials. There are certain
limitations associated with this metric. For example, this metric does not
capture whether a User is purchasing subscriptions or accessories and materials.
We compensate for these limitations by also reviewing other metrics that capture
portions of this information, including the metrics below.
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Paid Subscribers
We define Paid Subscribers as the number of users with a subscription to Cricut
Access or Cricut Access Premium, excluding cancelled, unpaid or free trial
subscriptions, as of the end of a period. Paid Subscribers is a key metric to
track growth in our subscriptions revenue and potential leverage in our gross
margin.
Subscription ARPU
We define Subscription ARPU as Subscriptions revenue divided by average users in
a period. Subscription ARPU allows us to forecast Subscriptions revenue over
time and is an indicator of our ability to expand with users and of user
engagement with our subscription offerings.
Accessories and Materials ARPU
We define Accessories and Materials ARPU as Accessories and Materials revenue
divided by average users in a period. Accessories and Materials ARPU allows us
to forecast Accessories and Materials revenue over time and is an indicator of
our ability to expand with users, particularly the volume of projects created by
our users.
EBITDA and EBITDA Margin
We define EBITDA as net income adjusted to exclude: interest expense, net;
income taxes and depreciation and amortization. We use EBITDA and EBITDA Margin
as measures of operating performance in our business. We believe these non-GAAP
financial measures are useful to investors for period-to-period comparisons of
our business and in understanding and evaluating our results of operations for
the following reasons:
•EBITDA and EBITDA Margin are widely used by investors and securities analysts
to measure a company's operating performance without regard to items such as
depreciation and amortization expense, interest expense, net and income taxes
that can vary substantially from company to company depending upon their
financing and the method by which assets were acquired;
•our management uses EBITDA and EBITDA Margin in conjunction with financial
measures prepared in accordance with GAAP for planning purposes, including the
preparation of our annual operating budget, as a measure of our core results of
operations and the effectiveness of our business strategy and in evaluating our
financial performance; and
•EBITDA and EBITDA Margin provide consistency and comparability with our past
financial performance, facilitate period-to-period comparisons of our core
results of operations and also facilitate comparisons with other peer companies,
many of which use similar non-GAAP financial measures to supplement their GAAP
results.
Our use of EBITDA and EBITDA Margin has limitations as an analytical tool, and
you should not consider these measures in isolation or as substitutes for
analysis of our financial results as reported under GAAP. Some of these
limitations are, or may in the future be, as follows:
•although depreciation and amortization expense are non-cash charges, the assets
being depreciated and amortized may have to be replaced in the future, and
EBITDA and EBITDA Margin do not reflect cash capital expenditure requirements
for such replacements or for new capital expenditure requirements;
•EBITDA and EBITDA Margin do not reflect the portion of software development
costs that we capitalize under GAAP, which has recently been, and will continue
to be for the foreseeable future, a significant recurring expense for our
business and an important part of our investment in new products;
•EBITDA and EBITDA Margin do not reflect: (i) changes in, or cash requirements
for, our working capital needs, (ii) interest expense, or the cash requirements
necessary to service interest or principal payments on our debt, which reduces
cash available to us or (iii) tax payments that may represent a reduction in
cash available to us.
Because of these limitations, we believe EBITDA and EBITDA Margin should be
considered along with other operating and financial performance measures
presented in accordance with GAAP.
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Set forth below is a reconciliation of EBITDA to net income for the three and
nine months ended September 30, 2021 and 2020:

                                               Three Months Ended September 30,               Nine Months Ended September 30,
                                                  2021                    2020                   2021                    2020
(in thousands)
Net income                                 $            30,005       $       45,211       $           128,549       $       93,130
Net income margin                                      11.5  %             21.6   %                   14.0  %             15.8   %
Adjusted to exclude the following:
Depreciation and amortization expense      $             4,976       $        3,431       $            13,152       $       10,097
Interest expense, net                      $              (22)       $          140       $               133       $        1,081
Corporate income tax expense               $             7,767       $       12,205       $            38,024       $       26,555
EBITDA                                     $            42,726       $       60,987       $           179,858       $      130,863
EBITDA margin                                          16.4  %             29.2   %                   19.6  %             22.3   %


Components of our Results of Operations
We operate and manage our business in three reportable segments: Connected
Machines, Subscriptions and Accessories and Materials. We identify our
reportable segments based on the information used by management to monitor
performance and make operating decisions. See Note 13 to our interim condensed
consolidated financial statements included elsewhere in this filing for
additional information regarding our reportable segments.
Revenue
Connected Machines
We generate Connected Machines revenue from sales of our portfolio of connected
machines, currently consisting of machines in three product families, Cricut
Maker, which includes Maker and Maker 3, Cricut Explore, which includes Explore
Air 2 and Explore 3, and Cricut Joy, net of sales discounts, incentives and
returns. Connected Machines revenue is recognized at the point in time when
control is transferred, which is either upon shipment or delivery to the
customer in accordance with the terms of each customer contract.
Subscriptions
We generate Subscriptions revenue primarily from sales of subscriptions to
Cricut Access and Cricut Access Premium and a minimal amount of revenue
allocated to the unspecified future upgrades and enhancements related to the
essential software and access to our cloud-based services. For a monthly or
annual subscription fee, Cricut Access includes a subscription to images, fonts
and projects as well as other member benefits, including discounts and priority
Cricut Member Care. For an annual subscription fee, Cricut Access Premium
includes all of the benefits of Cricut Access as well as additional discounts
and preferred shipping. Subscriptions revenue excludes à la carte digital
content purchases. Subscriptions revenue is recognized on a ratable basis over
the subscription term.
Accessories and Materials
We generate Accessories and Materials revenue from sales of ancillary products,
such as Cricut EasyPress, Cricut Mug Press, hand tools, machine replacement
tools and blades, project materials such as vinyl and iron-on and sales of à la
carte digital content purchases, including fonts, images and projects.
Accessories and Materials revenue is recognized for sales of such items, net of
sales discounts, incentives and returns. Accessories and Materials revenue is
recognized at the point in time when control is transferred, which is either
upon shipment or delivery to the customer in accordance with the terms of each
customer contract.
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Cost of Revenue
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. We expect our cost of revenue related to Connected Machines as a
percentage of revenue to fluctuate in the near term as we address global supply
chain challenges created by the COVID-19 pandemic and continue to invest in the
growth of our business and decrease over the long term as we drive greater scale
and efficiency in our business.
Subscriptions
Cost of revenue related to Subscriptions consists primarily of hosting fees,
digital content costs, amortization of capitalized software development costs
and software maintenance costs. We expect our cost of revenue related to
Subscriptions as a percentage of revenue to fluctuate in the near term as we
expand our content offerings, including localized content for international
target markets, and decrease over time as we drive greater scale and efficiency
in our business.
Accessories and Materials
Costs of revenue related to Accessories and Materials consists of product costs,
including costs of components, costs of contract manufacturers for production,
inspecting and packaging, shipping, receiving, handling, warehousing and
fulfillment, duties and other applicable importing costs, warranty replacement,
excess and obsolete inventory write-downs, tooling and equipment depreciation
and royalties. We expect our cost of revenue related to Accessories and
Materials as a percentage of revenue to fluctuate in the near term as we address
global supply chain challenges created by the COVID-19 pandemic and continue to
invest in the growth of our business and decrease over the long term as we drive
greater scale and efficiency in our business.
Operating Expenses
Research and Development
Research and development expenses consist primarily of costs associated with the
development of our connected machines, software and accessories and materials,
including personnel-related expenses for engineering, product development and
quality assurance, as well as prototype costs, service fees incurred by
contracting with vendors and allocated overhead. We expect our research and
development expenses to grow in the near term as we begin developing and
investing in more new products to support growth further into the future. Longer
term, we expect research and development expense to increase as a percentage of
revenue to levels somewhat higher than recent historical levels.
Sales and Marketing
Sales and marketing expenses consist primarily of the advertising and marketing
of our products, third-party payment processing fees, personnel-related
expenses, including salaries and bonuses, benefits and stock-based compensation
expense, as well as sales incentives, professional services, promotional items,
and allocated overhead costs. We expect our sales and marketing expenses as a
percentage of revenue to increase in the near and long term as we expand
internationally and launch new products.
General and Administrative
General and administrative expenses consist of personnel-related expenses for
our finance, legal, human resources and administrative personnel, including
salaries and bonuses, benefits and stock-based compensation expense, as well as
the costs of professional services, any allocated overhead, information
technology and other administrative expenses. We expect our general and
administrative expenses as a percentage of revenue to increase in the near term
as we expand our operations and incur expenses required of a public company, and
to decline over the long term as we drive greater scale and efficiency in our
business.
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Other Income (Expense), Net
Other income (expense), net consists primarily of interest expense associated
with our debt financing arrangements and amortization of debt issuance costs.
Provision for Income Taxes
Provision for income taxes consists of income taxes in the United States and
certain state and foreign jurisdictions in which we conduct business. We have
not recorded a valuation allowance against our deferred tax assets as we have
concluded that it is more likely than not that the deferred tax assets will be
realized.
Results of Operations
The following tables set forth the components of our interim condensed
consolidated statements of operations for each of the periods presented and as a
percentage of our revenue for those periods. The period-to-period comparison of
results of operations is not necessarily indicative of results of future
periods.
The following table is presented in thousands:
                                               Three Months Ended September 

30, Nine Months Ended September 30,


                                                   2021                2020               2021                2020
(in thousands)
Revenue:
Connected machines                             $  102,454          $  75,523          $  390,100          $ 245,799
Subscriptions                                      53,303             31,206             150,115             74,414
Accessories and materials                         104,329            102,276             378,186            267,851
Total revenue                                     260,086            209,005             918,401            588,064
Cost of revenue:
Connected machines(1)                              87,649             58,525             323,558            205,645
Subscriptions(1)                                    5,934              2,998              15,517              8,961
Accessories and materials(1)                       64,440             57,932             226,698            165,833
Total cost of revenue                             158,023            119,455             565,773            380,439
Gross profit                                      102,063             89,550             352,628            207,625
Operating expenses:
Research and development(1)                        20,531              9,977              56,835             27,784
Sales and marketing(1)                             30,293             13,660              90,812             39,544
General and administrative(1)                      13,491              8,195              38,417             19,368
Total operating expenses                           64,315             31,832             186,064             86,696
Income from operations                             37,748             57,718             166,564            120,929
Other income (expense), net                            24               (302)                  9             (1,244)
Income before provision for income taxes           37,772             57,416             166,573            119,685
Provision for income taxes                          7,767             12,205              38,024             26,555
Net income                                     $   30,005          $  45,211          $  128,549          $  93,130




(1)  Includes stock-based compensation expense as follows:
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                                             Three Months Ended September 

30, Nine Months Ended September 30,


                                                  2021                2020                2021                2020
(in thousands)
Cost of revenue
Connected machines                           $        10          $       2          $        26          $       5
Subscriptions                                         66                  7                  154                 22
Accessories and materials                              -                  -                    -                  -
Total cost of revenue                                 76                  9                  180                 27
Research and development                           3,590                716               10,999              1,984
Sales and marketing                                2,777              1,166               10,809              2,278
General and administrative                         1,703                297                5,953                672

Total stock-based compensation expense $ 8,146 $ 2,188

$ 27,941 $ 4,961





Comparison of the Three and Nine Months Ended September 30, 2021 and 2020
Revenue

                                        Three Months Ended                                                        Nine Months Ended
                                           September 30,                           Change                           September 30,                           Change
                                      2021               2020                $                %                2021               2020                $                 %
(dollars in thousands)
Revenue:
Connected machines                $ 102,454          $  75,523          $ 26,931               36  %       $ 390,100          $ 245,799          $ 144,301               59  %
Subscriptions                        53,303             31,206            22,097               71  %         150,115             74,414             75,701              102  %
Accessories and materials           104,329            102,276             2,053                2  %         378,186            267,851            110,335               41  %
Total revenue                     $ 260,086          $ 209,005          $ 51,081               24  %       $ 918,401          $ 588,064          $ 330,337               56  %


Three Months Ended September 30, 2021 and 2020



Connected Machines revenue increased by $26.9 million, or 36%, to $102.5 million
for the three months ended September 30, 2021 from $75.5 million for the three
months ended September 30, 2020. The increase was primarily driven by growth in
the number of Connected Machines sold during the period, including sales of
Explore 3 and Maker 3, which launched in June 2021.
Subscriptions revenue increased by $22.1 million, or 71%, to $53.3 million for
the three months ended September 30, 2021 from $31.2 million for the three
months ended September 30, 2020. The increase was primarily driven by an
increase in the number of Paid Subscribers which increased by 56% from 1.2
million as of September 30, 2020 to 1.8 million as of September 30, 2021.
Accessories and Materials revenue increased by $2.1 million, or 2%, to $104.3
million for the three months ended September 30, 2021 from $102.3 million for
the three months ended September 30, 2020. The increase was primarily driven by
growth in unit sales of Accessories and Materials during the period,
particularly growth in units of Mug Press and the units of BrightPad sold during
the period.

Nine Months Ended September 30, 2021 and 2020



Connected Machines revenue increased by $144.3 million, or 59%, to $390.1
million for the nine months ended September 30, 2021 from $245.8 million for the
nine months ended September 30, 2020. The increase was primarily driven by
significant growth in the number of Connected Machines sold during the period,
due to increased consumer demand, the launch of Explore 3 and Maker 3 during
June of 2021, and greater promotional activity and pricing during the Nine
Months Ended September 30, 2021 than during the Nine Months Ended September 30,
2020.
Subscriptions revenue increased by $75.7 million, or 102%, to $150.1 million for
the nine months ended September 30, 2021 from $74.4 million for the nine months
ended September 30, 2020. The increase was
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primarily driven by an increase in the number of Paid Subscribers which
increased by 56% from 1.2 million as of September 30, 2020 to 1.8 million as of
September 30, 2021.
Accessories and Materials revenue increased by $110.3 million, or 41%, to $378.2
million for the nine months ended September 30, 2021 from $267.9 million for the
nine months ended September 30, 2020. The increase was primarily driven by
growth in unit sales of Accessories and Materials during the period,
particularly growth in units of EasyPress, units of project materials, and units
of Mug Press, which launched in March 2021.

Cost of Revenue, Gross Profit and Gross Margin



                                         Three Months Ended                                                         Nine Months Ended
                                           September 30,                            Change                            September 30,                            Change
                                       2021               2020                $                %                 2021                2020                $                 %
(dollars in thousands)
Cost of Revenue:
Connected machines                $       87,649       $    58,525       $ 29,124               50  %       $      323,558       $    205,645       $ 117,913               57  %
Subscriptions                              5,934             2,998          2,936               98  %               15,517              8,961           6,556               73  %
Accessories and materials                 64,440            57,932          6,508               11  %              226,698            165,833          60,865               37  %
Total cost revenue                $      158,023       $   119,455       $ 38,568               32  %       $      565,773       $    380,439       $ 185,334               49  %
Gross Profit:
Connected machines                        14,805            16,998           (2,193)           (13) %               66,542             40,154          26,388               66  %
Subscriptions                             47,369            28,208         19,161               68  %              134,598             65,453          69,145              106  %
Accessories and materials                 39,889            44,344         (4,455)             (10) %              151,488            102,018          49,470               48  %
Total gross profit                $      102,063       $    89,550       $ 12,513               14  %       $      352,628       $    207,625       $ 145,003               70  %
Gross Margin
Connected machines                         14  %            23   %                                                   17  %            16    %
Subscriptions                              89  %            90   %                                                   90  %            88    %
Accessories and materials                  38  %            43   %                                                   40  %            38    %



Three Months Ended September 30, 2021 and 2020



Connected Machines cost of revenue increased by $29.1 million, or 50%, to $87.6
million for the three months ended September 30, 2021 from $58.5 million for the
three months ended September 30, 2020. The increase was primarily driven by
growth in the number of Connected Machines sold during the three months ended
September 30, 2021 compared to the three months ended September 30, 2020.
Gross margin for Connected Machines decreased to 14% for the three months ended
September 30, 2021 from 23% for the three months ended September 30, 2020. Gross
margin decreased due to higher promotions, sales incentives, and freight costs
due to global supply chain challenges as a percentage of revenue.
Subscriptions cost of revenue increased $2.9 million, or 98%, to $5.9 million
for the three months ended September 30, 2021 from $3.0 million for the three
months ended September 30, 2020. The increase was primarily driven by an
increase in hosting fees to support our growing number of subscribers along with
increases in amortization of capitalized software development costs, and digital
content costs.
Gross margin for Subscriptions decreased to 89% for the three months ended
September 30, 2021 from 90% for the three months ended September 30, 2020. Gross
margin decreased due to higher digital content costs and hosting fees as a
percentage of subscriptions revenue.
Accessories and Materials cost of revenue increased by $6.5 million, or 11%, to
$64.4 million for the three months ended September 30, 2021 from $57.9 million
for the three months ended September 30, 2020. The
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increase was primarily driven by growth in the units of Mug Press and the units
of BrightPad sold during the period.
Gross margin for Accessories and Materials decreased to 38% for the three months
ended September 30, 2021 from 43% for the three months ended September 30, 2020.
Gross margin decreased primarily due to unfavorable product mix changes along
with higher freight costs due to global supply chain challenges and sales
incentives as a percentage of revenue.

Nine Months Ended September 30, 2021 and 2020



Connected Machines cost of revenue increased by $117.9 million, or 57%, to
$323.6 million for the nine months ended September 30, 2021 from $205.6 million
for the nine months ended September 30, 2020. The increase was primarily driven
by growth in the number of Connected Machines sold during the nine months ended
September 30, 2021 compared to the nine months ended September 30, 2020.
Gross margin for Connected Machines increased to 17% for the nine months ended
September 30, 2021 from 16% for the nine months ended September 30, 2020. Gross
margin increased due to the net impact of tariff mitigation by moving a
significant amount of machine manufacturing from China to Malaysia, offset by
higher sales incentives and freight costs due to global supply chain challenges
as a percentage of revenue.
Subscriptions cost of revenue increased by $6.6 million, or 73%, to $15.5
million for the nine months ended September 30, 2021 from $9.0 million for the
nine months ended September 30, 2020. The increase was primarily driven by an
increase in hosting fees to support our growing number of subscribers along with
increases in amortization of capitalized software development costs, and digital
content costs.
Gross margin for Subscriptions increased to 90% for the nine months ended
September 30, 2021 from 88% for the nine months ended September 30, 2020. Gross
margin increased due to lower amortization of capitalized software development
costs as a percentage of subscriptions revenue.
Accessories and Materials cost of revenue increased by $60.9 million, or 37%, to
$226.7 million for the nine months ended September 30, 2021 from $165.8 million
for the nine months ended September 30, 2020. The increase was primarily driven
by growth in Accessories and Materials units sold during the period.
Gross margin for Accessories and Materials increased to 40% for the nine months
ended September 30, 2021 from 38% for the nine months ended September 30, 2020.
Gross margin increased primarily due to lower costs for EasyPress and favorable
product mix changes, offset partially by higher freight costs due to global
supply chain challenges as a percentage of revenue.
Operating Expenses
Research and Development
                               Three Months Ended                                                         Nine Months Ended
                                 September 30,                           Change                             September 30,                             Change
                             2021               2020               $                %                  2021                 2020                $                %
(dollars in thousands)
Research and development $      20,531       $    9,977       $ 10,554              106  %       $      56,835           $    27,784       $ 29,051              105  %
As a percentage of total
revenue                           8  %             5  %                                                      6   %             5   %


Research and development expenses increased by $10.6 million, or 106%, to $20.5
million for the three months ended September 30, 2021 from $10.0 million for the
three months ended September 30, 2020. The increase was primarily due to a $4.4
million increase in product development expenses for future products as well as
increases in stock-based compensation expense and other personnel-related
expenses due to headcount increases.
Research and development expenses increased by $29.1 million, or 105%, to $56.8
million for the nine months ended September 30, 2021 from $27.8 million for the
nine months ended September 30, 2020. The increase was primarily due to a $10.5
million increase in product development for future products as well as
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increases in stock-based compensation expense, other personnel-related expenses
due to headcount increases, and professional services.
Sales and Marketing

                               Three Months Ended                                                       Nine Months Ended
                                  September 30,                           Change                          September 30,                           Change
                             2021               2020                $                %                2021              2020                $                %
(dollars in thousands)
Sales and marketing      $      30,293       $    13,660       $ 16,633

122 % $ 90,812 $ 39,544 $ 51,268

     130  %
As a percentage of total
revenue                          12  %             7   %                                              10%                7%


Sales and marketing expenses increased by $16.6 million, or 122%, to $30.3
million for the three months ended September 30, 2021 from $13.7 million for the
three months ended September 30, 2020. The increase was primarily due to a $8.2
million increase in advertising and other marketing costs. Additionally, payment
processing fees, stock-based compensation expense, and personnel-related
expenses due to headcount increases contributed to the increase.
Sales and marketing expenses increased by $51.3 million, or 130%, to $90.8
million for the nine months ended September 30, 2021 from $39.5 million for the
nine months ended September 30, 2020. The increase was primarily due to a $23.6
million increase in advertising and other marketing costs including to support
the launch of Explore 3 and Maker 3 which launched in June 2021. Additionally,
payment processing fees, stock-based compensation expense, and other
personnel-related expenses due to headcount increases contributed to the
increase.
General and Administrative
                                    Three Months Ended                                                     Nine Months Ended
                                      September 30,                          Change                          September 30,                          Change
                                  2021               2020              $                %               2021              2020                $                %
(dollars in thousands)
General and administrative    $      13,491       $    8,195       $ 5,296               65  %       $ 38,417          $ 19,368          $ 19,049               98  %
As a percentage of total
revenue                                5  %             4  %                                                4  %              3  %


General and administrative expenses increased by $5.3 million, or 65%, to $13.5
million for the three months ended September 30, 2021 from $8.2 million for the
three months ended September 30, 2020. The increase was primarily due to a $1.4
million increase in stock-based compensation as well as increases in other
personnel-related expenses due to headcount increasing during the period and bad
debt expense.
General and administrative expenses increased by $19.0 million, or 98%, to $38.4
million for the nine months ended September 30, 2021 from $19.4 million for the
nine months ended September 30, 2020. The increase was primarily due to a $5.3
million increase in stock-based compensation as well as increases in
professional services and other personnel-related expenses due to headcount
increasing during the period.
Other Income (Expense), Net
                                       Three Months Ended                                                      Nine Months Ended
                                          September 30,                        Change                            September 30,                            Change
                                      2021             2020              $                %                 2021                2020               $                 %
(dollars in thousands)
Other income (expense), net        $     24          $ (302)         $  326              (108) %       $     9               $ (1,244)         $ 1,253              (101) %


Other income (expense), net changed by $0.3 million, or 108%, to income of $24
thousand for the three months ended September 30, 2021 from a net expense of
$0.3 million for the three months ended September 30, 2020. The change was
primarily due to a decrease in interest expense as we repaid all outstanding
borrowings in September 2020 and had no outstanding borrowings during the three
months ended September 30, 2021.
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Other income (expense), net changed by $1.3 million, or 101%, to income of $9
thousand for the nine months ended September 30, 2021 from a net expense of $1.2
million for the nine months ended September 30, 2020. The decrease was primarily
due to a decrease in interest expense as we repaid all outstanding borrowings in
September 2020 and had no outstanding borrowings during the nine months ended
September 30, 2021.
Provision for Income Taxes
                                        Three Months Ended                                                       Nine Months Ended
                                           September 30,                           Change                          September 30,                           Change
                                      2021               2020                $                %                2021              2020                $                %
(dollars in thousands)
Provision for income taxes        $    7,767          $ 12,205          $ (4,438)             (36) %       $  38,024          $ 26,555          $ 11,469               43  %


Provision for income taxes decreased by $4.4 million, or 36%, to $7.8 million
for the three months ended September 30, 2021 from $12.2 million for the three
months ended September 30, 2020. This represents an effective tax rate of 20.6%
and 21.3% for the three months ended September 30, 2021 and 2020, respectively.
Provision for income taxes increased by $11.5 million, or 43%, to $38.0 million
for the nine months ended September 30, 2021 from $26.6 million for the nine
months ended September 30, 2020. This represents an effective tax rate of 22.8%
and 22.2% for the nine months ended September 30, 2021 and 2020, respectively.
Liquidity and Capital Resources
Our operations have historically been financed primarily through cash flow from
operating activities and borrowings under our credit facilities. As of
September 30, 2021, we had cash and cash equivalents of $224.0 million. In March
2021, we completed our IPO, in which we issued and sold an aggregate of
13,250,000 shares of our Class A common stock. The price per share to the public
in the IPO was $20.00. We received aggregate net proceeds of $242.7 million from
the IPO, net of the underwriting discounts, commissions and offering costs of
approximately $22.3 million. On April 28, 2021, we sold an additional 968,815
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.
We believe our existing cash and cash equivalents, cash flow from operations and
amounts available for borrowing under our Credit Agreement will be sufficient to
meet our working capital and capital expenditure needs for at least the next 12
months. Our future capital requirements may vary materially from those currently
planned and will depend on many factors, including our rate of revenue growth,
the timing and extent of spending on research and development efforts and other
growth initiatives, the expansion of sales and marketing activities, the timing
of new product introductions, market acceptance of our products and overall
economic conditions. To the extent that current and anticipated future sources
of liquidity are insufficient to fund our future business activities and
requirements, we may be required to seek additional equity or debt financing.
The sale of additional equity would result in additional dilution to our
stockholders. The incurrence of debt financing would result in debt service
obligations, and the instruments governing such debt could provide for operating
and financing covenants that would restrict our operations. There can be no
assurances that we will be able to raise additional capital. The inability to
raise capital would adversely affect our ability to achieve our business
objectives.
Credit Facility
In September 2020, we entered into the Credit Agreement with JPMorgan Chase
Bank, N.A., Citibank, N.A. and Origin Bank. The Credit Agreement replaced our
prior amended credit agreement with Origin Bank. The Credit Agreement provides
for a three-year asset-based senior secured revolving credit facility of up to
$150.0 million, maturing on September 4, 2023. In addition, during the term of
the Credit Agreement, we may increase the aggregate amount of the Credit
Facility by up to an additional $200.0 million, subject to customary conditions
(for maximum aggregate lender commitments of up to $350.0 million), subject to
the satisfaction of certain conditions under the Credit Agreement, including
obtaining the consent of the administrative agent and each lender being added or
increasing its commitment. The Credit Facility may be used to issue letters of
credit, and for other business purposes, including working capital needs.
The Credit Facility is a standard asset-based lending facility, meaning that
notwithstanding the aggregate lender commitments, we can only borrow up to an
amount equal to our borrowing base at any given time. For
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example, as of September 30, 2021, we were able to borrow up to $150.0 million.
Our borrowing base is determined according to certain percentages of eligible
accounts receivable and eligible inventory (which may be valued at average cost,
market value or net orderly liquidation value), subject to reserves determined
by the administrative agent. At any time that our borrowing base is less than
the aggregate lender commitments, we can only borrow revolving loans up to the
amount of our borrowing base and not in the full amount of the aggregate lender
commitments.
Generally, borrowings under the Credit Agreement will bear interest at the
Adjusted LIBO rate or the ABR, plus, in each case, an applicable margin. The
applicable margin will range from (a) with respect to borrowings bearing
interest at the ABR, 1.50% to 2.00%, and (b) with respect to borrowings bearing
interest at the ABR (i) if the "REVLIBOR30 Screen Rate" (as defined in the
Credit Agreement) is available for such period, 1.50% to 2.00%, or (ii)
otherwise, 0.0% to 0.50%, in each case for the previous clauses (a) and (b),
based on our "Fixed Charge Coverage Ratio" as defined in the Credit Agreement.
The Credit Agreement contains financial covenants during the initial year of the
agreement, requiring us to maintain a fixed charge coverage ratio of at least
1.0 to 1.0, measured monthly on a trailing 12-month basis. We are also subject
to this covenant in future periods if the available commitments is less than the
greater of $15.0 million and 10% of the total commitment made by all lenders.
Management has determined that we were in compliance with all financial and
non-financial debt covenants as of September 30, 2021.
Cash Flows
                                                                  Nine Months Ended September 30,
                                                                      2021                2020
(in thousands)
Net cash flows (used in) provided by operating activities        $  (131,793)         $  187,403
Net cash flows used in investing activities                          (28,339)            (16,883)
Net cash flows provided (used in) by financing activities            261,990            (109,627)


Operating Activities
Net cash used in operating activities of $131.8 million for the nine months
ended September 30, 2021 was primarily due to a cash outflow from the net change
in operating assets and liabilities of $305.2 million offset by net income of
$128.5 million and non-cash adjustments of $44.8 million. The cash outflow from
the net change in operating assets and liabilities was primarily due to a $276.2
million increase in inventory levels to support seasonal sales levels and
mitigate the impact of upstream shipping delays, a $25.6 million increase in
prepaid expenses and other current assets and a $24.6 million decrease in
accrued liabilities and other current assets and other non-current liabilities.
These changes were offset primarily by a $18.6 million decrease in accounts
receivable and a $3.6 million increase in deferred revenue. Non-cash adjustments
primarily consisted of stock-based compensation of $27.9 million, depreciation
and amortization of $13.4 million, and inventory write-offs of $2.3 million.
Net cash provided by operating activities of $187.4 million for the nine months
ended September 30, 2020 was primarily due to net income of $93.1 million,
non-cash adjustments of $17.9 million, and a cash inflow from from the net
change in operating assets and liabilities of $76.4 million. The cash inflow
from the net change in operating assets and liabilities was primarily due to a
$96.4 million increase in accounts payable, a $13.2 million increase in accrued
expenses and other current liabilities and other non-current liabilities due to
increased expenditures to support general business growth, a $5.3 million
increase in deferred revenue and a $4.4 million decrease in inventory levels.
These changes were offset primarily by a $41.4 million increase in accounts
receivable and a $1.0 million increase in prepaid expenses and other current
assets. Non-cash adjustments primarily consisted of depreciation and
amortization of $10.1 million, stock-based compensation of $5.0 million, and
inventory write-offs of $2.2 million.
Investing Activities
Cash used in investing activities for the nine months ended September 30, 2021
was $28.3 million, all of which related to property and equipment acquisition or
investment, software development and investment and product research and
development.
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Cash used in investing activities for the nine months ended September 30, 2020
was $16.9 million, all of which related to property and equipment acquisition or
investment, software development and investment and product research and
development.
Financing Activities
Net cash provided by financing activities of $262.0 million for the nine months
ended September 30, 2021 was primarily related to proceeds from our IPO, net of
underwriter discounts and offering costs of $262.0 million.
Net cash used in financing activities of $109.6 million for the nine months
ended September 30, 2020 was primarily related to payment of a cash dividend of
$51.2 million, net payment on the line of credit of $32.6 million, payments on
the term loan of $22.9 million and repurchases of compensatory units of $3.0
million.
Contractual Obligations and Other Commitments
There were no material changes in our contractual obligations and other
commitments during the nine months ended September 30, 2021 from the contractual
obligations and other commitments disclosed in the Prospectus. See Note 9 of the
notes to our interim condensed consolidated financial statements included in
Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information
regarding contractual obligations and other commitments.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of September 30, 2021.
Critical Accounting Policies
Our management's discussion and analysis of our financial condition and results
of operations is based on our condensed consolidated financial statements, which
have been prepared in accordance with United States generally accepted
accounting principles ("GAAP"). The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, as well as the reported
revenues and expenses incurred during the reporting periods. Our estimates are
based on our historical experience and on various other factors that we believe
are reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. The critical accounting
policies that reflect our more significant judgments and estimates used in the
preparation of our condensed consolidated financial statements include those
described in Note 2 of the notes to our condensed consolidated financial
statements in the section titled "-Summary of Significant Accounting Policies"
in Part I, Item 1 of this Quarterly Report on Form 10-Q and in the Prospectus.
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