CORSAIR GAMING, INC. Management report and analysis of the financial situation and operating results. (Form 10-K)

You should read the following discussion of our financial condition and results
of operations in conjunction with the consolidated financial statements and the
related notes included elsewhere in this Annual Report on Form 10-K. The
following discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from such
forward-looking statements. Factors that could cause or contribute to these
differences include those discussed below and elsewhere in this Annual Report on
Form 10-K, particularly in the section Item 1A, "Risk Factors" and below in Item
7A, "Quantitative and Qualitative Disclosures about Market Risk".

Overview

We are a leading global provider and innovator of high-performance gear for
gamers, streamers and content creators, many of which build their own PCs using
our components. Our industry-leading gaming gear helps digital athletes, from
casual gamers to committed professionals, perform at their peak across PC or
console platforms, and streaming gear that enables streamers and content
creators to produce studio-quality content to share with friends or to broadcast
to millions of fans. Our PC components products offer our customers multiple
options to build their customized gaming and workstation desktop PCs. Our
solution is the most complete suite of gear that addresses the most critical
components for both game performance and streaming. Our product offering is
enhanced by our two proprietary software platforms: iCUE for gamers and the
Elgato streaming suite for content creators, including our Stream Deck control
software, which provide unified, intuitive performance, and aesthetic control
and customization across their respective product families. In 2020, we also
added a digital services layer to our offerings to enhance the customer
experience by integrating esports, coaching, stream deck marketplace, customer
care and extended warranty into our offerings.

We group our products into two categories (segments):

• Gamer and creator peripherals. Includes our high performance game

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

capture cards, Stream Decks, USB microphones, our Facecam streaming

camera, studio accessories and EpocCam software, as well as coaching and

        training services and content design services, among others.


• Game components and systems. Includes our high performance power supply

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

as pre-built and custom high-end gaming PCs, among others.

Further information about our industry, market opportunities and competitive strengths is set forth in Part I, Item 1, “Business” of this Annual Report on Form 10-K.

Our net revenue was $1,904.1 million, $1,702.4 million, and $1,097.2 million for
the years ended December 31, 2021, 2020, and 2019, respectively. We had net
income (loss) of $101.0 million, $103.2 million and $(8.4) million,
respectively. Net cash provided by operating activities was $20.2 million,
$169.0 million, and $37.1 million for the years ended December 31, 2021, 2020,
and 2019, respectively. We continue to experience a shift in net revenue towards
a more significant mix of our higher margin gamer and creator peripherals
segment, which represented 34.0%, 31.7% and 26.8% of total net revenue for the
years ended December 31, 2021, 2020 and 2019, respectively. As our product
portfolio continues to expand, our go-to-market model has also been evolving
with an increased mix of direct-to-consumer sales representing 10.7%, 8.6% and
2.7% of total net revenue for the years ended December 31, 2021, 2020 and 2019,
respectively.

Our net revenue increased 55.2% in 2020, as compared to 2019, primarily due to a
larger number of consumers gaming and working from home as a result of the
COVID-19 pandemic. Going into 2021, while the lockdowns and shelter-in-place
restrictions were gradually lifted, our net revenue continued to grow by 11.8%,
despite the negative impact from the global supply chain and logistics
challenges as well as the shortages of reasonably priced GPUs, which led to a
decrease in demand for self-built gaming PCs and systems and its related
components. We also experienced higher cost of goods sold in 2021 primarily
related to expenses on freight and logistics due to supply chain and logistics
issues. The full extent of the impact of COVID-19 pandemic remains uncertain,
which has and may continue to negatively impact our net revenue and gross
margin. While we experienced the aforementioned challenges in 2021 caused by the
COIVD-19 pandemic, our 2021 revenue and gross profits represented strong growth
from 2019, pre-pandemic, by 73.5% and 129.1%, respectively.

In the last 18 months, we have entered into three large new markets: microphones
and cameras for content creators and gaming monitors for both gamers and content
creators. In addition, we have launched 141 new products in 2021. Over the
longer term, we believe we will be able to continue to grow in new markets as
well as the markets that we participate in through innovation and leading
technologies and entry into new categories via organic growth or acquisition.
Since 2018, we have completed eight acquisitions, including our acquisition of a
51% of the share capital of iDisplay Technology, or "iDisplay", a leader in
electronic development and design specializing in display technology, in January
2022.

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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 titled “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K and those described below. below.

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

• Increase game engagement. We believe that the game takes more and more time

share of global entertainment consumption will drive continued growth in

spend on both games and gaming equipment. Gaming continues to become

increasingly social and streaming viewing is more widely adopted along

with a growing number of content creators. We believe that this trend, which

has accelerated in the current context, will continue and we are well

        positioned to serve the streaming market with best-in-class tools for
        content creation.

• Introduction of new high performance and sophisticated computer hardware

Games. We believe that the introduction of more powerful CPUs and GPUs

that put more strain on other system components, such as memory,

power supply or cooling, has a significant effect on increasing demand

for our material. In addition, we believe that the success of our business depends on

part on the introduction and success of games with sophisticated graphics

which place increasing demands on the speed and processing capacity of the system and

therefore require more powerful CPUs or GPUs, which in turn drives demand

for our high-performance gaming components and systems, such as power supplies and

cooling solutions and our gaming PC memory. As a result, our operation

results may be materially affected by the timing and rate at which

hardware companies are introducing new and improved processors and GPUs, the

the timing and rate at which computer game companies and developers

introduce sophisticated new and improved games that require more and more

high 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 26.7%, 24.6% and 25.1% of our net revenue for 2021, 2020,
and 2019, respectively, and sales to our ten largest customers accounting for
approximately 51.7%, 52.7%, and 51.6% of our net revenue for the same periods,
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
which 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. In 2021, we had several product introductions that had a
favorable impact on our net revenue and operating results, such as the
introduction of our new K65 mini RGB keyboard, Elgato's new accessories
including our new Facecam, Corsair DDR5 memory and new high-performance gaming
controllers including SCUF Reflex, Reflex Pro and Reflex FPS, among others.
However, there can be no assurance that our new product introductions will have
a favorable impact on our operating results or that customers will choose our
new gear over those of our competitors.

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

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enhanced CPUs, GPUs, and other computer hardware products, which usually take
place in the second calendar quarter and which tend to drive sales in the
following two quarters. Further, our net revenue tends to be higher in the third
and fourth calendar quarter due to seasonal sales such as "Black Friday," "Cyber
Monday" and "Singles Day" in China, as retailers tend to make purchases in
advance of these sales, and our sales also tend to be higher in the fourth
quarter due to the introduction of new consoles and high-profile games in
connection with the holiday season. As a consequence of seasonality, our net
revenue for the second calendar quarter is generally the lowest of the year
followed by the first calendar quarter. Historical seasonal patterns may not
continue in the future and have been impacted, and may be further impacted in
the future, by increasing supply constraints, GPU shortages, shifts in customer
behavior and the evolving impacts of the COVID-19 pandemic.

Impact of Fluctuations in Currency Exchange Rates. We are subject to inherent
risks attributed to operating in a global economy. Some of our international
sales are denominated in foreign currencies and any unfavorable movement in the
exchange rate between U.S. dollars and the currencies in which we conduct sales
in foreign countries, in particular the Euro and the British Pound could have an
adverse impact on our net revenue. In addition, we generally pay our employees
located outside the United States in the local currency, with a significant
portion of those payments being made in Taiwan dollars and Euros. 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 in 2021, which led to
increases in operating costs such as the significantly elevated ocean freight
costs we incurred in the second half of 2021 as compared to the same period of
2020. These negative financial impacts have been offset by revenue growth in
2020 and 2021, partly due to an increase in demand for our gear as more people
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 fully predicted.

We continue to evaluate the nature and extent of the impact of the COVID-19
pandemic to our business and we have implemented various measures to attempt to
mitigate the disruptive logistics impact to our business, specifically around
managing inventory stocking level 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

Revenue cost includes product costs, including contract manufacturer costs, inbound freight costs from manufacturers to our distribution centers as well as inter-center shipments, cost of materials and overhead, duties and rates, warranty replacement cost to process and rework the returned items. , depreciation of tooling equipment, storage costs, depreciation of excess and obsolete inventory,

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and certain allocated costs related to facilities and information technology, or IT, as well as personnel and other operating expenses related to supply chain logistics.

Functionnary costs

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

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

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

Product development. Product development costs are generally expensed as
incurred. Product development costs consist primarily of the costs associated
with the design and testing of new products and improvements to existing
products. These costs relate primarily to compensation of personnel and
consultants involved with product design, definition, compatibility testing and
qualification, as well as depreciation costs of equipment used, prototype
material costs and allocated overhead costs.

We expect our product development spending to increase in absolute dollars as we continue to make significant investments in developing new products and improving existing products.

Interest charges

Interest expense consists of interest associated with our debt financing
arrangements, including our revolving line of credit, amortization of debt
issuance costs and debt discounts, loss from debt extinguishment, consisting of
the write-off of unamortized debt discount and fees associated with the
prepayment of our term loans, and the change in fair value of our interest rate
cap contracts.

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

Income tax benefit (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 set forth the components of our consolidated statements of
operations, in dollars and as a percentage of total net revenue, for each of the
periods presented.

                                              Year Ended December 31,
                                       2021            2020            2019

                                                  (in thousands)
Net revenue                         $ 1,904,060     $ 1,702,367     $ 1,097,174
Cost of revenue                       1,390,206       1,236,938         872,887
Gross profit                            513,854         465,429         224,287
Operating expenses:
Sales, general and administrative       315,672         257,004         163,033
Product development                      60,288          50,064          37,547
Total operating expenses                375,960         307,068         200,580
Operating income                        137,894         158,361          23,707
Other (expense) income:
Interest expense                        (17,673 )       (35,137 )       (35,548 )
Other expense, net                       (5,661 )        (1,182 )        (1,558 )
Total other expense, net                (23,334 )       (36,319 )       (37,106 )
Income (loss) before income taxes       114,560         122,042         (13,399 )
Income tax (expense) benefit            (13,600 )       (18,825 )         5,005
Net income (loss)                   $   100,960     $   103,217     $    (8,394 )



                                        Year Ended December 31,
                                      2021        2020        2019

Net revenue                            100.0 %     100.0 %     100.0 %
Cost of revenue                         73.0        72.7        79.6
Gross profit                            27.0        27.3        20.4
Operating expenses:
Sales, general and administrative       16.6        15.1        14.9
Product development                      3.2         2.9         3.4
Total operating expenses                19.7        18.0        18.3
Operating income                         7.2         9.3         2.2
Other (expense) income:
Interest expense                        (0.9 )      (2.1 )      (3.2 )
Other expense, net                      (0.3 )      (0.1 )      (0.1 )
Total other expense, net                (1.2 )      (2.1 )      (3.4 )
Income (loss) before income taxes        6.0         7.2        (1.2 )
Income tax (expense) benefit            (0.7 )      (1.1 )       0.5
Net income (loss)                        5.3 %       6.1 %      (0.8 )%



Components of operating results

Net Revenue
                        Year Ended December 31,
                 2021            2020            2019

                            (in thousands)
Net revenue   $ 1,904,060     $ 1,702,367     $ 1,097,174




Net revenue increased $201.7 million, or 11.8%, in 2021 as compared to 2020.
This was due to a 20.0% increase in sales for our gamer and creator peripherals
segment and an 8.1% increase in sales for our gaming components and systems
segment. This increase in sales was largely due to increased demand for our
products in 2020 and the first half of 2021 driven by the COVID-19 pandemic,
with such growth beginning to slow down in the second half of 2021, partly due
to the easing of the COVID-19 shelter-in-place restrictions resulting in the
reopening of most outside entertainment. In addition, our second half 2021
revenue was negatively

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impacted by global supply and logistics constraints caused by the COVID-19 pandemic, as well as the shortage of reasonably priced GPUs.

Net revenue increased $605.2 million, or 55.2%, in 2020 as compared to 2019.
This increase was due to strong revenue growth in both segments. We believe the
increased demand of our products was generally due to a larger number of
consumers gaming and working from home due to the COVID-19 pandemic in 2020, in
addition to existing customers upgrading their systems and gear for a better
gaming and/or streaming experience, and to a lesser extent, the inclusion of
post-acquisition revenues from our acquisitions of SCUF and Origin.

Gross profit and gross margin

                      Year Ended December 31,
                 2021          2020          2019

                          (in thousands)
Gross profit   $ 513,854     $ 465,429     $ 224,287
Gross margin        27.0 %        27.3 %        20.4 %




Gross margin decreased to 27.0% in 2021 from 27.3% in 2020. The decrease was
driven primarily by an increase in logistics costs which were largely driven by
global shipping and logistics challenges caused by the COVID-19 pandemic, and
increased promotional activity. These negative impacts were partially offset by
an increase in gross margin from an improved product mix with more sales from
the higher margin gamer and creator peripherals segment.

Gross margin increased to 27.3% in 2020 from 20.4% in 2019. The increase in
gross margin was primarily driven by increased sales volume, an improved product
mix with more higher margin products being sold in 2020 as compared to 2019 and
less promotional activity. This increase was partially offset by increased air
freight costs driven primarily by tightness in inventory supply due to the
COVID-19 pandemic in 2020.

As global shipping and logistics challenges continue into 2022, we expect our 2022 gross margins to remain under pressure due to high logistics costs.

Sales, General and Administrative (SG&A)

                                           Year Ended December 31,
                                      2021          2020          2019

                                               (in thousands)

Commercial, general and administrative $315,672 $257,004 $163,033




SG&A expenses increased $58.7 million, or 22.8%, in 2021 as compared to 2020.
The increase was primarily due to a $22.4 million increase in distribution costs
primarily driven by an increase in sales volume as well as higher freight costs
due to the global supply chain and logistics constraints caused by the COVID-19
pandemic, a $18.3 million increase in personnel-related costs due to headcount
growth and higher stock-based compensation, a $5.3 million increase in director
and officer insurance policy fees, a $5.2 million increase in marketing and
advertising expenses, mainly due to increase in sponsorships and digital
marketing programs, and a $3.5 million increase in credit card fees due to
increased sales through our webstore.

SG&A expenses increased $94.0 million, or 57.6%, in 2020 as compared to 2019.
The increase was primarily due to the inclusion of $29.1 million of SCUF's
post-acquisition SG&A expenses, including debt refinancing costs for funding the
SCUF acquisition and acquisition and integration costs related to the SCUF
Acquisition, a $27.4 million increase in distribution costs including outbound
freight and the costs to operate our distribution hubs due to increased sales
volume, a $24.3 million increase in personnel-related costs due to headcount
growth and higher bonus expense, a $6.0 million increase in marketing expenses
and a $4.4 million increase in fees primarily related to increased credit card
fees due to increased sales through our webstore and fees from our insurance
policies.

Product Development
                           Year Ended December 31,
                        2021         2020         2019

                                (in thousands)

Product development $60,288 $50,064 $37,547

Product development spending increased $10.2 millionor 20.4%, in 2021 compared to 2020. The increase is mainly due to a $6.9 million increase in personnel costs due to the growth in the workforce and the increase in share-based compensation, $1.4 million

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increase in consultant and contractor expense supporting our business
development efforts and a $1.9 million increase in other product development
related costs to support our continued innovation and broadening of our product
portfolio.

Product development expenses increased $12.5 million, or 33.3%, in 2020 as
compared to 2019. The increase was primarily driven by a $5.7 million increase
in personnel-related expenses due to headcount growth and higher bonus expense,
the inclusion of $5.8 million of SCUF's post-acquisition product development
expenses and a $5.5 million increase in other product development related
expenses. These increases were partially offset by a $4.5 million decrease in
amortization expense of developed technologies intangible assets.

Interest expense and other charges, net

                            Year Ended December 31,
                       2021          2020          2019

                                (in thousands)
Interest expense     $ (17,673 )   $ (35,137 )   $ (35,548 )
Other expense, net      (5,661 )      (1,182 )      (1,558 )



Interest expense decreased $17.5 million, or 49.7%, in 2021 as compared to 2020.
The decrease was primarily due to lower interest expense paid in 2021 for our
First Lien Term Loan as a result of the partial and full repayment of such loan
in 2020 and 2021, and no interest paid for our Second Lien Term Loan due to the
full repayment of such loan in 2020. Additionally, to a lesser extent, the
decrease was due to the lower interest rate on our new Term Loan (defined below)
executed in September 2021 which replaced our First Lien Term Loan (defined
below). These decreases in interest expense were offset partially by higher
losses incurred on debt extinguishment in 2021 compared to 2020 as the total
debt amount extinguished in 2021 was higher than in 2020.

Interest expense decreased $0.4 million, or 1.2%, in 2020 as compared to 2019.
The decrease was primarily due to lower interest expense paid in 2020 for our
First Lien Term Loan and Second Lien Term Loan as a result of the partial
extinguishment of our First Lien Term Loan and full extinguishment of our Second
Lien Term Loan as well as a decrease in interest from borrowings from our line
of credit. The decrease in interest expense was partially offset by an aggregate
of $4.2 million write-off of deferred debt discounts and issuance costs
associated with extinguishments of our term loans and a $0.5 million loss
recognized for the change in fair value of our interest rate cap contracts.

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

Income Tax (Expense) Benefit
                                              Year Ended December 31,
                                        2021              2020          2019

                                        (in thousands, except percentages)
Income (Loss) Before Income Taxes   $    114,560       $  122,042     $ (13,399 )
Income Tax (Expense) Benefit             (13,600 )        (18,825 )       5,005
Effective Tax Rate                          11.9 %           15.4 %        37.4 %



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 tax expense of 11.9% and 15.4% for 2021 and 2020,
respectively. The change in effective tax rate for 2021 as compared to 2020 was
primarily due to excess tax benefits from stock-based compensation as well as
the recognition of a $3.1 million tax benefit resulting from the change in
management's assessment of the realizability of our California deferred tax
assets as a result of the increased U.S. profitability.

Our effective tax rates were tax expense of 15.4% and tax benefit of 37.4% for
2020 and 2019, respectively. The change in effective tax rate for 2020 as
compared to 2019 was primarily due to an increase in income before income tax
compared to 2019, the change in the mix of income and losses in the various tax
jurisdictions in which we operate, the recognition of a $4.6 million tax benefit
resulting from the change in management's assessment of the realizability of
certain deferred tax assets as a result of the reorganization of our
organizational structure in connection with our IPO, and a $0.6 million one-time
benefit from the change in tax law resulting from the enactment of the
Coronavirus Aid, relief and Economic Security Act ("CARES Act") in the first
quarter 2020.

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Segment Results

Segment Net Revenue

The following table shows our net revenues by segment expressed in dollars (thousands) and as a percentage of net revenues:

                                                                    Year Ended December 31,
                                                 2021                        2020                        2019

Segment of peripherals for gamers and creators $647,202 34.0% $539,366 31.7% $294,141 26.8% Gaming Components and Systems Segment

   Memory Products                          612,964        32.2         

609,053 35.8 463,406 42.2

   Other Component Products                 643,894        33.8         553,948        32.5         339,627        31.0
                                          1,256,858        66.0       1,163,001        68.3         803,033        73.2
Total Net Revenue                       $ 1,904,060       100.0 %   $ 1,702,367       100.0 %   $ 1,097,174       100.0 %

Segment of peripherals for gamers and creators

Net revenue of the gamer and creator peripherals segment increased $107.8
million, or 20.0%, in 2021 as compared to 2020 due to revenue growth across
almost all product categories. In particular, the Elgato branded content creator
products was our fastest growing category in this segment and accounted for
approximately one-third of the segment's revenue. We believe revenue growth in
this segment was driven in part by the COVID-19 shelter-in-place orders that
prompted consumers to spend more time working and gaming at home and gamers
seeking to improve their performance by upgrading their gear. The volume of the
products shipped in this segment was lower in the second half of 2021 than the
first half of 2021 primarily due to global supply and logistics constraints
caused by the COVID-19 pandemic.

Net revenue of the gamer and creator peripherals segment increased $245.2
million, or 83.4%, in 2020 as compared to 2019 primarily due to strong sales
growth in sales of Elgato branded streaming products, we believe driven in part
by the COVID-19 shelter-in-place orders as consumers spend more time working and
gaming at home, and the inclusion of SCUF post-acquisition revenue.

Gaming Components and Systems Segment

Net revenue of the gaming components and systems segment increased $93.9 million
or 8.1%, in 2021 as compared to 2020. We believe the revenue growth was driven
in part by the COVID-19 shelter-in-place orders, particularly, for our PSUs and
pre-built systems. The revenue growth in this segment was partially offset in
the second half of 2021 due to the shortage of reasonably priced GPUs which
curtailed the demand for new PC builds and related components, as well as global
supply and logistics constraints caused by the COVID-19 pandemic.

Net revenue of the gaming components and systems segment increased $360.0
million, or 44.8%, in 2020 as compared to 2019 primarily as a result of strong
sales growth across all products due to continued strong market demand, we
believe driven in part by the COVID-19 shelter-in-place orders, and to a lesser
extent, the inclusion of Origin post-acquisition revenue.

Segment gross profit and gross margin

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

                                                                 Year Ended December 31,
                                                2021                      2020                      2019

Segment of peripherals for gamers and creators $224,920 34.8% $189,742

        35.2 %   $  81,363        27.7 %
Gaming Components and Systems Segment
   Memory Products                        108,901        17.8       125,026        20.5        74,781        16.1
   Other Component Products               180,033        28.0       150,661        27.2        68,143        20.1
                                          288,934        23.0       275,687        23.7       142,924        17.8
Total Gross Profit                      $ 513,854        27.0 %   $ 465,429        27.3 %   $ 224,287        20.4 %




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Segment of peripherals for gamers and creators

The gross profit of the gamer and creator peripherals segment increased in 2021
by $35.2 million, or 18.5%, as compared to 2020, largely due to the revenue
growth of 20.0% in the same period. Gross margin decreased by 40 basis points
primarily due to increased logistics costs caused by the COVID-19 pandemic
disruptions and increased promotional activity. These negative impacts to the
gross margin were partially offset by the strong growth in the sales of our
higher margin Elgato branded content creator products and better leverage on our
fixed cost from higher sales volume year-over-year.

The gross profit of the gamer and creator peripherals segment increased in 2020
by $108.4 million, or 133.2%, as compared to 2019, largely due to the strong
revenue growth of 83.4% in the same period. The 7.5% increase in gross margin
was primarily driven by the addition of higher margin SCUF products and the
strong growth in sales of higher margin Elgato branded content creator products,
coupled with less promotional activities.

Gaming Components and Systems Segment

The gross profit of the gaming components and systems segment increased in 2021
by $13.2 million, or 4.8%, compared to 2020, primarily due to the revenue growth
of 8.1% in the same period. The 70 basis points decrease in gross margin was
primarily attributable to our memory products due to lower selling prices as a
result of competitive pricing pressure in addition to increased freight and
logistics costs across this segment caused by the COVID-19 pandemic disruptions.

The gross margin of the gaming components and systems segment increased in 2020 by $132.8 million, or 92.9%, compared to 2019, primarily due to strong revenue growth over the same period. The 5.9% increase in gross margin is mainly due to a higher margin product line and less promotional activity.

Risks and uncertainties related to the COVID-19 pandemic remain and until the
supply chain and logistics constraints ease and GPUs become more available, our
revenue and gross margin for both segments may continue to be negatively
impacted.

Cash and capital resources

Overview

Our principal sources of liquidity have been the payments received from
customers purchasing our products, the borrowings under our Credit Agreement
(defined below) and the net proceeds we received from our IPO completed in
September 2020. 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 and future investments in business and technology.

As of December 31, 2021, we had cash and restricted cash, in aggregate of $65.4
million, including $22.8 million held by our foreign subsidiaries. Amounts held
outside of the United States are generally utilized to support our non-U.S.
liquidity needs. Repatriations of amounts held outside the United States
generally will not be taxable from a U.S. federal tax perspective, but may be
subject to state income or foreign withholding tax. We do not expect
restrictions or potential taxes incurred on repatriation of amounts held outside
of the United States to have a material effect on our overall liquidity,
financial condition or results of operations.

We believe that the anticipated cash flows from operations based on our current
business outlook, combined with our current levels of cash balances at December
31, 2021, supplemented with the borrowings under our Revolving Credit Facility
will be sufficient to fund our principal uses of cash for at least the next
twelve months. In the longer term, liquidity will depend to a great extent on
our future revenues and our ability to appropriately manage our costs based on
the demand for our products. We may require additional funding and need or
choose to raise the required funds through borrowings or public or private sales
of debt or equity securities. The sale of additional equity would result in
additional dilution to our stockholders. The incurrence of debt financing would
result in debt service obligations and the instruments governing such debt could
provide for operating and financial covenants that would restrict our
operations. There can be no assurance that any such equity or debt financing
will be available on favorable terms, or at all. Our liquidity is subject to
various risks including the risks identified in the section titled "Risk
Factors" in Item 1A and market risks identified in the section titled
"Quantitative and Qualitative Disclosures about Market Risk" in Item 7A, each of
which is incorporated herein by reference.

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Liquidity

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

                                         Year Ended December 31,
                                    2021          2020           2019

Net cash provided by (used in):
Operating activities              $  20,192     $ 168,953     $   37,103
Investing activities                (20,541 )     (10,280 )     (145,427 )
Financing activities                (65,404 )     (79,131 )      132,314


Cash flow from operating activities

Net cash provided by operating activities for 2021 was $20.2 million and
consisted of net income of $101.0 million and non-cash adjustments of $60.0
million and offset partially by a net use of cash of $140.8 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, which were partially offset by changes in deferred income taxes.
The net cash outflow from changes in our net operating assets and liabilities
was primarily related to increases in inventory purchases and income tax
prepayment for our Hong Kong subsidiary, as well as a decrease in accounts
payable mainly due to timing of payments and purchases. These cash outflows were
partially offset by increases in the accrual for sales returns and customer
incentives, income tax payable and bonus accrual.

Net cash provided by operating activities for 2020 was $169.0 million and
consisted of net income of $103.2 million, non-cash adjustments of $50.8 million
and $14.9 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, which were partially offset by changes in
deferred income taxes. The net cash inflow from changes in our net operating
assets and liabilities was primarily related to increase in accounts payable,
other liabilities and accrued expenses. The increase in accounts payable was
mainly due to timing of payments and purchases with longer payment terms, and
the increase in other liabilities and accrued expenses was mainly from an
increase in the bonus accrual and a higher accrual for sales returns and
customer incentives. The 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 $20.5 million for 2021 and consisted of
$11.0 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 $4.8 million for acquisitions of immaterial
businesses.

Cash used in investing activities was $10.3 million for 2020 and consisted of
$9.0 million for the purchase of capital equipment and software and $1.3 million
for acquisitions of immaterial businesses.

Cash flow from financing activities

Net cash used in financing activities was $65.4 million for 2021 and consisted
primarily of $328.2 million repayments of debt and $0.4 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 $14.9 million proceeds received from the issuance of
shares through our employee equity incentive plans. During 2021, we also
borrowed $63.5 million from our revolving credit facility to fund our operations
and the full amount was repaid in 2021.

Cash used in financing activities was $79.1 million for 2020 and consisted of
$190.4 million repayments of debt and $8.5 payment of offering costs. These cash
outflows were partially offset by $118.6 million proceeds received from the
issuance of common stock in connection with our IPO, after deducting
underwriting discounts and commissions, and $1.3 million proceeds received from
the issuance of shares through our employee equity incentive plans.

Capital resources

Credit agreement (term loan and revolving credit facility)

On September 3, 2021, we refinanced the First Lien Credit and Guaranty Agreement
with a new Credit Agreement ("Credit Agreement"). The new Credit Agreement
provides for a total commitment of $350.0 million, consisting of a $100.0
million revolving credit facility ("Revolving Credit Facility") and a $250.0
million term loan facility ("Term Loan"). The net proceeds from borrowings

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under the Term Loan of $248.5 million (net of $1.5 million of debt discount)
were used to repay all amounts outstanding under the First Lien Term Loan on
September 3, 2021.

The Credit Agreement is available for a period of five years, maturing September
2026, and provides for additional incremental facilities up to a maximum
aggregate principal amount of $250.0 million, subject to the satisfaction of
certain conditions. We may prepay the Term Loan and the Revolving Facility at
any time without premium or penalty.

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

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

The Credit Agreement contains covenants with which we must comply during the
term of the agreement, which we believe are ordinary and standard for agreements
of this nature, including the maintenance of a maximum Consolidated Total Net
Leverage Ratio of 3.0 to 1.0 and a minimum Consolidated Interest Coverage Ratio
of 3.0 to 1.0 (as defined in our credit facilities). The Credit Agreement also
includes events of default customary for facilities of this nature and upon the
occurrence of such events of default, among other things, all outstanding
amounts under the Credit Agreement may be accelerated and/or the lenders'
commitments terminated. In addition, upon the occurrence of certain events of
default, the interest on the Term loan and Revolving Credit Facility can
increase by 2.0%. As of December 31, 2021, we were not in default under the
Credit Agreement.

As of December 31, 2021, total principal outstanding of the Term Loan was $248.8
million and the available and uncommitted capacity under the Revolving Credit
Facility was $99.5 million.


Contract cash and other obligations

The following table summarizes our contractual cash and other obligations as of
December 31, 2021 (in thousands):

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

Debt principal and interest           $ 278,168     $    9,899     $ 32,984     $ 235,285     $         -
payments (1)
Inventory-related purchase              141,599        141,599            -             -               -
obligations (2)
Operating lease obligations (3)          72,868         10,164       21,225        12,066          29,413
Other purchase obligations (4)           24,346         19,815        4,223           308               -
Contingent consideration in
connection with a                         1,250          1,250            -             -               -
   business acquisition
Total                                 $ 518,231     $  182,727     $ 58,432     $ 247,659     $    29,413


(1) The amounts represent the main disbursements as at December 31, 2021 of our

Term loan based on the repayment schedule according to the credit agreement

and the expected interest payments associated with the term loan. See Note 8

“Debt” to our Consolidated Financial Statements for more information.

(2) The amounts represent an estimate of the purchase obligations related to inventories,

of which $17.5 million is linked to purchase orders issued to iDisplay, in

of which we acquired a majority financial stake of 51% as of January

1st 2022 and therefore these obligations no longer exist as of

Date of purchase.

(3) The amounts represent the contractual obligations of our operating leases for

offices and storage spaces.

(4) Amounts represent non-cancellable obligations related to capital expenditures,

software licensing, marketing and other activities.


As of December 31, 2021, we had $2.1 million in non-current income tax payable,
including interest and penalties, related to our income tax liability for
uncertain tax positions. At this time, we are unable to make a reasonably
reliable estimate of the timing of payments in individual years in connection
with these tax liabilities; therefore, such amounts are not included in the
contractual cash obligation table above.

Critical accounting policies and estimates

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

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Accounting Principles ("GAAP"), which requires us to make estimates, judgments
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the consolidated
financial statements, as well as the reported amounts of revenue and expenses
during the reporting periods. Our estimates are based on our historical
experience and on various other factors that we believe to be applicable and
evaluate them on an ongoing basis to ensure they remain reasonable under current
conditions. Actual results may differ significantly from those estimates, which
could have a material impact on our business, results of operations, and
financial condition.

We believe the accounting policies below are critical in the portrayal of our
financial condition and results of operations, and involve management's most
difficult, subjective, or complex judgments.

Revenue recognition and accrued liabilities for product returns and customer incentive programs

We offer product return rights and customer incentive programs. Customer incentive programs include special pricing agreements, promotions, discounts and volume-based incentives.

Rights of return vary by customer and range from the right to return products to
limited stock rotation rights allowing the exchange of a percentage of the
customer's quarterly purchases. Estimates of expected future product returns
qualify as variable consideration and are recorded as a reduction of the
transaction price of the contract at the time of sale based on historical return
rates. Return rates are influenced by product life cycle status, new product
introductions, market acceptance of products, sales levels, the type of
customer, seasonality, product quality issues, competitive pressures, published
return policy, and other unforeseen global factors. Return rates can fluctuate
over time but are sufficiently predictable to allow us to estimate expected
future product returns.

Customer incentive programs are considered variable consideration, which we
estimate and record as a reduction to revenue at the time of sale. Significant
management judgments and estimates must be used to determine the cost of these
programs to be included in the transaction price in any accounting period
including a reduction for the estimate of amounts that ultimately will not be
claimed for certain customer incentive programs. We use the expected value
method to arrive at the amount of variable consideration. The Company constrains
variable consideration until the likelihood of a significant revenue reversal is
not probable. The accrual estimates are based on actual sales data, historical
experience, forecasted incentives, anticipated volume of future purchases, and
inventory levels in the channel.

Recent accounting pronouncements

See Note 2 to the consolidated financial statements included in this Annual Report on Form 10-K for recent accounting pronouncements adopted and to be adopted.

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