Corsair Gaming, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the section titled “Risk Factors” and in other parts of this Quarterly Report on Form 10-Q. Overview We are a leading global provider and innovator of high-performance gear for gamers, streamers and content creators, 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 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, 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 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. While we historically have sold a small percentage of our gear directly to consumers through our website, following the SCUF Acquisition and the Origin Acquisition in 2019, the volume of direct-to-consumer sales has increased as both of these companies primarily generated sales through direct-to-consumer channels. We expect net revenue from our direct-to-consumer channel to continue to increase as a percentage of total net revenue in future periods. 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. 22 Table of Contents 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 Our results of operations and financial condition are affected by numerous factors, including those discussed in the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and those described below. Impact of Industry Trends . Our results of operations and financial condition are impacted by industry trends in the gaming market, including: • Increasing gaming engagement . We believe that gaming’s increasing time share of global entertainment consumption will drive continued growth in spending on both games and gaming gear. Gaming continues to become increasingly social and streaming viewership more widely adopted along with increasing numbers of content creators. We believe this trend 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 . 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, 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 . Our gamer and creator peripherals segment has a higher gross margin than our gaming components and systems segment. As a result, our overall gross margin is affected by changes in product mix. External factors can have an impact on our product mix, such as popular game releases that can increase sales of peripherals and availability of new CPUs and GPUs that can impact component sales. In addition, within our gamer and creator peripherals and gaming components and systems segments, gross margin varies between products, and significant shifts in product mix within either segment may also significantly impact our overall gross margin. Impact of Customer Concentration . We operate a global sales network that consists primarily of retailers (including eRetailers), as well as distributors we use to access certain retailers. Further, a limited number of retailers and distributors represent a significant portion of our net revenue, with eRetailer Amazon accounting for 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. As a result of this concentration and the lack of long-term agreements with our customers, a primary driver of our net revenue and operating performance is maintaining good relationships with these retailers and distributors. To help maintain good relationships, we implement initiatives such as our updated packaging design that helps eRetailers such as Amazon process our packages more efficiently. Further, given our global operations, a significant percentage of our expenses relate to shipping costs. Our ability to effectively optimize these shipping expenses, for example utilizing expensive shipping options such as air freight for smaller packages and more urgent deliveries and more cost-efficient options, such as train or boat, for other shipments, has an impact on our expenses and results of operations. Impact of New Product Introductions . Gamers demand new technology and product features, and we expect our ability to accurately anticipate and meet these demands will be one of the main drivers for any future sales growth and market share expansion. 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 23 Table of Contents 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. 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. Further, our net revenue tends to be higher in the third and fourth calendar quarter due to seasonal sales such as “Black Friday,” “Cyber Monday” and “Singles Day” in China, as retailers tend to make purchases in advance of these sales, and our sales also tend to be higher in the fourth quarter due to the introduction of new consoles and high-profile games in connection with the holiday season. As a consequence of seasonality, our net revenue for the second calendar quarter is generally the lowest of the year followed by the first calendar quarter. 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 . We are subject to inherent risks attributed to operating in a global economy. Some of our international sales are denominated in foreign currencies and any unfavorable movement in the exchange rate between U.S. dollars and the currencies in which we conduct sales in foreign countries, in particular the Euro and the British Pound could have an adverse impact on our net revenue. In addition, we generally pay our employees located outside the United States in the local currency, with a significant portion of those payments being made in Taiwan dollars and Euros. Additionally, as a result of our foreign sales and operations, we have other expenses, assets and liabilities that are denominated in foreign currencies, in particular the Chinese Yuan, Euro and British Pound. Impact of COVID-19. 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 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 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 . Integrated circuits, or ICs, account for most of the cost of producing our high-performance memory products. IC prices are subject to pricing fluctuations which can affect the average sales prices of memory modules, and thus impact our net revenue, and can have an effect on gross margins. The impact on net revenues can be significant as our high-performance memory products, included within our gaming components and systems segment, represent a significant portion of our net revenue. 24 Table of Contents Components of our Operating Results Net Revenue We generate materially all of our net revenue from the sale of gamer and creator peripherals and gaming components and systems to retailers, including online retailers, gamers and distributors worldwide. Our revenue is recognized net of allowances for returns, discounts, sales incentives and any taxes collected from customers. Cost of Revenue Cost of revenue consists primarily of product costs, including costs of contract manufacturers, inbound freight costs from manufacturers to our distribution hubs as well as inter-hub shipments, cost of materials and overhead, duties and tariffs, warranty replacement cost to process and rework returned items, depreciation of tooling equipment, warehousing costs, excess and obsolete inventory write-downs, and certain allocated costs related to facilities and information technology, or IT, and personnel-related expenses and other operating expenses related to supply chain logistics. Operating Expenses Operating expenses consist of product development and sales, general and administrative expenses. Sales, general and administrative. Sales, general and administrative, or SG&A expenses represent the largest component of our operating expenses and consist of distribution costs, sales, marketing and other general and administrative costs. Distribution costs include outbound freight and the costs to operate our distribution hubs. Sales and marketing costs relate to the costs to operate our global sales force that works in conjunction with our channel partners, gaming team and event sponsorships, advertising and marketing promotions of our products and services, costs of maintaining our web store and credit card processing fees related to sales on our webstore, personnel-related cost and allocated overhead costs . 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 and allocated overhead costs . 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. 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 , 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. Interest Expense Interest expense consists of interest associated with our debt financing arrangements, including our revolving line of credit, amortization of debt issuance costs and debt discounts, loss from debt extinguishment, consisting of the write-off of unamortized debt discount and fees associated with the prepayment of our term loans. Other (Expense) Income, Net Other (expense) income, net consists primarily of our foreign currency exchange gains and losses relating to transactions and remeasurement of asset and liability balances denominated in foreign currencies. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates. Income Tax Expense We are subject to income taxes in the United States and foreign jurisdictions in which we do business. These foreign jurisdictions have statutory tax rates different from those in the United States. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to United States income, the utilization of foreign tax credits and changes in tax laws. Deferred tax assets are reduced through the establishment of a valuation allowance, if, based upon available evidence, it is determined that it is more likely than not that the deferred tax assets will not be realized. 25 Table of Contents Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the tax and financial reporting bases of our assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in future years in which those temporary differences are expected to be recovered or settled. 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 consolidated statements of operations, in dollars (thousands) and as a percentage of total net revenue, for each of the periods presented. Three Months Ended March 31, 2022 2021 Net revenue $ 380,691 $ 529,414 Cost of revenue 289,935 369,086 Gross profit 90,756 160,328 Operating expenses: Sales, general and administrative 76,131 77,853 Product development 17,110 15,186 Total operating expenses 93,241 93,039 Operating income (loss) (2,485 ) 67,289 Other (expense) income: Interest expense (1,279 ) (4,946 ) Other expense, net (499 ) (2,425 ) Total other expense, net (1,778 ) (7,371 ) Income (loss) before income taxes (4,263 ) 59,918 Income tax benefit (expense) 983 (13,195 ) Net income (loss) (3,280 ) 46,723 Less: Net loss attributable to noncontrolling interests (407 ) — Net income (loss) attributable to Corsair Gaming, Inc. $ (2,873 ) $ 46,723 26 Table of Contents Three Months Ended March 31, 2022 2021 Net revenue 100.0 % 100.0 % Cost of revenue 76.2 69.7 Gross profit 23.8 30.3 Operating expenses: Sales, general and administrative 20.0 14.7 Product development 4.5 3.0 Total operating expenses 24.5 17.7 Operating income (loss) (0.7 ) 12.6 Other (expense) income: Interest expense (0.3 ) (0.9 ) Other expense, net (0.1 ) (0.5 ) Total other expense, net (0.4 ) (1.4 ) Income (loss) before income taxes (1.1 ) 11.2 Income tax benefit (expense) 0.3 (2.5 ) Net income (loss) (0.8 ) 8.7 Less: Net loss attributable to noncontrolling interests (0.1 ) — Net income (loss) attributable to Corsair Gaming, Inc. (0.7 )% 8.7 % Components of Results of Operations Net Revenue Three Months Ended March 31, 2022 2021 (In thousands) Net revenue $ 380,691 $ 529,414 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 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 March 31, 2022 2021 (In thousands) Gross profit $ 90,756 $ 160,328 Gross margin 23.8 % 30.3 % 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. 27 Table of Contents Sales, General and Administrative (SG&A) Three Months Ended March 31, 2022 2021 (In thousands) Sales, general and administrative $ 76,131 $ 77,853 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 March 31, 2022 2021 (In thousands) Product development $ 17,110 $ 15,186 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 March 31, 2022 2021 (In thousands) Interest expense $ (1,279 ) $ (4,946 ) Other (expense) income, net (499 ) (2,425 ) 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 Benefit (Expense) Three Months Ended March 31, 2022 2021 (In thousands) Income (loss) before income taxes $ (4,263 ) $ 59,918 Income tax benefit (expense) 983 (13,195 ) Effective tax rate 23.1 % 22.0 % We are subject to income taxes in the United States and foreign jurisdictions in which we do business. These foreign jurisdictions have statutory tax rates different from those in the United States. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to United States income, the utilization of net operating loss and tax credit carry forwards, changes in geographic mix of income and expense, and changes in management’s assessment of matters such as the ability to realize deferred tax assets, and changes in tax laws. Our effective tax rates were 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 28 Table of Contents 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 Segment Net Revenue The following table sets forth our net revenue by segment expressed both in dollars (thousands) and as a percentage of net revenue: Three Months Ended March 31, 2022 2021 Gamer and Creator Peripherals Segment $ 134,148 35.2% $ 175,912 33.2% Gaming Components and Systems Segment Memory Products 132,154 34.7 161,864 30.6 Other Component Products 114,389 30.0 191,638 36.2 246,543 64.8 353,502 66.8 Total Net Revenue $ 380,691 100.0% $ 529,414 100.0% Gamer and Creator Peripherals Segment 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 $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 March 31, 2022 2021 Gamer and Creator Peripherals Segment $ 43,057 32.1% $ 68,866 39.1% Gaming Components and Systems Segment Memory Products 21,065 15.9 33,923 21.0 Other Component Products 26,634 23.3 57,539 30.0 47,699 19.3 91,462 25.9 Total Gross Profit $ 90,756 23.8% $ 160,328 30.3% 29 Table of Contents Gamer and Creator Peripherals Segment 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 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 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. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financial covenants that would restrict our operations. There can be no assurance that any such equity or debt financing will be available on favorable terms, or at all. Liquidity The following table summarizes our cash flows for the periods presented (in thousands): Three Months Ended March 31, 2022 2021 Net cash provided by (used in): Operating activities $ (6,106 ) $ 27,768 Investing activities (23,899 ) (8,073 ) Financing activities (1,906 ) (27,815 ) 30 Table of Contents Cash Flows from Operating Activities 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 $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 $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 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 31 Table of Contents 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. 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 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 cash and other obligations as of March 31, 2022 (in thousands): Payments Due by Period Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Debt principal and interest payments (1) $ 285,244 $ 12,650 $ 40,675 $ 231,919 $ — Inventory-related purchase obligations (2) 167,513 167,513 — — — Operating lease obligations (3) 70,234 10,053 20,356 11,855 27,970 Other purchase obligations (4) 35,469 31,745 3,664 60 — Contingent consideration in connection with a business acquisition 958 958 — — — Total $ 559,418 $ 222,919 $ 64,695 $ 243,834 $ 27,970 (1) 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 . (2) Amounts represent an estimate of purchase obligations related to inventory . (3) Amounts represent contractual obligations from our operating leases for offices and warehouse spaces . (4) 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 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 . 32 Table of Contents 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 consolidated financial statements included in this Quarterly Report on Form 10-Q for recent accounting pronouncements adopted and to be adopted. 33 Table of Contents