Corsair Gaming Inc

The following tables set forth the components of our condensed consolidated statements of operations, in dollars (thousands) and as a percentage of total net revenue, for each of the periods presented.

Components of Results of Operations

Net Revenue

Net revenue decreased by 4.7% for the three months ended March 31, 2024 as compared to the same period last year. The decrease was due to a 13.1% decrease in sales for our Gaming Components and Systems segment, which was partially offset by a 20.3% increase in sales for our Gamer and Creator Peripherals segment.

Gross Profit and Gross Margin

Gross margin increased by 1.6% for the three months ended March 31, 2024 as compared to the same period last year primarily due to increased sales of new products that carry higher margins in our Gamer and Creator Peripherals segment, which was partially offset by increased promotion activities for products in our Gaming Components and Systems segment.

Sales, General and Administrative (SG&A)

SG&A expenses increased 18.8% for the three months ended March 31, 2024 as compared to the same period last year primarily due to one-time higher legal expenses and settlement costs, higher personnel-related costs from merit increases, and higher freight costs which was partly due to increased ocean rates triggered by tensions in the Red Sea.

Product Development

Product development expenses decreased 1.2% for the three months ended March 31, 2024 as compared to the same period last year primarily due to lower consulting and contractor costs, which was partially offset by higher personnel-related cost.

Interest Expense, Interest Income and Other Expense, Net

Interest expense decreased by 14.2%, for the three months ended March 31, 2024 as compared to the same period last year primarily due to lower principle balance on our Term Loan, offset partially by higher interest rates on our Term Loan in the three months ended March 31, 2024.

Interest income increased by 6.2%, for the three months ended March 31, 2024 as compared to the same period last year primarily due to higher interest rates in the three months ended March 31, 2024.

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

Income Tax Benefit

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, 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 13.9% and 27.9% for the three months ended March 31, 2024 and 2023, respectively. The decrease in our effective rate in the three-month period was primarily due to a change in the mix of income and losses in the various tax jurisdictions in which we operate, and an increase in shortfall tax deficiencies from stock-based compensation.

On December 15, 2022, the European Union (“EU”) Member States formally adopted the EU’s Pillar Two Directive, which generally provides for a minimum effective tax rate of 15%, as established by the Organization for Economic Co-operation and Development (“OECD”) Pillar Two Framework that was supported by over 130 countries worldwide. The EU effective dates are January 1, 2024, and January 1, 2025, for different aspects of the directive. A significant number of other countries are expected to also implement similar legislation, including United Kingdom which approved the legislation on July 11, 2023 with a full effective date of January 1, 2024. We have evaluated the potential impact from the OECD Pillar Two rules and determined that the effects are immaterial to our financial position for the year of 2024.

Segment Results

Segment Net Revenue

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

Gamer and Creator Peripherals Segment

Net revenue of the Gamer and Creator Peripherals segment increased 20.3% for the three months ended March 31, 2024, as compared to the same period last year. The increase was driven primarily by the success of recent product launches, as well as increased demand for our gaming controllers and traditional headsets, keyboards and mice categories within this segment.

Gaming Components and Systems Segment

Net revenue of the Gaming Components and Systems segment decreased 13.1% for three months ended March 31, 2024, as compared to the same period last year. The demand for our products in this segment is largely influenced by the activity in the self-built PC market which is primarily triggered by the launch of new, reasonably priced GPUs and CPUs, as well as the release of new game titles. However, in 2024, we will be mid-cycle for new GPU platforms, and as anticipated, we experienced relatively flat self-built PC market trajectory since the beginning of the year. This has led to a decrease in demand for our products in this segment in the three months ended March 31, 2024.

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:

Gamer and Creator Peripherals Segment

The gross margin of the Gamer and Creator Peripherals segment increased by 10.8% for the three months ended March 31, 2024, as compared to the same period last year. The increase was primarily attributable to successful launches of new products that carry higher margins and lower promotional activities.

Gaming Components and Systems Segment

The gross margin of the Gaming Components and Systems segment decreased by 3.5% for the three months ended March 31, 2024, as compared to the same period last year. The decrease was primarily attributable to a change in sales mix toward the memory products that carry lower margins as well as higher promotional activities.

Liquidity and Capital Resources

Overview

We have financed our operations and acquisitions through cash from operations, and when applicable, also through debt facilities and issuance of equity securities. As of March 31, 2024, our principal sources of liquidity were cash and restricted cash, in aggregate of $130.2 million, and our borrowing capacity under the Revolving Facility (as defined below) of $100.0 million.

We have a shelf-registration statement on Form S-3 on file with the SEC, which allows us to offer securities, including common stock, preferred stock and warrants, through August 1, 2025. As of March 31, 2024, $216.7 million remained available for issuance under the shelf-registration statement.

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, future investments in business and technology, and selective mergers and acquisitions.

We believe that the anticipated cash flows from operations based on our current business outlook, combined with our current levels of cash balances at March 31, 2024, supplemented with the borrowing capacity under our Revolving Facility, if and as needed, will be sufficient to fund our principal uses of cash for at least the next twelve months. In the longer term, liquidity will depend to a great extent on our future revenues and our ability to appropriately manage our costs based on the demand for our products. We may require additional funding and need or choose to raise the required funds through borrowings or public or private sales of debt or equity securities. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financial covenants that would restrict our operations. There can be no assurance that any such equity or debt financing will be available on favorable terms, or at all.

Liquidity

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

Cash Flows from Operating Activities

Net cash used in operating activities for the three months ended March 31, 2024 was $26.3 million and consisted of a net loss of $11.0 million and a net cash outflow of $30.3 million from changes in our net operating assets and liabilities, offset partially by non-cash adjustments of $15.0 million. The net cash outflow from changes in our net operating assets and liabilities was primarily related to an increase in inventories, attributable in part to the buildup of safety stock to accommodate supply lead times in our peripherals products and in part due to lower demand for our components products in the first quarter of 2024, as well as a decrease in accounts payable due to timing of payments and a decrease in other liabilities and accrued expenses mainly due to a reduction in the accruals needed for sales returns and customer incentives with lower revenues. These net cash outflows were partially offset by a decrease in accounts receivable from lower revenue and a decrease in prepaid and other assets. The non-cash adjustments primarily consisted of amortization of intangibles, depreciation and stock-based compensation expense, which were partially offset by changes in deferred income taxes.

Net cash provided by operating activities for the three months ended March 31, 2023 was $41.8 million and consisted of a net cash inflow of $25.7 million from changes in our net operating assets and liabilities and non-cash adjustments of $17.8 million, offset partially by a net loss of $1.6 million. The net cash inflow from changes in our net operating assets and liabilities was primarily related to a decrease in accounts receivable, a decrease in inventories and an increase in accounts payable due to timing of payments. These net cash inflows were partially offset by a decrease in other liabilities and accrued expenses mainly due to lower accrual for sales returns and customer incentives. The non-cash adjustments consisted primarily of amortization of intangibles, depreciation and stock-based compensation expense, which were partially offset by changes in deferred income taxes.

Cash Flows from Investing Activities

Cash used in investing activities was $1.5 million for the three months ended March 31, 2024 and consisted of $2.5 million capital expenditure, partially offset by $1.0 million cash received from escrow for the purchase price adjustment related to a business acquisition.

Cash used in investing activities was $4.7 million for the three months ended March 31, 2023 and consisted of purchases of capital equipment and software.

Cash Flows from Financing Activities

Cash used in financing activities was $19.9 million for the three months ended March 31, 2024 and consisted of $15.0 million repayment of debt, $4.9 million settlement of deferred consideration related to a prior business acquisition in 2019, $2.0 million payment of dividends to noncontrolling interest, and $0.4 million payment of taxes related to net share settlement of equity awards, partially offset by $2.4 million proceeds received from the issuance of shares through the employee equity incentive plans.

Cash used in financing activities was $9.9 million for the three months ended March 31, 2023 and consisted of $10.0 million repayment of debt, $1.0 million payment of contingent consideration, $0.6 million payment of taxes related to net share settlement of equity awards, and $0.5 million payment of offering costs in connection with our underwritten public offering in the fourth quarter of 2022, partially offset by $2.1 million proceeds received from the issuance of shares through employee equity incentive plans.

Capital Resources

On September 3, 2021, we refinanced the First Lien Credit and Guaranty Agreement with a new Credit Agreement (as amended, the “Credit Agreement”). The Credit Agreement provides for a total commitment of $350.0 million, consisting of a $100.0 million revolving credit facility (the “Revolving Facility”) and a $250.0 million term loan facility (the “Term Loan”). 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. We prepaid $11.9 million and $34.1 million of the Term Loan principal in the three months ended March 31, 2024 and in the year ended December 31, 2023, respectively. As of March 31, 2024, the total principal outstanding of the Term Loan was $184.0 million and the available and uncommitted capacity under the Revolving Facility was $100 million.

The Credit Agreement has a variable rate structure. According to the provisions in the Third Amendment to the Credit Agreement (“Third Amendment”), beginning 2024, the Term Loan and the Revolving Facility carry interest at our election at either (a) Bloomberg Short-Term Bank Yield Index rate (“BSBY”) plus a percentage spread (ranging from 1.25% to 2.25%) based on our total net leverage ratio, or (b) the base rate (as described in the Credit Agreement as the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) one-month BSBY plus 1.0%) plus a percentage spread (ranging from 0.25% to 1.25%) based on our total net leverage ratio. Additionally, the commitment fees on the unused portion of the Revolving Facility ranges from 0.2% to 0.4% based on our total net leverage ratio.

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 (“CTNL Ratio”) and a minimum Consolidated Interest Coverage Ratio (“CIC Ratio”) (as defined in the Credit Agreement). According to the provisions in the Third Amendment, beginning 2024, we are required to maintain a maximum CTNL Ratio of 3.00 to 1.00 and a minimum CIC ratio of 3.00 to 1.00, with the provision that the maximum CTNL Ratio can be temporarily increased to 3.50 to 1.00 upon the occurrence of a Qualified Acquisition (as defined in, and subject to the requirements of the Credit Agreement). As of March 31, 2024, we were not in default under the Credit Agreement.

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.

Contractual Cash and Other Obligations

The following table summarizes our contractual cash and other obligations as of March 31, 2024 (in thousands):

(1)

Amounts represent the principal cash payments as of March 31, 2024 of our Term Loan based on the repayment schedule according to the Credit Agreement and the expected interest payments associated with the Term Loan. See Note 8, “Debt” to our condensed consolidated financial statements for more information.

(2)

Amounts represent an estimate of purchase obligations related to inventory.

(3)

Amounts represent contractual obligations from our operating leases for offices and warehouse spaces.

(4)

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

As of March 31, 2024, we had $2.7 million in non-current income tax payable, including interest and penalties, related to our income tax liability for uncertain tax positions. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities; therefore, such amounts are not included in the contractual cash obligation table above.

Critical Accounting Polices and Estimates

A critical accounting policy is defined as one that has both a material impact on our financial condition and results of operations and requires us to make difficult, complex and/or subjective judgments, often as a result of the need to make estimates about matters that are inherently uncertain. Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe to be applicable and 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.

There have been no material changes to our critical accounting policies and estimates during the three months ended March 31, 2024 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, 2023 filed with the SEC on February 27, 2024.

Recent Accounting Pronouncements

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