CRICUT, INC. 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 audited consolidated financial statements included in our annual report on Form 10-K for the year endedDecember 31, 2021 ("2021 Form 10-K"). 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 nearly 7.5 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, 2022 ):
•Cricut Joy for personalization on-the-go,
•Cricut Explore for cutting, writing and scoring,
•Cricut Maker for cutting, writing, scoring and adding decorative effects to a
wider range of materials,
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. We enable our users to be inspired, to create and share projects with theCricut community and to follow others doing the same. On our apps, users can find inspiration, purchase or upload content like fonts and images, design a project from scratch or find a vast array of ready-to-make projects. 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, including exclusive software features and functionality, discounts, and priority Cricut Member Care. Cricut Access is billed monthly for$9.99 per month or annually for$95.88 per year. Cricut Access Premium includes all of the benefits of Cricut Access as well as additional discounts and preferred shipping and is billed annually for$119.88 per year. As ofSeptember 30, 2022 , we had nearly 2.5 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. 24 -------------------------------------------------------------------------------- Historically, we generate higher revenue levels in the second half of the year compared to the first half of the year, coinciding with the ramp up to, and including the holiday shopping season inthe United States . For example, in 2019 and 2020, the second half of the year represented 59% and 60% of total revenue for the year, respectively. The seasonality patterns experienced in 2021 were not representative of our typical historical patterns due to the unique aspects of the pandemic that resulted in unusually high demand in the first and second quarters of 2021. As the impact of the pandemic on behaviors abate, we expect to return to a more normal seasonality pattern. As we continue to grow internationally, we expect we may experience seasonality in additional markets, which may differ from the seasonality experienced inthe United States . 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 .
For more information regarding our business model, factors affecting our performance, and seasonality, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Form 10-K.
Key Business Metrics
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.
As of September 30,
2022 2021
Users (in thousands) 7,457 5,732
Percentage of Users Creating in Trailing 90 Days 48 % 56 %
Paid Subscribers (in thousands) 2,456 1,814
Three Months Ended September 30,
2022 2021
Subscription ARPU $ 9.40 $ 9.60
Accessories and Materials ARPU $ 7.61 $ 18.79
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 an important 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
25
--------------------------------------------------------------------------------of subscriptions and accessories and materials. There are certain limitations associated with this metric. For example, this metric does not capture how active a User is during the 90-day period, nor whether a User is purchasing subscriptions or accessories and materials. We compensate for some of these limitations by also reviewing other metrics that capture portions of this information, including the metrics below.
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 number of 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 number of 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.
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 16 to our 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 portion of the revenue allocated to 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 exclusive software features and functionality, discounts, and priority Cricut Member Care. For an annual subscription fee, Cricut Access Premium includes all of the benefits ofCricut 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 , Cricut Autopress, 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. 26 --------------------------------------------------------------------------------
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 and increased expenses 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 increase as we expand our content offerings and benefits of the subscription, including localized content for international target markets, discounts and features that drive value of the subscription. Accessories and Materials Costs of revenue related to Accessories and Materials consists of product costs, including costs of components, costs of contract manufacturers for production, inspecting and packaging, shipping, receiving, handling, warehousing and fulfillment, duties and other applicable importing costs, warranty replacement, excess and obsolete inventory write-downs, tooling and equipment depreciation and royalties. We expect our cost of revenue related to Accessories and Materials as a percentage of revenue to fluctuate in the near term as we address global supply chain challenges and increased expenses 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 research and development expense to increase as a percentage of revenue to levels somewhat higher compared to historical annual levels to support growth from new products and services in the future.
Sales and Marketing
Sales and marketing expenses consist primarily of the advertising and marketing of our products, third-party payment processing fees, personnel-related expenses, including salaries and bonuses, benefits and stock-based compensation expense, as well as sales incentives, professional services, promotional items, and allocated overhead costs. We expect our sales and marketing expenses as a percentage of revenue to fluctuate in the near term as we expand internationally and launch new products, but over the long term we anticipate to be similar to pre-COVID-19 pandemic annual levels.
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 general and administrative expenses as a percentage of revenue over the long term to remain relatively similar to pre-COVID-19 pandemic annual levels.
Other Income, Net
Other income, net consists primarily of interest expense associated with our debt financing arrangements and amortization of debt issuance costs.
27
--------------------------------------------------------------------------------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
2022 2021 2022 2021
(in thousands)
Revenue:
Connected machines $ 52,420 $ 102,454 $ 150,249 $ 390,100
Subscriptions 68,865 53,303 201,247 150,115
Accessories and materials 55,711 104,329 254,040 378,186
Total revenue 176,996 260,086 605,536 918,401
Cost of revenue:
Connected machines(1) 49,240 87,649 144,835 323,558
Subscriptions(1) 6,500 5,934 18,933 15,517
Accessories and materials(1) 39,422 64,440 175,486 226,698
Total cost of revenue 95,162 158,023 339,254 565,773
Gross profit 81,834 102,063 266,282 352,628
Operating expenses:
Research and development(1) 18,747 20,531 59,332 56,835
Sales and marketing(1) 29,165 30,293 93,470 90,812
General and administrative(1) 16,501 13,491 44,623 38,417
Total operating expenses 64,413 64,315 197,425 186,064
Income from operations 17,421 37,748 68,857 166,564
Other income, net 235 24 518 9
Income before provision for income taxes 17,656 37,772 69,375 166,573
Provision for income taxes 5,212 7,767 19,600 38,024
Net income $ 12,444 $ 30,005 $ 49,775 $ 128,549 (1) Includes stock-based compensation expense as follows:
Three Months Ended September
30, Nine Months Ended
2022 2021 2022 2021
(in thousands)
Cost of revenue
Connected machines $ 11 $ 10 $ 23 $ 26
Subscriptions 115 66 274 154
Accessories and materials - - - -
Total cost of revenue 126 76 297 180
Research and development 4,746 3,590 13,672 10,999
Sales and marketing 3,347 2,777 9,470 10,809
General and administrative 3,051 1,703 7,191 5,953
Total stock-based compensation expense
$ 30,630 $ 27,941 28
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Comparison of the Three and Nine Months Ended
Revenue
Three Months Ended
September 30, Change Nine Months Ended September 30, Change
2022 2021 $ % 2022 2021 $ %
(dollars in thousands)
Revenue:
Connected machines $ 52,420 $ 102,454 $ (50,034) (49) % $ 150,249 $ 390,100 $ (239,851) (61) %
Subscriptions 68,865 53,303 15,562 29 % 201,247 150,115 51,132 34 %
Accessories and materials 55,711 104,329 (48,618) (47) % 254,040 378,186 (124,146) (33) %
Total revenue $ 176,996 $ 260,086 $ (83,090) (32) % $ 605,536 $ 918,401 $ (312,865) (34) %
Three Months Ended
Connected Machines revenue decreased by$50.0 million , or 49%, to$52.4 million for the three months endedSeptember 30, 2022 from$102.5 million for the three months endedSeptember 30, 2021 . The decrease was primarily driven by a decline in the number of Connected Machines sold during the period, across all product families, due to higher channel inventory entering the quarter and lower consumer demand.
Subscriptions revenue increased by
Accessories and Materials revenue decreased by$48.6 million , or 47%, to$55.7 million for the three months endedSeptember 30, 2022 from$104.3 million for the three months endedSeptember 30, 2021 . The decrease was driven by a decline in unit sales of EasyPress, Project Materials, due in part to increased competition, and a decline in unit sales ofMug Press .
Nine Months Ended
Connected Machines revenue decreased by$239.9 million , or 61%, to$150.2 million for the nine months endedSeptember 30, 2022 from$390.1 million for the nine months endedSeptember 30, 2021 . The decrease was primarily driven by a decline in the number of Connected Machines sold during the period, across all product families, due to higher channel inventory entering the year and lower consumer demand. Subscriptions revenue increased by$51.1 million , or 34%, to$201.2 million for the nine months endedSeptember 30, 2022 from$150.1 million for the nine months endedSeptember 30, 2021 . The increase was primarily driven by an increase in the number of Paid Subscribers which increased by 35% from 1.8 million as ofSeptember 30, 2021 to nearly 2.5 million as ofSeptember 30, 2022 . Accessories and Materials revenue decreased by$124.1 million , or 33%, to$254.0 million for the nine months endedSeptember 30, 2022 from$378.2 million for the nine months endedSeptember 30, 2021 . The decrease was driven by a decline in unit sales of Project Materials, due in part to increased competition, as well as a decline in unit sales ofEasyPress and Mug Press . The decrease was partially offset by increased revenue fromAutopress and Hat Press . 29 --------------------------------------------------------------------------------
Cost of Revenue, Gross Profit and Gross Margin
Three Months Ended
September 30, Change Nine Months Ended September 30, Change
2022 2021 $ % 2022 2021 $ %
(dollars in thousands)
Cost of Revenue:
Connected machines $ 49,240 $ 87,649 $ (38,409) (44) % $ 144,835 $ 323,558 $ (178,723) (55) %
Subscriptions 6,500 5,934 566 10 % 18,933 15,517 3,416 22 %
Accessories and materials 39,422 64,440 (25,018) (39) % 175,486 226,698 (51,212) (23) %
Total cost revenue $ 95,162 $ 158,023 $ (62,861) (40) % $ 339,254 $ 565,773 $ (226,519) (40) %
Gross Profit:
Connected machines 3,180 14,805 (11,625) (79) % 5,414 66,542 (61,128) (92) %
Subscriptions 62,365 47,369 14,996 32 % 182,314 134,598 47,716 35 %
Accessories and materials 16,289 39,889 (23,600) (59) % 78,554 151,488 (72,934) (48) %
Total gross profit $ 81,834 $ 102,063 $ (20,229) (20) % $ 266,282 $ 352,628 $ (86,346) (24) %
Gross Margin
Connected machines 6 % 14 % 4 % 17 %
Subscriptions 91 % 89 % 91 % 90 %
Accessories and materials 29 % 38 % 31 % 40 %
Three Months Ended
Connected Machines cost of revenue decreased by$38.4 million , or 44%, to$49.2 million for the three months endedSeptember 30, 2022 from$87.6 million for the three months endedSeptember 30, 2021 . The decrease was primarily driven by a decline in the number of Connected Machines sold across all product families during the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . Gross margin for Connected Machines decreased to 6% for the three months endedSeptember 30, 2022 from 14% for the three months endedSeptember 30, 2021 . Gross margin decreased due to higher sales incentives as a percentage of revenue and higher warranty costs. Subscriptions cost of revenue increased by$0.6 million , or 10%, to$6.5 million for the three months endedSeptember 30, 2022 from$5.9 million for the three months endedSeptember 30, 2021 . The increase was primarily driven by an increase in amortization of capitalized software development costs, offset partially by a decrease in hosting fees and digital content costs. Gross margin for Subscriptions increased to 91% for the three months endedSeptember 30, 2022 from 89% for the three months endedSeptember 30, 2021 . Gross margin increased due to lower hosting fees and digital content costs, offset partially by an increase in amortization of capitalized software development costs as a percentage of revenue. Accessories and Materials cost of revenue decreased by$25.0 million , or 39%, to$39.4 million for the three months endedSeptember 30, 2022 from$64.4 million for the three months endedSeptember 30, 2021 . The decrease was primarily driven by a decline in unit sales of Accessories and Materials during the period, particularly for units of EasyPress, Project Materials, andMug Press . Gross margin for Accessories and Materials decreased to 29% for the three months endedSeptember 30, 2022 from 38% for the three months endedSeptember 30, 2021 . Gross margin decreased primarily due to higher sales incentives, and higher freight and handling costs due to global supply chain challenges.
Nine Months Ended
Connected Machines cost of revenue decreased by
30
--------------------------------------------------------------------------------
decrease was primarily driven by a decline in the number of Connected Machines
sold across all product families during the nine months ended September 30, 2022
compared to the nine months ended September 30, 2021 .
Gross margin for Connected Machines decreased to 4% for the nine months ended
September 30, 2022 from 17% for the nine months ended September 30, 2021 . Gross
margin decreased due to higher sales incentives as a percentage of revenue,
end-of-life pricing for Explore Air 2 and Maker, higher warranty costs, and
higher freight and handling costs due to global supply chain challenges as a
percentage of revenue.
Subscriptions cost of revenue increased by $3.4 million , or 22%, to $18.9
million for the nine months ended September 30, 2022 from $15.5 million for the
nine months ended September 30, 2021 . The increase was primarily driven by an
increase in amortization of capitalized software development costs, offset
partially by lower hosting fees and digital content costs.
Gross margin for Subscriptions increased to 91% for the nine months ended
September 30, 2022 from 90% for the nine months ended September 30, 2021 . Gross
margin increased due to lower hosting fees and digital content costs, offset
partially by an increase in amortization of capitalized software development
costs.
Accessories and Materials cost of revenue decreased by $51.2 million , or 23%, to
$175.5 million for the nine months ended September 30, 2022 from $226.7 million
for the nine months ended September 30, 2021 . The decrease was primarily driven
by a decline in unit sales of Accessories and Materials during the period,
particularly for units of Project Materials, EasyPress, and Mug Press . The
decrease was partially offset by an increase in units sold of Autopress and Hat
Press .
Gross margin for Accessories and Materials decreased to 31% for the nine months
ended September 30, 2022 from 40% for the nine months ended September 30, 2021 .
Gross margin decreased primarily due to higher sales incentives and higher
freight and handling costs due to global supply chain challenges.
Operating Expenses
Research and Development
Three Months Ended
September 30, Change Nine Months Ended September 30, Change
2022 2021 $ % 2022 2021 $ %
(dollars in thousands)
Research and development $ 18,747 $ 20,531 $ (1,784) (9) % $ 59,332 $ 56,835 $ 2,497 4 %
As a percentage of total
revenue 11 % 8 % 10 % 6 %
Research and development expenses decreased by $1.8 million , or 9%, to $18.7
million for the three months ended September 30, 2022 from $20.5 million for the
three months ended September 30, 2021 . The decrease was primarily due to a $3.2
million decrease in product development expenses for future products, offset by
increases in stock-based compensation expense.
Research and development expenses increased by $2.5 million , or 4%, to $59.3
million for the nine months ended September 30, 2022 from $56.8 million for the
nine months ended September 30, 2021 . The increase was primarily due to a $2.7
million increase in personnel-related expenses due to headcount increases as
well as an increase in stock-based compensation expense, offset by a decrease in
product development expenses for future products.
Sales and Marketing
Three Months Ended
September 30, Change Nine Months Ended September 30, Change
2022 2021 $ % 2022 2021 $ %
(dollars in thousands)
Sales and marketing $ 29,165 $ 30,293 $ (1,128) (4) % $ 93,470 $ 90,812 $ 2,658 3 %
As a percentage of total
revenue 16 % 12 % 15 % 10 %
31-------------------------------------------------------------------------------- Sales and marketing expenses decreased by$1.1 million , or 4%, to$29.2 million for the three months endedSeptember 30, 2022 from$30.3 million for the three months endedSeptember 30, 2021 . The decrease was primarily due to a$3.2 million decrease in advertising and other marketing costs, offset by increases in software subscription expenses and stock-based compensation expense. Sales and marketing expenses increased by$2.7 million , or 3%, to$93.5 million for the nine months endedSeptember 30, 2022 from$90.8 million for the nine months endedSeptember 30, 2021 . The increase was primarily due to a$6.0 million increase in payment processing fees, as well as increases in personnel-related expenses due to headcount increases and software subscription expenses. The variance was offset by decreases in advertising and other marketing costs which included the launch of Explore 3 and Maker 3 inJune 2021 . General and Administrative Three Months Ended September 30, Change Nine Months Ended September 30, Change 2022 2021 $ % 2022 2021 $ % (dollars in thousands) General and administrative$ 16,501 $ 13,491 $ 3,010 22 % $ 44,623$ 38,417 $ 6,206 16 % As a percentage of total revenue 9 % 5 % 7 % 4 % General and administrative expenses increased by$3.0 million , or 22%, to$16.5 million for the three months endedSeptember 30, 2022 from$13.5 million for the three months endedSeptember 30, 2021 . The increase was primarily due to a$1.3 million increase in stock-based compensation expense, increases in professional services, and personnel-related expenses due to headcount increases. General and administrative expenses increased by$6.2 million , or 16%, to$44.6 million for the nine months endedSeptember 30, 2022 from$38.4 million for the nine months endedSeptember 30, 2021 . The increase was primarily due to a$2.2 million increase in personnel-related expenses due to headcount increases, increases in stock-based compensation expense, and software subscriptions. Other Income, Net Three Months Ended Nine Months Ended September September 30, Change 30, Change 2022 2021 $ % 2022 2021 $ % (dollars in thousands) Other income, net$ 235 $ 24 $ 211 879 %$ 518 $ 9 $ 509 5656 % Other income, net has increased by$0.2 million or 879% to$0.2 million for the three months endedSeptember 30, 2022 from$24 thousand for the three months endedSeptember 30, 2021 . The increase was primarily due to an increase in interest income. Other income, net has increased by$0.5 million or 5656% to$0.5 million for the nine months endedSeptember 30, 2022 from$9 thousand for the nine months endedSeptember 30, 2021 . The increase was primarily due to an increase in interest income. Income Tax Expense Three Months Ended Nine Months Ended September September 30, Change 30, Change 2022 2021 $ % 2022 2021 $ % (dollars in thousands) Provision for income taxes$ 5,212 $ 7,767 $ (2,555) (33) %$ 19,600 $ 38,024 $ (18,424) (48) % Provision for income taxes decreased by$2.6 million , or 33%, to$5.2 million for the three months endedSeptember 30, 2022 from$7.8 million for the three months endedSeptember 30, 2021 . The decrease was primarily 32 -------------------------------------------------------------------------------- due to a reduction in pre-tax net income and represents an effective tax rate after discrete items of 29.5% and 20.6% for the three months endedSeptember 30, 2022 and 2021, respectively. The increase in the effective tax rate after discrete items is primarily due to discrete tax items including a stock-based compensation difference of$0.6 million due to the decrease in stock price upon vesting versus the stock price at the grant date and a change in allocation of sales which resulted in a$1 million change in utilization of state research and development credit. Provision for income taxes decreased by$18.4 million , or 48%, to$19.6 million for the nine months endedSeptember 30, 2022 from$38.0 million for the nine months endedSeptember 30, 2021 . The decrease was primarily due to a reduction in pre-tax net income and represents an effective tax rate after discrete items of 28.3% and 22.8% for the nine months endedSeptember 30, 2022 and 2021, respectively. The increase in the effective tax rate after discrete items is due primarily to a$2.6 million discrete item in the nine months endedSeptember 30, 2022 , related to RSU's that vested throughout the period, which resulted in a significant tax shortfall due to the decrease in stock price upon vesting versus the stock price at the grant date. Liquidity and Capital Resources Our operations during the periods presented have been financed primarily through cash flow from operating activities and the net proceeds from our initial public offering in March of 2021. We believe our balances of cash and cash equivalents and marketable securities, which totaled$124.2 million and$73.8 million , respectively, as ofSeptember 30, 2022 , along with forecasted cash expected to be generated by ongoing operations and$300.0 million in available borrowings and the option to increase the aggregate amount of the New Credit Facility by up to an additional$150.0 million (see Note 7) will be sufficient to satisfy our cash requirements over the next 12 months and beyond. 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.
Other than our previously disclosed
Cash Flows
Nine Months Ended September 30,
2022 2021
(in thousands)
Net cash flows provided by (used in) operating activities $ 630 $ (131,793)
Net cash flows used in investing activities (101,011) (28,339)
Net cash flows provided by (used in) financing activities (16,654) 261,990
Operating Activities
The change in net cash flows from operating activities for the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021 is
primarily due to greater reductions in accounts receivable year over year as
well as less cash used to fund inventories. These increases were partially
offset by a larger decrease in payable balances with inventory vendors for the
nine months ended September 30, 2022 compared to nine months ended September 30,
2021 .
Investing Activities
The change in net cash flows from investing activities for the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021 was due
to investments in marketable securities.
33
--------------------------------------------------------------------------------Financing Activities
The change in net cash flows from financing activities for the nine months endedSeptember 30, 2022 compared to nine months endedSeptember 30, 2021 was primarily due to proceeds of$262.0 million received from our IPO during 2021 partially offset by repurchases of common stock during 2022.
Critical Accounting 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 2021 Form 10-K.
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