Corsair Gaming, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with the condensed combined consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the section titled “Risk Factors” and in other parts of this Quarterly Report on Form 10-Q. Overview We are a leading global provider and innovator of high-performance gear for gamers, streamers and content creators. We design industry-leading gaming gear that helps digital athletes, from casual gamers to committed professionals, to perform at their peak across PC or console platforms, and streaming gear that enables creators to produce studio-quality content to share with friends or to broadcast to millions of fans. Our solution is a complete suite of gear that addresses the most critical components for both game performance and streaming. Our product offering is enhanced by our two proprietary software platforms: iCUE for gamers and the Elgato suite for content creators, which provide unified, intuitive performance, and aesthetic control and customization across their respective product families. Recently, we further enhanced our streaming product offerings through acquiring EpocCam software, Gamer Sensei gaming coaching services and Visuals by Impulse (“ VBI ”) content creative design platform. We group our products into two categories (operating segments): • Gamer and creator peripherals. Includes our high-performance gaming keyboards, mice, headsets, controllers, and streaming gear, which includes capture cards, Stream Decks, USB microphones, studio accessories, and EpocCam software, as well as coaching and training services and content design services, 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. Our gear is sold to gaming enthusiasts worldwide through either our retail channel or our direct-to-consumer channel. In our retail channel, we distribute our gear either directly to the retailer, such as Amazon and Best Buy, or through key distributors. 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 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. In July 2019, we acquired Origin PC Corporation, a company based in Florida, specializing in delivering hand-built, personalized high-end gaming PCs and in December 2019, we acquired SCUF Holdings, Inc. and its subsidiaries. SCUF, headquartered in Georgia, specializes in delivering superior accessories and customized gaming controllers for gaming consoles and PCs that are used by top professional gamers as well as competitive amateur gamers. The addition of Origin’s and SCUF’s products enhances and expands our product offering to PC and console gamers, respectively. We subsequently completed three more immaterial acquisitions. I n August 2020, we acquired EpocCam to enhance the Elgato streaming camera software offering; in October 2020, we acquired Gamer Sensei to offer gaming coaching services to the wide audience of gamers looking to improve their skills and in February 2021, we acquired VBI to provide creative services to streamers looking to professionalize the look of their broadcast. 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 $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. 22 Table of Contents Key Factors Affecting Our Business Our results of operations and financial condition are affected by numerous factors, including those discussed in the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and those described below. Impact of Industry Trends . Our results of operations and financial condition are impacted by industry trends in the gaming market, including: • Increasing gaming engagement . We believe that gaming’s increasing time share of global entertainment consumption will drive continued growth in spending on both games and gaming gear. Gaming continues to become increasingly social and streaming viewership more widely adopted along with increasing numbers of content creators. We believe this trend, which has accelerated in the current environment, will continue and Corsair is well positioned to serve the streaming market with best-in-class tools for content creation. • Introduction of new high-performance computing hardware and sophisticated games . We believe that the introduction of more powerful CPUs and GPUs that place increased demands on other system components, such as memory, power supply or cooling, has a significant effect on increasing the demand for our gear. In addition, we believe that our business success depends in part on the introduction and success of games with sophisticated graphics that place increasing demands on system processing speed and capacity and therefore require more powerful CPUs or GPUs, which in turn drives demand for our high-performance gaming components and systems, such as PSUs and cooling solutions, and our gaming PC memory. As a result, our operating results may be materially affected by the timing of, and the rate at which computer hardware companies introduce, new and enhanced CPUs and GPUs, the timing of, and rate at which computer game companies and developers introduce, sophisticated new and improved games that require increasingly high levels of system and graphics processing power, and whether these new products and games are widely accepted by gamers. Impact of Product Mix . Our gamer and creator peripherals segment has a higher gross margin than our gaming components and systems segment. As a result, our overall gross margin is affected by changes in product mix. External factors can have an impact on our product mix, such as popular game releases that can increase sales of peripherals and availability of new CPUs and GPUs that can impact component sales. In addition, within our gamer and creator peripherals and gaming components and systems segments, gross margin varies between products, and significant shifts in product mix within either segment may also significantly impact our overall gross margin. Impact of Customer Concentration . 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 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. Our ability to effectively optimize these shipping expenses, for example utilizing expensive shipping options such as air freight for smaller packages and more urgent deliveries and more cost-efficient options, such as train or boat, for other shipments, has an impact on our expenses and results of operations. Impact of New Product Introductions . 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 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. Impact of Seasonal Sales Trends. We have experienced and expect to continue to experience seasonal fluctuations in sales due to the buying patterns of our customers and spending patterns of gamers. Our net revenue has generally been lowest in the first and second calendar quarters due to lower consumer demand following the fourth quarter holiday season and because of the decline in sales that typically occurs in anticipation of the introduction of new or enhanced CPUs, GPUs, and other computer hardware products, which usually take place in the second calendar quarter and which tend to drive sales in the following two quarters. Further, our net revenue tends to be higher in the third and fourth calendar quarter due to seasonal sales such as “Black Friday,” “Cyber Monday” and “Singles Day” in China, as retailers tend to make purchases in advance of these sales, and our sales also tend to be higher in the fourth quarter due to the introduction of new consoles and high-profile games in connection with the holiday season. As a consequence of seasonality, our net revenue for the second calendar quarter is generally the lowest of the year followed by the first calendar quarter. We expect these seasonality trends to continue. 23 Table of Contents Impact of Fluctuations in Currency Exchange Rates . We are subject to inherent risks attributed to operating in a global economy. Some of our international sales are denominated in foreign currencies and any unfavorable movement in the exchange rate between U.S. dollars and the currencies in which we conduct sales in foreign countries, in particular the Euro and the British Pound could have an adverse impact on our net revenue. In addition, we generally pay our employees located outside the United States in the local currency, with a significant portion of those payments being made in Taiwan dollars and Euros. Additionally, as a result of our foreign sales and operations, we have other expenses, assets and liabilities that are denominated in foreign currencies, in particular the Chinese Yuan, Euro and British Pound. Impact of COVID-19. 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. Our manufacturing facilities in Atlanta and the United Kingdom, and our contract manufacturing facilities in Southeast Asia, many of which closed between one to two months in early 2020 have caused some disruptions in our supply chain which also resulted in increased air freight costs. 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 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. Further, we believe the increased demand for our gear has been driven in part by individuals seeking to improve their work from home setup. 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 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 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 . Integrated circuits, or ICs, account for most of the cost of producing our high-performance memory products. IC prices are subject to pricing fluctuations which can affect the average sales prices of memory modules, and thus impact our net revenue, and can have an effect on gross margins. The impact on net revenues can be significant as our high-performance memory products, included within our gaming components and systems segment, represent a significant portion of our net revenue. Components of our Operating Results Net Revenue We generate materially all of our net revenue from the sale of gamer and creator peripherals and gaming components and systems to retailers, including online retailers, gamers and distributors worldwide. Our revenue is recognized net of allowances for returns, discounts, sales incentives and any taxes collected from customers. Cost of Revenue Cost of revenue consists primarily of product costs, including costs of contract manufacturers, inbound freight costs from manufacturers to our distribution hubs as well as inter-hub shipments, cost of materials and overhead, duties and tariffs, warranty replacement cost to process and rework returned items, depreciation of tooling equipment, warehousing costs, excess and obsolete inventory write-downs, and certain allocated costs related to facilities and information technology, or IT, and personnel-related expenses and other operating expenses related to supply chain logistics. 24 Table of Contents Operating Expenses Operating expenses consist of product development and sales, general and administrative expenses. Sales, general and administrative. Sales, general and administrative, or SG&A expenses represent the largest component of our operating expenses and consist of distribution costs, sales, marketing and other general and administrative costs. Distribution costs include outbound freight and the costs to operate our distribution hubs. Sales and marketing costs relate to the costs to operate our global sales force that works in conjunction with our channel partners, gaming team and event sponsorships, advertising and marketing promotions of our products and services, costs of maintaining our web store and credit card processing fees related to sales on our webstore, and personnel-related cost. General and administrative costs consist primarily of personnel-related expenses for our finance, legal, human resources, IT and administrative personnel, as well as the costs of professional services related to these functions. We expect our total sales, general and administrative expenses to increase in absolute dollars as we continue to actively promote and distribute a higher volume of our products and also due to the anticipated growth of our business and related infrastructure, including increase in legal, accounting, insurance, compliance, investor relations and other costs associated with becoming a public company. Product development . Product development costs are generally expensed as incurred and reported in the condensed combined consolidated statements of operations. Product development costs consist primarily of the costs associated with the design and testing of new products and improvements to existing products. These costs relate primarily to compensation of personnel and consultants involved with product design, definition, compatibility testing and qualification. We expect our product development expenses to increase in absolute dollars as we continue to make significant investments in developing new products and enhancing existing products. Interest Expense 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) 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. dollar. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates. Income Tax Expense 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 foreign tax credits and changes in tax laws. Deferred tax assets are reduced through the establishment of a valuation allowance, if, based upon available evidence, it is determined that it is more likely than not that the deferred tax assets will not be realized. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the tax and financial reporting bases of our assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in future years in which those temporary differences are expected to be recovered or settled. 25 Table of Contents Results of Operations The following tables set forth the components of our condensed combined consolidated statements of operations, in dollars and as a percentage of total net revenue, for each of the periods presented. Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (In thousands) Net revenue $ 472,903 $ 380,407 $ 1,002,317 $ 688,925 Cost of revenue 342,552 275,343 711,638 505,239 Gross profit 130,351 105,064 290,679 183,686 Operating expenses: Sales, general and administrative 80,169 56,827 158,022 110,556 Product development 15,469 11,827 30,655 23,383 Total operating expenses 95,638 68,654 188,677 133,939 Operating income 34,713 36,410 102,002 49,747 Other (expense) income: Interest expense (4,508 ) (9,572 ) (9,454 ) (18,946 ) Other (expense) income, net (175 ) 11 (2,600 ) (52 ) Total other expense, net (4,683 ) (9,561 ) (12,054 ) (18,998 ) Income before income taxes 30,030 26,849 89,948 30,749 Income tax expense (2,285 ) (4,249 ) (15,480 ) (6,932 ) Net income $ 27,745 $ 22,600 $ 74,468 $ 23,817 Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Net revenue 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenue 72.4 72.4 71.0 73.3 Gross profit 27.6 27.6 29.0 26.7 Operating expenses: Sales, general and administrative 17.0 14.9 15.8 16.0 Product development 3.3 3.2 3.1 3.4 Total operating expenses 20.3 18.1 18.8 19.4 Operating income 7.3 9.5 10.2 7.2 Other (expense) income: Interest expense (1.0 ) (2.5 ) (0.9 ) (2.8 ) Other (expense) income, net (0.0 ) 0.0 (0.3 ) (0.0 ) Total other expense, net (1.0 ) (2.5 ) (1.2 ) (2.8 ) Income before income taxes 6.3 7.0 9.0 4.5 Income tax expense (0.5 ) (1.1 ) (1.5 ) (1.0 ) Net income 5.8 % 5.9 % 7.4 % 3.5 % Components of Results of Operations Net Revenue Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (In thousands) Net revenue $ 472,903 $ 380,407 $ 1,002,317 $ 688,925 26 Table of Contents 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 (In thousands) Gross profit $ 130,351 $ 105,064 $ 290,679 $ 183,686 Gross margin 27.6 % 27.6 % 29.0 % 26.7 % 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 (In thousands) Sales, general and administrative $ 80,169 $ 56,827 $ 158,022 $ 110,556 27 Table of Contents 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 (In thousands) Product development $ 15,469 $ 11,827 $ 30,655 $ 23,383 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 (In thousands) Interest expense $ (4,508 ) $ (9,572 ) $ (9,454 ) $ (18,946 ) Other (expense) income, net (175 ) 11 (2,600 ) (52 ) 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. 28 Table of Contents Income Tax Expense Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (In thousands) Income before income taxes $ 30,030 $ 26,849 $ 89,948 $ 30,749 Income tax expense (2,285 ) (4,249 ) (15,480 ) (6,932 ) Effective tax rate 7.6 % 15.8 % 17.2 % 22.5 % 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. 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 Segment Net Revenue 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 Gamer and Creator Peripherals Segment $ 155,157 32.8% $ 110,115 28.9% $ 331,069 33.0% $ 185,976 27.0% Memory Products 158,735 33.6 145,969 38.4 320,599 32.0 282,852 41.1 Other Component Products 159,011 33.6 124,323 32.7 350,649 35.0 220,097 31.9 Gaming Components and Systems Segment 317,746 67.2 270,292 71.1 671,248 67.0 502,949 73.0 Total Net Revenue $ 472,903 100.0% $ 380,407 100.0% $ 1,002,317 100.0% $ 688,925 100.0% Gamer and Creator Peripherals Segment 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. 29 Table of Contents 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 $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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 Gamer and Creator Peripherals Segment $ 54,634 35.2% $ 38,743 35.2% $ 123,500 37.3% $ 60,876 32.7% Memory Products 28,126 17.7 30,950 21.2 62,049 19.4 62,955 22.3 Other Component Products 47,591 29.9 35,371 28.5 105,130 30.0 59,855 27.2 Gaming Components and Systems Segment 75,717 23.8 66,321 24.5 167,179 24.9 122,810 24.4 Total Gross Profit $ 130,351 27.6% $ 105,064 27.6% $ 290,679 29.0% $ 183,686 26.7% Gamer and Creator Peripherals Segment 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 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 June 30, 2021, we had cash and restricted cash, in aggregate of $138.6 million and 30 Table of Contents $ 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. We believe that our existing cash balances and cash flow from operations will be sufficient to fund our principal uses of cash for at least the next 12 months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth (if any), the timing and extent of spending on research and development efforts and other business initiatives, the expansion of sales and marketing activities, the timing of new product introductions, market acceptance and demand for our products and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. In addition, we may enter into other arrangements for potential investments in, or acquisitions of, complementary businesses, services or technologies, which could require us to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financial covenants that would restrict our operations. There can be no assurance that any such equity or debt financing will be available on favorable terms, or at all. Cash Flows The following table summarizes our cash flows for the periods presented (in thousands): Six Months Ended June 30, 2021 2020 Net cash provided by (used in): Operating activities $ 59,397 $ 75,608 Investing activities (10,931 ) (3,006 ) Financing activities (43,541 ) (13,124 ) Cash Flows from Operating Activities 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 $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. 31 Table of Contents Cash Flows from Financing Activities 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. The First Lien originally provided a $235 million term loan, or the 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, or the Revolver. The First Lien and the Revolver mature 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. 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%. As a result of the First Lien amendment in October 2018, the margin for 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, in each case, based on our net leverage ratio. According to the repayment schedule, the Consolidated Excess Cash Flow (as defined in the First Lien) and the IPO repayment provisions as set forth in the First Lien, we have made required repayments of the First Lien Term Loan of $59.6 million, in aggregate, in 2020, consisting of $1.2 million in March 2020, $2.6 million in April 2020 and $55.8 million in September 2020, with our IPO proceeds. There is no further repayment required under the First Lien Term Loan until it matures in full in August 2024. We may prepay the First Lien Term Loan and the Revolver at any time without premium or penalty other than customary LIBOR breakage. 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 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. The Second Lien initially provided a $65 million term loan, or the 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%. 32 Table of Contents We had the ability to prepay the Second Lien Term Loan any time after the first and second anniversary without premium or penalty . 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 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. 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 us, 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. 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. 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. 33 Table of Contents Contractual Obligations and Other Commitments The following table summarizes our contractual obligations and commitments as of June 30, 2021: Payments Due by Period Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years (In thousands) Debt principal and interest (1) $ 315,794 $ 13,193 $ 26,422 $ 276,179 $ — Purchase obligations (2) 112,131 107,731 3,597 803 — Operating leases (3) 69,761 6,434 17,054 14,026 32,247 Total $ 497,686 $ 127,358 $ 47,073 $ 291,008 $ 32,247 (1) 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. (2) 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 June 30, 2021. (3) Consists of contractual obligations from our non-cancellable operating leases for office and warehouse spaces. Off-Balance Sheet Arrangements We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities. Critical Accounting Polices and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed combined consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed combined consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed combined consolidated financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. 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 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 Refer to Note 2 to the condensed combined consolidated financial statements included in this Quarterly Report on Form 10-Q for recent accounting pronouncements adopted and to be adopted. 34 Table of Contents