What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-03 compared with 2022-08-04 · 139 added, 102 removed, 242 unchanged (50% of the section changed)

8 unchanged sentences

In our retail channel, we distribute our gear either directly to the retailer, such as Amazon and Best Buy, or through key distributors.

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.

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

microphones and cameras markets for content creators, the gaming monitors market and prebuilt gaming laptops market 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.

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Gaming components and systems.

Includes our high-performance power supply units, or PSUs, cooling solutions, computer cases, and DRAM modules, as well as high-end prebuilt and custom-built gaming PCs, and gaming monitor, among others.

Includes our high-performance power supply units, or PSUs, cooling solutions, computer cases, and DRAM modules, as well as high-end prebuilt and custom-built gaming PCs and laptops, and gaming monitor, among others.

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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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.

Our revenue for the three months ended September 30, 2022, decreased by $79.4 million or 20.3%, compared to the same period last year.

Our revenue for the nine months ended September 30, 2022, decreased by $417.1 million or 29.9% compared to the same period last year.

The decrease in revenue for the three- and nine-month periods was primarily driven by the continuing slowdown in consumer spending in Europe mainly related to the Russia and Ukraine war, the unexpected high inflationary pressure on consumer spending, and currency pressure from the strengthening of the U.S.

dollar against the Euro and British Pound, causing some of our products to become more expensive in Europe.

The decrease in revenue for the nine months ended September 30, 2022 was 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 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.

In the three months ended September 30, 2022, the excess inventory situation in the retail channel has begun to ease in the United States, and we expect it to gradually ease in Europe starting next quarter.

Our gross margins decreased from 25.9% to 23.0% for the three months ended September 30, 2022, and from 28.1% to 20.4% for the nine months ended September 30, 2022, in each case, as compared to the same periods last year.

The decrease in our gross margins for the three- and nine-month periods were primarily due to increased logistics costs and higher promotional activities.

The decrease in gross margin for the nine months ended September 30, 2022 was also partially due to the higher inventory impairment and related charges in 2022 as a result of our inventory rationalization plan to align our inventory balance with the updated revenue outlook for 2022.

In addition, the decrease in gross margins for the three and nine months ended September 30, 2022 was partially offset by lower freight costs as the elevated freight rate caused by the pandemic has normalized to close to pre-pandemic level, beginning in the third fiscal quarter of 2022.

As of September 30, 2022, we had cash and restricted cash, in the aggregate of $61.7 million and $245.0 million Term Loan outstanding (face value).

We generated $45.1 million cash from operations in the nine months ended September 30, 2022.

Key Factors Affecting Our Business

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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.

Starting from the third fiscal quarter of 2022, we saw the availability of reasonably priced GPUs begin to normalize and bring along some positive effects to the market.

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 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.

Further, a limited number of retailers and distributors represent a significant portion of our net revenue, with eRetailer Amazon accounting for 26.3% and 26.4% of our net revenue for the nine months ended September 30, 2022 and 2021, respectively, and sales to our ten largest customers accounting for approximately 52.0% and 50.5% of our net revenue for the nine months ended September 30, 2022 and 2021, respectively.

Our customers, including Amazon, 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.

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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 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.

In 2022, we had launched and started shipping several new products, such as 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.

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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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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.

dollars and the currencies in which we conduct sales in foreign countries, in particular, our revenue for the three and nine months ended September 30, 2022 were negatively impacted by the strengthening of the U.S.

dollar against the Euro and the British Pound.

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.

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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.

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 worldwide inflationary pressures and the negative impacts from the strengthening of the U.S.

dollar, has dampened consumer spending, which led to the 20.3% and 29.9% decrease in our net revenue in the three and nine months ended September 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.

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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.

In addition, we have experienced and may in the future 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, and geopolitical tensions 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.

During the second fiscal quarter of 2022, as part of our plan to rationalize inventory level to align with our updated revenue outlook for 2022, we increased our inventory impairment and related charges by approximately $22.7 million, as compared to the same period last year.

In the third fiscal quarter of 2022, we have seen the excess inventory situation in the distribution channels begin

to ease in the U nited S tates .

I nventory impairment and related charges , of a routine nature, were recognized in the three months ended September 30, 2022 , and the amount was immaterial .

In order to align our expenses with the expected revenue level, we implemented a restructuring plan in 2022 and terminated 94 employees worldwide, resulting in approximately $1.6 million of restructuring costs in the nine months ended September 30, 2022, primarily consisting of severance and benefits.

Our restructuring plan has been completed as of September 30, 2022.

Components of our Operating Results

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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.

SG&A expenses also includes factoring fees.

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.

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Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in future years in which those temporary differences are expected to be recovered or settled.

Net Income (Loss) Attributable to Noncontrolling Interests

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

Net Income Attributable to Noncontrolling Interests

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

Results of Operations

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Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Cost of revenue

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Net income (loss)

Net income (loss) attributable to noncontrolling interests

Net income attributable to noncontrolling interests

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

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Cost of revenue

11 unchanged sentences

Net income (loss)

Net income (loss) attributable to noncontrolling interests

Net income attributable to noncontrolling interests

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

1 unchanged sentence

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

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.

Net revenue decreased $79.4 million, or 20.3%, for the three months ended September 30, 2022, as compared to the same period last year.

The decrease was due to a 30.5% decrease in sales for our gamer and creator peripherals segment and a 14.7% decrease in sales for our gaming components and systems segment .

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.

Net revenue decreased $417.1 million, or 29.9%, for the nine months ended September 30, 2022, as compared to the same period last year.

The decrease was due to a 32.0% decrease in sales for our gamer and creator peripherals segment and a 28.9% 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.

We believe the decrease in net revenue in both segments for the three- and nine-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, as well as currency pressure from the strengthening of the U.S.

dollar against the Euro and British Pound, causing some of our products to become more expensive in Europe.

The decrease in our Europe and Middle East Region net revenue accounted for approximately 71.3% and 66.3% of the decline in our total net revenue in the three and nine months ended September 30, 2022, respectively.

The decrease in our net revenue for the nine months ended September 30, 2022 was also in part due to a slow-down in demand compared to the same period last year as a result of more entertainment options becoming available due to the easing of the COVID-19 shelter-in-place restrictions, 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

September 30,

Nine Months Ended

September 30,

(In thousands)

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.

Gross margin decreased by 2.9% for the three months ended September 30, 2022, as compared to the same period last year.

This decrease was primarily attributable to an unfavorable shift towards higher mix of net revenue from our lower margin gaming components and systems segment, increased promotional activity and logistics costs, as well as increased amortization of intangible assets from our iDisplay acquisition.

Gross margin decreased by 7.7% for the nine months ended September 30, 2022, as compared to the same period last year.

This decrease was primarily attributable to an increase in inventory impairment and related charges in 2022 due to the inventory rationalization plan to align our inventory balance with our updated revenue outlook for 2022.

The gross margin in the nine months ended September 30, 2022, as compared to the same period last year was also negatively impacted by increased promotional activity and logistics costs, as well as increased amortization of intangible assets from the iDisplay acquisition.

In addition, the decrease in gross margins for the three and nine months ended September 30, 2022, was partially offset by lower freight costs as the elevated freight rate caused by the pandemic has normalized to close to pre-pandemic level, beginning in the third fiscal quarter of 2022.

Sales, General and Administrative (SG&A)

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

Sales, general and administrative

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.

SG&A expenses decreased $9.2 million, or 12.1%, for the three months ended September 30, 2022, as compared to the same period last year.

The decrease was primarily due to a $4.0 million decrease in distribution cost including outbound freight cost due to decreased sales volume, a $3.4 million decrease in marketing and advertising expenses, and a $0.8 million decrease in personnel-related costs.

SG&A expenses decreased $17.7 million, or 7.6%, for the nine months ended September 30, 2022, as compared to the same period last year.

The decrease was primarily due to a $9.2 million decrease in distribution cost including outbound freight cost with lower shipment volume, a $5.5 million decrease in personnel-related costs with lower bonus expense, a $3.4 million decrease in marketing and advertising expenses 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 nine months ended September 30, 2022.

Product Development

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

Product development

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.

Product development expenses increased $1.1 million, or 7.7%, for the three months ended September 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 .

Product development expenses increased $5.6 million, or 12.4%, for the nine months ended September 30, 2022, as compared to the same period last year.

The increase was primarily due to a $2.9 million increase in amortization of intangible assets acquired in the iDisplay acquisition and a $2.6 million increase in allocation of corporate IT-related and facility-related costs.

Interest Expense and Other ( Expense ) Income , Net

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

1 unchanged sentence

Other (expense) income, net

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.

Interest expense decreased $4.5 million, or 62.0%, for the three months ended September 30, 2022, as compared to the same period last year.

Interest expenses decreased $11.0 million, or 65.8%, for the nine months ended September 30, 2022, as compared to the same period last year.

The decrease in interest expense in both the three- and nine-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

September 30,

Nine Months Ended

September 30,

(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 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.

Our effective tax rates were 50.7% and 17.4% for the three months ended September 30, 2022, and 2021, respectively.

The increase in effective tax rates was primarily due to the change in the forecast and the mix of losses between various jurisdictions.

Our effective tax rates were 15.6% and 17.2% for the nine months ended September 30, 2022, and 2021, respectively.

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

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

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 June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Gamer and Creator Peripherals Segment

4 unchanged sentences

Gamer and Creator Peripherals Segment

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

Net revenue of the gamer and creator peripherals segment decreased $42.4 million, or 30.5%, for the three months ended September 30, 2022 as compared to the same period last year, primarily due to the decline in consumer demand in Europe due to the war between Russia and Ukraine, inflationary economic pressures and currency pressure from the strengthening of the U.S.

dollar against the Euro and British Pound, causing some of our products to be more expensive in Europe.

Net revenue of the gamer and creator peripherals segment decreased $150.3 million, or 32.0%, for the nine months ended September 30, 2022 as compared to the same period last year, primarily due to the decline in consumer demand in Europe due to the war between Russia and Ukraine, inflationary economic pressures and currency pressure from the strengthening of the U.S.

dollar against the Euro and British Pound, causing some of our products to be more expensive in Europe.

The decrease in net revenue in the nine months ended September 30, 2022 was also partly due to the easing of the COVID-19 shelter-in-place restriction because more entertainment options becoming available, starting in the second half of 2021.

Gaming Components and Systems Segment

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.

Net revenue of the gaming components and systems segment decreased $36.9 million, or 14.7%, for the three months ended September 30, 2022 as compared to the same period last year, primarily attributable to our other components products, which was more affected by the decline in consumer demand in Europe due to the war between Russia and Ukraine and the inflationary economic pressures.

Net revenue of the gaming components and systems segment decreased $266.7 million, or 28.9%, for the nine months ended September 30, 2022 as compared to the same period last year, primarily driven by the decline in consumer demand in Europe due to the war between Russia and Ukraine and inflationary economic pressures.

In addition, the decrease in net revenue for the nine months ended September 30, 2022 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.

The availability of reasonably priced GPUs began to normalize in the three months ended September 30, 2022 and together with the new technology platforms launched by Nvidia, AMD and Intel during such period, we expect to see some positive impact in the customer demand for our component products beginning in the fourth quarter of 2022.

Segment Gross Profit and Gross Margin

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,

Three Months Ended September 30,

Nine Months Ended September 30,

Gamer and Creator Peripherals Segment

4 unchanged sentences

Gamer and Creator Peripherals Segment

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.

The gross margin of the gamer and creator peripherals segment decreased in the three months ended September 30, 2022 by 2.1% as compared to the same period last year, primarily due to increased promotional activity and logistics costs, 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 nine months ended September 30, 2022 by 9.9% as compared to the same period last year, primarily attributable to an increase in inventory impairment and related charges in 2022 due to the inventory rationalization plan to align our inventory balance with our updated revenue outlook for 2022, as well as increased logistics costs and promotional activity, and increased amortization of intangible assets from the iDisplay acquisition.

In addition, the decrease in gross margins of the gamer and creator peripherals segment for the three and nine months ended September 30, 2022, was partially offset by lower freight costs as the elevated freight rate caused by the pandemic has normalized to close to pre-pandemic level, beginning in the third fiscal quarter of 2022.

Gaming Components and Systems Segment

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.

The gross margin of the gaming components and systems segment decreased in the three months ended September 30, 2022 by 2.5% as compared to the same period last year, primarily attributable to a change in sales mix toward more lower margin products in this segment as well as increased promotional activity.

The gross margin of the gaming components and systems segment decreased in the nine months ended September 30, 2022 by 6.5% as compared to the same period last year, primarily attributable to an increase in inventory impairment and related charges in 2022 due to the inventory rationalization plan to align our inventory balance with our updated revenue outlook for 2022, as well as increased logistics costs and promotional activity.

In addition, the decrease in gross margins of the gaming components and systems segment for the three and nine months ended September 30, 2022, was partially offset by lower freight costs as the elevated freight rate caused by the pandemic has normalized to close to pre-pandemic level, beginning in the third fiscal quarter of 2022.

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).

On September 29, 2022, one of our subsidiaries entered into an accounts receivable Factoring Agreement with a Factor, a third-party financial institution.

Pursuant to the terms of the arrangement, we sell certain of our customer receivables on a non-recourse basis to the Factor.

Our obligations to the Factor arising from the Factoring Agreement are secured by certain assets of our subsidiary.

The cost of factoring is not expected to have a material effect to our overall liquidity, financial condition or results of operations.

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

7 million held by our foreign subsidiaries .

As of September 30, 2022, we had cash and restricted cash, in aggregate of $61.7 million, including $19.7 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 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.

We believe that the anticipated cash flows from operations based on our current business outlook, combined with our current levels of cash balances at September 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):

Six Months Ended June 30,

Nine Months Ended September 30,

Net cash provided by (used in):

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Cash Flows from Operating Activities

Net cash provided by operating activities for the six months ended June 30, 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.

Net cash provided by operating activities for the nine months ended September 30, 2022 was $45.1 million and consisted of $65.3 million net cash inflow from changes in our net operating assets and liabilities, partially offset by our net loss of $61.1 million, which included non-cash adjustments of $40.9 million.

The net cash inflow from changes in our net operating assets and liabilities was primarily related to a decrease in accounts receivable mainly from the cash we received from the Factor during the period and a decrease in inventories mainly from lower purchases.

These net cash inflows were partially offset by a decrease in accounts payable due to lower inventory purchases 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 and depreciation, stock-based compensation expense and change in net deferred tax liabilities.

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

The non-cash adjustments consisted primarily of amortization and depreciation, stock-based compensation expense, loss on debt extinguishment and amortization of debt issuance costs and change in deferred tax assets.

The net cash outflow from changes in our net operating assets and liabilities was primarily related to an 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 $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 used in investing activities was $40.5 million for the nine months ended September 30, 2022 and primarily consisted of $19.5 million for the iDisplay acquisition (net of cash acquired), $19.9 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 $14.0 million for the nine months ended September 30, 2021 and consisted of $7.7 million for the purchase of capital equipment and software, $4.7 million for the payment of deferred and contingent consideration primarily related to the Origin business acquisition, and $1.7 million for the acquisition of an immaterial business .

Cash Flows from Financing Activities

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.

Cash used in financing activities was $3.9 million for the nine months ended September 30, 2022 and consisted primarily of $4.0 million repayment of debt and debt issuance costs, $2.2 million payment of dividends to noncontrolling interests, $1.4 million payment of taxes related to net share settlement of equity awards, partially offset by $4.1 million proceeds received from the issuance of shares through the employee equity incentive plans.

During the nine months ended September 30, 2022, we also borrowed $626.0 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 $67.2 million for the nine months ended September 30, 2021 a nd consisted primarily of $327.0 million repayments of debt (First Lien Term Loan) and $0.2 million payment of taxes related to net share settlement of equity awards.

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

Capital Resources

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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.

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 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 BSBY plus 1.0%) plus a percentage spread (ranging from 0.25% to 1.25%) based on our total 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.

On September 29, 2022, we entered into an accounts receivable Factoring Agreement with a Factor.

In connection with the Factoring Agreement, we also entered into (i) a Second Amendment (“Second Amendment” ) to the Credit Agreement to permit the transactions contemplated by the Factoring Agreement and (ii) an Assignment of Factoring Proceeds and Intercreditor Agreement with the Factor and the administrative agent under the Credit Agreement to establish the respective rights of the Factor and the Credit Agreement Agent in and to the related factoring collateral.

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

Total principal outstanding of the Term Loan was $245.0 million and the available and uncommitted capacity under the Revolving Credit Facility was $100 million .

Contractual Obligations and Other Commitments

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

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

Payments Due by Period

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with a business acquisition

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 .

Amounts represent the principal cash payments as of September 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 condensed consolidated financial statements for more information .

Amounts represent an estimate of purchase obligations related to inventory .

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

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.

As of September 30, 2022, we had $2.6 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, 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.

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 nine months ended September 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