What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-03 compared with 2021-05-04 · 108 added, 76 removed, 237 unchanged (44% of the section changed)

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While we historically have sold a small percentage of our gear directly to consumers through our website, following the SCUF Acquisition and the Origin Acquisition in 2019, the volume of direct-to-consumer sales has increased as both of these companies primarily generated sales through direct-to-consumer channels.

We expect net revenue from our direct-to-consumer channel to increase as a percentage of total net revenue in future periods.

We expect net revenue from our direct-to-consumer channel to continue to increase as a percentage of total net revenue in future periods.

From time to time, we may seek to partner with or, when appropriate, acquire companies that have products, personnel, and technologies that complement our strategic direction.

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Origin is part of our gaming components and systems segment and SCUF, EpocCam, Gamer Sensei and VBI are part of our gamer and creator peripherals segment.

Our net revenue was $529.4 million and $308.5 million for the three months ended March 31, 2021 and 2020, respectively, representing a period-over-period increase of 71.6%.

We had net income of $46.7 million and $1.2 million for the three months ended March 31, 2021 and 2020, respectively.

Net cash provided by operating activities was $27.8 million and $2.0 million for the three months ended March 31, 2021 and 2020, respectively.

Our net revenue was $472.9 million and $380.4 million for the three months ended June 30, 2021 and 2020, respectively, representing a period-over-period increase of 24.3%.

We had net income of $27.7 million and $22.6 million for the three months ended June 30, 2021 and 2020, respectively .

Our net revenue was $1.0 billion and $688.9 million for the six months ended June 30, 2021 and 2020, respectively, representing a period-over-period increase of 45.5%.

We had net income of $74.5 million and $23.8 million for the six months ended June 30, 2021 and 2020, respectively.

Net cash provided by operating activities was $59.4 million and $75.6 million for the six months ended June 30, 2021 and 2020, respectively.

Key Factors Affecting Our Business

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Impact of Customer Concentration .

We operate a global sales network that consists primarily of retailers, as well as distributors we use to access certain retailers.

Further, a limited number of retailers and distributors represent a significant portion of our net revenue, with Amazon accounting for 24.6% of our net revenue for each of the three months ended March 31, 2021 and 2020 and sales to our ten largest customers accounted for approximately 49.3% and 52.0% of our net revenue for the three months ended March 31, 2021 and 2020, respectively.

We operate a global sales network that consists primarily of retailers (including eRetailers), as well as distributors we use to access certain retailers.

Further, a limited number of retailers and distributors represent a significant portion of our net revenue, with eRetailer Amazon accounting for 24.6% and 26.8% of our net revenue for the six months ended June 30, 2021 and 2020, respectively, and sales to our ten largest customers accounting for approximately 50.0% and 52.4% of our net revenue for the six months ended June 30, 2021 and 2020, respectively.

Our customers typically do not enter into long-term agreements to purchase our gear but instead enter into purchase orders with us.

As a result of this concentration and the lack of long-term agreements with our customers, a primary driver of our net revenue and operating performance is maintaining good relationships with these retailers and distributors.

To help maintain good relationships, we implement initiatives such as our updated packaging design which helps Amazon process our packages more efficiently.

To help maintain good relationships, we implement initiatives such as our updated packaging design that helps eRetailers such as Amazon process our packages more efficiently.

Further, given our global operations, a significant percentage of our expenses relate to shipping costs.

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Gamers demand new technology and product features, and we expect our ability to accurately anticipate and meet these demands will be one of the main drivers for any future sales growth and market share expansion.

To date, we have had several new product introductions that had a favorable impact on our net revenue and operating results, such as the introduction of our new high-performance Elgato Wave microphone in the second quarter of 2020.

To date, we have had several new product introductions that had a favorable impact on our net revenue and operating results, such as the introduction of our new K65 mini RGB keyboard and Elgato’s new accessories in the first quarter of 2021.

However, there can be no assurance that our new product introductions will have a favorable impact on our operating results or that customers will choose our new gear over those of our competitors.

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Impact of COVID-19.

In March 2020, the World Health Organization declared a global pandemic related to the rapidly growing outbreak of a novel strain of coronavirus known as COVID-19.

In the following weeks, many countries responded by implementing a number of measures designed to prevent its spread, including stay-at-home or shelter-in-place orders, quarantines and closure of all non-essential businesses.

The COVID-19 pandemic has caused general business disruption worldwide beginning in early 2020.

We have operations and employees in various regions affected by coronavirus, including our headquarters in California, which is subject to a shelter-in-place order.

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Although we have seen some significant business disruptions due to COVID-19, the broader implications of COVID-19 on our results of operations and overall financial performance remain uncertain.

The negative financial impact from the temporary stoppage in our factories, disruption in our supply chain and increased air freight costs experienced in the first quarter of 2020 was 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 negative financial impact from the temporary stoppage in our factories in early 2020, disruption in our supply chain and increased freight costs due to COVID-19 was 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.

We believe that shelter-in-place and other similar restrictions have resulted in increased demand for our gear because such restrictions have limited people’s access to alternative forms of entertainment and social interaction, and thus have increased the demand for home entertainment and connecting with others through content creation.

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However, as global economic activity slows down, the demand for our gear could decline despite these trends.

Moreover, travel restrictions, factory closures and disruptions in our supply chain are likely to happen and we or our suppliers may not be able to obtain adequate inventory to sell.

The dynamic nature and uncertainty of the circumstances surrounding COVID-19 pandemic may have adverse consequences on our results of operations for 2021 and may negatively impact future fiscal periods in the event of prolonged disruptions associated with the outbreak.

In contrast, if the COVID-19 pandemic subsides in 2021, resulting in shelter-in-place and other similar restrictions being eased, it could result in consumers returning to other alternative forms of entertainment and interaction.

Moreover, travel restrictions, factory closures and disruptions in our supply chain have happened causing our logistics costs to increase in 2021 and are likely to continue to happen and we or our suppliers may not be able to obtain adequate inventory to sell.

The dynamic nature and uncertainty of the circumstances surrounding COVID-19 pandemic, including any new variants, may have adverse consequences on our results of operations for 2021 and may negatively impact future fiscal periods in the event of prolonged disruptions associated with the outbreak.

In contrast, if the COVID-19 pandemic subsides, resulting in shelter-in-place and other similar restrictions being eased, it could result in consumers returning to other alternative forms of entertainment and interaction.

This in turn could result in a decline in demand for our products.

We continue to evaluate the nature and extent of the impact of the COVID-19 pandemic to our business and we have implemented various measures to attempt to mitigate the disruptive logistic impact specifically around managing inventory stocking level at our distribution hubs and determining the mode of shipment used to deploy our gear to the customers, and we are also ready to implement adjustments to our expenses and cash flow in the event of declines in revenues.

We continue to closely monitor the impact of the COVID-19 pandemic to our business and we have implemented various measures to mitigate the disruptive logistic impact specifically around managing inventory stocking level at our distribution hubs and determining the mode of shipment used to deploy our gear to the customers, and we are also ready to implement adjustments to our expenses and cash flow in the event of declines in revenues.

Impact of Fluctuations in Integrated Circuits Pricing .

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Interest expense consists of interest associated with our debt financing arrangements, including our revolving line of credit, amortization of debt issuance costs and debt discounts, loss from debt extinguishment, consisting of the write-off of unamortized debt discount and fees associated with the prepayment of our term loans.

Other Expense, Net

Other expense, net consists primarily of our foreign currency exchange gains and losses relating to transactions and remeasurement of asset and liability balances denominated in currencies other than the U.S.

Other (Expense) Income, Net

Other (expense) income, net consists primarily of our foreign currency exchange gains and losses relating to transactions and remeasurement of asset and liability balances denominated in currencies other than the U.S.

We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates.

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Three Months Ended

Six Months Ended

(In thousands)

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Interest expense

Other expense, net

Other (expense) income, net

Total other expense, net

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Three Months Ended

Six Months Ended

Cost of revenue

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Interest expense

Other expense, net

Other (expense) income, net

Total other expense, net

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Three Months Ended

Six Months Ended

(In thousands)

Net revenue increased $220.9 million, or 71.6%, for the three months ended March 31, 2021 as compared to the same period last year.

This increase was due to strong revenue growth in both our gaming components and systems segment and gamer and creator peripherals segment.

We believe the increased demand of our products is generally due to a larger number of consumers that are gaming and working from home due to the COVID-19 pandemic, in addition to existing customers upgrading their systems and gear for a better gaming and/or streaming experience.

Net revenue increased $92.5 million, or 24.3%, for the three months ended June 30, 2021 as compared to the same period last year.

The increase was due to a 40.9% growth in sales for our gamer and creator peripherals segment and a 17.6% growth in sales for our gaming components and systems segment.

Net revenue increased $313.4 million, or 45.5%, for the six months ended June 30, 2021 as compared to the same period last year.

The increase was due to a 78.0% growth in sales for our gamer and creator peripherals segment and a 33.5% growth in sales for our gaming components and systems segment.

Overall, we believe the increased demand of our products is generally due to a larger number of consumers that are gaming and working from home due to the COVID-19 pandemic, in addition to existing customers upgrading their systems and gear for a better gaming and/or streaming experience.

Gross Profit and Gross Margin

Three Months Ended

Six Months Ended

(In thousands)

Gross margin increased to 30.3% for the three months ended March 31, 2021 from 25.5% for the same period last year.

The increase in gross margin was primarily driven by improved product mix, particularly the strong growth in sales from our Elgato streaming products, and increased sales volume, and were partially offset by increased freight costs driven primarily by inventory supply limitations largely driven by the COVID-19 pandemic.

Gross margin remained flat at 27.6% for the three months ended June 30, 2021 and for the same period last year.

Gross margins remained flat as the increase in gross margin in the three months ended June 30, 2021 from a favorable shift in mix towards our gamer and creator peripherals segment was offset primarily by increased freight costs and logistics costs driven by inventory supply limitations largely due to the COVID-19 pandemic, as well as pandemic related port shutdowns in the second fiscal quarter of 2021.

Gross margin increased to 29.0% for the six months ended June 30, 2021 from 26.7% for the same period last year.

This increase was primarily driven by improved product mix towards our gamer and creator peripherals segment and the increase in sales volume, particularly the strong revenue growth in our Elgato streaming products.

The increase in gross margin was partially offset by increased freight costs and logistics costs driven by inventory supply limitations largely due to the COVID-19 pandemic, as well as pandemic related port shutdowns in the second fiscal quarter of 2021.

Sales, General and Administrative (SG&A)

Three Months Ended

Six Months Ended

(In thousands)

Sales, general and administrative

SG&A expenses increased $24.1 million, or 44.9%, for the three months ended March 31, 2021 as compared to the same period last year.

The increase was primarily due to a $12.1 million increase in distribution costs including outbound freight and the costs to operate our distribution hubs due to increased sales volume, a $10.1 million increase in personnel-related costs due to headcount growth and increase in bonus expense and a $1.9 million increase in other SG&A expenses.

SG&A expenses increased $23.3 million, or 41.1%, for the three months ended June 30, 2021 as compared to the same period last year.

The increase was primarily due to an $8.1 million increase in distribution costs including outbound freight and the costs to operate our distribution hubs due to increased sales volume, a $6.6 million increase in personnel-related costs due to headcount growth and higher stock-based compensation, a $2.7 million increase in marketing expenses, mainly due to increase in sponsorships and digital marketing programs, and an $1.1 million increase in credit card processing fees driven by an increase in our webstore sales.

Other increases in SG&A expenses included increased director and officer insurance fees and professional services expenses.

SG&A expenses increased $47.5 million, or 42.9%, for the six months ended June 30, 2021 as compared to the same period last year.

The increase was primarily due to an $18.8 million increase in distribution costs including outbound freight and the costs to operate our distribution hubs due to increased sales volume, a $16.7 million increase in personnel-related costs due to headcount growth and an increase in bonus expense and stock-based compensation, a $3.3 million in marketing expenses, mainly due to increase in sponsorships and digital marketing programs and a $2.6 million increase in credit card processing fees driven by an increase in our webstore sales.

Other increases in SG&A expenses included increased director and officer insurance fees and professional services expenses.

Product Development

Three Months Ended

Six Months Ended

(In thousands)

Product development

Product development expenses increased $3.6 million, or 31.4%, for the three months ended March 31, 2021 as compared to the same period last year.

The increase was primarily due to a $2.6 million increase in personnel-related expenses due to headcount growth and increase in bonus expense and a $1.0 million increase in other product development related costs to support our continued innovation and broadening of our product portfolio.

Interest Expense and Other Expense, Net

Product development expenses increased $3.6 million, or 30.8%, for the three months ended June 30, 2021 as compared to the same period last year.

The increase was primarily due to a $2.7 million increase in personnel-related expenses due to headcount growth and an increase in bonus expense and stock-based compensation, and a $0.7 million increase in other product development related costs to support our continued innovation and broadening of our product portfolio.

Product development expenses increased $7.3 million, or 31.1%, for the six months ended June 30, 2021 as compared to the same period last year.

The increase was primarily due to a $5.4 million increase in personnel-related expenses due to headcount growth and an increase in bonus expense and stock-based compensation, an $0.8 million increase in consultant and contractor expense, and a $1.3 million increase in other product development related costs to support our continued innovation and broadening of our product portfolio.

Interest Expense and Other (Expense) Income, Net

Three Months Ended

Six Months Ended

(In thousands)

Interest expense

Other expense, net

Interest expense decreased $4.4 million, or 47.2%, for the three months ended March 31, 2021 as compared to the same period last year.

The decrease was primarily due to lower interest expense paid in the three months of March 31, 2021 for our First Lien Term Loan due to partial extinguishment of our First Lien Term Loan in 2020 and no interest paid for our Second Lien Term Loan due to the full extinguishment of our Second Lien Term Loan in 2020.

Other expense, net is primarily comprised of foreign exchange gains and losses on cash, accounts receivable and intercompany balances denominated in currencies other than the functional currencies of our subsidiaries .

Other (expense) income, net

Interest expense decreased $5.1 million, or 52.9%, for the three months ended June 30, 2021 as compared to the same period last year.

Interest expense decreased $9.5 million, or 50.1%, for the six months ended June 30, 2021 as compared to the same period last year.

The decreases in interest expense in both the three and six-months ended June 30, 2021 compared to the same periods last year were due to lower interest expense paid for our First Lien Term Loan as a result of the partial extinguishment of our First Lien Term Loan in 2020 and 2021 and no interest paid for our Second Lien Term Loan due to the full extinguishment of our Second Lien Term Loan in 2020.

Other (expense) income, net is primarily comprised of foreign exchange gains and losses on cash, accounts receivable and intercompany balances denominated in currencies other than the functional currencies of our subsidiaries .

Our foreign currency exposure is primarily driven by fluctuations in the foreign currency exchanges rates of the Euro, British Pound and the Chinese Yuan.

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Three Months Ended

Six Months Ended

(In thousands)

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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.

Our effective tax rates were tax expense of 22.0% and 68.8% for the three months ended March 31, 2021 and 2020, respectively.

The decrease in the effective income tax rate from the three months ended March 31, 2020 was primarily due to U.S.

tax losses and credits in that period being subject to a valuation allowance, whereas only an insignificant valuation allowance was necessary for the three months ended March 31, 2021.

In the three months ended March 31, 2020 we recorded a $0.6 million one-time tax benefit from the change in tax law resulting from the enactment of the CARES Act.

Our effective tax rates were 7.6% and 15.8% for the three months ended June 30, 2021 and 2020, respectively.

The change in effective tax rates was primarily due to an increase in excess tax benefits from stock-based compensation recognized in the three months ended June 30, 2021, as well as the change in the mix of income and losses in the various tax jurisdictions in which we operate.

In addition, the U.S.

tax losses and credits in the three months ended June 30, 202 were subject to a valuation allowance, whereas only an insignificant valuation allowance was necessary for the three months ended June 30, 2021.

Our effective tax rates were 17.2% and 22.5% for the six months ended June 30, 2021 and 2020, respectively.

The change in effective tax rates was primarily due to an increase in excess tax benefits from stock-based compensation recognized in the six months ended June 30, 2021, as well as the change in the mix of income and losses in the various tax jurisdictions in which we operate, and also due to lower valuation allowance for our U.S.

tax losses and credits in the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

In addition, in the six months ended June 30, 2021, we recorded a $1.4 million one-time tax expense related to the remeasurement of our United Kingdom deferred tax liabilities as a result of the enactment of the increased corporate tax rate in the United Kingdom.

In the six months ended June 30, 2020, we recorded a $0.6 million one-time tax benefit from the change in tax law resulting from the enactment of the CARES Act.

Segment Results

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The following table sets forth our net revenue by segment expressed both in dollars (thousands) and as a percentage of net revenue:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Gamer and Creator Peripherals Segment

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Gamer and Creator Peripherals Segment

Net revenue of the gamer and creator peripherals segment increased $100.1 million, or 131.9%, for the three months ended March 31, 2021 as compared to the same period last year, primarily due to strong sales growth across all product categories, particularly the Elgato branded streaming products.

We believe the strong revenue growth year-over-year is driven in part by the COVID-19 shelter-in-place orders as consumers spend more time working and gaming at home.

Net revenue of the gamer and creator peripherals segment increased $45.0 million, or 40.9%, for the three months ended June 30, 2021 as compared to the same period last year, primarily due to strong sales growth across all product categories, led primarily by increased sales of our Elgato branded streaming and peripherals products, as well as our SCUF branded console products.

Net revenue of the gamer and creator peripherals segment increased $145.1 million, or 78.0%, for the six months ended June 30, 2021 as compared to the same period last year due to strong growth across all product categories, led primarily by increased sales of our Elgato branded streaming and peripherals products, as well as our SCUF branded console products.

We believe the revenue growth in the three- and six-month periods was driven in part by the COVID-19 shelter-in-place orders as consumers spend more time working and gaming at home and gamers seeking to improve their performance by upgrading their gear.

Gaming Components and Systems Segment

Net revenue of the gaming components and systems segment increased $120.8 million, or 51.9%, for the three months ended March 31, 2021 as compared to the same period last year, primarily as a result of strong sales growth across all products due to continued strong market demand, we believe driven in part by the COVID-19 shelter-in-place orders.

Net revenue of the gaming components and systems segment increased $47.5 million, or 17.6%, for the three months ended June 30, 2021 as compared to the same period last year, primarily driven by increase in demand for our PSUs and pre-built systems.

Net revenue of the gaming components and systems segment increased $168.3 million, or 33.5%, for the six months ended June 30, 2021 as compared to the same period last year, with revenue growth across all products, particularly, PSUs and pre-built systems.

Segment Gross Profit and Gross Margin

The following table sets forth our gross profit expressed in dollars (thousands) and gross margin (which we define as gross profit as a percentage of net revenue) by segment:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Gamer and Creator Peripherals Segment

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Gamer and Creator Peripherals Segment

The gross profit of the gamer and creator peripherals segment increased in the three months ended March 31, 2021 by $46.7 million, or 211.1%, as compared to the same period last year.

The 9.9% increase in gross margin was primarily driven by the strong growth in sales of higher margin Elgato branded streaming products and the increase in sales volume in the same period, coupled with less promotional activities.

This was partially offset by the increase in freight costs driven by inventory supply limitations largely due to the COVID-19 pandemic.

The gross profit of the gamer and creator peripherals segment increased in the three months ended June 30, 2021 by $15.9 million, or 41.0%, as compared to the same period last year.

Gross margin remained flat at 35.2% for the three months ended June 30, 2021, and for the same period last year.

Gross margin for the three months ended June 30, 2021 was burdened with increased freight costs and logistics costs due to pandemic related port shutdowns and inventory supply limitations.

The gross profit of the gamer and creator peripherals segment increased in the six months ended June 30, 2021 by $62.6 million, or 102.9%, as compared to the same period last year.

The 4.6% increase in gross margin in the six-month period, compared to the same period last year, was primarily driven by the strong growth in sales of higher margin Elgato branded streaming products and the increase in sales volume in the same period, as well as a reduction in tariff costs.

This was partially offset by the increase in freight costs and logistics costs driven by inventory supply limitations largely due to the COVID-19 pandemic, as well as pandemic related port shutdowns in the second fiscal quarter of 2021.

Gaming Components and Systems Segment

The gross profit of the gaming components and systems segment increased in the three months ended March 31, 2021 by $35.0 million, or 61.9% as compared to the same period last year.

The 1.6% increase in gross margin was primarily driven by a favorable shift in product mix to higher margin products and the increase in sales volume in the same period.

The gross profit of the gaming components and systems segment increased in the three months ended June 30, 2021 by $9.4 million, or 14.2%, as compared to the same period last year.

The 0.7% decrease in gross margin in the three-month period, compared to the same period last year, was driven by increased freight costs, both ocean and air, including a higher mix of incoming air freight and higher input costs, largely due to the COVID-19 pandemic.

The gross profit of the gaming components and systems segment increased in the six months ended June 30, 2021 by $44.4 million, or 36.1%, as compared to the same period last year.

The 0.5% increase in gross margin in the six-month period, compared to the same period last year, was primarily driven by a favorable shift in product mix to higher margin products and the increase in sales volume in the same period.

This was partially offset by increased freight costs and input costs, largely due to the COVID-19 pandemic.

Liquidity and Capital Resources

Our principal sources of liquidity have been the payments received from customers purchasing our products, the net proceeds we received from private sales of equity securities, the borrowings under our credit facilities and the net proceeds we received from our IPO, completed in September 2020.

As of March 31, 2021, we had cash and restricted cash, in aggregate of $125.6 million and $48.1 million capacity under our revolving credit facility.

Our total borrowings outstanding as of March 31, 2021 consisted of $294.3 million of long-term debt.

As of June 30, 2021, we had cash and restricted cash, in aggregate of $138.6 million and

$ 48.6 million capacity under our revolving credit facility.

Our total borrowings outstanding as of June 30, 2021 consisted of $270.0 million of long-term debt.

We anticipate our principal uses of cash will include purchases of inventory, payroll and other operating expenses related to the development and marketing of our gear, repayments of debt and related interest, and purchases of property and equipment and other contractual obligations for the foreseeable future.

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The following table summarizes our cash flows for the periods presented (in thousands):

Three Months Ended March 31,

Six Months Ended June 30,

Net cash provided by (used in):

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Cash Flows from Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2021 was $27.8 million and consisted of net income of $46.7 million, non-cash adjustments of $13.5 million and were partially offset by $32.4 million from changes in our net operating assets and liabilities.

The non-cash adjustments consisted primarily of amortization of intangibles and depreciation, stock-based compensation expense, loss on debt extinguishment and amortization of debt issuance costs.

The net cash outflow from changes in our net operating assets and liabilities was primarily related to increase in inventory, accounts receivable and prepaid expenses and other assets, as well as a decrease in accounts payable mainly due to timing of payments.

The net cash outflow was partially offset by an increase in other liabilities and accrued expenses.

Net cash provided by operating activities for the three months ended March 31, 2020 was $2.0 million and consisted of a net income of $1.2 million, non-cash adjustments of $12.8 million and partially offset by $12.0 million from changes in our net operating assets and liabilities.

The non-cash adjustments consisted primarily of amortization of intangibles and depreciation, stock-based compensation expense and amortization of debt issuance costs.

The net cash outflow from changes in our net operating assets and liabilities was primarily related to decreases in accounts payable and other liabilities and accrued expenses.

The net cash outflow was partially offset by decreases in accounts receivable and prepaid expenses and other assets.

Net cash provided by operating activities for the six months ended June 30, 2021 was $59.4 million and consisted of net income of $74.5 million, non-cash adjustments of $27.9 million and was partially offset by $43.0 million from changes in our net operating assets and liabilities.

The non-cash adjustments consisted primarily of amortization of intangibles and depreciation, stock-based compensation expense, loss on debt extinguishment and amortization of debt issuance costs and change in deferred tax assets.

The net cash outflow from changes in our net operating assets and liabilities was primarily related to increase in inventory, prepaid expenses and other assets, and a decrease in accounts payable mainly due to timing of payments.

The net cash outflow was partially offset by a decrease in accounts receivable and an increase in other liabilities and accrued expenses.

Net cash provided by operating activities for the six months ended June 30, 2020 was $75.6 million and consisted of a net income of $23.8 million, non-cash adjustments of $24.7 million and $27.1 million from changes in our net operating assets and liabilities.

The non-cash adjustments consisted primarily of amortization of intangibles and depreciation, stock-based compensation expense, amortization of debt issuance costs, and change in deferred tax assets.

The net cash inflow from changes in our net operating assets and liabilities was primarily related to an increase in other liabilities and accrued expenses and accounts payable, as well decreases in inventories and prepaid expense and other assets.

The net cash inflow was partially offset by an increase in accounts receivable.

Cash Flows from Investing Activities

Cash used in investing activities was $8.1 million for the three months ended March 31, 2021 and consisted of $4.4 million for the payment of deferred and contingent consideration related to Origin acquisition, $2.0 million for the purchase of capital equipment and software, and $1.7 million for the acquisition of an immaterial business.

Cash used in investing activities was $1.8 million for the three months ended March 31, 2020 and it consisted of payments for capital equipment and software.

Cash used in investing activities was $10.9 million for the six months ended June 30, 2021 and consisted of $4.9 million for the purchase of capital equipment and software, $4.3 million for the payment of deferred and contingent consideration related to the Origin acquisition, and $1.7 million for the acquisition of an immaterial business.

Cash used in investing activities was $3.0 million for the six months ended June 30, 2020 and consisted of payments for capital equipment and software.

Cash Flows from Financing Activities

Cash used in financing activities was $27.8 million for the three months ended March 31, 2021 and consisted of $28.0 repayment of debt and was partially offset by $0.2 million proceeds received from the exercise of employee stock options.

Cash used in financing activities was $1.3 million for the three months ended March 31, 2020 and consisted of repayments of debt of $1.2 million and the payment of offering costs of $0.1 million.

Credit Facilities and Dividend

Cash used in financing activities was $43.5 million for the six months ended June 30, 2021 and consisted of $53.0 repayment of debt, partially offset by $9.5 million proceeds received from the issuance of shares through the employee equity incentive plans.

Cash used in financing activities was $13.1 million for the six months ended June 30, 2020 and consisted primarily of $13.8 million repayments of debt, which was partially offset by $1.0 million proceeds received from the issuance of shares through the employee equity incentive plans.

Credit Facilities

In August 2017, we entered into a syndicated First Lien Credit and Guaranty Agreement, or the First Lien, with various financial institutions.

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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.

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 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 3.5%, or (b) the greater of (i) LIBOR and (ii) 1.0%, plus a margin of 4.5%.

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With the excess cash on hand, we have made voluntary prepayments in aggregate of $80.8 million in 2020, consisting of $30.8 million in September 2020, with our IPO proceeds, $25.0 million in November 2020 and $25.0 million in December 2020.

We further prepaid $28.0 million in March 2021 .

We further prepaid $28.0 million and $25.0 million in March and June 2021, respectively .

In August 2017, we also entered into a syndicated Second Lien Credit and Guaranty Agreement, or the Second Lien, with various financial institutions.

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In 2020, with excess cash on hand, we repaid an aggregate of $50 million of the Second Lien Term Loan, consisting of $10.0 million in May 2020, $15.0 million in August 2020 and $25.0 million in September 2020.

Following these repayments, the Second Lien Term Loan was fully repaid and all obligations and covenants thereunder were terminated.

Following these repayment s , the Second Lien Term Loan was fully repaid and all obligations and covenants thereunder were terminated.

All accrued and unpaid interest on the borrowed amounts is due and payable on a quarterly basis.

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These restrictive covenants include operating covenants restricting, among other things, our ability to incur additional indebtedness, effect certain acquisitions or make other fundamental changes.

We were in compliance with all of the covenants as of March 31, 2021.

We were in compliance with all of the covenants as of June 30, 2021.

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.

1 unchanged sentence

Contractual Obligations and Other Commitments

The following table summarizes our contractual obligations and commitments as of March 31, 2021:

The following table summarizes our contractual obligations and commitments as of June 30, 2021:

Payments Due by Period

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Operating leases (3)

Represents our syndicated First Lien Term Loan and our anticipated repayment schedule for the loan as of March 31, 2021.

Represents our syndicated First Lien Term Loan and our anticipated repayment schedule for the loan as of June 30, 2021.

See Note 8 “Debt” to our condensed combined consolidated financial statements for more information.

Represents an estimate of our non-cancelable open purchase orders and contractual obligations in the ordinary course of business for which we have not received the goods or services as of March 31, 2021.

Consists of contractual obligations from our non-cancellable operating leases for office and warehouse spaces.

On April 27, 2021, we entered into an operating lease agreement for our new Milpitas headquarters in California, U.S.

The lease term of this new agreement is 10.5 years with the accounting lease commencement date expected to be in May 2021.

The total undiscounted fixed lease payment for this agreement is approximately $45.6.

million and this amount is not included in the table above.

Off-Balance Sheet Arrangements

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Actual results may differ from these estimates under different assumptions or conditions.

There have been no material changes to our critical accounting policies and estimates during the three months ended March 31, 2021 as compared to the critical accounting policies and estimates described in our Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 11, 2021.

There have been no material changes to our critical accounting policies and estimates during the six months ended June 30, 2021 as compared to the critical accounting policies and estimates described in our Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 11, 2021.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis