CORSAIR GAMING, INC. Discussion and analysis by management of the financial position and operating results. (form 10-Q)

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DISCUSSION AND ANALYSIS BY THE FINANCIAL SITUATION DEPARTMENT

                           AND RESULTS OF OPERATIONS



You should read the following discussion and analysis of our financial condition
and results of operations together with the condensed combined consolidated
financial statements and related notes included elsewhere in this Quarterly
Report on Form 10-Q. This discussion contains forward-looking statements based
upon current expectations that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those discussed in the
section titled "Risk Factors" and in other parts of this Quarterly Report on
Form 10-Q.

Overview

We are a leading global provider and innovator of high-performance gear for
gamers, streamers and content creators. We design industry-leading gaming gear
that helps digital athletes, from casual gamers to committed professionals, to
perform at their peak across PC or console platforms, and streaming gear that
enables creators to produce studio-quality content to share with friends or to
broadcast to millions of fans. Our solution is a complete suite of gear that
addresses the most critical components for both game performance and streaming.
Our product offering is enhanced by our two proprietary software platforms: iCUE
for gamers and the Elgato suite for content creators, which provide unified,
intuitive performance, and aesthetic control and customization across their
respective product families. Recently, we further enhanced our streaming product
offerings through acquiring EpocCam software, Gamer Sensei gaming coaching
services and Visuals by Impulse ("VBI") content creative design platform.

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

• Gaming and designer peripherals. Includes our high performance games

keyboards, mice, headsets, controllers and streaming equipment, which includes

capture cards, Stream Decks, USB microphones, studio accessories and

EpocCam software, as well as coaching and training services and content

        design services, among others.



• Components and play systems. Includes our high performance power supply

units, or power supplies, cooling solutions, computer cases and DRAM modules, such as

as well as premium prebuilt and custom gaming PCs and a gaming monitor,

among others.


Our gear is sold to gaming enthusiasts 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.

From time to time, we may seek to partner with or, when appropriate, acquire
companies that have products, personnel, and technologies that complement our
strategic direction. In July 2019, we acquired Origin PC Corporation, a company
based in Florida, specializing in delivering hand-built, personalized high-end
gaming PCs and in December 2019, we acquired SCUF Holdings, Inc. and its
subsidiaries. SCUF, headquartered in Georgia, specializes in delivering superior
accessories and customized gaming controllers for gaming consoles and PCs that
are used by top professional gamers as well as competitive amateur gamers. The
addition of Origin's and SCUF's products enhances and expands our product
offering to PC and console gamers, respectively. We subsequently completed three
more immaterial acquisitions. In August 2020, we acquired EpocCam to enhance the
Elgato streaming camera software offering; in October 2020, we acquired Gamer
Sensei to offer gaming coaching services to the wide audience of gamers looking
to improve their skills and in February 2021, we acquired VBI to provide
creative services to streamers looking to professionalize the look of their
broadcast. Origin is part of our gaming components and systems segment and SCUF,
EpocCam, Gamer Sensei and VBI are part of our gamer and creator peripherals
segment.

Our net revenue was $391.1 million and $457.1 million for the three months ended
September 30, 2021 and 2020, respectively, representing a period-over-period
decrease of 14.4%. We had net income of $1.8 million and $36.4 million for the
three months ended September 30, 2021 and 2020, respectively. Our net revenue
was $1.4 billion and $1.1 billion for the nine months ended September 30, 2021
and 2020, respectively, representing a period-over-period increase of 21.6%. We
had net income of $76.2 million and $60.2 million for the nine months ended
September 30, 2021 and 2020, respectively. Net cash provided by operating
activities was $25.1 million and $100.3 million for the nine months ended
September 30, 2021 and 2020, respectively.

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Key factors affecting our business

Our results of operations and financial condition are affected by many factors, including those discussed in the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and those described below. below.

Impact of industry trends. Our results of operations and financial condition are influenced by industry trends in the gaming market, including:

• Increased playtime engagement. We believe playtime is increasing

share of global entertainment consumption will lead to continued growth of

spending on games and play equipment. Gambling continues to become

increasingly social audience and more widely adopted streaming along

with a growing number of content creators. We believe this trend will

continue and Corsair is well positioned to serve the streaming market with

the best content creation tools.

• Introduction of new high performance and sophisticated computer hardware

Games. We believe that the introduction and availability of more powerful solutions

CPU and GPU which place increased demands on other system components,

        such as memory, power supply or cooling, has a significant effect on
        increasing the demand for our gear. In addition, we believe that our
        business success depends in part on the introduction and success of games
        with sophisticated graphics that place increasing demands on system

speed and processing capacity and therefore require more powerful processors or

GPUs, which in turn drive demand for our high-performance games

components and systems, such as power supplies and cooling solutions, and our sets

PC memory. As a result, our operating results could be materially affected.

by the timing and pace at which hardware companies

introduce new and improved CPUs and GPUs, as well as the availability and

the price of these CPUs and GPUs, when and at the rate at which the computer

game companies and developers introduce new and improved, sophisticated

games that require higher and higher levels of system and graphics

processing power, and if these new products and games are widely

accepted by players.


Impact of Product Mix. Our gamer and creator peripherals segment has a higher
gross margin than our gaming components and systems segment. As a result, our
overall gross margin is affected by changes in product mix. External factors can
have an impact on our product mix, such as popular game releases that can
increase sales of peripherals and availability of new CPUs and GPUs that can
impact component sales. In addition, within our gamer and creator peripherals
and gaming components and systems segments, gross margin varies between
products, and significant shifts in product mix within either segment may also
significantly impact our overall gross margin.

Impact of Customer Concentration. We operate a global sales network that
consists primarily of retailers (including eRetailers), as well as distributors
we use to access certain retailers. Further, a limited number of retailers and
distributors represent a significant portion of our net revenue, with eRetailer
Amazon accounting for 26.4% and 25.1% of our net revenue for the nine months
ended September 30, 2021 and 2020, respectively, and sales to our ten largest
customers accounting for approximately 50.5% and 51.0% of our net revenue for
the nine months ended September 30, 2021 and 2020, respectively. Our customers
typically do not enter into long-term agreements to purchase our gear but
instead enter into purchase orders with us. As a result of this concentration
and the lack of long-term agreements with our customers, a primary driver of our
net revenue and operating performance is maintaining good relationships with
these retailers and distributors. To help maintain good relationships, we
implement initiatives such as our updated packaging design that helps eRetailers
such as Amazon process our packages more efficiently. Further, given our global
operations, a significant percentage of our expenses relate to shipping costs.
Our ability to effectively optimize these shipping expenses, for example
utilizing expensive shipping options such as air freight for smaller packages
and more urgent deliveries and more cost-efficient options, such as train or
boat, for other shipments, has an impact on our expenses and results of
operations.

Impact of New Product Introductions. Gamers demand new technology and product
features, and we expect our ability to accurately anticipate and meet these
demands will be one of the main drivers for any future sales growth and market
share expansion. To date, we have had several new product introductions that had
a favorable impact on our net revenue and operating results, such as the
introduction of our new K65 mini RGB keyboard and Elgato's new accessories in
the first quarter of 2021 and our new Facecam in the third quarter of 2021.
However, there can be no assurance that our new product introductions will have
a favorable impact on our operating results or that customers will choose our
new gear over those of our competitors.

Impact of Seasonal Sales Trends. Notwithstanding the results of operations for
the third quarter of 2021, which were adversely impacted by the COVID-19
pandemic, historically, we have experienced and expect to continue to experience
seasonal fluctuations in sales due to the buying patterns of our customers and
spending patterns of gamers. Our net revenue has generally been lowest in the
first and second calendar quarters due to lower consumer demand following the
fourth quarter holiday season and because of the decline in sales that typically
occurs in anticipation of the introduction of new or enhanced CPUs, GPUs, and
other computer hardware products, which usually take place in the second
calendar quarter, and which tend to drive sales in the following two quarters.
Further, our net revenue tends to be higher in the third and fourth calendar
quarter due to seasonal sales such as "Black Friday," "Cyber Monday" and
"Singles Day" in China, as retailers tend to make purchases in advance of these
sales, and our sales also tend to be higher in the fourth quarter due to the
introduction of new consoles and high-profile games in connection with the
holiday season. As a consequence of seasonality, our net revenue for the second
calendar quarter is generally the lowest of the year followed by the first
calendar quarter. Historical seasonal patterns may not continue in the future
and have been impacted, and may be further impacted in

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

Impact of Fluctuations in Currency Exchange Rates. We are subject to inherent
risks attributed to operating in a global economy. Some of our international
sales are denominated in foreign currencies and any unfavorable movement in the
exchange rate between U.S. dollars and the currencies in which we conduct sales
in foreign countries, in particular the Euro and the British Pound could have an
adverse impact on our net revenue. In addition, we generally pay our employees
located outside the United States in the local currency, with a significant
portion of those payments being made in Taiwan dollars and Euros. Additionally,
as a result of our foreign sales and operations, we have other expenses, assets
and liabilities that are denominated in foreign currencies, in particular the
Chinese Yuan, Euro and British Pound.

Impact of COVID-19. Due to the COVID-19 pandemic, there has been and will
continue to be uncertainty and disruption in the global economy and financial
markets. Since early 2020, we have experienced some business disruptions due to
COVID-19, including the stoppage in our factories in early 2020, disruption in
our supply chain and increased distribution costs, which led to increases in
operating costs such as the significantly elevated ocean freight costs we
incurred in the third quarter of 2021 as compared to the same quarter from the
prior year and the most recent trailing quarter. As a result of the COVID-19
pandemic, we are continuing to experience logistics challenges globally. These
negative financial impacts have been offset by strong revenue growth
year-over-year partly due to an increase in demand for our gear as more people
in more countries are under shelter-in-place restrictions, which we believe have
limited people's access to alternative forms of entertainment and social
interaction, and thus have increased the demand for home entertainment and
connecting with others through content creation. In contrast, as the COVID-19
pandemic subsides, it has, and could continue to result in shelter-in-place and
other similar restrictions being eased. Such easing of restrictions likely has,
and will continue to result in consumers returning to other alternative forms of
entertainment and interaction. This in turn has, and could continue to, result
in a decline in demand for our products. The full extent of the impact of the
COVID-19 pandemic on our business, results of operations, cash flows and
financial position will depend on future developments, which are highly
uncertain and cannot be predicted, including, but not limited to, the duration
and spread of the outbreak, its severity, the prevalence and severity of any
variants, the actions to contain the virus or treat its impact, and how quickly
and to what extent normal economic and operating conditions can resume. Even
after the COVID-19 outbreak has subsided, we may continue to experience
significant impacts to our business as a result of its global economic impact,
including any economic downturn or recession that has occurred or may occur in
the future.

We continue to closely monitor the impact of the COVID-19 pandemic to our
business, and we have implemented various measures to mitigate the disruptive
logistic impact specifically around managing inventory stocking levels at our
distribution hubs and determining the mode of shipment used to deploy our gear
to the customers, and we are also ready to implement adjustments to our expenses
and cash flow in the event of declines in revenues.

Impact of Fluctuations in Integrated Circuits Pricing. Integrated circuits, or
ICs, account for most of the cost of producing our high-performance memory
products. IC prices are subject to pricing fluctuations which can affect the
average sales prices of memory modules, and thus impact our net revenue, and can
have an effect on gross margins. The impact on net revenues can be significant
as our high-performance memory products, included within our gaming components
and systems segment, represent a significant portion of our net revenue.

Components of our operating results

Net revenue

We generate materially all of our net revenue from the sale of gamer and creator
peripherals and gaming components and systems to retailers, including online
retailers, gamers and distributors worldwide. Our revenue is recognized net of
allowances for returns, discounts, sales incentives and any taxes collected from
customers.

Cost of Revenue

Cost of revenue consists primarily of product costs, including costs of contract
manufacturers, inbound freight costs from manufacturers to our distribution hubs
as well as inter-hub shipments, cost of materials and overhead, duties and
tariffs, warranty replacement cost to process and rework returned items,
depreciation of tooling equipment, warehousing costs, excess and obsolete
inventory write-downs, and certain allocated costs related to facilities and
information technology, or IT, and personnel-related expenses and other
operating expenses related to supply chain logistics.

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Operating Expenses

Operating expenses include product development and selling, general and administrative expenses.

Sales, general and administrative. Sales, general and administrative, or SG&A
expenses represent the largest component of our operating expenses and consist
of distribution costs, sales, marketing and other general and administrative
costs. Distribution costs include outbound freight and the costs to operate our
distribution hubs. Sales and marketing costs relate to the costs to operate our
global sales force that works in conjunction with our channel partners, gaming
team and event sponsorships, advertising and marketing promotions of our
products and services, costs of maintaining our web store and credit card
processing fees related to sales on our webstore, and personnel-related cost.
General and administrative costs consist primarily of personnel-related expenses
for our finance, legal, human resources, IT and administrative personnel, as
well as the costs of professional services related to these functions.

We expect our total sales, general and administrative expenses to increase in
absolute dollars as we continue to actively promote and distribute a higher
volume of our products and also due to the anticipated growth of our business
and related infrastructure, including increase in legal, accounting, insurance,
compliance, investor relations and other costs associated with becoming a public
company.

Product development. Product development costs are generally expensed as
incurred and reported in the condensed combined consolidated statements of
operations. Product development costs consist primarily of the costs associated
with the design and testing of new products and improvements to existing
products. These costs relate primarily to compensation of personnel and
consultants involved with product design, definition, compatibility testing and
qualification.

We expect our product development expenses to increase in absolute dollars as we continue to make significant investments in the development of new products and the improvement of existing products.

Interest charges

Interest expense includes interest associated with our debt financing arrangements, including our revolving line of credit, amortization of debt issuance costs and debt discounts, loss resulting from the extinguishment of debt, consisting of the write-off of the unamortized debt discount and the costs associated with the prepayment of our term loans.

Other (expenses) income, net

Other (expense) income, net consists primarily of our foreign currency exchange
gains and losses relating to transactions and remeasurement of asset and
liability balances denominated in currencies other than the U.S. dollar. We
expect our foreign currency gains and losses to continue to fluctuate in the
future due to changes in foreign currency exchange rates.

Income tax expense

We are subject to income taxes in the United States and foreign jurisdictions in
which we do business. These foreign jurisdictions have statutory tax rates
different from those in the United States. Accordingly, our effective tax rates
will vary depending on the relative proportion of foreign to United States
income, the utilization of foreign tax credits and changes in tax laws. Deferred
tax assets are reduced through the establishment of a valuation allowance, if,
based upon available evidence, it is determined that it is more likely than not
that the deferred tax assets will not be realized.

Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the tax and financial reporting bases of our
assets and liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in future years in which
those temporary differences are expected to be recovered or settled.

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Results of Operations

The following tables show the components of our condensed consolidated statements of earnings, in dollars and as a percentage of total net revenue, for each of the periods presented.


                                      Three Months Ended             Nine Months Ended
                                         September 30,                 September 30,
                                      2021          2020           2021            2020

                                                        (In thousands)
Net revenue                         $ 391,121     $ 457,103     $ 1,393,438     $ 1,146,028
Cost of revenue                       289,759       329,159       1,001,397         834,398
Gross profit                          101,362       127,944         392,041         311,630
Operating expenses:
Sales, general and administrative      76,112        65,321         234,134         175,877
Product development                    14,495        12,902          45,150          36,285
Total operating expenses               90,607        78,223         279,284         212,162
Operating income                       10,755        49,721         112,757          99,468
Other (expense) income:
Interest expense                       (7,202 )     (10,170 )       (16,656 )       (29,116 )
Other (expense) income, net            (1,402 )          23          (4,002 )           (29 )
Total other expense, net               (8,604 )     (10,147 )       (20,658 )       (29,145 )
Income before income taxes              2,151        39,574          92,099          70,323
Income tax expense                       (374 )      (3,217 )       (15,854 )       (10,149 )
Net income                          $   1,777     $  36,357     $    76,245     $    60,174






                                      Three Months Ended          Nine Months Ended
                                         September 30,              September 30,
                                       2021          2020          2021         2020
Net revenue                              100.0 %      100.0 %        100.0 %     100.0 %
Cost of revenue                           74.1         72.0           71.9        72.8
Gross profit                              25.9         28.0           28.1        27.2
Operating expenses:
Sales, general and administrative         19.5         14.3           16.8        15.3
Product development                        3.7          2.9            3.2         3.2
Total operating expenses                  23.2         17.2           20.0        18.5
Operating income                           2.7         10.8            8.1         8.7
Other (expense) income:
Interest expense                          (1.8 )       (2.2 )         (1.2 )      (2.5 )
Other (expense) income, net               (0.4 )        0.0           (0.3 )      (0.0 )
Total other expense, net                  (2.2 )       (2.2 )         (1.5 )      (2.5 )
Income before income taxes                 0.5          8.6            6.6         6.1
Income tax expense                        (0.1 )       (0.7 )         (1.1 )      (0.9 )
Net income                                 0.4 %        7.9 %          5.5 %       5.3 %



Components of the results of operations

Net Revenue



                Three Months Ended             Nine Months Ended
                   September 30,                 September 30,
                2021          2020           2021            2020

                                  (In thousands)
Net revenue   $ 391,121     $ 457,103     $ 1,393,438     $ 1,146,028




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Net revenue decreased $66.0 million, or 14.4%, for the three months ended
September 30, 2021 as compared to the same period last year. The decrease was
due to a 13.8% decrease in sales for our gamer and creator peripherals segment
and a 14.8% decrease in sales for our gaming components and systems segment. We
believe the decrease in sales in both segments was primarily due to supply and
logistic constraints caused by the COVID-19 pandemic, as well as the shortage of
reasonably priced GPUs.



Net revenue increased  $247.4 million, or 21.6%, for the nine months ended
September 30, 2021 as compared to the same period last year. The increase was
due to a 35.3% increase in sales for our gamer and creator peripherals segment
and a 15.6% increase in sales for our gaming components and systems segment.
Overall, we saw strong growth in revenue for both our gamer and creator
peripherals segment and gaming components and systems segments year-over-year
primarily resulting from a larger number of consumers that are gaming and
working from home due to the COVID-19 pandemic, but this revenue growth was
partially offset by a decrease in revenue in the third quarter of 2021 in both
segments primarily due to supply and logistic constraints caused by the COVID-19
pandemic, as well as the shortage of reasonably priced GPUs.



Gross profit and gross margin


                 Three Months Ended           Nine Months Ended
                    September 30,               September 30,
                 2021          2020          2021          2020

                                 (In thousands)
Gross profit   $ 101,362     $ 127,944     $ 392,041     $ 311,630
Gross margin        25.9 %        28.0 %        28.1 %        27.2 %




Gross margin decreased to 25.9% for the three months ended September 30, 2021
from 28.0% for the same period last year. The decrease was driven primarily by
an increase in logistic costs which were largely driven by the COVID-19
pandemic, and increased promotional activity.



Gross margin increased to 28.1% for the nine months ended September 30, 2021
from 27.2% for the same period last year. This increase was primarily driven by
improved product mix towards our gamer and creator peripherals segment and the
increase in sales volume, particularly the strong revenue growth in our Elgato
streaming products. The increase in gross margin was partially offset by
increased logistics costs largely due to the COVID-19 pandemic, and pandemic
related port shutdowns in addition to increased promotional activity.

Sales, General and Administrative (SG&A)


                                      Three Months Ended           Nine Months Ended
                                         September 30,               September 30,
                                       2021          2020         2021          2020

                                                      (In thousands)

Sales, general and administrative $ 76,112 $ 65,321 $ 234,134

  $ 175,877


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SG&A expenses increased $10.8 million, or 16.5%, for the three months ended
September 30, 2021 as compared to the same period last year. The increase was
primarily due a $2.7 million increase in personnel-related costs due to
headcount growth and higher stock-based compensation, a $2.5 million increase in
marketing expenses, mainly due to increase in sponsorships and digital marketing
programs, a $2.0 million increase in director and officer insurance fees, and a
$1.9 million increase in distribution costs including outbound freight and the
costs to operate our distribution hubs largely due to the COVID-19 pandemic
impact to logistic constraints. Other increases in SG&A expenses included
increased credit card processing fees, driven by an increase in our webstore
sales and professional services expenses.



SG&A expenses increased $58.3 million, or 33.1%, for the nine months ended
September 30, 2021 as compared to the same period last year. The increase was
primarily due to a $20.7 million increase in distribution costs including
outbound freight expenses and the costs to operate our distribution hubs, in
each case, due to increased sales volume as well as the COVID-19 pandemic impact
to logistic constraints, a $19.4 million increase in personnel-related costs due
to headcount growth and higher stock-based compensation, a $6.0 million increase
in director and officer insurance fees, a $5.8 million increase in marketing
expenses, mainly due to increase in sponsorships and digital marketing programs,
and a $3.0 million increase in credit card processing fees driven by an increase
in our webstore sales. Other increases in SG&A expenses included increased
professional services expenses.

Product development


                        Three Months Ended          Nine Months Ended
                           September 30,              September 30,
                         2021          2020         2021          2020

                                        (In thousands)

Product development $ 14,495 $ 12,902 $ 45,150 $ 36,285




Product development expenses increased $1.6 million, or 12.3%, for the three
months ended September 30, 2021 as compared to the same period last year. The
increase was primarily due to a $0.6 million increase in consultant and
contractor expense, a $0.7 million increase in other product development related
costs to support our continued innovation and broadening of our product
portfolio, and a $0.3 million increase in personnel-related expense.



Product development expenses increased $8.9 million, or 24.4%, for the nine
months ended September 30, 2021 as compared to the same period last year. The
increase was primarily due to a $5.7 million increase in personnel-related
expenses due to headcount growth and higher stock-based compensation, a $1.8
million increase in other product development related costs to support our
continued innovation and broadening of our product portfolio, and a $1.4 million
increase in consultant and contractor expense.

Interest expense and other (expense) income, net


                                Three Months Ended           Nine Months Ended
                                   September 30,               September 30,
                                2021          2020          2021          2020

                                                (In thousands)
Interest expense              $  (7,202 )   $ (10,170 )   $ (16,656 )   $ (29,116 )
Other (expense) income, net      (1,402 )          23        (4,002 )         (29 )




Interest expense decreased $3.0 million, or 29.2%, for the three months ended
September 30, 2021 as compared to the same period last year. Interest expense
decreased $12.5 million, or 42.8%, for the nine months ended September 30, 2021
as compared to the same period last year. The decreases in interest expense in
both the three and nine-months ended September 30, 2021 compared to the same
periods last year were due to lower interest expense paid for our First Lien
Term Loan as a result of the partial and full extinguishment of our First Lien
Term Loan in 2020 and 2021, respectively, and no interest paid for our Second
Lien Term Loan due to the full extinguishment of our Second Lien Term Loan in
2020. Additionally, the decreases in interest expense were due in part, to a
lesser extent, lower interest rate on our new Term Loan executed in September
2021 which replaced our First Lien Term Loan.

Other (expense) income, net is primarily comprised of foreign exchange gains and
losses on cash, accounts receivable and intercompany balances denominated in
currencies other than the functional currencies of our subsidiaries. Our foreign
currency exposure is primarily driven by fluctuations in the foreign currency
exchanges rates of the Euro, British Pound and the Chinese Yuan.

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Income Tax Expense



                               Three Months Ended           Nine Months Ended
                                  September 30,               September 30,
                               2021           2020         2021          2020

                                               (In thousands)
Income before income taxes   $   2,151      $ 39,574     $  92,099     $  70,323
Income tax expense                (374 )      (3,217 )     (15,854 )     (10,149 )
Effective tax rate                17.4 %         8.1 %        17.2 %        14.4 %




We are subject to income taxes in the United States and foreign jurisdictions in
which we do business. These foreign jurisdictions have statutory tax rates
different from those in the United States. Accordingly, our effective tax rates
will vary depending on the relative proportion of foreign to United States
income, the utilization of net operating loss and tax credit carry forwards,
changes in geographic mix of income and expense, and changes in management's
assessment of matters such as the ability to realize deferred tax assets, and
changes in tax laws.

Our effective tax rates were 17.4% and 8.1% for the three months ended September
30, 2021 and 2020, respectively. The effective tax rate was higher in the three
months ended September 30, 2021 as compared to the same period last year
primarily due to a $4.3 million tax benefit recognized in the three months ended
September 30, 2020, resulting from the change in management's assessment of the
realizability of certain deferred tax assets as a result of the Reorganization.
The increase to the effective tax rate for such three-month period was partially
offset by the favorable impacts on the effective tax rate for 2021 from higher
excess tax benefits related to stock-based compensation recognized in the three
months ended September 30, 2021, as well as the change in the mix of income and
losses in the various tax jurisdictions in which we operate.

Our effective tax rates were 17.2% and 14.4% for the nine months ended September
30, 2021 and 2020, respectively. The effective tax rate was higher in the nine
months ended September 30, 2021 as compared to the same period last year
primarily due to a $4.3 million tax benefit recognized in the nine months ended
September 30, 2020, resulting from the change in management's assessment of the
realizability of certain deferred tax assets as a result of the Reorganization
and a $0.6 million one-time tax benefit from the change in tax law resulting
from the enactment of the CARES Act. In the nine months ended September 30,
2021, we recorded a $1.4 million one-time tax expense related to the
remeasurement of our United Kingdom deferred tax liabilities as a result of the
enactment of the increased corporate tax rate in the United Kingdom. The
increase to the effective tax rate for such nine-month period was partially
offset by the favorable impacts on the effective tax rate for 2021 from higher
excess tax benefits related to stock-based compensation recognized in the nine
months ended September 30, 2021, as well as the change in the mix of income and
losses in the various tax jurisdictions in which we operate.

Segment results

Segment net income

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


                                                 Three Months Ended September 30,                       Nine Months Ended September 30,
                                                  2021                      2020                       2021                        2020

Peripherals segment for gamers and creators $ 139,260 35.6% $ 161,555 35.3% $ 470,329 33.8% $ 347,531 30.3% of the game components and systems segment

    Memory Products                         115,524        29.5       

141,298 30.9 436 123 31.3 424 150 37.0

    Other Component Products                136,337        34.9       154,250        33.7         486,986        34.9         374,347        32.7
                                            251,861        64.4       295,548        64.7         923,109        66.2         798,497        69.7
    Total Net Revenue                     $ 391,121     100.0%      $ 457,103     100.0%      $ 1,393,438     100.0%      $ 1,146,028     100.0%



Peripherals segment for gamers and creators

Net revenue of the gamer and creator peripherals segment decreased $22.3
million, or 13.8%, for the three months ended September 30, 2021 as compared to
the same period last year, due to decreased sales across all products in this
segment. The decrease in sales was primarily driven by supply and logistics
constraints caused by the COVID-19 pandemic.

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Net revenue of the gamer and creator peripherals segment increased $122.8
million, or 35.3%, for the nine months ended September 30, 2021 as compared to
the same period last year due to strong growth across all product categories in
the first half of 2021, led primarily by increased sales of our Elgato branded
streaming and peripherals products, as well as our SCUF branded console
products. We believe the revenue growth year-over-year was driven in part by the
COVID-19 shelter-in-place orders as consumers spend more time working and gaming
at home and gamers seeking to improve their performance by upgrading their gear.
This revenue growth was partially offset by decreased sales in the third quarter
of 2021 which was primarily driven by supply and logistic constraints caused by
the COVID-19 pandemic.

Game components and systems segment

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

Net revenue of the gaming components and systems segment increased $124.6
million, or 15.6%, for the nine months ended September 30, 2021 as compared to
the same period last year. We believe the revenue growth year-over-year was
driven in part by the COVID-19 shelter-in-place orders, particularly, for our
PSUs and pre-built systems. This revenue growth was partially offset in the
third quarter of 2021 due to the shortage of reasonably priced GPUs which
curtailed the demand for new PC builds and its components, as well as supply and
logistic constraints caused by the COVID-19 pandemic.



Segment gross margin and gross margin

The following table shows our gross margin expressed in dollars (in thousands) and our gross margin (which we define as gross margin as a percentage of net sales) by segment:


                                        Three Months Ended September 30,                   Nine Months Ended September 30,
                                          2021                     2020                     2021                     2020

Gamer and Creator Peripherals
Segment                           $  48,580     34.9%      $  60,010     

37.1% $ 172,080 36.6% $ 120,886 34.8% Game components and systems segment

    Memory Products                  15,935       13.8        26,552       

18.8 77 984 17.9 89 507 21.1

    Other Component Products         36,847       27.0        41,382       26.8       141,977       29.2       101,237       27.0
                                     52,782       21.0        67,934       23.0       219,961       23.8       190,744       23.9
    Total Gross Profit            $ 101,362     25.9%      $ 127,944     28.0%      $ 392,041     28.1%      $ 311,630     27.2%



Peripherals segment for gamers and creators

The gross profit of the gamer and creator peripherals segment decreased in the
three months ended September 30, 2021 by $11.4 million, or 19.0%, as compared to
the same period last year. The 2.2% decrease in gross margin in the three-month
period, compared to the same period last year, was driven by increased logistics
costs, largely due to the COVID-19 pandemic, and increased promotional activity.

The gross profit of the gamer and creator peripherals segment increased in the
nine months ended September 30, 2021 by $51.2 million, or 42.3%, as compared to
the same period last year. The 1.8% increase in gross margin in the nine-month
period, compared to the same period last year, was primarily driven by the
strong growth in sales of higher margin Elgato branded streaming products and
the increase in sales volume in the same period. This increase was partially
offset by increased logistics costs, largely due to the COVID-19 pandemic, and
increased promotional activity.

Game components and systems segment

The gross profit of the gaming components and systems segment decreased in the
three months ended September 30, 2021 by $15.2 million, or 22.3%, as compared to
the same period last year. The 2.0% decrease in gross margin in the three-month
period, compared to the same period last year, was driven by increased logistic
costs, largely due to the COVID-19 pandemic, and increased promotional activity.

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

Liquidity and capital resources

Our principal sources of liquidity have been the payments received from
customers purchasing our products, the net proceeds we received from private
sales of equity securities, the borrowings under our credit facilities and the
net proceeds we received from our IPO, completed in September 2020. As of
September 30, 2021, we had cash and restricted cash, in aggregate of $76.3
million.

On September 3, 2021, we entered into a new Credit Agreement (defined below)
which replaced our previous credit facilities under the First Lien and Credit
Guaranty Agreement (defined below). As of September 30, 2021, under the new
Credit Agreement, we had $100 million capacity under the Revolving Facility and
$250.0 million Term Loan outstanding (face value). Please see the section below
under the heading "Credit Agreement" for additional information on the Credit
Agreement and the loans thereunder.

We anticipate our principal uses of cash will include purchases of inventory,
payroll and other operating expenses related to the development and marketing of
our gear, repayments of debt and related interest, and purchases of property and
equipment and other contractual obligations for the foreseeable future. We
believe that our existing cash balances and cash flow from operations will be
sufficient to fund our principal uses of cash for at least the next 12 months.
Our future capital requirements may vary materially from those currently planned
and will depend on many factors, including our rate of revenue growth (if any),
the timing and extent of spending on research and development efforts and other
business initiatives, the expansion of sales and marketing activities, the
timing of new product introductions, market acceptance and demand for our
products and overall economic conditions. To the extent that current and
anticipated future sources of liquidity are insufficient to fund our future
business activities and requirements, we may be required to seek additional
equity or debt financing. In addition, we may enter into other arrangements for
potential investments in, or acquisitions of, complementary businesses, services
or technologies, which could require us to seek additional equity or debt
financing. The sale of additional equity would result in additional dilution to
our stockholders. The incurrence of debt financing would result in debt service
obligations and the instruments governing such debt could provide for operating
and financial covenants that would restrict our operations. There can be no
assurance that any such equity or debt financing will be available on favorable
terms, or at all.

Cash Flows

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



                                      Nine Months Ended September 30,
                                        2021                   2020

Net cash provided by (used in):
Operating activities              $         25,061       $        100,324
Investing activities                       (14,039 )               (5,908 )
Financing activities                       (67,183 )              (26,371 )


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Cash flow from operating activities

Net cash provided by operating activities for the nine months ended
September 30, 2021 was $25.1 million and consisted of net income of $76.2
million, non-cash adjustments of $48.7 million and was partially offset by $99.8
million from changes in our net operating assets and liabilities. The non-cash
adjustments consisted primarily of amortization of intangibles and depreciation,
stock-based compensation expense, loss on debt extinguishment and amortization
of debt issuance costs and change in deferred tax assets. The net cash outflow
from changes in our net operating assets and liabilities was primarily related
to increase in inventory, prepaid expenses and other assets, and a decrease in
accounts payable mainly due to timing of payments. The net cash outflow was
partially offset by a decrease in accounts receivable and an increase in other
liabilities and accrued expenses.

Net cash provided by operating activities for the nine months ended
September 30, 2020 was $100.3 million and consisted of a net income of $60.2
million, non-cash adjustments of $35.7 million and $4.4 million from changes in
our net operating assets and liabilities. The non-cash adjustments consisted
primarily of amortization of intangibles and depreciation, stock-based
compensation expense, loss on debt extinguishment and amortization of debt
issuance costs and change in deferred tax assets. The net cash inflow from
changes in our net operating assets and liabilities was primarily related to an
increase in accounts payable and other liabilities and accrued expenses. The net
cash inflow was partially offset by an increase in inventory, accounts
receivable and prepaid expenses and other assets.

Cash flow from investing activities

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

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

Cash flow from financing activities

Cash used in financing activities was $67.2 million for the nine months ended
September 30, 2021 and consisted primarily of $327.0 million repayments of debt
(First Lien Term Loan) and $0.2 million payment of taxes related to net share
settlement of equity awards. These cash outflows were partially offset by $248.5
million net proceeds from our new Term Loan executed in September 2021 and $11.5
million proceeds received from the issuance of shares through the employee
equity incentive plans.

Cash used in financing activities was $26.4 million for the nine months ended
September 30, 2020 and consisted primarily of $140.4 million repayments of debt,
$5.6 million payment of offering costs, and $0.2 million payment of debt
issuance costs. These cash outflows were partially offset by $118.6 million
proceeds received from the issuance of our common stock in connection with our
IPO, after deducting underwriting discounts and commissions, and $1.2 million
proceeds received from the issuance of shares through the employee equity
incentive plans.

Credit facilities

First of all Lien credit and warranty agreement (extinguished in September 2021)

In August 2017, we entered into a syndicated First Lien Credit and Guaranty
Agreement, or the First Lien, with various financial institutions. The First
Lien originally provided a $235 million term loan, or the First Lien Term Loan,
for a business acquisition and to repay existing indebtedness of the acquired
company and a $50 million revolving line-of-credit, or the Revolver. The First
Lien and the Revolver was to mature on August 28, 2024 and August 28, 2022,
respectively.

Subsequently, we entered into several amendments to the First Lien and the
principal amount of the First Lien Term Loan was increased by $10 million in
2017 and increased by $115 million in each of 2018 and 2019, primarily to fund
various business acquisitions and operation needs.

The First Lien Term Loan initially carried interest at a rate equal to, at our
election, either the (a) greatest of (i) the prime rate, (ii) sum of the Federal
Funds Effective Rate plus 0.5%, (iii) one month LIBOR plus 1.0% and (iv) 2%,
plus a margin of 3.5%, or (b) the greater of (i) LIBOR and (ii) 1.0%, plus a
margin of 4.5%. The Revolver initially carried interest at a rate equal to, at
our election, either the (a) greatest of (i) the prime rate, (ii) sum of the
Federal Funds Effective Rate plus 0.5%, (iii) one month LIBOR plus 1.0% and (iv)
2%, plus 3.5%, or (b) the greater of (i) LIBOR and (ii) 1.0%, plus a margin of
4.5%. As a result of the First Lien amendment

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in October 2018, the margin for the First Lien term loan and Revolver margin
were both changed to range from 2.75% to 3.25% for base rate loans and to range
from 3.75% to 4.25% for Eurodollar loans, in each case, based on our net
leverage ratio.

According to the repayment schedule, the Consolidated Excess Cash Flow (as
defined in the First Lien) and the IPO repayment provisions as set forth in the
First Lien, we made required repayments of the First Lien Term Loan of $59.6
million, in aggregate, in 2020 using the net proceeds from our IPO and excess
cash on hand. Further, we may prepay the First Lien Term Loan and the Revolver
at any time without premium or penalty other than customary LIBOR breakage. In
2020, we began to prepay the First Lien Term loan using our excess cash on hand,
resulting in $80.8 million in 2020 and $78.3 million in 2021 through September
2021. The remainder of First Lien Term Loan of $248.5 million was fully prepaid
with the proceeds from the Term Loan (defined below) on September 3, 2021, and
as a result, all obligations and covenants thereunder were terminated.

Second Lien credit and warranty agreement (extinguished in September 2020)

In August 2017, we also entered into a syndicated Second Lien Credit and
Guaranty Agreement, or the Second Lien, with various financial institutions. The
Second Lien initially provided a $65 million term loan, or the Second Lien Term
Loan, with a maturity date of August 28, 2025, for a business acquisition and
for general corporate operations purposes. The Second Lien Term Loan initially
carried interest at a base rate equal to that of the First Lien loan, plus a
margin of 7.25% for base rate loans and 8.25% for Eurodollar loans. In October
2017, we entered into an amendment to the Second Lien and the principal amount
of the Second Lien Term Loan was reduced to $50 million and the applicable
interest rate margins for both the base rate loans and Eurodollar loans were
increased by 0.25%.

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

Credit agreement (executed on September 3, 2021)

On September 3, 2021, we entered into a new Credit Agreement ("Credit
Agreement") which provides for a $100.0 million five-year revolving credit
facility ("Revolving Facility") and a $250.0 million five-year term loan
facility ("Term Loan"), with each maturing in September 2026. The Credit
Agreement also permits, subject to conditions stated therein, additional
incremental facilities in a maximum aggregate principal amount not to exceed
$250.0 million. We may prepay the Term Loan and the Revolving Facility at any
time without premium or penalty.

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

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

Our obligations under the Credit Agreement are guaranteed by substantially all
of our U.S. subsidiaries and secured by a security interest in substantially all
assets of the Company and the guarantor subsidiaries, subject to certain
exceptions detailed in the Credit Agreement and related ancillary documentation.

The Credit Agreement contains covenants with which we must comply during the
term of the agreement, which we believe are ordinary and standard for agreements
of this nature, including the maintenance of a maximum Consolidated Total Net
Leverage Ratio of 3.0 to 1.0 and a minimum Consolidated Interest Coverage Ratio
of 3.0 to 1.0 (as defined in our credit facilities). The Credit Agreement also
includes events of default customary for facilities of this nature and upon the
occurrence of such events of default, among other things, all outstanding
amounts under the Credit Agreement may be accelerated and/or the lenders'
commitments terminated. In addition, upon the occurrence of certain events of
default, the interest on the Term loan and Revolving Facility can be

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increased by 2.0%. As of September 30, 2021, we were not in default under the
Credit Agreement and our Consolidated Total Net Leverage Ratio and Consolidated
Interest Coverage Ratio were 0.8 to 1.0 and 10.4 to 1.0 as of September 30,
2021, respectively.

Contractual obligations and other commitments

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



                                                             Payments Due by Period
                                                     Less than        1-3           3-5         More than
                                        Total         1 Year         Years         Years         5 Years

                                                                 (In thousands)
Debt principal and interest (1)       $ 265,693     $     8,596     $ 23,961     $ 233,136     $         -
Purchase obligations (2)                 84,608          79,594        4,281           733               -
Operating leases (3)                     73,326           9,257       20,981        12,165          30,923
Total                                 $ 423,627     $    97,447     $ 49,223     $ 246,034     $    30,923



(1) Represents our new Term Loan and related interest based on repayment

the term loan maturity date September 30, 2021. See Note 8 “Debt” to our

condensed combined consolidated financial statements for more information.

(2) Represents an estimate of our non-cancellable open purchase orders and

contractual obligations in the ordinary course of business for which we have

not received the goods or services at September 30, 2021.

(3) Includes the contractual obligations of our non-cancellable operating leases

for offices and warehouses.

Off-balance sheet provisions

We have not entered into any off-balance sheet arrangements and do not hold any interests in variable interest entities.

Critical accounting policies and estimates

Our management's discussion and analysis of our financial condition and results
of operations is based on our condensed combined consolidated financial
statements, which have been prepared in accordance with GAAP. The preparation of
these condensed combined consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the condensed combined consolidated financial statements, as well as the
reported revenue generated and expenses incurred during the reporting periods.
Our estimates are based on our historical experience and on various other
factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.

There have been no material changes to our critical accounting policies and
estimates during the nine months ended September 30, 2021 as compared to the
critical accounting policies and estimates described in our Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in our Annual Report on Form 10-K for the year ended December 31, 2020
filed with the SEC on March 11, 2021.

Recent accounting positions

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

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