What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-04 compared with 2022-05-06 · 123 added, 98 removed, 221 unchanged (50% of the section changed)

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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:

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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.

We group our products into two categories (operating segments):

Gamer and creator peripherals.

Gaming components and systems.

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.

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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.

Summary of Financial Results

Our revenue for the three months ended June 30, 2022 decreased by $189.0 million or 40.0%, compared to the same period last year.

Our revenue for the six months ended June 30, 2022 decreased by $337.7 million or 33.7%, compared to the same period last year.

The decrease in revenue for the three- and six-month periods was primarily driven by the continuing slowdown in consumer spending in Europe mainly related to the Russia and Ukraine war and the unexpected high inflationary pressure on worldwide consumer spending, and also partly due to the easing of the COVID-19 shelter in-place restrictions which resulted in decreased demand for our gear as consumers sought alternative forms of entertainment.

The decrease in demand for our gear in the first half of 2022, particularly in the second quarter of 2022, resulted in a buildup of inventory in our warehouses as well as in the retail channel, causing our channel partners to delay ordering while they clear excess inventory.

Our gross margins decreased from 27.6% to 12.8% for the three months ended June 30, 2022 and from 29.0% to 19.1% for the six months ended June 30, 3022, in each case, as compared to the same periods last year.

The decrease in our gross margins for the three- and six-month periods were primarily due to increased freight and logistics costs and higher promotional activities, as well as higher inventory impairment and related charges in connection with our inventory rationalization plan to align our inventory balance with the current revenue outlook at end of June 2022.

As of June 30, 2022 we had cash and restricted cash, in the aggregate of $38.7 million and $246.3 million Term Loan outstanding (face value).

We generated $10.1 million cash from operations in the six months ended June 30, 2022.

Key Factors Affecting Our Business

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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.

The shortage of reasonably priced GPUs since the second half of 2021 has had a negative impact to our gaming component revenue.

We believe the availability of reasonably priced GPS will improve in the second half of 2022.

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.

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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 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.

Further, a limited number of retailers and distributors represent a significant portion of our net revenue, with eRetailer Amazon accounting for 27.45% and 24.6% of our net revenue for the six months ended June 30, 2022 and 2021, respectively, and sales to our ten largest customers accounting for approximately 51.96% and 50.0% of our net revenue for the six months ended June 30, 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.

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 .

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 K70 Pro RGB keyboard and Elgato’s new accessories including our new Facecam and next generation of HD60 X Capture card, 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

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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.

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.

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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

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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.

Impact of Macroeconomic Conditions, COVID-19 Pandemic and Supply Chain Challenges

In February 2022, Russia invaded Ukraine resulting in, among other things, broad economic sanctions being imposed on Russia, which has further increased existing global supply chain, logistics, and inflationary challenges.

Although our business in Russia and Ukraine was not material to our results, we believe the war has degraded the consumer sentiment in Europe and coupled with the unexpected inflationary pressures which dampened consumer spending, attributed to the 40.0% and 33.7% decrease in our net revenue in the three and six months ended June 30, 2022, respectively, compared to the same periods last year.

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

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

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.

In addition, we have experienced and continue to experience supply chain challenges, including longer production and shipping times, and increased shipping and logistics costs, each of which has negatively impacted our gross margins, as well as the need to purchase long-lead time items ahead of demand due to supply constraints.

The extent of the impact of macroeconomic conditions, the COVID-19 pandemic, geopolitical tensions and supply chain challenges on our business, sales, results of operations, cash flows and financial condition will depend on future developments, which are not within our control and are highly uncertain and cannot be predicted.

We will continue to evaluate these risks and uncertainties and further our mitigation plans.

Our inventory impairment and related charges increased by $22.7 million in the three months ended June 30, 2022, as compared to the same period last year, primarily resulting from our inventory valuation assessment and our plan to rationalize our inventory level to align with the current revenue outlook at end of June 2022.

In addition, in the three months ended June 30, 2022, in order to align our expenses with the expected revenue level, we implemented a restructuring plan and terminated 92 employees worldwide, resulting in approximately $1.5 million of restructuring costs, primarily consisting of severance and benefits.

Our restructuring plan has been substantially completed as of June 2022.

Components of our Operating Results

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Three Months Ended

Six Months Ended

Cost of revenue

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Interest expense

Other expense, net

Other income (expense), net

Total other expense, net

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Net income (loss)

Net loss attributable to noncontrolling interests

Net income (loss) attributable to noncontrolling interests

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

Three Months Ended

Six Months Ended

Cost of revenue

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Interest expense

Other expense, net

Other income (expense), net

Total other expense, net

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Net income (loss)

Net loss attributable to noncontrolling interests

Net income (loss) attributable to noncontrolling interests

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

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Three Months Ended

Six Months Ended

(In thousands)

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.

Net revenue decreased $189.0 million, or 40.0%, for the three months ended June 30, 2022 as compared to the same period last year.

The decrease was due to a 42.6% decrease in sales for our gamer and creator peripherals segment and a 38.7% 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

Net revenue decreased $337.7 million, or 33.7%, for the six months ended June 30, 2022 as compared to the same period last year.

The decrease was due to a 32.6% decrease in sales for our gamer and creator peripherals segment and a 34.2% decrease in sales for our gaming components and systems segment .

We believe the decrease in net revenue in both segments for the three- and six-month periods was primarily due to consumer consumption in Europe being negatively impacted by the Russia-Ukraine war, coupled with lower consumer discretionary spending due to higher-than-expected inflationary pressures world-wide.

The decrease in our net revenue to the Europe and Middle East Region accounted for approximately 62% and 65% of the decline in our total net revenue in the three and six months ended June 30, 2022, respectively.

The decrease in our net revenue for the three- and six- month periods was also in part due to a slow-down in demand compared to the same periods last year as a result of the easing of the COVID-19 shelter-in-place restrictions because more other entertainment options began to reopen, starting in the second half of 2021.

Gross Profit and Gross Margin (defined as gross profit as a percentage of revenue)

Three Months Ended

Six Months Ended

(In thousands)

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.

Gross margin decreased by 14.8% for the three months ended June 30, 2022 as compared to the same period last year.

This decrease was primarily attributable to an increase in inventory impairment and related charges due to our inventory rationalization plan to align our inventory balance with the current expected revenue level as well as our planned introduction of new replacement products.

The gross margin in the three months ended June 30, 2022 was also negatively impacted by an unfavorable shift towards higher mix of net revenue from our lower margin gaming components and systems segment, increased freight and logistics costs largely driven by global shipping and logistics challenges caused by the COVID-19 pandemic, increased promotional activity, as well as increased amortization of intangible assets from our iDisplay acquisition.

Gross margin decreased by 9.9% for the six months ended June 30, 2022 as compared to the same period last year.

The gross margin in the six months ended June 30, 2022 compared to the same period last year was also negatively impacted by increased freight and logistics costs largely driven by global shipping and logistics challenges caused by the COVID-19 pandemic, increased promotional activity, as well as increased amortization of intangible assets from the iDisplay acquisition.

Sales, General and Administrative (SG&A)

Three Months Ended

Six Months Ended

(In thousands)

Sales, general and administrative

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.

SG&A expenses decreased $6.8 million, or 8.5%, for the three months ended June 30, 2022 as compared to the same period last year.

The decrease was primarily due to a $5.8 million decrease in distribution cost including outbound freight cost due to decreased sales volume, a $2.3 million decrease in personnel-related costs due to lower bonus expense, a $1.4 million decrease in marketing and advertising expenses and a $0.4 million decrease in legal and other professional fees.

These decreases were offset partially by a $3.5 million charge related to the acceleration of the amortization of capitalized cloud computing implementation costs in the three months ended June 30, 2022.

SG&A expenses decreased $8.5 million, or 5.4%, for the six months ended June 30, 2022 as compared to the same period last year.

The decrease was primarily due to a $5.2 million decrease in distribution cost including outbound freight cost with lower shipment volume, a $4.7 million decrease in personnel-related costs with lower bonus expense and a $1.8 million decrease in legal and other professional fees.

These decreases were offset partially by a $3.5 million charge related to the acceleration of the amortization of capitalized cloud computing implementation costs in the six months ended June 30, 2022.

Product Development

Three Months Ended

Six Months Ended

(In thousands)

Product development

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.

Product development expenses increased $2.6 million, or 16.5%, for the three months ended June 30, 2022 as compared to the same period last year.

The increase was primarily due to a $0.9 million increase in amortization of intangible assets acquired in the iDisplay acquisition , a $0.8 million increase in allocation of corporate IT-related costs and a $0.5 million increase in consultant and contractor expenses.

Product development expenses increased $4.5 million, or 14.6%, for the six months ended June 30, 2022 as compared to the same period last year.

The increase was primarily due to a $1.9 million increase in amortization of intangible assets acquired in the iDisplay acquisition, a $1.1 million increase in allocation of corporate IT-related and facility-related costs, and a $1.5 million increase in other product development related costs to support our continued innovation and broadening of our product portfolio.

Interest Expense and Other ( Expense ) Income , Net

Three Months Ended

Six Months Ended

(In thousands)

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Other (expense) income, net

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.

Interest expense decreased $2.8 million, or 62.8%, for the three months ended June 30, 2022 as compared to the same period last year.

Interest expenses decreased $6.5 million, or 68.7%, for the six months ended June 30, 2022 as compared to the same period last year.

The decrease in interest expense in both the three- and six-month periods was primarily due to a 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 periods 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 .

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Three Months Ended

Six Months Ended

(In thousands)

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Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to United States income, the utilization of net operating loss and tax credit carry forwards, changes in geographic mix of income and expense, and changes in management’s assessment of matters such as the ability to realize deferred tax assets, and changes in tax laws.

Our effective tax rates were 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 .

Our effective tax rates were consistent for the three months ended June 30, 2022 and 2021, at 7.4 % and 7.6 %, respectively.

Our effective tax rates were 8.5% and 17.2% for the six months ended June 30, 2022 and 2021, respectively.

The decrease in effective tax rates was primarily due to an increase in losses in our foreign subsidiaries offset by a decrease in excess tax benefits from stock-based compensation recognized in the six months ended June 30, 2022, as compared to the same period last year.

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

Segment Results

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Gamer and Creator Peripherals Segment

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Gamer and Creator Peripherals Segment

Net revenue of the gamer and creator peripherals segment 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.

Net revenue of the gamer and creator peripherals segment decreased $66.2 million, or 42.6%, for the three months ended June 30, 2022 as compared to the same period last year, and decreased $107.9 million, or 32.6%, for the six months ended June 30, 2022 as compared to the same period last year.

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

The decrease in net revenue was also partly due to the easing of the COVID-19 shelter-in-place restriction because more entertainment options began to reopen, starting in the second half of 2021

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.

Net revenue of the gaming components and systems segment decreased $122.8 million, or 38.7%, for the three months ended June 30, 2022 as compared to the same period last year, and decreased $229.8 million, or 34.2%, for the six months ended June 30, 2022 as compared to the same period last year.

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

The decrease in net revenue 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.

We believe the availability of reasonably priced GPUs will improve in the second half of 2022.

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,

The following table sets forth our gross profit expressed in dollars (thousands) and gross margin by segment:

Three Months Ended June 30,

Six Months Ended June 30,

Gamer and Creator Peripherals Segment

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Gamer and Creator Peripherals Segment

The gross profit of the gamer and creator peripherals segment 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.

The gross margin of the gamer and creator peripherals segment decreased in the three and six months ended June 30, 2022 by 23.3% and 13.3%, respectively, as compared to the same periods last year.

The decrease was primarily attributable to an increase in inventory impairment and related charges due to our inventory rationalization plan to align our inventory balance with the current expected revenue level and our planned introduction of new replacement products, as well as increased logistics costs, increased promotional activity, and 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.

The gross margin of the gaming components and systems segment decreased in the three and six months ended June 30, 2022 by 10.5% and 8.2%, respectively, as compared to the same periods last year.

The decrease was primarily attributable to an increase in inventory impairment and related charges due to our inventory rationalization plan to align our inventory balance with the current expected revenue level and our planned introduction of new replacement products, as well as increased logistics costs, increased promotional activity and downward pressure on pricing for our memory products.

Liquidity and Capital Resources

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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 .

As of June 30, 2022 , we had cash and restricted cash, in aggregate of $38.7 million , including $ 10.

7 million held by our foreign subsidiaries .

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

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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.

We believe that the anticipated cash flows from operations based on our current business outlook, combined with our current levels of cash balances at June 30, 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.

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

Three Months Ended March 31,

Six Months Ended June 30,

Net cash provided by (used in):

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Cash Flows from Operating Activities

Net cash 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 .

Net cash provided by operating activities for the six months ended June 30, 2022 was $10.1 million and consisted of $32.9 million net cash inflow from changes in our net operating assets and liabilities, offset partially by our net loss of $55.1 million, which included non-cash adjustments of $32.2 million.

The net cash inflow from changes in our net operating assets and liabilities was primarily related to a decrease in accounts receivable due to decrease in revenue and a decrease in inventories mainly from increase in inventory impairment charges due to our inventory rationalization plan to align our inventory balance with the current expected revenue level as well as our planned introduction of new replacement products.

These net cash inflows was partially offset by an increase in prepaid and other assets, as well as 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.

The non-cash adjustments consisted primarily of amortization, depreciation, stock-based compensation expense, and changes in deferred tax assets.

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

The non-cash adjustments consisted primarily of amortization, 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 .

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 used in investing activities was $32.6 million for the six months ended June 30, 2022 and primarily consisted of $19.5 million for the iDisplay acquisition (net of cash acquired), $11.9 million capital expenditure including renovation and furnishing of our new headquarters in Milpitas, California, as well as purchases of equipment and software, and $1.0 million for the investment in an available-for-sale convertible note.

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

Cash 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 .

Cash used in financing activities was $0.7 million for the six months ended June 30, 2022 and consisted of $2.8 million repayment of debt and debt issuance costs, $1.0 million payment of taxes related to net share settlement of equity awards, and $0.4 million payment of contingent consideration from previous acquisitions, partially offset by $3.5 million proceeds received from the issuance of shares through the employee equity incentive plans.

During the six months ended June 30, 2022, we also borrowed $403.0 million from our revolving credit facility to fund our operations and the full amount was repaid within the same period.

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

Capital Resources

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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

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 Term Loan and Revolving Credit Facility under the Credit Agreement initially carried interest at our election at 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.

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 .

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

On June 30, 2022, we entered into a First Amendment of the Credit Agreement (“ First Amendment ”) which among other changes resulted in the Bloomberg Short-Term Bank Yield Index rate (“ BSBY ”) being utilized as a replacement rate for LIBOR.

Consequently, following the First Amendment, the Term Loan and Revolving Facility will each bear interest at our election at either (a) BSBY plus a percentage spread (ranging from 1.25% to 2.25%) based on our total net leverage ratio, or (b) the base rate as the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) one-month BSBY plus 1.0%) plus a percentage spread (ranging from 0.25% to 1.25%) based on our net leverage ratio.

In addition, pursuant to the First Amendment, the maximum permitted Consolidated Total Net Leverage Ratio (as defined in the Credit Agreement) was also amended to increase to 3.50 to 1.0 between the quarters ending September 30, 2022 through and including March 31, 2023, and such ratio will revert to 3.00 to 1.00 from the quarter ended June 30, 2023 and each quarter thereafter, provided that, upon the occurrence of a Qualified Acquisition (as defined in the Credit Agreement), such ratio can be increased to 3.50 to 1.0 temporarily provided all the requirements set forth in the Credit Agreement are met.

As of June 30, 2022, we were not in default under the Credit Agreement.

Total principal outstanding of the Term Loan was $246.3 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):

The following table summarizes our contractual cash and other obligations as of June 30, 2022 (in thousands):

Payments Due by Period

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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.

Amounts represent the principal cash payments as of June 30, 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 .

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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.

As of June 30, 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;

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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 .

Other than the new items discussed in Note 2 of our condensed consolidated financial statements, there have been no material changes to our critical accounting policies and estimates during the six months ended June 30, 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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis