What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-06 compared with 2021-11-02 · 152 added, 204 removed, 167 unchanged (68% of the section changed)

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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.

You should read the following discussion and analysis of our financial condition and results of operations together with the condensed 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.

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.

We are a leading global provider and innovator of high-performance gear for gamers, streamers and content creators, many of which build their own PCs using our components.

Our industry-leading gaming gear helps digital athletes, from casual gamers to committed professionals, perform at their peak across PC or console platforms, and our streaming gear enables streamers and content creators to produce studio-quality content to share with friends or to broadcast to millions of fans.

Our PC components products offer our customers multiple options to build their customized gaming and workstation desktop PCs.

Our solution is the most 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.

iCUE for gamers and the Elgato streaming suite for steamers and content creators, including our Stream Deck control software, which provide unified, intuitive performance, and aesthetic control and customization across their respective product families.

We also offer digital services to enhance customer experience by integrating esports, coaching, stream deck marketplace, customer care and extended warranty.

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.

Includes our high-performance gaming keyboards, mice, headsets, controllers, and streaming gear, which includes capture cards, Stream Decks, USB microphones, our Facecam streaming camera, studio accessories, and EpocCam software, as well as coaching and training 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, and gaming monitor, among others.

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

Our gear is sold to end users 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.

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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 $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.

In the last two years, we have entered into three large new markets:

microphones and cameras for content creators and gaming monitors for both gamers and content creators.

We continue to optimize the value of existing products and to introduce new products to the market driving growth.

Over the longer term, we believe we will be able to continue to grow in new markets as well as the markets that we participate in through innovation and leading technologies and entry into new categories via organic growth or acquisition.

Since 2018, we have completed eight acquisitions, including our acquisition of 51% of the share capital of iDisplay, a leader in electronic development and design specializing in display technology, in January 2022.

The iDisplay acquisition will allow us to direct the development and integration of iDisplay’s display-based touch-screen technologies into our products for creators, gamers and streamers.

iDisplay’s results of operations are fully consolidated with Corsair with effect from January 1, 2022.

Our net revenue was $380.7 million and $529.4 million for the three months ended March 31, 2022 and 2021, respectively.

We had net loss of $3.3 million and net income of $46.7 million for the three months ended March 31, 2022 and 2021, respectively .

Net cash used by operating activities was $2.6 million and net cash provided by operating activities was $27.8 million for the three months ended March 31, 2022 and 2021, respectively.

We continue to experience a shift in net revenue towards a more significant mix of our higher margin gamer and creator peripherals segment, which represented 35.2% and 33.2% of total net revenue for the three months ended March 31, 2022 and 2021, respectively.

As our product portfolio continues to expand, our go-to-market model has also been evolving with an increased mix of direct-to-consumer sales representing 12.5% and 10.6% of total net revenue for the three months ended March 31, 2022 and 2021, respectively.

Our revenue for the three months ended March 31, 2022 was negatively impacted by a short-term slowdown in consumer spending in Europe, and the recent higher than expected inflationary pressure also put a curb on worldwide consumer spending.

In addition, our management believes the revenue for the prior year three-month period ended March 31, 2021 reflected strong consumption driven in part by stimulus payments distributed by the United States federal government to its taxpayers and pent-up demand from prior product shortages.

For fiscal 2022, w e anticipate that a de gree of component shortages, manufacturing disruptions and logistics challenges will continue to negatively impact our net revenues and profit margins.

W e also will closely monitor the unfolding events due to the Russian - Ukraine war and its regional and global ramifications.

While the situation is still evolving and the outcomes remain highly uncertain, these events have, and may continue to have an unfavorable impact on our business, results of operations, cash flows and financial position .

As of March 31, 2022, the Russia-Ukraine war did not result in any impairment of our assets.

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 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 we are 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 .

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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 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.

Further, a limited number of retailers and distributors represent a significant portion of our net revenue, with eRetailer Amazon accounting for 30.4% and 24.6% of our net revenue for the three months ended March 31, 2022 and 2021, respectively, and sales to our ten largest customers accounting for approximately 52.5% and 49.3% of our net revenue for the three months ended March 31, 2022 and 2021, 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 and our new Facecam in the third 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.

Since 2021, we had several 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 including our new Facecam, Corsair DDR5 memory and new high-performance gaming controllers including SCUF Reflex, Reflex Pro and Reflex FPS, among others .

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.

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.

Since 2020, our revenue seasonality has been impacted positively and negatively, and thus has not followed historic patterns, by external events, such as shelter-in-place restrictions, global supply chain and logistics issues and availability of affordable GPUs, primarily caused by the COVID-19 pandemic.

H istorically, prior to 2020, 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.

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 .

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, GPU 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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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.

Since early 2020, we have experienced an increase in demand for our gear as more people were 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 resulted in shelter-in-place and other similar restrictions being eased, starting in the second half of 2021.

Such easing of restrictions has resulted in consumers returning to other alternative forms of entertainment and interaction.

This in turn has resulted in a decline in demand for our products since the second half of 2021.

The extent to which the COVID-19 outbreak ultimately impacts our business, sales, results of operations, cash flows and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the severity, duration and spread of the outbreak, how quickly and to what extent normal economic and operating conditions can resume, and the actions to contain the virus and prevent any reoccurrence.

For example, China's zero-COVID policy has negative implications for global supply chains generally;

factory shutdowns and transport backlogs may result in inventory shortfalls for our products, which could negatively impact our sales.

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.

We continue to evaluate the nature and extent of the impact of the COVID-19 pandemic to our business and we have implemented various measures to attempt to mitigate the disruptive logistics impact to our business, 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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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.

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 increases in legal, accounting, insurance, compliance, investor relations and other consulting costs.

Product development .

Product development costs are generally expensed as incurred and reported in the condensed combined consolidated statements of operations.

Product development costs are generally expensed as incurred.

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.

These costs relate primarily to compensation of personnel and consultants involved with product design, definition, compatibility testing and qualification , as well as depreciation costs of equipment used, prototype material costs and allocated overhead costs .

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.

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Other (Expense) Income, Net

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

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

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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.

Net Income (Loss) Attributable to Noncontrolling Interests

Net income (loss) attributable to noncontrolling interests represents the share of the net income (loss) of iDisplay attributable to the 49% ownership interest of iDisplay not acquired by Corsair.

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.

The following tables set forth the components of our condensed consolidated statements of operations, in dollars (thousands) and as a percentage of total net revenue, for each of the periods presented.

Three Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

Cost of revenue

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Total operating expenses

Operating income

Operating income (loss)

Other (expense) income:

Interest expense

Other (expense) income, net

Other expense, net

Total other expense, net

Income before income taxes

Income tax expense

Income (loss) before income taxes

Income tax benefit (expense)

Net income (loss)

Net loss attributable to noncontrolling interests

Net income (loss) attributable to Corsair Gaming, Inc.

Three Months Ended

September 30,

Nine Months Ended

September 30,

Cost of revenue

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Total operating expenses

Operating income

Operating income (loss)

Other (expense) income:

Interest expense

Other (expense) income, net

Other expense, net

Total other expense, net

Income before income taxes

Income tax expense

Income (loss) before income taxes

Income tax benefit (expense)

Net income (loss)

Net loss attributable to noncontrolling interests

Net income (loss) attributable to Corsair Gaming, Inc.

Components of Results of Operations

Three Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

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.

Net revenue decreased $148.7 million, or 28.1%, for the three months ended March 31, 2022 as compared to the same period last year.

The decrease was due to a 23.7% decrease in sales for our gamer and creator peripherals segment and a 30.3% 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.

We believe the decrease in sales in both segments was primarily due to consumer consumption in Europe being negatively impacted by the Russia-Ukraine war, coupled with lower consumer discretionary spending due to inflationary pressures world-wide, as well as a slow-down in demand compared to the same period last year as a result of the easing of the COVID-19 shelter-in-place restrictions, starting in the second half of 2021, resulting in the reopening of most outside entertainment.

Gross Profit and Gross Margin

Three Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

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 logistics costs largely due to the COVID-19 pandemic, and pandemic related port shutdowns in addition to increased promotional activity.

Gross margin decreased to 23.8% for the three months ended March 31, 2022 from 30.3% for the same period last year.

The decrease was due to increased freight costs largely driven by global shipping and logistics challenges caused by the COVID-19 pandemic, increased promotional activity, lower absorption of fixed costs as a result of the lower sales volume, as well as increased amortization of intangible assets from the iDisplay Acquisition.

Sales, General and Administrative (SG&A)

Three Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

Sales, general and administrative

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.

SG&A expenses decreased $1.7 million, or 2.2%, for the three months ended March 31, 2022 as compared to the same period last year.

The decrease was primarily due to a $2.4 million decrease in personnel-related costs with lower bonus expense, offset partially by increased marketing and advertising expense.

Product Development

Three Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

Product development

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.

Product development expenses increased $1.9 million, or 12.7%, for the three months ended March 31, 2022 as compared to the same period last year.

The increase was primarily due to a $1.1 million increase in amortization of intangible assets acquired in the iDisplay Acquisition and a $0.6 million increase in personnel-related expense.

Interest Expense and Other (Expense) Income, Net

Three Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

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Other (expense) income, net

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.

Interest expense decreased $3.7 million, or 74.1%, for the three months ended March 31, 2022 as compared to the same period last year.

The decrease in interest expense was primarily due to lower principal balance on our Term Loan executed in September 2021 which replaced our First Lien Term Loan and lower interest rate compared to the same period last year.

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.

Income Tax Expense

Income Tax Benefit (Expense)

Three Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

Income before income taxes

Income tax expense

Income (loss) before income taxes

Income tax benefit (expense)

Effective tax rate

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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 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.

Our effective tax rates were 23.1% and 22.0% for the three months ended March 31, 2022 and 2021, respectively.

The effective tax rate was higher in the three months ended March 31, 2022, as compared to the same period last year primarily due to a reduction

of foreign tax credit upon adopting the new rules under the 2021 Final Regulations released by Treasury and IRS in December 2021 finalizing certain regulations regarding foreign tax credit and an increase of the deduction limitation over $1 million on our named executive officer s’ stock-based compensation expense .

Segment Results

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Gamer and Creator Peripherals Segment

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Gamer and Creator Peripherals Segment

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.

Net revenue of the gamer and creator peripherals segment decreased $41.8 million, or 23.7%, for the three months ended March 31, 2022 as compared to the same period last year, due to decreased sales across most products in this segment.

The decrease in sales was driven primarily by the decline in consumer demand in Europe due to the war between Russian and Ukraine as well as the inflationary economic pressures.

The decrease in sales was also due to the easing of the COVID-19 shelter-in-place restriction, starting in the second half of 2021, resulting in the reopening of most outside entertainment.

Gaming Components and Systems Segment

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.

Net revenue of the gaming components and systems segment decreased $107.0 million, or 30.3%, for the three months ended March 31, 2022 as compared to the same period last year, due to decreased sales across most products in this segment.

The decrease was primarily driven primarily by the decline in consumer demand in Europe due to the war between Russian and Ukraine as well as the inflationary economic pressures.

The decrease in sales was also attributable to the shortage of reasonably priced GPUs which curtailed the demand for new PC builds and its components, as well as supply and logistics 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:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Gamer and Creator Peripherals Segment

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Gamer and Creator Peripherals Segment

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.

The gross profit of the gamer and creator peripherals segment decreased in the three months ended March 31, 2022 by $25.8 million, or 37.5%, as compared to the same period last year.

The 7.0% decrease in gross margin in the three-month period, compared to the same period last year, was driven primarily by increased logistics costs, largely due to the COVID-19 pandemic, increased promotional activity, as well as increased amortization of intangible assets from the iDisplay Acquisition.

Gaming Components and Systems Segment

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.

The gross profit of the gaming components and systems segment decreased in the three months ended March 31, 2022 by $43.8 million, or 47.8%, as compared to the same period last year.

The 6.6% decrease in gross margin in the three-month period, compared to the same period last year, was driven primarily by increased logistics costs, largely due to the COVID-19 pandemic, increased promotional activity, downward pressure on pricing for our memory products, and lower absorption of fixed costs as a result of the lower sales volume.

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 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.

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.

Our principal sources of liquidity have been the payments received from customers purchasing our products and the borrowings under our Credit Agreement (defined below).

Our principal uses of cash generally will include purchases of inventory, payroll and other operating expenses related to the development and marketing of our products, capital expenditure, repayments of debt and related interest, income tax payments, continued investments in businesses and technology, and selective mergers and acquisitions .

As of March 31, 2022, we had cash and restricted cash, in aggregate of $32.0 million, including $16.7 million held by our foreign subsidiaries .

Amounts held outside of the United States are generally utilized to support our non-U.S.

liquidity needs.

Repatriations of amounts held outside the United States generally will not be taxable from a U.S.

federal tax perspective, but may be subject to state income or foreign withholding tax.

We do not expect restrictions or potential taxes incurred on repatriation of amounts held outside of the United States to have a material effect on our overall liquidity, financial condition or results of operations.

We believe that the anticipated cash flows from operations based on our current business outlook, combined with our current levels of cash balances at March 31, 2022, supplemented with the borrowings under our Revolving Credit Facility will be sufficient to fund our principal uses of cash for at least the next twelve months.

In the longer term, liquidity will depend to a great extent on our future revenues and our ability to appropriately manage our costs based on the demand for our products.

We may require additional funding and need or choose to raise the required funds through borrowings or public or private sales of debt or equity securities.

The sale of additional equity would result in additional dilution to our stockholders.

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

Nine Months Ended September 30,

Three Months Ended March 31,

Net cash provided by (used in):

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Cash Flows from Operating Activities

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.

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 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.

Net cash used by operating activities for the three months ended March 31, 2022 was $6.1 million and consisted of net loss of $3.3 million and $17.3 million net cash outflow from changes in our net operating assets and liabilities, partially offset by non-cash adjustments of $14.5 million.

The net cash outflow from changes in our net operating assets and liabilities was primarily related to a decrease in accounts payable due to timing of payments and a decrease in other liabilities and accrued expenses mainly due to lower accrual for sales returns and customer incentives and bonus expense, as well as an increase in prepaid and other assets.

The net cash outflows were partially offset by a decrease in accounts receivable.

The non-cash adjustments consisted primarily of amortization of intangibles, depreciation and stock-based compensation expense, which were partially offset by changes in deferred tax assets.

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

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

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

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

Cash Flows from Investing Activities

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 used in investing activities was $23.9 million for the three months ended March 31, 2022 and consisted of $19.5 million for the iDisplay Acquisition (net of cash acquired) and $4.4 million for the purchase of capital equipment and software.

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

Cash Flows from Financing Activities

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 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.

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 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.

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%.

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.

Cash used in financing activities was $1.9 million for the three months ended March 31, 2022 and consisted primarily of $1.3 million repayment of debt and $0.9 million payment of taxes related to net share settlement of equity awards, partially offset by $0.5 million proceeds received from the issuance of shares through the employee equity incentive plans.

During the three months ended March 31, 2022, we also borrowed $293.0 million from our revolving credit facility to fund our operations and the full amount was repaid within the same quarter.

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

Capital Resources

Credit Agreement (Term Loan and Revolving Credit Facility)

On September 3, 2021, we refinanced the First Lien Credit and Guaranty Agreement with a new Credit Agreement (“Credit Agreement”).

The new Credit Agreement provides for a total commitment of $350 million, consisting of a $100 million revolving credit facility (“Revolving Credit Facility”) and a $250 million term loan facility (“Term Loan”).

The net proceeds from borrowings under the Term Loan 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 Credit Agreement is available for a period of five years, maturing September 2026, and provides for additional incremental facilities up to a maximum aggregate principal amount of $250.0 million, subject to the satisfaction of certain conditions.

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.

The Term Loan and Revolving Credit Facility under the Credit Agreement will each bear interest at our 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 total net leverage ratio.

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

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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 .

In addition, upon the occurrence of certain events of default, the interest on the Term loan and Revolving Credit Facility can increase by 2.0%.

As of March 31, 2022, we were not in default under the Credit Agreement.

As of March 31, 2022, total principal outstanding of the Term Loan was $247.5 million and the available and uncommitted capacity under the Revolving Credit Facility was $99.5 million .

Contractual Obligations and Other Commitments

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

The following table summarizes our contractual cash and other obligations as of March 31, 2022 (in thousands):

Payments Due by Period

(In thousands)

Debt principal and interest (1)

Purchase obligations (2)

Operating leases (3)

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 September 30, 2021.

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.

Debt principal and interest payments (1)

Inventory-related purchase obligations (2)

Operating lease obligations (3)

Other purchase obligations (4)

Contingent consideration in connection

with a business acquisition

Amounts represent the principal cash payments as of March 31, 2022 of our Term Loan based on the repayment schedule according to the Credit Agreement and the expected interest payments associated with the Term Loan.

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

Amounts represent an estimate of purchase obligations related to inventory .

Amounts represent contractual obligations from our operating leases for offices and warehouse spaces .

Amounts represent non-cancelable obligations related to capital expenditures, software licenses, marketing and other activities.

As of March 31, 2022, we had $2.4 million in non-current income tax payable, including interest and penalties, related to our income tax liability for uncertain tax positions.

At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities;

therefore, such amounts are not included in the contractual cash obligation table above.

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 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.

A critical accounting policy is defined as one that has both a material impact on our financial condition and results of operations and requires us to make difficult, complex and/or subjective judgments, often as a result of the need to make estimates about matters that are inherently uncertain.

Our consolidated financial statements are prepared in accordance with U.S.

generally accepted accounting principles ("GAAP"), which requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting periods .

Our estimates are based on our historical experience and on various other factors that we believe to be applicable and we evaluate them on an ongoing basis to ensure they remain reasonable under current conditions.

Actual results may differ significantly from those estimates, which could have a material impact on our business, results of operations, and financial condition .

Other than the new items discussed in Note 2 of our condensed consolidated financial statements, t here have been no material changes to our critical accounting policies and estimates during the t hree months ended March 31, 2022 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, 2021 filed with the SEC on March 1, 2022 .

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.

Refer to Note 2 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for recent accounting pronouncements adopted and to be adopted.

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