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 datedMarch 24, 2021 and filed with theU.S Securities and Exchange Commission , or theSEC , pursuant to Rule 424(b) under the Securities Act of 1933, as amended, or the Securities Act, onMarch 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 AtCricut , 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 ofSeptember 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 andCricut Access Premium. Cricut Access provides a subscription to images, fonts and projects as well as other member benefits, such as discounts and priorityCricut Member Care. Cricut Access Premium includes all of the benefits of Cricut Access as well as additional discounts and preferred shipping. As ofSeptember 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 toCricut -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 ofCricut -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 endedSeptember 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 25 -------------------------------------------------------------------------------- Table of Contents For the nine months endedSeptember 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 OnMarch 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 . OnApril 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
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. 26 -------------------------------------------------------------------------------- Table of Contents Paid Subscribers We define Paid Subscribers as the number of users with a subscription toCricut 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. 27 -------------------------------------------------------------------------------- Table of Contents Set forth below is a reconciliation of EBITDA to net income for the three and nine months endedSeptember 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 includesExplore 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. 28 -------------------------------------------------------------------------------- Table of Contents 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. 29 -------------------------------------------------------------------------------- Table of Contents 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 inthe 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
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: 30
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Three Months Ended September
30, Nine Months Ended
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
Comparison of the Three and Nine Months EndedSeptember 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
Connected Machines revenue increased by$26.9 million , or 36%, to$102.5 million for the three months endedSeptember 30, 2021 from$75.5 million for the three months endedSeptember 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 inJune 2021 . Subscriptions revenue increased by$22.1 million , or 71%, to$53.3 million for the three months endedSeptember 30, 2021 from$31.2 million for the three months endedSeptember 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 ofSeptember 30, 2020 to 1.8 million as ofSeptember 30, 2021 . Accessories and Materials revenue increased by$2.1 million , or 2%, to$104.3 million for the three months endedSeptember 30, 2021 from$102.3 million for the three months endedSeptember 30, 2020 . The increase was primarily driven by growth in unit sales of Accessories and Materials during the period, particularly growth in units ofMug Press and the units of BrightPad sold during the period.
Nine Months Ended
Connected Machines revenue increased by$144.3 million , or 59%, to$390.1 million for the nine months endedSeptember 30, 2021 from$245.8 million for the nine months endedSeptember 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 EndedSeptember 30, 2021 than during the Nine Months EndedSeptember 30, 2020 . Subscriptions revenue increased by$75.7 million , or 102%, to$150.1 million for the nine months endedSeptember 30, 2021 from$74.4 million for the nine months endedSeptember 30, 2020 . The increase was 31 -------------------------------------------------------------------------------- Table of Contents primarily driven by an increase in the number of Paid Subscribers which increased by 56% from 1.2 million as ofSeptember 30, 2020 to 1.8 million as ofSeptember 30, 2021 . Accessories and Materials revenue increased by$110.3 million , or 41%, to$378.2 million for the nine months endedSeptember 30, 2021 from$267.9 million for the nine months endedSeptember 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 ofMug Press , which launched inMarch 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
Connected Machines cost of revenue increased by$29.1 million , or 50%, to$87.6 million for the three months endedSeptember 30, 2021 from$58.5 million for the three months endedSeptember 30, 2020 . The increase was primarily driven by growth in the number of Connected Machines sold during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . Gross margin for Connected Machines decreased to 14% for the three months endedSeptember 30, 2021 from 23% for the three months endedSeptember 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 endedSeptember 30, 2021 from$3.0 million for the three months endedSeptember 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 endedSeptember 30, 2021 from 90% for the three months endedSeptember 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 endedSeptember 30, 2021 from$57.9 million for the three months endedSeptember 30, 2020 . The 32 -------------------------------------------------------------------------------- Table of Contents increase was primarily driven by growth in the units ofMug Press and the units of BrightPad sold during the period. Gross margin for Accessories and Materials decreased to 38% for the three months endedSeptember 30, 2021 from 43% for the three months endedSeptember 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
Connected Machines cost of revenue increased by$117.9 million , or 57%, to$323.6 million for the nine months endedSeptember 30, 2021 from$205.6 million for the nine months endedSeptember 30, 2020 . The increase was primarily driven by growth in the number of Connected Machines sold during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . Gross margin for Connected Machines increased to 17% for the nine months endedSeptember 30, 2021 from 16% for the nine months endedSeptember 30, 2020 . Gross margin increased due to the net impact of tariff mitigation by moving a significant amount of machine manufacturing fromChina toMalaysia , 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 endedSeptember 30, 2021 from$9.0 million for the nine months endedSeptember 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 endedSeptember 30, 2021 from 88% for the nine months endedSeptember 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 endedSeptember 30, 2021 from$165.8 million for the nine months endedSeptember 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 endedSeptember 30, 2021 from 38% for the nine months endedSeptember 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 endedSeptember 30, 2021 from$10.0 million for the three months endedSeptember 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 endedSeptember 30, 2021 from$27.8 million for the nine months endedSeptember 30, 2020 . The increase was primarily due to a$10.5 million increase in product development for future products as well as 33 -------------------------------------------------------------------------------- Table of Contents 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 %
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 endedSeptember 30, 2021 from$13.7 million for the three months endedSeptember 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 endedSeptember 30, 2021 from$39.5 million for the nine months endedSeptember 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 inJune 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 endedSeptember 30, 2021 from$8.2 million for the three months endedSeptember 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 endedSeptember 30, 2021 from$19.4 million for the nine months endedSeptember 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 endedSeptember 30, 2021 from a net expense of$0.3 million for the three months endedSeptember 30, 2020 . The change was primarily due to a decrease in interest expense as we repaid all outstanding borrowings inSeptember 2020 and had no outstanding borrowings during the three months endedSeptember 30, 2021 . 34 -------------------------------------------------------------------------------- Table of Contents Other income (expense), net changed by$1.3 million , or 101%, to income of$9 thousand for the nine months endedSeptember 30, 2021 from a net expense of$1.2 million for the nine months endedSeptember 30, 2020 . The decrease was primarily due to a decrease in interest expense as we repaid all outstanding borrowings inSeptember 2020 and had no outstanding borrowings during the nine months endedSeptember 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 endedSeptember 30, 2021 from$12.2 million for the three months endedSeptember 30, 2020 . This represents an effective tax rate of 20.6% and 21.3% for the three months endedSeptember 30, 2021 and 2020, respectively. Provision for income taxes increased by$11.5 million , or 43%, to$38.0 million for the nine months endedSeptember 30, 2021 from$26.6 million for the nine months endedSeptember 30, 2020 . This represents an effective tax rate of 22.8% and 22.2% for the nine months endedSeptember 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 ofSeptember 30, 2021 , we had cash and cash equivalents of$224.0 million . InMarch 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 . OnApril 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 InSeptember 2020 , we entered into the Credit Agreement withJPMorgan Chase Bank, N.A .,Citibank, N.A . andOrigin Bank . The Credit Agreement replaced our prior amended credit agreement withOrigin Bank . The Credit Agreement provides for a three-year asset-based senior secured revolving credit facility of up to$150.0 million , maturing onSeptember 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 35 -------------------------------------------------------------------------------- Table of Contents example, as ofSeptember 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$15.0 million and 10% of the total commitment made by all lenders. Management has determined that we were in compliance with all financial and non-financial debt covenants as ofSeptember 30, 2021 . Cash Flows Nine Months Ended September 30, 2021 2020 (in thousands) Net cash flows (used in) provided by operating activities$ (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 endedSeptember 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 endedSeptember 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 endedSeptember 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. 36 -------------------------------------------------------------------------------- Table of Contents Cash used in investing activities for the nine months endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 ofSeptember 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 withUnited 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. 37
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