What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-02 compared with 2021-08-03 · 147 added, 121 removed, 224 unchanged (54% of the section changed)

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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.

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, and gaming monitor, among others.

Our gear is sold to gaming enthusiasts worldwide through either our retail channel or our direct-to-consumer channel.

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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 $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.

Our net revenue was $391.1 million and $457.1 million for the three months ended September 30, 2021 and 2020, respectively, representing a period-over-period decrease of 14.4%.

We had net income of $1.8 million and $36.4 million for the three months ended September 30, 2021 and 2020, respectively .

Our net revenue was $1.4 billion and $1.1 billion for the nine months ended September 30, 2021 and 2020, respectively, representing a period-over-period increase of 21.6%.

We had net income of $76.2 million and $60.2 million for the nine months ended September 30, 2021 and 2020, respectively.

Net cash provided by operating activities was $25.1 million and $100.3 million for the nine months ended September 30, 2021 and 2020, respectively.

Key Factors Affecting Our Business

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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.

We believe this trend 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.

We believe that the introduction and availability 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.

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, as well as the availability and pricing of such 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 .

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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.

Further, a limited number of retailers and distributors represent a significant portion of our net revenue, with eRetailer Amazon accounting for 26.4% and 25.1% of our net revenue for the nine months ended September 30, 2021 and 2020, respectively, and sales to our ten largest customers accounting for approximately 50.5% and 51.0% of our net revenue for the nine months ended September 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.

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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 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.

Notwithstanding the results of operations for the third quarter of 2021, which were adversely impacted by the COVID-19 pandemic, historically, 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.

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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.

Historical seasonal patterns may not continue in the future and have been impacted, and may be further impacted in

the future, by increasing supply constraints, GPUs shortages, shifts in customer behavior and the evolving impacts of the COVID-19 pandemic .

Impact of Fluctuations in Currency Exchange Rates .

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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.

Due to the COVID-19 pandemic, there has been and will continue to be uncertainty and disruption in the global economy and financial markets.

Since early 2020, we have experienced some business disruptions due to COVID-19, including the stoppage in our factories in early 2020, disruption in our supply chain and increased distribution costs, which led to increases in operating costs such as the significantly elevated ocean freight costs we incurred in the third quarter of 2021 as compared to the same quarter from the prior year and the most recent trailing quarter.

As a result of the COVID-19 pandemic, we are continuing to experience logistics challenges globally.

These negative financial impacts have been offset by strong revenue growth year-over-year partly due to an increase in demand for our gear as more people in more countries are under shelter-in-place restrictions, which we believe 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.

In contrast, as the COVID-19 pandemic subsides, it has, and could continue to result in shelter-in-place and other similar restrictions being eased.

Such easing of restrictions likely has, and will continue to result in consumers returning to other alternative forms of entertainment and interaction.

This in turn has, and could continue to, result in a decline in demand for our products.

The full extent of the impact of the COVID-19 pandemic on our business, results of operations, cash flows and financial position will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the prevalence and severity of any variants, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.

Even after the COVID-19 outbreak has subsided, we may continue to experience significant impacts to our business as a result of its global economic impact, including any economic downturn or recession that has occurred or may occur in the future.

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 levels 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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Cost of revenue

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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.

Net revenue decreased $66.0 million, or 14.4%, for the three months ended September 30, 2021 as compared to the same period last year.

The decrease was due to a 13.8% decrease in sales for our gamer and creator peripherals segment and a 14.8% decrease in sales for our gaming components and systems segment .

We believe the decrease in sales in both segments was primarily due to supply and logistic constraints caused by the COVID-19 pandemic, as well as the shortage of reasonably priced GPUs.

Net revenue increased $247.4 million, or 21.6%, for the nine months ended September 30, 2021 as compared to the same period last year.

The increase was due to a 35.3% increase in sales for our gamer and creator peripherals segment and a 15.6% increase in sales for our gaming components and systems segment .

Overall, we saw strong growth in revenue for both our gamer and creator peripherals segment and gaming components and systems segments year-over-year primarily resulting from a larger number of consumers that are gaming and working from home due to the COVID-19 pandemic, but this revenue growth was partially offset by a decrease in revenue in the third quarter of 2021 in both segments primarily due to supply and logistic constraints caused by the COVID-19 pandemic, as well as the shortage of reasonably priced GPUs.

Gross Profit and Gross Margin

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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.

Gross margin decreased to 25.9% for the three months ended September 30, 2021 from 28.0% for the same period last year.

The decrease was driven primarily by an increase in logistic costs which were largely driven by the COVID-19 pandemic, and increased promotional activity.

Gross margin increased to 28.1% for the nine months ended September 30, 2021 from 27.2% 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.

The increase in gross margin was partially offset by increased logistics costs largely due to the COVID-19 pandemic, and pandemic related port shutdowns in addition to increased promotional activity.

Sales, General and Administrative (SG&A)

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Sales, general and administrative

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.

SG&A expenses increased $10.8 million, or 16.5%, for the three months ended September 30, 2021 as compared to the same period last year.

The increase was primarily due a $2.7 million increase in personnel-related costs due to headcount growth and higher stock-based compensation, a $2.5 million increase in marketing expenses, mainly due to increase in sponsorships and digital marketing programs, a $2.0 million increase in director and officer insurance fees, and a $1.9 million increase in distribution costs including outbound freight and the costs to operate our distribution hubs largely due to the COVID-19 pandemic impact to logistic constraints.

Other increases in SG&A expenses included increased credit card processing fees, driven by an increase in our webstore sales and professional services expenses.

SG&A expenses increased $58.3 million, or 33.1%, for the nine months ended September 30, 2021 as compared to the same period last year.

The increase was primarily due to a $20.7 million increase in distribution costs including outbound freight expenses and the costs to operate our distribution hubs, in each case, due to increased sales volume as well as the COVID-19 pandemic impact to logistic constraints, a $19.4 million increase in personnel-related costs due to headcount growth and higher stock-based compensation, a $6.0 million increase in director and officer insurance fees, a $5.8 million increase in marketing expenses, mainly due to increase in sponsorships and digital marketing programs, and a $3.0 million increase in credit card processing fees driven by an increase in our webstore sales.

Other increases in SG&A expenses included increased professional services expenses.

Product Development

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Product development

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.

Product development expenses increased $1.6 million, or 12.3%, for the three months ended September 30, 2021 as compared to the same period last year.

The increase was primarily due to a $0.6 million increase in consultant and contractor expense, a $0.7 million increase in other product development related costs to support our continued innovation and broadening of our product portfolio, and a $0.3 million increase in personnel-related expense.

Product development expenses increased $8.9 million, or 24.4%, for the nine months ended September 30, 2021 as compared to the same period last year.

The increase was primarily due to a $5.7 million increase in personnel-related expenses due to headcount growth and higher stock-based compensation, a $1.8 million increase in other product development related costs to support our continued innovation and broadening of our product portfolio, and a $1.4 million increase in consultant and contractor expense.

Interest Expense and Other (Expense) Income, Net

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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.

Interest expense decreased $3.0 million, or 29.2%, for the three months ended September 30, 2021 as compared to the same period last year.

Interest expense decreased $12.5 million, or 42.8%, for the nine months ended September 30, 2021 as compared to the same period last year.

The decreases in interest expense in both the three and nine-months ended September 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 and full extinguishment of our First Lien Term Loan in 2020 and 2021, respectively, and no interest paid for our Second Lien Term Loan due to the full extinguishment of our Second Lien Term Loan in 2020.

Additionally, the decreases in interest expense were due in part, to a lesser extent, lower interest rate on our new Term Loan executed in September 2021 which replaced our First Lien Term Loan.

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 .

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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 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.

Our effective tax rates were 17.4% and 8.1% for the three months ended September 30, 2021 and 2020, respectively.

The effective tax rate was higher in the three months ended September 30, 2021 as compared to the same period last year primarily due to a $4.3 million tax benefit recognized in the three months ended September 30, 2020, resulting from the change in management’s assessment of the realizability of certain deferred tax assets as a result of the Reorganization.

The increase to the effective tax rate for such three-month period was partially offset by the favorable impacts on the effective tax rate for 2021 from higher excess tax benefits related to stock-based compensation recognized in the three months ended September 30, 2021, as well as the change in the mix of income and losses in the various tax jurisdictions in which we operate.

Our effective tax rates were 17.2% and 14.4% for the nine months ended September 30, 2021 and 2020, respectively.

The effective tax rate was higher in the nine months ended September 30, 2021 as compared to the same period last year primarily due to a $4.3 million tax benefit recognized in the nine months ended September 30, 2020, resulting from the change in management’s assessment of the realizability of certain deferred tax assets as a result of the Reorganization and a $0.6 million one-time tax benefit from the change in tax law resulting from the enactment of the CARES Act.

In the nine months ended September 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.

The increase to the effective tax rate for such nine-month period was partially offset by the favorable impacts on the effective tax rate for 2021 from higher excess tax benefits related to stock-based compensation recognized in the nine months ended September 30, 2021, as well as the change in the mix of income and losses in the various tax jurisdictions in which we operate.

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:

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Gamer and Creator Peripherals Segment

Gaming Components and Systems Segment

Memory Products

Other Component Products

Gaming Components and Systems Segment

Total Net Revenue

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.

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.

Net revenue of the gamer and creator peripherals segment decreased $22.3 million, or 13.8%, for the three months ended September 30, 2021 as compared to the same period last year, due to decreased sales across all products in this segment.

The decrease in sales was primarily driven by supply and logistics constraints caused by the COVID-19 pandemic.

Net revenue of the gamer and creator peripherals segment increased $122.8 million, or 35.3%, for the nine months ended September 30, 2021 as compared to the same period last year due to strong growth across all product categories in the first half of 2021, 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 year-over-year 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.

This revenue growth was partially offset by decreased sales in the third quarter of 2021 which was primarily driven by supply and logistic constraints caused by the COVID-19 pandemic.

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.

Net revenue of the gaming components and systems segment decreased $43.7 million, or 14.8%, for the three months ended September 30, 2021 as compared to the same period last year, due to decreased sales across all products in this segment, The decrease was primarily attributable to the shortage of reasonably priced GPUs which curtailed the demand for new PC builds and its components, as well as supply and logistic constraints caused by the COVID-19 pandemic.

Net revenue of the gaming components and systems segment increased $124.6 million, or 15.6%, for the nine months ended September 30, 2021 as compared to the same period last year.

We believe the revenue growth year-over-year was driven in part by the COVID-19 shelter-in-place orders, particularly, for our PSUs and pre-built systems.

This revenue growth was partially offset in the third quarter of 2021 due to the shortage of reasonably priced GPUs which curtailed the demand for new PC builds and its components, as well as supply and logistic constraints caused by the COVID-19 pandemic.

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:

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Gamer and Creator Peripherals Segment

Gaming Components and Systems Segment

Memory Products

Other Component Products

Gaming Components and Systems Segment

Total Gross Profit

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.

The gross profit of the gamer and creator peripherals segment decreased in the three months ended September 30, 2021 by $11.4 million, or 19.0%, as compared to the same period last year.

The 2.2% decrease in gross margin in the three-month period, compared to the same period last year, was driven by increased logistics costs, largely due to the COVID-19 pandemic, and increased promotional activity.

The gross profit of the gamer and creator peripherals segment increased in the nine months ended September 30, 2021 by $51.2 million, or 42.3%, as compared to the same period last year.

The 1.8% increase in gross margin in the nine-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.

This increase was partially offset by increased logistics costs, largely due to the COVID-19 pandemic, and increased promotional activity.

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.

The gross profit of the gaming components and systems segment decreased in the three months ended September 30, 2021 by $15.2 million, or 22.3%, as compared to the same period last year.

The 2.0% decrease in gross margin in the three-month period, compared to the same period last year, was driven by increased logistic costs, largely due to the COVID-19 pandemic, and increased promotional activity.

The gross profit of the gaming components and systems segment increased in the nine months ended September 30, 2021 by $29.2 million , or 15.3% , as compared to the same period last year .

Gross margin for the nine -month period , compare d to the same period last year, remained relatively flat.

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

$ 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.

As of September 30, 2021, we had cash and restricted cash, in aggregate of $76.3 million.

On September 3, 2021, we entered into a new Credit Agreement (defined below) which replaced our previous credit facilities under the First Lien and Credit Guaranty Agreement (defined below).

As of September 30, 2021, under the new Credit Agreement, we had $100 million capacity under the Revolving Facility and $250.0 million Term Loan outstanding (face value).

Please see the section below under the heading “Credit Agreement” for additional information on the Credit Agreement and the loans thereunder.

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):

Six Months Ended June 30,

Nine Months Ended September 30,

Net cash provided by (used in):

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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.

Net cash provided by operating activities for the nine months ended September 30, 2021 was $25.1 million and consisted of net income of $76.2 million, non-cash adjustments of $48.7 million and was partially offset by $99.8 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.

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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.

Net cash provided by operating activities for the nine months ended September 30, 2020 was $100.3 million and consisted of a net income of $60.2 million, non-cash adjustments of $35.7 million and $4.4 million from changes in our net operating assets and liabilities.

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

The net cash inflow was partially offset by an increase in inventory, accounts receivable and prepaid expenses and other assets.

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.

Cash used in investing activities was $14.0 million for the nine months ended September 30, 2021 and consisted of $7.7 million for the purchase of capital equipment and software, $4.7 million for the payment of deferred and contingent consideration primarily related to the Origin business acquisition, and $1.7 million for the acquisition of an immaterial business.

Cash used in investing activities was $5.9 million for the nine months ended September 30, 2020 and consisted of $5.1 million for the purchase of capital equipment and software, and $0.8 million for the acquisition of an immaterial business.

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.

Cash used in financing activities was $67.2 million for the nine months ended September 30, 2021 and consisted primarily of $327.0 million repayments of debt (First Lien Term Loan) and $0.2 million payment of taxes related to net share settlement of equity awards.

These cash outflows were partially offset by $248.5 million net proceeds from our new Term Loan executed in September 2021 and $11.5 million proceeds received from the issuance of shares through the employee equity incentive plans.

Cash used in financing activities was $26.4 million for the nine months ended September 30, 2020 and consisted primarily of $140.4 million repayments of debt, $5.6 million payment of offering costs, and $0.2 million payment of debt issuance costs.

These cash outflows were partially offset by $118.6 million proceeds received from the issuance of our common stock in connection with our IPO, after deducting underwriting discounts and commissions, and $1.2 million proceeds received from the issuance of shares through the employee equity incentive plans.

Credit Facilities

First Lien Credit and Guaranty Agreement (Extinguished in September 2021)

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.

The First Lien and the Revolver was to 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.

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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 .

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 made required repayments of the First Lien Term Loan of $59.6 million, in aggregate, in 2020 using the net proceeds from our IPO and excess cash on hand.

Further, we may prepay the First Lien Term Loan and the Revolver at any time without premium or penalty other than customary LIBOR breakage.

In 2020, we began to prepay the First Lien Term loan using our excess cash on hand, resulting in $80.8 million in 2020 and $78.3 million in 2021 through September 2021.

The remainder of First Lien Term Loan of $248.5 million was fully prepaid with the proceeds from the Term Loan (defined below) on September 3, 2021, and as a result, all obligations and covenants thereunder were terminated.

Second Lien Credit and Guaranty Agreement (Extinguished in September 2020)

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 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%.

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.

In 2020, with excess cash on hand, we prepaid the entire outstanding balance of $50 million on the Second Lien Term Loan without paying any premium or penalty, and as a result, all obligations and covenants thereunder were terminated.

Credit Agreement (Executed on September 3, 2021)

On September 3, 2021, we entered into a new Credit Agreement (“ Credit Agreement ”) which provides for a $100.0 million five-year revolving credit facility (“ Revolving Facility ”) and a $250.0 million five-year term loan facility (“ Term Loan ”), with each maturing in September 2026.

The Credit Agreement also permits, subject to conditions stated therein, additional incremental facilities in a maximum aggregate principal amount not to exceed $250.0 million.

We may prepay the Term Loan and the Revolving Facility at any time without premium or penalty.

The credit facilities under the Credit Agreement replaced our senior credit facilities under the First Lien Credit and Guaranty Agreement.

The net proceeds from borrowings under the Credit Agreement of $248.5 million (net of $1.5 million of debt discount) were used to repay all amounts outstanding under the First Lien Term Loan on September 3, 2021.

The Term Loan and Revolving Facility under the Credit Agreement will each bear interest at the Company’s election, either (a) LIBOR plus a percentage spread (ranging from 1.25% to 2.0%) based on our total net leverage ratio, or (b) the base rate (described in the Credit Agreement as the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) one-month LIBOR plus 1.0%) plus a percentage spread (ranging from 0.25% to 1.0%) based on our net leverage ratio.

Our obligations under the Credit Agreement are guaranteed by substantially all of our U.S.

subsidiaries and secured by a security interest in substantially all assets of the Company and the guarantor subsidiaries, subject to certain exceptions detailed in the Credit Agreement and related ancillary documentation.

The Credit Agreement contains covenants with which we must comply during the term of the agreement, which we believe are ordinary and standard for agreements of this nature, including the maintenance of a maximum Consolidated Total Net Leverage Ratio of 3.0 to 1.0 and a minimum Consolidated Interest Coverage Ratio of 3.0 to 1.0 (as defined in our credit facilities) .

The Credit Agreement also includes events of default customary for facilities of this nature and upon the occurrence of such events of default, among other things, all outstanding amounts under the Credit Agreement may be accelerated and/or the lenders’ commitments terminated.

In addition, upon the occurrence of certain events of default, the interest on the Term loan and Revolving Facility can be

increased by 2.0%.

As of September 30, 2021, we were not in default under the Credit Agreement and our Consolidated Total N et L everage R atio and Consolidated Interest Coverage R atio were 0.8 to 1.0 and 10.4 to 1.0 as of September 30, 2021 , respectively .

Contractual Obligations and Other Commitments

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

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

Represents our new Term Loan and related interests according to the repayment schedule for the Term Loan as of September 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 June 30, 2021.

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

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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 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.

There have been no material changes to our critical accounting policies and estimates during the nine months ended September 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