Cricut(US:CRCT)2021-11-11 00:58PART I. FINANCIAL INFORMATION This section presents Cricut, Inc.'s unaudited condensed consolidated financial statements and related management discussion for the period ended September 30, 2021 Item 1. Financial Statements (unaudited) This section presents Cricut, Inc.'s unaudited condensed consolidated financial statements for the period ended September 30, 2021, reflecting financial position, operational results, and cash flows, including the significant impact of its Initial Public Offering (IPO) in March 2021 Condensed Consolidated Balance Sheets Cricut's total assets increased to $980.6 million by September 30, 2021, driven by higher cash and inventories, while equity surged due to IPO proceeds Condensed Consolidated Balance Sheet Highlights (in thousands of US dollars) | Account | Sep 30, 2021 (unaudited) | Dec 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $224,003 | $122,215 | | Inventories | $524,576 | $248,745 | | Total current assets | $922,176 | $538,807 | | Total assets | $980,604 | $581,400 | | Liabilities & Equity | | | | Total current liabilities | $318,576 | $346,500 | | Total liabilities | $327,386 | $352,475 | | Total stockholders' equity | $653,218 | $228,925 | | Total liabilities and stockholders' equity | $980,604 | $581,400 | Condensed Consolidated Statements of Operations and Comprehensive Income Q3 2021 revenue grew 24% to $260.1 million, but net income declined 34% to $30.0 million due to higher costs, while nine-month revenue increased 56% to $918.4 million Q3 2021 vs Q3 2020 Performance (in thousands of US dollars) | Metric | Q3 2021 | Q3 2020 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $260,086 | $209,005 | +24% | | Gross Profit | $102,063 | $89,550 | +14% | | Income from Operations | $37,748 | $57,718 | -35% | | Net Income | $30,005 | $45,211 | -34% | | Diluted EPS | $0.13 | $0.22 | -41% | Nine Months 2021 vs 2020 Performance (in thousands of US dollars) | Metric | Nine Months 2021 | Nine Months 2020 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $918,401 | $588,064 | +56% | | Gross Profit | $352,628 | $207,625 | +70% | | Income from Operations | $166,564 | $120,929 | +38% | | Net Income | $128,549 | $93,130 | +38% | | Diluted EPS | $0.59 | $0.45 | +31% | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity significantly increased to $653.2 million by September 30, 2021, primarily driven by IPO proceeds and net income - The company completed its IPO, receiving net proceeds of $242.7 million in March 2021 and an additional $18.0 million in April 2021 from the underwriters' option exercise1931 - Net income of $128.5 million for the nine months ended September 30, 2021, contributed to the increase in retained earnings (by reducing the accumulated deficit)19 Condensed Consolidated Statements of Cash Flows Nine-month operating cash flow was a net outflow of $131.8 million due to inventory build-up, while financing activities provided $262.0 million from the IPO Cash Flow Summary (Nine Months Ended Sep 30, in thousands of US dollars) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(131,793) | $187,403 | | Net cash used in investing activities | $(28,339) | $(16,883) | | Net cash provided by (used in) financing activities | $261,990 | $(109,627) | | Net increase in cash and cash equivalents | $101,788 | $60,854 | - The significant cash use in operations was mainly driven by a $276.2 million increase in inventories to support seasonal sales and mitigate shipping delays24200 - Financing activities were dominated by $262.0 million in net proceeds from the IPO24205 Notes to Condensed Consolidated Financial Statements Notes detail Cricut's business as a creativity platform, its March 2021 IPO, three reportable segments, and accounting policies - The company designs and markets a creativity platform with connected machines, design apps, and materials, operating in three reportable segments: Connected Machines, Subscriptions, and Accessories and Materials2730112 - The company completed its IPO on March 29, 2021, selling 13,250,000 shares of Class A common stock and raising net proceeds of $242.7 million, with an additional $18.0 million raised in April 202131 - A corporate reorganization and IPO led to modification of stock-based awards, resulting in $14.5 million incremental compensation cost recognized over the vesting term7375 Segment Gross Profit (Nine Months Ended Sep 30, 2021, in thousands of US dollars) | Segment | Revenue | Cost of Revenue | Gross Profit | | :--- | :--- | :--- | :--- | | Connected Machines | $390,100 | $323,558 | $66,542 | | Subscriptions | $150,115 | $15,517 | $134,598 | | Accessories and Materials | $378,186 | $226,698 | $151,488 | | Consolidated Total | $918,401 | $565,773 | $352,628 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2021 revenue growth of 24% to $260.1 million but a 34% net income decline, alongside nine-month revenue growth of 56% to $918.4 million, driven by user base expansion and IPO proceeds - In Q3 2021, revenue grew 24% year-over-year to $260.1 million, while net income fell 34% to $30.0 million122 - For the nine months ended September 30, 2021, revenue grew 56% year-over-year to $918.4 million, and net income grew 38% to $128.5 million125 Key Business Metrics (as of Sep 30, 2021) | Metric | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Users (in thousands) | 5,732 | 3,688 | | Paid Subscribers (in thousands) | 1,814 | 1,164 | - The company's cash position was strengthened by net proceeds of $260.7 million from its IPO in March and April 2021125192 - Operating cash flow was negative $131.8 million for the first nine months of 2021, primarily due to a $276.2 million increase in inventory to support seasonal demand and mitigate supply chain risks199200 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company identifies interest rate and foreign currency exchange risks as primary market exposures, neither of which is currently considered material - The company is primarily exposed to interest rate risk from its revolving credit facility, but a hypothetical 10% change in rates would not have a material impact211 - Foreign currency exchange risk exists due to transactions in various foreign currencies, but the impact has not been material, and the company does not currently hedge this exposure212 Item 4. Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal controls during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2021213 - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting214 PART II. OTHER INFORMATION This section covers other required disclosures including legal proceedings, comprehensive risk factors, equity sales, and filed exhibits Item 1. Legal Proceedings The company is not a party to any material pending legal proceedings but is involved in a complaint against the U.S. government regarding tariffs on Chinese imports - The company is not currently involved in any material legal proceedings220 - In September 2020, Cricut joined a complaint against the U.S. government challenging the legality of Section 301 tariffs on certain products from China222 Item 1A. Risk Factors This section details numerous risks including user engagement, intense competition, supply chain vulnerabilities, intellectual property, and the dual-class stock structure Risks Related to Our Industry and Business The company's success depends on user engagement, product innovation, accurate demand forecasting, and managing reliance on key retail partners - The company's growth depends on its ability to attract and engage users and anticipate their preferences for new products227232 - For the nine months ended September 30, 2021, the top seven brick-and-mortar and online retail partners accounted for 55% of product revenue, indicating significant partner concentration risk241 - Inaccurate forecasting of consumer demand could lead to inventory shortages or excess stock, impacting revenue and margins, with the company intending to carry higher inventory levels to mitigate supply chain risks238239 Risks Related to Manufacturing, Supply Chain and Fulfillment Cricut faces significant manufacturing and supply chain risks due to dependence on a single contract manufacturer, limited-source suppliers, and manufacturing concentration in China and Malaysia - The company is primarily dependent on a single contract manufacturer, Xiamen Intretech, Inc., for the production of most of its connected machines353 - Reliance on limited or sole-source suppliers for key components, such as microchips, exposes the company to shortages and price increases, which is a current global issue362365 - Manufacturing concentration in China and Malaysia exposes the company to risks from tariffs, trade policy changes, and regional disruptions like the COVID-19 pandemic357359394 Risks Related to Privacy, Data Protection and Cybersecurity The company is subject to evolving global privacy laws and cybersecurity threats, with non-compliance or breaches posing significant financial and reputational risks - The company is subject to numerous and evolving privacy laws globally, such as GDPR and CCPA, with non-compliance posing risks of significant penalties and reputational damage402403410 - Cybersecurity threats, including breaches, phishing, and hacking, pose a risk to user data, proprietary information, and system integrity415418 - The company relies on Amazon Web Services (AWS) for a substantial portion of its computing and data services, making it vulnerable to disruptions or policy changes from AWS305306 Risks Related to Foreign Operations International expansion exposes Cricut to risks including complex local regulations, currency fluctuations, tariffs, and compliance with anti-corruption laws - International expansion subjects the company to risks including complex local regulations, currency fluctuations, tariffs, and the need to localize products and content425 - The company is subject to U.S. and foreign governmental export/import controls and economic sanctions laws, which could impair its ability to compete internationally430431 - Compliance with anti-corruption laws like the FCPA and U.K. Bribery Act is critical, and violations could lead to severe penalties and reputational harm435437 Risks Related to our Intellectual Property Cricut's success depends on protecting its intellectual property, facing risks of infringement from counterfeit products and third-party claims, and managing open-source software use - The company's inability to protect its intellectual property (patents, trademarks, etc.) could reduce the value of its products and brand446447 - The company faces threats of infringement lawsuits from third parties, which could result in substantial damages, royalty payments, or prevent the sale of certain products452453 - Use of open-source software in products carries risks, including potential requirements to disclose proprietary source code or re-engineer products462463 Risks Related to the Ownership of Our Class A Common Stock Risks include concentrated voting power with pre-IPO stockholders due to a dual-class stock structure, affecting corporate governance and stock price volatility - The dual-class stock structure concentrates approximately 66% of voting power with Petrus and its affiliates, limiting the influence of other stockholders on major corporate decisions467475 - As a "controlled company," Cricut is exempt from certain Nasdaq corporate governance requirements, such as having a majority of independent directors476 - The company does not intend to pay dividends for the foreseeable future, meaning investors must rely on stock price appreciation for returns484 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities and confirms the use of $260.7 million net proceeds from its March and April 2021 IPO - The company completed its IPO on March 29, 2021, receiving net proceeds of $242.7 million, with an additional $18.0 million in net proceeds received on April 28, 2021, from the partial exercise of the underwriters' option539 - There were no unregistered sales of equity securities during the reporting period539 Item 3. Default Upon Senior Securities This item is not applicable as the company reports no defaults upon senior securities - Not applicable542 Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable543 Item 5. Other Information This item is not applicable as there is no other information to report - Not applicable544 Item 6. Exhibits This section lists exhibits filed with the Quarterly Report on Form 10-Q, including CEO and CFO certifications and XBRL data files - The report includes CEO and CFO certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act550 - XBRL Taxonomy Extension documents are also filed as exhibits550