Corsair Gaming, Inc. 10-Q

Item 1. Financial Statements (Unaudited). Corsair Gaming, Inc. Condensed Combined Consolidated Statements of Operations (Unaudited, in thousands, except per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net revenue $ 457,103 $ 284,372 $ 1,146,028 $ 770,619 Cost of revenue 329,159 224,145 834,398 616,785 Gross profit 127,944 60,227 311,630 153,834 Operating expenses: Sales, general and administrative 65,321 39,811 175,877 115,992 Product development 12,902 9,454 36,285 28,353 Total operating expenses 78,223 49,265 212,162 144,345 Operating income 49,721 10,962 99,468 9,489 Other (expense) income: Interest expense (10,170 ) (9,119 ) (29,116 ) (27,063 ) Other (expense) income, net 23 (399 ) (29 ) (1,477 ) Total other expense, net (10,147 ) (9,518 ) (29,145 ) (28,540 ) Income (loss) before income taxes 39,574 1,444 70,323 (19,051 ) Income tax (expense) benefit (3,217 ) 75 (10,149 ) 4,645 Net income (loss) $ 36,357 $ 1,519 $ 60,174 $ (14,406 ) Net income (loss) per share Basic $ 0.43 $ 0.02 $ 0.71 $ (0.19 ) Diluted $ 0.40 $ 0.02 $ 0.69 $ (0.19 ) Weighted-average shares used to compute net income (loss) per share Basic 84,871 75,939 84,352 75,928 Diluted 90,084 77,884 87,499 75,928 The accompanying notes are an integral part of these condensed combined consolidated financial statements 2 Table of Contents Corsair Gaming, Inc. Condensed Combined Consolidated Statements of Comprehensive Income (Loss) (Unaudited, in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net income (loss) $ 36,357 $ 1,519 $ 60,174 $ (14,406 ) Other comprehensive gain (loss): Foreign currency translation adjustments, net of zero tax 2,378 (54 ) (1,217 ) (52 ) Unrealized foreign exchange gain (loss) from long-term intercompany loans, net of tax benefit (expense) of $(128) and $134 for the three months ended September 30, 2020 and 2019, respectively and $(24) and $139 for the nine months ended September 30, 2020 and 2019, respectively 691 (682 ) 580 (704 ) Comprehensive income (loss) $ 39,426 $ 783 $ 59,537 $ (15,162 ) The accompanying notes are an integral part of these condensed combined consolidated financial statements 3 Table of Contents Corsair Gaming, Inc. Condensed Combined Consolidated Balance Sheets (Unaudited, in thousands, except per share amounts) September 30, 2020 December 31, 2019 Assets Current assets: Cash $ 116,185 $ 48,165 Restricted cash 3,726 3,552 Accounts receivable, net 259,542 202,334 Inventories 210,151 151,063 Prepaid expenses and other current assets 38,014 24,696 Total current assets 627,618 429,810 Property and equipment, net 15,404 15,365 Goodwill 311,573 312,750 Intangible assets, net 265,446 291,027 Restricted cash, noncurrent 230 230 Other assets 35,449 10,536 TOTAL ASSETS $ 1,255,720 $ 1,059,718 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 274,771 $ 182,025 Current portion of debt, net — 2,364 Other liabilities and accrued expenses 169,586 115,541 Total current liabilities 444,357 299,930 Debt, net including related party balance of nil and $5,779 as of September 30, 2020 and December 31, 2019, respectively 370,090 503,448 Deferred tax liabilities 30,655 33,820 Other liabilities, noncurrent 22,066 5,745 TOTAL LIABILITIES 867,168 842,943 Commitments and Contingencies (Note 9) Stockholders’ Equity: Preferred stock, $0.0001 par value: 5,000 shares authorized, nil and nil shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively — — Common stock, $0.0001 par value: 300,000 shares authorized, 91,914 and 84,079 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively 9 8 Additional paid-in capital 437,207 324,968 Accumulated deficit (45,856 ) (106,030 ) Accumulated other comprehensive loss (2,808 ) (2,171 ) Total Stockholders’ Equity 388,552 216,775 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 1,255,720 $ 1,059,718 The accompanying notes are an integral part of these condensed combined consolidated financial statements 4 Table of Contents Corsair Gaming, Inc. Condensed Combined Consolidated Statements of Stockholders’ Equity (Unaudited, in thousands) Three months ended September 30, 2020 Common Stock Additional Paid-in Retained Earnings (Accumulated Accumulated Other Comprehensive Total Stockholders’ Shares Amount Capital Deficit) Loss Equity Balance as of June 30, 2020 84,349 $ 8 $ 328,588 $ (82,213 ) $ (5,877 ) $ 240,506 Issuance of common stock for stock option exercises 56 — 259 — — 259 Issuance of common stock upon vesting of restricted stock units 9 — — — — — Issuance of common stock upon initial public offering, net of underwriting discounts and commissions and other offering costs 7,500 1 106,729 — — 106,730 Stock-based compensation — — 1,631 — — 1,631 Other comprehensive income — — — — 3,069 3,069 Net income — — — 36,357 — 36,357 Balance as of September 30, 2020 91,914 $ 9 $ 437,207 $ (45,856 ) $ (2,808 ) $ 388,552 Three months ended September 30, 2019 Common Stock Additional Paid-in Retained Earnings (Accumulated Accumulated Other Comprehensive Total Stockholders’ Shares Amount Capital Deficit) Loss Equity Balance as of June 30, 2019 75,815 $ 8 $ 258,954 $ (113,046 ) $ (2,403 ) $ 143,513 Issuance of common stock in relation to acquisitions 267 — 2,000 — — 2,000 Issuance of common stock for stock option exercises 7 — 53 — — 53 Stock-based compensation — — 867 — — 867 Other comprehensive loss — — — — (736 ) (736 ) Net income — — — 1,519 — 1,519 Balance as of September 30, 2019 76,089 $ 8 $ 261,874 $ (111,527 ) $ (3,139 ) $ 147,216 Nine months ended September 30, 2020 Common Stock Additional Paid-in Retained Earnings (Accumulated Accumulated Other Comprehensive Total Stockholders’ Shares Amount Capital Deficit) Loss Equity Balance as of December 31, 2019 84,079 $ 8 $ 324,968 $ (106,030 ) $ (2,171 ) $ 216,775 Issuance of common stock to directors 20 — — — — — Issuance of common stock for stock option exercises 306 — 1,224 — — 1,224 Issuance of common stock upon vesting of restricted stock units 9 — — — — — Issuance of common stock upon initial public offering, net of underwriting discounts and commissions and other offering costs 7,500 1 106,729 — — 106,730 Stock-based compensation — — 4,286 — — 4,286 Other comprehensive loss — — — — (637 ) (637 ) Net income — — — 60,174 — 60,174 Balance as of September 30, 2020 91,914 $ 9 $ 437,207 $ (45,856 ) $ (2,808 ) $ 388,552 5 Table of Contents Nine months ended September 30, 2019 Common Stock Additional Paid-in Retained Earnings (Accumulated Accumulated Other Comprehensive Total Stockholders’ Shares Amount Capital Deficit) Loss Equity Balance as of December 31, 2018 75,896 $ 8 $ 258,238 $ (93,161 ) $ (2,383 ) $ 162,702 Cumulative effect of adoption of new accounting standard — — — (3,686 ) — (3,686 ) Issuance of common stock in relation to acquisitions 267 — 2,000 — — 2,000 Issuance of common stock for stock option exercises 14 — 80 — — 80 Repurchase of common stock (Note 11) (88 ) — (1,257 ) (274 ) — (1,531 ) Stock-based compensation — — 2,813 — — 2,813 Other comprehensive loss — — — — (756 ) (756 ) Net loss — — — (14,406 ) — (14,406 ) Balance as of September 30, 2019 76,089 $ 8 $ 261,874 $ (111,527 ) $ (3,139 ) $ 147,216 The accompanying notes are an integral part of these condensed combined consolidated financial statements 6 Table of Contents Corsair Gaming, Inc. Condensed Combined Consolidated Statements of Cash Flows (Unaudited, in thousands) Nine Months Ended September 30, 2020 2019 Cash flows from operating activities: Net income (loss) $ 60,174 $ (14,406 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Stock-based compensation 4,286 2,813 Depreciation 6,706 5,448 Amortization of intangible assets 25,344 23,551 Debt issuance costs amortization 1,990 2,281 Loss on debt extinguishment 3,256 — Deferred income taxes (6,892 ) (7,257 ) Other 1,070 598 Changes in operating assets and liabilities: Accounts receivable (58,067 ) (10,573 ) Inventories (60,886 ) (13,021 ) Prepaid expenses and other assets (20,431 ) (3,312 ) Accounts payable 92,772 2,065 Other liabilities and accrued expenses 51,002 12,947 Net cash provided by operating activities 100,324 1,134 Cash flows from investing activities: Acquisition of business, net of cash acquired (836 ) (4,846 ) Payment of deferred consideration — (10,300 ) Purchase of property and equipment (5,072 ) (7,003 ) Net cash used in investing activities (5,908 ) (22,149 ) Cash flows from financing activities: Repayment of debt (140,394 ) (2,775 ) Payment of debt issuance costs (194 ) (150 ) Repayment of line of credit, net — 8,700 Proceeds from initial public offering and private placement, net of underwriting discounts and commissions 118,575 — Payment of other offering costs (5,582 ) (108 ) Repurchase of common stock — (569 ) Proceeds from exercise of stock options 1,224 80 Net cash provided by (used in) financing activities (26,371 ) 5,178 Effect of exchange rate changes on cash 149 46 Net increase (decrease) in cash and restricted cash 68,194 (15,791 ) Cash and restricted cash at the beginning of the period 51,947 27,920 Cash and restricted cash at the end of the period $ 120,141 $ 12,129 Supplemental cash flow disclosures: Cash paid for interest $ 23,397 $ 24,799 Cash paid for income taxes 7,276 372 Supplemental schedule of non-cash investing and financing activities: Equipment purchased and unpaid at period end $ 2,331 $ 1,353 Issuance of common stock relating to business acquisitions — 2,000 Deferred purchase consideration (Note 5) 145 6,003 Measurement period adjustment relating to business acquisitions 1,834 — Forward contract on common stock repurchase — 962 Deferred offering costs included in accounts payable and accrued expenses 2,710 2,346 The accompanying notes are an integral part of these condensed combined consolidated financial statements 7 Table of Contents Corsair Gaming, Inc. Notes to Condensed Combined Consolidated Financial Statements (Unaudited) 1. Description of Business and Basis of Presentation Description of Business Corsair Gaming, Inc., a Delaware corporation, together with its subsidiaries (collectively, “Corsair” the “Company”, “we”, “us”, or “our”) , is a global provider and innovator of high-performance gear for gamers, streamers and content creators. Corsair is organized into two reportable segments: • Gamer and creator peripherals. Includes our high-performance gaming keyboards, mice, headsets and controllers, as well as our streaming gear including capture cards, studio accessories, and microphones, among others. • Gaming components and systems. Includes our high-performance power supply units, or PSUs, cooling solutions, computer cases, and DRAM modules, as well as high-end prebuilt and custom-built gaming PCs, among others. Reorganization On September 15, 2020, a corporate reorganization (the “Reorganization”) was consummated whereby we now own directly and indirectly all of the operating subsidiaries and assets that were formerly owned by Corsair Group (Cayman), LP (the “Parent”) and Corsair Group (US), LLC, a minority interest holder. The Parent is a limited partnership domiciled in the Cayman Islands. The Parent and Corsair Group (US), LLC are under common control of the affiliates of EagleTree Capital, LP, a private equity investment firm. Prior to the Reorganization, the North American and international operations of Corsair were conducted by certain operating subsidiaries held by separate entities, Corsair Gaming, Inc. and Corsair Holdings (Lux) S.à r.l. (or “Corsair Luxco”) , respectively, each of which was substantially owned by and under common control of the Parent. The Reorganization was comprised of a series of steps as set forth below: • The Parent acquired the minority interest held by Corsair Group (US), LLC in exchange for its own units. • Corsair Gaming, Inc. acquired all of the outstanding capital stock of Corsair Luxco from the Parent in exchange for its own stock. • In order for management and certain other partnership unit holders of the Parent to hold Corsair’s common stock directly, we entered into exchange agreements with such holders to exchange the Parent’s units for shares of Corsair’s common stock on a pro rata basis relative to their holdings in the Parent prior to the Reorganization. • The Parent’s 2017 Equity Incentive Program was assumed by Corsair and all of the outstanding options to acquire units under the Parent’s 2017 Equity Incentive Program were converted into options to purchase Corsair’s common stock on a pro rata basis with an adjusted exercise price to reflect the assumption. • We implemented a 1-for-28,693.596843964 stock split resulting in there being 84,405,366 shares of Corsair’s common stock outstanding and 10,029,388 options outstanding to purchase Corsair’s common stock as of the date of the Reorganization. As all legal entities included in the Reorganization are under common control of the Parent, all steps of the Reorganization were accounted for as a combination of entities under common control. Unless otherwise indicated, the accompanying condensed combined consolidated financial statements and related notes that reference Corsair’s capitalization, including other matters relating to equity, share, and per share information, have been retroactively revised to reflect the Reorganization for all periods presented. Accordingly, references in the footnotes related to transactions entered into by the Parent involving the Parent’s units or options to purchase the Parent’s units have been revised as common share equivalents of Corsair and options to purchase shares of Corsair’s common stock using the ratio of Corsair’s issued and outstanding shares immediately post-Reorganization to the Parent’s issued and outstanding units immediately post-Reorganization but prior to the unit exchanges described above. 8 Table of Contents Initial Public Offering On September 25, 2020, we completed our initial public offering (IPO) . In connection with the IPO, we sold 7,500,000 shares of common stock at $17.00 per share, resulting in proceeds of $118.6 million, net of the underwriting discounts and commissions and before offering costs. In connection with the IPO, certain stockholders sold 6,500,000 shares of common stock at $17.00 per share. Subsequent to the IPO, certain stockholders further sold 1,135,375 shares pursuant to the underwriters’ exercise of their option to purchase additional shares. We did not receive any of the proceeds from the sale of shares by the selling stockholders. Deferred offering costs consist primarily of accounting, legal, and other fees related to the IPO. Prior to the IPO, all deferred offering costs were capitalized in other assets in the condensed combined consolidated balance sheets. After the IPO, $11.8 million of deferred offering costs were reclassified into stockholders’ equity as a reduction of the IPO proceeds in the condensed combined consolidated balance sheets. The amount of deferred offering costs capitalized as of December 31, 2019 was $5.8 million. Basis of Presentation Our interim condensed combined consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ( “ U.S. GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The condensed combined consolidated balance sheet as of December 31, 2019, included herein, was derived from the audited consolidated financial statements as of that date. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed combined or omitted pursuant to such rules and regulations. Therefore, these interim condensed combined consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the final prospectus dated and filed on September 24, 2020 (the “Prospectus”) with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended , (the “Securities Act”) . The interim condensed combined consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and in management’s opinion, include all adjustments, which consist of only normal recurring adjustments necessary for the fair statement of our condensed combined consolidated balance sheet as of September 30, 2020 and our results of operations for the three and nine months ended September 30, 2020 and 2019. The results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results expected for the current fiscal year or any other future periods. Except as described elsewhere to the condensed combined consolidated financial statements, there have been no material changes to our significant accounting policies as described in Note 2 “Summary of Significant Accounting Policies” in the Notes to the consolidated financial statements in our Prospectus. Principles of Consolidation The accompanying condensed combined consolidated financial statements include the accounts of Corsair and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. 2. Summary of Significant Accounting Policies Use of Estimates The preparation of condensed combined consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed combined consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to, the valuation of intangible assets, accounts receivable, sales return reserves, reserves for customer incentives, warranty reserves, inventory, derivative instruments, stock-based compensation, deferred income tax, and common stock (prior to the IPO completed in September 2020). These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. 9 Table of Contents Risks and Uncertainties related to the COVID-19 Pandemic Due to the COVID-19 pandemic, there has been and will continue to be uncertainty and disruption in the global economy and financial markets. Since early 2020, we have experienced some business disruptions due to COVID-19 including the stoppage in our factories in early 2020, disruption in our supply chain and increased distribution costs, which led to increase in operating costs. This negative financial impact has been offset by strong revenue growth year-over-year partly due to an increase in demand for our gear as more people in more countries are under shelter-in-place restrictions. The increase in demand has continued into the third quarter of 2020 and we expect it to continue through the remainder of the year as the COVID-19 pandemic continues. However, as the global economic activity slows down, the demand for our gear could decline despite these trends. The extent to which the COVID-19 outbreak ultimately impacts our business, sales, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience significant impacts to our business as a result of its global economic impact, including any economic downturn or recession that has occurred or may occur in the future. As of the date of issuance of these condensed combined consolidated financial statements, we are not aware of any specific event or circumstance that would require updates to our estimates and judgments or revisions due to COVID-19 to the carrying value of our assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed combined consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the condensed combined consolidated financial statements. Advertising Costs Advertising costs are expensed as incurred and are included as a component of sales, general and administrative expense in the condensed combined consolidated statements of operations. Advertising and promotion expenses were $4.1 million and $2.6 million for the three months ended September 30, 2020 and 2019, respectively, and $12.3 million and $7.4 million for nine months ended September 30, 2020 and 2019, respectively. Nonmonetary Transactions We have sales and repurchases of inventory with our manufacturers, which are accounted for as nonmonetary transactions. Upon sale of raw materials to the manufacturer, for the inventories on-hand with the manufacturer where there is an anticipated reciprocal purchase by Corsair, we will record prepaid inventories and accrued liabilities as a nonmonetary transaction. When the reciprocal purchase of inventory from the manufacturer is transacted, a payable to the manufacturer at the repurchase price will be recorded, which replaces the initial nonmonetary transaction and inventory will be reflected at carrying value, which includes the costs for the raw materials and the incremental costs charged by the manufacturer for additional work performed on the inventory. As of September 30, 2020, we recognized $2.1 million prepaid inventory and $2.4 million accrued liabilities in the condensed combined consolidated balance sheet for such nonmonetary transactions with our manufacturers. Because the transactions are nonmonetary, they have not been included in the condensed combined consolidated statements of cash flows pursuant to ASC 230, Statement of Cash Flows . Recently Adopted Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which was further updated and clarified by the FASB through issuance of additional related ASUs. ASU 2016-13 replaces the incurred-loss impairment methodology and requires immediate recognition of estimated credit losses expected to occur for most financial assets, including trade receivables. We adopted this standard effective January 1, 2020 using a modified retrospective approach. The adoption of this new standard did not have a material impact on our condensed combined consolidated financial statements. In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment . The ASU simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. The second step measures goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the new guidance, a company will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. We adopted this standard effective January 1, 2020. The adoption of this new standard did not have a material impact on our condensed combined consolidated financial statements. 10 Table of Contents In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) , to modify certain disclosure requirements on fair value measurements in Topic 820. We adopted this standard effective January 1, 2020. The adoption of this new standard did not have a material impact on our condensed combined consolidated financial state ments. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) , and subsequent updates (collectively, referred to as Accounting Standard Codification 842 or Topic 842). Topic 842 requires a lessee to recognize right of use ( “ROU” ) assets and lease liabilities for a lease with terms longer than 12 months on the consolidated balance sheets and to disclose key information related to the leasing arrangements. On January 1, 2020, we adopted Topic 842 using the modified retrospective method, applying Topic 842 to all leases existing at the date of initial application. We elected to use the effective date as the date of initial application. Consequently, prior period balances and disclosures have not been restated. We elected the package of transitional practical expedients, which among other provisions, allows us to carry forward prior conclusions about lease identification and classification. In addition, for operating leases, we elected to account for lease and non-lease components as a single lease component. We also made an accounting policy election not to apply the recognition guidance of Topic 842 to record all leases that, at the lease commencement date, have a lease term of 12 months or less on the consolidated balance sheet. The adoption of Topic 842 had a material impact to our condensed combined consolidated balance sheet but did not have an impact on our condensed combined consolidated statement of operations or cash flows. As a result of adopting Topic 842 as of January 1, 2020, we recognized lease liabilities of $17.9 million and corresponding ROU assets of $17.7 million. See Note 16, Leases, for additional information. Accounting Pronouncements Issued but Not Yet Adopted In December 2019, the FASB issued ASU No. 2019-12 , Income Taxes (Topic 740) , to simplify various aspects related to the accounting for income taxes. The new guidance is effective for us beginning in year 2021. We are in the process of evaluating the effects of this new guidance on our condensed combined consolidated financial statements. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) , to provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The new guidance is effective, at our election, beginning March 12, 2020 through December 31, 2022. Our term loan and revolving line of credit have interest payments that are correlated to a reference rate, and we are currently evaluating the impact of adopting this guidance and the potential effects it could have on our condensed combined consolidated financial statements. 3. Fair Value Measurement U.S. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy is broken down into the following three levels of inputs that may be used to measure fair value: Level 1 —Quoted prices are available in active markets for identical assets or liabilities as of the measurement date. Level 2 —Pricing inputs are other than quoted prices in active market, which are either directly or indirectly observable as of the report date. The nature of these securities includes investments for which quoted prices are available but traded less frequently and investments that are fair valued using other securities, the parameters of which can be directly observed. Level 3 —Securities that have little to no pricing observability as of the report date. These securities are measured using management’s best estimate of fair value, where the inputs into the determination of fair value are not observable and require significant management judgment or estimation. 11 Table of Contents The following tables summarize our financial assets and liabilities that were measured at fair value on a recurring basis, and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value: September 30, 2020 (Level 1) (Level 2) (Level 3) Total (in thousands) Assets: Interest rate cap contract (4) $ — $ 45 $ — $ 45 Foreign currency forward contracts (4) — 88 — 88 Total assets $ — $ 133 $ — $ 133 Liabilities: Contingent consideration in connection with a business acquisition—Origin (1) $ — $ — $ 2,078 $ 2,078 Contingent consideration in connection with an immaterial business acquisition — — 9 $ 9 Deferred cash consideration in connection with a business acquisition—SCUF (2) — — 1,638 1,638 Deferred cash consideration in connection with a business acquisition—Origin (3) — — 1,481 1,481 Foreign currency forward contracts (4) — 378 — 378 Total liabilities $ — $ 378 $ 5,206 $ 5,584 December 31, 2019 (Level 1) (Level 2) (Level 3) Total (In thousands) Liabilities: Contingent consideration in connection with a business acquisition—Origin (1) $ — $ — $ 3,964 $ 3,964 Deferred cash consideration in connection with a business acquisition—SCUF (2) — — 1,638 1,638 Deferred cash consideration in connection with a business acquisition—Origin (3) — — 1,411 1,411 Foreign currency forward contracts (4) — 335 — 335 Total liabilities $ — $ 335 $ 7,013 $ 7,348 (1) The fair value of the Origin earn-out liability (Refer to Note 5 for further details on this acquisition) is estimated using a Monte Carlo Simulation, a simulation-based measurement technique with significant inputs that are not observable in the market and thus represents a level 3 fair value measurement. The significant inputs in the fair value measurement not supported by market activity included the expected future standalone EBITDA growth of Origin during the earn-out period, appropriately discounted by a risk adjustment factor, considering the uncertainties associated with the obligation, its associated volatility, and calculated in accordance with the terms of the Unit Purchase Agreement for this acquisition. Significant changes of these significant inputs, in isolation or in combination, would result in a material change in fair value estimates. The interrelationship between these inputs is not considered significant. The fair value of the Origin earn-out liability is remeasured at every reporting period and the change in fair value is recorded to sales, general and administrative expenses. During the year ended December 31, 2019, a $0.6 million credit to sales, general and administrative expenses was recorded resulting from a reduction in the fair value remeasurement. The earn-out liability of $2.4 million contingent upon Origin’s 2019 standalone EBITDA was fully paid in April 2020. During the nine months ended September 30, 2020, there was no material change in the fair value of the remaining earn-out liability that is contingent upon Origin’s 2020 standalone EBITDA results. The Origin contingent consideration balance as of September 30, 2020 also included $0.3 million related to the finalization of pre-acquisition sales tax liabilities owed to Origin’s sellers according to the terms of the Origin Unit Purchase Agreement and this balance will be settled together with the Origin 2020 earn-out liability in 2021. (2) The fair value of the SCUF contingent consideration was determined based on the estimates of acquired tax benefits owed to SCUF’s sellers according to the merger agreement. These estimates involved inputs unobservable in the markets and thus represent a level 3 fair value measurement. The measurement of this liability was provisional at the SCUF Acquisition Date (as defined in Note 5) and as of September 30, 2020 and will be finalized in the fourth quarter of 2020. The amount is subject to update upon filing the tax returns for 2019 through 2021. Refer to Note 5 for further details on this acquisition. (3) The fair value of Origin’s deferred cash consideration is determined at the Origin acquisition date by using a discount rate of 6.5%. This discount rate approximated our borrowing rate under the revolving line of credit and represented a Level 3 input under the fair value hierarchy. (4) The fair values of the forward contracts and interest rate cap contract are based on similar exchange traded derivatives and the related asset or liability is, therefore, included within Level 2 of the fair value hierarchy. 12 Table of Contents 4. Derivative Financial Instruments We are exposed to foreign currency risk relating to our ongoing business operations and use derivative financial instruments, principally foreign currency forward contracts, to reduce the risk. The notional principal amount of outstanding foreign exchange forward contracts was $21.5 million and $18.3 million as of September 30, 2020 and December 31, 2019, respectively, none of which have been designated as hedging instruments during the periods presented. The fair value gain (loss) recognized in other (expense) income, net in relation to these derivative instruments was $(1.1) million and $0.9 million for the three months ended September 30, 2020 and 2019, respectively, and $(1.2) million and $0.5 million for the nine months ended September 30, 2020 and 2019, respectively. In April 2020, we purchased interest rate cap contracts for $0.5 million with a notional amount of $465 million to manage our exposure to interest rate movements on our variable rate debt when 3-month LIBOR exceeds 1.0%. Refer to Note 8 for further information relating to the interest rates on our debts. The interest rate cap contracts mature on June 30, 2022 and none of which have been designated as hedging instruments. Accordingly, we recognized $55 thousand and $0.5 million net loss for the change in fair value of the interest rate contracts in interest expense for the three and nine months ended September 30, 2020, respectively. 5. Business Combinations 2020 Immaterial Acquisition On August 31, 2020, we completed an acquisition that is not material to our consolidated financial position, results of operations or cash flows. We believe that the acquisition will enhance the product offering in our gamer and creator peripherals segment. The purchase consideration was $1.0 million and consisted of $0.8 million of cash and $0.2 million of additional cash earn-out based on the achievement of certain net revenue targets of the acquiree from the acquisition date through December 31, 2021. We acquired intangibles of $0.7 million, goodwill of $0.2 million and accounts receivable of $0.1 million. These intangibles will be amortized over a weighted-average estimated useful life of 3.1 years. SCUF Acquisition On December 19, 2019 (the “SCUF Acquisition Closing Date”) , one of our subsidiaries entered into an Agreement and Plan of Merger with Scuf Holdings, Inc. and subsidiaries (collectively “SCUF”) and acquired 100% of their equity interests (the “SCUF Acquisition”) . SCUF, headquartered in Georgia, U.S., specializes in delivering high-performance accessories and customized gaming controllers for consoles and PCs used by top professionals as well as casual gamers. We believe that the SCUF Acquisition will enhance our product and service offerings to both console and PC gamers. Because the acquired companies met the definition of a business, the SCUF Acquisition has been accounted for as a business combination using the acquisition method of accounting. Subsequent to the SCUF Acquisition Closing Date, we recorded measurement period adjustments which reduced purchase price, inventories and goodwill by $1.5 million, $0.5 million and $1.0 million, respectively, and accordingly, the SCUF Acquisition total adjusted purchase consideration was $136.3 million. The SCUF Acquisition purchase consideration consisted of (i) $128.2 million cash consideration (including the payment of SCUF’s transaction costs and debt on behalf of SCUF), (ii) $8.0 million equity consideration (an issuance of approximately 2.1 million units of the Parent which was equivalent to approximately 1.1 million shares of Corsair common stock immediately post-Reorganization and prior to the exchange agreements described in Note 1), (iii) $1.6 million estimated contingent cash consideration relating to the our expected utilization of the acquired SCUF tax liabilities or tax benefits relating to pre-acquisition SCUF results over the next 4 years of tax filings, (iv) additional cash earn-out based on the achievement of certain SCUF standalone EBITDA targets for 2019 and the ability of SCUF to renew a licensing agreement with a certain vendor, and these contingent cash earn-outs were determined to have zero value based on the assessment of the outcome of these contingent events on the SCUF Acquisition Closing Date, and (v) net of $1.5 million contingent cash consideration paid on the SCUF Acquisition Closing Date that is expected to be returned by the sellers to us to fund an incentive payment to certain ex-SCUF employees who joined Corsair and are required to remain employed through a contractual service period. The purchase price is subject to further adjustments of certain net working capital items within 12 months of the SCUF Acquisition Closing Date. 13 Table of Contents Preliminary purchase price allocation The following table summarizes the preliminary allocation of the purchase consideration to the estimated fair value of the assets acquired and liabilities assumed at the SCUF Acquisition Closing Date. The allocation of the purchase price was based upon a preliminary valuation, and the estimates and assumptions are subject to change within the measurement period. The primary areas of the purchase price allocation that are not yet finalized consist of federal and state income tax and other tax considerations and the valuation of identifiable intangible assets acquired. We will continue to reflect measurement period adjustments to purchase price allocation, if any, in the period in which the adjustments are recognized. Final determination of the fair values may result in adjustments to the values presented in the following table: (In thousands) Assets acquired: Cash $ 6,947 Accounts receivable 4,587 Inventories 12,800 Prepaid and other assets 1,377 Identifiable intangible assets 71,890 Property and equipment 2,927 Other assets 40 Liabilities assumed: Accounts payable (9,182 ) Sales tax payable (5,533 ) Deferred revenue (3,752 ) Other liabilities and accrued expenses (8,416 ) Deferred tax liabilities (10,015 ) Net identifiable net assets acquired $ 63,670 Goodwill 72,642 Net assets acquired $ 136,312 The excess of the purchase price over the preliminary net tangible assets and preliminary intangible assets was recorded as goodwill. Goodwill of $72.6 million, derived from the SCUF Acquisition, is primarily related to the value of the acquired workforce and the ability to design and generate revenue from future technology and customers. The goodwill and identifiable intangible assets are not deductible for tax purposes. The fair value of the inventory acquired was estimated using the expected selling price of the inventory, then deducting direct selling expenses and a reasonable allocation of profit to a likely buyer. The difference between the fair value of the inventories and the amount recorded by SCUF immediately before the acquisition date is $1.5 million, which is recognized in cost of revenue in the condensed combined consolidated statements of operations upon the sale of the acquired inventory. The following table summarizes the components of identifiable intangible assets acquired and their estimated useful lives as of the SCUF Acquisition Closing Date: Fair Value Weighted Average Useful Life (In thousands) (In years) Patents $ 30,500 8 Developed technology 18,600 6 Customer Relationships 590 5 Trade name 22,200 15 Total identifiable intangible assets $ 71,890 Intangible assets acquired as a result of the SCUF Acquisition are being amortized over their estimated useful lives using the straight-line method of amortization, which reflect the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. Amortization of patent and developed technology are included in cost of revenue and product development expense, respectively. Amortization of customer relationships and trade names are included in sales, general and administrative expense in the condensed combined consolidated statements of operations. 14 Table of Contents Origin Acquisition On July 22, 2019 (the “Origin Closing Date”) , one of our subsidiaries acquired all the equity interests in Origin PC Corporation (“Origin” and such acquisition, the “Origin Acquisition”) . Origin, based in Florida, U.S., specializes in delivering hand-built, personalized PCs. We believe the integration of Origin’s expertise in personalized custom gaming systems and Corsair’s strength in performance PC hardware and the iCUE software ecosystems enhances and expands our product and service offerings to PC gamers. Origin met the definition of a business, and therefore this acquisition is accounted for as a business combination. Subsequent to the Origin Closing Date, we recorded measurement period adjustments which increased the purchase price by $0.2 million and reduced other liabilities and accrued expenses by $0.3 million and goodwill by $0.1 million, and accordingly, the Origin Acquisition total adjusted purchase consideration was $13.8 million. The Origin Acquisition purchase consideration consisted of (i) $5.5 million cash consideration (including the payment of Origin’s transaction costs and debt on behalf of Origin), (ii) $2.0 million equity consideration provided by Corsair, which was immediately exchanged for approximately 0.5 million units of the Parent, which was equivalent to approximately 0.2 million shares of Corsair common stock immediately post-Reorganization and prior to the exchange agreements described in Note 1), (iii) $1.4 million deferred cash consideration payable 18 months after closing, not contingent on any future conditions, (iv) $4.6 million of additional cash earn-out based on the achievement of certain Origin standalone EBITDA targets for 2019 and 2020, and (v) $0.3 million estimated contingent cash consideration relating to the finalization of pre-acquisition sales tax liabilities owed to Origin’s sellers according to the terms of the Origin Unit Purchase Agreement. The final allocation of the Origin Acquisition purchase consideration to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date is as follows: (In thousands) Assets acquired: Cash, net of cash acquired $ 376 Accounts receivable 1,379 Inventories 4,445 Prepaid and other assets 309 Identifiable intangible assets (customer relationship with estimated 6 years of useful life) 1,000 Property and equipment 140 Liabilities assumed: Accounts payable (2,670 ) Other liabilities and accrued expenses (3,033 ) Other liabilities, noncurrent (447 ) Net identifiable assets acquired 1,499 Goodwill 12,270 Net assets acquired $ 13,769 The goodwill and identifiable intangible assets are deductible for tax purposes. The estimated fair value of Origin’s contingent earn-out decreased from $4.6 million at the Origin Closing Date to $4.0 million at December 31, 2019, primarily resulting from Origin’s lower-than-expected EBITDA for the projected 2020 earn-out period. The reduction in fair value of $0.6 million was recorded as a reduction to sales and general administrative expenses in the condensed combined consolidated statement of operations in the fourth quarter of 2019. The earn-out liability of $2.4 million contingent upon Origin’s 2019 standalone EBITDA was fully paid in April 2020. During the nine months ended September 30, 2020, there was no material change in the fair value of the remaining earn-out liability that is contingent upon Origin’s 2020 standalone EBITDA results. Acquisition-related costs We incurred acquisition-related costs of approximately $0.3 million and $1.1 million for the three months ended September 30, 2020 and 2019, respectively, and $0.8 million and $1.4 million for the nine months ended September 30, 2020 and 2019, respectively, and these costs are recorded in sales, general and administrative expenses in the condensed combined consolidated statement of operations. 15 Table of Contents Unaudited Pro Forma Financial Information The following unaudited pro forma financial information combines the unaudited condensed combined consolidated results of operations as if the SCUF Acquisition had occurred as of January 1, 2019: Three months Ended September 30, 2019 Nine months Ended September 30, 2019 (in thousands) Net revenue $ 299,130 $ 815,432 Net loss (3,101 ) (25,040 ) The unaudited pro forma adjustments primarily include amortization for intangible assets acquired, the purchase accounting effect on contract liabilities assumed and inventory acquired, acquisition-related costs and interest expense related to financing arrangements. The unaudited pro forma condensed combined consolidated information is provided for informational purposes only and is not indicative of the results of operations that would have been achieved if the SCUF Acquisition and any borrowings undertaken to finance the SCUF Acquisition had taken place at the beginning of the periods presented. Pro forma financial information for the Origin Acquisition and the 2020 immaterial acquisition have not been prepared because the effects of these acquisitions were not material to our condensed combined consolidated statements of operations individually or in aggregate for all periods presented. 6. Goodwill and Intangible Assets Goodwill The following table summarizes the changes in the carrying amount of goodwill by reportable segment: Gaming Components and Systems Gamer and Creator Peripherals Total (In thousands) Balance as of December 31, 2019 $ 145,375 $ 167,375 $ 312,750 Addition from business acquisition - 185 185 Measurement period adjustments (47 ) (1,023 ) (1,070 ) Effect of foreign currency exchange rates 284 (576 ) (292 ) Balance as of September 30, 2020 $ 145,612 $ 165,961 $ 311,573 Intangible assets, net The following table is a summary of intangible assets, net: September 30, 2020 December 31, 2019 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount (In thousands) Developed technology $ 44,883 $ 21,606 $ 23,277 $ 44,243 $ 17,536 $ 26,707 Trade name 30,128 2,388 27,740 30,253 833 29,420 Customer relationships 218,456 67,397 151,059 218,459 50,916 167,543 Patent 29,989 3,007 26,982 30,721 130 30,591 Non-competition agreements 3,110 2,152 958 3,110 1,774 1,336 Total finite-life intangibles 326,566 96,550 230,016 326,786 71,189 255,597 Indefinite life trade name 35,430 — 35,430 35,430 — 35,430 Total intangible assets $ 361,996 $ 96,550 $ 265,446 $ 362,216 $ 71,189 $ 291,027 16 Table of Contents For the three months and nine months ended September 30, 2020, the gross amount for int angible assets increased $0.7 million as a result of an immaterial acquisition. Refer to Note 5 for additional information on our business acquisitions. The gross carrying amounts of intangible assets are removed when fully amortized. The estimated future amortization expense of intangible assets as of September 30, 2020 is as follows: Amounts (in thousands) 2020 (remaining three months) $ 8,484 2021 33,938 2022 33,761 2023 32,359 2024 30,913 Thereafter 90,561 Total $ 230,016 7. Balance Sheet Components Cash and Restricted Cash September 30, 2020 December 31, 2019 (In thousands) Cash $ 116,185 $ 48,165 Restricted cash—short term 3,726 3,552 Restricted cash—noncurrent 230 230 Total cash and restricted cash $ 120,141 $ 51,947 Accounts Receivable, net: September 30, 2020 December 31, 2019 (In thousands) Accounts receivable $ 260,476 $ 202,546 Allowance for doubtful accounts (934 ) (212 ) Accounts receivable, net $ 259,542 $ 202,334 As of September 30, 2020, and December 31, 2019, two customers each represented 10% or more of our consolidated accounts receivable, net. Inventories September 30, 2020 December 31, 2019 (In thousands) Raw materials $ 29,937 $ 25,547 Work in progress 17,842 2,690 Finished goods 162,372 122,826 Inventories $ 210,151 $ 151,063 17 Table of Contents Property and Equipment, Net September 30, 2020 December 31, 2019 (In thousands) Manufacturing equipment $ 18,939 $ 15,291 Computer equipment, software and office equipment 9,489 6,958 Furniture and fixtures 3,342 2,602 Leasehold improvements 3,951 3,544 Total property and equipment $ 35,721 $ 28,395 Less: Accumulated depreciation and amortization (20,317 ) (13,030 ) Property and equipment, net $ 15,404 $ 15,365 Other Liabilities and Accrued Expenses September 30, 2020 December 31, 2019 (In thousands) Accrued reserves for customer incentive programs $ 40,318 $ 36,582 Accrued reserves for sales return 29,805 24,610 Accrued payroll and related expense 22,474 10,638 Income tax payable 20,929 8,524 Operating lease liabilities, current 8,883 — Other 47,177 35,187 Other liabilities and accrued expenses $ 169,586 $ 115,541 Contract Balances Contract assets represent amounts that have been recognized as revenue but for which we did not have the unconditional right to invoice the customer yet. There were no unbilled accounts receivable recorded within our accounts receivable, net on the condensed combined consolidated balance sheets as of September 30, 2020 and December 31, 2019. Contract liabilities consist of deferred revenue and unearned revenue. Deferred revenue consists primarily of amounts that have been shipped and invoiced, but the control of the inventory has not been passed to the customer yet. The current portion of deferred revenue balances are recognized over the next 12 months. As of September 30, 2020, the current and long-term portion of our deferred revenue was $1.1 million and $0.4 million, respectively. As of December 31, 2019, the current and long-term portion of our deferred revenue was $3.3 million and $0.4 million, respectively. Unearned revenue consists of payments received from customers in advance of product shipment for our webstore orders. These orders are generally shipped within two weeks from order date. The unearned revenue balance as of September 30, 2020 and December 31, 2019 was $4.1 million and $1.3 million, respectively. Unearned revenue and the current portion of deferred revenue are included in other liabilities and accrued expenses, and the long-term portion of deferred revenue is included in other liabilities on the condensed combined consolidated balance sheets. 8. Debt First Lien Credit and Guaranty Agreement On August 28, 2017, we entered into a syndicated First Lien Credit and Guaranty Agreement ( “First Lien” ) with various financial institutions. The First Lien originally provided a $235 million term loan ( “First Lien Term Loan” ) for a business acquisition and to repay existing indebtedness of the acquired company and a $50 million revolving line-of-credit ( “Revolver” ). The First Lien and the Revolver matures on August 28, 2024 and August 28, 2022, respectively. Subsequently, we entered into several amendments to the First Lien and the principal amount of the First Lien Term Loan was increased by $10 million in 2017 and increased by $115 million in each of 2018 and 2019, primarily to fund various business acquisitions and operation needs. 18 Table of Contents The First Lien Term Loan initially carried interest at a rate equal to, at our election, either the (a) greatest of (i) the prime rate, (ii) sum of the Federal Funds Effective Rate plus 0.5%, (iii) one month LIBOR plus 1.0% and (iv) 2%, plus a margin of 3.5%, or (b) the greater of (i) LIBOR and (ii) 1.0%, plus a margin of 4.5%. The Revolver initially bore interest at a rate equal to, at our election, either the (a) greatest of (i) the prime rate, (ii) sum of the Federal Funds Effective Rate plu s 0.5%, (iii) one month LIBOR plus 1.0% and (iv) 2%, plus 3.5%, or (b) the greater of (i) LIBOR and (ii) 1.0%, plus a margin of 4.5%. As a result of the First Lien amendment in October 2018, the First Lien term loan and Revolver margin were both changed to range from 2.75% to 3.25% for base rate loans and to range from 3.75% to 4.25% for Eurodollar loans, based on our net leverage ratio. Additionally, new contingent repayment provisions were added in the First Lien amendment in October 2018. Five business days after the initial public offering ( “IPO” ) of our stock, we were required to prepay all amounts (principal and interest) outstanding under the Second Lien term loan. Concurrently, we also were required to prepay the First Lien Term Loan in an amount equal to the IPO proceeds, less the amount used to repay the Second Lien Term Loan, multiplied by 50%. Accordingly, in September 2020, with the IPO proceeds, we repaid the mandatory minimum amount of $55.8 million and made an additional $30.8 million voluntary repayment. We may prepay the First Lien Term Loan and the Revolver at any time without premium or penalty other than customary LIBOR breakage. According to the Consolidated Excess Cash Flow clause as defined in the First Lien, in April 2020, we prepaid $2.6 million of the First Lien Term Loan. The amendments to the First Lien were accounted for as loan modifications. The following table summarizes the carrying value of the First Lien Term Loan: September 30, 2020 December 31, 2019 (In thousands) Principal amount outstanding $ 376,938 $ 467,332 Less: Debt discount, net of amortization (2,623 ) (3,850 ) Less: Debt issuance costs, net of amortization (4,225 ) (5,825 ) Carrying amount $ 370,090 $ 457,657 Our obligation under the First Lien is secured by substantially all of our personal property assets and those of our United States-organized subsidiaries, including intellectual property. The First Lien Term Loan includes customary restrictive covenants that impose operating and financial restrictions on Corsair, including restrictions on our ability to take actions that could be in our best interests. These restrictive covenants include operating covenants restricting, among other things, our ability to incur additional indebtedness, effect certain acquisitions or make other fundamental changes. As of September 30, 2020, we were in compliance with all covenants. In addition, the First Lien contains events of default that include, among others, non-payment of principal, interest or fees, breach of covenants, inaccuracy of representations and warranties, cross defaults to certain other indebtedness, bankruptcy and insolvency events, material judgments and events constituting a change of control. Upon the occurrence and during the continuance of an event of default, interest on the obligations may accrue at an increased rate in the case of a non-payment or bankruptcy and insolvency and the lenders may accelerate our obligations under the First Lien Term Loan, except that acceleration will be automatic in the case of bankruptcy and insolvency events of default. Second Lien Credit and Guaranty Agreement On August 28, 2017, we also entered into a syndicated Second Lien Credit and Guaranty Agreement ( “Second Lien” ) with various financial institutions. The Second Lien initially provided a $65 million term loan ( “Second Lien Term Loan” ), with a maturity date of August 28, 2025, for a business acquisition and for general corporate operations purposes. The Second Lien Term Loan initially carried interest at a base rate equal to that of the First Lien loan, plus a margin of 7.25% for base rate loans and 8.25% for Eurodollar loans. In October 2017, we entered into an amendment to the Second Lien and the principal amount of the Second Lien Term Loan was reduced to $50 million and the applicable interest rate margins for both the base rate loans and Eurodollar loans were increased by 0.25%. The amendment to the Second Lien was accounted for as a loan modification. We had the ability to prepay the Second Lien Term Loan any time after the first and second anniversary without premium or penalty. In the second and third quarter of 2020, with excess cash on hand, we repaid an aggregate of $50 million of the outstanding principal balance of the Second Lien Term Loan and following these repayments, the Second Lien Term Loan was fully repaid and all obligations and covenants thereunder were terminated. 19 Table of Contents The following table summarizes the carrying value of the Second Lien Te rm Loan: September 30, 2020 December 31, 2019 (In thousands) Principal amount outstanding $ — $ 50,000 Less: Debt discount, net of amortization — (471 ) Less: Debt issuance costs, net of amortization — (1,374 ) Carrying amount $ — $ 48,155 The following table summarizes the interest expense recognized for the First Lien and Second Lien: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands) Contractual interest expense for First Lien and Second Lien Term Loan $ 6,408 $ 7,582 $ 22,914 $ 22,662 Contractual interest expense for Revolver — 789 16 2,099 Amortization of debt discount 219 216 672 700 Amortization of debt issuance costs 489 514 1,401 1,583 Loss on debt extinguishment 2,864 — 3,256 — Total interest expense recognized $ 9,980 $ 9,101 $ 28,259 $ 27,044 The estimated future principal payments under our total long-term debt as of September 30, 2020 are as follows: Amounts (In thousands) 2020 (remaining three months) $ — 2021 — 2022 — 2023 — 2024 376,938 Thereafter — Total debt $ 376,938 Less: Discount and debt issuance costs (6,848 ) Total Debt, net of discount and debt issuance costs $ 370,090 Presented on the condensed combined consolidated balance sheet under: Current portion of debt, net $ — Debt, net $ 370,090 9. Commitments and Contingencies Product Warranties Changes in our warranty obligations were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (in thousands) Beginning of the period $ 5,005 $ 2,776 $ 3,991 $ 2,581 Balance assumed from business combinations — 223 — 223 Warranty provision related to products shipped 1,518 1,395 4,928 4,231 Deductions for warranty claims processed (1,400 ) (1,338 ) (3,796 ) (3,979 ) End of period $ 5,123 $ 3,056 $ 5,123 $ 3,056 20 Table of Contents Unconditional Purchase Obligations Our total non-cancelable purchase commitments outstanding was $103.1 million and $44.1 million as of September 30, 2020 and December 31, 2019, respectively. Letters of Credit The letters of credit outstanding, in aggregate, was $2.0 million and $1.5 million as of September 30, 2020 and December 31, 2019, respectively. No amounts have been drawn upon the letters of credit for all periods presented. Indemnification In the ordinary course of business, we may provide indemnifications of varying scope and terms with respect to certain transactions. We have entered into indemnification agreements with directors and certain officers and employees that will require Corsair, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon Corsair to provide indemnification under such agreements, and thus, there are no claims that we are aware of that could have a material effect on our condensed combined consolidated balance sheets, statements of operations, or statements of cash flows. We currently have directors’ and officers’ insurance. 10. Stockholders’ Equity On December 19, 2019, the Parent issued 14,092,098 units, which following the Reorganization and prior to the exchange agreements described in Note 1, represents 7,046,049 equivalent shares of our common stock, as a result of a capital call, for a total capital contribution of $53.5 million to fund the SCUF Acquisition. For the year ended 2019, the Parent issued an aggregate of 2,644,151 units, which following the Reorganization and prior to the exchange agreements described in Note 1, represents 1,322,075 equivalent shares of our common stock, as part of the consideration for acquisitions. The units had an estimated fair value of $10.0 million, in aggregate, at the time of issuance. Refer to Note 5 for additional information regarding our acquisitions. On September 15, 2020, we completed a Reorganization through a series of steps as discussed in Note 1. In connection with the Reorganization, we filed a certificate of amendment to our Amended and Restated Certificate of Incorporation which authorized 100,000,000 shares of our common stock for issuance, with a par value of $0.0001 per share and effected a 1-for-28,693.596843964 stock split resulting in there being 84,405,366 shares of Corsair’s common stock outstanding as of September 15, 2020. On September 25, 2020, in connection with the closing of the IPO, we filed an Amended and Restated Certificate of Incorporation which increased the authorized shares of common stock for issuance to 300,000,000 and authorized 5,000,000 shares of preferred stock, with a par value of $0.0001 per share, for issuance. There were no shares of preferred stock outstanding as of September 30, 2020. 11. Equity Incentive Plans and Stock-Based Compensation Equity Incentive Plans I n 2017, the Parent adopted the 2017 Equity Incentive Program ( the “2017 Plan” ). The 2017 Plan was administered by the General Partner, EagleTree-Carbide (GP), LLC, who determines the types of awards to be granted, the number of units subject to the awards, the exercise price and the vesting requirements. Only our employees and directors participated in this program. In connection with the Reorganization discussed in Note 1, we assumed the 2017 Plan and all the outstanding options to acquire units of the Parent under the 2017 Plan were converted into options to purchase our common stock on a pro rata basis with an adjusted exercise price to reflect the assumption. No other modifications were made to the options and no further options will be granted under the 2017 Plan following the Reorganization. In September 2020, we adopted the 2020 Incentive Award Plan ( the “2020 Plan” ), which became effective on September 22, 2020, the day prior to the first public trading date of our common stock. The 2020 Plan is the successor and continuation to the 2017 Plan. The 2020 Plan provides for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock unit ( “RSU” ) awards, performance awards and other forms of awards. Incentive stock options may be granted only to employees. All other awards may be granted to eligible employees, non-employee directors and consultants, at the discretion of our board of directors ( the “Board” ). Under the 2020 Plan, 5,125,000 shares of our common stock are initially reserved for issuance. The 2020 Plan reserve also includes any shares under the 2017 Plan and the 2020 Plan that may become available for issuance if the award terminates without the 21 Table of Contents delivery of shares or if shares are tendered to satisfy the exercise price or tax withholding obligation wit h respect of the award. The 2020 Plan reserve increases annually on January 1 of each calendar year, starting on January 1, 2021 through January 1, 2030, by an amount equal to the lesser of (a) 4% of the shares outstanding on the last day of the immediatel y preceding fiscal year or (b) a smaller number of shares as determined by the Board; provided, however, no more than 75,000,000 shares of our common stock may be issued upon the exercise of incentive stock options. All stock options under the 2017 Plan and the 2020 Plan are issued at exercise prices not less than the fair market value on the date of grant. RSUs have no exercise price. Both stock options and RSUs vest over a period of time as determined by the Board, generally four to five years, and expire ten years from date of grant. As of September 30, 2020, 4,941,580 shares were available for grant under the 2020 Plan. Employee Stock Purchase Plan In September 2020, we adopted the 2020 Employee Stock Purchase Plan ( the “ESPP” ), which became effective September 22, 2020, the day prior to the first public trading date of our common stock. The ESPP is intended to qualify under Section 423 of the U.S. Internal Revenue Service Code. The ESPP initially reserved 1,025,000 shares of our common stock for issuance. The ESPP reserve increases annually on January 1 of each calendar year, starting on January 1, 2021 through January 1, 2030, by an amount equal to the lesser of (a) 1% of the shares outstanding on the last day of the immediately preceding fiscal year or (b) a smaller number of shares as determined by the Board; provided, however, no more than 20,000,000 shares of our common stock may be issued under the ESPP. The ESPP is designed to allow eligible employees to purchase shares of our common stock, at semi-annual intervals, with their accumulated payroll deductions. Under the ESPP, participants are offered the option to purchase shares of our common stock at a discount during a series of successive offering periods, the duration and timing of which will be determined by the ESPP administrator. The offering period may not be longer than 27 months in length. The option purchase price will be the lower of 85% of the closing trading price per share of our common stock on the first trading date of an offering period in which a participant is enrolled or 85% of the closing trading price per share on the purchase date, which will occur on the last trading day of each offering period. Employees may participate through payroll deductions of 1% to 15% of their earnings. No participant may purchase more than 30,000 shares in each offering period and may not subscribe for more than $25,000 in fair market value of shares of our common stock (determined at the time the option is granted) during any calendar year. The first offering period will begin on January 1, 2021. Stock Options Activities The following table summarizes the stock option activities and related information for the nine months ended September 30, 2020: Outstanding Stock Options Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Term Aggregate Intrinsic Value (In years) (In thousands) Balance as of December 31, 2019 8,790,000 $ 4.86 8.1 $ 24,949 Granted 1,875,161 8.59 Exercised (306,000 ) 4.05 Forfeited/cancelled (164,000 ) 6.30 Balance as of September 30, 2020 10,195,161 $ 5.55 7.9 $ 67,698 Vested and exercisable as of September 30, 2020 4,045,117 $ 4.31 7.2 $ 31,534 The weighted average grant-date fair value of the stock options granted for the nine months ended September 30, 2020 was $8.59 per share. As of September 30, 2020, the unrecognized stock-based compensation costs related to outstanding unvested stock options was $15.4 million, which is expected to be recognized over a weighted average period of 3.3 years. 22 Table of Contents RSUs Activities The following table summarizes the RSUs activities and related information for the nine months ended September 30, 2020: Unvested RSUs Weighted- Average Grant Date Fair Value Per Share Balance as of December 31, 2019 — — Granted 17,647 $ 17.00 Vested (8,823 ) 17.00 Balance as of September 30, 2020 8,824 $ 17.00 As of September 30, 2020, the unrecognized stock-based compensation costs related to outstanding unvested RSUs was $0.1 million, which is expected to be recognized over a weighted average period of 1.0 year. Stock-based Compensation The following table summarizes stock-based compensation expense by line item in the accompanying condensed combined consolidated statements of operations: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands) Cost of revenue $ 60 $ 52 $ 192 $ 145 Sales, general and administrative 1,414 672 3,634 2,251 Product development 157 143 460 417 Total stock-based compensation expense $ 1,631 $ 867 $ 4,286 $ 2,813 Valuation Assumptions We estimate the fair value of the stock options on the date of grant using the Black-Scholes-Merton pricing model, with the following valuation assumptions: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Weighted average grant date fair value of common stock (per share) $ 16.38 $ 7.55 $ 8.60 $ 7.46 Expected term (years) 6.09 6.50 6.37 6.48 Expected volatility 41.7%-44.0% 34.5%-34.9% 35.8%-44.0% 34.3%-34.9% Dividend yield — — — — Range of risk-free interest rate 0.3%-0.4% 1.4-1.9% 0.3%-1.8% 1.4%-2.6% 23 Table of Contents 12. Net Income (Loss) Per Share Following the Reorganization, all share and per share information in this section has been revised as Corsair common share equivalents. The following table summarizes the calculation of basic and diluted net income (loss) per share: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (in thousands, except share and per share amounts) Numerator Net income (loss), basic and diluted $ 36,357 $ 1,519 $ 60,174 $ (14,406 ) Denominator Weighted-average shares used to compute net income (loss) per share, basic 84,870,837 75,939,443 84,352,415 75,928,057 Effect of dilutive securities (1) 5,213,112 1,944,311 3,146,104 — Weighted-average shares used to compute net income (loss) per share, diluted 90,083,949 77,883,754 87,498,519 75,928,057 Net income (loss) per share: Basic $ 0.43 $ 0.02 $ 0.71 $ (0.19 ) Diluted $ 0.40 $ 0.02 $ 0.69 $ (0.19 ) (1) As a result of our net loss, potentially dilutive ordinary share equivalents of approximately 1.8 million options were excluded from the calculation of diluted net loss per share for the nine months ended September 30, 2019. Share equivalents attributable to outstanding stock options and RSUs totaling approximately 22 thousand and 1.2 million for the three months ended September 30, 2020 and 2019, respectively, and 2.1 million and 1.7 million for the nine months ended September 30, 2020 and 2019, respectively, were excluded from the calculation of diluted net income per share because the combined exercise price and average unamortized grant date fair value upon exercise of the stock options or vesting of RSUs were greater than the average market price of our shares during the periods presented herein, and therefore their inclusion would have been anti-dilutive. 13. Income Taxes The table below presents our income (loss) before income taxes, income tax (expense) benefit and effective income tax rates for all periods presented: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands) Income (loss) before income taxes $ 39,574 $ 1,444 $ 70,323 $ (19,051 ) Income tax (expense) benefit (3,217 ) 75 (10,149 ) 4,645 Effective income tax rate 8.1 % 5.2 % 14.4 % 24.4 % We are subject to income taxes in the United States and foreign jurisdictions in which we do business. These foreign jurisdictions have statutory tax rates different from those in the United States. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to United States income, the utilization of net operating loss and tax credit carry forwards, changes in geographic mix of income and expense, and changes in management’s assessment of matters such as the ability to realize deferred tax assets, and changes in tax laws. The Coronavirus Aid, Relief, and Economic Security Act ( “CARES Act” ), enacted on March 27, 2020, provides tax relief to individuals and businesses in light of the impacts of COVID-19. Changes in tax laws or rates are accounted for in the period of enactment and as a result, additional income tax benefits of $0.6 million were recorded during the nine months ended September 30, 2020 resulting from the enactment of the CARES Act. 24 Table of Contents Our effective tax rates were tax expense of 8.1% and tax benefit of 5.2% for the three months ended September 30, 2020 and 2019, respectively, and tax expense of 14.4% and tax benefit of 24.4% for the nine months ended September 30, 2020 and 2019, respectively. The change in the effe ctive income tax rate for the three months ended September 30, 2020, compared to the same period last year was primarily due to the mix of income and losses in the various tax jurisdictions in which we operate, as well as the recognition of a $1.5 million tax benefit in the three months ended September 30, 2019 versus a $4.3 million tax benefit recognized in the three months September 30, 2020, resulting from the change in management’s assessment of the realizability of certain deferred tax assets as a resu lt of the Reorganization. The change in the effective tax rate for the nine months ended September 30, 2020, compared to the same period last year was primarily due to the recognition of a $4.3 million tax benefit in the nine months ended September 30, 202 0 resulting from the change in management’s assessment of the realizability of certain deferred tax assets as a result of the Reorganization, and a $0.6 million one-time benefit from the change in tax law resulting from the enactment of the CARES Act in th e first quarter 2020. Unrecognized tax benefits were $0.6 million and $0.7 million as of September 30, 2020 and December 31, 2019, respectively, and i f recognized, would favorably affect the effective income tax rate in future periods . 14. Related-Party Transactions A company affiliated with a major shareholder, EagleTree-Carbide (GP), LLC, provided management and consulting services to us. We incurred $21 thousand and $33 thousand for the three months ended September 30, 2020 and 2019, respectively, and $0.1 million for each of the nine months ended September 30, 2020 and 2019, which primarily covered travel and out-of-pocket expenses related to such services. The unpaid services were $21 thousand and $0.1 million as of September 30, 2020 and December 31, 2019, respectively. This management and consulting service agreement was terminated in September 2020. One of our directors, through one of his companies, entered into a service agreement to serve as our business management consultant. We incurred $30 thousand and $8 thousand of consulting fees under the service agreement for the three months ended September 30, 2020 and 2019, respectively, and $92 thousand and $55 thousand for the nine months ended September 30, 2020 and 2019, respectively. The unpaid services were $44 thousand and $30 thousand as of September 30, 2020 and December 31, 2019, respectively. This service agreement was terminated in September 2020. As discussed in Note 8, we had a Second Lien Term Loan outstanding as of December 31, 2019. The total net carrying value of the Second Lien Term Loan balance held by all related parties, an affiliate of the Parent and one of our directors, was $5.8 million as of December 31, 2019. As of September 30, 2020, the outstanding balance of the Second Lien Term Loan was fully repaid and as a result, there was no debt held by related parties as of September 30, 2020. 15. Segment and Geographic Information We have two reportable segments: • Gamer and Creator Peripherals , which includes high-performance gaming keyboards, mice, headsets and controllers, as well as our gaming gear including capture cards, studio accessories, among others. • Gaming Components and Systems , which includes high performance power supply units, or PSUs, cooling solutions, computer cases, and DRAM modules, as well as high-end prebuilt and custom-built gaming PCs, among others. The segments are defined as those operations our chief operating decision maker ( “CODM” ) regularly reviews to analyze performance and allocate resources. Our CODM is determined to be Corsair’s Chief Executive Officer. The results of the reportable segments are derived directly from our reporting system and are based on the methods of internal reporting which are not necessarily in conformity with GAAP. Management measures net revenue and gross profit to evaluate the performance of, and allocate resources to, each of the segments. 25 Table of Contents The table below summarizes the financial information for each reportable segment: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands) Net revenue Gaming and Creator Peripherals $ 161,555 $ 70,606 $ 347,531 $ 200,084 Gaming Components and Systems 295,548 213,766 798,497 570,535 Total net revenue $ 457,103 $ 284,372 $ 1,146,028 $ 770,619 Gross Profit Gaming and Creator Peripherals $ 60,010 $ 19,948 $ 120,886 $ 58,234 Gaming Components and Systems 67,934 40,279 190,744 95,600 Total gross profit $ 127,944 $ 60,227 $ 311,630 $ 153,834 The CODM manages assets on a total company basis, not by operating segments; therefore, asset information and capital expenditures by operating segments are not presented. Geographic Information The following table summarizes our net revenue by geographic region based on the location of the customer: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands) Net revenue Americas $ 216,982 $ 108,318 $ 517,165 $ 315,200 Europe and Middle East 162,615 114,118 412,349 287,502 Asia Pacific 77,506 61,936 216,514 167,917 Total net revenue $ 457,103 $ 284,372 $ 1,146,028 $ 770,619 No other countries besides United States represented 10% or more of total net revenue for each of the periods presented. One customer represented at least 10% of total net revenue for each of the periods presented. Long-lived assets are comprised primarily of property and equipment, net. The following table summarizes property and equipment, net by country: September 30, 2020 December 31, 2019 (In thousands) United States $ 6,532 $ 6,400 China 5,039 4,998 Taiwan 2,668 2,270 Other countries 1,165 1,697 Total property and equipment, net $ 15,404 $ 15,365 16. Leases Our lease portfolio consists primarily of real estate facilities under operating leases and we determine if an arrangement is or contains a lease at inception. ROU assets and lease liabilities are recognized at commencement based on the present value of the lease consideration in the contracts over the lease term. We apply the incremental borrowing rate in determining the present value of the lease consideration in the contracts, as most of our leases do not provide an implicit rate. Our incremental borrowing rate is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Because we generally do not borrow on a collateralized basis, we apply an estimate of what the collateralized credit rating would be as an input to deriving an appropriate incremental borrowing rate. Certain of our lease agreements include options to extend or renew the lease terms. Such options are excluded from the ROU assets and lease liabilities, unless they are reasonably certain to be exercised. Operating lease expense is recognized on a straight-line basis over the lease term. 26 Table of Contents Certain lease agreements contain variable lease payments, which primarily include variable costs for warehousing and distribution services related to our outsourced distribution hubs, and to a lesser extent, variable costs related to office common area maintenance charges. The table below summarizes the components of lease expenses: Three Months Ended September 30, Nine months ended September 30, 2020 2020 (In thousands) Operating lease expense $ 2,739 $ 6,932 Variable lease expense 2,226 4,657 Total lease expense $ 4,965 $ 11,589 During the three and nine months ended September 30, 2020, we made $2.6 million and $6.7 million, respectively, in payments for operating leases included within cash provided by operating activities in our condensed combined consolidated statement of cash flows. As of September 30, 2020, the weighted-average remaining lease term was 3.6 years and the weighed-average discount rate was 4.0%. Amounts of future undiscounted cash flows related to operating lease payments over the lease term included in the measurement of lease liabilities as of September 30, 2020 are as follows: Amounts (In thousands) 2020 (remaining three months) $ 2,310 2021 9,072 2022 6,372 2023 5,172 2024 3,999 Thereafter 1,987 Total future lease payments $ 28,912 Less: Imputed interest (2,133 ) Present value of operating lease liabilities $ 26,779 Current portion of operating lease liabilities (1) $ 8,883 Long-term operating lease liabilities (1) $ 17,896 (1) The current portion and long-term portion of operating lease liabilities are included in “other liabilities and accrued expenses” and “other liabilities, noncurrent”, respectively, on our condensed combined consolidated balance sheets. Future minimum lease payments under non-cancelable operating leases as of December 31, 2019, as defined under the previous lease accounting guidance of ASC Topic 840, were as follows: Amounts (In thousands) 2020 $ 7,525 2021 5,786 2022 2,701 2023 1,584 2024 1,025 Thereafter — Total $ 18,621 27 Table of Contents