Cricut(CRCT) - 2022 Q1 - Quarterly Report

Note Regarding Forward-Looking Statements Forward-Looking Statements The report contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially[7][8][11] Part I. Financial Information Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets (unaudited) The balance sheets show a decrease in total assets and liabilities, driven by lower accounts receivable and payable Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | As of March 31, 2022 (in thousands) | As of December 31, 2021 (in thousands) | | :--- | :--- | :--- | | Total Assets | $966,184 | $1,006,250 | | Total Liabilities | $259,558 | $332,274 | | Total Current Assets | $879,528 | $928,099 | | Total Current Liabilities | $232,716 | $308,367 | | Cash and Cash Equivalents | $245,699 | $241,597 | | Accounts Receivable, net | $122,780 | $199,508 | | Inventories | $483,009 | $454,174 | | Accounts Payable | $155,657 | $204,714 | | Accrued Expenses and Other Current Liabilities | $41,669 | $69,351 | Condensed Consolidated Statements of Operations and Comprehensive Income (unaudited) The company's financial performance shows a significant decrease in total revenue and net income for Q1 2022 Condensed Consolidated Statements of Operations Highlights (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $244,783 | $323,822 | $(79,039) | (24)% | | Connected Machines Revenue | $62,391 | $141,320 | $(78,929) | (56)% | | Subscriptions Revenue | $64,778 | $46,139 | $18,639 | 40% | | Accessories and Materials Revenue | $117,614 | $136,363 | $(18,749) | (14)% | | Gross Profit | $99,020 | $120,270 | $(21,250) | (18)% | | Income from Operations | $31,407 | $64,664 | $(33,257) | (51)% | | Net Income | $23,504 | $49,418 | $(25,914) | (52)% | | Basic EPS | $0.11 | $0.24 | $(0.13) | (54)% | | Diluted EPS | $0.11 | $0.24 | $(0.13) | (54)% | Condensed Consolidated Statements of Changes in Stockholders' Equity (unaudited) Stockholders' equity increased due to net income and stock-based compensation, following a significant 2021 IPO Condensed Consolidated Statements of Stockholders' Equity Highlights (in thousands) | Metric | As of March 31, 2022 (in thousands) | As of December 31, 2021 (in thousands) | | :--- | :--- | :--- | | Total Stockholders' Equity | $706,626 | $673,976 | | Net Income | $23,504 | $23,504 (for the period) | | Stock-based Compensation | $10,500 | N/A | | Accumulated Deficit | $(20,056) | $(43,560) | - In 2021, the company completed its IPO, generating $242.7 million in net proceeds and significantly increasing additional paid-in capital[22][34] Condensed Consolidated Statements of Cash Flows (unaudited) Operating activities generated positive cash flow in 2022, a significant improvement from a net cash outflow in 2021 Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | $15,579 | $(21,963) | $37,542 | | Net Cash from Investing Activities | $(9,807) | $(7,839) | $(1,968) | | Net Cash from Financing Activities | $(1,642) | $245,098 | $(246,740) | | Net Increase in Cash and Cash Equivalents | $4,102 | $215,257 | $(211,155) | | Cash and Cash Equivalents at End of Period | $245,699 | $337,472 | $(91,773) | - The significant change in financing activities from 2021 to 2022 is primarily due to the $245.1 million proceeds received from the IPO in 2021[27][164] Notes to Condensed Consolidated Financial Statements 1. Description of Business and Basis of Presentation Cricut designs and markets a creativity platform with three segments: Connected Machines, Subscriptions, and Accessories - Cricut, Inc is a designer and marketer of a creativity platform, offering connected machines, design apps, and accessories/materials under the Cricut brand globally[30][31] - The company completed its IPO on March 29, 2021, selling 13,250,000 shares of Class A common stock and receiving $242.7 million in net proceeds[34] - The business is organized into three reportable segments: Connected Machines, Subscriptions, and Accessories and Materials[33] 2. Summary of Significant Accounting Policies Financial statements are prepared using GAAP, requiring management estimates and using the two-class method for EPS - The financial statements are prepared using GAAP, requiring management to make estimates and assumptions for revenue recognition, warranty reserves, inventory, intangible assets, stock-based compensation, and income taxes[43] - Money market funds, classified as Level 1 in the fair value hierarchy, totaled $212.8 million as of March 31, 2022, and $197.8 million as of December 31, 2021, with no unrealized gains or losses[46] - Earnings per share are computed using the two-class method, with identical liquidation and dividend rights for Class A and Class B common stock, resulting in the same net income per share for both classes[47] 3. Revenue and Deferred Revenue Deferred revenue primarily consists of subscription services and is expected to be mostly recognized in 2022 - Deferred revenue primarily stems from subscription-based services and allocations from connected machine sales for future upgrades and cloud services[49] Changes in Deferred Revenue Balance (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--- | :--- | :--- | | Deferred Revenue, beginning of period | $35,405 | $26,276 | | Recognition of revenue included in beginning of period deferred revenue | $(18,039) | $(14,389) | | Revenue deferred, net of revenue recognized | $18,321 | $16,118 | | Deferred Revenue, end of period | $35,687 | $28,005 | Expected Recognition of Deferred Revenue as of March 31, 2022 (in thousands) | Year Ended December 31, | Revenue expected to be recognized (in thousands) | | :--- | :--- | | 2022 (remainder of year) | $28,977 | | 2023 | $5,035 | | 2024 | $1,646 | | 2025 | $29 | | Total | $35,687 | Total Revenue by Geography (in thousands) | Geography | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--- | :--- | :--- | | North America | $208,305 | $290,337 | | International | $36,478 | $33,485 | | Total Revenue | $244,783 | $323,822 | 4. Inventory The company's inventory, primarily finished goods, increased from December 31, 2021, to March 31, 2022 Inventory Composition (in thousands) | Inventory Type | As of March 31, 2022 (in thousands) | As of December 31, 2021 (in thousands) | | :--- | :--- | :--- | | Raw Materials | $24,279 | $20,187 | | Finished Goods | $458,730 | $433,987 | | Total Inventories | $483,009 | $454,174 | 5. Accrued Expenses and Other Current Liabilities Accrued expenses decreased from year-end 2021, primarily due to a reduction in sales incentives Accrued Expenses and Other Current Liabilities (in thousands) | Liability Type | As of March 31, 2022 (in thousands) | As of December 31, 2021 (in thousands) | | :--- | :--- | :--- | | Sales Incentives | $21,667 | $36,969 | | Other Accrued Liabilities and Other Current Liabilities | $20,002 | $32,382 | | Total Accrued Expenses | $41,669 | $69,351 | 6. Revolving Credit Facility The company maintained full availability of its $150 million credit facility with no outstanding balance - Cricut has a $150.0 million asset-based senior secured revolving credit facility, maturing September 4, 2023[56] - As of March 31, 2022, no amount was outstanding under the credit facility, and $150.0 million was available for borrowings[58] - The company was in compliance with all financial and non-financial debt covenants as of March 31, 2022[60] 7. Income Taxes The effective tax rate increased, while the provision for income taxes decreased due to lower pre-tax net income Income Tax Highlights | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | | :--- | :--- | :--- | :--- | | Effective Tax Rate (after discrete items) | 25.1% | 23.5% | +1.6% | | Provision for Income Taxes (in thousands) | $7,864 | $15,217 | $(7,353) | - The decrease in income tax provision was primarily due to a reduction in pre-tax net income[62] - The company has concluded that its net deferred tax assets will likely be realized and has not recorded a valuation allowance[63] 8. Capital Structure The company has a dual-class stock structure, with Class B shares carrying five votes per share - As of March 31, 2022, the company had 40,233,642 shares of Class A common stock and 181,575,972 shares of Class B common stock issued and outstanding[64] - Class A common stock has one vote per share, and Class B common stock has five votes per share, convertible into Class A at any time[64] - During the three months ended March 31, 2022, 2,336,595 shares of Class B common stock were converted to Class A[64] 9. Stock-Based Compensation Stock-based compensation decreased, with significant unrecognized costs for service-based and performance-based awards Stock-Based Compensation Cost (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--- | :--- | :--- | | Total Stock-Based Compensation | $10,270 | $12,676 | | Stock-Based Compensation Expense | $8,958 | $11,685 | | Capitalized for Software Development Costs | $541 | $294 | | Capitalized to Inventory | $771 | $697 | - As of March 31, 2022, unrecognized stock-based compensation cost for service-based awards was $115.7 million (over 3.0 years) and for PRSUs was $154.6 million[66] - No stock-based compensation was recorded for PRSUs during the three months ended March 31, 2022, as the company determined it was not probable that any performance conditions would be achieved[76] 10. Commitments and Contingencies The company is involved in ordinary legal proceedings not expected to materially affect its financial position - The company is subject to ordinary course legal proceedings and claims, but management does not anticipate a material effect on financial position, results of operations, or liquidity[84] 11. Leases Operating lease costs increased in Q1 2022 following an amendment to the corporate headquarters lease Operating Lease Costs (in millions) | Metric | Three Months Ended March 31, 2022 (in millions) | Three Months Ended March 31, 2021 (in millions) | | :--- | :--- | :--- | | Operating Lease Costs | $1.4 | $1.0 | | Variable Lease Costs | $0.2 | $0.0 | | Cash Paid for Operating Lease Liabilities | $1.4 | $1.1 | - The company amended its corporate headquarters lease in December 2021, extending the term through March 2027 and reducing the annual rent rate[87] Maturities of Operating Lease Liabilities as of March 31, 2022 (in thousands) | Year Ending December 31, | Operating Leases (in thousands) | | :--- | :--- | | 2022 (remainder of year) | $3,372 | | 2023 | $5,678 | | 2024 | $5,419 | | 2025 | $4,255 | | 2026 | $3,799 | | Thereafter | $967 | | Total minimum lease payments, net | $23,490 | | Present value of operating lease liabilities | $21,926 | 12. Related Party Transactions The company received no capital contributions from its former parent in Q1 2022, unlike the prior year Capital Contributions from Former Parent (in millions) | Metric | Three Months Ended March 31, 2022 (in millions) | Three Months Ended March 31, 2021 (in millions) | | :--- | :--- | :--- | | Capital Contributions from former parent | $0.0 | $0.2 | 13. Employee Benefit Plan Company contributions to its 401(k) plan increased slightly year-over-year 401(k) Contributions (in millions) | Metric | Three Months Ended March 31, 2022 (in millions) | Three Months Ended March 31, 2021 (in millions) | | :--- | :--- | :--- | | 401(k) Contributions | $0.8 | $0.7 | 14. Net Income Per Share Basic and diluted earnings per share both decreased to $0.11, reflecting the decline in net income Net Income Per Share Highlights | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | | :--- | :--- | :--- | :--- | | Net Income (in thousands) | $23,504 | $49,418 | $(25,914) | | Basic EPS | $0.11 | $0.24 | $(0.13) | | Diluted EPS | $0.11 | $0.24 | $(0.13) | | Weighted-average common shares outstanding, basic | 212,403,383 | 207,309,946 | +5,093,437 | | Diluted weighted-average common shares outstanding | 220,967,935 | 208,458,352 | +12,509,583 | - Potentially dilutive shares, including 6,615,000 PRSUs, were excluded from diluted EPS computation for Q1 2022 because their performance conditions were not achieved, making them anti-dilutive[94] 15. Segment Information Connected Machines revenue and profit fell sharply, while Subscriptions grew and Accessories and Materials declined - The company's three reportable segments are Connected Machines, Subscriptions, and Accessories and Materials[96][97] Segment Financial Performance (in thousands) | Segment | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | | Connected Machines | Revenue | $62,391 | $141,320 | $(78,929) | (56)% | | | Cost of Revenue | $60,713 | $119,692 | $(58,979) | (49)% | | | Gross Profit | $1,678 | $21,628 | $(19,950) | (92)% | | Subscriptions | Revenue | $64,778 | $46,139 | $18,639 | 40% | | | Cost of Revenue | $6,252 | $4,298 | $1,954 | 45% | | | Gross Profit | $58,526 | $41,841 | $16,685 | 40% | | Accessories and Materials | Revenue | $117,614 | $136,363 | $(18,749) | (14)% | | | Cost of Revenue | $78,798 | $79,562 | $(764) | (1)% | | | Gross Profit | $38,816 | $56,801 | $(17,985) | (32)% | | Consolidated | Revenue | $244,783 | $323,822 | $(79,039) | (24)% | | | Cost of Revenue | $145,763 | $203,552 | $(57,789) | (28)% | | | Gross Profit | $99,020 | $120,270 | $(21,250) | (18)% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview of Our Business and History Cricut's creativity platform includes connected machines, design apps, and subscriptions with over 2.3 million users - Cricut's platform includes connected machines (Joy, Explore, Maker), cloud-based design apps, and a broad range of accessories and materials[101][102][104] - As of March 31, 2022, the company had over 2.3 million Paid Subscribers to Cricut Access and Cricut Access Premium[103] - The company typically experiences higher revenue in the second half of the year due to the holiday shopping season, but 2021's seasonality was skewed by unusually high demand in Q1 and Q2 due to the pandemic[107] Key Business Metrics Users and Paid Subscribers increased year-over-year, while user creation percentage and ARPU metrics declined Key Business Metrics | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Users (in thousands) | 6,904 | 4,939 | +1,965 | 40% | | Percentage of Users Creating in Trailing 90 Days | 54% | 62% | -8% | (13)% | | Paid Subscribers (in thousands) | 2,311 | 1,614 | +697 | 43% | | Subscription ARPU | $9.73 | $9.90 | $(0.17) | (1.7)% | | Accessories and Materials ARPU | $17.67 | $29.40 | $(11.73) | (39.9)% | - User count is a key indicator of business health, reflecting connected machine sales and opportunities for subscription and accessory sales[115] - Paid Subscribers is a key metric for tracking growth in subscriptions revenue and potential gross margin leverage[118] Components of our Results of Operations This section details revenue and cost components for the Connected Machines, Subscriptions, and Accessories segments - Connected Machines revenue is from machine sales, recognized upon shipment or delivery[122] - Subscriptions revenue is from Cricut Access fees and allocated revenue for software upgrades/cloud services, recognized ratably over the subscription term[123] - Accessories and Materials revenue is from ancillary products and à la carte digital content, recognized upon shipment or delivery[124] - Cost of revenue for Connected Machines and Accessories & Materials includes product costs, manufacturing, shipping, warranty, and inventory write-downs; Subscriptions cost of revenue includes hosting fees, digital content, and software amortization[125][127][128] Results of Operations Comparison of the Three Months Ended March 31, 2022 and 2021 (Revenue) Total revenue decreased by 24%, driven by a 56% decline in Connected Machines, despite 40% growth in Subscriptions Revenue Comparison (in thousands) | Revenue Segment | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Connected Machines | $62,391 | $141,320 | $(78,929) | (56)% | | Subscriptions | $64,778 | $46,139 | $18,639 | 40% | | Accessories and Materials | $117,614 | $136,363 | $(18,749) | (14)% | | Total Revenue | $244,783 | $323,822 | $(79,039) | (24)% | - Connected Machines revenue decreased primarily due to lower demand for Maker and Explore families[139] - Subscriptions revenue increased due to a 43% rise in Paid Subscribers, from 1.6 million to 2.3 million[140] - Accessories and Materials revenue decreased due to lower unit sales of heat presses and project materials, partially offset by new product launches in Q1 2022[141] Cost of Revenue, Gross Profit and Gross Margin Connected Machines gross margin dropped significantly from 15% to 3% due to lower prices and higher costs Cost of Revenue, Gross Profit and Gross Margin Comparison (in thousands) | Segment | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | | Connected Machines | Cost of Revenue | $60,713 | $119,692 | $(58,979) | (49)% | | | Gross Profit | $1,678 | $21,628 | $(19,950) | (92)% | | | Gross Margin | 3% | 15% | -12% | (80)% | | Subscriptions | Cost of Revenue | $6,252 | $4,298 | $1,954 | 45% | | | Gross Profit | $58,526 | $41,841 | $16,685 | 40% | | | Gross Margin | 90% | 91% | -1% | (1.1)% | | Accessories and Materials | Cost of Revenue | $78,798 | $79,562 | $(764) | (1)% | | | Gross Profit | $38,816 | $56,801 | $(17,985) | (32)% | | | Gross Margin | 33% | 42% | -9% | (21.4)% | - Connected Machines gross margin decreased due to lower selling prices, higher warranty costs, and increased freight and handling costs[145] - Accessories and Materials gross margin decreased due to higher freight and handling costs and lower average selling prices[149] Operating Expenses Total operating expenses increased by 21.6%, driven by higher R&D, sales and marketing, and G&A costs Operating Expenses Comparison (in thousands) | Operating Expense | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Research and Development | $20,530 | $15,698 | $4,832 | 31% | | Sales and Marketing | $32,789 | $27,489 | $5,300 | 19% | | General and Administrative | $14,294 | $12,419 | $1,875 | 15% | | Total Operating Expenses | $67,613 | $55,606 | $12,007 | 21.6% | - R&D expenses increased due to a $2.5 million rise in product development for future products, along with higher personnel and stock-based compensation[151] - Sales and marketing expenses increased primarily due to a $4.7 million increase in payment processing fees[152] Other Expense, Net Other expense, net remained materially consistent year-over-year with a slight increase of $10 thousand Other Expense, Net Comparison (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Other Expense, Net | $(39) | $(29) | $(10) | 34% | Income Tax Expense The provision for income taxes decreased by 48% due to a reduction in pre-tax net income Income Tax Expense Comparison (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Provision for Income Taxes | $7,864 | $15,217 | $(7,353) | (48)% | | Effective Tax Rate | 25.1% | 23.5% | +1.6% | 6.8% | - The decrease in income tax provision was primarily driven by a reduction in pre-tax net income[157] Liquidity and Capital Resources The company believes its $245.7 million in cash and $150.0 million credit facility are sufficient for future needs - As of March 31, 2022, the company had $245.7 million in cash and cash equivalents and $150.0 million in available borrowings from its credit facility[158] - The company believes current liquidity sources are sufficient to meet cash requirements for the next 12 months and beyond[158] - Future capital requirements are subject to factors like revenue growth, R&D spending, sales and marketing expansion, and new product introductions[159] Operating Activities Net cash from operating activities improved significantly to $15.6 million due to better working capital management Net Cash Flows from Operating Activities (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--- | :--- | :--- | | Net Cash from Operating Activities | $15,579 | $(21,963) | - The improvement in operating cash flow was driven by greater reductions in accounts receivable and less cash used for inventories, partially offset by increased cash used for sales incentive liabilities[160] Investing Activities Net cash used in investing activities increased due to higher acquisitions of property and equipment Net Cash Flows from Investing Activities (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--- | :--- | :--- | | Net Cash from Investing Activities | $(9,807) | $(7,839) | - Increased cash usage in investing activities was due to higher acquisitions of property and equipment and capitalized software development costs[161] Financing Activities Net cash from financing activities decreased significantly due to the absence of IPO proceeds from the prior year Net Cash Flows from Financing Activities (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--- | :--- | :--- | | Net Cash from Financing Activities | $(1,642) | $245,098 | - The substantial decrease in cash from financing activities was primarily due to the $245.1 million proceeds received from the IPO in 2021, which did not recur in 2022[164] Critical Accounting Policies Financial statements rely on significant management estimates, particularly for deferred revenue and entitlements - Preparation of financial statements requires significant estimates and assumptions, particularly for deferred revenue and entitlements, which are based on historical experience and current economic factors[165][490] Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk The company's primary interest rate exposure is from its credit facility, with no material risk anticipated - The company's primary interest rate exposure is from its revolving credit facility[166] - A hypothetical 10% change in interest rates would not have a material impact on the condensed consolidated financial statements[166] Foreign Currency Exchange Risk The company is exposed to foreign currency fluctuations but does not currently hedge these risks - Cricut's reporting currency is the U.S dollar, but it transacts in foreign currencies like AUD, CAD, CNY, EUR, GBP, and MYR, exposing it to exchange rate fluctuations[167][401] - Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive income (loss)[167] - The company does not currently hedge foreign currency exposures but may consider it if exposure becomes more significant[167][401] Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2022 - As of March 31, 2022, the CEO and CFO concluded that disclosure controls and procedures were effective in ensuring timely and accurate reporting of information for SEC filings[168] Changes in Internal Control over Financial Reporting No material changes to internal control over financial reporting were identified during the period - No material changes to internal control over financial reporting occurred during the quarter ended March 31, 2022[170] Inherent Limitations on Effectiveness of Controls Control systems provide reasonable, not absolute, assurance due to inherent limitations like human error - Control systems provide only reasonable assurance, not absolute, due to inherent limitations such as resource constraints, human error, and potential for circumvention or management override[171] Part II. Other Information Item 1. Legal Proceedings The company is not party to any material legal proceedings but is a plaintiff in a tariff-related complaint - The company is not currently involved in any material pending legal proceedings[174] - Cricut is a plaintiff in a complaint against the U.S federal government regarding the imposition of tariffs on products from China[176] - Litigation, even if resolved favorably, can incur significant costs and divert management resources[175] Item 1A. Risk Factors Summary of Risk Factors The company faces high risk from competition, supply chain vulnerabilities, and international trade uncertainties - Key risks include attracting and engaging users, intense competition across all segments, supply chain dependencies on a single manufacturer and limited component sources, and international trade barriers[178] - Other significant risks involve managing business complexity, product quality and warranty claims, protecting intellectual property, general socio-economic conditions, and reliance on the CEO[178][180] Risks Related to Our Industry and Business Cricut faces risks from declining user acquisition, intense competition, and dependence on key retail partners - The rate of adding new users is declining, and the number of paid subscribers could remain flat or decline in the short term, impacting future growth[181][185] - Failure to anticipate user preferences, timely develop new products, or effectively manage inventory could adversely affect the business[186][187][193] - Significant dependence on sales of connected machines and to a limited number of brick-and-mortar and online retail partners (43% of Q1 2022 revenue) poses a risk if these relationships or sales volumes decline[190][196] - Inability to maintain or increase subscriptions, or if existing users do not renew, could harm future revenue and results, especially given the availability of à la carte digital content[206][207] - The company operates in a highly competitive market across all segments, particularly Accessories and Materials, facing competition from lower-priced alternatives and well-established content providers[210][211] - Competitive pricing pressures, including from competitors' discounts and shipping offers, could reduce gross margins if Cricut is compelled to match them without corresponding sales volume increases[218][220][223] - Rapid growth and limited operating experience at current scale, coupled with business complexity, could strain resources and harm brand, culture, and financial performance if not managed effectively[226][227][228] - The business is affected by seasonality, with a disproportionate amount of sales in Q4, and recent growth has obscured typical patterns, making future results difficult to predict[231][232] - The company's focus on high-quality products, which may not maximize short-term financial results, could conflict with market expectations and negatively affect stock price[238][239] - Reliance on Amazon Web Services for computing and storage, and the integration of software across various devices/OS, exposes the company to risks of service disruptions, increased costs, and potential censorship in international markets[258][259][264][266] - Failure to offer high-quality customer support, especially with international expansion and remote work, could harm reputation and business growth[261][262][263] - Warranty claims, product recalls, and product liability risks, exacerbated by manufacturing defects or non-compliance with safety laws, could lead to significant costs, reputational damage, and reduced sales[273][274][276][279] - Economic downturns or uncertainty may adversely affect consumer discretionary spending and demand for Cricut's products, which are considered discretionary items[286][287] - Covenants in the $150 million revolving credit facility may restrict business growth, and non-compliance could lead to accelerated debt repayment[288][290][291] - The company may require additional capital for growth, which may not be available on reasonable terms and could result in stockholder dilution or restrictive debt covenants[293][294] - Maintaining corporate culture during growth and managing a public company with limited experience are significant challenges[295][296] - Fluctuations in tax obligations and effective tax rates, due to uncertain tax determinations or changes in tax laws, could adversely affect financial results[297][298][301] - The company may incur significant losses from various types of fraud, including credit card fraud, which could damage reputation and impact results[303] Risks Related to Manufacturing, Supply Chain and Fulfillment The company relies heavily on a single manufacturer and limited suppliers, creating significant supply chain risks - The company primarily depends on a single contract manufacturer, Intretech (Malaysia/China), for most connected machines, posing risks of capacity constraints, component availability issues, and limited control over production[304][305][308][309] - Reliance on a limited number of international third-party suppliers, some sole-source, for components and accessories/materials creates risks of shortages, long lead times, and supply disruptions, exacerbated by global events like the COVID-19 pandemic[315][316][317] - Inaccurate demand forecasting can lead to manufacturing delays, increased costs, or excess inventory, with the company bearing supply risk under contract manufacturing arrangements[319][320][321] - Dependence on five third-party logistics partners, with the majority of products handled by one in California, introduces risks related to staffing, operational control, and potential disruptions[322][323][324][325] - Disruptions in shipping services (air/ocean carriers) or at ports, increased transportation costs, and reliance on major shipping companies like FedEx and UPS could adversely affect product delivery and financial results[327][328][329][330] - Limited control over contract manufacturers, component suppliers, and third-party logistics partners exposes the company to risks including inability to meet demand, reduced product reliability, price increases, and geopolitical/economic instability in manufacturing regions (Malaysia, China)[331][332][334] - Products may be affected by design and manufacturing defects, leading to warranty claims, product liability, recalls, and reputational harm, potentially exceeding insurance coverage[335][336][337][338] - Regulations related to conflict minerals may increase expenses and limit supply, while significant increases in inflation, commodity prices, or transportation costs could adversely affect costs if not passed on to customers[339][340][341][342][344] - Geopolitical tensions and trade policies, particularly with China (tariffs, export controls), could disrupt manufacturing, increase costs, and force relocation of production[345][346][352] - Changes in U.S tax, tariff, or other trade policies regarding products from other countries could adversely affect the business, including increased costs and supply chain disruptions[349][352] Risks Related to Privacy, Data Protection and Cybersecurity The company faces significant risks from evolving global data privacy laws and cybersecurity threats - The company is subject to numerous and evolving global privacy, data protection, and information security laws (e.g., GDPR, LGPD, CCPA, CPRA), with non-compliance potentially leading to significant penalties, investigations, and reputational harm[353][354][355][364][366] - Cybersecurity risks, including system failures, software defects, malware, and security breaches, could disrupt operations, expose sensitive data, and lead to litigation and financial losses, requiring ongoing investment in security infrastructure[369][370][371][374] - Restrictions on "cookie" tracking technologies, due to privacy laws or browser settings, could decrease the amount and accuracy of user information collected, harming marketing effectiveness and potentially requiring alternative tracking systems[376][378][379][381] Risks Related to Foreign Operations International expansion exposes the company to significant regulatory, economic, and geopolitical risks - International expansion exposes the company to significant risks, including difficulties in managing operations, increased competition, compliance with diverse local laws, tariffs, currency fluctuations, and political/social unrest[382][383][384] - Brexit and ongoing trade negotiations create uncertainty and potential disruptions to trade, increased costs, and legal/economic uncertainty in the UK/EU region[386] - Compliance with governmental export/import controls and economic sanctions laws (e.g., U.S sanctions) is critical, with potential for liability, delays, and restrictions on international sales if violated[387][388][389][391] - Failure to comply with anti-corruption and anti-money laundering laws (e.g., FCPA, U.K Bribery Act) in global operations could result in severe penalties, investigations, and reputational damage[392][393][396][397] - Changes in U.S and foreign taxation of international business activities, including transfer pricing regulations, could adversely impact financial position and results of operations[398][399][400] - Exposure to foreign currency exchange rate fluctuations, particularly with the U.S dollar, can affect revenue and results, and the company does not currently hedge these exposures[401] Risks Related to our Intellectual Property Protecting intellectual property is crucial but faces risks from copycat products and infringement claims - Protecting intellectual property (patents, trademarks, trade secrets) is crucial but expensive and difficult globally, with risks of challenges, invalidation, or unenforceability[402][403][404][406] - Sales of copycat products or unauthorized "gray market" goods can harm authorized channels, reputation, and business, requiring significant resources to combat[215][216][217] - The company faces threats of alleged infringement from third parties, which could lead to costly litigation, substantial damages, or restrictions on product offerings[407][408][410] - Dependence on third-party licenses and purchases for digital content (fonts, images) carries risks of adverse changes, loss of rights, or claims of lacking necessary licenses, potentially leading to copyright infringement liability[411][412][413][414][415] - Legislation regarding copyright protection or content review (e.g., EU law requiring efforts to exclude infringing content) could impose complex and costly constraints on the business model, requiring significant investment in technology and licensing[415][416][417][419] - Use of open source software in products poses risks, including potential requirements to disclose proprietary source code or make derivative works available on unfavorable terms, and lack of warranties or support[420][421][422] Risks Related to the Ownership of Our Class A Common Stock The dual-class stock structure concentrates voting power, limiting public stockholder influence - The dual-class common stock structure (Class A: 1 vote/share, Class B: 5 votes/share) concentrates voting power with pre-IPO stockholders, particularly Petrus and affiliates (~67% of total voting power), limiting other stockholders' influence[423][424][433] - The company is a "controlled company" under Exchange rules, allowing it to rely on exemptions from certain corporate governance requirements (e.g., independent directors majority, independent nominating/compensation committees)[434][437] - The dual-class structure may result in a lower or more volatile market price for Class A common stock and could lead to exclusion from certain stock indices, reducing investment by passive funds[427] - The stock price of Class A common stock may be highly volatile due to numerous factors beyond control, including market performance, operational results, analyst expectations, and macroeconomic conditions[428][430][431] - Future sales of a large number of Class A common shares, or the perception of such sales, could depress the stock price and make future equity offerings more difficult[440][441] - The company does not currently intend to pay dividends for the foreseeable future, with future earnings to be retained for business development and corporate purposes[443] - Provisions in charter documents and Delaware law could delay or prevent acquisitions, limit stockholders' ability to influence management, and adversely affect the Class A common stock price[444][445][446][448] - Exclusive forum provisions in charter documents designate Delaware courts and federal district courts as exclusive forums for certain disputes, potentially limiting stockholders' ability to choose a favorable judicial forum[449][450][451][452] General Risk Factors The COVID-19 pandemic poses ongoing risks to operations, supply chains, and consumer spending - The COVID-19 pandemic caused increased demand in 2020-2021, but current revenue growth rates are declining, and the pandemic continues to pose risks to operations, supply chain, and consumer discretionary spending[453][456][457][461][462] - The business is subject to a large number of evolving U.S and non-U.S laws, including those specific to e-commerce, privacy, data protection, and consumer protection, with compliance being costly and potentially leading to enforcement actions or litigation[463][464][465][466][467][468][469] - The company is subject to legal proceedings, regulatory disputes, and governmental inquiries that could incur significant expenses, divert management attention, and harm the business[470][471][472] - Merger and acquisition activities could require significant management attention, disrupt the business, dilute stockholder value, and adversely affect results of operations[473][474][475] - The business is vulnerable to catastrophic events (earthquakes, fires, floods, public health crises, war, terrorism) and man-made problems, which could disrupt operations and may not be fully covered by insurance[477][478] - Payment processing risks, including fraudulent use of payment methods and reliance on third-party financing providers, could impact revenue and operations[479][480] - Estimates of market size (SAM and TAM) may be inaccurate, and there's no assurance the business will penetrate these markets as estimated[481][482][483] - Being a public company strains resources, diverts management attention, and requires maintaining adequate internal controls over financial reporting, incurring significant legal, accounting, and compliance expenses[484][485][486][487][488] - Incorrect estimates or judgments related to critical accounting policies (e.g., deferred revenue, entitlements) could adversely affect results of operations[489][490] - The company may be subject to sales and other taxes, and potential liabilities on past sales for taxes, surcharges, and fees, particularly with evolving interpretations of indirect tax laws like those following the Wayfair decision[491][492] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section is not applicable, indicating no unregistered sales of equity securities for the period - This section is not applicable for the reporting period[493] Item 3. Default Upon Senior Securities This section is not applicable, indicating no defaults upon senior securities for the period - This section is not applicable for the reporting period[494] Item 4. Mine Safety Disclosures This section is not applicable, indicating no mine safety disclosures for the period - This section is not applicable for the reporting period[495] Item 5. Other Information This section is not applicable, indicating no other information to report for the period - This section is not applicable for the reporting period[496] Item 6. Exhibits This section lists the exhibits filed with the report, including certifications and XBRL documents - Exhibits include a confirmatory employment letter for Kimball Shill, CEO and CFO certifications (31.1, 31.2, 32.1, 32.2), and XBRL taxonomy extension documents[499][500][501] - Certifications in Exhibits 32.1 and 32.2 are deemed to accompany the report but are not "filed" for Section 18 purposes unless specifically incorporated by reference[503] Signatures Signatures The report is signed by the CEO, CFO, and Corporate Controller, certifying compliance with the Securities Exchange Act - The report was signed on May 10, 2022, by Ashish Arora (CEO), Kimball Shill (CFO), and Ryan Harmer (VP of Accounting, Corporate Controller)[506][509]