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 final prospectus or Prospectus datedMarch 24, 2021 and filed with theU.S Securities and Exchange Commission , or theSEC , pursuant to Rule 424(b) under the Securities Act of 1933, as amended, or the Securities Act, onMarch 25, 2021 . This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from these forward-looking statements as a result of many factors, including those discussed in the sections titled "Risk Factors" and "Special Note Regarding Forward-Looking Statements." Overview of Our Business and History AtCricut , our mission is to help people lead creative lives. We have designed and built a creativity platform that enables our engaged and loyal community of nearly 5.4 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 ofJune 30, 2021 ): •Cricut Joy for personalization on-the-go,$159.99 MSRP •Cricut Explore for cutting, writing and scoring,$249.99 -$299.99 MSRP •Cricut Maker for cutting, writing, scoring and adding decorative effects to a wider range of materials,$399.99 MSRP Our software integrates our connected machines and design apps, allowing our users to create and share seamlessly. Our software is cloud-based, meaning that users can access and work on their projects anywhere, at any time, across desktops or mobile devices. Users can leverage the full power of our platform by using our connected machines together with our free design apps, in-app purchases and subscription offerings to design and complete projects. All users can access a select number of free images, fonts and projects from our design apps or upload their own. In addition, we offer a wider selection of images, fonts and projects for purchase à la carte, including licensed content from partners with well-known brands and characters, like major motion picture studios. We also have two subscription offerings: Cricut Access andCricut Access Premium. Cricut Access provides a subscription to images, fonts and projects as well as other member benefits, such as discounts and priorityCricut Member Care. Cricut Access Premium includes all of the benefits of Cricut Access as well as additional discounts and preferred shipping. As ofJune 30, 2021 , we had nearly 1.8 million Paid Subscribers to Cricut Access and Cricut Access Premium. We sell a broad range of accessories and materials that bring our users' designs to life, from advanced tools like heat presses toCricut -branded rulers, scoring tools, pens, paper and iron-on vinyl, all designed to work seamlessly with our connected machines. Designing and completing projects drives repeat purchases ofCricut -branded accessories and materials. We design and develop our software and hardware products, and we work with third-party contract manufacturers to source components and finished goods and with third-party logistics companies to warehouse and distribute our products. We sell our connected machines and accessories and materials through our brick-and-mortar and online retail partners, as well as through our website at cricut.com. Our partners include Amazon,Hobby Lobby , HSN, Jo-Ann, Michaels, Target, Walmart and many others. We also sell our products, including subscriptions to Cricut Access and Cricut Access Premium, on cricut.com. For the three months endedJune 30, 2021 and 2020, we generated: •Total revenue of$334.5 million and$235.3 million , respectively, representing 42% year-over-year growth •Net income of$49.1 million and$34.9 million , respectively, representing 41% year-over-year growth •EBITDA of$68.5 million and$49.2 million , respectively, representing 39% year-over-year growth 24 -------------------------------------------------------------------------------- Table of Contents For the six months endedJune 30, 2021 and 2020, we generated: •Total revenue of$658.3 million and$379.1 million , respectively, representing 74% year-over-year growth •Net income of$98.5 million and$47.9 million , respectively, representing 106% year-over-year growth •EBITDA of$137.1 million and$69.9 million , respectively, representing 96% year-over-year growth OnMarch 29, 2021 , we completed an initial public offering ("IPO"), in which we sold 13,250,000 shares of Class A common stock, and the selling stockholders sold an additional 2,064,903 shares of Class A common stock at a price to the public of$20.00 per share. We received aggregate net proceeds of$242.7 million after deducting offering costs, underwriting discounts and commissions of$22.3 million . OnApril 28, 2021 , we sold an additional 968,815 shares of Class A common stock and the selling stockholders sold an additional 150,984 shares of Class A common stock pursuant to the partial exercise of the underwriters' option to purchase additional shares which generated net proceeds of$18.0 million after deducting for underwriting discounts and commissions of$1.4 million . Key Business Metrics and Non-GAAP Financial Measures In addition to the measures presented in our interim condensed consolidated financial statements, we use the following key metrics to evaluate our business, measure our performance, identify trends and make strategic decisions. As of June 30, 2021 2021 2020 Users (in thousands) 5,373 3,274 Percentage of Users Creating in Trailing 90 Days 59 % 63 % Paid Subscribers (in thousands) 1,765 996 Three Months Ended June 30, 2021 2020 Subscription ARPU $ 9.83$ 7.91 Accessories and Materials ARPU$ 26.67 $ 32.23 EBITDA (in millions) $ 68.5$ 49.2 Users We define a User as a registered user of at least one registered connected machine as of the end of a period. One user may own multiple registered connected machines but is only counted once if that user registers those connected machines by using the same email address. If possession of a connected machine is transferred to a new owner and registered by that new owner, the new owner is added to the total user count and the prior owner is removed from the total user count if the prior owner does not own any other registered connected machines. User count is a key indicator of the health of our business, because changes in the number of users reflects changes in connected machine sales and represents opportunities for us to drive additional sales of subscriptions and accessories and materials. There are certain limitations associated with this metric. For example, this metric does not capture whether a User is active in using a connected machine and does not indicate whether a User is purchasing subscriptions or accessories and materials. We compensate for these limitations by also reviewing other metrics that capture portions of this information, including the metrics below. Percentage of Users Creating in Trailing 90 Days We define the Percentage of Users Creating in Trailing 90 Days as the percentage of users who have used a connected machine for any activity, such as cutting, writing or any other activity enabled by our connected machines, in the past 90 days. This metric is a key indicator of our engagement with users, which helps drive sales of subscriptions and accessories and materials. There are certain limitations associated with this metric. For example, this metric does not capture whether a User is purchasing subscriptions or accessories and materials. We compensate for these limitations by also reviewing other metrics that capture portions of this information, including the metrics below. 25 -------------------------------------------------------------------------------- Table of Contents Paid Subscribers We define Paid Subscribers as the number of users with a subscription toCricut Access or Cricut Access Premium, excluding cancelled, unpaid or free trial subscriptions, as of the end of a period. Paid Subscribers is a key metric to track growth in our subscriptions revenue and potential leverage in our gross margin. Subscription ARPU We define Subscription ARPU as Subscriptions revenue divided by average users in a period. Subscription ARPU allows us to forecast Subscriptions revenue over time and is an indicator of our ability to expand with users and of user engagement with our subscription offerings. Accessories and Materials ARPU We define Accessories and Materials ARPU as Accessories and Materials revenue divided by average users in a period. Accessories and Materials ARPU allows us to forecast Accessories and Materials revenue over time and is an indicator of our ability to expand with users, particularly the volume of projects created by our users. EBITDA and EBITDA Margin We define EBITDA as net income adjusted to exclude: interest expense, net; income taxes and depreciation and amortization. We use EBITDA and EBITDA Margin as measures of operating performance in our business. We believe these non-GAAP financial measures are useful to investors for period-to-period comparisons of our business and in understanding and evaluating our results of operations for the following reasons: •EBITDA and EBITDA Margin are widely used by investors and securities analysts to measure a company's operating performance without regard to items such as depreciation and amortization expense, interest expense, net and income taxes that can vary substantially from company to company depending upon their financing and the method by which assets were acquired; •our management uses EBITDA and EBITDA Margin in conjunction with financial measures prepared in accordance with GAAP for planning purposes, including the preparation of our annual operating budget, as a measure of our core results of operations and the effectiveness of our business strategy and in evaluating our financial performance; and •EBITDA and EBITDA Margin provide consistency and comparability with our past financial performance, facilitate period-to-period comparisons of our core results of operations and also facilitate comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results. Our use of EBITDA and EBITDA Margin has limitations as an analytical tool, and you should not consider these measures in isolation or as substitutes for analysis of our financial results as reported under GAAP. Some of these limitations are, or may in the future be, as follows: •although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and EBITDA and EBITDA Margin do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; •EBITDA and EBITDA Margin do not reflect the portion of software development costs that we capitalize under GAAP, which has recently been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our investment in new products; •EBITDA and EBITDA Margin do not reflect: (i) changes in, or cash requirements for, our working capital needs, (ii) interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces cash available to us or (iii) tax payments that may represent a reduction in cash available to us. Because of these limitations, we believe EBITDA and EBITDA Margin should be considered along with other operating and financial performance measures presented in accordance with GAAP. 26 -------------------------------------------------------------------------------- Table of Contents Set forth below is a reconciliation of EBITDA to net income for the three and six months endedJune 30, 2021 and 2020: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (in thousands) Net income $ 49,126$ 34,879 $ 98,544$ 47,919 Net income margin 14.7 % 14.8 % 15.0 % 12.6 % Adjusted to exclude the following: Depreciation and amortization expense $ 4,290$ 3,430 $ 8,176$ 6,666 Interest expense, net $ 76 $ 367 $ 155 $ 941 Corporate income tax expense $ 15,040$ 10,514 $ 30,257$ 14,350 EBITDA $ 68,532$ 49,190 $ 137,132$ 69,876 EBITDA margin 20.5 % 20.9 % 20.8 % 18.4 % Components of our Results of Operations We operate and manage our business in three reportable segments: Connected Machines, Subscriptions and Accessories and Materials. We identify our reportable segments based on the information used by management to monitor performance and make operating decisions. See Note 13 to our interim condensed consolidated financial statements included elsewhere in this filing for additional information regarding our reportable segments. Revenue Connected Machines We generate Connected Machines revenue from sales of our portfolio of connected machines, currently consisting of machines in three product families,Cricut Maker, which includes Maker and Maker 3, Cricut Explore, which includesExplore Air 2 and Explore 3, and Cricut Joy, net of sales discounts, incentives and returns. Connected Machines revenue is recognized at the point in time when control is transferred, which is either upon shipment or delivery to the customer in accordance with the terms of each customer contract. Subscriptions We generate Subscriptions revenue primarily from sales of subscriptions to Cricut Access and Cricut Access Premium and a minimal amount of revenue allocated to the unspecified future upgrades and enhancements related to the essential software and access to our cloud-based services. For a monthly or annual subscription fee, Cricut Access includes a subscription to images, fonts and projects as well as other member benefits, including discounts and priority Cricut Member Care. For an annual subscription fee, Cricut Access Premium includes all of the benefits of Cricut Access as well as additional discounts and preferred shipping. Subscriptions revenue excludes à la carte digital content purchases. Subscriptions revenue is recognized on a ratable basis over the subscription term. Accessories and Materials We generate Accessories and Materials revenue from sales of ancillary products, such as Cricut EasyPress,Cricut Mug Press , hand tools, machine replacement tools and blades, project materials such as vinyl and iron-on and sales of à la carte digital content purchases, including fonts, images and projects. Accessories and Materials revenue is recognized for sales of such items, net of sales discounts, incentives and returns. Accessories and Materials revenue is recognized at the point in time when control is transferred, which is either upon shipment or delivery to the customer in accordance with the terms of each customer contract. 27 -------------------------------------------------------------------------------- Table of Contents Cost of Revenue Connected Machines Cost of revenue related to Connected Machines consists of product costs, including costs of components, costs of contract manufacturers for production, inspecting and packaging, shipping, receiving, handling, warehousing and fulfillment, duties and other applicable importing costs, warranty replacement, excess and obsolete inventory write-downs, tooling and equipment depreciation and royalties. We expect our cost of revenue related to Connected Machines as a percentage of revenue to fluctuate in the near term as we address global supply chain challenges created by the COVID-19 pandemic and continue to invest in the growth of our business and decrease over the long term as we drive greater scale and efficiency in our business. Subscriptions Cost of revenue related to Subscriptions consists primarily of hosting fees, digital content costs, amortization of capitalized software development costs and software maintenance costs. We expect our cost of revenue related to Subscriptions as a percentage of revenue to fluctuate in the near term as we expand our content offerings, including localized content for international target markets, and decrease over time as we drive greater scale and efficiency in our business. Accessories and Materials Costs of revenue related to Accessories and Materials consists of product costs, including costs of components, costs of contract manufacturers for production, inspecting and packaging, shipping, receiving, handling, warehousing and fulfillment, duties and other applicable importing costs, warranty replacement, excess and obsolete inventory write-downs, tooling and equipment depreciation and royalties. We expect our cost of revenue related to Accessories and Materials as a percentage of revenue to fluctuate in the near term as we address global supply chain challenges created by the COVID-19 pandemic and continue to invest in the growth of our business and decrease over the long term as we drive greater scale and efficiency in our business. Operating Expenses Research and Development Research and development expenses consist primarily of costs associated with the development of our connected machines, software and accessories and materials, including personnel-related expenses for engineering, product development and quality assurance, as well as prototype costs, service fees incurred by contracting with vendors and allocated overhead. We expect our research and development expenses to grow in the near term as we begin developing and investing in more new products to support growth further into the future. Longer term, we expect research and development expense to increase as a percentage of revenue to levels somewhat higher than recent historical levels. Sales and Marketing Sales and marketing expenses consist primarily of the advertising and marketing of our products, third-party payment processing fees, personnel-related expenses, including salaries and bonuses, benefits and stock-based compensation expense, as well as sales incentives, professional services, promotional items, and allocated overhead costs. We expect our sales and marketing expenses as a percentage of revenue to increase in the near and long term as we expand internationally and launch new products. General and Administrative General and administrative expenses consist of personnel-related expenses for our finance, legal, human resources and administrative personnel, including salaries and bonuses, benefits and stock-based compensation expense, as well as the costs of professional services, any allocated overhead, information technology and other administrative expenses. We expect our general and administrative expenses as a percentage of revenue to increase in the near term as we expand our operations and incur expenses to become a public company, and to decline over the long term as we drive greater scale and efficiency in our business. Other Income (Expense), Net Other income (expense), net consists primarily of interest expense associated with our debt financing arrangements and amortization of debt issuance costs. 28 -------------------------------------------------------------------------------- Table of Contents 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 (in thousands) Revenue: Connected machines$ 146,326 $ 113,388 $ 287,646 $ 170,276 Subscriptions 50,673 24,028 96,812 43,208 Accessories and materials 137,494 97,920 273,857 165,575 Total revenue 334,493 235,336 658,315 379,059 Cost of revenue: Connected machines(1) 116,217 95,543 235,909 147,120 Subscriptions(1) 5,285 3,122 9,583 5,963 Accessories and materials(1) 82,696 63,364 162,258 107,901 Total cost of revenue 204,198 162,029 407,750 260,984 Gross profit 130,295 73,307 250,565 118,075 Operating expenses: Research and development(1) 20,606 8,636 36,304 17,807 Sales and marketing(1) 33,030 13,437 60,519 25,884 General and administrative(1) 12,507 5,473 24,926 11,173 Total operating expenses 66,143 27,546 121,749 54,864 Income from operations 64,152 45,761 128,816 63,211 Other income (expense), net 14 (368) (15) (942) Income before provision for income taxes 64,166 45,393 128,801 62,269 Provision for income taxes 15,040 10,514 30,257 14,350 Net income$ 49,126 $ 34,879 $ 98,544 $ 47,919
(1) Includes stock-based compensation expense as follows:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
(in thousands)
Cost of revenue
Connected machines $ 8 $ 1 $ 16 $ 3
Subscriptions 52 6 88 15
Accessories and materials - - - -
Total cost of revenue 60 7 104 18
Research and development 3,768 508 7,409 1,268
Sales and marketing 2,425 655 8,032 1,112
General and administrative 1,857 157 4,250 375
Total stock-based compensation expense
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Table of Contents Comparison of the Three and Six Months EndedJune 30, 2021 and 2020 Revenue Three Months Ended Six Months Ended June 30, Change June 30, Change 2021 2020 $ % 2021 2020 $ % (dollars in thousands) Revenue: Connected machines$ 146,326 $ 113,388 $ 32,938 29 %$ 287,646 $ 170,276 $ 117,370 69 % Subscriptions 50,673 24,028 26,645 111 % 96,812 43,208 53,604 124 % Accessories and materials 137,494 97,920 39,574 40 % 273,857 165,575 108,282 65 % Total revenue$ 334,493 $ 235,336 $ 99,157 42 %$ 658,315 $ 379,059 $ 279,256 74 %
Three Months Ended
Connected Machines revenue increased by$32.9 million , or 29%, to$146.3 million for the three months endedJune 30, 2021 from$113.4 million for the three months endedJune 30, 2020 . The increase was primarily driven by growth in the number of Connected Machines sold during the period and the launch of Explore 3 and Maker 3, which launched inJune 2021 . Subscriptions revenue increased by$26.6 million , or 111%, to$50.7 million for the three months endedJune 30, 2021 from$24.0 million for the three months endedJune 30, 2020 . The increase was primarily driven by an increase in the number of Paid Subscribers which increased by 77% from 1.0 million as ofJune 30, 2020 to nearly 1.8 million as ofJune 30, 2021 . Accessories and Materials revenue increased by$39.6 million , or 40%, to$137.5 million for the three months endedJune 30, 2021 from$97.9 million for the three months endedJune 30, 2020 . The increase was primarily driven by growth in unit sales of Accessories and Materials during the period, particularly growth in units of EasyPress and units ofMug Press , which launched inMarch 2021 .
Six Months Ended
Connected Machines revenue increased by$117.4 million , or 69%, to$287.6 million for the six months endedJune 30, 2021 from$170.3 million for the six months endedJune 30, 2020 . The increase was primarily driven by significant growth in the number of Connected Machines sold during the period, due to increased consumer demand, the launch of Explore 3 and Maker 3 during June of 2021, and greater promotional activity and pricing during the six months endedJune 30, 2021 than during the six months endedJune 30, 2020 . Subscriptions revenue increased by$53.6 million , or 124%, to$96.8 million for the six months endedJune 30, 2021 from$43.2 million for the six months endedJune 30, 2020 . The increase was primarily driven by an increase in the number of Paid Subscribers which increased by 77% from 1.0 million as ofJune 30, 2020 to nearly 1.8 million as ofJune 30, 2021 . Accessories and Materials revenue increased by$108.3 million , or 65%, to$273.9 million for the six months endedJune 30, 2021 from$165.6 million for the six months endedJune 30, 2020 . The increase was primarily driven by growth in unit sales of Accessories and Materials during the period, particularly growth in units of EasyPress and units ofMug Press , which launched inMarch 2021 . 30 -------------------------------------------------------------------------------- Table of Contents Cost of Revenue, Gross Profit and Gross Margin Three Months Ended Six Months Ended June 30, Change June 30, Change 2021 2020 $ % 2021 2020 $ % (dollars in thousands) Cost of Revenue: Connected machines$ 116,217 $ 95,543 $ 20,674 22 %$ 235,909 $ 147,120 $ 88,789 60 % Subscriptions 5,285 3,122 2,163 69 % 9,583 5,963 3,620 61 % Accessories and materials 82,696 63,364 19,332 31 % 162,258 107,901 54,357 50 % Total cost revenue$ 204,198 $ 162,029 $ 42,169 26 %$ 407,750 $ 260,984 $ 146,766 56 % Gross Profit: Connected machines 30,109 17,845 12,264 69 % 51,737 23,156 28,581 123 % Subscriptions 45,388 20,906 24,482 117 % 87,229 37,245 49,984 134 % Accessories and materials 54,798 34,556 20,242 59 % 111,599 57,674 53,925 93 % Total gross profit$ 130,295 $ 73,307 $ 56,988 78 %$ 250,565 $ 118,075 $ 132,490 112 % Gross Margin Connected machines 21 % 16 % 18 % 14 % Subscriptions 90 % 87 % 90 % 86 % Accessories and materials 40 % 35 % 41 % 35 %
Three Months Ended
Connected Machines cost of revenue increased by$20.7 million , or 22%, to$116.2 million for the three months endedJune 30, 2021 from$95.5 million for the three months endedJune 30, 2020 . The increase was primarily driven by growth in the number of Connected Machines sold during the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 Gross margin for Connected Machines increased to 21% for the three months endedJune 30, 2021 from 16% for the three months endedJune 30, 2020 . Gross margin increased due to the net impact of favorable product mix changes, lower handling costs as a percentage of revenue, and tariff mitigation by moving a significant amount of machine manufacturing fromChina toMalaysia . Subscriptions cost of revenue increased$2.2 million , or 69%, to$5.3 million for the three months endedJune 30, 2021 from$3.1 million for the three months endedJune 30, 2020 . The increase was primarily driven by an increase in amortization of capitalized software development costs, an increase in digital content costs, and an increase in hosting fees to support our growing base of subscribers. Gross margin for Subscriptions increased to 90% for the three months endedJune 30, 2021 from 87% for the three months endedJune 30, 2020 . Gross margin increased due to lower amortization of capitalized software development costs and hosting fees as a percentage of subscriptions revenue. Accessories and Materials cost of revenue increased by$19.3 million , or 31%, to$82.7 million for the three months endedJune 30, 2021 from$63.4 million for the three months endedJune 30, 2020 . The increase was primarily driven by growth in Accessories and Materials units sold during the period, particularly growth in units of EasyPress and units ofMug Press , which launched inMarch 2021 . Gross margin for Accessories and Materials increased to 40% for the three months endedJune 30, 2021 from 35% for the three months endedJune 30, 2020 . Gross margin primarily increased due to lower costs for EasyPress, lower handling costs as a percentage of revenue and lower sales incentives as a percentage of revenue. 31
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Table of Contents
Six Months Ended
Connected Machines cost of revenue increased by$88.8 million , or 60%, to$235.9 million for the six months endedJune 30, 2021 from$147.1 million for the six months endedJune 30, 2020 . The increase was primarily driven by growth in the number of Connected Machines sold during the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . Gross margin for Connected Machines increased to 18% for the six months endedJune 30, 2021 from 14% for the six months endedJune 30, 2020 . Gross margin increased due to the net impact of favorable product mix changes, lower handling costs as a percentage of revenue, and tariff mitigation by moving a significant amount of machine manufacturing fromChina toMalaysia . Subscriptions cost of revenue increased by$3.6 million , or 61%, to$9.6 million for the six months endedJune 30, 2021 from$6.0 million for the six months endedJune 30, 2020 . The increase was primarily driven by an increase in hosting fees to support our growing base of subscribers, an increase in amortization of capitalized software development costs, and an increase in digital content costs. Gross margin for Subscriptions increased to 90% for the six months endedJune 30, 2021 from 86% for the six months endedJune 30, 2020 . Gross margin increased due to lower amortization of capitalized software development costs and hosting fees as a percentage of subscriptions revenue. Accessories and Materials cost of revenue increased by$54.4 million , or 50%, to$162.3 million for the six months endedJune 30, 2021 from$107.9 million for the six months endedJune 30, 2020 . The increase was primarily driven by growth in Accessories and Materials units sold during the period, particularly growth in units of EasyPress and units ofMug Press , which launched inMarch 2021 . Gross margin for Accessories and Materials increased to 41% for the six months endedJune 30, 2021 from 35% for the six months endedJune 30, 2020 . Gross margin primarily increased due to lower costs for EasyPress, lower handling costs as a percentage of revenue and lower sales incentives as a percentage of revenue. Operating Expenses Research and Development Three Months Ended Six Months Ended June 30, Change June 30, Change 2021 2020 $ % 2021 2020 $ % (dollars in thousands) Research and development$ 20,606 $ 8,636 $ 11,970 139 %$ 36,304 $ 17,807 $ 18,497 104 % As a percentage of total revenue 6 % 4 % 6 % 5 % Research and development expenses increased by$12.0 million , or 139%, to$20.6 million for the three months endedJune 30, 2021 from$8.6 million for the three months endedJune 30, 2020 . The increase was primarily due to a$5.0 million increase in product development expenses for future products as well as increases in stock-based compensation expense and other personnel-related expenses due to headcount increasing during the period. Research and development expenses increased by$18.5 million , or 104%, to$36.3 million for the six months endedJune 30, 2021 from$17.8 million for the six months endedJune 30, 2020 . The increase was primarily due to a$6.1 million increase in product development expenses for future products as well as increases in stock-based compensation expense, personnel-related expenses due to headcount increasing during the period, and professional services expenses. 32 --------------------------------------------------------------------------------
Table of Contents
Sales and Marketing
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2021 2020 $ % 2021 2020 $ %
(dollars in thousands)
Sales and marketing $ 33,030 $ 13,437 $ 19,593 146 %
134 % As a percentage of total revenue 10 % 6 % 9 % 7 % Sales and marketing expenses increased by$19.6 million , or 146%, to$33.0 million for the three months endedJune 30, 2021 from$13.4 million for the three months endedJune 30, 2020 . The increase was primarily due to a$9.8 million increase in advertising and other marketing costs including to support the launch of Explore 3 and Maker 3 which launched inJune 2021 . Additionally, increases in payment processing fees, personnel-related expenses due to headcount increases, and stock-based compensation expense contributed to the increase. Sales and marketing expenses increased by$34.6 million , or 134%, to$60.5 million for the six months endedJune 30, 2021 from$25.9 million for the six months endedJune 30, 2020 . The increase was primarily due to a$15.4 million increase in advertising and other marketing costs including to support the launch of Explore 3 and Maker 3 which launched inJune 2021 . Additionally, increases in stock-based compensation expense, payment processing fees, and other personnel-related expenses due to headcount increases contributed to the increase. General and Administrative Three Months Ended Six Months Ended June 30, Change June 30, Change 2021 2020 $ % 2021 2020 $ % (dollars in thousands) General and administrative$ 12,507 $ 5,473 $ 7,034 129 %$ 24,926 $ 11,173 $ 13,753 123 % As a percentage of total revenue 4 % 2 % 4 % 3 % General and administrative expenses increased by$7.0 million , or 129%, to$12.5 million for the three months endedJune 30, 2021 from$5.5 million for the three months endedJune 30, 2020 . The increase was primarily due to a$2.1 million increase in personnel-related expenses due to headcount increasing during the period as well as increases in professional services and stock-based compensation. General and administrative expenses increased by$13.8 million , or 123%, to$24.9 million for the six months endedJune 30, 2021 from$11.2 million for the six months endedJune 30, 2020 . The increase was primarily due to a$4.2 million increase in professional services expenses for additional costs associated with our being a public company, as well as increases in stock-based compensation and other personnel-related expenses due to headcount increasing during the period. Other Income (Expense), Net Three Months Ended Six Months Ended June 30, Change June 30, Change 2021 2020 $ % 2021 2020 $ % (dollars in thousands) Other income (expense), net$ 14 $ (368) $ 382 (104) %$ (15) $ (942) $ 927 (98) % Other income (expense), net changed by$0.4 million , or 104%, to income of$14 thousand for the three months endedJune 30, 2021 from a net expense of$0.4 million for the three months endedJune 30, 2020 . The change was primarily due to a decrease in interest expense as we repaid all outstanding borrowings inSeptember 2020 and had no outstanding borrowings during the three months endedJune 30, 2021 . 33 -------------------------------------------------------------------------------- Table of Contents Other income (expense), net changed by$0.9 million , or 98%, to a net expense of$15 thousand for the six months endedJune 30, 2021 from a net expense of$0.9 million for the six months endedJune 30, 2020 . The decrease was primarily due to a decrease in interest expense as we repaid all outstanding borrowings inSeptember 2020 and had no outstanding borrowings during the six months endedJune 30, 2021 . Provision for Income Taxes Three Months Ended Six Months Ended June 30, Change June 30, Change 2021 2020 $ % 2021 2020 $ % (dollars in thousands) Provision for income taxes$ 15,040 $ 10,514 $ 4,526 43 %$ 30,257 $ 14,350 $ 15,907 111 % Provision for income taxes increased by$4.5 million , or 43%, to$15.0 million for the three months endedJune 30, 2021 from$10.5 million for the three months endedJune 30, 2020 . This represents an effective tax rate of 23.4% and 23.2% for the three months endedJune 30, 2021 and 2020, respectively. Provision for income taxes increased by$15.9 million , or 111%, to$30.3 million for the six months endedJune 30, 2021 from$14.4 million for the six months endedJune 30, 2020 . This represents an effective tax rate of 23.5% and 23.0% for the six months endedJune 30, 2021 and 2020, respectively. Liquidity and Capital Resources Our operations over all periods have been financed primarily through cash flow from operating activities and borrowings under our credit facilities. As ofJune 30, 2021 , we had cash and cash equivalents of$314.1 million . InMarch 2021 , we completed our IPO, in which we issued and sold an aggregate of 13,250,000 shares of our Class A common stock. The price per share to the public in the IPO was$20.00 . We received aggregate net proceeds of$242.7 million from the IPO, net of the underwriting discounts, commissions and offering costs of approximately$22.3 million . OnApril 28, 2021 , we sold an additional 968,815 shares of Class A common stock pursuant to the partial exercise of the underwriters' option to purchase additional shares which generated net proceeds of$18.0 million after deducting for underwriting discounts and commissions of$1.4 million . We believe our existing cash and cash equivalents, cash flow from operations and amounts available for borrowing under our New Credit Agreement will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending on research and development efforts and other growth initiatives, the expansion of sales and marketing activities, the timing of new product introductions, market acceptance of our products and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations, and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. There can be no assurances that we will be able to raise additional capital. The inability to raise capital would adversely affect our ability to achieve our business objectives. New Credit Facility InSeptember 2020 , we entered into the New Credit Agreement withJPMorgan Chase Bank, N.A .,Citibank, N.A . andOrigin Bank . The New Credit Agreement replaced our prior amended Credit Agreement withOrigin Bank . The New Credit Agreement provides for a three-year asset-based senior secured revolving credit facility of up to$150.0 million , maturing onSeptember 4, 2023 . In addition, during the term of the New Credit Agreement, we may increase the aggregate amount of the New Credit Facility by up to an additional$200.0 million , subject to customary conditions (for maximum aggregate lender commitments of up to$350.0 million ), subject to the satisfaction of certain conditions under the New Credit Agreement, including obtaining the consent of the administrative agent and each lender being added or increasing its commitment. The New Credit Facility may be used to issue letters of credit, and for other business purposes, including working capital needs. The New Credit Facility is a standard asset-based lending facility, meaning that notwithstanding the aggregate lender commitments, we can only borrow up to an amount equal to our borrowing base at any given time. For example, as ofJune 30, 2021 , we were able to borrow up to$150.0 million . Our borrowing base is 34 -------------------------------------------------------------------------------- Table of Contents determined according to certain percentages of eligible accounts receivable and eligible inventory (which may be valued at average cost, market value or net orderly liquidation value), subject to reserves determined by the administrative agent. At any time that our borrowing base is less than the aggregate lender commitments, we can only borrow revolving loans up to the amount of our borrowing base and not in the full amount of the aggregate lender commitments. Generally, borrowings under the New Credit Agreement will bear interest at the Adjusted LIBO rate or the ABR, plus, in each case, an applicable margin. The applicable margin will range from (a) with respect to borrowings bearing interest at the ABR, 1.50% to 2.00%, and (b) with respect to borrowings bearing interest at the ABR (i) if the "REVLIBOR30 Screen Rate" (as defined in the New Credit Agreement) is available for such period, 1.50% to 2.00%, or (ii) otherwise, 0.0% to 0.50%, in each case for the previous clauses (a) and (b), based on our "Fixed Charge Coverage Ratio" as defined in the New Credit Agreement. The New Credit Agreement contains financial covenants during the initial year of the agreement, requiring us to maintain a fixed charge coverage ratio of at least 1.0 to 1.0, measured monthly on a trailing 12-month basis. We are also subject to this covenant in future periods if the available commitments is less than the greater of$15.0 million and 10% of the total commitment made by all lenders. Management has determined that we were in compliance with all financial and non-financial debt covenants as ofJune 30, 2021 . Cash Flows Six Months Ended June 30, 2021 2020 (in thousands) Net cash flows (used in) provided by operating activities$ (53,995) $ 115,268 Net cash flows used in investing activities (16,124) (12,269) Net cash flows provided (used in) by financing activities 262,013 (36,468) Operating Activities Net cash used in operating activities of$54.0 million for the six months endedJune 30, 2021 was primarily due to net income of$98.5 million and non-cash adjustments of$29.6 million offset by a decrease in the net change of operating assets and liabilities of$182.1 million . Non-cash adjustments primarily consisted of stock-based compensation of$19.8 million , depreciation and amortization of$8.3 million , and inventory write-offs of$1.6 million . The decrease in the net change of operating assets and liabilities was primarily due to a$178.5 million increase in inventories and a$20.9 million decrease in accrued liabilities and other current assets and other non-current liabilities. These changes were offset primarily by a$28.8 million increase in accounts payable due to increased inventory purchases and a$4.1 million increase in deferred revenue. Net cash provided by operating activities of$115.3 million for the six months endedJune 30, 2020 was primarily due to net income of$47.9 million , non-cash adjustments of$12.6 million , and an increase in the net change of operating assets and liabilities of$54.8 million . Non-cash adjustments primarily consisted of depreciation and amortization of$6.7 million , inventory write-offs of$2.8 million , stock-based compensation of$2.8 million , and provision for doubtful accounts$0.3 million . The increase in the net change of operating assets and liabilities was primarily due to a$95.4 million decrease in inventory levels, a$27.3 million increase in accrued expenses and other current liabilities and other non-current liabilities due to increased expenditures to support general business growth, a$3.6 million increase in deferred revenue and a$0.6 million decrease in prepaid expenses and other current assets. These changes were offset primarily by a$57.2 million increase in accounts receivable and a$15.1 million decrease in accounts payable. Investing Activities Cash used in investing activities for the six months endedJune 30, 2021 was$16.1 million , all of which related to property and equipment acquisition or investment, software development and investment and product research and development. Cash used in investing activities for the six months endedJune 30, 2020 was$12.3 million , all of which related to property and equipment acquisition or investment, software development and investment and product research and development. 35 -------------------------------------------------------------------------------- Table of Contents Financing Activities Net cash provided by financing activities of$262.0 million for the six months endedJune 30, 2021 was primarily related to proceeds from our IPO, net of underwriter discounts and offering costs of$262.0 million . Net cash used in financing activities of$36.4 million for the six months endedJune 30, 2020 was primarily related to payment on the line of credit of$32.6 million , payments on the term loan of$2.5 million and repurchases of compensatory units of$2.4 million , partially offset by proceeds from capital contributions of$1.1 million . Contractual Obligations and Other Commitments There were no material changes in our contractual obligations and other commitments during the six months endedJune 30, 2021 from the contractual obligations and other commitments disclosed in the Prospectus. See Note 9 of the notes to our interim condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding contractual obligations and other commitments. Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as ofJune 30, 2021 . Critical Accounting Policies Our management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance withUnited States generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The critical accounting policies that reflect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements include those described in Note 2 of the notes to our condensed consolidated financial statements in the section titled "-Summary of Significant Accounting Policies" in Part I, Item 1 of this Quarterly Report on Form 10-Q and in the Prospectus. 36
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